<PAGE>
MORGAN STANLEY FUNDS
- --------------------------------------------------------------------------------
DISTRIBUTED BY VAN KAMPEN AMERICAN CAPITAL DISTRIBUTORS, INC.
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MORGAN STANLEY GLOBAL EQUITY ALLOCATION FUND
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MORGAN STANLEY GLOBAL EQUITY FUND
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MORGAN STANLEY GLOBAL FIXED INCOME FUND
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MORGAN STANLEY ASIAN GROWTH FUND
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MORGAN STANLEY AMERICAN VALUE FUND
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MORGAN STANLEY VALUE FUND
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MORGAN STANLEY WORLDWIDE HIGH INCOME FUND
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MORGAN STANLEY LATIN AMERICAN FUND
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MORGAN STANLEY EMERGING MARKETS FUND
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MORGAN STANLEY AGGRESSIVE EQUITY FUND
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MORGAN STANLEY U.S. REAL ESTATE FUND
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MORGAN STANLEY HIGH YIELD FUND
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MORGAN STANLEY INTERNATIONAL MAGNUM FUND
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MORGAN STANLEY GOVERNMENT OBLIGATIONS
MONEY MARKET FUND
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MORGAN STANLEY MONEY MARKET FUND
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SEMI-ANNUAL REPORT
DECEMBER 31, 1997
<PAGE>
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<PAGE>
MORGAN STANLEY FUNDS
TABLE OF CONTENTS
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<TABLE>
<S> <C>
Overview and Portfolio of Investments by Fund:
Letter to Shareholders.............................................. 1
Performance Summary................................................. 3
Global Equity Allocation Fund....................................... 4
Global Equity Fund.................................................. 20
Global Fixed Income Fund............................................ 25
Asian Growth Fund................................................... 29
American Value Fund................................................. 34
Value Fund.......................................................... 39
Worldwide High Income Fund.......................................... 43
Latin American Fund................................................. 49
Emerging Markets Fund............................................... 54
Aggressive Equity Fund.............................................. 61
U.S. Real Estate Fund............................................... 65
High Yield Fund..................................................... 71
International Magnum Fund........................................... 75
Government Obligations Money Market Fund............................ 82
Money Market Fund................................................... 85
Statement of Assets and Liabilities................................... 89
Statement of Operations............................................... 93
Statement of Changes in Net Assets.................................... 95
Financial Highlights ................................................. 110
Notes to Financial Statements......................................... 125
</TABLE>
<PAGE>
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<PAGE>
LETTER TO SHAREHOLDERS
- --------------------------------------------------------------------------------
Dear Shareholder,
The new year ushers in what promises to be an exciting and challenging time for
investors. The Taxpayer Relief Act of 1997, passed by President Clinton in
August, creates many new opportunities for you and your family to take a more
active role in achieving your long-term financial goals.
Most Americans will benefit from the bill's $95 billion in tax cuts over five
years. The so-called Kiddie Credit gives parents $400 in immediate tax relief
for every child under age 17, and families will find it easier to save for their
children's college expenses through the new Education IRA. The bill also cuts
capital gains tax rates for the first time in over a decade, and loosens
restrictions on tax-deductible IRA contributions. Perhaps the most exciting
feature of all is the new Roth IRA, which allows investment earnings to grow tax
free, not just tax deferred.
This year more than ever, it could be important for you to talk with your
financial adviser about how to make the tax code work to your advantage. At Van
Kampen American Capital, we have prepared a variety of publications to help you
understand your choices under the new tax legislation. And with the help of your
adviser, we'll help you locate the many benefits hidden among the changing tax
landscape.
ECONOMIC OVERVIEW
After years of breakneck growth and rapid expansion of credit, Asia experienced
a severe economic setback during the reporting period. The region's problems
first became evident in July, when Thailand responded to a growing trade deficit
by allowing its currency to float freely in international markets. The Thai
government's move set in motion a chain reaction of devaluations which
ultimately severed much of the region's traditional currency link to the U.S.
dollar. At the height of the crisis in October, the Hong Kong dollar, pegged to
the American dollar since 1983, also came under attack from speculators.
While Chinese officials defended the currency and retained the U.S. dollar peg,
Asia's turmoil was far from finished. The crisis next spread to South Korea,
where that country's ailing financial sector required a massive infusion of
liquidity from the International Monetary Fund to stave off widespread
bankruptcies.
Compared to Asia, economic conditions in Europe and the United States were
healthy and tranquil. Europe continues to enjoy solid economic growth with low
inflation. The relatively tight fiscal policies required to accomplish a move to
a single currency, however, have left Europe's unemployment rate in double
digits.
In the United States, economic growth remains strong, unemployment is low,
consumers are optimistic, the budget is headed for surplus this year, and our
nation's currency is rising around the world. Despite the strength in the U.S.
economy, there was no indication of troublesome inflation. In fact, the producer
price index fell by 1.2 percent during the year, the largest annual decline in
wholesale prices since 1986. Inflation at the consumer level was also virtually
nonexistent, with the consumer price index rising by only 1.7 percent during
1997. A strong dollar and significant productivity gains helped offset the
inflationary pressures caused by rising wages.
MARKET REVIEW
After gliding through a strong and mostly uneventful first half of 1997, global
equity markets experienced a sharp increase in volatility during the later
stages of the year. In particular, the currency crisis that roiled most
Southeast Asian economies spilled over into the region's equity markets,
creating an avalanche of selling that unnerved markets in Europe, Latin America,
and the United States as well.
Despite the shifting global economic conditions, U.S. stocks continued to post
solid returns. For the year, the Wilshire 5000 Index, which measures the
performance of all publicly traded U.S. companies, gained 29.17 percent. But
while the general upward trend in U.S. stocks continued, volatility also picked
up. Between early August and late October, the Dow Jones Industrial Average fell
by 16 percent before rebounding sharply to close the reporting period near
record-high territory.
In Europe, falling interest rates, low inflation, and improving corporate
profitability provided a strong underpinning to the region's equity markets. In
local currency terms, every European market gained at least 13 percent, led by
the 79 percent gain in Portugal and the nearly 51 percent rise in Switzerland.
However, the strong U.S. dollar offset a significant portion of those gains for
American investors.
In Asia, falling currencies exacerbated the impact of tumbling stock prices. For
the year, the Dow Jones Asia/Pacific Index fell 29.13 percent in dollar terms.
Equity markets in Indonesia, Malaysia, South Korea, and Thailand each finished
1997 with losses of more than 60 percent. The negative impact of the Asian
crisis on prospects for world economic growth created a positive environment for
global bonds. For the 12 months ended December 31, the Salomon Brothers World
Government Bond Index gained 8.97 percent in local currency terms. However, the
strong dollar undermined the results for U.S. investors, and the Index gained
0.23 percent in U.S. dollar terms during the same period.
------------------
1
<PAGE>
LETTER TO SHAREHOLDERS
- --------------------------------------------------------------------------------
Bond markets were especially strong in European nations that are not
participating in the planned European Monetary Union, as interest rates in
non-EMU countries such as Sweden and the United Kingdom fell toward those in
Germany and France. In the U.S., the yield on the Treasury's benchmark 30-year
bond began the year at 6.64 percent and climbed to 7.17 percent in April amid
fears of increasing inflation. When subsequent data showed the economy to be
slowing, bond yields drifted gradually lower. By the end of the reporting
period, the long-term Treasury bond yield had fallen to 5.92 percent, its lowest
level in more than four years, and bond prices, which move in the opposite
direction of bond yields, rose significantly.
OUTLOOK
We expect that the recent upheavals in Southeast Asia will have a mixed impact
on the U.S. economy and financial markets. Sales of American goods overseas are
likely to decline in coming months, and competition from relatively inexpensive
imports could pinch profit margins. Overall, we believe that lower currency
values in Asia will likely result in less inflation in the U.S. and a greater
likelihood of stable or falling interest rates. We also anticipate that stock
selection will play a larger role in generating investment performance due to
the uneven impact of the Asian crisis on individual companies and the
broad-based nature of the advance in equity prices in recent years.
Within Asia itself, we believe that the turbulence has yet to run its course. It
is likely that Pacific Rim markets will continue to search for a bottom until
investors arrive at meaningful projections for economic growth rates and
corporate profits. As the reporting period ended, a clear vision of the new
economic order in Asia remained elusive. We believe that European markets
generally have the least amount to lose by the Asian shock. European exports to
Asia are relatively modest, and the region continues to enjoy solid growth,
declining budget deficits, and benign inflation.
As we noted earlier, the Taxpayer Relief Act of 1997 provides attractive new
vehicles through which investors can save for a variety of goals, including
higher education and retirement. We encourage you to work with your financial
adviser to consider how the tax changes can work to your benefit.
Additional details about your Funds, including investment overviews from your
portfolio management team, are provided in this report. As always, we are
pleased to have the opportunity to serve you and your family through our diverse
menu of quality investments.
Sincerely,
<TABLE>
<S> <C>
Don G. Powell Dennis J. McDonnell
Chairman President
Van Kampen American Capital Van Kampen American Capital
Investment Advisory Corp. Investment Advisory Corp.
</TABLE>
February 9, 1998
- --------------
2
<PAGE>
MORGAN STANLEY FUNDS, INC.
PERFORMANCE SUMMARY (UNAUDITED)
- --------------------------------------------------------------------------------
DECEMBER 31, 1997
<TABLE>
<CAPTION>
SIX MONTHS TOTAL RETURNS
---------------------------------
NET NET ASSET WITH WITHOUT
INCEPTION ASSETS VALUE PER SALES SALES COMPARABLE
FUNDS DATES (000) SHARE CHARGE CHARGE INDEXES
- ------------------------------ ---------- -------- --------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
GLOBAL EQUITY ALLOCATION
Class A..................... 1/4/93 $74,593 $ 14.34 (5.81)% (0.07)% 0.33%(1)
Class B..................... 8/1/95 58,639 13.93 (4.83) (0.52) 0.33(1)
Class C..................... 1/4/93 80,036 14.07 (1.28) (0.42) 0.33(1)
GLOBAL EQUITY
Class A..................... 10/29/97 55,372 9.91 N/A N/A N/A
Class B..................... 10/29/97 467,465 9.91 N/A N/A N/A
Class C..................... 10/29/97 45,801 9.91 N/A N/A N/A
GLOBAL FIXED INCOME
Class A..................... 1/4/93 5,851 9.93 (2.51) 2.39 2.52(2)
Class B..................... 8/1/95 1,539 9.88 (2.00) 1.99 2.52(2)
Class C..................... 1/4/93 2,103 9.87 0.99 1.99 2.52(2)
ASIAN GROWTH
Class A..................... 6/23/93 63,990 8.30 (52.82) (49.96) (45.59)(3)
Class B..................... 8/1/95 27,558 8.04 (52.66) (50.17) (45.59)(3)
Class C..................... 6/23/93 37,979 8.03 (50.64) (50.14) (45.59)(3)
AMERICAN VALUE
Class A..................... 10/18/93 106,826 19.41 9.98 16.66 11.78(4)
Class B..................... 8/1/95 107,301 19.36 11.25 16.25 11.78(4)
Class C..................... 10/18/93 73,222 19.36 15.24 16.24 11.78(4)
VALUE
Class A..................... 7/7/97 102,701 10.10 N/A N/A N/A
Class B..................... 7/7/97 88,112 10.09 N/A N/A N/A
Class C..................... 7/7/97 19,466 10.08 N/A N/A N/A
WORLDWIDE HIGH INCOME
Class A..................... 4/21/94 82,139 12.99 (1.54) 3.36 4.59(6)
Class B..................... 8/1/95 103,847 12.92 (0.68) 2.96 4.59(6)
Class C..................... 4/21/94 50,102 12.93 1.97 2.88 4.59(6)
LATIN AMERICAN
Class A..................... 7/6/94 66,929 13.48 (8.06) (2.46) (6.29)(7)
Class B..................... 8/1/95 29,554 13.06 (6.53) (2.66) (6.29)(7)
Class C..................... 7/6/94 22,730 13.07 (3.52) (2.75) (6.29)(7)
EMERGING MARKETS
Class A..................... 7/6/94 95,359 9.44 (26.66) (22.19) (26.93)(8)
Class B..................... 8/1/95 43,549 9.23 (25.98) (22.50) (26.93)(8)
Class C..................... 7/6/94 39,235 9.24 (23.18) (22.48) (26.93)(8)
AGGRESSIVE EQUITY
Class A..................... 1/2/96 35,689 17.82 9.92 16.66 8.81(9)
Class B..................... 1/2/96 58,739 17.58 11.26 16.26 8.81(9)
Class C..................... 1/2/96 11,837 17.57 15.21 16.21 8.81(9)
U.S. REAL ESTATE
Class A..................... 5/1/96 20,768 16.79 7.28 13.83 13.77(10)
Class B..................... 5/1/96 12,764 16.73 8.40 13.40 13.77(10)
Class C..................... 5/1/96 3,910 16.73 12.36 13.36 13.77(10)
HIGH YIELD
Class A..................... 5/1/96 5,644 12.59 1.20 6.24 6.40(11)
Class B..................... 5/1/96 9,931 12.56 1.76 5.67 6.40(11)
Class C..................... 5/1/96 2,864 12.56 4.69 5.66 6.40(11)
INTERNATIONAL MAGNUM
Class A..................... 7/1/96 36,918 12.67 (12.85) (7.52) (8.48)(12)
Class B..................... 7/1/96 33,824 12.61 (12.43) (7.87) (8.48)(12)
Class C..................... 7/1/96 9,147 12.66 (8.79) (7.88) (8.48)(12)
GOVERNMENT OBLIGATIONS MONEY
MARKET...................... 3/12/92 52,997 1.00 N/A 2.37 N/A
MONEY MARKET.................. 8/4/89 362,813 1.00 N/A 2.42 N/A
<CAPTION>
ONE YEAR TOTAL RETURNS AVERAGE ANNUAL SINCE INCEPTION
--------------------------------- ---------------------------------
WITH WITHOUT WITH WITHOUT
SALES SALES COMPARABLE SALES SALES COMPARABLE
FUNDS CHARGE CHARGE INDEXES CHARGE CHARGE INDEXES
- ------------------------------ -------- -------- ----------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
GLOBAL EQUITY ALLOCATION
Class A..................... 9.73% 16.44% 15.76%(1) 12.83% 14.17% 15.34%(1)
Class B..................... 10.49 15.49 15.76(1) 14.11 15.13 14.39(1)
Class C..................... 14.60 15.60 15.76(1) 13.33 13.33 15.34(1)
GLOBAL EQUITY
Class A..................... (6.44)* (0.74)* 2.43*(1) N/A N/A N/A
Class B..................... (5.81)* (0.86)* 2.43*(1) N/A N/A N/A
Class C..................... (5.81)* (0.86)* 2.43*(1) N/A N/A N/A
GLOBAL FIXED INCOME
Class A..................... (3.97) 0.77 1.40(2) 5.28 6.31 7.51(2)
Class B..................... (3.77) 0.07 1.40(2) 2.64 3.83 3.54(2)
Class C..................... (0.89) 0.07 1.40(2) 5.47 5.47 7.51(2)
ASIAN GROWTH
Class A..................... (52.14) (49.22) (45.48)(3) (7.89) (6.68) (3.67)(3)
Class B..................... (52.15) (49.64) (45.48)(3) (25.93) (25.01) (19.84)(3)
Class C..................... (50.11) (49.61) (45.48)(3) (7.34) (7.34) (3.67)(3)
AMERICAN VALUE
Class A..................... 28.56 36.39 24.35(4) 16.74 18.39 17.23(4)
Class B..................... 30.41 35.41 24.35(4) 23.39 24.30 20.63(4)
Class C..................... 34.48 35.48 24.35(4) 17.47 17.47 17.23(4)
VALUE
Class A..................... (4.02)* 1.84* 7.27*(5) N/A N/A N/A
Class B..................... (3.49)* 1.51* 7.27*(5) N/A N/A N/A
Class C..................... 0.43* 1.43* 7.27*(5) N/A N/A N/A
WORLDWIDE HIGH INCOME
Class A..................... 10.14 15.62 12.56(6) 15.15 16.67 15.34(6)
Class B..................... 10.82 14.72 12.56(6) 19.10 20.07 17.26(6)
Class C..................... 13.64 14.62 12.56(6) 15.76 15.76 15.34(6)
LATIN AMERICAN
Class A..................... 31.59 39.61 31.66(7) 13.39 15.33 10.34(7)
Class B..................... 33.89 38.89 31.66(7) 31.67 32.50 19.89(7)
Class C..................... 37.74 38.74 31.66(7) 14.40 14.40 10.34(7)
EMERGING MARKETS
Class A..................... (7.58) (1.96) (14.42)(8) (4.86) (3.23) (3.85)(8)
Class B..................... (7.04) (2.66) (14.42)(8) (2.91) (1.82) (5.77)(8)
Class C..................... (3.63) (2.75) (14.42)(8) (3.97) (3.97) (3.85)(8)
AGGRESSIVE EQUITY
Class A..................... 24.11 31.70 19.86(9) 30.72 34.64 17.38(9)
Class B..................... 25.87 30.87 19.86(9) 32.24 33.74 17.38(9)
Class C..................... 29.82 30.82 19.86(9) 33.67 33.67 17.38(9)
U.S. REAL ESTATE
Class A..................... 17.33 24.48 20.29(10) 28.70 33.33 31.61(10)
Class B..................... 18.40 23.40 20.29(10) 30.28 32.27 31.61(10)
Class C..................... 22.43 23.43 20.29(10) 32.28 32.28 31.61(10)
HIGH YIELD
Class A..................... 8.41 13.80 12.65(11) 11.41 14.71 13.33(11)
Class B..................... 8.76 12.76 12.65(11) 11.54 13.75 13.33(11)
Class C..................... 11.76 12.76 12.65(11) 13.75 13.75 13.33(11)
INTERNATIONAL MAGNUM
Class A..................... (0.05) 6.05 1.78(12) 1.50 5.57 2.16(12)
Class B..................... 0.20 5.20 1.78(12) 2.15 4.77 2.16(12)
Class C..................... 4.20 5.20 1.78(12) 4.74 4.74 2.16(12)
GOVERNMENT OBLIGATIONS MONEY
MARKET...................... N/A -- N/A N/A -- N/A
MONEY MARKET.................. N/A -- N/A N/A -- N/A
</TABLE>
- --------------------------------------------------------------------------------
* Cumulative (unannualized) total return since inception of the Portfolio.
<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) S&P 500 Index
(6) Worldwide High Income Blended Index
(7) MSCI Latin America Global Index
(8) IFC Global Total Return Composite Index
(9) Lipper Capital Appreciation Index
(10) NAREIT Equity Index
(11) CS First Boston High Yield Index
(12) MSCI EAFE Index
(13) IBC's Money Fund Report Averages/Government
(14) IBC's Money Fund Report Averages/All Taxable
</TABLE>
<TABLE>
<CAPTION>
YIELD INFORMATION AS OF DECEMBER 31, 1997
- --------------------------------------------------------------------------------------------------------------------------------
30 DAY 7 DAY 7 DAY 30 DAY 30 DAY
CURRENT CURRENT EFFECTIVE CURRENT COMPARABLE
YIELD++ YIELD+ YIELD+ YIELD++ YIELD
------------ ------------ ------------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
GLOBAL FIXED INCOME MONEY MARKET PORTFOLIOS:
Class A................ 3.70% Government Obligations
Class B................ 3.14 Money Market.............. 5.01% 5.14% 4.87% 5.19% (13)
Class C................ 3.13 Money Market.............. 5.06 5.19 5.02 5.10% (14)
WORLDWIDE HIGH INCOME
Class A................ 8.65%
Class B................ 8.30
Class C................ 8.29
HIGH YIELD
Class A................ 7.46%
Class B................ 7.10
Class C................ 7.10
</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.
------------------
3
<PAGE>
MORGAN STANLEY
GLOBAL EQUITY ALLOCATION FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW
(UNAUDITED)
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.
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1997)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Canada 2.9%
France 3.8%
Germany 4.9%
Italy 2.9%
Japan 8.7%
Spain 2.7%
Sweden 2.1%
Switzerland 3.7%
United Kingdom 7.2%
United States 39.5%
Short-Term Investments 15.3%
Other 6.3%
</TABLE>
<TABLE>
<CAPTION>
TOTAL RETURNS**
-------------------------------------------------------------
AVERAGE ANNUAL
SIX MONTHS ONE YEAR SINCE INCEPTION
----------------- ----------------- -----------------
WITH WITHOUT WITH WITHOUT WITH WITHOUT
SALES SALES SALES SALES SALES SALES
CHARGE* CHARGE CHARGE* CHARGE CHARGE* CHARGE
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class A Shares -5.81% -0.07% 9.73% 16.44% 12.83% 14.17%
- ---------------------------------------------------------------------------------------
Class B+ Shares -4.83% -0.52% 10.49% 15.49% 14.11% 15.13%
- ---------------------------------------------------------------------------------------
Class C Shares -1.28% -0.42% 14.60% 15.60% 13.33% 13.33%
- ---------------------------------------------------------------------------------------
MSCI World Index:
Class A & C Shares N/A 0.33% N/A 15.76% N/A 15.34%
Class B Shares N/A 0.33% N/A 15.76% N/A 14.39%
- ---------------------------------------------------------------------------------------
</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.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
<TABLE>
<CAPTION>
TOP FIVE HOLDINGS
PERCENT OF
ISSUER COUNTRY NET ASSETS
- ---------------------------------------- ------------- ----------
<S> <C> <C>
Latin American Discovery Fund, Inc. United States 1.3%
General Electric Co. United States 1.2%
Royal Dutch Petroleum, N.V. Netherlands 0.9%
Novartis AG (Registered) Switzerland 0.9%
Coca-Cola Co. United States 0.8%
</TABLE>
<TABLE>
<CAPTION>
TOP FIVE SECTORS
VALUE PERCENT OF
SECTOR (000) NET ASSETS
- -------------------- --------- -------------
<S> <C> <C>
Consumer Goods $ 42,382 19.9%
Finance 35,867 16.8%
Capital Equipment 29,493 13.8%
Services 29,110 13.6%
Energy 18,990 8.9%
</TABLE>
The Global Equity Allocation Fund seeks long-term capital appreciation by
investing primarily in equity securities of U.S. and non-U.S. issuers in
accordance with country weightings determined by the subadviser and with stock
selection within each country designed to replicate a broad market index. As
such, emphasis is placed upon country rather than stock selection. This approach
reflects our investment philosophy that a diversified selection of securities
representing exposure to each country that we find attractive is an effective
way to maximize the return and reduce the risk associated with global investing.
For the six months ended December 31, 1997, the Fund generated a total return of
- -0.07 percent for the Class A shares at net asset value, as compared to a total
return of 0.33 percent for the Morgan Stanley Capital International (MSCI) World
Index.
The Asian crisis created a steady flow of negative surprises. The question now
is whether the markets have correctly assessed its potential implications to
economic growth and earnings downgrades in the face of large amounts of
anecdotal evidence and a shortage of hard facts.
During the reporting period, the Japanese economy moved from a potentially
robust recovery to the brink of recession, Europe's vision of a single currency
went from a dream to a near-certainty, and what began as pressure on the Thai
baht turned into an ever-widening Asian currency and asset-price debacle.
Although the United States continues to perform well and its economy seems to
run along effortlessly, we remain cautious. We believe that the U.S. equity
market is "priced for perfection." Economic growth is slackening, inflation is
lower, and minimal pricing power should undermine earnings. The strong U.S.
dollar certainly does not help the profit picture for U.S. multinationals.
Current valuation levels demand double-digit earnings growth to look reasonable,
and we are unconvinced of that likelihood.
Of the developed international regions, Europe has the most investment promise
for 1998. Though valuations are high by historic measures, earnings expectations
remain strong (though falling), and there is substantial potential for corporate
restructuring and government deregulation. Much downsizing and balance sheet
recovery has already taken place in the manufacturing and industrial sectors,
but restructuring has just begun in the financial and service industries. With
regard to
- --------------
4
<PAGE>
MORGAN STANLEY
GLOBAL EQUITY ALLOCATION FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
(UNAUDITED)
deregulation, European telecommunication markets officially opened to
cross-border competition on January 1, and more is to follow. In countries such
as Germany, France, and Italy, where domestic politics are too rigid or
splintered to push through necessary pension and labor market reforms, many
corporations are showing dynamism and entrepreneurship on their own.
One of the major themes for the European markets this year will be the run-up to
the introduction of the euro in January 1999. By the close of 1998, short-term
interest rates in countries participating in the single currency will have to be
identical, as there will be one short rate for the whole new currency area. Our
economists and currency strategists expect short rates to converge at around
4.00 percent by late 1998. This implies an easing of monetary conditions in the
peripheral countries of Italy, Spain, Portugal, and Ireland (where rates are
currently between 5 and 6 percent), and a tightening of short rates in Germany,
France, Benelux, Austria, and Finland (where rates are currently 3.7 percent).
This divergence of monetary policy, in combination with high German and French
export exposure to Asia, should lead to a slight easing of growth in core
European countries and an acceleration of growth in the periphery. We have
recently increased our portfolio overweights to Italy and Spain and have moved
back to neutral in France and Germany.
German orders for foreign manufactured goods were down 3 percent in November,
consumer confidence remains anemic, and business confidence has recently turned
down. A French slowdown in capital goods exports may be offset by strengthening
domestic demand, but a slowdown in Germany is never good news for France. In
addition, the recent insurance worker strikes remind us of France's high
political and social risks. Meanwhile, Italian economic growth and business
sentiment picked up nicely in the third quarter. Italy's economy, like that of
Spain, is among the least exposed to Asia and is very interest rate sensitive.
Sharply lower short-term rates, combined with the boost to sentiment from
first-round entry into European Monetary Union, should bring strong relative
growth to Italy and Spain in 1998.
The reporting period was a difficult period for Japan, and the outlook for 1998
is not very different. Restrictive Japanese fiscal policy in April brought the
long-faltering recovery to a standstill and renewed pressure on Japanese banks.
The banks, profligate lenders for years, have become extremely risk averse in
the face of bankruptcies and tougher government regulations. Though tighter
lending standards are necessary for the financial system in the long run, small-
and medium-sized companies are facing a severe credit squeeze, and consumer and
business confidence has plummeted. Export growth potential has been dampened by
the fallout from Asia and U.S. trade pressures, while the government's
anti-deficit stance implies no major fiscal stimulus or personal/ corporate tax
relief.
The silver lining is that the strain of a tumbling stock market and a
depreciating yen increases the odds for a more aggressive policy response. To be
effective, policy will need to both stimulate the economy and reform the
financial sector. Unfortunately, economic stimulus in recent years has
emphasized deregulation and structural reform rather than direct pump-priming.
Bank reform has focused on guaranteeing depositors and recapitalizing the banks.
The Japanese government officials we met with in mid-December assured us that
the old bank convoy system of "good banks" bailing out "bad banks" was over, but
they had no RTC-type proposals to clear bank balance sheets and no plans to
close down insolvent institutions.
We have moved to a neutral position in Japan from underweight relative to our
benchmark. More importantly, valuations are relatively attractive. Japan
currently sells at 1.6 times book value, the fourth-cheapest and in the first
quartile of EAFE markets. On any kind of dividend discount model, Japanese
equities look attractive compared to 10-year bonds, which yield about 1.5
percent. The price-to-sales ratio, at 0.6 percent, is the cheapest in the world.
As we write this letter, many Asian markets have recovered from their lows, but
their currencies remain under pressure and the markets are fragile and illiquid.
Companies that are bankrupt remain open due to a lack of bankruptcy laws and
creditor rights. Meanwhile, healthy companies cannot get credit or cash to
operate. Under these circumstances, it will take time for Asian growth to
recover.
------------------
5
<PAGE>
MORGAN STANLEY
GLOBAL EQUITY ALLOCATION FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
(UNAUDITED)
Malaysia is an interesting example. While we concur with the Malaysian Central
Bank's position that an austere International Monetary Fund type of program of
high interest rates and severe fiscal belt-tightening would not necessarily
stabilize the currency and may serve only to kill off the economy, we do not
believe the Central Bank should be suppressing interest rates and printing money
to keep banks and companies afloat. Unfortunately, as the crisis deepens,
Malaysia and Singapore--countries that initially hoped to grow their way out of
the price deflation--are now looking at negative-to-flat economic growth.
We remain very underweight in Asia-ex Japan. We have positions of 1 percent in
Singapore, 0.4 percent in Malaysia and 1.5 percent in Australia. The Singapore
dollar and Malaysian ringgit positions are completely hedged.
In sum, we are ringing in the new year with less mirth and good cheer than we
would like. There is a chance that the U.S. market and economy will grind upward
and pull the world along, but U.S. valuations leave little room for
disappointment. Until we see more positive policy responses in Asia and some
indication that the eye of the storm has passed, we remain cautious.
<TABLE>
<S> <C>
Barton M. Biggs Madhav Dhar
PORTFOLIO MANAGER PORTFOLIO MANAGER
Francine J. Bovich Ann D. Thivierge
PORTFOLIO MANAGER PORTFOLIO MANAGER
</TABLE>
- --------------
6
<PAGE>
MORGAN STANLEY
GLOBAL EQUITY ALLOCATION FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
COMMON STOCKS (80.4%)
AUSTRALIA (0.0%)
718 Broken Hill Proprietary Ltd...................... $ 7
227 Coles Myer Ltd................................... 1
334 Gio Australia Holdings Ltd....................... 1
271 MIM Holdings Ltd................................. --
(a)755 Westfield Trust (New)............................ 1
--------
10
--------
AUSTRIA (0.4%)
200 Austria Mikro Systems International AG........... 10
(a)700 Austrian Airlines Osterreichische Luftverkehrs
AG............................................. 15
(a)2,100 Bank Austria AG.................................. 106
(a)1,864 Bank Austria AG.................................. 92
200 Bau Holdings AG.................................. 13
600 Boehler-Udderholm AG............................. 35
100 BWT AG........................................... 16
1,300 Flughafen Wein AG................................ 52
300 Generali AG...................................... 79
(a)200 Lenzing AG....................................... 12
600 Mayr-Melnhof Karton AG........................... 32
(a)300 Oesterreichische Brau-Beteiligungs AG............ 15
1,500 Oesterreichische Elektrizitaetswirtschafts, 'A'
AG............................................. 159
1,100 OMV AG........................................... 152
700 Radex-Heraklith Industriebet AG.................. 24
500 Steyr-Daimler-Puch AG............................ 13
600 VA Technologies AG............................... 91
400 Wienerberger Baustoffindustrie AG................ 77
--------
993
--------
CANADA (2.9%)
4,000 Abitibi-Consolidated, Inc........................ 56
3,300 Agrium, Inc...................................... 40
(a)3,300 Air Canada....................................... 34
4,800 Alcan Aluminum Ltd............................... 132
1,500 Avenor, Inc...................................... 21
5,800 Bank of Montreal................................. 257
5,300 Bank of Nova Scotia.............................. 250
9,300 Barrick Gold Corp................................ 173
13,800 BCE, Inc......................................... 460
7,100 Bombardier, Inc., 'A'............................ 146
3,000 CAE, Inc......................................... 24
1,300 Cameco Corp...................................... 42
9,100 Canadian Imperial Bank of Commerce............... 284
(a)2,300 Canadian Natural Resources Ltd................... 49
3,500 Canadian Occidental Petroleum Ltd................ 79
7,600 Canadian Pacific Ltd............................. 205
2,000 Canadian Tire Corp., 'A'......................... 43
1,800 Cominco Ltd...................................... 28
(a)1,600 Corel Corp....................................... 3
1,300 Cott Corp........................................ 11
2,200 Dofasco, Inc..................................... 35
3,600 Domtar, Inc...................................... 25
(a)3,500 Echo Bay Mines Ltd............................... 9
1,000 George Weston Ltd................................ 85
(a)5,400 Gulf Canada Resources Ltd........................ 38
4,700 Imasco Ltd....................................... 166
3,700 Imperial Oil Ltd................................. 238
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
3,500 Inco Ltd......................................... $ 59
1,300 IPL Energy, Inc.................................. 60
6,400 Laidlaw, Inc. 'B'................................ 87
1,500 Loewen Group, Inc................................ 39
3,500 MacMillan Bloedel Ltd............................ 36
1,600 Magna International, Inc., 'A'................... 100
(a)3,900 Methanex Corp.................................... 31
1,800 Molson Companies Ltd., 'A'....................... 32
2,500 Moore Corp. Ltd.................................. 38
(a)3,300 Newbridge Networks Corp.......................... 116
5,400 Noranda, Inc..................................... 93
6,800 Norcen Energy Resources Ltd...................... 78
5,200 Northern Telecom Ltd............................. 463
12,100 Nova Corp........................................ 115
6,500 Petro............................................ 118
4,700 Placer Dome, Inc................................. 59
1,200 Potash Corp. of Saskatchewan, Inc................ 100
2,900 Power Corp. of Canada............................ 104
(a)2,900 Provigo, Inc..................................... 18
3,000 Ranger Oil Ltd................................... 20
(a)2,900 Renaissance Energy Ltd........................... 60
(a)4,100 Repap Enterprises, Inc........................... 1
(a)3,900 Rogers Communication, Inc., 'B'.................. 19
6,900 Royal Bank of Canada............................. 365
1,800 Suncor, Inc...................................... 62
(a)2,900 Talisman Energy, Inc............................. 89
1,900 Teck Corp., 'B'.................................. 29
2,300 TELUS Corp....................................... 51
7,800 The Seagram Co., Ltd............................. 252
12,800 Thomson Corp..................................... 351
5,300 Transcanada Pipelines Ltd........................ 118
2,700 Westcoast Energy, Inc............................ 62
--------
6,158
--------
FRANCE (3.8%)
693 Accor S.A........................................ 129
2,650 Alcatel Alsthom.................................. 337
5,564 AXA S.A.......................................... 431
3,700 Banque Nationale de Paris RFD.................... 197
1,877 Banque Paribas................................... 163
1,200 BIC.............................................. 88
478 Bouygues......................................... 54
582 Canal Plus....................................... 108
660 Carrefour S.A.................................... 344
1,600 Casino Guichard Perrachon........................ 89
500 Cie Bancaire S.A................................. 81
1,510 Cie de Saint-Gobain.............................. 215
2,209 Cie Generale des Eaux............................ 308
4,550 Elf Aquitaine.................................... 529
550 Eridania Beghin-Say S.A.......................... 86
200 Essilor International............................ 60
18,700 France Telecom S.A............................... 678
1,368 Groupe Danone RFD................................ 244
1,289 Havas S.A........................................ 93
300 Imetal, S.A...................................... 37
1,757 L'Air Liquide.................................... 275
1,192 L'Oreal.......................................... 466
1,643 Lafarge Coppee S.A............................... 108
1,900 Lagardere S.C.A.................................. 63
</TABLE>
-----------------------
7
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
GLOBAL EQUITY ALLOCATION FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
FRANCE (CONT.)
<TABLE>
<C> <S> <C>
535 Legrand S.A...................................... $ 107
1,505 LVMH Moet Hennessy Louis Vuitton................. 250
2,177 Lyonnaise des Eaux S.A........................... 241
2,123 Michelin (C.G.D.E.) 'B'.......................... 107
150 Pathe S.A........................................ 29
1,175 Pernod-Ricard.................................... 69
380 Pinault S.A...................................... 203
340 Promodes......................................... 141
905 PSA Peugeot Citroen S.A.......................... 114
5,902 Rhone-Poulenc S.A. 'A'........................... 264
85 Sagem............................................ 38
1,936 Sanofi S.A....................................... 216
2,297 Schneider S.A.................................... 125
409 Simco S.A........................................ 27
65 Societe Eurafrance S.A........................... 26
1,738 Societe Generale................................. 237
125 Sodexho S.A...................................... 67
(a)13 Sodexho S.A. (New)............................... 7
2,108 Thomson CSF S.A.................................. 66
4,205 Total S.A. 'B'................................... 458
4,390 Usinor Sacilor................................... 63
1,150 Valeo S.A........................................ 78
--------
8,116
--------
GERMANY (4.7%)
900 adidas AG........................................ 119
(a)850 Agiv AG.......................................... 17
4,500 Allianz AG....................................... 1,161
500 AMB Aachener & Muenchener
Beteiligungs AG................................ 55
10,700 BASF AG.......................................... 382
13,600 Bayer AG......................................... 505
4,550 Bayerische Hypotheken Bank AG.................... 221
4,750 Bayerische Vereinsbank AG........................ 306
1,600 Beiersdorf AG.................................... 68
900 Bilfinger & Berger Bau AG........................ 28
(a)150 Brau und Brunnen AG.............................. 15
550 CKAG Colonia Konzern AG.......................... 53
1,750 Continental AG................................... 39
9,200 Daimler-Benz AG.................................. 649
2,000 Degussa AG....................................... 100
9,200 Deutsche Bank AG................................. 643
38,770 Deutsche Telekom AG.............................. 718
8,050 Dresdner Bank AG................................. 366
935 Heidelberger Zement AG........................... 66
1,650 Hochtief AG...................................... 68
200 Karstadt AG...................................... 69
(a)1,150 Kloeckner-Humboldt-Deutz AG...................... 9
200 Linde AG......................................... 121
6,950 Lufthansa AG..................................... 131
250 MAN AG........................................... 72
650 Mannesmann AG.................................... 326
2,923 Merck KGAA....................................... 98
4,464 METRO AG......................................... 158
1,530 Muenchener Rueckversicherungs (Registered)....... 582
300 Preussag AG...................................... 92
6,100 RWE AG........................................... 327
1,110 SAP AG........................................... 337
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
1,350 Schering AG...................................... $ 130
10,300 Siemens AG....................................... 621
(a)50 Starbag AG....................................... 4
750 Thyssen AG....................................... 160
9,050 VEBA AG.......................................... 616
678 Viag AG.......................................... 371
550 Volkswagen AG.................................... 307
--------
10,110
--------
ITALY (2.9%)
25,422 Assicurazioni Generali S.p.A..................... 624
40,300 Banca Commerciale Italiana....................... 140
15,900 Banco Ambrosiano Veneto.......................... 61
5,160 Benetton Group S.p.A............................. 84
4,700 Cartiere Burgo S.p.A............................. 28
68,500 Credito Italiano S.p.A........................... 211
19,000 Edison S.p.A..................................... 115
220,000 Ente Nazionale Idrocarburi S.p.A................. 1,247
4,500 Falck............................................ 21
92,930 Fiat S.p.A....................................... 270
20,570 Fiat S.p.A. Di Risp NCS.......................... 34
11,000 Impreglio S.p.A.................................. 8
24,100 Istituto Bancario San Paolo di Torina S.p.A...... 230
17,700 Istituto Mobiliare Italiano S.p.A................ 210
116,020 Istituto Nazionale delle Assicurazioni (INA)..... 235
6,800 Italcementi S.p.A................................ 47
4,650 Italcementi S.p.A. NCS........................... 14
19,400 Italgas.......................................... 80
(a)6,478 La Rinascente S.p.A.............................. 48
14,000 Magneti Marelli S.p.A............................ 24
33,500 Mediaset S.p.A................................... 165
14,050 Mediobanca S.p.A................................. 110
83,108 Montedison S.p.A................................. 75
28,900 Montedison S.p.A. Di Risp NCS.................... 19
(a)96,880 Olivetti Group................................... 59
44,640 Parmalat Finanziaria S.p.A....................... 64
45,000 Pirelli S.p.A.................................... 120
9,269 R.A.S............................................ 91
462 R.A.S. Di Risp................................... 3
4,100 S.A.I............................................ 46
5,000 Sasib S.p.A...................................... 15
8,500 Sirti S.p.A...................................... 52
21,000 Snia BPD S.p.A................................... 22
42,500 Telecom Italia Mobile Di Risp S.p.A.............. 121
182,800 Telecom Italia Mobile S.p.A...................... 844
24,884 Telecom Italia Mobile S.p.A...................... 110
95,666 Telecom Italia S.p.A............................. 611
--------
6,258
--------
JAPAN (8.7%)
1,500 Advantest Corp................................... 85
19,800 Ajinomoto Co., Inc............................... 193
(a)11,800 Aoki Corp........................................ 4
1,600 Aoyama Trading Co., Ltd.......................... 29
500 Asahi Bank Ltd................................... 2
11,800 Asahi Breweries Ltd.............................. 172
35,400 Asahi Chemical Industry Co., Ltd................. 120
33,600 Asahi Glass Co................................... 160
35,000 Bank of Tokyo-Mitsubishi......................... 483
</TABLE>
- --------------
8
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
GLOBAL EQUITY ALLOCATION FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
JAPAN (CONT.)
<TABLE>
<C> <S> <C>
500 Bank of Yokohama................................. $ 1
11,800 Bridgestone Corp................................. 256
14,800 Canon, Inc....................................... 345
7,000 Casio Computer Co., Ltd.......................... 50
3,800 Chiba Bank Ltd................................... 12
11,800 Chugai Pharmaceutical Ltd........................ 61
13,800 Dai Nippon Printing Co., Ltd..................... 259
12,800 Daiei, Inc....................................... 53
11,800 Daikin Industries Ltd............................ 44
11,800 Daiwa House Industry............................. 62
69 East Japan Railway Co............................ 311
7,800 Ebara Corp....................................... 82
5,100 Fanuc Co......................................... 193
7,000 Fuji Photo Film Co............................... 268
30,600 Fujitsu Ltd...................................... 328
8,800 Furukawa Electric................................ 38
15,800 Hankyu Corp...................................... 74
11,800 Hazama-Gumi...................................... 6
59,000 Hitachi Ltd...................................... 421
15,000 Honda Motor Co................................... 551
400 Industrial Bank of Japan......................... 3
7,000 Ito-Yokado Co., Ltd.............................. 357
36,000 Japan Airlines Co................................ 98
29,600 Japan Energy Corp................................ 28
800 Joyo Bank........................................ 3
5,800 Jusco Co......................................... 82
23,600 Kajima Corp...................................... 60
15,700 Kansai Electric Power Co......................... 266
20,800 KAO Corp......................................... 300
18,600 Kawasaki Steel Corp.............................. 25
28,600 Kinki Nippon Railway............................. 153
23,600 Kirin Brewery Co., Ltd........................... 172
23,600 Komatsu Ltd...................................... 118
35,400 Kubota Corp...................................... 93
23,600 Kumagai Gumi Co., Ltd............................ 13
3,600 Kyocera Corp..................................... 163
11,800 Kyowa Hakko Kogyo................................ 51
31,000 Long-Term Credit Bank of Japan Ltd............... 50
35,200 Marubeni Corp.................................... 62
2,800 Marui Co......................................... 44
35,400 Matsushita Electric Industrial Ltd............... 518
35,400 Mitsubishi Chemical Corp......................... 51
33,000 Mitsubishi Corp.................................. 260
41,400 Mitsubishi Electric Corp......................... 106
64,000 Mitsubishi Heavy Industries Ltd.................. 267
23,600 Mitsubishi Materials Corp........................ 38
10,000 Mitsubishi Trust and Banking Corp................ 100
35,200 Mitsui & Co...................................... 208
(a)23,600 Mitsui Engineering & Shipbuilding Co., Ltd....... 15
400 Mitsui Trust & Banking Corp...................... 1
12,800 Mitsukoshi....................................... 34
4,000 Murata Manufacturing Co., Inc.................... 101
7,800 Mycal Corp....................................... 65
20,600 NEC Corp......................................... 219
11,800 NGK Insulators Ltd............................... 105
14,600 Nippon Denko Co., Ltd............................ 263
9,000 Nippon Express Co., Ltd.......................... 45
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
11,800 Nippon Fire & Marine Insurance Co................ $ 44
11,800 Nippon Light Metal Co............................ 17
11,800 Nippon Meat Packers, Inc......................... 161
33,600 Nippon Oil Co.................................... 87
131,000 Nippon Steel Corp................................ 194
177 Nippon Telegraph & Telephone ADR................. 1,519
35,400 Nippon Yusen Kabushiki Kaisha.................... 97
44,400 Nissan Motor Co., Ltd............................ 184
69,000 NKK Corp......................................... 55
13,800 Odakyu Electric Railway Co....................... 60
23,600 OJI Paper Co., Ltd............................... 94
52,200 Osaka Gas Co..................................... 119
11,800 Penta-Ocean Construction......................... 16
3,000 Pioneer Electronic Corp.......................... 46
1,000 Rohm Co.......................................... 102
25,200 Sakura Bank Ltd.................................. 72
8,800 Sankyo Co., Ltd.................................. 199
42,000 Sanwa Bank, Ltd.................................. 425
35,400 Sanyo Electric Co., Ltd.......................... 92
2,800 Secom Co......................................... 179
2,300 Sega Enterprises Ltd............................. 42
11,800 Sekisui House Ltd................................ 76
23,600 Sharp Corp....................................... 162
3,000 Shimano, Inc..................................... 55
5,000 Shin-Etsu Chemical Co............................ 95
16,800 Shinizu Corp..................................... 39
5,000 Shiseido Co., Ltd................................ 68
800 Shizuoka Bank.................................... 9
23,600 Showa Denko K.K.................................. 21
5,500 Sony Corp........................................ 489
47,200 Sumitomo Chemical Co............................. 108
23,400 Sumitomo Corp.................................... 131
15,800 Sumitomo Electric Industries..................... 216
5,000 Sumitomo Forestry................................ 24
42,400 Sumitomo Metal Industries........................ 54
11,000 Sumitomo Metal Mining Co......................... 36
11,800 Sumitomo Osaka Cement Co., Ltd................... 15
23,600 Taisei Corp., Ltd................................ 39
(a)7,000 Taisho Pharmaceutical Co......................... 179
14,800 Takeda Chemical Industries....................... 422
23,600 Teijin Ltd....................................... 49
15,800 Tobu Railway Co.................................. 49
8,500 Tohoku Electric Power............................ 129
600 Tokai Bank....................................... 3
35,400 Tokio Marine & Fire Insurance Co................. 402
21,900 Tokyo Electric Power Co.......................... 399
2,000 Tokyo Electron Ltd............................... 64
47,200 Tokyo Gas Co..................................... 107
19,800 Tokyu Corp....................................... 76
15,800 Toppan Printing Co., Ltd......................... 206
35,500 Toray Industries, Inc............................ 159
11,800 Toto Ltd......................................... 75
23,600 Toyobo Ltd....................................... 29
51,200 Toyota Motor Corp................................ 1,468
23,600 Ube Industries Ltd............................... 30
300 Yamaichi Securities.............................. --
--------
18,487
--------
</TABLE>
-----------------------
9
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
GLOBAL EQUITY ALLOCATION FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
NETHERLANDS (1.9%)
11,845 ABN-Amro Holding N.V............................. $ 231
700 Akzo Nobel N.V................................... 121
5,800 Elsevier N.V..................................... 94
350 Heineken N.V..................................... 61
7,195 ING Groep N.V.................................... 303
68 ING Groep N.V. ADR............................... 3
823 KLM Royal Dutch Airlines N.V..................... 30
3,866 Koninklijke Ahold N.V............................ 101
287 Koninklijke Hoogovens............................ 12
900 Koninklijke KNP BT............................... 21
9,587 Koninklijke PTT Nederland N.V.................... 400
200 Nedlloyd Groep N.V............................... 4
2,900 Phillips Electronics N.V......................... 174
18,800 Royal Dutch Petroleum N.V........................ 1,032
18,300 Royal Dutch Petroleum N.V. - New York Shares..... 992
296 Stork N.V........................................ 10
5,600 Unilever N.V..................................... 345
646 Wolters Kluwer N.V............................... 83
--------
4,017
--------
NORWAY (0.5%)
2,200 AKER S.A. 'A'.................................... 40
1,900 Bergesen dy ASA, 'A'............................. 45
800 Bergesen dy ASA, 'B'............................. 19
18,600 Christiania Bank OG Kreditkasse.................. 75
1,000 Dyno Industrier ASA.............................. 19
1,800 Elkem ASA........................................ 24
3,300 Hafslund ASA 'B'................................. 16
700 Helikopter Services Group ASA.................... 8
1,400 Kvaerner ASA..................................... 71
1,100 Leif Hoegh & Co., ASA............................ 22
(a)4,500 NCL Holdings ASA................................. 16
7,800 Norsk Hydro ASA.................................. 380
1,000 Norske Skogindustrier AGA........................ 29
1,600 Orkla ASA........................................ 137
(a)1,100 Petroleum Geo-Services ASA....................... 69
(a)9,600 Storebrand ASA................................... 68
700 Unitor ASA....................................... 9
--------
1,047
--------
PORTUGAL (1.1%)
10,500 Banco Comercial Portugues, S.A. (Registered)..... 215
5,500 Banco Espirito Santo e Comercial de Lisboa,
S.A............................................ 164
4,000 Banco Totta & Acores 'B' (Registered)............ 78
5,300 BPI-SGPS S.A..................................... 129
500 Cia de Seguros Tranquilidade (Registered)........ 12
5,600 Cimpor-Cimentos de Portugal, SGPS, S.A........... 147
300 CIN, S.A......................................... 19
1,300 Corticeira Amorim, S.A........................... 15
24,500 EDP-Eletricidade de Portugal, S.A................ 464
400 Engil-SGPS....................................... 4
1,100 INAPA Investimentos Participacoes e Gestao,
S.A............................................ 13
7,600 Jeronimo Martins, SGPS, S.A...................... 241
6,000 Portucel Industrial-Empresa Produtora de
Celulose, S.A.................................. 37
12,600 Portugal Telecom S.A............................. 585
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
(a)800 Sociedade de Construcoes Soares da Costa, S.A.... $ 5
2,800 Sonae Investimentos-Sociedade Gestora de
Participacoes Sociais, S.A..................... 113
800 UNICER-Uniao Cervejeira, S.A..................... 11
--------
2,252
--------
SPAIN (2.7%)
340 Acerinox S.A..................................... 50
(a)264 ACS S.A.......................................... 6
(a)20 Aguas de Barcelona............................... --
4,800 Argentaria S.A................................... 292
8,211 Autopistas Concesionaria Espanola S.A............ 110
24,000 Banco Bilbao Vizcaya, S.A. (Registered).......... 777
12,200 Banco Central Hispanoamericano S.A............... 297
21,900 Banco Santander S.A.............................. 732
400 Corporacion Financiera Alba S.A.................. 42
1,698 Corporacion Mapfre S.A........................... 45
1,550 Dragados y Construcciones S.A.................... 33
1,300 Ebro Agricolas, Compania de Alimentacion S.A..... 23
550 Empresa Nacional de Cellulosas S.A............... 7
40,000 Endesa S.A....................................... 710
317 Energia y Industrias Aragonesas.................. 2
(a)4,700 Ercros S.A....................................... 5
1,600 Fomento de Construcciones y Contratas S.A........ 61
5,200 Gas Natural SDG 'E'.............................. 270
1,635 General de Aguas De Barcelona S.A................ 67
35,300 Iberdrola S.A.................................... 465
656 Inmobiliaria Metropolitana Vasco Central S.A..... 30
200 Portland Vaderrivas S.A.......................... 18
11,600 Repsol S.A....................................... 495
1,000 Tabacalera S.A. 'A'.............................. 81
34,600 Telefonica de Espana............................. 988
8,100 Union Electrica Fenosa S.A....................... 78
2,400 Uralita S.A...................................... 27
1,376 Vallehermoso S.A................................. 42
650 Viscofan Industria Navarra de Envolturas
Celulosicas S.A................................ 16
348 Zardoya-Otis S.A................................. 41
--------
5,810
--------
SWEDEN (2.1%)
21,100 ABB AB 'A'....................................... 250
(a)3,500 ABB AB 'B'....................................... 41
5,900 AGA AB 'B'....................................... 78
(a)40,166 Astra AB 'A'..................................... 696
9,100 Astra AB 'B'..................................... 153
4,650 Atlas Copco AB 'A'............................... 139
2,500 Electrolux AB 'B'................................ 173
1,200 Esselte AB 'B'................................... 24
(a)850 Granges AB....................................... 13
1,100 Hennes & Mauritz AB 'A'.......................... 49
5,000 Hennes & Mauritz AB 'B'.......................... 220
5,700 SCA AB 'B'....................................... 128
2,600 Securitas AB 'B'................................. 79
3,200 Skandia Group Forsakrings AB..................... 151
16,600 Skandinaviska Enskilda Banken 'A'................ 210
3,800 Skanska AB 'B'................................... 156
2,400 SKF AB 'B'....................................... 51
10,050 Stora Kopparbergs Bergslags Aktiebolag........... 127
</TABLE>
- --------------
10
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
GLOBAL EQUITY ALLOCATION FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
SWEDEN (CONT.)
<TABLE>
<C> <S> <C>
6,800 Svenska Handelsbanken 'A'........................ $ 235
17,200 Swedish Match AB................................. 57
27,600 Telefonaktiebolaget LM Ericsson.................. 1,038
4,600 Trelleborg AB 'B'................................ 58
11,300 Volvo AB 'B'..................................... 303
--------
4,429
--------
SWITZERLAND (3.7%)
165 ABB AG (Bearer).................................. 207
320 Adia S.A. (Bearer)............................... 93
100 Alusuisse-Lonza Holding AG (Registered).......... 96
3,850 CS Holding AG (Registered)....................... 596
15 Georg Fischer AG (Bearer)........................ 21
115 Holderbank Financiere Glarus AG 'B' (Bearer)..... 94
105 Merkur Holding AG (Registered)................... 22
685 Nestle S.A. (Registered)......................... 1,027
1,130 Novartis AG (Registered)......................... 1,834
29 Roche Holding AG (Bearer)........................ 447
121 Roche Holding AG-Genusshein...................... 1,202
260 Schweizerische Rueckversicherungs-Gesellchaft
(Registered)................................... 486
85 SMH AG (Bearer).................................. 47
35 Societe Generale de Surveillance Holding S.A.
(Bearer)....................................... 67
70 Sulzer AG (Registered)........................... 44
1,330 Swiss Bank Corp. (Registered).................... 413
65 SwissAir AG (Registered)......................... 89
355 Union Bank of Switzerland (Bearer)............... 513
400 Union Bank of Switzerland (Registered)........... 115
835 Zuerich Versicherungs-Gesellschaft (Registered).. 398
--------
7,811
--------
UNITED KINGDOM (7.2%)
18,200 Abbey National plc............................... 326
11,665 Argyll Group plc................................. 66
9,100 Arjo Wiggins Appleton plc........................ 24
6,500 Associated British Foods plc..................... 57
22,589 Barclays plc..................................... 601
14,300 Bass plc......................................... 222
40,266 B.A.T Industries plc............................. 367
50,470 BG plc........................................... 227
9,127 BICC plc......................................... 26
16,856 Blue Circle Industries plc....................... 95
9,055 BOC Group plc.................................... 149
14,300 Boots Co. plc.................................... 206
9,100 BPB Industries plc............................... 51
6,468 British Aerospace plc............................ 184
15,628 British Airways plc.............................. 144
76,115 British Petroleum Co. plc........................ 1,001
20,800 British Sky Broadcasting Group plc............... 156
26,000 British Steel plc................................ 56
75,400 British Telecommunications plc................... 593
54,606 BTR plc.......................................... 165
3,856 Burmah Castrol plc............................... 67
32,462 Cable & Wireless plc............................. 285
14,335 Cadbury Schweppes plc............................ 145
9,360 Caradon plc...................................... 27
(a)57,200 Centrica plc..................................... 84
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
11,671 Coats Viyella plc................................ $ 17
9,056 Commercial Union plc............................. 126
6,500 Courtaulds plc................................... 32
1,272 De La Rue plc.................................... 8
(a)11,730 EMI Group plc.................................... 98
37,700 General Electric plc............................. 244
7,767 GKN plc.......................................... 159
41,600 Glaxo Wellcome plc............................... 984
9,090 Granada Group plc................................ 139
15,600 Great Universal Stores plc....................... 197
10,369 Guardian Royal Exchange plc...................... 56
57,172 Guinness plc..................................... 526
28,570 HSBC Holdings plc................................ 705
7,768 Hanson plc....................................... 35
16,900 Harrisons & Crosfield plc........................ 39
11,700 Imperial Chemical Industries plc................. 183
15,613 Ladbroke Group plc............................... 68
10,400 Land Securities plc.............................. 166
10,400 Lasmo plc........................................ 47
15,600 Legal & General Group plc........................ 136
71,500 Lloyds TSB Group plc............................. 925
10,418 Lonrho plc....................................... 16
45,500 Marks & Spencer plc.............................. 448
7,800 MEPC plc......................................... 65
18,200 National Power plc............................... 180
9,098 North West Water plc............................. 117
10,757 Peninsular & Oriental Steam Navigation Co........ 122
19,478 Pilkington plc................................... 41
26,009 Prudential Corp. plc............................. 314
11,700 Rank Group plc................................... 65
7,751 Redland plc...................................... 44
18,200 Reed International plc........................... 182
22,100 Reuters Holdings plc............................. 242
7,800 Rexam plc........................................ 38
3,900 RMC Group plc.................................... 54
18,212 Royal & Sun Alliance Insurance Group plc......... 183
6,454 Royal Bank of Scotland plc....................... 82
15,760 RTZ Corp. plc (Registered)....................... 194
20,772 Sainsbury (J) plc................................ 174
2,600 Schroders plc.................................... 82
12,993 Scottish Power plc............................... 115
26,000 Sears plc........................................ 23
8,051 Sedgwick Group plc............................... 19
6,500 Slough Estates plc............................... 37
64,896 SmithKline Beecham plc........................... 664
6,476 Southern Electric plc............................ 54
18,185 Tarmac plc....................................... 34
10,354 Taylor Woodrow plc............................... 30
24,742 Tesco plc........................................ 201
9,144 Thames Water plc................................. 136
(a)5,571 Thorn plc........................................ 14
6,500 Thorn EMI plc 'B'................................ 2
6,466 TI Group plc..................................... 49
36,400 Unilever plc..................................... 312
42,892 Vodafone Group plc............................... 309
11,700 Zeneca Group plc................................. 411
--------
15,267
--------
</TABLE>
-----------------------
11
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
GLOBAL EQUITY ALLOCATION FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
UNITED STATES (37.8%)
5,200 Abbott Laboratories.............................. $ 341
(a)900 AccuStaff, Inc................................... 21
3,000 Adobe Systems, Inc............................... 124
(a)700 Advanced Fibre Communications, Inc............... 20
900 AGCO Corp........................................ 26
900 A.H. Belo Corp., 'A'............................. 51
800 Air Express International Corp................... 24
900 Air Products & Chemicals, Inc.................... 74
500 Airborne Freight Corp............................ 31
600 Albank Financial Corp............................ 31
3,300 Albertson's, Inc................................. 156
1,100 Allegheny Teledyne, Inc.......................... 28
(a)600 Allen Telecom, Inc............................... 11
1,500 Allergan, Inc.................................... 50
(a)1,200 Allied Waste Industries, Inc..................... 28
5,100 Allstate Corp.................................... 463
3,900 Alltel Corp...................................... 160
900 Aluminum Co. of America.......................... 63
1,000 Alza Corp., 'A'.................................. 32
900 AMBAC Finacial Group, Inc........................ 41
700 American Bankers Insurance Group, Inc............ 32
5,600 American Express Co.............................. 500
1,000 American General Corp............................ 54
8,200 American Greeting Corp., 'A'..................... 321
8,600 American Home Products Corp...................... 658
5,500 American International Group, Inc................ 598
(a)700 American Power Conversion Corp................... 16
1,000 American Stores Co............................... 20
15,400 American Telephone & Telegraph Co................ 943
4,600 Ameritech Corp................................... 370
5,000 Amoco Corp....................................... 426
2,700 AMP, Inc......................................... 113
(a)600 AMR Corp......................................... 77
(a)600 Amresco, Inc..................................... 18
(a)1,200 Andrew Corp...................................... 29
6,700 Anheuser-Busch Cos., Inc., 'A'................... 295
(a)1,100 Apple Computer, Inc.............................. 14
(a)9,900 Applied Material, Inc............................ 298
600 Aptar Group, Inc................................. 33
1,900 Armstrong World Industries, Inc., 'B'............ 142
800 Arvin Industries, Inc............................ 27
2,200 Asarco, Inc...................................... 49
4,000 Ashland, Inc..................................... 215
600 Associated Banc-Corp............................. 33
800 Astoria Financial Corp........................... 45
1,500 Atlantic Richfield Co............................ 120
(a)1,300 Atmel Corp....................................... 24
2,900 Automatic Data Processing, Inc................... 178
1,100 Avnet, Inc....................................... 73
800 AVX Corp......................................... 15
2,200 Baker Hughes, Inc................................ 96
1,600 Baldor Electric Co............................... 35
1,000 Ballard Medical Products......................... 24
5,200 Banc One Corp.................................... 282
5,300 Bank of New York Co., Inc........................ 306
9,100 BankAmerica Corp................................. 664
3,200 BankBoston Corp.................................. 301
1,000 Bankers Trust New York Corp...................... 112
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
(a)1,300 Barnes & Noble, Inc.............................. $ 43
2,900 Bausch & Lomb, Inc............................... 115
3,600 Baxter International, Inc........................ 182
9,600 Becton & Dickinson & Co.......................... 480
700 Belden, Inc...................................... 25
6,900 Bell Atlantic Corp............................... 628
9,500 BellSouth Corp................................... 535
600 Beneficial Corp.................................. 50
600 Bergen Brunswig Corp., 'A'....................... 25
600 Betz Laboratories, Inc........................... 37
(a)2,900 Beverly Enterprises, Inc......................... 38
3,600 BFGoodrich Co.................................... 149
(a)900 Biogen, Inc...................................... 33
1,200 Biomet, Inc...................................... 31
2,900 Birmingham Steel Corp............................ 46
(a)1,300 BISYS Group, Inc................................. 43
(a)700 Black Box Corp................................... 25
1,200 BMC Industries, Inc.............................. 19
1,900 Bob Evans Farms, Inc............................. 42
4,900 Boeing Co........................................ 240
800 Boise Cascade Corp............................... 24
(a)600 Borders Group, Inc............................... 19
600 Bowater, Inc..................................... 27
3,400 Briggs & Stratton Corp........................... 165
10,500 Bristol-Myers Squibb Co.......................... 993
2,600 Brown-Forman Corp., 'B'.......................... 144
2,600 Browning-Ferris Industries, Inc.................. 96
2,400 Burlington Northern Railroad Co.................. 223
1,367 Burlington Resources, Inc........................ 61
(a)900 California Energy Company, Inc................... 26
1,100 Callaway Golf Co................................. 31
(a)800 Cambridge Tech Partner, Inc...................... 33
500 Camco International, Inc......................... 32
2,900 Campbell Soup Co................................. 169
500 Capital RE Corp.................................. 31
(a)400 Catalina Marketing Corp.......................... 18
6,100 Caterpillar, Inc................................. 296
1,190 CBS, Inc......................................... 35
(a)700 Centocor, Inc.................................... 23
3,100 Central & South West Corp........................ 84
700 Central Louisiana Electric Co.................... 23
400 Central Newspapers, Inc., 'A'.................... 30
700 Centura Banks, Inc............................... 48
700 Century Telephone Enterprises, Inc............... 35
(a)500 Chancellor Media Corp., 'A'...................... 37
655 Charter One Financial Inc........................ 41
5,800 Chase Manhattan Corp............................. 635
8,500 Chevron Corp..................................... 654
625 Chittenden Corp.................................. 22
(a)1,500 Choice Hotels International, Inc................. 24
9,600 Chrysler Corp.................................... 338
1,800 Chubb Corp....................................... 136
1,900 CIGNA Corp....................................... 329
4,000 Cincinatti Milacron, Inc......................... 104
900 CIPSCO, Inc...................................... 40
(a)1,500 Circus Circus Enterprises, Inc................... 31
(a)3,900 Cisco Systems, Inc............................... 217
5,400 Citicorp......................................... 683
700 CKE Restaurants, Inc............................. 29
</TABLE>
- --------------
12
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
GLOBAL EQUITY ALLOCATION FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
UNITED STATES (CONT.)
<TABLE>
<C> <S> <C>
1,900 Clayton Homes, Inc............................... $ 34
1,900 Clorox Co........................................ 150
500 CMAC Investment Corp............................. 30
600 CNF Transportation, Inc.......................... 23
(a)500 Coast Savings Financial, Inc..................... 34
1,500 Coastal Corp..................................... 93
25,700 Coca-Cola Co..................................... 1,712
900 Colgate Palmolive Co............................. 66
15,300 Columbia HCA/Healthcare Corp..................... 453
700 Comdisco, Inc.................................... 23
3,800 Comerica, Inc.................................... 343
1,000 Commercial Metals Co............................. 32
(a)2,200 Commnet Cellular, Inc............................ 78
8,700 Compaq Computer Corp............................. 491
700 Compass Bancshares, Inc.......................... 31
(a)900 CompUSA, Inc..................................... 28
6,600 Computer Associates International, Inc........... 349
(a)1,100 Computer Management Sciences..................... 21
1,700 Conagra, Inc..................................... 56
(a)900 Concord EFS, Inc................................. 22
1,800 Conseco, Inc..................................... 82
3,700 Consolidated Edison Co. of New York, Inc......... 152
600 Consolidated Papers, Inc......................... 32
(a)900 Consolidated Stores Corp......................... 40
(a)600 Continental Airlines, 'B'........................ 29
(a)500 Cooper Cameron Corp.............................. 31
2,200 Cooper Industries, Inc........................... 108
2,000 Cooper Tire & Rubber Co.......................... 49
1,600 Coors (Adolph) 'B'............................... 53
1,500 Corestates Financial Corp........................ 120
(a)1,100 Corporate Express, Inc........................... 14
1,200 Countrywide Credit Industries, Inc............... 51
(a)1,300 Covance, Inc..................................... 26
3,600 CPC International, Inc........................... 389
3,500 C.R. Bard, Inc................................... 110
1,300 Crompton & Knowles Corp.......................... 34
100 Crown Cork & Seal, Inc........................... 5
4,700 CSX Corp......................................... 254
300 Cummins Engine................................... 18
2,600 Cyprus Amaz Minerals Co.......................... 40
(a)700 Cytec Industries, Inc............................ 33
800 Dallas Semiconductor Corp........................ 33
1,000 Dana Corp........................................ 47
900 Danaher Corp..................................... 57
6,200 Darden Restaurants, Inc.......................... 78
6,400 Dayton Hudson Corp............................... 432
900 Dean Foods Co.................................... 54
6,800 Deere & Co....................................... 397
(a)1,600 Dell Computer Corp............................... 134
2,300 Delta Airlines Inc............................... 274
5,100 Deluxe Corp...................................... 176
700 Deposit Guaranty Corp............................ 40
1,600 Dime Bancorp, Inc................................ 48
600 Dow Chemical Co.................................. 61
(a)1,000 Dress Barn, Inc.................................. 28
7,200 Dresser Industries, Inc.......................... 302
600 DTE Energy Co.................................... 21
13,400 Du Pont (EI) de Nemours Co....................... 805
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
10,600 Dun & Bradstreet Corp............................ $ 328
(a)600 Dura Pharmaceuticals, Inc........................ 28
4,400 Eastern Entreprises.............................. 198
1,300 Eastman Chemical Co.............................. 77
4,200 Eastman Kodak Co................................. 255
900 Echlin, Inc...................................... 33
800 Ecolab, Inc...................................... 44
1,900 EG&G, Inc........................................ 40
(a)800 Electronic Arts, Inc............................. 30
(a)700 Electronics for Imaging, Inc..................... 12
6,500 Eli Lilly & Co................................... 453
(a)3,000 EMC Corp......................................... 82
2,900 Emerson Electric Co.............................. 164
2,100 Enova Corp....................................... 57
2,300 Enron Corp....................................... 96
15,000 Entergy Corp..................................... 449
(a)400 Etec Systems, Inc................................ 19
1,200 E.W. Blanch Holdings, Inc........................ 41
15,300 Exxon Corp....................................... 936
8,900 Fannie Mae....................................... 508
1,000 Family Dollar Stores, Inc........................ 29
600 Fastenal Co...................................... 23
(a)700 Federal Express Corp............................. 43
900 Federal Signal Corp.............................. 19
800 FINOVA Group, Inc................................ 40
900 First American Corp., Tennessee.................. 45
3,500 First Chicago Corp............................... 292
500 First Commerce Corp.............................. 34
1,050 First Commercial Corp............................ 62
700 First Hawaiian, Inc.............................. 28
900 First Midwest Bancorp, Inc....................... 39
1,000 First Security Corp.............................. 42
10,200 First Union Corp. (N.C.)......................... 523
1,200 First Virginia Banks, Inc........................ 62
100 Firstenergy Corp................................. 3
500 Firstmerit Corp.................................. 14
(a)900 FISERV, Inc...................................... 44
5,400 Fleet Financial Group, Inc....................... 405
4,400 Fleming Cos., Inc................................ 59
2,800 Fluor Corp....................................... 105
(a)500 FMC Corp......................................... 34
16,100 Ford Motor Co.................................... 784
(a)800 Forest Laboratories, Inc. 'A'.................... 39
600 Fort James Corp.................................. 23
3,200 Fortune Brands, Inc.............................. 119
(a)900 Fred Meyer, Inc.................................. 33
700 Freddie Mac...................................... 29
4,700 Freeport McMoran Copper Corp., 'B'............... 74
(a)1,200 Fruit of the Loom................................ 31
2,100 Gannett Co., Inc................................. 130
2,100 Gap, Inc......................................... 74
300 Gaylord Entertainment Co......................... 10
400 General Dynamics Corp............................ 35
30,500 General Electric Co.............................. 2,238
1,600 General Mills, Inc............................... 115
8,700 General Motors Corp.............................. 527
900 General RE Corp.................................. 191
1,500 General Signal Corp.............................. 63
(a)400 Genesis Health Ventures, Inc..................... 11
</TABLE>
-----------------------
13
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
GLOBAL EQUITY ALLOCATION FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
UNITED STATES (CONT.)
<TABLE>
<C> <S> <C>
900 Genzyme Corp..................................... $ 25
1,200 Giant Food, Inc. 'A'............................. 40
1,400 Goodyear Tire & Rubber Co........................ 89
1,100 GPU, Inc......................................... 46
3,800 Great Atlantic & Pacific Tea Co.................. 113
2,400 Great Lakes Chemical Corp........................ 108
8,400 Green Tree Financial Corp........................ 220
11,500 GTE Corp......................................... 601
(a)500 GTECH Holdings Corp.............................. 16
(a)1,300 Gulfstream Aerospace Corp........................ 38
1,200 Halliburton Co................................... 62
1,000 Hannaford Brothers Co............................ 43
1,700 Harleysville Group, Inc.......................... 41
600 Harman International Industries, Inc............. 25
600 Harnischfeger Industries, Inc.................... 21
(a)1,200 Harrah's Entertainment, Inc...................... 23
7,200 Harris Corp...................................... 330
1,300 Harsco Corp...................................... 56
900 Harte-Hanks Communications, Inc.................. 33
4,700 Hartford Financial Services Group................ 440
100 HBO & Co......................................... 5
5,500 Hercules, Inc.................................... 275
600 Herman Miller, Inc............................... 33
800 Hershey Foods Corp............................... 50
13,400 Hewlett-Packard Co............................... 838
2,500 Hibernia Corp., 'A'.............................. 47
2,500 Hilton Hotels Corp............................... 74
2,700 H.J. Heinz Co.................................... 137
10,600 Home Depot, Inc.................................. 624
1,400 Honeywell, Inc................................... 96
2,300 Houston Industries, Inc.......................... 61
100 H&R Block, Inc................................... 4
670 Huntington Bancshares, Inc....................... 24
600 Illinois Central Corp............................ 20
1,000 IMCO Recycling, Inc.............................. 16
2,300 Imperial Credit Mortgage Holdings................ 41
2,200 Ingersoll-Rand Co................................ 89
1,200 INMC Mortgage Holdings, Inc...................... 28
700 Integrated Health Services, Inc.................. 22
17,300 Intel Corp....................................... 1,215
(a)1,300 Interim Services, Inc............................ 34
11,300 International Business Machines Corp............. 1,182
3,100 International Flavors & Fragrances, Inc.......... 160
1,200 International Game Technology.................... 30
(a)1,300 International Rectifier Corp..................... 15
1,700 Interpublic Group of Cos., Inc................... 85
1,000 Interstate Bakeries Corp......................... 37
1,000 Invacare Corp.................................... 22
(a)2,000 Iomega Corp...................................... 25
(a)2,000 Ionics, Inc...................................... 78
5,500 ITT Industries, Inc.............................. 173
(a)600 Jacobs Engineering Group, Inc.................... 15
3,000 J.C. Penney Co., Inc............................. 181
600 Jefferson-Pilot Corp............................. 47
2,200 John H. Harland Co............................... 46
1,500 Johns Manville Corp.............................. 15
13,900 Johnson & Johnson................................ 916
5,900 Johnson Controls, Inc............................ 282
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
(a)500 Jones Apparel Group, Inc......................... $ 22
7,300 Jostens, Inc..................................... 168
1,600 Kansas City Southern Industries, Inc............. 51
(a)900 Kemet Corp....................................... 17
700 Kennametal, Inc.................................. 36
(a)800 Kent Electronics Corp............................ 20
200 Kerr-McGee Corp.................................. 13
5,400 KeyCorp.......................................... 382
500 Keyspan Energy Corp.............................. 18
2,400 Kimball International, Inc., 'B'................. 44
5,800 Kimberly-Clark Corp.............................. 286
800 King World Productions, Inc...................... 46
(a)900 KLA-Tencor Corp.................................. 35
800 KN Energy, Inc................................... 43
500 Knight Ridder, Inc............................... 26
(a)1,000 Komag, Inc....................................... 15
(a)700 LCI International, Inc........................... 22
(a)700 Lear Corp........................................ 33
(a)900 Lexmark International Group, Inc................. 34
1,400 LG&E Energy Corp................................. 35
750 Liberty Financial Cos., Inc...................... 28
2,500 Lincoln National Corp............................ 195
(a)700 Littlefuse, Inc.................................. 17
3,800 Lockheed Martin Corp............................. 374
3,400 Loews Corp....................................... 361
1,000 Long Island Lighting Co.......................... 30
800 Longs Drug Stores, Inc........................... 26
800 Louisiana-Pacific Corp........................... 15
4,600 Lowe's Cos., Inc................................. 219
800 Lubrizol Corp.................................... 30
1,900 Lucent Technologies, Inc......................... 152
(a)800 Mac Frugals Bargains Close-Outs, Inc............. 33
1,000 Magna Group, Inc................................. 46
1,200 M.A. Hanna Co.................................... 30
2,800 Mallinckrodt, Inc................................ 106
9,500 Manor Care, Inc.................................. 333
(a)200 Markel Corp...................................... 31
200 Marriott International, Inc...................... 14
800 Martin Marietta Corp............................. 29
2,800 May Department Stores Co......................... 148
900 Maytag Corp...................................... 34
3,000 MBIA, Inc........................................ 200
3,000 MBNA Corp........................................ 82
1,200 McClatchy Newspapers, Inc........................ 33
1,500 McCormick & Co., Inc............................. 42
10,700 McDonald's Corp.................................. 511
500 McGraw-Hill Cos., Inc............................ 37
1,200 MCN Corp......................................... 48
1,200 Medical Assurance, Inc........................... 35
1,600 Medtronic, Inc................................... 84
3,800 Mellon Bank Corp................................. 230
500 Mercantile Stores Co., Inc....................... 30
11,500 Merck & Co., Inc................................. 1,222
1,800 Meredith Corp.................................... 64
2,366 Meritor Automotive, Inc.......................... 50
7,500 Merrill Lynch & Co., Inc......................... 547
(a)800 Microchip Technology, Inc........................ 24
(a)10,900 Microsoft Corp................................... 1,409
1,400 Millenium Chemicals, Inc......................... 33
</TABLE>
- --------------
14
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
GLOBAL EQUITY ALLOCATION FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
UNITED STATES (CONT.)
<TABLE>
<C> <S> <C>
900 Millipore Corp................................... $ 31
500 Minerals Technologies, Inc....................... 23
2,300 Minnesota Mining & Manufacturing Co.............. 189
9,700 Mobil Corp....................................... 700
1,175 Molex, Inc....................................... 38
2,700 Monsanto......................................... 113
1,200 Montana Power Co................................. 38
1,000 Morgan (J.P.) & Co., Inc......................... 113
2,500 Morton International, Inc........................ 86
5,800 Motorola, Inc.................................... 331
(a)500 MSC Industrial Direct Co., Inc. 'A'.............. 21
800 Murphy Oil Corp.................................. 43
1,400 Mylan Laboratories, Inc.......................... 29
(a)1,500 Nabors Industries, Inc........................... 47
1,800 Nalco Chemical Co................................ 71
1,300 National City Corp............................... 85
1,400 National Commerce Bancorp........................ 49
700 National Fuel Gas Co............................. 34
600 National Service Industries, Inc................. 30
6,600 NationsBank Corp................................. 401
(a)1,200 NCS HealthCare, Inc.............................. 32
1,900 New Century Energies, Inc........................ 91
1,000 New England Electric System...................... 43
1,000 New Jersey Resources Corp........................ 40
1,600 New York State Electric & Gas Corp............... 57
500 New York Times Co., 'A'.......................... 33
600 Newell Co........................................ 26
200 Nicor, Inc....................................... 8
(a)800 Nine West Group, Inc............................. 21
500 Noble Affiliates, Inc............................ 18
(a)1,000 Noble Drilling Corp.............................. 31
600 Nordson Corp..................................... 28
700 Norfolk Southern Corp............................ 22
900 Norrell Corp..................................... 18
1,200 Northern Telecom Ltd............................. 107
500 Northrop Grumman Corp............................ 58
4,000 Norwest Corp..................................... 155
(a)1,100 Novacare Corp.................................... 14
(a)5,100 Novell, Inc...................................... 38
(a)600 Novellus Systems, Inc............................ 19
(a)2,400 Office Depot, Inc................................ 57
(a)2,300 OfficeMax, Inc................................... 33
700 Ohio Casualty Corp............................... 31
1,600 Old Kent Financial Corp.......................... 63
2,100 Olsten Corp...................................... 32
600 OM Group, Inc.................................... 22
1,200 Omnicare, Inc.................................... 37
1,300 One Valley Bancorp., Inc......................... 50
(a)4,200 Oracle System Corp............................... 94
(a)1,000 O'Reilly Automotive, Inc......................... 26
1,000 Oregon Steel Mills, Inc.......................... 21
800 Orion Capital Corp............................... 37
(a)1,300 Oryx Energy Co................................... 33
1,400 Pacific Century Financial Corp................... 35
4,700 Pacific Enterprises.............................. 177
2,500 Pall Corp........................................ 52
700 Parker-Hannifin Corp............................. 32
(a)600 Patterson Dental Co.............................. 27
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
(a)500 Payless ShoeSource, Inc.......................... $ 34
3,300 Peco Energy Co................................... 80
700 Pennziol Co...................................... 47
1,000 Peoples Energy Corp.............................. 39
1,500 Pep Boys Manny, Moe & Jack....................... 36
7,000 PepsiCo, Inc..................................... 255
900 Perkin-Elmer Corp................................ 64
(a)700 Personnel Group of America, Inc.................. 23
12,500 Pfizer, Inc...................................... 932
1,100 PG&E Corp........................................ 33
(a)1,276 PharMerica, Inc.................................. 13
3,400 Pharmacia & Upjohn, Inc.......................... 125
8,400 Phelps Dodge Corp................................ 523
32,200 Philip Morris Cos., Inc.......................... 1,459
7,300 Phillips Petroleum Co............................ 355
1,500 Phillips-Van Heusen Corp......................... 21
(a)1,100 Photronics, Inc.................................. 27
(a)900 PhyCor, Inc...................................... 24
1,200 Pier 1 Imports, Inc.............................. 27
1,000 Pinnacle West Capital Corp....................... 42
700 Pioneer Natural Resources Co..................... 20
500 PMI Group, Inc................................... 36
2,500 PNC Bank Corp.................................... 143
900 PPG Industries, Inc.............................. 51
600 Pogo Producing Co................................ 18
700 Polaroid Corp.................................... 34
(a)600 Policy Management Systems Corp................... 42
1,700 Potomac Electric Power Co........................ 44
7,000 PP&L Resources, Inc.............................. 168
600 Precision Castparts Corp......................... 36
15,600 Procter & Gamble Co.............................. 1,245
(a)900 Profitt's Inc.................................... 26
(a)2,500 Promus Company, Inc.............................. 105
600 Protective Life Corp............................. 36
600 Provident Bankshares Corp........................ 38
700 Provident Companies, Inc......................... 27
17,000 Public Service Enterprise Group, Inc............. 539
1,300 Puget Sound Energy, Inc.......................... 39
500 Quanex Corp...................................... 14
(a)1,400 Quantum Corp..................................... 28
900 Queens County Bancorp, Inc....................... 36
(a)900 Quintiles Transnational Corp..................... 34
(a)1,526 R & B Falcon Corp................................ 53
5,400 Raychem Corp..................................... 233
600 Rayonier, Inc., WI............................... 26
554 Raytheon Co., 'A'................................ 27
5,600 Raytheon Co., 'B'................................ 283
1,300 Readers Digest Association, Inc., 'A'............ 31
(a)1,000 Reebok International, Ltd........................ 29
800 Reliastar Financial Corp......................... 33
(a)700 Renal Care Group, Inc............................ 22
1,400 Republic New York Corp........................... 160
600 Rite Aid Corp.................................... 35
1,100 RLI Corp......................................... 55
(a)1,200 Robert Half International, Inc................... 48
1,200 Rochester Gas & Electric Corp.................... 41
4,000 Rockwell International Corp...................... 209
1,000 Rohm & Haas Co................................... 96
(a)800 Rowan Cos., Inc.................................. 24
</TABLE>
-----------------------
15
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
GLOBAL EQUITY ALLOCATION FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
UNITED STATES (CONT.)
<TABLE>
<C> <S> <C>
4,075 RPM, Inc......................................... $ 62
(a)600 R.P. Scherer Corp................................ 37
1,000 R.R. Donnelly & Sons Co.......................... 37
500 Russell Corp..................................... 13
700 Ryder Systems, Inc............................... 23
500 SAFECO Corp...................................... 24
(a)1,300 Safeguard Scientifics, Inc....................... 41
(a)300 Samina Corp...................................... 20
11,500 Sara Lee Corp.................................... 648
7,399 SBC Communications, Inc.......................... 542
1,300 SCANA Corp....................................... 39
1,200 Schering-Plough Corp............................. 75
(a)600 Scholastic Corp.................................. 23
(a)900 SCI Systems, Inc................................. 39
4,500 Scientific-Atlanta, Inc.......................... 75
(a)700 Sealed Air Corp.................................. 43
9,100 Sears, Roebuck & Co.............................. 412
2,900 Service Corp. International...................... 107
200 Shared Medical Systems Corp...................... 13
1,500 Shaw Industries, Inc............................. 17
(a)700 Sierra Health Services, Inc...................... 24
(a)400 Smith International, Inc......................... 25
1,200 Snap-On, Inc..................................... 52
700 Sonat, Inc....................................... 32
1,200 Sonoco Products Co............................... 42
3,800 Southern Co...................................... 98
3,300 Sprint Corp...................................... 193
1,200 St. Paul Cos., Inc............................... 98
800 St. John Knits, Inc.............................. 32
(a)1,200 St. Jude Medical, Inc............................ 37
1,000 St. Paul Bancorp, Inc............................ 26
(a)900 Starbucks Corp................................... 35
(a)1,300 Steel Dynamics, Inc.............................. 21
(a)500 Steris Corp...................................... 24
(a)800 Sterling Commerce, Inc........................... 31
(a)1,000 Sterling Software, Inc........................... 41
900 Stewart Enterprises, Inc. 'A'.................... 42
600 Storage Technology Corp.......................... 37
6,500 Sun Co., Inc..................................... 273
(a)8,400 Sun Microsystems, Inc............................ 335
600 Sunbeam Corp..................................... 25
533 Sunburst Hospitality, Corp....................... 5
(a)1,000 SunGuard Data Systems, Inc....................... 31
(a)1,600 Sunrise Medical, Inc............................. 25
1,500 Superior Industries International................ 40
10,700 SUPERVALU Inc.................................... 448
(a)1,400 Sybase, Inc...................................... 19
(a)800 Sybron International Corp........................ 38
(a)2,100 Symantec Corp.................................... 46
700 Symbol Technologies, Inc......................... 26
(a)700 Synopsys, Inc.................................... 25
400 Sysco Corp....................................... 18
2,800 Tandy Corp....................................... 108
(a)600 Tech Data Corp................................... 23
3,500 Tektronix, Inc................................... 139
900 Telephone & Data Systems, Inc.................... 42
4,700 Texaco, Inc...................................... 256
3,200 Texas Instruments, Inc........................... 144
4,700 Texas Utilities Co............................... 195
1,600 The Limited, Inc................................. 41
500 Thiokol Corp..................................... 41
1,200 Thomas & Betts Corp.............................. 57
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
(a)4,100 3Com Corp........................................ $ 143
(a)1,400 360 Communications Co............................ 28
600 Tidewater, Inc................................... 33
600 TIG Holdings, Inc................................ 20
5,600 TJX Companies, Inc............................... 193
1,600 Torchmark Corp................................... 67
600 Toro Co.......................................... 26
600 T. Rowe Price Associates, Inc.................... 38
800 Trans Financial, Inc............................. 31
800 Transamerica Corp................................ 85
600 Transatlantic Holdings, Inc...................... 43
11,300 Travelers, Inc................................... 609
(a)1,100 Triad Guaranty, Inc.............................. 32
700 Trinity Industries, Inc.......................... 31
2,100 TRW, Inc......................................... 112
3,200 Tupperware Corp.................................. 89
5,900 Tyco International, Ltd.......................... 266
(a)500 Ucar International, Inc.......................... 20
1,000 Ultramar Diamond Shamrock Corp................... 32
10,200 Unicom Corp...................................... 314
900 Unifi, Inc....................................... 37
1,700 Union Carbide Corp............................... 73
600 Union Pacific Corp............................... 37
(a)2,600 Unisys Corp...................................... 36
1,000 United Asset Management Co....................... 24
900 United Cos. Financial Corp....................... 14
900 United Illuminating Co........................... 41
3,000 United Technologies Corp......................... 218
(a)800 Universal Health Services, Inc................... 40
(a)700 U.S. Airways Group, Inc.......................... 44
800 U.S. Bancorp..................................... 90
(a)800 U.S. Cellular Corp............................... 25
(a)1,200 U.S. Filter Corp................................. 36
600 U.S. Industries, Inc............................. 18
3,900 U.S. Surgical Corp............................... 114
5,300 U.S. West Communications Group................... 239
5,300 USF&G Corp....................................... 117
(a)700 USG Corp......................................... 34
7,300 UST, Inc......................................... 270
9,900 USX-Marathon Group............................... 334
20,200 USX-U.S. Steel Group, Inc........................ 631
1,200 UtliCorp. United, Inc............................ 47
1,000 Valero Energy Corp............................... 31
900 Varian Associates, Inc........................... 46
(a)900 Vencor, Inc...................................... 22
1,200 VF Corp.......................................... 55
(a)1,300 Viking Office Products, Inc...................... 28
800 Vintage Petroleum, Inc........................... 15
1,500 Vishay Intertechnology, Inc...................... 35
600 Vulcan Materials Co.............................. 61
567 Wachovia Corp.................................... 46
24,500 Wal-Mart Stores, Inc............................. 966
1,600 Walgreen Co...................................... 50
900 Wallace Computer Services, Inc................... 35
3,300 Walt Disney Co................................... 327
1,400 Warner-Lambert Co................................ 174
200 Waste Management, Inc............................ 6
(a)800 Weatherford Enterra, Inc......................... 35
400 Webster Financial Corp........................... 27
4,200 Wendy's International, Inc....................... 101
700 Westamerica Bancorp.............................. 72
(a)900 Western Digital Corp............................. 14
800 Western National Corp............................ 24
</TABLE>
- --------------
16
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
GLOBAL EQUITY ALLOCATION FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
UNITED STATES (CONT.)
11,500 Whitman Corp..................................... $ 300
500 Wicor, Inc....................................... 23
200 Williams Cos., Inc............................... 6
(a)900 Wisconsin Central Transportation Corp............ 21
800 Witco Corp....................................... 33
(a)100 Wordcom, Inc..................................... 3
1,500 Worthington Industries, Inc...................... 25
1,700 WPS Resources Corp............................... 57
900 W.R. Berkley Corp................................ 39
3,300 Xerox Corp....................................... 244
900 York International Corp.......................... 36
900 Zions Bancorp.................................... 41
--------
80,662
--------
TOTAL COMMON STOCKS (COST $157,172)............................. 171,427
--------
PREFERRED STOCKS (0.3%)
AUSTRIA (0.1%)
800 Bank Austria AG.................................. 38
1,064 Bank Austria AG.................................. 47
100 Bau Holding AG................................... 5
100 EA-Generali AG................................... 11
--------
101
--------
GERMANY (0.2%)
4,150 RWE AG........................................... 178
776 SAP AG........................................... 252
--------
430
--------
ITALY (0.0%)
31,850 Fiat S.p.A....................................... 49
--------
TOTAL PREFERRED STOCKS (COST $391).............................. 580
--------
INVESTMENT COMPANIES (1.7%)
UNITED STATES (1.7%)
(g)156,800 Latin American Discovery Fund, Inc............... 2,813
(g)70,000 Morgan Stanley Africa Investment Fund, Inc....... 805
--------
TOTAL INVESTMENT COMPANIES (COST $3,144)........................ 3,618
--------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
RIGHTS
<C> <S> <C>
- ------------
RIGHTS (0.0%)
PORTUGAL (0.0%)
(a)1,600 Jeronimo Martins................................. --
--------
SPAIN (0.0%)
(a)264 ACS S.A.......................................... --
--------
TOTAL RIGHTS (COST $0).......................................... --
--------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
WARRANTS
<C> <S> <C>
- ------------
WARRANTS (0.0%)
FRANCE (0.0%)
(a)320 Casino Guichard Perrachon, expiring 12/31/99..... 7
(a)2,073 Cie Generale des Eaux, expiring 5/2/01........... 1
(a)5 Sodexho S.A., expiring 6/7/04.................... 1
--------
9
--------
HONG KONG (0.0%)
(a)585 Peregine Investment Holdings Ltd., expiring
5/15/98........................................ --
--------
<CAPTION>
NO. OF VALUE
WARRANTS (000)
<C> <S> <C>
- --------------------------------------------------------------------------
ITALY (0.0%)
(a)913 La Rinascente S.p.A., expiring 12/31/99.......... $ --
(a)1,491 La Rinascente S.p.A., expiring 12/31/99.......... 2
--------
2
--------
SWITZERLAND (0.0%)
(a)45 Roche Holdings, expiring 5/5/98.................. 5
--------
TOTAL WARRANTS (COST $1)........................................ 16
--------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- ------------
CONVERTIBLE DEBENTURES (0.0%)
FRANCE (0.0%)
FRF 32 Casino Guichard Perrachon 4.50%, 7/12/01......... 18
29 Sanofi S.A. 4.00%, 1/1/00........................ 35
19 Simco S.A. 8.25%, 1/1/06......................... 16
1 Sodexho S.A.6.00%, 6/7/04........................ 4
--------
73
--------
ITALY (0.0%)
ITL 7,304 Mediobanca S.p.A. 4.50%, 1/1/00.................. 4
2,125 Mediobanca S.p.A. 6.00%, 12/31/02................ 2
--------
6
--------
TOTAL CONVERTIBLE DEBENTURES (COST $42)......................... 79
--------
TOTAL FOREIGN & U.S. SECURITIES (82.4%) (COST $160,750)......... 175,720
--------
SHORT-TERM INVESTMENT (15.3%)
REPURCHASE AGREEMENT (15.3%)
$ 32,681 Chase Securities, Inc., 5.95%, dated 12/31/97 due
1/2/98, to be repurchased at $32,692,
collateralized by $33,050 U.S. Treasury Bonds,
5.25%, due 1/31/01, valued at $33,383 (COST
$32,681)....................................... 32,681
--------
TOTAL INVESTMENT IN SECURITIES (97.7%) (COST $193,431).......... 208,401
--------
FOREIGN CURRENCY (0.1%)
AUD 2 Australian Dollar................................ 1
ATS 5 Austrian Schilling............................... --
GBP 6 British Pound.................................... 9
CAD 77 Canadian Dollar.................................. 54
DEM 33 German Mark...................................... 18
FRF 9 French Franc..................................... 2
IDR 99,571 Indonesian Rupiah................................ 18
ITL 146,403 Italian Lira..................................... 83
JPY 701 Japanese Yen..................................... 5
PTE 1,397 Portuguese Escudo................................ 8
SGD 2 Singapore Dollar................................. 1
ESP 3,759 Spanish Peseta................................... 25
SEK 2 Swedish Krona.................................... --
--------
TOTAL FOREIGN CURRENCY (COST $249).............................. 224
--------
TOTAL INVESTMENTS (97.8%) (COST $193,680)....................... 208,625
OTHER ASSETS IN EXCESS OF LIABILITIES (2.2%).................... 4,643
--------
NET ASSETS (100%)............................................... $213,268
--------
--------
</TABLE>
- ---------------
(a) -- Non-income producing security
(g) -- The fund is advised by an affiliate.
(ADR) -- American Depositary Receipt
(NCS) -- Non Convertible Shares
(RFD) -- Ranked for Dividend
-----------------------
17
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
GLOBAL EQUITY ALLOCATION FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
DECEMBER 31, 1997
(UNAUDITED)
- --------------------------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE INFORMATION:
Under the terms of foreign currency contracts open at December 31, 1997, the
Portfolio 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>
ESP 3,706 $ 24 1/2/98 $ 24 $ 24 $ --
IDR 99,571 18 1/2/98 $ 18 18 --
$ 132 132 1/16/98 DEM 229 128 (4)
$ 930 930 1/16/98 DEM 1,596 888 (42)
$ 632 632 1/16/98 DEM 1,080 601 (31)
DEM 8,921 4,964 1/16/98 $ 5,084 5,084 120
$ 1,894 1,894 1/21/98 FRF 11,000 1,830 (64)
$ 1,015 1,015 1/21/98 FRF 5,825 969 (46)
FRF 6,351 1,056 1/21/98 $ 1,089 1,089 33
$ 1,622 1,622 1/21/98 ITL 2,761,232 1,561 (61)
$ 945 945 1/21/98 ITL 1,648,883 932 (13)
ITL 641,978 363 1/21/98 $ 375 375 12
ITL 5,212,918 2,946 1/21/98 $ 3,044 3,044 98
JPY 821,696 6,326 1/29/98 $ 6,841 6,841 515
JPY 123,140 948 1/29/98 $ 1,020 1,020 72
$ 3,830 3,830 2/5/98 JPY 455,272 3,507 (323)
JPY 1,217,549 9,380 2/5/98 $ 10,260 10,260 880
$ 322 322 2/12/98 ESP 46,749 307 (15)
ESP 46,749 307 2/12/98 $ 320 320 13
$ 12,078 12,078 2/19/98 GBP 7,159 11,737 (341)
$ 2,357 2,357 2/19/98 ITL 3,985,066 2,252 (105)
ITL 810,604 458 2/19/98 $ 476 476 18
ITL 1,332 -- 2/19/98 $ -- -- --
$ 280 280 2/19/98 NLG 540 267 (13)
$ 123 123 2/19/98 NLG 236 117 (6)
NLG 776 384 2/19/98 $ 400 400 16
SEK 15,084 1,902 2/19/98 $ 2,000 2,000 98
$ 2,800 2,800 2/26/98 DEM 4,785 2,669 (131)
$ 89 89 2/26/98 JPY 11,140 86 (3)
$ 7,300 7,300 2/26/98 JPY 922,380 7,128 (172)
JPY 363,023 2,805 2/26/98 $ 2,970 2,970 165
JPY 682,557 5,275 2/26/98 $ 5,434 5,434 159
$ 1,006 1,006 3/16/98 FRF 5,896 983 (23)
DEM 1,632 912 3/16/98 $ 933 933 21
FRF 5,531 923 3/16/98 $ 944 944 21
$ 21 21 3/16/98 JPY 2,575 20 (1)
CAN 1,408 989 3/23/98 $ 985 985 (4)
JPY 125,215 976 4/20/98 $ 1,000 1,000 24
--------- --------- -----
$ 78,332 $ 79,199 $ 867
--------- --------- -----
--------- --------- -----
</TABLE>
- --------------
18
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
GLOBAL EQUITY ALLOCATION FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
DECEMBER 31, 1997
(UNAUDITED)
- --------------------------------------------------------------------------------
FUTURES CONTRACTS: At December 31, 1997, the Portfolio had futures contracts
open:
<TABLE>
<CAPTION>
UNREALIZED
AGGREGATE APPRECIATION
NUMBER OF FACE VALUE EXPIRATION (DEPRECIATION)
CONTRACTS (000) DATE (000)
--------------- ----------- ---------- ---------------
<S> <C> <C> <C> <C>
PURCHASES:
FTSE 100 Index 59 GBP 12,652 Mar-98 $ 232
MIB 30 Index 9 ITL 1,310 Jan-98 78
Toronto 35 Index 8 CAD 1,013 Mar-98 24
SALES:
CAC 40 Index 30 FRF 3,041 Jan-98 (160)
DAX Index 3 DEM 726 Mar-98 (38)
OMX Index 65 SEK 2,017 Jan-98 (52)
TOPIX Index 85 JPY 7,810 Mar-98 395
-----
$ 479
-----
-----
</TABLE>
- ---------------
GBP -- British Pound
CAD -- Canadian Dollar
FRF -- French Franc
DEM -- German Mark
IDR -- Indonesian Rupiah
ITL -- Italian Lira
JPY -- Japanese Yen
NLG -- Netherlands Guilder
ESP -- Spanish Peseta
SEK -- Swedish Krona
- --------------------------------------------------------------------------------
SUMMARY OF FOREIGN & U.S. SECURITIES BY INDUSTRY CLASSIFICATION
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
- --------------------------------------------------------------------------------- --------- -------------
<S> <C> <C>
Consumer Goods................................................................... $ 42,382 19.9%
Finance.......................................................................... 35,867 16.8
Capital Equipment................................................................ 29,493 13.8
Services......................................................................... 29,110 13.6
Energy........................................................................... 18,990 8.9
Materials........................................................................ 13,184 6.2
Investment Companies............................................................. 3,618 1.7
Multi-Industry................................................................... 2,570 1.3
Gold Mines....................................................................... 506 0.2
--------- ---
$ 175,720 82.4%
--------- ---
--------- ---
</TABLE>
-----------------------
19
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
GLOBAL EQUITY FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW
(UNAUDITED)
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.
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1997)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C> <C>
Canada 3.4%
France 5.3%
Germany 5.5%
Ireland 3.2%
Italy 2.4%
Japan 7.9%
Netherlands 2.6%
Switzerland 5.6%
United Kingdom 11.1%
United States 40.8%
Short-Term Investments 9.4%
Other 2.8%
</TABLE>
<TABLE>
<CAPTION>
TOTAL RETURNS
SINCE INCEPTION
(10/29/97)**
---------------------
WITH WITHOUT
SALES SALES
CHARGE* CHARGE
<S> <C> <C>
- ---------------------------------------------
Class A Shares -6.44% -0.74%
- ---------------------------------------------
Class B Shares -5.81% -0.86%
- ---------------------------------------------
Class C Shares -5.81% -0.86%
- ---------------------------------------------
MSCI World Index N/A 2.43%
- ---------------------------------------------
</TABLE>
* The returns above are calculated using the applicable sales charge for Class
A shares and the 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 Capital International (MSCI) World Index is an unmanaged
index which includes securities listed on the stock exchanges of the U.S.,
Europe, Canada, Australia, New Zealand and the Far East and assumes dividends
are reinvested net of withholding tax.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
<TABLE>
<CAPTION>
TOP FIVE HOLDINGS
PERCENT OF
ISSUER COUNTRY NET ASSETS
- ---------------------------------------- --------------- ----------
<S> <C> <C>
Philip Morris Cos., Inc. United States 3.1%
Reckitt & Coleman plc United Kingdom 2.5%
GenRad, Inc. United States 2.4%
Albertson's, Inc. United States 2.3%
Pharmacia & Upjohn, Inc. United States 2.1%
</TABLE>
<TABLE>
<CAPTION>
TOP FIVE SECTORS
VALUE PERCENT OF
SECTOR (000) NET ASSETS
- ------------------- --------- -------------
<S> <C> <C>
Finance $ 107,480 18.9%
Consumer--Staples 84,164 14.8%
Consumer--Cyclical 51,750 9.1%
Capital Equipment 48,338 8.5%
Technology 44,926 7.9%
</TABLE>
The investment objective of the Global Equity Fund is to seek long-term capital
appreciation by investing primarily in equity securities of issuers throughout
the world, including issuers in the United States and emerging market countries.
For the period from inception of the portfolio on October 29, 1997 through
December 31, 1997, the Fund generated a total return of -0.74 percent for Class
A shares at net asset value, as compared to a total return of 2.43 percent for
the Morgan Stanley Capital International (MSCI) World Index during the same
period.
The Fund's underperformance during this initial period can be attributed to the
negative effect of the relatively high cash position as the Portfolio became
fully invested. The initial funding is largely complete and the chart shown
above illustrates the country weightings within the Portfolio as of the end of
December.
A significant feature of our strategy during the final quarter of 1997 was our
underweight positions in Japan and Southeast Asia. However, many of the Fund's
Japanese stocks--notably large exporters such as Fuji--have continued to benefit
from the yen's weakness. Another positive factor was stock selection in the
financial sectors of such European markets as Ireland, France, Sweden, and the
United Kingdom. Partially offsetting these favorable holdings was stock
selection in the United States, Switzerland, and the Netherlands.
Some of our recent stock picks included Valmet, ABB, and American Stores. Based
in Finland, Valmet is the world's leading paper machine manufacturer. In recent
years, the group has expanded from its strong European base and is now well
established in North America and the rapidly growing markets of Asia. Also,
Valmet has reduced its cyclicality by increasing its use of subcontractors and
expanding its service and maintenance businesses. Valmet has a strong financial
position, and its stock price is cheap relative to earnings and cash flow.
The Swiss power engineering conglomerate ABB is a market leader in large-scale
power projects and will be a major beneficiary of long-term projections for
world power demand. The market's overreaction to ABB's Southeast Asian exposure
provides a unique opportunity to buy into a group with a clear global franchise
and a reputation for nimble management. A recovery in the group's Industrial and
Building Systems business is also being overlooked.
- --------------
20
<PAGE>
MORGAN STANLEY
GLOBAL EQUITY FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
(UNAUDITED)
American Stores operates the second-largest food store chain as well as large
drugstore chains in the United States. The company is currently tackling its
enormous transition from a decentralized holding company into an integrated
operating company. Over time, the benefits of this re-engineering program should
outweigh the implementation costs. The company should also benefit from a
stabilization of its capital expenditures, which have grown substantially in
recent years.
Given a projected slowdown in global growth as a result of the deepening Asian
crisis the Federal Reserve Board's next move may well be to ease rather than
raise interest rates. This would be positive for most interest-rate sensitive
sectors such as utilities, banks, tobacco, and telecommunications. Furthermore,
if mid-single digit earnings growth can be maintained, and inflation remains
quiescent, then the U.S. market is arguably fairly valued with long-term bond
yields at current levels. While equity mutual fund inflows should slow, merger
activity, in the absence of any pricing power, is expected to continue at record
levels. We remain slightly underweight in the U.S. market relative to the
benchmark, finding better relative value in Europe, particularly Ireland and the
U.K. We recently raised our position to overweight in the U.K., having found a
number of strong business franchises with management dedicated to shareholder
value. Despite continued underperformance, we still struggle to find value in
Japan, other than in selected sectors such as exporters and pharmaceuticals.
Consequently, we expect to remain underweight in the foreseeable future. We also
remain cautious about Asia as a whole and, despite the exceptionally steep
sell-off, we are unlikely to revise our weighting there in a material sense, any
time soon.
<TABLE>
<S> <C> <C>
Frances Campion Richard Boon Paul Boyne
PORTFOLIO MANAGER PORTFOLIO MANAGER PORTFOLIO MANAGER
</TABLE>
------------------
21
<PAGE>
MORGAN STANLEY
GLOBAL EQUITY FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
COMMON STOCKS (96.1%)
AUSTRALIA (0.3%)
(a)893,600 Telstra Corp., Ltd............................... $ 1,886
--------
CANADA (3.4%)
94,600 Potash Corp. of Saskatchewan, Inc................ 7,878
(a)130,000 Renaissance Energy, Ltd.......................... 2,683
385,500 TELUS Corp....................................... 8,549
--------
19,110
--------
FINLAND (0.5%)
210,000 Valmet Oyj....................................... 2,897
--------
FRANCE (5.3%)
62,300 Elf Aquitaine.................................... 7,246
(a)149,900 France Telecom S.A............................... 5,437
33,600 Groupe Danone RFD................................ 6,002
166,000 Scor............................................. 7,938
(a)55,600 SGS-Thomson Microelectronics N.V................. 3,441
--------
30,064
--------
GERMANY (5.5%)
223,400 BASF AG.......................................... 7,973
215,000 Bayer AG......................................... 7,977
133,400 Veba AG.......................................... 9,084
11,000 Viag AG.......................................... 6,023
--------
31,057
--------
HONG KONG (0.8%)
2,330,000 Hysan Development Co............................. 4,646
--------
IRELAND (3.1%)
604,400 Bank of Ireland.................................. 9,304
470,000 Green Property plc............................... 2,675
978,500 Irish Life plc................................... 5,611
--------
17,590
--------
ITALY (2.4%)
1,700,000 Mediaset S.p.A................................... 8,351
(a)1,273,000 Telecom Italia S.p.A............................. 5,613
--------
13,964
--------
JAPAN (7.9%)
939,000 Daicel Chemical Industries, Ltd.................. 1,223
142,000 Fuji Photo Film Co............................... 5,442
911,000 Fujisawa Pharmaceutical Co., Ltd................. 7,960
335,000 Hitachi, Ltd..................................... 2,388
600 Japan Tobacco, Inc............................... 4,258
460,000 Matsushita Electric Industrial Co., Ltd.......... 6,734
2,783,000 NKK Corp......................................... 2,218
1,069,000 Shionogi & Co.................................... 4,900
773,000 Sumitomo Marine & Fire Insurance Co.............. 4,088
77,000 TDK Corp......................................... 5,807
--------
45,018
--------
NETHERLANDS (2.6%)
(a)148,400 Benckiser N.V. `B'............................... 6,140
200,000 ING Groep N.V.................................... 8,424
--------
14,564
--------
NEW ZEALAND (1.1%)
2,928,900 Lion Nathan, Ltd................................. 6,565
--------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
PORTUGAL (0.9%)
203,500 Cimpor-Cimentos de Portugal S.A.................. $ 5,334
--------
SINGAPORE (0.7%)
1,608,000 Jardine Strategic Holdings, Ltd.................. 4,245
--------
SPAIN (2.4%)
610,400 Iberdrola S.A.................................... 8,033
188,600 Telefonica de Espana............................. 5,385
--------
13,418
--------
SWEDEN (1.7%)
(a)1,722,700 Nordbanken Holding AB............................ 9,742
--------
SWITZERLAND (5.6%)
6,000 ABB AG (Bearer).................................. 7,538
(a)1,800 Ascom Holding AG (Bearer)........................ 2,317
13,100 Forbo Holding AG (Registered).................... 5,355
9,900 Holderbank Financiere Glarus AG `B' (Bearer)..... 8,080
5,600 Nestle S.A. (Registered)......................... 8,393
--------
31,683
--------
UNITED KINGDOM (11.1%)
589,700 BG plc........................................... 2,655
304,800 Burmah Castrol plc............................... 5,309
1,255,900 English China Clays plc.......................... 5,531
838,300 Imperial Tobacco Group plc....................... 5,276
722,500 Peninsular & Oriental Steam Navigation Co........ 8,222
811,800 Premier Farnell plc.............................. 5,843
695,100 Racal Electronic plc............................. 3,050
915,500 Reckitt & Colman plc............................. 14,368
628,800 Royal & Sun Alliance Insurance Group plc......... 6,334
1,402,700 WPP Group plc.................................... 6,247
--------
62,835
--------
UNITED STATES (40.8%)
279,400 Albertson's, Inc................................. 13,237
100,600 Aluminum Co. of America.......................... 7,080
275,100 American Stores Co............................... 5,657
286,200 Boise Cascade Corp............................... 8,658
180,400 Borg-Warner Automotive, Inc...................... 9,381
81,900 Chase Manhattan Corp............................. 8,968
337,900 COMSAT Corp...................................... 8,194
365,000 Danka Business Systems plc....................... 5,817
(a)623,300 Data General Corp................................ 10,869
(a)535,300 Egghead, Inc..................................... 3,479
37,100 Enhance Financial Services Group, Inc............ 2,207
117,300 FINOVA Group, Inc................................ 5,828
128,400 General Signal Corp.............................. 5,417
(a)456,900 GenRad, Inc...................................... 13,793
121,500 Georgia-Pacific Corp............................. 7,381
(a)121,500 Georgia-Pacific Corp. (Timber Group)............. 2,757
217,700 Houghton Mifflin Co.............................. 8,354
200,000 IBP, Inc......................................... 4,187
129,300 MBIA, Inc........................................ 8,639
(a)255,000 NCR Corp......................................... 7,092
(a)174,900 Noble Drilling Corp.............................. 5,356
158,500 Penncorp Financial Group, Inc.................... 5,656
324,500 Pharmacia & Upjohn, Inc.......................... 11,885
390,100 Philip Morris Cos., Inc.......................... 17,676
99,300 Tecumseh Products Co. `A'........................ 4,841
</TABLE>
- --------------
22
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
GLOBAL EQUITY FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
UNITED STATES (CONT.)
178,600 Tenneco, Inc..................................... $ 7,055
199,100 Terra Nova (Bermuda) Holdings Ltd., `A'.......... 5,226
166,100 The B.F. Goodrich Co............................. 6,883
205,600 Tupperware Corp.................................. 5,731
197,200 United Dominion Industries....................... 4,992
(a)151,800 United Meridian Corp............................. 4,269
199,100 UST Corp......................................... 5,525
--------
232,090
--------
TOTAL COMMON STOCKS (COST $551,567)............................. 546,708
--------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- ------------
SHORT-TERM INVESTMENTS (9.4%)
U. S. TREASURY SECURITY (4.9%)
$ 28,000 U.S. Treasury Bill 1/2/98........................ 28,000
--------
REPURCHASE AGREEMENT (4.5%)
25,400 Chase Securities, Inc., 5.95%, dated 12/31/97,
due 1/2/98, to be repurchased at $25,408,
collateralized by $20,225 U.S. Treasury Bonds,
8.125%, due 8/15/19, valued at $25,951......... 25,400
--------
TOTAL SHORT-TERM INVESTMENTS (COST $53,400)..................... 53,400
--------
TOTAL INVESTMENT IN SECURITIES (105.5%) (COST $604,967)......... 600,108
--------
FOREIGN CURRENCY (0.3%)
AUD 1,787 Australian Dollar................................ 1,164
IEP 283 Irish Punt....................................... 403
NZD 154 New Zealand Dollar............................... 89
--------
TOTAL FOREIGN CURRENCY (COST $1,727)............................ 1,656
--------
TOTAL INVESTMENTS (105.8%) (COST $606,694)...................... 601,764
LIABILITIES IN EXCESS OF OTHER ASSETS (-5.8%)................... (33,126)
--------
NET ASSETS (100%)............................................... $568,638
--------
--------
</TABLE>
- ---------------
(a) -- Non-income producing security
RFD -- Ranked for Dividend
-----------------------
23
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
GLOBAL EQUITY FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
DECEMBER 31, 1997
(UNAUDITED)
- --------------------------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE INFORMATION:
Under the terms of foreign currency contracts open at December 31, 1997, the
Portfolio 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>
$ 2,894 $ 2,894 1/2/98 FIM 15,685 $ 2,878 $ (16)
$ 3,350 3,350 1/5/98 GBP 2,025 3,327 (23)
--------- --------- ---
$ 6,244 $ 6,205 $ (39)
--------- --------- ---
--------- --------- ---
</TABLE>
- ---------------
FIM -- Finnish Markka
GBP -- British Pound
- --------------------------------------------------------------------------------
SUMMARY OF FOREIGN & U.S. SECURITIES BY INDUSTRY CLASSIFICATION
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
- --------------------------------------------------------------------------------- --------- -------------
<S> <C> <C>
Finance.......................................................................... $ 107,480 18.9%
Consumer Staples................................................................. 84,164 14.8
Consumer Cyclical................................................................ 51,750 9.1
Capital Equipment................................................................ 48,338 8.5
Technology....................................................................... 44,926 7.9
Basic Industry................................................................... 43,220 7.6
Retail........................................................................... 37,533 6.6
Telecommunications............................................................... 36,395 6.4
Services......................................................................... 26,728 4.7
Utilities (Electric & Gas)....................................................... 25,591 4.5
Healthcare....................................................................... 14,217 2.5
Consumer Durable................................................................. 9,875 1.7
Energy........................................................................... 9,667 1.7
Transportation................................................................... 6,824 1.2
--------- ---
$ 546,708 96.1%
--------- ---
--------- ---
</TABLE>
- --------------
24
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
GLOBAL FIXED INCOME FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW
(UNAUDITED)
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.
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1997)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Australia 4.2%
Canada 4.0%
Denmark 2.6%
Germany 12.7%
Italy 5.7%
Japan 7.9%
Spain 5.0%
Sweden 5.5%
United Kingdom 8.4%
United States 32.4%
Short-Term Investments 6.8%
Other 4.8%
</TABLE>
<TABLE>
<CAPTION>
TOTAL RETURNS**
---------------------------------------------------------------------
AVERAGE ANNUAL
SIX MONTHS ONE YEAR SINCE INCEPTION
--------------------- --------------------- ---------------------
WITH WITHOUT WITH WITHOUT WITH WITHOUT
SALES SALES SALES SALES SALES SALES
CHARGE* CHARGE CHARGE* CHARGE CHARGE* CHARGE
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class A Shares -2.51% 2.39% -3.97% 0.77% 5.28% 6.31%
- ---------------------------------------------------------------------------------------------
Class B+ Shares -2.00% 1.99% -3.77% 0.07% 2.64% 3.83%
- ---------------------------------------------------------------------------------------------
Class C Shares 0.99% 1.99% -0.89% 0.07% 5.47% 5.47%
- ---------------------------------------------------------------------------------------------
J.P. Morgan Traded
Global Bond Index:
Class A & C Shares N/A 2.52% N/A 1.40% N/A 7.51%
Class B Shares N/A 2.52% N/A 1.40% N/A 3.54%
- ---------------------------------------------------------------------------------------------
</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.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
<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 14.1%
U.S. Treasury Bond 8.125%, 8/15/19 U.S. Dollar 8.8%
United Kingdom 9.50%, 4/18/05 British 6.1%
Pound
Swedish Government 6.00%, 2/9/05 Swedish 5.5%
Krona
U.S. Treasury Note 5.125%, 11/30/98 U.S. Dollar 4.9%
</TABLE>
<TABLE>
<CAPTION>
TOP FIVE CURRENCY DENOMINATIONS
VALUE PERCENT OF
CURRENCY (000) NET ASSETS
- -------------------- ----------- -------------
<S> <C> <C>
U.S. Dollar $ 3,724 32.4%
German Mark 1,209 12.7%
British Pound 799 8.4%
Japanese Yen 747 7.9%
Italian Lira 543 5.7%
</TABLE>
The Global Fixed Income Fund seeks to produce an attractive real rate of return
while preserving capital by investing in fixed-income securities of U.S. and
foreign issuers denominated in U.S. dollars and in other currencies. For the six
months ended December 31, 1997, the Fund achieved a total return of 2.39 percent
(Class A shares at net asset value). By comparison, the J.P. Morgan Traded
Global Bond Index returned 2.52 percent during the same period.
Global fixed-income markets in every country rallied during the second half of
1997. After a solid third quarter, the market began to focus on the likely
impact of the Asian economic crisis. A consensus view emerged that the region's
problems would reduce world economic growth and that the devaluation of Asian
currencies would increase competitive pressures globally, thereby keeping
inflation in check. Both developments are positive for bond markets.
In Japan, where the Asian impact is expected to be greatest, 10-year bond yields
fell 82 basis points despite concerns about the financial sector, particularly
the high-profile collapse of Yamaichi Securities in November. U.S. Treasury
bonds also benefited from their "safe haven" status, benign inflation data, and
the belief that any tightening in monetary policy by the Federal Reserve Board
was now on hold despite evidence of strong economic activity. As a result, the
yield on 10-year Treasuries fell 83 basis points, taking the long bond close to
5.90 percent. Bonds in Australia also performed well as a result of the ongoing
Asian crisis, and 10-year yields fell 106 basis points.
Although European bond markets benefited from developments in Asia, the
continued political move towards monetary union was the dominant theme, as
reflected in the further yield convergence of higher-yielding markets towards
Germany. Italian and Spanish bonds rallied strongly, and their 10-year yields
fell 115 and 81 basis points, respectively. Both markets responded positively to
interest-rate cuts in December, and Italy received a further boost from the
final approval of its 1998 budget. Attention also shifted to those countries
that may be part of the second stage of European Monetary Union, with yields in
the U.K. and Sweden contracting dramatically towards Germany. Bonds in core
European markets were the poorest performers, although 10-year
------------------
25
<PAGE>
MORGAN STANLEY
GLOBAL FIXED INCOME FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
(UNAUDITED)
yields still declined by 25 to 37 basis points. However, the drop in rates in
core European markets was part of an overall flattening of the curve, as yields
at the short-end rose in response to monetary tightening early in the fourth
quarter.
In a continuation of the trend in place during the first half of the year, bond
market returns in U.S. dollar terms were significantly reduced as the dollar
gained on its "safe haven" status. During the reporting period, the dollar rose
3.1 percent versus the Deutsche mark and 12.4 percent against the Japanese yen.
The Australian and New Zealand dollars fared particularly poorly, falling 13.4
percent and 14.8 percent against the American dollar, respectively.
These developments resulted in a 2.5 percent return in the second half of 1997
for the J.P. Morgan Global Government Bond Index. During the period, the Fund
benefited from its overweighting to higher-yielding European, Australian, Irish,
and U.K. bonds. On the currency side, the Fund benefited from its overweighting
to the U.S. dollar at the expense of the Japanese yen. The duration of the Fund
at the end of December was 4.8 years. This slightly short duration was mainly a
result of our Japanese position and was a negative factor.
Strategy changes included a reduction in exposure to Japanese bonds, with
proceeds being placed in the Australian market. A position in the 5-year U.S.
Treasury inflation-protected security was also purchased to take advantage of
its relative cheapness. On the currency front, there was a 2 percent reduction
in our underweighting of the Japanese yen in favor of the U.S. dollar. Other
moves included small increases in exposure to the Spanish peseta and Swedish
krona.
Although the Asian crisis will hinder economic growth, expansions in Europe and
North America are expected to continue. In the United States, the Asian crisis
should help lower economic growth to a more sustainable pace. This reduction,
combined with the likely downward pressure on the prices of goods resulting from
the increased competitiveness of Asian exporters, will act to prevent any
near-term tightening on the part of the Federal Reserve. U.S. labor markets are
very tight, however, and the prospect remains for increases in both U.S. wages
and service-sector prices. Within Europe, inflation remains low. Competitive
exchange rates to the dollar and low interest rates continue to promote a
broadening of the recovery. The impact from Asia will also be less pronounced in
Europe than in the United States. We therefore remain cautious about increasing
interest-rate exposure in North America or Europe at the current time. In Japan,
we retain the view that the exceptionally low levels of Japanese yields offer
minimal value despite the dire state of its economy.
IMPORTANT FUND UPDATE
On October 23, 1997, the Trustees of the Fund approved its reorganization into
the Van Kampen American Capital Global Government Securities Fund. Upon
shareholder approval, the reorganization of the Fund is expected to take place
prior to June 30, 1998. More information about the reorganization will be
forwarded to you in a proxy statement in the near future.
Your Fund and the Van Kampen American Capital Global Government Securities Fund
have similar investment objectives and similar investment policies and
practices, and are managed by the same portfolio management team, with the
addition of Richard B. Worley. Both funds seek a high level of current income
while preserving capital, and both funds invest primarily in the debt securities
of issuers located in at least three different countries in attempting to
achieve their investment objectives.
<TABLE>
<S> <C>
J. David Germany Michael B. Kushma
PORTFOLIO MANAGER PORTFOLIO MANAGER
Paul F. O'Brien Richard B. Worley
PORTFOLIO MANAGER PORTFOLIO MANAGER
</TABLE>
- --------------
26
<PAGE>
MORGAN STANLEY
GLOBAL FIXED INCOME FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- -----------------------------------------------------------------------
FIXED INCOME SECURITIES (91.0%)
AUSTRALIAN DOLLAR (4.2%)
GOVERNMENT BONDS
AUD 250 Government of Australia 9.00%, 9/15/04........... $ 191
100 Government of Australia 7.50%, 9/15/09........... 72
------
263
------
U.S. GOVERNMENT & AGENCY OBLIGATIONS-GLOBAL
200 Federal National Mortgage Association 6.50%,
7/10/02........................................ 133
------
TOTAL AUSTRALIAN DOLLAR...................................... 396
------
BRITISH POUND (8.4%)
GOVERNMENT BONDS
GBP 300 United Kingdom 9.50%, 4/18/05.................... 579
110 United Kingdom 8.00%, 6/7/21..................... 220
------
TOTAL BRITISH POUND.......................................... 799
------
CANADIAN DOLLAR (4.0%)
GOVERNMENT BONDS
CAD 300 Government of Canada 7.50%, 3/1/01............... 223
180 Government of Canada 8.75%, 12/1/05.............. 151
------
TOTAL CANADIAN DOLLAR........................................ 374
------
DANISH KRONE (2.6%)
GOVERNMENT BOND
DKK 1,500 Kingdom of Denmark 8.00%, 5/15/03................ 247
------
GERMAN MARK (12.7%)
CORPORATE BONDS
DEM 150 KFW International Finace, Inc. 7.50%, 1/24/00.... 88
200 Landeskreditbank Baden-Wuerttemberg Financial
6.63%, 8/20/03................................. 119
------
207
------
GOVERNMENT BONDS
200 Deutschland Republic 6.25%, 1/4/24............... 117
450 German Unity Fund 8.00%, 1/21/02................. 280
450 Treuhandanstalt 7.00%, 11/25/99.................. 265
540 Treuhandanstalt 7.50%, 9/9/04.................... 340
------
1,002
------
TOTAL GERMAN MARK............................................ 1,209
------
IRISH PUNT (2.6%)
GOVERNMENT BOND
IEP 150 Government of Ireland 8.00%, 8/18/06............. 249
------
ITALIAN LIRA (5.7%)
GOVERNMENT BONDS
ITL 400,000 Buoni Poliennali Del Tes 10.00%, 8/1/03.......... 276
150,000 Buoni Poliennali Del Tes 9.50%, 1/1/05........... 104
230,000 Buoni Poliennali Del Tes 9.50%, 2/1/06........... 163
------
TOTAL ITALIAN LIRA........................................... 543
------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- -----------------------------------------------------------------------
JAPANESE YEN (7.9%)
EUROBONDS
JPY 25,000 Export Import Bank of Japan 4.38%, 10/1/03....... $ 222
27,000 Japan Development Bank 6.50%, 9/20/01............ 248
30,000 World Bank 4.75%, 12/20/04....................... 277
------
TOTAL JAPANESE YEN........................................... 747
------
SPANISH PESETA (5.0%)
GOVERNMENT BONDS
ESP 50,000 Spanish Government 8.30%, 12/15/98............... 339
20,000 Spanish Government 7.40%, 7/30/99................ 137
------
TOTAL SPANISH PESETA......................................... 476
------
SWEDISH KRONA (5.5%)
GOVERNMENT BOND
SEK 4,100 Swedish Government 6.00%, 2/9/05................. 520
------
UNITED STATES DOLLAR (32.4%)
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (32.4%)
U.S. TREASURY BONDS
$ 665 8.125%, 8/15/19.................................. 832
40 7.625%, 2/15/25.................................. 49
------
881
------
U.S. TREASURY NOTES
465 5.125%, 11/30/98................................. 463
200 6.25%, 10/31/01.................................. 204
192 3.625%, 7/15/02 (Inflation Indexed).............. 191
1,238 7.25%, 5/15/04................................... 1,336
------
2,194
------
TOTAL UNITED STATES DOLLAR................................... 3,075
------
TOTAL FIXED INCOME SECURITIES (COST $8,661).................... 8,635
------
SHORT-TERM INVESTMENT (6.8%)
REPURCHASE AGREEMENT (6.8%)
UNITED STATES DOLLAR
649 Chase Securities, Inc., 5.95%, dated 12/31/97,
due 1/2/98, to be repurchased at $649,
collateralized by $660 U.S. Treasury Notes,
5.625%, due 2/15/06, valued at $667 (COST
$649).......................................... 649
------
FOREIGN CURRENCY (0.0%)
JPY 713 Japanese Yen (COST $6)........................... 6
------
TOTAL INVESTMENTS (97.8%) (COST $9,316)........................ 9,290
OTHER ASSETS IN EXCESS OF LIABILITIES (2.2%)................... 203
------
NET ASSETS (100%).............................................. $9,493
------
------
</TABLE>
- ---------------
Inflation Indexed Security -- Security includes principal adjustment feature in
which par amount adjusts with the Consumer Price Index to insulate bonds from
the effects of inflation. The face amount shown is that in effect on December
31, 1997.
-----------------------
27
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
GLOBAL FIXED INCOME FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
DECEMBER 31, 1997
(UNAUDITED)
- --------------------------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE INFORMATION:
Under the terms of foreign currency contracts open at December 31, 1997, the
Portfolio 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>
ITL 26 $ -- 1/2/98 $ -- $ -- $ --
ESP 10,000 65 1/9/98 $ 68 68 3
$ 29 29 1/9/98 ESP 4,345 28 (1)
AUD 500 326 1/16/98 $ 338 338 12
IEP 170 242 1/16/98 $ 250 250 8
SEK 540 68 1/16/98 $ 69 69 1
GBP 52 85 1/16/98 $ 87 87 2
$ 39 39 1/16/98 CAD 55 39 --
$ 176 176 1/16/98 DEM 311 173 (3)
--------- --------- ---
$ 1,030 $ 1,052 $ 22
--------- --------- ---
--------- --------- ---
</TABLE>
- ---------------
AUD -- Australian Dollar
GBP -- British Pound
CAD -- Canadian Dollar
DEM -- German Mark
IEP -- Irish Punt
ITL -- Italian Lira
ESP -- Spanish Peseta
SEK -- Swedish Krona
- --------------
28
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
ASIAN GROWTH FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW
(UNAUDITED)
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.
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1997)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
China 2.8%
Hong Kong 38.9%
India 6.4%
Indonesia 3.0%
Korea 3.1%
Malaysia 4.5%
Philippines 5.4%
Singapore 15.1%
Taiwan 15.3%
Thailand 1.6%
Other 3.9%
</TABLE>
<TABLE>
<CAPTION>
TOTAL RETURNS**
---------------------------------------------------------------------
AVERAGE ANNUAL
SIX MONTHS ONE YEAR SINCE INCEPTION
--------------------- --------------------- ---------------------
WITH WITHOUT WITH WITHOUT WITH WITHOUT
SALES SALES SALES SALES SALES SALES
CHARGE* CHARGE CHARGE* CHARGE CHARGE* CHARGE
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class A Shares -52.82% -49.96% -52.14% -49.22% -7.89% -6.68%
- -----------------------------------------------------------------------------------------------------
Class B+ Shares -52.66% -50.17% -52.15% -49.64% -25.93% -25.01%
- -----------------------------------------------------------------------------------------------------
Class C Shares -50.64% -50.14% -50.11% -49.61% -7.34% -7.34%
- -----------------------------------------------------------------------------------------------------
MSCI CFEF ex-Japan
Index:
Class A & C Shares N/A -45.59% N/A -45.48% N/A -3.67%
Class B Shares N/A -45.59% N/A -45.48% N/A -19.84%
- -----------------------------------------------------------------------------------------------------
</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.
+ 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 and assumes
dividends are reinvested.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
<TABLE>
<CAPTION>
TOP FIVE HOLDINGS
PERCENT OF
ISSUER COUNTRY NET ASSETS
- --------------------------------- --------- --------------
<S> <C> <C>
Cheung Kong Holdings Ltd. Hong Kong 10.6%
HSBC Holdings plc Hong Kong 5.5%
Hutchinson Whampoa Ltd. Hong Kong 5.4%
China Light & Power Co., Ltd. Hong Kong 5.3%
Asustek Computer, Inc. Taiwan 4.1%
</TABLE>
<TABLE>
<CAPTION>
TOP FIVE SECTORS
VALUE PERCENT OF
SECTOR (000) NET ASSETS
- -------------------- --------- -------------
<S> <C> <C>
Finance $ 48,957 37.8%
Capital Equipment 19,358 14.9%
Energy 14,948 11.5%
Consumer Goods 14,199 11.0%
Services 12,207 9.4%
</TABLE>
The investment objective of the Asian Growth Fund is long-term capital
appreciation through investments primarily in equity securities of Asian issues,
excluding Japan.
For the six months ended December 31, 1997, the Fund generated a total
return of -49.96 percent for the Class A shares at net asset value, as compared
to a total return of -45.59 percent for the Morgan Stanley Capital International
(MSCI) Combined Far East Free ex-Japan Index.
Asian markets continued to witness steep losses in the second half of 1997, with
the MSCI Combined Far East Free ex-Japan Index recording a decline of 45.6
percent. None of the Asian equity markets posted a positive return during the
reporting period. In relative terms, the region's "best" performers were Taiwan
(-26.5 percent) and Hong Kong (-31.4 percent). Five of the nine countries
encompassing the Index suffered declines of more than 50 percent, including
Indonesia (-75.9 percent), Korea (-70.2 percent), Malaysia (-64.2 percent),
Thailand (-60.3 percent), and the Philippines (-57.8 percent).
The Asian crisis is the result of excessive credit creation throughout the
region. However, the trigger for the collapse was the de-pegging of the Thai
baht on July 2, a move that forced regional currencies and equity markets into
vicious downward spirals. In Thailand, the devaluation in the baht was
exacerbated by the country's large current-account deficit and the substantial
amount of unhedged U.S.-dollar corporate loans. Despite a change of government
and a bailout package led by the International Monetary Fund (IMF), the Thai
stock market was down nearly 90 percent from its peak two years ago. While the
IMF has been successful in closing shaky financial institutions, an absence of
confidence in the Thai currency and illiquidity in most stocks led many
international investors to desert Thailand's equity market.
The currency depreciation in Thailand quickly spread to other Southeast Asian
countries. Most severely impacted was Indonesia. Despite significant
improvements on the country's macro-economic front in recent years, the rapid
erosion of domestic and foreign confidence in the economy and the rupiah brought
the currency down 56 percent by year end. Indonesian corporations and banks with
large exposure to U.S. dollar-denominated debt deepened the currency crisis.
Meanwhile, skyrocketing domestic interest rates hastened the pace of corporate
bankruptcies. The ensuing economic downturn, as well as concerns about the
health of Indonesia's ailing patriarch President Suharto, dampened market
sentiment as the reporting period ended.
------------------
29
<PAGE>
MORGAN STANLEY
ASIAN GROWTH FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
(UNAUDITED)
The contagion effect that lashed Southeast Asia subsequently transmitted to
Northeast Asia, with the Korean won depreciating by 47 percent. In the fourth
quarter, the Korean stock market declined sharply amid concerns about the credit
quality of the country's financial sector and the ability of Korean corporations
to repay foreign short-term obligations. Korea's economic downturn was a result
of excessive expansion and over-leverage by Korean chaebols (business
conglomerates), which comprise over 70 percent of the country's gross domestic
product. Several large chaebols, including Sammi, Hanbo, Kia, and Jinro, entered
into court receivership with debt-to-equity ratios well above 500 percent. In
the latter part of the year, the IMF stepped in and Korea was forced to
undertake quick liberalization and reform measures, including the opening of its
capital markets.
Even Hong Kong did not escape unscathed from the regional turmoil. Although its
currency board system meant that the Hong Kong dollar remain pegged to the U.S.
dollar, the cost was levied through a sharp rise in interest rates. The equity
market, dominated by interest-sensitive stocks in the property and banking
sectors, reversed the 20 percent return it had posted through September and
plummeted to a final -25 percent performance for the year. Hong Kong property
prices, among the most expensive in the world, fell 30 percent in four months as
asset deflation replaced currency depreciation.
As the initial equity-market victims in ASEAN (a trade group of eight Southeast
Asian nations) remain nearly 70 percent below their peaks, focus has now shifted
to Northeast Asia. The imminent demise of the Korean economy (the 11th largest
in the world) has awakened global investors to the risks of a worldwide
contagion and begun to elicit concerted responses from the United States and the
international community.
As other Asian currencies and markets fall, however, remaining markets such as
Hong Kong, Singapore, and Taiwan look relatively more expensive and vulnerable.
In particular, Hong Kong's currency peg to the U.S. dollar is exacting a heavy
toll on its economy. There also remains a risk that an economic slowdown in
China may compound the already-difficult economic conditions in Hong Kong.
Should China falter, Taiwan would be seriously impacted. Already, Taiwan is
experiencing weakness in its technology and electronics sectors. Any fallout in
the electronics area will also cause problems for Singapore, which already is
contending with the devastation of its ASEAN trading partners.
As a result of these risks, we would look to reduce our exposure to Hong Kong
and China. We also seek to hedge our currency exposure to the Hong Kong dollar,
the New Taiwan dollar, and the Singapore dollar. Concurrently, we would be
seeking to put money to work in selected stocks in the more devastated markets
that are beginning to offer compelling values for the patient investor.
We anticipate 1998 to be a very difficult year for the region. The effect of the
fallout on the regional markets is just beginning to filter through to the real
economy, and the year likely will be marked by corporate collapses and massive
layoffs. In turn, many Asian nations could experience economic recession as well
as political and social unrest.
Although there are no signs of stabilization for equity prices or currency
values, and despite the ongoing crisis of confidence, the speed at which some of
the regional currencies and markets are sliding would indicate a climatic
condition. Under these circumstances, it is our view that now is not the time
for serious investors to exit these markets. Indeed, investors with the luxury
of a longer-term horizon may stand to reap massive long-term gains by
capitalizing on this monumental meltdown in the Asian markets. Our strategy will
be to concentrate on identifying and acquiring those companies that represent
irreplaceable franchises and that are currently available at bargain-basement
prices.
<TABLE>
<S> <C>
Vinod Sethi Ean Wan Chin
PORTFOLIO MANAGER PORTFOLIO MANAGER
</TABLE>
- --------------
30
<PAGE>
MORGAN STANLEY
ASIAN GROWTH FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -----------------------------------------------------------------------------
COMMON STOCKS (95.8%)
CHINA (2.8%)
3,179,000 Qingling Motors Co., `H'......................... $ 1,559
65,340 Shenzhen Fangda Co., Ltd. `B'.................... 75
(a)5,792,000 Zhejiang Expressway Co., Ltd. `H'................ 1,173
(a)2,416,000 Zhejiang Southeast Electric Power Co., Ltd.
`B'............................................ 778
--------
3,585
--------
HONG KONG (38.9%)
2,102,000 Cheung Kong Holdings Ltd......................... 13,767
1,235,000 China Light & Power Co., Ltd..................... 6,853
806,000 Dao Heng Bank Group Ltd.......................... 2,013
1,461,800 Hong Kong Telecommunications Ltd................. 3,009
290,400 HSBC Holdings plc................................ 7,158
1,107,600 Hutchison Whampoa Ltd............................ 6,947
2,528,700 Ng Fung Hong Ltd................................. 2,659
115,000 Shanghai Industrial Holdings Ltd................. 427
569,900 Sun Hung Kai Properties Ltd...................... 3,971
518,000 Swire Pacific Ltd. `A'........................... 2,841
47,000 Television Broadcasting Ltd...................... 134
1,629,000 Zhenhai Refining & Chemical Co................... 678
--------
50,457
--------
INDIA (6.4%)
133,700 Bharat Heavy Electricals Ltd..................... 1,207
40,000 Castrol Ltd...................................... 760
30,000 Container Corp. of India Ltd..................... 322
(a)25,000 Hoechst Marion Roussel Ltd....................... 215
42,000 Housing Development Finance Corp., Ltd........... 3,297
12,800 SmithKline Beecham Consumer Healthcare Ltd....... 107
211,450 State Bank of India.............................. 1,311
135,000 Tata Engineering & Locomotive Co., Ltd........... 1,020
--------
8,239
--------
INDONESIA (3.0%)
68,000 Bat Indonesia (Foreign).......................... 321
227,000 Gudang Garam (Foreign)........................... 346
(a)57,500 Gulf Indonesia Resources Ltd. (Foreign).......... 1,265
(a)6,445,000 Makindo Tbk (Foreign)............................ 1,143
1,123,500 Telekomunikasi (Foreign)......................... 597
34,000 Unilever Indonesia (Foreign)..................... 186
--------
3,858
--------
KOREA (2.8%)
(e)17,082 Housing & Commercial Bank GDR (Foreign).......... 90
(d)200 Korea Mobile Telecommunications Corp............. 60
19,537 LG Information & Communication (Foreign)......... 547
(d)27,462 Pohang Iron & Steel Ltd. (Foreign)............... 766
80,909 Samsung Electronics Co. (Foreign)................ 1,833
(a)24,095 Samsung Electronics Co. GDR (New)................ 342
--------
3,638
--------
MALAYSIA (4.5%)
154,000 Dialog Group Bhd................................. 265
414,400 Genting Bhd...................................... 1,039
53,000 Kuala Lumpur Kepong Bhd.......................... 114
276,000 Telekom Malaysia Bhd............................. 816
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -----------------------------------------------------------------------------
1,612,000 Tenaga Nasional Bhd.............................. $ 3,440
149,000 United Engineers Bhd............................. 124
--------
5,798
--------
PHILIPPINES (5.4%)
3,663,496 Ayala Land, Inc. `B'............................. 1,447
(a)2,775,000 Fil-Estate Land, Inc............................. 81
411,965 Manila Electric `B'.............................. 1,363
(a)5,610,000 Music Corp....................................... 2,009
786,000 San Miguel Corp. `B'............................. 960
8,158,180 SM Prime Holdings, Inc........................... 1,209
--------
7,069
--------
SINGAPORE (15.1%)
(a)93,600 Creative Technology Ltd.......................... 2,059
223,500 Development Bank of Singapore (Foreign).......... 1,914
269,000 Electronic Resources Ltd......................... 274
(a)589,000 NatSteel Ltd..................................... 757
865,238 Oversea-Chinese Banking Corp. (Foreign).......... 5,043
584,000 Parkway Holdings Ltd............................. 1,320
207,400 Singapore Press Holdings (Foreign)............... 2,602
902,000 United Overseas Bank Ltd. (Foreign).............. 5,016
155,000 Venture Manufacturing Ltd........................ 433
(a)12,000 Want Want Holdings............................... 16
93,000 Wing Tai Holdings Ltd............................ 109
--------
19,543
--------
TAIWAN (15.3%)
(a)319,000 Asustek Computer, Inc............................ 5,055
(a)16,600 Asustek Computer, Inc., GDR...................... 265
322,000 Cathay Construction Corp......................... 367
(a)218,950 China Development Corp........................... 624
(a)951,383 Compal Electronics, Inc.......................... 2,770
(a)106,000 Delpha Construction Co., Ltd..................... 159
97,000 Delta Electronics, Inc........................... 387
2,714,287 Far Eastern Textile, Ltd......................... 2,945
(a)680,000 Hon Hai Precision Industry....................... 3,439
(a)312,500 Kuoyang Construction............................. 589
(a)338,000 Pou Chen Corp.................................... 1,388
788,000 Siliconware Precision Industries Co.............. 1,860
--------
19,848
--------
THAILAND (1.6%)
15,000 Advanced Info Service Public Co., Ltd.
(Foreign)...................................... 72
(a,d)115,000 Bangkok Expressway Public Co., Ltd. (Foreign).... 64
(d)29,000 BEC World Public Co., Ltd. (Foreign)............. 116
(d)200,900 CVD Entertainment Public Co., Ltd. (Foreign)..... 105
947,700 Eastern Water Resources Development Public Co.,
Ltd............................................ 984
(d)68,700 Nation Multimedia Group Public Co., Ltd.
(Foreign)...................................... 18
(d)983,000 National Petrochemical Public Co., Ltd........... 521
(d)35,000 Thai Storage Battery Public Co., Ltd.
(Foreign)...................................... 29
(d)174,900 Thai Theparos Food Product Public Co., Ltd.
(Foreign)...................................... 169
--------
2,078
--------
TOTAL COMMON STOCKS (COST $158,053)................................ 124,113
--------
</TABLE>
-----------------------
31
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
ASIAN GROWTH FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- -----------------------------------------------------------------------------
<C> <S> <C>
INVESTMENT COMPANY (0.3%)
KOREA (0.3%)
(a)58,000 Korea Fund, Inc. (COST $592)..................... $ 384
--------
TOTAL FOREIGN SECURITIES (96.1%) (COST $158,645)................... 124,497
--------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- ---------------
FOREIGN CURRENCY (1.7%)
HKD 5 Hong Kong Dollar................................. 1
INR 4,694 Indian Rupee..................................... 120
MYR 34 Malaysian Ringgit................................ 9
SGD 3,448 Singapore Dollar................................. 2,050
TWD 571 Taiwan Dollar.................................... 17
--------
TOTAL FOREIGN CURRENCY (COST $2,206)............................... 2,197
--------
TOTAL INVESTMENTS (97.8%) (COST $160,851).......................... 126,694
OTHER ASSETS IN EXCESS OF LIABILITIES (2.2%)....................... 2,833
--------
NET ASSETS (100%).................................................. $129,527
--------
--------
</TABLE>
- ---------------
(a) -- Non-income producing security
(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
- -----------------------
32
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
ASIAN GROWTH FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
DECEMBER 31, 1997
(UNAUDITED)
- --------------------------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE INFORMATION:
Under the terms of foreign currency contracts open at December 31, 1997, the
Portfolio 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>
HKD 4,634 $ 598 1/2/98 $ 598 $ 598 $ --
MYR 4,437 1,141 1/2/98 $ 1,135 1,135 (6)
PHP 9,505 235 1/2/98 $ 234 234 (1)
SGD 3,623 2,155 1/2/98 $ 2,163 2,163 8
HKD 7,279 939 1/5/98 $ 939 939 --
MYR 702 180 1/5/98 $ 180 180 --
PHP 1,501 37 1/5/98 $ 37 37 --
SGD 192 115 1/5/98 $ 115 115 --
THB 166 3 1/5/98 $ 3 3 --
MYR 3,718 956 1/6/98 $ 953 953 (3)
PHP 3,535 87 1/6/98 $ 87 87 --
SGD 444 264 1/6/98 $ 263 263 (1)
THB 4,583 95 1/6/98 $ 95 95 --
KRW 1,861,500 1,093 2/25/98 $ 1,700 1,700 607
SGD 22,204 13,105 3/18/98 $ 12,985 12,985 (120)
--------- --------- -----
$ 21,003 $ 21,487 $ 484
--------- --------- -----
--------- --------- -----
</TABLE>
- ---------------
HKD -- Hong Kong Dollar
KRW -- South Korean Won
MYR -- Malaysian Ringgit
PHP -- Philippine Peso
SGD -- Singapore Dollar
THB -- Thai Baht
- --------------------------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
<TABLE>
<CAPTION>
PERCENT
OF
VALUE NET
INDUSTRY (000) ASSETS
- ---------------------------------------- -------- --------
<S> <C> <C>
Finance................................. $ 48,957 37.8%
Capital Equipment....................... 19,358 14.9
Energy.................................. 14,948 11.5
Consumer Goods.......................... 14,199 11.0
Services................................ 12,207 9.4
Multi-Industry.......................... 12,028 9.3
Materials............................... 2,800 2.2
-------- ---
$124,497 96.1%
-------- ---
-------- ---
</TABLE>
-----------------------
33
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
AMERICAN VALUE FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW
(UNAUDITED)
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.
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1997)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Banking 7.1%
Building 5.4%
Computers 4.6%
Consumer--Retail 6.0%
Consumer--Staples 7.7%
Energy 7.0%
Financial--Diversified 10.8%
Health Care 4.9%
Insurance 5.0%
Technology 6.6%
Short-Term Investments 8.0%
Other 26.9%
</TABLE>
<TABLE>
<CAPTION>
TOTAL RETURNS**
---------------------------------------------------------------------
AVERAGE ANNUAL
SIX MONTHS ONE YEAR SINCE INCEPTION
--------------------- --------------------- ---------------------
WITH WITHOUT WITH WITHOUT WITH WITHOUT
SALES SALES SALES SALES SALES SALES
CHARGE* CHARGE CHARGE* CHARGE CHARGE* CHARGE
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class A Shares 9.98% 16.66% 28.56% 36.39% 16.74% 18.39%
- -----------------------------------------------------------------------------------------------------
Class B+ Shares 11.25% 16.25% 30.41% 35.41% 23.39% 24.30%
- -----------------------------------------------------------------------------------------------------
Class C Shares 15.24% 16.24% 34.48% 35.48% 17.47% 17.47%
- -----------------------------------------------------------------------------------------------------
Russell 2500 Small Company
Index:
Class A & C Shares N/A 11.78% N/A 24.35% N/A 17.23%
Class B Shares N/A 11.78% N/A 24.35% N/A 20.63%
- -----------------------------------------------------------------------------------------------------
S&P 500 Index:
Class A & C Shares N/A 10.58% N/A 33.36% N/A 22.01%
Class B Shares N/A 10.58% N/A 33.36% N/A 28.00%
- -----------------------------------------------------------------------------------------------------
</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.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
<TABLE>
<CAPTION>
TOP FIVE HOLDINGS
PERCENT OF
ISSUER SECTOR NET ASSETS
- ------------------------------ -------------------- ----------
<S> <C> <C>
NBTY, Inc. Consumer--Staples 1.8%
Valassis Communications, Inc. Communications 1.6%
Universal Corp. Consumer--Staples 1.5%
DIMON, Inc. Consumer--Staples 1.4%
Storage Technology Corp. Computers 1.3%
</TABLE>
<TABLE>
<CAPTION>
TOP FIVE SECTORS
VALUE PERCENT OF
SECTOR (000) NET ASSETS
- ------------------------------ ------- ----------
<S> <C> <C>
Financial--Diversified $30,913 10.8%
Consumer--Staples 22,234 7.7%
Banking 20,386 7.1%
Energy 20,243 7.0%
Technology 19,077 6.6%
</TABLE>
The American Value Fund invests in domestic small- to- medium-sized companies
that our research indicates are undervalued, of high quality, and will have the
potential to 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.
Our stock selection process favors companies that offer the best value when
looking at the trade-off between the price/earnings ratio and the earnings
growth rate. Among the companies offering attractive value, we generally favor
those with improving near-term business prospects relative to investor
expectations. As a way of helping to control risk, the Fund is diversified
across the major economic sectors.
For the six months ended December 31, 1997, the Fund generated a total return of
16.66 percent for Class A shares at net asset value, as compared to a total
return of 11.78 percent for the Russell 2500 Small Company Index and 10.58
percent for the Standard & Poor's 500-Stock Index.
The Fund's relative performance during the reporting period benefited from stock
selection in the finance sector. In particular, North Fork Bancorporation, First
of America Bank, and Nationwide Financial Services posted strong returns. Also,
the Fund's overweight in energy service stocks (a position that we reduced after
the first half of the reporting period) contributed positively to relative
performance. Stocks from the food and tobacco sector, including NBTY (vitamins)
and Universal (tobacco leaf processing), also produced solid returns. The Fund's
underweight in the electric utility sector, as well as mediocre performance from
some of our health-care service stocks, had a negative effect on relative
returns.
We reduced our bank and thrift holdings toward the end of the reporting period
as valuations in the group became expensive. Within the finance sector, we
reinvested the bank and thrift proceeds into real estate investment trusts
(REITs). Among cyclical stocks, we increased the Fund's presence in housing and
furniture-related holdings, while maintaining our underweight in the basic
resources sector.
- --------------
34
<PAGE>
MORGAN STANLEY
AMERICAN VALUE FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
(UNAUDITED)
Looking to the future, we believe that returns may fall short of the very strong
performance the stock market has delivered during the past three years. While
corporate earnings should continue to increase, we believe that the growth rate
for corporate profits may decelerate. In this environment, careful attention to
earnings risk will become increasingly important. Be assured that this is an
area that we monitor closely. But while overall corporate earnings growth may be
slowing, we continue to find undervalued stocks that have favorable earnings
prospects. Given the availability of such investments, we remain optimistic
about the Fund's long-term future. We also recognize, however, that volatility
may increase in the near term.
<TABLE>
<S> <C> <C>
Chris Leavy William B. Gerlach Gary G. Schlarbaum
PORTFOLIO MANAGER PORTFOLIO MANAGER PORTFOLIO MANAGER
</TABLE>
------------------
35
<PAGE>
MORGAN STANLEY
AMERICAN VALUE FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ------------------------------------------------------------------------
COMMON STOCKS (92.7%)
AEROSPACE (1.3%)
(a)29,800 Alliant Techsystems, Inc......................... $ 1,661
(a)20,600 Coltec Industries, Inc........................... 478
5,300 Doncasters plc ADR............................... 112
(a)36,300 Hexcel Corp...................................... 905
10,100 Precision Castparts Corp......................... 609
(a)2,700 Triumph Group, Inc............................... 90
--------
3,855
--------
BANKING (7.1%)
21,500 Affiliated Community Bancorp, Inc................ 812
5,500 AmSouth Bancorp.................................. 299
9,868 Associated Banc-Corp............................. 544
(a)21,700 Cadillac Fairview Corp........................... 510
16,800 City National Corp............................... 621
61,500 Colonial BancGroup, Inc.......................... 2,118
15,200 Comerica, Inc.................................... 1,372
17,000 Community First Bankshares, Inc.................. 905
28,500 Compass Bancshares, Inc.......................... 1,247
51,400 Dime Bancorp, Inc................................ 1,555
40,000 First Savings Bank of Washington Bancorp, Inc.... 1,100
12,400 Franchise Mortgage Acceptance Co., L.L.C......... 228
16,200 Long Island Bancorp, Inc......................... 804
18,100 MAF Bancorp, Inc................................. 640
53,000 North Fork Bancorp, Inc.......................... 1,779
7,919 Peoples Heritage Financial Group, Inc............ 364
3,400 Prime Bancshares, Inc............................ 71
60,900 Trans Financial, Inc............................. 2,368
34,800 Webster Financial Corp........................... 2,314
10,000 Western Bancorp.................................. 330
6,500 Wilmington Trust Corp............................ 405
--------
20,386
--------
BUILDING (5.4%)
(a)119,300 AFC Cable Systems, Inc........................... 3,549
74,600 Essex International, Inc......................... 2,219
43,400 General Cable Corp............................... 1,571
57,000 Lone Star Industries, Inc........................ 3,028
34,100 Southdown, Inc................................... 2,012
(a)53,000 Superior TeleCom, Inc............................ 1,832
(a)28,100 USG Corp......................................... 1,377
--------
15,588
--------
CAPITAL GOODS (2.5%)
115,400 AGCO Corp........................................ 3,375
15,900 Case Corp........................................ 961
48,300 Flowserve Corp................................... 1,349
11,400 IRI International Corp........................... 160
12,500 Stoneridge, Inc.................................. 200
7,900 Tecumseh Products 'A'............................ 385
18,500 Trinity Industries, Inc.......................... 826
--------
7,256
--------
CHEMICALS (1.6%)
108,300 Crompton & Knowles Corp.......................... 2,870
34,200 Lubrizol Corp. (The)............................. 1,261
(a)17,400 Quaker Chemical Corp............................. 329
--------
4,460
--------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ------------------------------------------------------------------------
COMMUNICATIONS (2.6%)
(a)6,100 Hirsch International Corp. 'A'................... $ 134
68,400 Journal Register Co.............................. 1,436
21,200 McClatchy Newspapers, Inc........................ 576
(a)39,200 Nextel Communications Inc., 'A'.................. 1,019
(a)121,600 Valassis Communications, Inc..................... 4,499
--------
7,664
--------
COMPUTERS (4.6%)
(a)71,400 Apex PC Solutions, Inc........................... 1,580
(a)7,700 Box Hill Systems Corp............................ 80
(a)51,300 CHS Electronics, Inc............................. 879
17,300 Elbit Systems Ltd................................ 238
(a)38,500 InaCom Corp...................................... 1,080
23,200 Quantum Corp..................................... 465
(a)26,800 SCI Systems, Inc................................. 1,168
(a)29,000 SMART Modular Technologies, Inc.................. 667
61,300 Storage Technology Corp.......................... 3,797
(a)55,600 Stratus Computer, Inc............................ 2,102
(a)14,400 Tech Data Corp................................... 560
(a)38,600 Western Digital Corp............................. 620
--------
13,236
--------
CONSUMER--DURABLES (4.1%)
30,300 Arvin Industries, Inc............................ 1,009
42,700 Dan River, Inc. 'A'.............................. 702
9,300 Dana Corp........................................ 442
(a)22,300 Datascope Corp................................... 577
(a)153,400 Furniture Brands Internatioanl, Inc.............. 3,145
48,200 I.C. Isaacs & Co., Inc........................... 488
13,200 Interface, Inc................................... 383
(a)27,100 Lear Corp........................................ 1,287
101,800 MascoTech, Inc................................... 1,871
48,700 Windmere-Durable Holdings, Inc................... 1,099
(a)25,900 VWR Scientific Products Corp..................... 732
--------
11,735
--------
CONSUMER--RETAIL (6.0%)
(a)13,900 Brylane, Inc..................................... 685
26,500 Claire's Stores, Inc............................. 515
(a)1,600 Day Runner, Inc.................................. 65
(a)8,200 Fred Meyer, Inc.................................. 298
(a)80,800 Goody's Family Clothing, Inc..................... 2,197
27,900 Hughes Supply, Inc............................... 975
(a)22,000 Neiman Marcus Group, Inc. (The).................. 666
5,300 Novel Denim Holdings, Ltd........................ 106
(a)140,700 Office Depot, Inc................................ 3,368
(a)17,100 Polo Ralph Lauren Corp........................... 416
93,500 Ross Stores, Inc................................. 3,401
52,200 Russ Berrie & Co., Inc........................... 1,370
(a)20,700 Stage Stores, Inc................................ 774
34,700 TJX Companies, Inc............................... 1,193
16,200 VF Corp.......................................... 744
(a)21,000 Zale Corp........................................ 483
--------
17,256
--------
CONSUMER--SERVICE & GROWTH (1.2%)
4,800 Hertz Corp. 'A'.................................. 193
(a)105,200 Prime Hospitality Corp........................... 2,143
</TABLE>
- --------------
36
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
AMERICAN VALUE FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
CONSUMER--SERVICE & GROWTH (CONT.)
<TABLE>
<C> <S> <C>
(a)23,300 Renters Choice, Inc.............................. $ 478
41,200 Select Appointments Holdings Public Ltd., Co.
ADR............................................ 752
--------
3,566
--------
CONSUMER--STAPLES (7.7%)
(a)5,300 Beringer Wine Estates Holdings, Inc. 'B'......... 201
(a)82,500 Blyth Industries, Inc............................ 2,470
(a)38,000 Consolidated Cigar Holdings, Inc................. 1,047
(a)19,600 CTB International Corp........................... 279
15,000 Dean Foods Co.................................... 893
157,200 DIMON, Inc....................................... 4,127
50,800 Fresh Del Monte Produce Inc...................... 743
23,100 General Cigar Holdings, Inc...................... 492
40,400 Interstate Bakeries Corp......................... 1,510
(a)154,600 NBTY, Inc........................................ 5,160
13,600 Richfood Holdings, Inc........................... 384
8,700 Schweitzer-Mauduit International, Inc............ 324
16,000 Standard Commercial Corp......................... 265
105,500 Universal Corp................................... 4,339
--------
22,234
--------
ENERGY (7.0%)
22,900 Apache Corp...................................... 803
(a)8,500 BJ Services Co................................... 611
1,800 Black Hills Corp................................. 63
(a)27,700 Cooper Cameron Corp.............................. 1,690
39,100 Diamond Offshore Drilling, Inc................... 1,882
(a)8,500 EVI, Inc......................................... 440
(a)86,300 Global Industries, Ltd........................... 1,467
(a)27,400 Marine Drilling Cos, Inc......................... 569
16,200 National Fuel Gas Co............................. 789
14,700 Nicor, Inc....................................... 620
(a)7,500 Noble Affiliates, Inc............................ 264
84,800 Noble Drilling Corp.............................. 2,597
(a)8,200 NS Group, Inc.................................... 140
(a)20,600 Ocean Energy, Inc................................ 1,016
(a)28,900 Precision Drilling Corp.......................... 704
6,300 Stolt Comex Seaway, S.A.......................... 315
21,300 Sun Co., Inc..................................... 896
35,200 Transocean Offshore, Inc......................... 1,696
8,900 Ultramar Diamond Shamrock Corp................... 284
(a)11,600 United Meridian Corp............................. 326
(a)36,100 Varco International, Inc......................... 774
44,700 Vintage Petroleum, Inc........................... 849
14,000 Washington Gas Light Co.......................... 433
(a)23,200 Weatherford Enterra, Inc......................... 1,015
--------
20,243
--------
ENTERTAINMENT (0.1%)
(a)9,300 Imax Corp........................................ 205
--------
FINANCIAL--DIVERSIFIED (10.8%)
18,600 A.G. Edwards, Inc................................ 739
(a)25,300 AmeriCredit Corp................................. 700
27,600 Bear Stearns Companies, Inc...................... 1,311
49,500 CIT Group, Inc. (The) 'A'........................ 1,596
10,000 CMAC Investment Corp............................. 604
43,400 Cousins Properties, Inc. REIT.................... 1,272
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ------------------------------------------------------------------------
32,900 Crescent Real Estate Equities Co. REIT........... $ 1,295
(a)34,300 Delta Financial Corp............................. 459
34,600 Developers Diversified Realty Corp............... 1,323
54,300 Duke Realty Investment, Inc. REIT................ 1,317
13,125 Equity Residential Properties Trust.............. 664
45,100 Felcor Suite Hotels, Inc. REIT................... 1,601
(a)27,200 First Alliance Corp.............................. 500
35,000 First Washinton Realty Trust, Inc................ 963
15,600 Franklin Resources, Inc.......................... 1,356
26,500 Glenborough Realty Trust, Inc.................... 785
6,800 Hartford Life, Inc. 'A'.......................... 308
12,900 Irvine Apartment Communities, Inc. REIT.......... 410
38,000 JDN Realty Corp.................................. 1,230
46,900 Kilroy Realty Corp. REIT......................... 1,348
37,200 Kimco Realty Corp................................ 1,311
8,900 Lehman Brothers Holdings, Inc.................... 454
(a)79,100 Lexington Corporate Properties, Inc.............. 1,221
48,600 Liberty Property Trust, REIT..................... 1,388
30,000 Mack-Cali Realty Corp............................ 1,230
58,500 Manufactured Home Communities, Inc. REIT......... 1,580
32,000 Money Store, Inc. (The).......................... 672
16,300 Nationwide Health Properties, Inc................ 416
3,400 Post Properties, Inc............................. 138
19,400 Security Capital Group Inc. 'B'.................. 631
9,600 Security Capital Industrial Trust................ 239
12,400 SL Green Realty Corp............................. 322
30,600 Spieker Properties, Inc. REIT.................... 1,312
(a)8,200 T&W Financial Corp............................... 136
5,250 Wellsford Realty Properties Inc.................. 82
--------
30,913
--------
HEALTH CARE (4.9%)
17,500 Bergen Brunswig Corp., 'A'....................... 737
(a)25,800 Del Global Technologies Corp..................... 258
(a)4,000 Dental Care Alliance, Inc........................ 42
(a)32,200 ESC Medical Systems Ltd.......................... 1,248
(a)81,200 FPA Medical Management, Inc...................... 1,512
(a)108,500 Healthdyne Technologies, Inc..................... 2,211
(a)27,300 Hologic, Inc..................................... 565
26,800 ICN Pharmaceuticals, Inc......................... 1,308
(a)9,200 Laser Industries, Ltd............................ 252
39,300 Mylan Laboratories, Inc.......................... 823
(a)40,800 Physician Sale & Service, Inc.................... 877
(a)13,600 Universal Health Services, Inc................... 685
(a)128,000 VIVUS, Inc....................................... 1,360
(a)10,600 Watson Pharmaceuticals, Inc...................... 344
(a)45,800 Wellpoint Health Networks, Inc................... 1,935
--------
14,157
--------
INDUSTRIAL (1.3%)
13,200 Ameron, Inc...................................... 835
19,500 Barnes Group, Inc................................ 444
(a)160,600 Philip Services Corp............................. 2,309
--------
3,588
--------
INSURANCE (5.0%)
58,258 AmerUs Life Holdings, Inc. 'A'................... 2,148
(a)79,000 Bethlehem Steel Corp............................. 681
(a)56,400 ESG Re Ltd....................................... 1,325
</TABLE>
-----------------------
37
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
AMERICAN VALUE FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
INSURANCE (CONT.)
<TABLE>
<C> <S> <C>
56,100 Everest Reinsurance Holdings, Inc................ $ 2,314
39,400 EXEL Ltd......................................... 2,497
54,900 Nationwide Financial Services, Inc., 'A'......... 1,983
19,200 Old Republic International Corp.................. 714
16,600 Reliance Group Holdings, Inc..................... 234
(a)78,600 Stirling Cooke Browm Holdings Ltd................ 1,926
10,200 Torchmark Corp................................... 429
--------
14,251
--------
METALS (1.7%)
88,300 AK Steel Holding Corp............................ 1,562
76,200 Barrick Gold Corp................................ 1,419
72,600 Homestake Mining Co.............................. 644
(a)46,900 NatSteel Corp. 'B'............................... 542
22,700 USX-U.S. Steel Group, Inc........................ 709
--------
4,876
--------
MISCELLANEOUS (0.9%)
39,800 S & P Mid Cap 400 Depositary Receipts............ 2,550
--------
PAPER & PACKAGING (0.4%)
(a)7,500 Owens-Illinois, Inc.............................. 284
27,500 P.H. Glatfelter Co............................... 512
10,900 Potlatch Corp.................................... 469
--------
1,265
--------
RESTAURANTS (0.7%)
53,700 Applebee's International, Inc.................... 970
80,000 Friendly Ice Cream Corp.......................... 930
--------
1,900
--------
SERVICES (3.1%)
(a)18,000 AccuStaff, Inc................................... 414
20,300 Bowne & Co....................................... 810
(a)49,600 CDI Corp......................................... 2,269
38,000 Danka Business Systems plc....................... 606
(a)5,300 Data Processing Resources Corp................... 135
(a)14,900 Fiserv, Inc...................................... 732
27,000 Herman Miller, Inc............................... 1,473
26,800 Ogden Corp....................................... 755
1,000 True North Communications, Inc................... 25
(a)8,100 USA Waste Services, Inc.......................... 318
(a)67,700 U.S. Office Products Co.......................... 1,329
--------
8,866
--------
TECHNOLOGY (6.6%)
(a)1,600 Aspen Technologies, Inc.......................... 55
(a)69,400 Avid Technology, Inc............................. 1,856
(a)60,600 Boston Technology, Inc........................... 1,522
(a)113,000 Cidco, Inc....................................... 2,204
(a)41,700 Comverse Technology, Inc......................... 1,626
(a)3,400 Electro Scientific Industries, Inc............... 129
(a)12,000 Electronics for Imaging, Inc..................... 200
(a)48,600 Etec Systems, Inc................................ 2,260
(a)93,700 HMT Technology Corp.............................. 1,218
(a)13,300 KLA-Tencor Corp.................................. 514
(a)13,800 Lattice Semiconductor Corp....................... 654
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ------------------------------------------------------------------------
(a)38,700 MicroAge, Inc.................................... $ 583
(a)62,500 Procom Technology, Inc........................... 988
16,000 Park Electrochemical Corp........................ 454
(a)10,400 Semitool, Inc.................................... 136
(a)108,900 Symantec Corp.................................... 2,389
27,750 Tektronix, Inc................................... 1,101
(a)34,900 Teradyne, Inc.................................... 1,117
(a)1,800 Veritas DGC, Inc................................. 71
--------
19,077
--------
TRANSPORTATION (3.0%)
38,800 Air Express International Corp................... 1,183
36,400 Arnold Industries, Inc........................... 628
(a)92,200 Atlas Air, Inc................................... 2,213
5,700 C.H. Robinson Worldwide, Inc..................... 128
66,900 CNF Transportation, Inc.......................... 2,567
(a)15,000 Jevic Transportation, Inc........................ 242
(a)8,900 Midway Airlines, Corp............................ 135
43,000 USFreightways Corp............................... 1,398
--------
8,494
--------
UTILITIES (3.1%)
(a)22,900 CalEnergy Co., Inc............................... 658
18,000 Cinergy Corp..................................... 690
10,500 Eastern Entreprises.............................. 472
26,200 Illinova Corp.................................... 706
16,800 Minnesota Power & Light Co....................... 732
28,400 New Century Energies, Inc........................ 1,361
21,200 New York State Electric & Gas Corp............... 753
16,300 ONEOK, Inc....................................... 658
22,200 Pinnacle West Capital Corp....................... 941
45,200 Public Service Co. of New Mexico................. 1,071
5,300 SJW Corp......................................... 321
19,600 Washington Water Power Co........................ 476
--------
8,839
--------
TOTAL COMMON STOCKS (COST $251,360)........................... 266,460
--------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- ----------
SHORT-TERM INVESTMENT (8.0%)
REPURCHASE AGREEMENT (8.0%)
$ 22,945 Chase Securities, Inc., 5.95%, dated 12/31/97,
due 1/2/98, to be repurchased at $22,953,
collateralized by $23,205 U.S. Treasury Notes,
5.25%, due 1/31/01, valued at $23,432 (COST
$22,945)....................................... 22,945
--------
TOTAL INVESTMENTS (100.7%) (COST $274,305).................... 289,405
LIABILITIES IN EXCESS OF OTHER ASSETS (-0.7%)................. (2,156)
--------
NET ASSET (100%).............................................. $287,249
--------
--------
</TABLE>
- ---------------
(a) -- Non-income producing security
ADR -- American Depositary Receipt
REIT -- Real Estate Investment Trust
- --------------
38
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
VALUE FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW
(UNAUDITED)
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.
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1997)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Capital Equipment 25.0%
Consumer Products--Miscellaneous 25.8%
Energy 7.5%
Finance 18.0%
Materials 4.7%
Services 4.8%
Short-Term Investments 14.2%
</TABLE>
<TABLE>
<CAPTION>
TOTAL RETURNS
SINCE INCEPTION
(7/7/97)**
-----------------
WITH WITHOUT
SALES SALES
CHARGE* CHARGE
- -------------------------------------------
<S> <C> <C>
Class A Shares -4.02% 1.84%
- -------------------------------------------
Class B Shares -3.49% 1.51%
- -------------------------------------------
Class C Shares 0.43% 1.43%
- -------------------------------------------
S&P 500 Index: N/A 7.27%
- -------------------------------------------
</TABLE>
* The returns above with sales charge are calculated using the applicable sales
charge for Class A shares and 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 S&P 500 Index is an unmanaged index of common stocks. The S&P 500 Index
assumes dividends are reinvested.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
<TABLE>
<CAPTION>
TOP FIVE HOLDINGS
PERCENT OF
ISSUER SECTOR NET ASSETS
- ------------------------------ -------------------- ----------
<S> <C> <C>
Ford Motor Co. Consumer Products-- 3.2%
Miscellaneous
International Business Consumer Products--
Machines Corp. Miscellaneous 2.7%
Aeroquip-Vickers, Inc. Capital Equipment 2.2%
Philip Morris Cos., Inc. Consumer Products-- 2.1%
Miscellaneous
Goodyear Tire & Rubber Co. Capital Equipment 2.0%
</TABLE>
<TABLE>
<CAPTION>
TOP FIVE SECTORS
VALUE PERCENT OF
SECTOR (000) NET ASSETS
- ------------------------------ ------- ----------
<S> <C> <C>
Consumer Products-
Miscellaneous $54,328 25.8%
Capital Equipment 52,475 25.0%
Finance 37,821 18.0%
Energy 15,723 7.5%
Services 10,178 4.8%
</TABLE>
The Value Fund seeks to achieve above-average total return over a market cycle
of three to five years, consistent with reasonable risk, by investing in a
diversified portfolio of common stocks and other equity securities that we
believe to be relatively undervalued based on various risk measures such as
price/earnings ratios and price/book ratios. We try to buy companies with
average or better-than-average profitability and revenue growth, but
below-average valuations.
For the period from inception of the portfolio on July 7, 1997 through December
31, 1997, the Fund generated a total return of 1.84 percent for Class A shares
at net asset value, as compared to a total return of 7.27 percent for the S&P
500 Index.
Both sector allocation and stock selection contributed to a performance
shortfall, particularly during the later stages of the reporting period. Our
significant underweightings in such traditionally defensive sectors of the
market--such as health care, beverages, personal care products, and telephone
and consumer services--penalized relative returns. Fears of a global economic
slowdown caused by the crisis in Asia generated strong interest in defensive
stocks and created a strong aversion to economically sensitive sectors of the
market. Poor stock selection in the financial services, heavy industry, health
care, and retail sectors also negatively impacted our performance.
Most active managers struggled in 1997, with about 90 percent of all equity
mutual funds falling behind the S&P 500. The past year represented the third
consecutive year (and the only consecutive three-year period since 1958) in
which the market-weighted S&P 500 significantly outperformed an equal-weighted
version of the same Index. Also, because of valuation considerations, our
portfolio remains somewhat smaller and more economically sensitive than the
Index. Nearly 46 percent of our portfolio holdings are invested in companies
with market-capitalizations of less than $5 billion, versus only about 8 percent
for the S&P 500.
Our current portfolio characteristics reflect our commitment to investing in
stocks with low price/ earnings ratios. Our portfolio's projected P/E ratio for
the next 12 months is 12.5, versus 18.1 for the
------------------
39
<PAGE>
MORGAN STANLEY
VALUE FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
(UNAUDITED)
S&P 500. Our price/sales ratio, another important valuation parameter in our
investment process, is 76 percent, compared to 151 percent for the Index. The
Fund's price/cash flow and price/book value ratios also are at significant
discounts to the market.
Typically, our portfolio maintains growth and profitability characteristics that
approach the Index. Unfortunately, growth is now generally too expensive for us
to own while still adhering to our valuation restrictions. And because of the
current global economic uncertainty, growth and defensive stocks have become
richly priced as well. Our portfolio maintains a projected secular (long-term)
growth rate of 11 percent, versus 13.4 percent for the Index, and a current
return on equity of 17.4 percent against 22.4 percent for the benchmark.
We remain cautious about the outlook for U.S. stocks during the coming year. The
cumulative return of the S&P 500 during the three-year period from 1995 to 1997
is 125 percent. Since 1945, stocks have climbed by that amount in any
consecutive three-year period on only two previous occasions, and each of those
rallies began from considerably lower valuation levels. However, there are
fundamental reasons supporting the current bull run, including
lower-than-expected inflation, exceptional cash flows into equities, healthy
merger and acquisition activity, reasonable profit growth, and a strong bond
market.
Many of these factors may persist through 1998. But because we enter the new
year with very high P/E ratios and unprecedented price/sales, price/book value
and price/dividend ratios, much if not all of these fundamental improvements
appear to be priced into current market levels. Should these ideal conditions
change for the worse, equity prices would almost certainly come under some
pressure.
Our fundamental, top-down outlook is for continued low inflation and interest
rates through 1998. Our concerns revolve around corporate profitability and
asset allocation issues. With demand moderating, labor costs rising, and the
dollar climbing, many large multinational companies (which dominate the S&P 500)
may find it difficult to increase their already historically high levels of
profitability. Revenue growth for the average company has slowed to around 5
percent, and appears to be decelerating as we head into the new year.
Expectations of 10 to 12 percent long-term profit growth are built into current
valuations, and 1998 could be the first year in some time that profitability is
disappointing.
Regarding asset allocation, both household and institutional equity ownership as
a percentage of financial assets is approaching historically peak levels. In
this new era, investors might continue to buy during each dip in the market,
believing that every correction represents a new opportunity to increase equity
exposure and, therefore, historical asset allocation guidelines are obsolete.
But if not, stock market valuations cannot well tolerate significant
liquidations from retail or institutional investors. If something happens to
"break the spell," it is a long way down to average valuations from today's
market levels.
While the equity market in general appears quite expensive to us, valuations in
our low P/E universe of stocks look reasonable. The Fund's 12.5 P/E ratio
includes many high-quality industrial franchise companies selling for less than
10 times 1998 estimated earnings. On either a relative or absolute basis, these
valuations are very cheap, and valuation divergences between many economically
sensitive companies and the broad market have never been wider. We do not know
what type of economy 1998 will deliver, and we can't predict with certainty what
kind of scenario will generate interest in economically sensitive stocks.
However, we do know that on a fundamental basis, many of our companies have
never been better positioned to profit, grow, and create shareholder value. The
stock market may continue to ignore the type of businesses that dominate our
portfolio for a while longer, but over time we believe our patience and
commitment to value will be handsomely rewarded.
<TABLE>
<S> <C> <C>
Richard Behler Nicholas Kovich Robert Marcin
PORTFOLIO MANAGER PORTFOLIO MANAGER PORTFOLIO MANAGER
</TABLE>
- --------------
40
<PAGE>
MORGAN STANLEY
VALUE FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ------------------------------------------------------------------------------
COMMON STOCKS (85.8%)
CAPITAL EQUIPMENT (25.0%)
AEROSPACE & MILITARY TECHNOLOGY (1.1%)
(a)18,140 AMR Corp......................................... $ 2,331
--------
CHEMICALS--DIVERSIFIED (2.8%)
20,600 Dow Chemical Co.................................. 2,091
28,210 Du Pont (EI) de Nemours Co....................... 1,694
22,060 Rohm & Haas Co................................... 2,112
--------
5,897
--------
CONSTRUCTION & HOUSING (0.9%)
52,820 Owens Corning.................................... 1,802
--------
ELECTRICAL & ELECTRONICS (1.4%)
37,990 Entergy Corp..................................... 1,137
3,712 Raytheon Co., 'A'................................ 183
35,770 Tecumseh Products Co. 'A'........................ 1,744
--------
3,064
--------
ELECTRONIC COMPONENTS--MISCELLANEOUS (2.3%)
(a)53,060 Arrow Electronics, Inc........................... 1,721
37,180 DTE Energy Co.................................... 1,290
47,410 Tektronix, Inc................................... 1,882
--------
4,893
--------
ENERGY EQUIPMENT & SERVICES (1.7%)
59,200 Cummins Engine................................... 3,497
--------
INDUSTRIAL COMPONENTS (4.4%)
96,090 Aeroquip-Vickers, Inc............................ 4,714
57,730 Beckman Instruments, Inc......................... 2,309
50,425 Parker-Hannifin Corp............................. 2,313
--------
9,336
--------
MACHINERY & ENGINEERING (5.4%)
69,300 Case Corp........................................ 4,188
26,300 Caterpillar, Inc................................. 1,277
9,460 Deere & Co....................................... 552
80,060 Harnischfeger Industries, Inc.................... 2,827
47,350 Kennametal, Inc.................................. 2,453
--------
11,297
--------
MANUFACTURING (3.7%)
22,800 Eaton Corp....................................... 2,035
(a)22,010 FMC Corp......................................... 1,482
66,400 Goodyear Tire & Rubber Co........................ 4,225
--------
7,742
--------
OFFICE EQUIPMENT (0.4%)
22,870 Standard Register Co............................. 795
--------
PROFESSIONAL SERVICES (0.9%)
121,370 Olsten Corp...................................... 1,821
--------
TOTAL CAPITAL EQUIPMENT........................................... 52,475
--------
CONSUMER PRODUCTS--MISCELLANEOUS (25.8%)
AUTOMOBILES (6.6%)
39,390 Dana Corp........................................ 1,871
137,530 Ford Motor Co.................................... 6,696
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ------------------------------------------------------------------------------
59,080 General Motors Corp.............................. $ 3,582
34,260 TRW, Inc......................................... 1,828
--------
13,977
--------
COMPUTERS/SOFTWARE (4.5%)
53,400 International Business Machines Corp............. 5,584
(a)53,030 Seagate Technology, Inc.......................... 1,021
(a)73,600 Stratus Computer, Inc............................ 2,783
--------
9,388
--------
CONSUMER PRODUCTS--MISCELLANEOUS (1.0%)
48,700 Quantum Corp..................................... 977
41,510 Tupperware Corp.................................. 1,157
--------
2,134
--------
HEALTHCARE SUPPLIES & SERVICES (2.8%)
13,180 Bergen Brunswig Corp., 'A'....................... 555
77,670 Columbia HCA/Healthcare Corp..................... 2,301
46,610 Mallinckrodt, Inc................................ 1,771
(a)41,910 Maxicare Health Plans, Inc....................... 456
(a)34,100 Vencor, Inc...................................... 833
--------
5,916
--------
RECREATION, OTHER CONSUMER GOODS (0.5%)
(a)23,100 Wellpoint Health Networks, Inc................... 976
--------
RETAIL--MAJOR DEPARTMENT STORES (3.9%)
41,520 Dillards Inc. 'A'................................ 1,464
(a)50,410 Federated Department Stores...................... 2,171
60,100 Sears, Roebuck & Co.............................. 2,720
(a)58,440 Toys 'R' Us, Inc................................. 1,837
--------
8,192
--------
TEXTILES & APPAREL (2.7%)
43,830 Russell Corp..................................... 1,164
33,620 Springs Industries, Inc. 'A'..................... 1,748
58,740 VF Corp.......................................... 2,698
--------
5,610
--------
TOBACCO (3.8%)
99,040 Philip Morris Cos., Inc.......................... 4,488
94,840 RJR Nabisco Holdings Corp........................ 3,557
--------
8,045
--------
TOTAL CONSUMER PRODUCTS--MISCELLANEOUS............................ 54,238
--------
ENERGY (7.5%)
ELECTRIC--INTEGRATED (1.6%)
22,870 Cinergy Corp..................................... 876
19,100 Duke Power Co.................................... 1,058
32,240 GPU, Inc......................................... 1,358
--------
3,292
--------
OIL & GAS (5.9%)
24,080 Amoco Corp....................................... 2,050
28,110 Atlantic Richfield Co............................ 2,252
47,960 Phillips Petroleum Co............................ 2,332
43,630 Repsol S.A. ADR.................................. 1,857
</TABLE>
-----------------------
41
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
VALUE FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------------------------
<C> <S> <C>
OIL & GAS (CONT.)
51,870 Ultramar Diamond Shamrock Corp................... $ 1,653
66,900 YPF ADR.......................................... 2,287
--------
12,431
--------
TOTAL ENERGY...................................................... 15,723
--------
FINANCE (18.0%)
BANKING (4.2%)
21,210 Bank of New York Co., Inc........................ 1,226
32,520 Chase Manhattan Corp............................. 3,561
17,030 Citicorp......................................... 2,153
16,320 Republic New York Corp........................... 1,864
--------
8,804
--------
FINANCIAL SERVICES (3.3%)
32,040 American General Corp............................ 1,732
16,200 CIGNA Corp....................................... 2,803
19,650 Crestar Financial Corp........................... 1,120
23,040 Fannie Mae....................................... 1,315
--------
6,970
--------
INSURANCE (5.5%)
31,540 Allstate Corp.................................... 2,866
19,340 Chubb Corp....................................... 1,463
24,420 Hartford Financial Services Group................ 2,285
49,370 Old Republic International Corp.................. 1,836
46,060 TIG Holdings, Inc................................ 1,528
22,865 Transatlantic Holdings, Inc...................... 1,635
--------
11,613
--------
LIFE/HEALTH INSURANCE (1.0%)
49,780 Reliastar Financial Corp......................... 2,050
--------
REINSURANCE (1.1%)
54,510 Everest Reinsurance Holdings, Inc................ 2,249
--------
SUPER-REGIONAL BANKS--U.S. (2.9%)
77,989 First Union Corp. (N.C.)......................... 3,997
35,260 Mellon Bank Corp................................. 2,138
--------
6,135
--------
TOTAL FINANCE..................................................... 37,821
--------
MATERIALS (4.7%)
CHEMICALS (3.6%)
27,830 British Petroleum ADR............................ 2,218
41,710 Cabot Corp....................................... 1,152
57,330 Great Lakes Chemical Corp........................ 2,573
50,800 IMC Global, Inc.................................. 1,664
--------
7,607
--------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ------------------------------------------------------------------------------
FOREST PRODUCTS & PAPER (0.4%)
29,120 Westvaco Corp.................................... $ 915
--------
METALS--STEEL (0.7%)
55,600 Inland Steel Industries, Inc..................... 952
(a)45,700 National Steel Corp. 'B'......................... 528
--------
1,480
--------
TOTAL MATERIALS................................................... 10,002
--------
SERVICES (4.8%)
FOOD--MISCELLANEOUS (1.5%)
54,210 IBP, Inc......................................... 1,135
48,060 Universal Foods Corp............................. 2,030
--------
3,165
--------
MEDICAL--NURSING HOMES (0.8%)
79,800 Foundation Health Systems 'A'.................... 1,786
--------
TRANSPORTATION--AIRLINES (1.7%)
30,000 Delta Airlines Inc............................... 3,570
--------
TRANSPORTATION--RAIL (0.8%)
30,680 CSX Corp......................................... 1,657
--------
TOTAL SERVICES.................................................... 10,178
--------
TOTAL COMMON STOCKS (COST $181,979)................................. 180,437
--------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- ----------------
SHORT-TERM INVESTMENT (15.0%)
REPURCHASE AGREEMENT (15.0%)
$ 31,553 Chase Securities, Inc., 5.95%, dated 12/31/97,
due 1/2/98, to be repurchased at $31,563,
collateralized by $30,910 U.S. Treasury Notes,
6.875%, due 3/31/00, valued at $32,232 (COST
$31,553)....................................... 31,553
--------
TOTAL INVESTMENTS (100.8%) (COST $213,532).......................... 211,990
LIABILITIES IN EXCESS OF OTHER ASSETS (-0.8%)....................... (1,711)
--------
NET ASSETS (100%)................................................... $210,279
--------
--------
</TABLE>
- ---------------
(a) -- Non-income producing security
ADR -- American Depositary Receipt
- --------------
42
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
WORLDWIDE HIGH INCOME FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW
(UNAUDITED)
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.
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1997)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Argentina 9.8%
Brazil 12.0%
Bulgaria 5.9%
Ecuador 4.6%
Jamaica 3.2%
Mexico 6.7%
Russia 9.0%
Turkey 2.9%
United States 26.8%
Venezuela 6.8%
Short-Term Investments 5.7%
Other 6.6%
</TABLE>
<TABLE>
<CAPTION>
TOTAL RETURNS**
---------------------------------------
AVERAGE ANNUAL
SIX MONTHS ONE YEAR SINCE INCEPTION
----------------- ----------------- -----------------
WITH WITHOUT WITH WITHOUT WITH WITHOUT
SALES SALES SALES SALES SALES SALES
CHARGE* CHARGE CHARGE* CHARGE CHARGE* CHARGE
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class A Shares -1.54% 3.36% 10.14% 15.62% 15.15% 16.67%
- -----------------------------------------------------------------------------------------------
Class B+ Shares -0.68% 2.96% 10.82% 14.72% 19.10% 20.07%
- -----------------------------------------------------------------------------------------------
Class C Shares 1.97% 2.88% 13.64% 14.62% 15.76% 15.76%
- -----------------------------------------------------------------------------------------------
Worldwide High Income Blended
Index***
Class A & C Shares N/A 4.59% N/A 12.56% N/A 15.34%
Class B Shares N/A 4.59% N/A 12.56% N/A 17.26%
- -----------------------------------------------------------------------------------------------
Lehman Aggregate Bond Index:
Class A & C Shares N/A 6.36% N/A 9.65% N/A 8.66%
Class B Shares N/A 6.36% N/A 9.65% N/A 8.23%
- -----------------------------------------------------------------------------------------------
</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 Worldwide High Income Blended Index is comprised of 50% CS First Boston
High Yield Index, 25% J.P. Morgan Emerging Markets Bond Index Plus, and 25%
J.P. Morgan Latin Eurobond Index.
+ Class B shares have been offered since August 1, 1995.
The Lehman Aggregate Bond Index is an unmanaged index comprised of the
Government/Corporate Index, the Mortgage-Backed Securities Index and the
Asset-Backed Securities Index.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
<TABLE>
<CAPTION>
TOP FIVE HOLDINGS
PERCENT OF
SECURITY COUNTRY NET ASSETS
- ------------------------------ ---------- ----------
<S> <C> <C>
Federative Republic of Brazil,
Series C PIK 8.00%, 4/15/04 Brazil 5.8%
Russia Principal Notes 6.719%,
12/15/20 Russia 4.3%
Republic of Venezuela 9.25%,
9/15/27 Venezuela 3.5%
Republic of Venezuela Discount
Bond, Series L, 6.81%,
12/18/07 Venezuela 3.3%
Republic of Bulgaria Front
Loaded Interest Reduction
Bond 2.25%, 7/28/12 Bulgaria 3.3%
</TABLE>
<TABLE>
<CAPTION>
TOP FIVE SECTORS
VALUE PERCENT OF
SECTOR (000) NET ASSETS
- ------------------------------ ------ ----------
<S> <C> <C>
Foreign Government & Agency
Obligations $70,103 29.7%
Eurobonds 40,718 17.1%
Multi-Industry 16,535 7.0%
Telecommunications 13,034 5.5%
Finance 12,684 5.4%
</TABLE>
The Worldwide High Income Fund seeks to offer investors high current income
consistent with relative stability of principal and potential for capital
appreciation. To achieve this objective, the Fund will invest primarily in
high-yielding, high-risk fixed-income securities of issuers located throughout
the world.
For the six months ended December 31, 1997, the Fund generated a total return of
3.36 percent for the Class A shares at net asset value, as compared to a total
return of 4.59 percent for the Worldwide High Income Blended Index comprised of
50 percent CS First Boston High Yield Index, 25 percent J.P. Morgan Emerging
Markets Bond Index Plus, and 25 percent J.P. Morgan Latin Eurobond Index. In
addition, the Lehman Aggregate Bond Index returned 6.36 percent for the same
period.***
Relative to the blended benchmark, the Fund had a higher weighting in emerging
debt than in high yield bonds during the reporting period. A steep appreciation
in global bond prices pushed yield spreads (the yield differential between
different quality bonds of similar maturities) to historically tight levels
throughout July, August, and September. This strong performance was driven by
the rally in U.S. bonds, which benefited from the benign inflation and moderate
growth outlooks in the United States. Yield spreads on emerging debt also
benefited from a number of technical factors,
*** The Lehman Aggregate Bond Index was initially selected as a benchmark for
the Fund's performance; however, based upon the Fund's asset composition, we
believe the Worldwide High Income Blended Index provides a more accurate
benchmark for the Fund. Therefore, the Lehman Brothers Aggregate Bond Index
will not be shown beginning with the December 31, 1998 semi-annual report.
------------------
43
<PAGE>
MORGAN STANLEY
WORLDWIDE HIGH INCOME FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
(UNAUDITED)
including large inflows to mutual funds specializing in high yield and emerging
markets debt, and Brady bond buybacks by most of the larger Latin countries.
Together, these factors caused yield spreads to narrow to an average of 350
basis points (3.5 percent) over U.S. Treasuries.
As the reporting period continued, however, the deepening economic crisis in
Asia caused investors to reconsider how much additional risk they were willing
to take to hold emerging market bonds. Following a robust third quarter, the
almost two-year rally in emerging country debt came to an abrupt halt during the
final three months of 1997. After emerging market debt had reached an all-time
high in terms of price in early September, investors suddenly lost their
appetite for risk, causing prices to fall to a 12-month low by mid-October.
The ripple effect of the Asian problems were felt in all emerging countries and
caused spreads on emerging debt to widen to 800 basis points (8 percent) over
U.S. Treasuries. Once the broad-based panic subsided, however, spreads narrowed,
falling to roughly 500 basis points (5 percent) over Treasuries.
The sell-off occurred even though the majority of emerging market debt was from
Latin American and Eastern European countries. All emerging market bond prices
fell, as any asset with the word "emerging" in its description was penalized.
Prior to the sell-off, bonds from most Asian countries were rated investment
grade and not considered part of the emerging debt universe. However, the Asian
countries have now entered our radar screen.
Within the high yield market, the telecommunications sector was clearly the best
performing group. Fortunately, this was our most heavily weighted sector. Even
within the telecommunications industry, we picked our sectors and issues well.
The "Enhanced Specialized Mobile Radio" area-- through our large position in
Nextel--did extremely well, as did long distance telephone companies and
competitive local exchange carriers. We successfully avoided areas that
experienced trouble, particularly supermarkets and sub-prime lenders.
The continuing strength of the U.S. economy and the attractive growth prospects
of selected companies in the U.S. high-yield market cause us to be relatively
optimistic about prospects for 1998 returns. Due to the age of the economic
cycle and the still historically narrow average yield spreads, we continue to
emphasize somewhat higher-than-average credit quality in the portfolio.
Additionally, we intend to maintain interest-rate sensitivity on the high-yield
portion, which is no longer than that of its benchmark.
The Asian financial crisis will continue to impact all emerging markets into
1998. Severe dislocations in Asia have created several areas of value for our
portfolio, and for the first time since the inception of the Fund we are
gradually building exposure in Asia to what we consider solid sovereign and
corporate issuers with good medium-term prospects. The ripple effects of Asia
will likely keep the overall risk spreads in the broad emerging debt universe
high, as fair value may be deemed to be 400 to 500 basis points of spread,
rather than 300 to 400 basis points.
More yield is available in the global high yield markets today and, importantly,
several non-Asian countries (e.g. Brazil, Mexico, Russia) have been forced by
the Asian crisis to accelerate long overdue structural reform. While the
stabilization and recovery processes in Asia will take many quarters to
materialize, the repricing of the overall debt market in recent months, along
with a renewed commitment to a proper policy mix in many countries, makes the
1998 outlook attractive from a total return standpoint.
<TABLE>
<S> <C>
Robert Angevine Paul Ghaffari
PORTFOLIO MANAGER PORTFOLIO MANAGER
</TABLE>
- --------------
44
<PAGE>
MORGAN STANLEY
WORLDWIDE HIGH INCOME FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------------------------
FIXED INCOME SECURITIES (91.9%)
CORPORATE BONDS & NOTES (34.7%)
ARGENTINA (1.5%)
$ 3,500 Impsa S.A. 11.75%, 3/27/98....................... $ 3,518
--------
BRAZIL (1.3%)
250 Banco Nacional De Desen Econo 9.00%, 9/24/07..... 224
3,200 CSN Iron S.A. 9.125%, 6/1/07..................... 2,766
--------
2,990
--------
CANADA (1.2%)
400 Rogers Cablesystems 10.125%, 9/1/12.............. 438
865 Rogers Cablesystems, Series B, 10.00%, 3/15/05... 956
1,080 Rogers Cantel, Inc. 8.30%, 10/1/07............... 1,073
250 Rogers Communications, Inc. 9.125%, 1/15/06...... 254
100 Rogers Communications, Inc. 8.875%, 7/15/07...... 100
--------
2,821
--------
ECUADOR (1.3%)
(e)3,000 Consorcio Ecuadoriano 14.00%, 5/1/02............. 3,000
--------
JAMAICA (0.8%)
2,000 Mechala Group Jamaica Ltd., Series B, 12.75%,
12/30/99....................................... 1,900
--------
MEXICO (2.1%)
(e)3,000 Empresas ICA Sociedad Controladora S.A. 11.875%,
5/30/01........................................ 3,255
(n)2,200 Grupo Televisa S.A. Zero Coupon, 5/15/08......... 1,661
--------
4,916
--------
RUSSIA (1.7%)
4,800 SBS Argo Finance B.V. 10.25%, 7/21/00............ 4,104
--------
TURKEY (1.4%)
ZAR(e)2,500 Pera Financial Services 9.375%, 10/15/02......... 2,350
1,050 Yapi Kredi Finance Co. 10.00%, 8/19/02........... 1,029
--------
3,379
--------
UNITED STATES (23.4%)
1,470 Advanced Micro Devices 11.00%, 8/1/03............ 1,580
(e)600 Ameriserv Food Co. 8.875%, 10/15/06.............. 602
(e)275 Ameriserv Food Co. 10.125%, 7/15/07.............. 286
870 Big Flower Press 8.875%, 7/1/07.................. 879
(e)489 CA FM Lease Trust 8.50%, 7/15/17................. 516
3,655 Cablevision Systems Corp. 9.875%, 5/15/06........ 4,016
705 Comcast Corp. 1.125%, 4/15/07.................... 464
1,345 Comcast Corp. 9.50%, 5/1/07...................... 1,402
(n)1,025 Dial Call Communications, Series B, 0.00%,
12/15/05....................................... 938
825 DR Securitized Lease Trust, Series 1993-K1, Class
A1, 6.66%, 8/15/10............................. 764
997 DR Securitized Lease Trust, Series 1994-K1, Class
A1, 7.60%, 8/15/07............................. 979
250 DR Securitized Lease Trust, Series 1994-K1, Class
A2, 8.38%, 8/15/15............................. 246
150 DR Structured Finance, Series 1994-K2, CMO,
9.35%, 8/15/19................................. 156
(e)300 EES Coke Battery Co., Inc. 9.382%, 4/15/07....... 316
(e)525 Fleming Cos, Inc. 10.50%, 12/1/04................ 549
(e)300 Fleming Cos, Inc. 10.625%, 7/31/07............... 317
(e)310 Fox/Liberty Networks L.L.C. 8.875%, 8/15/07...... 310
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------------------------
$ (e,n)510 Fox/Liberty Networks L.L.C. 0.00%, 8/15/07....... $ 326
1,130 Grand Casinos, Inc. 10.125%, 12/1/03............. 1,220
(e)175 Hermes Euro Railtel B.V. 11.50%, 8/15/07......... 193
625 HMC Acquisition Properties 9.00%, 12/15/07....... 652
(e)1,535 Horseshoe Gaming L.L.C. 9.375%, 6/15/07.......... 1,604
950 Host Marriott Travel Plaza, Series B, 9.50%,
5/15/05........................................ 1,007
(e,h)850 Huntsman Corp. 9.09%, 7/1/07..................... 888
1,970 ISP Holdings, Inc., Series B, 9.00%, 10/15/03.... 2,045
800 IXC Communications, Inc. 12.50%, 10/1/05......... 920
(e)2,000 Integrated Health Servies 9.50%, 9/15/07......... 2,052
(n)760 Intermedia Communications, Series B, 0.00%,
7/15/07........................................ 538
(e)300 Jet Equipment Trust, Series C-1, 11.79%,
6/15/13........................................ 404
(e)300 Jet Equipment Trust, Series 1995-D, 11.44%,
11/1/14........................................ 401
265 Kmart Corp. 7.75%, 10/1/12....................... 258
350 Kmart Funding Corp. 8.80%, 7/1/10................ 362
600 Lenfest Communications 8.375%, 11/1/05........... 619
443 Midland Cogeneration Ventures, Series C-94,
10.33%, 7/23/02................................ 474
305 Midland Funding II, Series A, 11.75%, 7/23/05.... 358
200 Navistar Financial Corp., Series B, 9.00%,
6/1/02......................................... 206
(e)220 Newpark Resources, Inc. 8.625%, 12/15/07......... 224
(n)1,915 Nextel Communications 0.00%, 8/15/04............. 1,700
(n)990 Norcal Waste Systems 13.50%, 11/15/05............ 1,151
660 Nuevo Energy Co. 9.50%, 4/15/06.................. 704
2,420 Outdoor Systems, Inc., 8.875%, 6/15/07........... 2,523
2,400 Paramount Communications 8.25%, 8/1/22........... 2,420
320 Qwest Communcations International 10.875%,
4/1/07......................................... 362
(e,n)1,450 RCN Corp. 0.00%, 10/15/07........................ 901
425 Revlon Worldwide, Series B, Zero Coupon,
3/15/01........................................ 293
800 SD Warren Co., Series B, 12.00%, 12/15/04........ 894
(e)1,800 Sinclair Broadcast Group 9.00%, 7/15/07.......... 1,836
1,360 Snyder Oil Corp. 8.75%, 6/15/07.................. 1,384
1,982 Southland Corp. 5.00%, 12/15/03.................. 1,734
825 Station Casinos, Inc. 9.75%, 4/15/07............. 854
(e,n)2,290 TCI Satellite Entertainment 0.00%, 2/15/07....... 1,529
(n)4,325 Teleport Communications 0.00%, 7/1/07............ 3,536
1,280 Tenet Healthcare Corp. 8.625%, 1/15/07........... 1,320
(e,n)350 Transamerica Energy, 0.00%, 6/15/02.............. 276
(e)1,380 Vencor, Inc. 8.625%, 7/15/07..................... 1,382
1,470 Western Financial Bank 8.875%, 8/1/07............ 1,459
--------
55,329
--------
TOTAL CORPORATE BONDS & NOTES (COST $80,127)...................... 81,957
--------
ASSET BACKED SECURITIES (1.0%)
UNITED STATES (1.0%)
(e)499 Aircraft Lease Portfolio Securitization Ltd.,
Series 1996-1, Class D 12.75%, 6/15/06......... 539
(e)934 Commercial Financial Services, Inc., Series
1997-5, Class A1 7.72%, 6/15/05................ 943
(e)847 Long Beach Acceptance Auto Grantor Trust 1997-1,
Class B, 14.22%, 10/26/03...................... 847
--------
TOTAL ASSET BACKED SECURITIES (COST $2,293)....................... 2,329
--------
</TABLE>
-----------------------
45
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
WORLDWIDE HIGH INCOME FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ------------------------------------------------------------------------------
<C> <S> <C>
COLLATERALIZED MORTGAGE OBLIGATIONS (1.3%)
UNITED STATES (1.3%)
$ (e,h)1,020 DLJ Mortgage Acceptance Corp., Series 1996-CF2,
Class S, IO, 1.64%, 11/12/21................... $ 88
36,944 DLJ Mortgagae Acceptance Corp., Series 1997-CF2,
Class S, IO, 0.3571%, 10/15/30................. 982
(e)537 First Home Mortgage Acceptance Corp., Series
1996-B, Class C, 7.9289%, 11/1/18.............. 481
1,420 OHA Auto Grantor Trust, 11.00%, 9/15/03.......... 1,423
--------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS (COST $2,923)........... 2,974
--------
EUROBONDS (17.1%)
ARGENTINA (5.5%)
(e,h)2,500 Acindar Industria Agrentina 11.66%, 11/12/98..... 2,513
(e)5,500 Republic of Argentina 11.75%, 2/12/07............ 5,226
650 Republic of Argentina 11.75%, 2/12/07............ 618
1,550 Republic of Argentina 9.75%, 9/19/27............. 1,483
(h)3,360 Republic of Argentina, Series L, 6.69%, 3/31/05.. 3,006
--------
12,846
--------
BRAZIL (6.4%)
(h)1,700 Federative Republic of Brazil 6.75%, 4/15/09..... 1,374
(n)17,503 Federative Republic of Brazil, Series C, PIK
8.00%, 4/15/04................................. 13,762
--------
15,136
--------
BULGARIA (2.6%)
(h)8,500 Republic of Bulgaria Past Due Interest Bond
6.69%, 7/28/11................................. 6,237
--------
RUSSIA (1.1%)
(e)3,000 Mosenergo Finance B.V. 8.375%, 10/9/02........... 2,580
--------
TURKEY (1.5%)
3,750 Export Credit Bank of Turkey 9.00%, 8/18/00...... 3,619
--------
TOTAL EUROBONDS (COST $41,343).................................... 40,418
--------
FOREIGN GOVERNMENT & AGENCY OBLIGATIONS (29.7%)
ARGENTINA (2.8%)
(e)8,000 CIA International Telecom 10.375%, 8/1/04........ 6,481
--------
BRAZIL (1.5%)
3,920 Federative Republic of Brazil 10.125%, 5/15/27... 3,680
--------
BULGARIA (3.3%)
(n)12,700 Republic of Bulgaria Front Loaded Interest
Reduction Bond 2.25%, 7/28/12.................. 7,735
--------
COLOMBIA (1.1%)
(h)2,714 Republic of Colombia 6.84%, 12/15/03............. 2,619
--------
ECUADOR (3.3%)
(h)11,647 Republic of Ecuador Past Due Interest Bond, PIK,
6.69%, 2/27/15................................. 7,643
--------
JAMAICA (2.0%)
4,600 Government of Jamaica 12.00%, 7/19/99............ 4,658
--------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------------------------
MEXICO (4.6%)
ZAR 8,000 Nacional Financiera 17.00%, 2/26/99.............. $ 1,641
$ 2,750 United Mexican States 6.25%, 12/31/19............ 2,297
5,750 United Mexican States 11.375%, 9/15/16........... 6,602
200 United Mexican States 11.50%, 5/15/26............ 238
--------
10,778
--------
PANAMA (0.8%)
2,100 Republic of Panama 8.875%, 9/30/27............... 1,976
--------
PERU (1.8%)
(e,n)7,200 Republic of Peru Front Loaded Interest Reduction
Bond 3.25%, 3/7/17............................. 4,284
--------
RUSSIA (1.7%)
60 Ministry of Finance Tranche IV GDR 3.00%,
5/14/03........................................ 40
4 Ministry of Finance Tranche VI GDR 3.00%,
5/14/06........................................ 3
(e)4,600 Unexim International Finance B.V. 9.875%,
8/1/00......................................... 4,071
--------
4,114
--------
VENEZUELA (6.8%)
9,150 Republic of Venezuela 9.25%, 9/15/27............. 8,228
(h)8,810 Republic of Venezuela Discount Bond, Series L,
6.81%, 12/18/07................................ 7,907
--------
16,135
--------
TOTAL FOREIGN GOVERNMENT & AGENCY OBLIGATIONS
(COST $70,172).................................................. 70,103
--------
LOAN AGREEMENTS (7.9%)
GABON (1.5%)
(h)99 Republic of Gabon Syndicated Loan, 6.69%,
4/1/04......................................... 3,515
--------
IVORY COAST (0.2%)
DEM 2,210 Republic of Ivory Coast Syndicated Loan, Zero
Coupon, 12/31/00............................... 485
--------
JAMAICA (0.4%)
$ (h)1,000 Government of Jamaica Syndicated Loan, 6.56%,
12/1/05........................................ 915
--------
MOROCCO (1.5%)
(h)4,100 Kingdom of Morocco Restructuring and
Consolidation Agreement, 6.66%, 1/1/09
(Participation J.P. Morgan).................... 3,558
--------
RUSSIA (4.3%)
(n)16,400 Russia Principal Loans, 6.719%, 12/15/20......... 10,188
--------
TOTAL LOAN AGREEMENTS (COST $19,673).............................. 18,661
--------
NOTES (0.2%)
RUSSIA (0.2%)
(e,h)600 Russian Interest Arrears Note 6.72%, 12/2/15
(COST $395).................................... 426
--------
TOTAL FIXED INCOME SECURITIES (COST $216,926)....................... 216,868
--------
</TABLE>
- --------------
46
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
WORLDWIDE HIGH INCOME FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------------------------
<C> <S> <C>
EQUITY SECURITIES (1.1%)
COMMON STOCKS (0.1%)
UNITED STATES (0.1%)
(a)4,926 Nextel Communications Inc., `A'.................. $ 128
--------
PREFERRED STOCK (1.0%)
UNITED STATES (1.0%)
(a,e)16 IXC Communications, Inc., PIK 9.50%.............. 18
2,134 Time Warner, Inc., `M', PIK 10.25%............... 2,404
--------
2,422
--------
TOTAL EQUITY SECURITIES (COST $2,430)............................... 2,550
--------
<CAPTION>
FACE
AMOUNT
(000)
- ----------------
<C> <S> <C>
STRUCTURED INVESTMENT (2.8%)
BRAZIL (2.8%)
$ (f)8,000 Salomon Bros. Federative Republic of Brazil
Credit Linked Enhanced Access Note 9.00%,
5/4/99 (COST $7,143)........................... 6,695
--------
TOTAL FOREIGN AND U.S. SECURITIES (95.8%) (COST $226,499)........... 226,113
--------
SHORT-TERM INVESTMENTS (5.7%)
PROMISSORY NOTE (0.4%)
INDONESIA (0.4%)
1,000 Polysindo Zero Coupon, 2/24/98................... 850
--------
REPURCHASE AGREEMENT (5.3%)
UNITED STATES (5.3%)
12,585 Chase Securities, Inc., 5.95%, dated 12/31/97,
due 1/2/98, to be repurchased at $12,589,
collateralized by $12,710 U.S. Treasury Notes,
5.625%. due 2/15/06, valued at $12,845......... 12,585
--------
TOTAL SHORT-TERM INVESTMENTS (COST $13,548)......................... 13,435
--------
TOTAL INVESTMENTS (101.5%) (COST $240,047).......................... 239,548
LIABILITIES IN EXCESS OF OTHER ASSETS (-1.5%)....................... (3,460)
--------
NET ASSETS (100%)................................................... $236,088
--------
--------
</TABLE>
- ---------------
(a) -- Non-income producing security
(e) -- 144A Security -- certain conditions for public sale may exist.
(f) -- Restricted as to public resale. Total value of restricted securities
at December 31, 1997 was $6,695 or 2.8% of net assets
(h) -- Variable/floating rate security -- rate disclosed is as of December
31, 1997.
(n) -- Step Bond -- coupon rate increases in increments to maturity. Rate
disclosed is as of December 31, 1997. Maturity date disclosed is the
ultimate maturity date.
DEM -- German Mark
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.
ZAR -- South African Rand
-----------------------
47
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
WORLDWIDE HIGH INCOME FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
DECEMBER 31, 1997
(UNAUDITED)
- --------------------------------------------------------------------------------
SUMMARY OF FOREIGN & U.S. SECURITIES
BY INDUSTRY CLASSIFICATION
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
- -------------------------------------------------------------------------------------- --------- -------------
<S> <C> <C>
Foreign Government & Agency Obligations............................................... $ 70,103 29.7%
Eurobonds............................................................................. 40,418 17.1
Loan Agreements....................................................................... 18,661 7.9
Multi-Industry........................................................................ 16,535 7.0
Telecommunications.................................................................... 13,034 5.5
Finance............................................................................... 12,684 5.4
Services.............................................................................. 11,006 4.7
Broadcast--Radio & Television......................................................... 10,037 4.3
Materials............................................................................. 9,533 4.0
Structured Investment................................................................. 6,695 2.8
Collateralized Mortgage Obligation & Asset Backed Securities.......................... 5,303 2.3
Capital Equiptment.................................................................... 3,659 1.5
Consumer Goods........................................................................ 2,647 1.1
Energy................................................................................ 2,365 1.0
Technology............................................................................ 1,580 0.7
Utilities............................................................................. 833 0.4
Transportation........................................................................ 594 0.2
Notes................................................................................. 426 0.2
--------- ---
$ 226,113 95.8%
--------- ---
--------- ---
</TABLE>
BY ASSET CLASSIFICATION
<TABLE>
<CAPTION>
PERCENT OF
ASSET NET ASSETS
- ------------------------------------------------------------------------------------------------ -------------
<S> <C>
High Yield...................................................................................... 27.8%
Brady Bonds..................................................................................... 23.2
Sovereign Non-Bradys............................................................................ 18.4
Corporate Bonds................................................................................. 12.1
Performance Loans............................................................................... 8.3
Local Intruments................................................................................ 6.2
Short-Term Investments.......................................................................... 3.8
Non-Performance Loans........................................................................... 0.2
-----
100.0%
-----
-----
</TABLE>
- --------------
48
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
LATIN AMERICAN FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW
(UNAUDITED)
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.
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1997)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Argentina 8.5%
Brazil 44.7%
Chile 5.1%
Colombia 1.5%
Mexico 34.7%
Peru 2.2%
Venezuela 1.8%
Short-Term Investments 1.5%
</TABLE>
<TABLE>
<CAPTION>
TOTAL RETURNS**
-------------------------------------------------------------
AVERAGE ANNUAL
SIX MONTHS ONE YEAR SINCE INCEPTION
----------------- ----------------- -----------------
WITH WITHOUT WITH WITHOUT WITH WITHOUT
SALES SALES SALES SALES SALES SALES
CHARGE* CHARGE CHARGE* CHARGE CHARGE* CHARGE
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class A Shares -8.06% -2.46% 31.59% 39.61% 13.39% 15.33%
- -----------------------------------------------------------------------------------------------
Class B+ Shares -6.53% -2.66% 33.89% 38.89% 31.67% 32.50%
- -----------------------------------------------------------------------------------------------
Class C Shares -3.52% -2.75% 37.74% 38.74% 14.40% 14.40%
- -----------------------------------------------------------------------------------------------
MSCI Latin America Global
Index:
Class A & C Shares N/A -6.29% N/A 31.66% N/A 10.34%
Class B Shares N/A -6.29% N/A 31.66% N/A 19.89%
- -----------------------------------------------------------------------------------------------
</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 and assumes dividends are reinvested.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
<TABLE>
<CAPTION>
TOP FIVE HOLDINGS
PERCENT OF
ISSUER COUNTRY NET ASSETS
- ----------------------------------- --------- --------------
<S> <C> <C>
Telebras Brazil 12.1%
CRT Brazil 11.3%
Telemex ADR Mexico 7.4%
Unibanco GDR Brazil 5.1%
FEMSA 'B' Mexico 4.9%
</TABLE>
<TABLE>
<CAPTION>
TOP FIVE SECTORS
VALUE PERCENT OF
SECTOR (000) NET ASSETS
- -------------------- --------- -------------
<S> <C> <C>
Services $ 62,397 52.3%
Energy 12,974 10.9%
Finance 12,283 10.3%
Consumer Goods 11,859 10.0%
Materials 10,564 8.9%
</TABLE>
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 six months ended December 31, 1997, the Fund generated a total return of
- -2.46 percent for the Class A shares at net asset value, as compared to a total
return of -6.29 percent for the Morgan Stanley Capital International (MSCI)
Latin America Global Index.
The Asian economic crisis, which began on July 2 with the devaluation of the
Thai baht, undermined performance in nearly all emerging markets, including
those in Latin America. However, the Fund outperformed its benchmark during the
reporting period due to strong country allocation and stock selection. In
particular, the largest contributors to the Fund's outperformance were
overweighting Mexico, underweighting Chile, adding to Brazil in early December,
and making strong stock selections in Mexico, where we are focusing on
consumer-related companies.
The Brazilian stock market fell 18.4 percent during the six months ended
December 31 due to exaggerated currency fears. Investors expected fallout from
the Asian currency crisis to impact Brazil due to its superficial similarities
with many Southeast Asian countries. (Brazil follows a fixed exchange-rate
regime and has large current account and fiscal deficits.) These fears were
exacerbated by profit-taking, given the sharp equity gains prior to the onset of
the Asian crisis.
Our concerns about Brazil's vulnerable macro-economic outlook (current account
deficit, overvalued exchange rate, fiscal deficit, and stubborn Congress) led us
to reduce our exposure to Brazilian equities during the third quarter.
Nevertheless, positive themes such as the ongoing privatization process cause us
to be optimistic about Brazil's prospects for the long term.
During the latter part of the fourth quarter, Brazilian equities were able to
pull away from the effects of investors' recent focus on Asia. A strong U.S.
market and favorable domestic news helped Brazilian stocks begin to recoup
earlier losses. A number of positive moves by political authorities also
supported the equity market, including an aggressive, well-planned response to
the Asian crisis, the doubling of interest rates, and a significant tightening
of fiscal policy.
Even the Brazilian Congress contributed to building confidence in the economy.
Not only was the fiscal package passed quickly and with few amendments, but the
Asian currency crisis provided the spur for action on the reform process. Since
the full-blown eruption of the crisis in late October, the
------------------
49
<PAGE>
MORGAN STANLEY
LATIN AMERICAN FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
(UNAUDITED)
Brazilian Lower House passed an administrative reform package that allows
government at all levels to fire workers when payroll costs exceed 60 percent of
total costs. Given these positive measures, we increased our exposure to an
overweight position in Brazil at the end of November, a move that proved
favorable for the Fund's performance.
Mexico was the best-performing market in the region during the six-month period,
appreciating 16.8 percent. Most of Mexico's exports are to the U.S., making the
country less vulnerable to an economic slowdown in Asia. The outstanding
performance of Mexican stocks during the reporting period was also due to the
recovery of the Mexican consumer, as evidenced by improving retail and consumer
production sales, and increasing real wages. On the political front, the smooth
transition to a multiparty Congressional leadership after the July 6 mid-term
elections seems to have appeased investors. We increased our exposure to Mexico
during the third quarter in response to consumer-led economic progress and the
country's strong operating earnings growth potential.
Argentina declined 1.4 percent during the last six months of 1997, largely in
sympathy with the broad-based declines throughout the region. However, Argentina
continued a strong economic acceleration that began at the end of last year, led
by infrastructure and mining-related industries. Equities in Argentina performed
well during the third quarter, gaining 7.6 percent amid indications of a
recovery in domestic consumption.
The Chilean market fell 21.3 percent during the six months ended December 31 due
to modest profit-taking during the third quarter and commodity deflation during
the fourth quarter. We lightened our exposure early in the third quarter to fund
purchases in Mexico and because of lackluster Chilean earnings growth relative
to the region. Commodity deflation in copper, pulp, and paper, as a result of
reduced demand from Asia, has pressured the Chilean economy and equity market.
None of the remaining Latin markets were immune to the Asian contagion. Colombia
posted the second-best return for the region, appreciating 3.3 percent during
the second half of 1997. Colombia benefited from improved sentiment as investors
anticipated a bottoming of the economic slowdown from which forward momentum
will begin. Peru fell 14.9 percent during the period in response to political
instability and concerns over the impact of the El Nino weather phenomenon on
the economy, primarily the fishmeal industry.
Despite the impact of Asian turmoil on Latin America, our outlook for the region
is positive. We are encouraged by the many key steps taken across the region to
strengthen and consolidate economic and political reforms. We will continue to
focus on Brazil and Mexico in 1998. The Brazilian equity market should be fueled
by continued privatization successes, further progress in structural reforms, a
gradual decline in interest rates, and the reelection of President Cardoso. The
Mexican market should be driven by another year of strong economic growth and
further strengthening of the consumer.
<TABLE>
<S> <C> <C>
Robert L. Meyer Andy B. Skov
PORTFOLIO MANAGER PORTFOLIO MANAGER
</TABLE>
- --------------
50
<PAGE>
MORGAN STANLEY
LATIN AMERICAN FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ------------------------------------------------------------------------------
COMMON STOCKS (73.2%)
ARGENTINA (8.5%)
(a)274,087 Acindar.......................................... $ 653
172,387 Banco del Suquia................................. 448
90,665 Banco Rio de La Plata ADR........................ 1,269
62,112 Siderar 'A'...................................... 264
(e)8,095 Siderar ADR...................................... 275
34,145 Telecom Argentina ADR............................ 1,221
98,351 Telefonica de Argentina ADR...................... 3,664
67,450 YPF ADR.......................................... 2,306
--------
10,100
--------
BRAZIL (20.1%)
23,569 CEMIG ADR........................................ 1,024
(e)683 CEMIG ADR........................................ 29
28,790 Copel ADR........................................ 394
3,410,000 Coteminas........................................ 1,130
(a,e)23,790 Coteminas ADR.................................... 394
(a)10,908,918 CRT.............................................. 13,440
(a)2,961,000 Encorpar......................................... 2
600,500 Iven............................................. 342
(e)10,410 Lojas Arupua ADR................................. 35
(a,e)233,455 Rossi Residencial GDR............................ 1,138
(a)186,932 Unibanco GDR..................................... 6,017
(a)31,997 Vale Do Rio Doce................................. --
--------
23,945
--------
CHILE (5.1%)
61,685 CCU ADR.......................................... 1,812
77,850 Chilectra ADR.................................... 2,160
119,013 Santa Isabel ADR................................. 2,083
--------
6,055
--------
COLOMBIA (1.3%)
5,519 Banco de Colombia................................ 2
146,317 Bavaria.......................................... 1,501
--------
1,503
--------
MEXICO (34.7%)
(a)564,792 Banacci 'B'...................................... 1,692
(a)166,310 Banacci 'L'...................................... 429
(a)244,830 Bancomer 'B'..................................... 159
(a)28,435 Cemex ADR........................................ 256
(a)25,200 Cemex 'B'........................................ 134
(a)52,234 Cemex 'B' ADR.................................... 555
(a)399,931 Cemex CPO........................................ 1,811
(a)3,155 Cifra ADR........................................ 78
502,575 Cifra 'B'........................................ 1,236
591,070 Cifra 'C'........................................ 1,327
(a)73,300 Corporation Interamericana de Entretenimiento
S.A............................................ 569
(e)23,400 FEMSA ADR........................................ 187
701,595 FEMSA 'B'........................................ 5,641
69,630 Grupo Modelo 'C'................................. 584
1,018,494 Kimberly 'A'..................................... 4,840
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ------------------------------------------------------------------------------
16,201 Panamerican Beverages, Inc....................... $ 529
894,968 Soriana 'B'...................................... 3,964
156,890 Telemex ADR...................................... 8,796
(a)120,635 Televisa CPO ADR................................. 4,667
(a)174,495 TV Azteca ADR.................................... 3,937
--------
41,391
--------
PERU (1.7%)
70,755 Banco Weise ADR.................................. 354
72,120 Tel Peru 'B' ADR................................. 1,681
--------
2,035
--------
VENEZUELA (1.8%)
469,326 C.A. La Electricidad de Caracas.................. 563
28,852 CANTV ADR........................................ 1,201
103,385 Sivensa S.A.C.A. ADR............................. 433
--------
2,197
--------
TOTAL COMMON STOCKS (COST $83,967).................................. 87,226
--------
PREFERRED STOCKS (24.6%)
BRAZIL (NON-VOTING STOCKS) (24.6%)
192,522,000 Banco Bradesco................................... 1,894
(a,d)8,115,000 Banco Nacional................................... --
55,000,200 CEMIG............................................ 2,390
1,827,000 Cimento Portland Itau............................ 352
129,387 CVRD............................................. 2,603
83,035 CVRD ADR......................................... 1,635
79,020,767 Gerdau........................................... 991
8,000 Globex Utilidades................................ 47
19,195,300 Lojas Arapua..................................... 69
24,090,300 Lojas Renner..................................... 755
10,966,800 Petrobras........................................ 2,565
(a,e)64,625 Petrobras ADR.................................... 1,543
81,265,783 Telebras......................................... 9,269
44,621 Telebras ADR..................................... 5,196
--------
TOTAL PREFERRED STOCKS (COST $30,879)............................... 29,309
--------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
RIGHTS
<C> <S> <C>
- ----------------
RIGHTS (0.0%)
BRAZIL (0.0%)
(a,d)195,522,000 Banco Bradesco (COST $0)......................... 17
--------
TOTAL FOREIGN SECURITIES (97.8%) (COST $114,846).................... 116,552
--------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- ----------------
SHORT-TERM INVESTMENT (3.2%)
REPURCHASE AGREEMENT (3.2%)
$ 3,861 Chase Securities, Inc., 5.95%, dated 12/31/97,
due 1/2/98, to be repurchased at $3,862,
collateralized by $3,900 U.S. Treasury Bonds,
5.625% due 2/15/06 valued at $3,941 (COST
$3,861)........................................ 3,861
--------
TOTAL INVESTMENT IN SECURITIES (101.0%) (COST $118,707)............. 120,413
--------
</TABLE>
-----------------------
51
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
LATIN AMERICAN FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------------------------
FOREIGN CURRENCY (0.8%)
ARP 86 Argentine Peso................................... $ 86
BRL 21 Brazilian Real................................... 18
COP 346,124 Colombian Peso................................... 267
MXP 7 Mexican Peso..................................... 1
PSS 1,433 Peruvian Sol..................................... 526
VEB 8,980 Venezuelan Bolivar............................... 18
--------
TOTAL FOREIGN CURRENCY (COST $933).................................. 916
--------
TOTAL INVESTMENTS (101.8%) (COST $119,640).......................... 121,329
LIABILITIES IN EXCESS OF OTHER ASSETS (-1.8%)....................... (2,116)
--------
NET ASSETS (100%)................................................... $119,213
--------
--------
</TABLE>
- ---------------
(a) -- Non-income producing security
(d) -- Security valued at fair value -- see note A-1 to financial statements.
(e) -- 144A Security -- certain conditions for public sale may exist.
CPO -- Certificate of Participation
ADR -- American Depositary Receipt
GDR -- Global Depositary Receipt
- --------------
52
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
LATIN AMERICAN FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
DECEMBER 31, 1997
(UNAUDITED)
- --------------------------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE INFORMATION:
Under the terms of foreign currency contracts open at December 31, 1997, the
Portfolio is obligated to deliver or is to receive foreign currency in exchange
for U.S. dollars as indicated below:
<TABLE>
<CAPTION>
CURRENCY IN EXCHANGE NET UNREALIZED
TO DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS)
(000) (000) DATE (000) (000) (000)
- ------------- ----- ----------- ----------- ----- -----------------
<S> <C> <C> <C> <C> <C>
$ 95 $ 95 1/2/98 BRL 106 $ 95 $ --
$ 87 87 1/2/98 MXP 701 87 --
----- ----- -----
$ 182 $ 182 $ --
----- ----- -----
----- ----- -----
</TABLE>
- ---------------
BRL -- Brazilian Real
MXP -- Mexican Peso
- --------------------------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
- ----------------------------------------------------------------------------- --------- -------------
<S> <C> <C>
Services..................................................................... $ 62,397 52.3%
Energy....................................................................... 12,974 10.9
Finance...................................................................... 12,283 10.3
Consumer Goods............................................................... 11,859 10.0
Materials.................................................................... 10,564 8.9
Capital Equipment............................................................ 5,378 4.5
Multi-Industry............................................................... 1,097 0.9
--------- ---
$ 116,552 97.8%
--------- ---
--------- ---
</TABLE>
-----------------------
53
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
EMERGING MARKETS FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW
(UNAUDITED)
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.
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1997)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Brazil 14.6%
India 7.7%
Korea 3.2%
Malaysia 3.1%
Mexico 11.2%
Pakistan 4.1%
Russia 8.7%
South Africa 6.0%
Taiwan 6.2%
Turkey 5.6%
Other 29.6%
</TABLE>
<TABLE>
<CAPTION>
TOTAL RETURNS**
-------------------------------------------------------------
AVERAGE ANNUAL
SIX MONTHS ONE YEAR SINCE INCEPTION
----------------- ----------------- -----------------
WITH WITHOUT WITH WITHOUT WITH WITHOUT
SALES SALES SALES SALES SALES SALES
CHARGE* CHARGE CHARGE* CHARGE CHARGE* CHARGE
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class A Shares -26.66% -22.19% -7.58% -1.96% -4.86% -3.23%
- -----------------------------------------------------------------------------------------------
Class B+ Shares -25.98% -22.50% -7.04% -2.66% -2.91% -1.82%
- -----------------------------------------------------------------------------------------------
Class C Shares -23.18% -22.48% -3.63% -2.75% -3.97% -3.97%
- -----------------------------------------------------------------------------------------------
IFC Global Total Return
Composite Index:
Class A & C Shares N/A -26.93% N/A -14.42% N/A -3.85%
Class B Shares N/A -26.93% N/A -14.42% N/A -5.77%
- -----------------------------------------------------------------------------------------------
</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 and assumes dividends are reinvested.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
<TABLE>
<CAPTION>
TOP FIVE HOLDINGS
PERCENT OF
ISSUER COUNTRY NET ASSETS
- --------------------------------- --------- --------------
<S> <C> <C>
Telebras ADR Brazil 4.5%
CRT Brazil 3.1%
FEMSA 'B' Mexico 2.7%
Yapi Ve Kredi Bankasi A.S. Turkey 2.6%
Telemex 'L' ADR Mexico 2.5%
</TABLE>
<TABLE>
<CAPTION>
TOP FIVE SECTORS
VALUE PERCENT OF
SECTOR (000) NET ASSETS
- -------------------- --------- -------------
<S> <C> <C>
Services $ 40,100 22.5%
Finance 27,959 15.7%
Consumer Goods 27,469 15.4%
Energy 21,369 12.0%
Capital Equipment 17,496 9.8%
</TABLE>
The investment objective of the Emerging Markets Fund is to seek to provide
long-term capital appreciation by investing primarily in equity securities of
emerging country issuers.
For the six months ended December 31, 1997, the Fund had a total return of
- -22.19 percent for Class A shares at net asset value, as compared to a total
return of -26.93 percent for the IFC Global Total Return Composite Index for the
same period.
The contagion effect of the currency crisis in Asia triggered a collapse of
nearly every emerging market during the final months of the reporting period.
The selling panic that ensued across all emerging markets left Asia down 33
percent, Latin America down 11 percent, and Russia down 18 percent. Even the
relatively isolated Indian market was off 12 percent during the fourth quarter.
Performance relative to the Fund's benchmark was primarily driven by country
allocation. Fund results were helped by overweights in Russia, India, Pakistan,
and Turkey, and by underweights in Asia. However, given our view that currency
and stock markets throughout the region dramatically overshot fair-value
benchmarks, we began easing into Asia during the third and fourth quarters.
Asian markets finished the reporting period off between 70 percent and 85
percent from their highs, and we believe that current prices already discount
economic devastation and corporate bankruptcies.
While we also believe that the near-term economic and earnings outlook for most
Asian countries remains grim and that considerable economic pain--with its
commensurate political convulsions-- is ahead, we nonetheless believe that the
worst has been discounted in the prices of stocks and currencies. Asian markets
have been tremendously oversold, and in the face of such negative sentiment, any
marginally positive news could ignite a huge rally in the region.
We believe that after the shake-out in Asia is complete, the region will divide
into groups of winners and losers as the era of "Asian Value" crony-capitalism
comes to an end. As always, country allocation and stock selection are
important, and the Fund has been highly discriminating in its selection of both
markets and stocks. We feel that Korea has the best chance of transforming its
economy and its corporate structure for the benefit of the shareholder.
World-class companies such as Samsung Electronics, LG Information &
Communication Ltd., and Pohang Iron and Steel are at bargain-basement levels.
Our overweight position in Korea is concentrated in those stocks.
Last month's closure of 56 out of 58 finance companies in Thailand signaled the
start of the corporate restructuring that is inevitable in that country. After
an agonizing six months, it appears
- --------------
54
<PAGE>
MORGAN STANLEY
EMERGING MARKETS FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
(UNAUDITED)
that the Thai government and corporate sector have recognized the need for
reform. While we feel that positive economic and corporate news will be scarce
during the next year, the market is already discounting much of the potentially
negative developments. Consequently, we are overweight Thailand.
Indonesia has fallen the farthest and the fastest of all Asian markets. Although
the Indonesian equity market currently is capitalized at just 10 percent of its
value in U.S. dollars from a year earlier, we remain hesitant to add to
positions. While Indonesia is cheap, it is deservedly so. The fate of the
country's 200 million residents could rest on the will of one man, President
Suharto. The nexus between politics and business remains intractable, and it
appears that no real progress on economic reform can be made while the current
political regime retains power. President Suharto has made some concessions and
conciliatory gestures under pressure from the IMF and President Clinton.
However, a true embracing of the IMF reform package implies a fundamental
reformation of the political system and abdication of economic largesse by the
Suharto family. Resentment of the First Family, particularly toward the Suharto
children, runs deep and may prove incendiary in coming months. The scenario
developing in Indonesia includes sharply higher inflation, a recession, a
dramatic rise in unemployment, food shortages, and an election. We maintain a
neutral weight in Indonesia given the market's dramatically oversold condition.
Although we expect a significant upward move from these levels, we would expect
to sell into a rally, assuming no change in underlying fundamentals.
Malaysia has earned the dubious distinction of being the "least-worst" Asian
market. The country's banking system is sound, its politics are stable, and its
corporate sector is in reasonable financial shape. Our hesitancy towards
Malaysia has been based on valuations. Given the recent correction, however, we
are in the process of increasing our long underweight position.
We are slightly underweight in Latin America and expect to decrease our exposure
even further. We remain upbeat on the political and corporate leadership
witnessed during the post-Mexico devaluation crisis and the more recent Asian
crisis. In Mexico, the consumer recovery continues, while in Brazil the
privatization program is moving ahead. However, the Brazilian Real is perhaps
one of the more overvalued currencies in the emerging-market universe, and the
high real interest rates required to support it in the aftermath of the Asian
crisis will prove burdensome both for the corporate sector and for equity market
performance.
Mexico has performed spectacularly well over the last 12 months as the country
has benefited from having taken its devaluation "medicine" early, as well as
being geographically situated to capitalize on the phenomenal strength of the
U.S. economy. As a result of the strong gains, however, many of the Fund's
Mexican holdings no longer offer compelling value and will likely be trimmed
back to gain exposure to other investments in Asia.
We continue to view India and South Africa as sources of funds for our increased
exposure in Asia. India is well underpinned by both valuations and corporate
fundamentals; however, we believe that political uncertainty and slightly higher
interest rates will cap some of the upside potential in the Indian market.
In Europe, Russian stocks experienced a substantial correction after a stellar
run. We remain optimistic about the country's long-term prospects, but have
reduced our exposure to Russian equities. Likewise, Turkey experienced
tremendous returns in the last year and remains one of the last markets that has
yet to conquer inflation. Positive news on the inflation front could trigger
another move up in stock prices. Because valuations remain at attractive levels,
we are overweight in the Turkish market. The Fund's cash position is slowly
being redeployed as the entire emerging-market asset class has fallen to levels
significantly below fair value.
<TABLE>
<S> <C>
Madhav Dhar Robert L. Meyer
PORTFOLIO MANAGER PORTFOLIO MANAGER
</TABLE>
------------------
55
<PAGE>
MORGAN STANLEY
EMERGING MARKETS FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ------------------------------------------------------------------------------
COMMON STOCKS (75.8%)
ARGENTINA (2.3%)
12,975 Nortel Inversora ADR............................. $ 331
8,449 Telecom Argentina ADR............................ 302
71,551 Telefonica de Argentina ADR...................... 2,665
24,156 YPF ADR.......................................... 826
--------
4,124
--------
BRAZIL (2.4%)
42,380 Brahma ADR....................................... 601
(a,e)12,645 Coteminas ADR.................................... 210
(a)295,381 CRT 'A'.......................................... 364
(a)1,256,000 Encorpar......................................... 1
571,000 Lightpar......................................... 171
(e)14,225 Lojas Arupua ADR................................. 51
7,720 Pao de Acucar ADR................................ 150
14,961 Pao de Acucar ADR................................ 291
(a,e)16,025 Rossi Residencial GDR............................ 78
1,508,100 Tecidos Nortre de Minas.......................... 541
5,854,000 Telebras......................................... 595
(a)38,920 Unibanco GDR..................................... 1,253
--------
4,306
--------
CHILE (0.7%)
18,300 CCU ADR.......................................... 538
8,290 Enersis ADR...................................... 240
22,954 Santa Isabel ADR................................. 402
--------
1,180
--------
CHINA (0.2%)
281,000 Qingling Motors Co., 'H'......................... 138
(a)996,000 Zhejiang Expressway Co., Ltd. 'H'................ 202
--------
340
--------
COLOMBIA (0.0%)
68,572 Banco de Colombia................................ 24
--------
EGYPT (1.9%)
7,400 Al-Ahram Beverages Co. S.A.E. GDR................ 205
7,916 Ameriyah Cement Co............................... 185
34,430 Commercial International Bank.................... 695
16,750 Commercial International Bank GDR................ 350
13,720 Eastern Tobacco.................................. 318
5,775 Egyptian Finance & Industrial.................... 348
(a)10,800 General Silo Storage............................. 260
(a)10,475 Helwan Portland Cement Co........................ 211
(a)6,377 Industrial & Engineering......................... 107
(a)3,200 Madinet Housing & Development.................... 207
1,950 North Cairo Flour Mills.......................... 55
500 Paints & Chemical Industries Co. S.A.E........... 16
31,100 Paints & Chemical Industries Co. S.A.E. GDR...... 311
8,575 Tourah Portland Cement Co........................ 197
--------
3,465
--------
HONG KONG (2.0%)
80,000 Cheung Kong Holdings Ltd......................... 524
111,000 China Light & Power Co., Ltd..................... 616
147,000 China Resources Enterprises Ltd.................. 328
24,400 HSBC Holdings plc................................ 601
433,000 Ng Fung Hong Ltd................................. 455
77,000 Shanghai Industrial Holdings Ltd................. 286
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ------------------------------------------------------------------------------
78,000 Sun Hung Kai Properties Ltd...................... $ 544
456,000 Zhenhai Refining & Chemical Co................... 190
--------
3,544
--------
HUNGARY (0.6%)
3,601 BorsodChem Rt. GDR............................... 130
3,200 Gedeon Richter Ltd............................... 336
16,416 MOL Magyar Olaj-es Gazipari Rt. GDR.............. 401
6,200 OPT Bank Rt...................................... 235
--------
1,102
--------
INDIA (7.2%)
100 Automotive Axles Ltd............................. 1
209,700 Bharat Heavy Electricals Ltd..................... 1,893
4,369 Century Textiles & Industries GDR................ 109
105,000 Container Corp. of India Ltd..................... 1,125
(e)150,000 E.I.D. Parry Ltd. GDR............................ 244
56,600 Great Eastern Shipping GDR....................... 304
85,314 Gujarat Narmada Valley Fertilizers Co., Ltd.
GDR............................................ 128
22,500 Hero Honda Motors Ltd............................ 530
504,000 Hindustan Development Corp. Ltd. GDR............. 78
24,400 Hoechst Shering Agrero Ltd....................... 386
32,409 Housing Development Finance Corp., Ltd........... 2,544
(e)108,750 Indo Rama Synthetics Ltd. GDR.................... 218
61,000 Infosys Technologies Ltd......................... 1,918
51,200 ITC Ltd.......................................... 808
184,150 LG Balakrishnan Bros............................. 479
32,300 Mahanagar Telephone Nigam Ltd.................... 213
5,000 MRF Ltd. 'B'..................................... 247
100,000 Philips India Ltd................................ 166
21,150 Rane Madras Ltd.................................. 55
(a)317,000 SIV Industries GDR............................... 127
135,600 State Bank of India.............................. 841
302,600 Tube Investments of India Ltd. GDR............... 287
40,550 United Phosphorus Ltd. GDR....................... 101
--------
12,802
--------
INDONESIA (2.5%)
(d)3,204,563 Astra International (Foreign).................... 830
(d)3,265,138 Bank International Indonesia (Foreign)........... 193
(d)2,059,300 Bank Negara Indonesia (Foreign).................. 197
51,300 Barito Pacific Timber (Foreign).................. 15
359,428 Bimantara Citra (Foreign)........................ 69
166,300 Citra Marga Nusaphala Persada (Foreign).......... 18
50,246 Daya Guna Samudera (Foreign)..................... 38
(d)546,325 Gudang Garam (Foreign)........................... 831
(a)4,700 Gulf Indonesia Resources Ltd. (Foreign).......... 103
(d)287,000 Hanjaya Mandala Sampoerna (Foreign).............. 217
1,472,880 Indah Kiat Pulp & Paper (Foreign)................ 261
743,000 Indofood Sukses Makmur (Foreign)................. 243
37,600 London Sumatra Indonesia (Foreign)............... 21
(d)1,199,000 Mayora Indah (Foreign)........................... 104
(a,d)1,153,200 Putra Surya Multidana (Foreign).................. 110
37,300 Tambang Timah (Foreign).......................... 40
6,400 Telekomunikasi ADR............................... 71
1,997,700 Telekomunikasi (Foreign)......................... 1,062
--------
4,423
--------
ISRAEL (2.9%)
273,200 Bank Hapoalim Ltd................................ 656
1 Elbit Medical Imaging Ltd........................ --
</TABLE>
- -----------------------
56
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
EMERGING MARKETS FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
ISRAEL (CONT.)
<TABLE>
<C> <S> <C>
37,500 Elbit Systems Ltd................................ $ 495
680 First International Bank of Israel Ltd. '1'...... 93
1,097 First International Bank of Israel Ltd. '5'...... 805
10,890 Koor Industries Ltd.............................. 1,207
16,500 Koor Industries Ltd. ADR......................... 362
530,700 Super Sol Ltd.................................... 1,505
1,030 Super Sol Ltd. ADR............................... 14
--------
5,137
--------
KOREA (3.2%)
(a)25,260 Hansol Paper Co.................................. 111
(a)33,022 Housing & Commercial Bank (Foreign).............. 222
59,593 Housing & Commercial Bank GDR.................... 393
(d)650 Korea Mobile Telecommunications Corp............. 196
46,209 LG Information & Communication Ltd............... 1,295
(d)40,200 Pohang Iron & Steel Co., Ltd..................... 1,121
24,486 Pohang Iron & Steel Co., Ltd. (Foreign).......... 663
56,723 Samsung Electronics Co. (Foreign)................ 1,285
(a)28,184 Samsung Electronics Co. GDR (New)................ 400
--------
5,686
--------
MALAYSIA (3.1%)
69,800 AMMB Holdings Bhd................................ 46
13,000 Berjaya Sports Toto Bhd.......................... 33
20,000 Carlsberg Brewery Malaysia Bhd................... 64
164,000 Commerce Asset Holdings Bhd...................... 78
253,000 DCB Holdings Bhd................................. 122
125,000 Genting Bhd...................................... 313
242,000 Golden Hope Plantations Bhd...................... 280
124,000 IOI Corp., Bhd................................... 40
150,000 Kuala Lumpur Kepong Bhd.......................... 322
166,000 Magnum Corp., Bhd................................ 100
154,800 Malayan Banking Bhd.............................. 450
155,000 Malayan United Industries Bhd.................... 27
59,000 Malaysian International Shipping (Foreign)....... 86
19,000 Malaysian Pacific Industries Bhd................. 46
46,000 Nestle Bhd....................................... 213
31,000 New Straits Times Press Bhd...................... 38
51,000 Perusahaan Otomobil Nasional Bhd................. 50
193,000 Petronas Gas Bhd................................. 439
60,000 Rashid Hussain Bhd............................... 47
58,000 Resorts World Bhd................................ 98
52,000 R.J. Reynolds Bhd................................ 85
62,000 Rothmans of Pall Mall Bhd........................ 482
323,000 Sime Darby Bhd................................... 311
102,000 Technology Resources Industries.................. 60
259,000 Telekom Malaysia Bhd............................. 766
336,000 Tenaga Nasional Bhd.............................. 717
208,000 United Engineers Bhd............................. 173
--------
5,486
--------
MEXICO (11.2%)
44,710 Apasco........................................... 308
(a)79,309 Banacci 'B'...................................... 238
(a)193,888 Banacci 'L'...................................... 500
(a)461,662 Bancomer 'B'..................................... 300
(a,e)21,425 Bancomer 'B' ADR................................. 277
(a)239,635 Cemex CPO........................................ 1,085
(a)34,354 Cemex CPO ADR.................................... 312
15,004 Cifra 'A'........................................ 37
21,930 Cifra 'B'........................................ 54
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ------------------------------------------------------------------------------
36,440 Cifra 'B' ADR.................................... $ 89
141,854 Cifra 'C'........................................ 318
601,835 FEMSA 'B'........................................ 4,839
(a)1 Gruma ADR........................................ --
545,427 Kimberly 'A'..................................... 2,592
80,754 Telemex 'L' ADR.................................. 4,527
(a)87,665 Televisa CPO GDR................................. 3,392
(a)47,255 TV Azteca ADR.................................... 1,066
--------
19,934
--------
PAKISTAN (4.1%)
753,600 Fauji Fertilizer Co., Ltd........................ 1,443
(a)1,080,000 Hub Power Co..................................... 1,406
154,644 Pakistan State Oil Co., Ltd...................... 1,316
3,635,900 Pakistan Telecommunication Co.................... 2,747
(a)771,650 Sui Northern Gas Pipelines....................... 472
--------
7,384
--------
PERU (0.6%)
45,190 Tel Peru 'B' ADR................................. 1,053
--------
PHILIPPINES (1.9%)
1,736,300 Ayala Corp....................................... 675
207,860 Ayala Land, Inc. 'B'............................. 82
348,290 C&P Homes, Inc................................... 20
(a)283,460 Filinvest Land, Inc.............................. 11
199,250 Manila Electric 'B'.............................. 659
185,410 Metro Pacific Corp............................... 5
10,814 Metropolitan Bank & Trust Co..................... 73
254,490 Petron Corp...................................... 21
42,170 Philippine Long Distance Telephone Co............ 916
3,200 Philippine Long Distance Telephone Co. ADR....... 72
(a)8,770 Philippine National Bank 'B'..................... 19
359,720 San Miguel Corp. 'B'............................. 440
2,400,940 SM Prime Holdings, Inc........................... 356
--------
3,349
--------
POLAND (2.2%)
(a)18,860 Agros Holdings S.A. 'C'.......................... 391
(a)4,080 Agros Holdings S.A. 'D'.......................... 84
12,500 Bank Rozwoju Eksportu S.A........................ 259
8,136 Bank Slaski S.A.................................. 450
(a)8,300 Bank of Handlowy W Warszawie S.A................. 106
588,000 BIG Bank Gdanski S.A............................. 575
(a)13,000 BIG Bank Gdanski ell............................. 202
15,750 Debica S.A....................................... 384
77,100 Elektrim S.A..................................... 746
(a)30,500 Exbud S.A........................................ 286
(a)99,597 Polifarb Wroclaw S.A............................. 472
--------
3,955
--------
RUSSIA (8.4%)
6,852,500 Edinaya Energetiches............................. 2,056
1,622,000 Irkutskenergo.................................... 320
73,333 Lukoil Holdings Co............................... 1,694
4,333 Lukoil Holdings Co. ADR.......................... 400
736,667 Moscow Energy (Mosenergo)........................ 935
(a,d)4,570,885 Mustcom.......................................... 3,885
(a)600 Storyfirst Communications........................ 1,716
116,300 Surgutneftegaz ADR............................... 1,189
</TABLE>
-----------------------
57
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
EMERGING MARKETS FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
RUSSIA (CONT.)
<TABLE>
<C> <S> <C>
(a,d)2,684,488 Svyaz Finance.................................... $ 2,336
3,400 Tatneft ADR...................................... 483
--------
15,014
--------
SOUTH AFRICA (4.8%)
62,200 Barlow Ltd....................................... 528
21,262 Bidvest Group Ltd................................ 176
8,400 Coronation Holdings Ltd. 'N'..................... 122
127,400 Ellerine Holdings Ltd............................ 822
66,358 Foodcorp Limited................................. 341
94,400 Forbes Group Ltd................................. 175
182,400 Illovo Sugar Ltd................................. 311
249,675 Malbak Ltd....................................... 244
278,800 NBS Boland Group, Ltd............................ 690
893,500 New Africa Investments Ltd. 'N'.................. 854
236,100 Orion Selections Holdings, Ltd................... 606
160,000 Orion Selections Ltd............................. 345
64,779 Persetel Holdings Ltd............................ 355
519,900 Protea Furnishers Ltd............................ 259
122,900 Rembrandt Group Ltd.............................. 897
170,600 Sasol Ltd........................................ 1,784
--------
8,509
--------
TAIWAN (4.3%)
(a)191,500 Asustek Computer, Inc............................ 3,035
359,000 Cathay Construction Corp......................... 409
(a)342,572 Compal Electronics, Inc.......................... 998
1,173,632 Far Eastern Textile, Ltd......................... 1,273
(a)226,000 Hon Hai Precision Industry....................... 1,143
357,000 Siliconware Precision Industries Co.............. 843
--------
7,701
--------
THAILAND (2.8%)
(a)8,100 Advance Agro Public Co., Ltd..................... 7
(a)24,400 Advance Agro Public Co., Ltd. (Foreign).......... 20
137,100 Advanced Info Service Public Co., Ltd.
(Foreign)...................................... 655
38,200 BEC World Public Co., Ltd. (Foreign)............. 152
14,300 Bangkok Bank Public Co., Ltd. (Foreign).......... 36
(a,d)804,600 Bangkok Expressway Public Co., Ltd. (Foreign).... 447
3,200 Bank of Ayudhya Public Co., Ltd. (Foreign)....... 1
(d)88,700 Central Pattana Public Co., Ltd. (Foreign)....... 28
(a,d)54,900 Delta Electronics Public Co., Ltd. (Foreign)..... 451
(a)27,700 Electricity Generating Public Co., Ltd.
(Foreign)...................................... 52
105,300 Exploration & Production Public Co., Ltd.
(Foreign)...................................... 1,212
(d)65,300 Grammy Entertainment Public Co., Ltd.
(Foreign)...................................... 285
385,400 Industrial Finance Corp. of Thailand (Foreign)... 59
(d)22,000 Lanna Lignite Public Co., Ltd. (Foreign)......... 45
278,000 National Finance & Securities Co., Ltd.
(Foreign)...................................... 51
(d)253,400 National Petrochemical Public Co., Ltd.
(Foreign)...................................... 134
113,440 Shinawatra Computer Co., Ltd. (Foreign).......... 377
4,200 Siam City Cement Public Co., Ltd. (Foreign)...... 4
445,866 Siam Commercial Bank Co. Ltd. (Foreign).......... 509
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ------------------------------------------------------------------------------
(a)15,500 TelecomAsia Corp. Public Co. Ltd. (Foreign)...... $ 3
(d)235,000 Thai Airways International Public Co., Ltd.
(Foreign)...................................... 254
(a,d)30,300 Thai Engine Manufacturing Public Co., Ltd.
(Foreign)...................................... 51
41,900 Thai Farmers Bank Public Co., Ltd. (Foreign)..... 76
8,400 Thailand Petrochemical Industry.................. 1
174,700 United Communications Industry Public Co., Ltd.
(Foreign)...................................... 71
--------
4,981
--------
TURKEY (5.6%)
5,669,750 Arcelik A.S...................................... 533
6,495,500 Ege Biracilik Ve Malt Sanayii.................... 588
4,009,000 Erciyas Biracilik Ve Malt Sanayii................ 561
14,583,000 Eregli Demir Ve Celik Fabrikalari A.S............ 2,252
119,000 Migros Turk...................................... 108
12,603,383 Turkiye Garanti Bankasi A.S...................... 623
8,071,000 Vestel Elektronik Sanayii ve Ticaret A.S......... 662
120,265,330 Yapi Ve Kredi Bankasi A.S........................ 4,584
--------
9,911
--------
VENEZUELA (0.4%)
91,003 C.A. La Electricidad de Caracas.................. 109
17,005 CANTV ADR........................................ 708
--------
817
--------
ZIMBABWE (0.5%)
656,950 Delta Corp....................................... 447
374,200 Meikles Africa Ltd............................... 337
(e)597,000 Trans Zambesi Industries Ltd. 'S'................ 190
--------
974
--------
TOTAL COMMON STOCKS (COST $164,281).................................
135,201
--------
PREFERRED STOCKS (12.5%)
BRAZIL (NON-VOTING STOCKS) (12.2%)
67,992,584 Banco Bradesco................................... 670
(a,d)11,156,000 Banco Nacional................................... --
2,963,099 Brahma........................................... 1,991
41,211,110 CEMIG............................................ 1,791
13,945 CEMIG ADR........................................ 606
(a)4,164,300 CRT.............................................. 5,131
30,400 CVRD............................................. 612
23,359 CVRD ADR......................................... 470
1,734,000 Itaubanco........................................ 932
12,437,000 Lojas Arapua..................................... 45
6,448,000 Lojas Renner..................................... 202
4,660,000 Pao de Acucar.................................... 85
(e)6,401,000 Petrobras........................................ 1,497
(a,e)12,430 Petrobras ADR.................................... 295
12,862,390 Telebras......................................... 1,467
51,035 Telebras ADR..................................... 5,942
53,661,000 Telesp........................................... 14
--------
21,750
--------
RUSSIA (0.3%)
200,000 Rostelekom....................................... 466
--------
TOTAL PREFERRED STOCKS (COST $23,258)............................... 22,216
--------
</TABLE>
- -----------------------
58
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
EMERGING MARKETS FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------------------------
<C> <S> <C>
INVESTMENT COMPANIES (1.0%)
UNITED STATES (1.0%)
(a)71,000 Korea Fund, Inc.................................. $ 470
(g)34,265 Morgan Stanley Africa Investment Fund, Inc....... 394
(a,g)105,434 Morgan Stanley India Investment Fund, Inc........ 883
--------
TOTAL INVESTMENT COMPANIES (COST $2,228)............................ 1,747
--------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
RIGHTS
<C> <S> <C>
- ----------------
RIGHTS (0.0%)
BRAZIL (0.0%)
(a)75,148,584 Banco Bradesco................................... 7
(a,d)53,661 Telecom de Sao Paulo............................. --
--------
7
--------
POLAND (0.0%)
(a)1,694 Polifarb Wroclaw S.A............................. 2
--------
SOUTH AFRICA (0.0%)
(a)2,100 Coronation Holdings Ltd.......................... --
--------
THAILAND (0.0%)
(a,d)278,000 National Finance & Securities Public Co., Ltd.... --
--------
TOTAL RIGHTS (COST $0).............................................. 9
--------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
WARRANTS
<C> <S> <C>
- ----------------
WARRANTS (0.0%)
INDONESIA (0.0%)
(a)126,596 Bank International Indonesia, expiring 1/17/00... 2
(a)80,192 Indah Kiat Pulp & Paper, expiring 7/11/02........ 2
--------
4
--------
MALAYSIA (0.0%)
(a)26,750 Commerce Asset Holdings Bhd., expiring 3/16/02... 4
(a)7,428 Rashid Hussain Bhd. expiring 3/25/02............. 1
--------
5
--------
THAILAND (0.0%)
(a,d)111,466 Siam Commercial Bank Co.......................... --
--------
TOTAL WARRANTS (COST $26)........................................... 9
--------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------------------------
CONVERTIBLE DEBENTURE (0.1%)
SOUTH AFRICA (0.1%)
$ (a)14,600 Sasol Ltd. 8.50%, 12/15/2099 (COST $182)......... $ 146
--------
TOTAL FOREIGN SECURITIES (89.4%) (COST $189,975).................... 159,328
--------
FOREIGN CURRENCY (5.6%)
ARP 14 Argentine Peso................................... 14
BRL 84 Brazilian Real................................... 75
COP 7,776 Colombian Peso................................... 6
EGP 170 Egyptian Pound................................... 50
HKD 17,621 Hong Kong Dollar................................. 2,274
HUF 37,262 Hungarian Forint................................. 183
INR 37,214 Indian Rupee..................................... 949
IDR 900,987 Indonesian Rupiah................................ 164
MYR 224 Malaysian Ringgit................................ 58
PKR 4 Pakistani Rupee.................................. --
PLN 1,453 Polish Zloty..................................... 412
ZAR 9,495 South African Rand............................... 1,951
KRW 621,772 South Korean Won................................. 367
TWD 111,558 Taiwan Dollar.................................... 3,419
TRL 205,528 Turkish Lira..................................... 1
VEB 450 Venezuelan Bolivar............................... 1
ZWD 11 Zimbabwe Dollar.................................. 1
--------
TOTAL FOREIGN CURRENCY (COST $10,029)............................... 9,925
--------
TOTAL INVESTMENTS (95.0%) (COST $200,004)........................... 169,253
OTHER ASSETS IN EXCESS OF LIABILITIES (5.0%)........................ 8,890
--------
NET ASSETS (100%)................................................... $178,143
--------
--------
</TABLE>
- ---------------
(a) -- Non-income producing security
(d) -- Security valued at fair value -- see note A-1 to financial statements.
(e) -- 144A Security -- certain conditions for public sale may exist.
(g) -- The Fund is advised by an affiliate.
ADR -- American Depositary Receipt
CPO -- Certificate of Participation
GDR -- Global Depositary Receipt
-----------------------
59
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
EMERGING MARKETS FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
DECEMBER 31, 1997
(UNAUDITED)
- --------------------------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE INFORMATION:
Under the terms of foreign currency contracts open at December 31, 1997, the
Portfolio 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>
HKD 17,622 $ 2,274 1/2/98 $ 2,274 $ 2,274 $ --
IDR 899,539 164 1/2/98 $ 159 159 (5)
MYR 220 57 1/2/98 $ 56 57 --
ZAR 3,019 620 1/2/98 $ 620 620 --
--------- --------- ---
$ 3,115 $ 3,110 $ (5)
--------- --------- ---
--------- --------- ---
</TABLE>
- ---------------
HKD -- Hong Kong Dollar
IDR -- Indonesian Rupiah
MYR -- Malaysian Ringgit
ZAR -- South African Rand
- --------------------------------------------------------------------------------
SWAP AGREEMENT:
The Portfolio had the following Total Return Swap Agreement open at December 31,
1997:
<TABLE>
<CAPTION>
UNEALIZED
NOTIONAL APPRECIATION
AMOUNT (DEPRECIATION)
(000) DESCRIPTION (000)
- --------- ---------------------------------------------------------------------------- -----------------
<C> <S> <C>
$2,000,000 Agreement with Goldman Sachs International terminating November 30, 1998 to
pay 12 month USD-LIBOR minus 4.00% and to receive the SET Index converted
into USD at the mid-market rate on October 30, 1998......................... $ 581
</TABLE>
- ---------------
LIBOR -- London Interbank Offer Rate
USD -- U.S. Dollar
- --------------------------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
- ----------------------------------------------------------------------------- --------- -------------
<S> <C> <C>
Services..................................................................... $ 40,100 22.5%
Finance...................................................................... 27,959 15.7
Consumer Goods............................................................... 27,469 15.4
Energy....................................................................... 21,369 12.0
Capital Equipment............................................................ 17,496 9.8
Materials.................................................................... 13,549 7.6
Mutli-Industry............................................................... 11,365 6.4
Gold Mines................................................................... 21 0.0
--------- ---
$ 159,328 89.4%
--------- ---
--------- ---
</TABLE>
- -----------------------
60
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
AGGRESSIVE EQUITY FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW
(UNAUDITED)
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.
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1997)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Capital Goods 17.2%
Consumer--Cyclical 15.6%
Consumer--Staples 5.7%
Diversified 27.1%
Energy 1.1%
Finance 10.2%
Services 12.1%
Technology 5.2%
Short-Term Investments 3.4%
Other 2.4%
</TABLE>
<TABLE>
<CAPTION>
TOTAL RETURNS**
---------------------------------------
AVERAGE ANNUAL
SIX MONTHS ONE YEAR SINCE INCEPTION
----------------- ----------------- -----------------
WITH WITHOUT WITH WITHOUT WITH WITHOUT
SALES SALES SALES SALES SALES SALES
CHARGE* CHARGE CHARGE* CHARGE CHARGE* CHARGE
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class A Shares 9.92% 16.66% 24.11% 31.70% 30.72% 34.64%
- ---------------------------------------------------------------------------------------
Class B Shares 11.26% 16.26% 25.87% 30.87% 32.24% 33.74%
- ---------------------------------------------------------------------------------------
Class C Shares 15.21% 16.21% 29.82% 30.82% 33.67% 33.67%
- ---------------------------------------------------------------------------------------
Lipper Capital
Appreciation Index N/A 8.81% N/A 19.86% N/A 17.38%
- ---------------------------------------------------------------------------------------
S&P 500 Index N/A 10.58% N/A 33.36% N/A 28.05%
- ---------------------------------------------------------------------------------------
</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.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
<TABLE>
<CAPTION>
TOP FIVE HOLDINGS
PERCENT OF
ISSUER INDUSTRY NET ASSETS
- ------------------------------ -------------- ----------
<S> <C> <C>
United Technologies Corp. Diversified 18.6%
Cendant Corp. Services 12.1%
Lockheed Martin Corp. Capital Goods 12.0%
Loews Corp. Diversified 4.0%
Clear Channel Communications,
Inc. Consumer-- 4.0%
Cyclical
</TABLE>
<TABLE>
<CAPTION>
TOP FIVE SECTORS
VALUE PERCENT OF
SECTOR (000) NET ASSETS
- -------------------- --------- -------------
<S> <C> <C>
Diversified $ 28,745 27.1%
Capital Goods 18,231 17.2%
Consumer--Cyclical 4,485 15.6%
Services 12,873 12.1%
Finance 10,839 10.2%
</TABLE>
The investment 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.
For the six-month period ended December 31, 1997, the Fund had a total return of
16.66 percent for the Class A shares at net asset value, as compared to a total
return of 8.81 percent for the Lipper Capital Appreciation Index and 10.58
percent for the Standard & Poor's 500-Stock Index during the same period.
After three heady years for the market, Wall Street futurists are divided firmly
into bull and bear camps. We are foremost bottom-up investors, focusing on
companies rather than markets, and we do not care which way the U.S. market
moves in 1998. But if pushed, we are bullish because the backdrop for financial
assets remains positive: inflation and interest rates are at 30-year lows, the
U.S. budget is balanced, and U.S. companies seem as strong as ever in terms of
global competitiveness. Also, the Federal Reserve has enormous flexibility due
to the strength in the dollar and low inflation; if the economy slows,
short-term rates will come down quickly. Meanwhile, corporate managements are
more focused on creating shareholder value than in prior business cycles. Still,
negative factors such as the strong dollar and disinflationary/deflationary
trends are combining to put pressure on corporate profits. Additionally,
valuations are high on an absolute basis.
In our view, this sets up a classic stock-pickers' market. We prefer such an
environment because we would rather deal with earnings risk than upward pressure
on interest rates. Companies that are able to rise above profit pressures and
achieve significant earnings growth will be richly rewarded. However, the "safe
growth" segment of the U.S. market--stocks like Coca-Cola and General
Electric--look extended and expensive. We don't believe they necessarily need to
go down, but they have gone up much more than their respective earnings in
recent years and should eventually enter a phase where their stock prices lag
profit growth.
We believe there is more money to be made in "unsafe growth," i.e., companies
that have strong fundamentals but where investors still have doubts. We divide
those "unsafe growth" stocks that we find compelling into two categories: stocks
infected with investor fears stemming from the turmoil in
------------------
61
<PAGE>
MORGAN STANLEY
AGGRESSIVE EQUITY FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
(UNAUDITED)
Asia, and stocks that should be insulated against the negative factors
pressuring U.S. corporate profits. In the first category, we include such
companies as United Technologies, whose earnings are growing at 17 to 18 percent
annually, and Gulfstream Aerospace, the leading producer of executive jets with
a debt-free balance sheet and earnings estimates on the rise.
In the second category we include Cendant, the new company formed by the merger
of HFS and CUC International. We feel Cendant may reap tremendous revenue and
profit-margin gains from the combination of the country's largest franchiser
with the preeminent direct marketing company. Also in this category is Cracker
Barrel Old Country Store, a 300-unit chain of restaurant and gift shops that is
experiencing profit-margin improvement after several sluggish years. A final
example of a stock that should be somewhat insulated from generalized corporate
profit pressure is Lockheed Martin. The company is generating massive free cash
flow and will be the largest defense contractor in the world, pending the
closing of its acquisition of Northrop Grumman.
Kurt A. Feuerman
PORTFOLIO MANAGER
- --------------
62
<PAGE>
MORGAN STANLEY
AGGRESSIVE EQUITY FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ------------------------------------------------------------------------------
COMMON STOCKS (93.6%)
CAPITAL GOODS (17.2%)
AEROSPACE & DEFENSE (17.2%)
21,200 AVTEAM, Inc., `A'................................ $ 188
(a)85,100 Gulfstream Aerospace Corp........................ 2,489
(a)33,800 Litton Industries, Inc........................... 1,943
129,600 Lockheed Martin Corp............................. 12,766
10,400 Thiokol Corp..................................... 845
--------
TOTAL CAPITAL GOODS............................................... 18,231
--------
CONSUMER -- CYCLICAL (15.6%)
AUTOMOTIVE (4.2%)
68,100 Avis Rent A Car, Inc............................. 2,175
19,000 Borg-Warner Automotive, Inc...................... 988
21,800 General Motors Corp.............................. 1,322
--------
4,485
--------
BROADCAST -- RADIO & TELEVISION (6.7%)
(a)10,100 American Radio Systems Corp., `A'................ 538
57,700 CBS, Inc......................................... 1,699
(a)52,900 Clear Channel Communications, Inc................ 4,202
(a)16,200 Viacom, Inc., `B'................................ 671
--------
7,110
--------
FOOD SERVICE & LODGING (2.6%)
(a)39,900 Brinker Intertional, Inc......................... 638
63,700 Cracker Barrel Old Country Store, Inc............ 2,126
--------
2,764
--------
LEISURE RELATED (0.9%)
38,000 International Game Technology.................... 960
--------
PUBLISHING (1.2%)
(a)102,900 PRIMEDIA, Inc.................................... 1,299
--------
TOTAL CONSUMER -- CYCLICAL........................................ 16,618
--------
CONSUMER -- STAPLES (5.7%)
BEVERAGES (0.9%)
28,500 Coca-Cola Enterprises, Inc....................... 1,013
--------
FOOD (1.1%)
12,100 Ralston-Ralston Purina Group..................... 1,125
--------
TOBACCO (3.7%)
(a)19,100 Consolidated Cigar Holdings, Inc................. 526
62,100 Philip Morris Cos., Inc.......................... 2,814
16,600 RJR Nabisco Holdings Corp........................ 623
--------
3,963
--------
TOTAL CONSUMER -- STAPLES......................................... 6,101
--------
DIVERSIFIED (27.1%)
DIVERSIFIED (27.1%)
(a)65 Berkshire Hathaway, Inc.......................... 2,990
57,200 ITT Industries, Inc.............................. 1,795
39,700 Loews Corp....................................... 4,213
271,200 United Technologies Corp......................... 19,747
--------
TOTAL DIVERSIFIED................................................. 28,745
--------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ------------------------------------------------------------------------------
ENERGY (1.1%)
COAL, GAS, & OIL (1.1%)
23,800 Diamond Offshore Drilling, Inc................... $ 1,145
--------
FINANCE (9.6%)
BANKING (1.4%)
(a)32,600 Friedman, Billings, Ramsey Group, Inc., `A'...... 585
2,733 Wells Fargo Co................................... 927
--------
1,512
--------
FINANCIAL SERVICES (5.6%)
15,600 American Express Co.............................. 1,392
22,900 SLM Holding Corp................................. 3,186
25,550 Travelers, Inc................................... 1,377
--------
5,955
--------
INSURANCE (2.6%)
33,100 American Bankers Insurance Group, Inc............ 1,521
4,000 Cincinnati Financial Corp........................ 563
19,300 Nationwide Financial Services, Inc., 'A'......... 697
--------
2,781
--------
TOTAL FINANCE..................................................... 10,248
--------
SERVICES (12.1%)
PROFESSIONAL SERVICES (12.1%)
(a)374,491 Cendant Corp..................................... 12,873
--------
TECHNOLOGY (5.2%)
COMPUTERS (1.8%)
18,700 International Business Machines Corp............. 1,955
--------
SOFTWARE SERVICES (2.2%)
(a)17,900 Microsoft Corp................................... 2,314
--------
TECHNOLOGY (0.7%)
13,700 Linear Technology Corp........................... 789
--------
TELECOMMUNICATIONS (0.5%)
(a)9,200 Associated Group, Inc., Class A.................. 273
(a)7,900 Associated Group, Inc., Class B.................. 230
--------
503
--------
TOTAL TECHNOLOGY.................................................. 5,561
--------
TOTAL COMMON STOCKS (COST $93,897).................................. 99,522
--------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
RIGHTS
<C> <S> <C>
- ----------------
RIGHTS (0.6%)
FINANCE (0.6%)
FINANCIAL SERVICES (0.6%)
(a)17,700 Newcourt Credit Group, Inc. (COST $577).......... 591
--------
</TABLE>
-----------------------
63
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
AGGRESSIVE EQUITY FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ------------------------------------------------------------------------------
<C> <S> <C>
SHORT-TERM INVESTMENT (3.4%)
REPURCHASE AGREEMENT (3.4%)
$ 3,601 Chase Securities, Inc. 5.95%, dated 12/31/97, due
1/2/98, to be repurchased at $3,602,
collateralized by $3,640 U.S. Treasury Notes,
5.625%, due 2/15/06, valued at $3,679 (COST
$3,601)........................................ $ 3,601
--------
TOTAL INVESTMENTS (97.6%) (COST $98,075)............................ 103,714
OTHER ASSETS IN EXCESS OF LIABILITIES (2.4%)........................ 2,551
--------
NET ASSETS (100%)................................................... $106,265
--------
--------
</TABLE>
- ---------------
(a) -- Non-income producing security
SECURITIES SOLD SHORT (NOTE A-6)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ---------------- --------
<C> <S> <C>
17,700 Newcourt Credit Group, Inc. Rights (TOTAL
PROCEEDS $605)................................. $ 591
--------
--------
</TABLE>
- --------------
64
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
U.S. REAL ESTATE FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW
(UNAUDITED)
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.
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1997)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Apartment 19.5%
Healthcare 6.2%
Land 1.4%
Lodging/Leisure 11.5%
Manufactured Homes 6.6%
Office & Industrial 28.1%
Retail 18.3%
Self Storage 3.2%
Short-Term Investments 5.2%
</TABLE>
<TABLE>
<CAPTION>
TOTAL RETURNS**
-------------------------------------------------------------
AVERAGE ANNUAL
SIX MONTHS ONE YEAR SINCE INCEPTION
----------------- ----------------- -----------------
WITH WITHOUT WITH WITHOUT WITH WITHOUT
SALES SALES SALES SALES SALES SALES
CHARGE* CHARGE CHARGE* CHARGE CHARGE* CHARGE
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class A Shares 7.28% 13.83% 17.33% 24.48% 28.70% 33.33%
- ---------------------------------------------------------------------------------------
Class B Shares 8.40% 13.40% 18.40% 23.40% 30.28% 32.27%
- ---------------------------------------------------------------------------------------
Class C Shares 12.36% 13.36% 22.43% 23.43% 32.28% 32.28%
- ---------------------------------------------------------------------------------------
NAREIT Equity Index N/A 13.77% N/A 20.29% N/A 31.61%
- ---------------------------------------------------------------------------------------
</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.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
<TABLE>
<CAPTION>
TOP FIVE HOLDINGS
PERCENT OF
ISSUER INDUSTRY NET ASSETS
- ---------------------------------------- ------------------ ----------
<S> <C> <C>
Taubman Centers, Inc. REIT Retail 5.4%
Arden Realty Group, Inc. Office &
Industrial 4.7%
Chateau Communities, Inc. REIT Manufactured Homes 4.6%
Nationwide Health Properties, Inc. Healthcare 4.6%
Bay Apartment Communities, Inc. REIT Apartment 4.0%
</TABLE>
<TABLE>
<CAPTION>
TOP FIVE SECTORS
VALUE PERCENT OF
SECTOR (000) NET ASSETS
- ------------------------------ ------ ----------
<S> <C> <C>
Office & Industrial $10,502 28.1%
Apartment 7,301 19.5%
Retail 6,839 18.3%
Lodging/Leisure 4,294 11.5%
Manufactured Homes 2,476 6.6%
</TABLE>
The U.S. Real Estate Fund seeks to provide above-average current income and
long-term capital appreciation by investing primarily in equity securities of
companies in the U.S. real estate industry, including real estate investment
trusts (REITs).
For the six-month period ended December 31, 1997, the Fund achieved a total
return of 13.83 percent for Class A shares at net asset value, as compared to a
total return of 13.77 percent for the National Association of Real Estate
Investment Trusts (NAREIT) Equity Index.
INVESTMENT THEMES
The past six months were very exciting for the REIT industry, as REITs continued
to become much more widely accepted in the investment community. Reasons for
this acceptance include the tremendous growth of the industry, continued strong
performance, and positive attention from the business media.
Total equity capitalization of the REIT industry at the end of the reporting
period reached $145 billion, a 65 percent increase over 1996. New equity
issuance of $23 billion during 1997 was more than the three previous years
combined, and double the previous record of 1993, when the market was dominated
by IPOs. Although the majority of the issuance was for secondary offerings by
existing REITs, there was also a reopening of the window for IPOs, with
approximately $3 billion raised in 12 separate transactions.
Noteworthy IPOs included several regional office companies. Potentially of
greater interest, however, were the IPOs of Equity Office Properties and AMB
Property Corporation, involving essentially the conversion of a pension fund
advisory business to a REIT. It also is noteworthy that the office and
industrial sectors accounted for almost one-half of the total equity issuance.
We expect equity issuance to continue at a high rate, albeit at a slower pace
than in 1997. We believe that given current valuations, we will continue to see
a modest level of IPOs both from regional operators and from pension fund
advisors.
Participants in the REIT industry have speculated on the timing of a merger wave
as the public real estate market matures beyond its initial proliferation of
IPOs. It now appears as if the anticipated wave of mergers has officially
commenced, beginning with the friendly and surprising merger between Equity
Office Properties (the nation's largest office REIT) with Beacon Properties
(Equity
------------------
65
<PAGE>
MORGAN STANLEY
U.S. REAL ESTATE FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
(UNAUDITED)
Office Properties' largest national rival). Generally, the majority of the other
merger deals involved companies expanding to become super-regional or national
players in their sector, with the multifamily sector producing the most mergers.
However, the greatest excitement was generated by the bidding war between
Starwood Lodging and Hilton Hotels to purchase ITT Corporation, a battle won by
Starwood. The battle over ITT commanded daily articles in THE WALL STREET
JOURNAL and other business publications.
This merger activity set off an interesting debate about whether it is more
favorable to own the consolidators or the targets. Given our approach of
selecting securities that we believe offer the best value relative to their
underlying net property assets, it is not surprising that we often own the
targets. Although we are not opposed to owning the consolidators, owning such
companies in the portfolio would likely be as a result of their underlying
relative valuation, as opposed to a stated goal to be a large participant in a
sector.
Clearly, with healthy investor interest in REITs combined with REITs trading at
significant premiums to asset value, a number of companies are attempting to
position themselves as growth companies. While this objective may be achievable
at this stage of the real estate recovery cycle, it may be far more difficult to
implement this type of approach to real estate investing and strategic direction
in other phases of the real estate cycle. We expect that as the current recovery
in the U.S. real estate market continues toward equilibrium, we will see a
decline in the average premiums to net asset value at which the companies trade.
SECTOR REVIEW
With regard to the property markets, we are seeing evidence of an emerging
recovery in the area of new construction of real estate. Despite the disfavor
that real estate development faced in virtually every property sector in the
early 1990s, we have witnessed the financial community reopening their doors to
finance development. Although the real estate market generally remains in a
favorable part of its cycle, this new supply causes us to raise the following
issues. In our modeling of companies, we have implemented a negative
reversionary value calculation (to reflect our anticipation of declines in
occupancy caused by oversupply) in calculating the net asset value of companies.
This is particularly true in the limited service hotel business, as well as for
companies with a concentration of multifamily properties in the Southeast.
Additionally, we are monitoring a number of industrial markets for oversupply
and potential decline in occupancy. Finally, although we have discussed our
rationale for overweighting the office and upscale full-service hotel markets
since inception of the Fund, we have begun shifting the portfolio to favor those
companies with properties in the most supply-constrained locations, which
include urban markets as well as those in California and the Northeast.
The majority of sell-side analysts predicted that 1997 would be a year for
stock-picking as opposed to sector allocation. At the beginning of the year, we
declared that there was still room for outperformance through sector allocation.
The chart below outlines the total return performance of the various sectors in
the real estate industry for 1996 and 1997.
<TABLE>
<CAPTION>
TOTAL PERFORMANCE
------------------------
SECTOR 1997 1996
- --------------------------------------------------------------- ----------- -----------
<S> <C> <C>
Apartments..................................................... 16.0% 28.4%
Manufactured Homes............................................. 18.1% 34.9%
Strip Centers.................................................. 21.4% 32.8%
Regional Malls................................................. 13.7% 44.6%
Outlet Centers................................................. 0.1% 3.5%
Industrial..................................................... 19.0% 27.0%
Office......................................................... 29.0% 51.8%
Self Storage................................................... 3.4% 42.0%
Triple Net Lease............................................... 17.7% 30.8%
Hotel.......................................................... 30.1% 49.2%
</TABLE>
- --------------
66
<PAGE>
MORGAN STANLEY
U.S. REAL ESTATE FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
(UNAUDITED)
From a market perspective, the office and hotel sectors provided the best
performance for the third consecutive year. However, we believe that the
increasing supply in these markets, combined with the prevailing prices of the
securities in these sectors, may cause overall returns in 1998 to be
substantially less than in previous years.
The self-storage and factory outlet sectors drastically underperformed the
NAREIT Equity Index for two very different reasons. The poor returns in the
factory outlet sector were the result of a continued deterioration of the
sector's fundamentals. Looking forward, we believe this sector will continue to
trail due to continued weakness in occupancies and rents. The self-storage
market, by contrast, is in equilibrium from a supply-and-demand perspective;
however, share prices had run too far in 1996, leaving no room for continued
appreciation last year. In 1998, we expect this sector to be a market performer.
As we discussed last year, we were unable to explain the outperformance of the
regional mall sector, and despite improving occupancies and reduced
bankruptcies, this sector trailed the Index in 1997. The other major sectors in
the Index provided returns similar to the market.
With respect to the performance of the Fund from a top-down perspective, we
created outperformance through our overweighting of the office and hotel
sectors, and through the underweighting of the self-storage and factory outlet
sectors. From a bottom-up perspective, we created significant outperformance
from our stock-picking in the apartment, manufactured home, industrial, and
regional mall sectors.
INVESTMENT STRATEGY
We will continue to pursue a strategy of overweighting those sectors that offer
the best underlying real estate fundamentals. We believe that in 1998 our
overall sector weightings will probably come closer to approximating market
weightings, due to two factors. First, the relative weightings in the NAREIT
Equity Index have changed materially and are now more in line with our Fund. For
example, we have maintained a hotel weighting between 8 and 15 percent during
the last several years. During this reporting period, the Index weighting has
shifted from 4 percent to a likely weighting of 13 to 15 percent in light of
recent merger activity. Second, the underlying valuations have generally
adjusted to reflect the relative attractiveness of each sector. We will continue
to provide basic sector weighting guidelines, but it is important to note that
we focus in great detail on sub-sectors within those sectors. Following is our
outlook for the various sub-sectors in the coming year:
<TABLE>
<CAPTION>
UNDERPERFORM MARKET PERFORM OUTPERFORM
- --------------------------------- --------------------------------- ---------------------------------
<S> <C> <C>
Class A Apartments Class B Apartments CBD Office
Sunbelt Self Storage Upscale Hotels
Economy Lodging Suburban Office Northeast/Pacific Coast
Factory Outlets Industrial
Class B Regional Malls Class A Regional Malls
Midwest
Manufactured Housing
Strip Shopping Centers
</TABLE>
Within this framework, we will, as discussed above, continue to select those
securities that we feel offer the best value relative to our estimate of their
intrinsic asset value.
------------------
67
<PAGE>
MORGAN STANLEY
U.S. REAL ESTATE FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
(UNAUDITED)
IMPORTANT FUND UPDATE
On October 23, 1997, the Trustees of the Fund approved its reorganization into
the Van Kampen American Capital Real Estate Securities Fund. Upon shareholder
approval, the reorganization of the Fund is expected to take place prior to June
30, 1998. More information about the reorganization will be forwarded to you in
a proxy statement in the near future.
Your Fund and the Van Kampen American Capital Real Estate Securities Fund have
substantially similar investment objectives, policies and practices, and are
managed by the same portfolio management team. The Van Kampen American Capital
Fund's investment objective is to provide shareholders with long-term growth of
capital, with current income as a secondary objective.
<TABLE>
<S> <C>
Russell Platt Theodore R. Bigman
PORTFOLIO MANAGER PORTFOLIO MANAGER
</TABLE>
- --------------
68
<PAGE>
MORGAN STANLEY
U.S. REAL ESTATE FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ----------------------------------------------------------------------
COMMON STOCKS (93.3%)
APARTMENT (19.5%)
3,400 Amli Residential Properties Trust REIT........... $ 76
30,900 Avalon Properties, Inc. REIT..................... 956
38,600 Bay Apartment Communities, Inc. REIT............. 1,505
41,400 Essex Property Trust, Inc. REIT.................. 1,449
5,800 Irvine Apartment Communities, Inc. REIT.......... 184
34,000 Oasis Residential, Inc. REIT..................... 759
48,032 Security Capital Atlantic, Inc................... 1,015
25,400 Walden Residential Properties, Inc. REIT......... 648
45,351 Wellsford Properties, Inc........................ 709
-------
7,301
-------
HEALTHCARE (6.2%)
66,800 Nationwide Health Properties, Inc................ 1,703
16,500 Omega Healthcare Investors, Inc.................. 637
-------
2,340
-------
LAND (0.9%)
(a)45,424 Atlantic Gulf Communities Corp................... 204
(a)7,600 Catellus Development Corp........................ 152
-------
356
-------
LODGING/LEISURE (11.5%)
17,700 American General Hospitality Corp................ 473
(a)36,800 CapStar Hotel Co................................. 1,263
(a)33,100 Extended Stay of America, Inc.................... 412
(a)76,000 Host Marriott Corp............................... 1,491
(a)400 ITT Corp......................................... 33
(a)31,700 John Q. Hammons Hotels, Inc...................... 285
(a)12,600 Suburban Lodges of America....................... 168
(a)6,500 Vail Resorts, Inc................................ 169
-------
4,294
-------
MANUFACTURED HOMES (6.6%)
54,848 Chateau Communities, Inc. REIT................... 1,728
27,700 Manufactured Home Communities, Inc. REIT......... 748
-------
2,476
-------
OFFICE & INDUSTRIAL (27.6%)
INDUSTRIAL (3.8%)
59,000 Pacific Gulf Properties, Inc. REIT............... 1,401
-------
OFFICE (19.0%)
56,600 Arden Realty Group, Inc.......................... 1,740
51,166 Brandywine Realty Trust REIT..................... 1,286
50,600 Brookfield Properties Corp....................... 844
20,500 Brookfield Properties Corp. Installment
Receipts....................................... 244
39,200 CarrAmerica Realty Corp. REIT.................... 1,242
19,407 Equity Office Properties Trust REIT.............. 613
34,400 Great Lakes REIT, Inc............................ 669
21,016 Trizec Hahn Corp................................. 487
-------
7,125
-------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ----------------------------------------------------------------------
OFFICE & INDUSTRIAL (4.8%)
41,400 Bedford Property Investors, Inc. REIT............ $ 906
34,400 Prime Group Realty Trust REIT.................... 697
7,600 Reckson Associates Realty Trust REIT............. 193
-------
1,796
-------
TOTAL OFFICE & INDUSTRIAL.................................. 10,322
-------
RETAIL (17.8%)
REGIONAL MALL (10.4%)
36,200 CBL & Associates Properties, Inc. REIT........... 894
23,900 First Union Real Estate Investments REIT......... 388
156,300 Taubman Center, Inc. REIT........................ 2,032
16,900 Urban Shopping Centers, Inc. REIT................ 589
-------
3,903
-------
SHOPPING CENTER (7.4%)
43,500 Burnham Pacific Property Trust REIT.............. 666
48,200 Federal Realty Investment Trust REIT............. 1,241
17,900 Pan Pacific Retail Properties, Inc. REIT......... 383
9,500 Pennsylvania REIT................................ 233
200 Ramco-Gershenson Properties Trust REIT........... 4
16,400 Western Investment Real Estate Trust REIT........ 225
-------
2,752
-------
TOTAL RETAIL............................................... 6,655
-------
SELF STORAGE (3.2%)
8,800 Public Storage, Inc. REIT........................ 258
32,100 Shurgard Storage Centers, Inc. `A' REIT.......... 931
-------
TOTAL SELF STORAGE......................................... 1,189
-------
TOTAL COMMON STOCKS (COST $31,977)........................... 34,933
-------
PREFERRED STOCKS (0.9%)
LAND (0.4%)
(a)14,036 Atlantic Gulf Communities Corp................... 155
-------
RETAIL (0.5%)
SHOPPING CENTER (0.5%)
5,500 First Washington Realty Trust, Inc. `A'.......... 184
-------
TOTAL PREFERRED STOCKS (COST $294)........................... 339
-------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- ---------
CONVERTIBLE BONDS (0.5%)
OFFICE & INDUSTRIAL (0.5%)
$ 224 Brookfield Properties Corp. 6.00%, 2/14/07 (COST
$92)........................................... 180
-------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
WARRANTS
<C> <S> <C>
- ---------
WARRANTS (0.1%)
LAND (0.1%)
(a)9,609 Atlantic Gulf Communities Corp., Class A,
expiring 6/23/04............................... 14
(a)9,609 Atlantic Gulf Communities Corp., Class B,
expiring 6/23/04............................... 14
(a)9,609 Atlantic Gulf Communities Corp., Class C,
expiring 6/23/04............................... 14
-------
TOTAL WARRANTS (COST $0)..................................... 42
-------
</TABLE>
-----------------------
69
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
U.S. REAL ESTATE FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ----------------------------------------------------------------------
SHORT-TERM INVESTMENT (14.7%)
REPURCHASE AGREEMENT (14.7%)
$ 5,507 Chase Securities, Inc. 5.95%, dated 12/31/97, due
1/2/98 to be repurchased at $5,509,
collateralized by $4,985, U.S. Treasury Bonds,
7.875%, due 11/15/04, valued at $5,624
(COST $5,507).................................. $ 5,507
-------
TOTAL INVESTMENTS (109.5%) (COST $37,870).................... 41,001
LIABILITIES IN EXCESS OF OTHER ASSETS (-9.5%)................ (3,559)
-------
NET ASSET (100%)............................................. $37,442
-------
-------
</TABLE>
- ---------------
(a) -- Non-income producing security
REIT -- Real Estate Investment Trust
- --------------
70
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
HIGH YIELD FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW
(UNAUDITED)
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.
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1997)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Aerospace & Defense 4.6%
Broadcast--Radio & Television 13.2%
Energy 6.1%
Entertainment 5.2%
Finance 4.9%
Foreign Government Bonds 4.2%
Gaming & Lodging 4.4%
Health Care Supplies &
Services 3.1%
Retail 5.7%
Telecommunications 22.3%
Short-Term Investments 3.2%
Other 23.1%
</TABLE>
<TABLE>
<CAPTION>
TOTAL RETURNS**
-------------------------------------------------------------
AVERAGE ANNUAL
SIX MONTHS ONE YEAR SINCE INCEPTION
----------------- ----------------- -----------------
WITH WITHOUT WITH WITHOUT WITH WITHOUT
SALES SALES SALES SALES SALES SALES
CHARGE* CHARGE CHARGE* CHARGE CHARGE* CHARGE
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class A Shares 1.20% 6.24% 8.41% 13.80% 11.41% 14.71%
- ---------------------------------------------------------------------------------------
Class B Shares 1.76% 5.67% 8.76% 12.76% 11.54% 13.75%
- ---------------------------------------------------------------------------------------
Class C Shares 4.69% 5.66% 11.76% 12.76% 13.75% 13.75%
- ---------------------------------------------------------------------------------------
CS First Boston High
Yield Index N/A 6.40% N/A 12.65% N/A 13.33%
- ---------------------------------------------------------------------------------------
</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.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
<TABLE>
<CAPTION>
TOP FIVE HOLDINGS
PERCENT OF
SECURITY SECTOR NET ASSETS
- ------------------------------ ------------------- ----------
<S> <C> <C>
Time Warner, Inc., 'M', 10.25% Entertainment 5.2%
Teleport Communications 0.00%,
7/1/07 Telecommunications 3.3%
Nextel Communications 0.00%,
8/15/04 Telecommunications 3.2%
Norcal Waste Systems 'B',
13.50%, 11/15/05 Environmental 2.8%
Controls
Advanced Micro Devices 11.00%,
8/1/03 Computers 2.8%
</TABLE>
<TABLE>
<CAPTION>
TOP FIVE SECTORS
VALUE PERCENT OF
SECTOR (000) NET ASSETS
- -------------------- --------- -------------
<S> <C> <C>
Telecommunications $ 4,116 22.3%
Broadcast--Radio &
Television 2,438 13.2%
Energy 1,130 6.1%
Retail 1,036 5.7%
Entertainment 955 5.2%
</TABLE>
The investment objective of the High Yield Fund is to seek to maximize total
return by investing in a diversified portfolio of high-yield, high-risk income
securities that offer a yield above what is generally available on debt
securities in the four highest categories of the recognized rating services.
For the six months ended December 31, 1997, the Fund had a total return at net
asset value of 6.24 percent for Class A shares, as compared to a total return of
6.40 percent for the CS First Boston High Yield Index.
High-yield bond yield spreads over U.S. Treasuries continue to be at
historically narrow levels. These levels have been supported by several factors,
including the solid U.S. economy, strong demand among investors for high-yield
bonds, and favorable merger and acquisition activity affecting high-yield
companies. The telecommunications sector has been especially active in the M & A
and IPO fronts.
The third quarter was capped by the proposed acquisition of MCI Communications
and Brooks Fiber by WorldCom. These transactions would follow WorldCom's
acquisition of MFS Communications completed earlier in the year. These and
similar transactions are being consummated through stock swaps, so the combined
companies have not increased debt levels. Credit quality of the acquired
companies has improved as a result of the mergers, favorably impacting prices on
their high-yield bonds. We believe the accelerating demand for
telecommunications services will continue to favorably impact companies that
have sound business strategies and attractive fiber-optic networks. We have been
significantly weighted in the sector and increased our commitment in the second
half of the year. In particular, we feel there will be investment opportunities
in European telecommunications companies that we believe will benefit from the
deregulation underway in the long-distance business in the region.
We have continued to reduce our exposure to the cable television sector.
Following the news in the second quarter that Microsoft planned to make an
investment in Comcast, Tele-Communications Inc., the leader in the industry, has
also begun to improve credit quality by spinning off non-cable
------------------
71
<PAGE>
MORGAN STANLEY
HIGH YIELD FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
(UNAUDITED)
assets and entering into joint ventures to realize efficiencies in its cable
system. Cable company stock prices soared last year, indirectly helping bond
prices and more directly boosting returns on a TCI convertible-bond investment
we made earlier in the year.
After reducing our exposure to dollar-denominated non-U.S. issues in the second
and third quarters, we reversed course as problems in the Asian economies caused
international bonds to underperform regardless of credit profile or country of
origin. While we do have limited direct exposure to corporate bonds in Asia, the
majority of our investments have been in Latin America and Europe. In our
opinion, the fundamentals in those regions remain strong, and we view the higher
yields as an opportunity. We maintained a 20 percent limit on dollar-denominated
issuers in below-investment grade countries. Recent investments have increased
our commitment closer to that level.
The continuing strength of the U.S. economy and the attractive growth prospects
of selected companies in the domestic high-yield market lead us to be relatively
optimistic about prospects for 1998 returns. Due to the age of the economic
cycle and the still historically narrow average yield spreads, however, we
continue to emphasize somewhat higher-than-average credit quality in the
portfolio. Additionally, we intend to maintain interest-rate sensitivity at no
longer than that of the Fund's benchmark.
<TABLE>
<S> <C> <C>
Robert Angevine Thomas L. Bennett Stephen F. Esser
PORTFOLIO MANAGER PORTFOLIO MANAGER PORTFOLIO MANAGER
</TABLE>
- --------------
72
<PAGE>
MORGAN STANLEY
HIGH YIELD FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- -----------------------------------------------------------------------
CORPORATE BONDS AND NOTES (75.4%)
AEROSPACE & DEFENSE (3.6%)
$ (e)200 Jet Equipment Trust, Series 1994-C1, 11.79%,
6/15/13........................................ $ 269
(e)300 Jet Equipment Trust, Series 1995-D, 11.44%,
11/1/14........................................ 401
-------
670
-------
BANKING (0.3%)
65 Korea Development Bank 7.375%, 9/17/04........... 52
-------
BROADCAST -- RADIO & TELEVISION (13.2%)
410 Cablevision Systems Corp. 9.875%, 5/15/06........ 451
155 Comcast Corp. 1.125%, 4/15/07.................... 102
(e,n)165 Fox/Liberty Networks L.L.C. 0.00%, 8/15/07....... 106
(e)115 Fox/Liberty Networks L.L.C. 8.875%, 8/15/07...... 115
130 Lenfest Communications 8.375%, 11/1/05........... 134
210 Multicanal S.A. 10.50%, 2/1/07................... 208
350 Paramount Communications 8.25%, 8/1/22........... 353
(e)240 RBS Participacoes S.A. 11.00%, 4/1/07............ 222
60 Rogers Communications, Inc. 9.125%, 1/15/06...... 61
350 Rogers Communications, Inc. 8.875%, 7/15/07...... 350
325 TV Azteca S.A. de CV, 'B', 10.50%, 2/15/07....... 336
-------
2,438
-------
CHEMICALS (1.3%)
(e,h)225 Huntsman Corp. 9.09%, 7/1/07..................... 235
-------
COMPUTERS (2.8%)
480 Advanced Micro Devices 11.00%, 8/1/03............ 516
-------
ELECTRICAL EQUIPMENT (1.3%)
(e)325 Hyundai Semiconductor 8.625%, 5/15/07............ 239
-------
ENERGY (6.1%)
340 Nuevo Energy Co. 9.50%, 4/15/06.................. 363
325 Quezon Power Ltd. 8.86%, 6/15/17................. 278
380 Snyder Oil Corp. 8.75%, 6/15/07.................. 386
(e,n)130 Transamerican Energy 0.00%, 6/15/02.............. 103
-------
1,130
-------
ENVIRONMENTAL CONTROLS (2.8%)
(n)450 Norcal Waste Systems, 'B', 13.50%, 11/15/05...... 523
-------
FINANCE (1.6%)
75 Navistar Financial Corp., 'B', 9.00%, 6/1/02..... 77
225 Western Financial Bank 8.875%, 8/1/07............ 223
-------
300
-------
FOOD (2.0%)
105 Ameriserve Food Co. 10.125%, 7/15/07............. 109
(e)240 Fleming Cos., Inc. 10.50%, 12/1/04............... 251
-------
360
-------
FOOD SERVICE & LODGING (3.1%)
150 HMC Acquisition Properties, 'B', 9.00%,
12/15/07....................................... 157
50 HMH Properties Inc., 'B', 8.875%, 1/15/07........ 53
335 Host Marriott Travel Plaza, 'B', 9.50%,
5/15/05........................................ 355
-------
565
-------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- -----------------------------------------------------------------------
FOREST PRODUCTS & PAPER (2.8%)
$ 215 Asia Pulp & Paper Co., Ltd. 12.00%, 12/29/49..... $ 181
305 SD Warren Co., 'B', 12.00%, 12/15/04............. 341
-------
522
-------
GAMING & LODGING (4.4%)
445 Grand Casinos, Inc. 10.125%, 12/1/03............. 480
320 Station Casinos, Inc. 10.125%, 3/15/06........... 337
-------
817
-------
HEALTH CARE SUPPLIES & SERVICES (3.1%)
(e)200 Integrated Health Services 9.50%, 9/15/07........ 206
220 Tenet Healthcare Corp. 8.625%, 1/15/07........... 227
145 Vencor, Inc. 8.625%, 7/15/07..................... 145
-------
578
-------
OUTDOOR ADVERTISING (2.0%)
355 Outdoor Systems, Inc., 8.875%, 6/15/07........... 370
-------
RETAIL -- GENERAL (1.8%)
95 Kmart Corp. 7.75%, 10/1/12....................... 92
225 Kmart Funding Corp. 8.80%, 7/1/10................ 233
-------
325
-------
SOAP & TOILETRIES (0.4%)
100 Revlon Worldwide, 'B', Zero Coupon, 3/15/01...... 69
-------
TELECOMMUNICATIONS (22.0%)
260 Comcast Cellular Holdings 'B', 9.50%, 5/1/07..... 271
(n)190 Dial Call Communications, 0.00%, 12/15/05........ 174
210 Globalstar LP/Capital 11.375%, 2/15/04........... 214
(e)150 Globo Communicoes 10.50%, 12/20/06............... 144
(e)50 Hermes Euro Railtel B.V. 11.50%, 8/15/07......... 55
(e)200 Hylsa S.A. de C.V. 9.25%, 9/15/07................ 196
320 IXC Communications, Inc., 'B', 12.50%, 10/1/05... 368
(n)665 Nextel Communications 0.00%, 8/15/04............. 590
(n)400 Occidente Y Caribe 0.00%, 3/15/04................ 300
215 Philippine Long Distance Telephone 7.85%,
3/6/07......................................... 186
(e,n)250 PTC International Finance B.V. 0.00%, 7/1/07..... 161
100 Qwest Communcations International, 'B', 10.88%,
4/1/07......................................... 113
150 Rogers Cantel, Inc. 8.30%, 10/1/07............... 149
(e,n)645 TCI Satellite Entertainment 0.00%, 2/15/07....... 430
(n)745 Teleport Communications 0.00%, 7/1/07............ 609
180 Total Access Communications 2.00%, 5/31/06....... 84
-------
4,044
-------
UTILITIES (0.8%)
125 Midland Funding II, 'A', 11.75%, 7/23/05......... 147
-------
TOTAL CORPORATE BONDS AND NOTES (COST $13,618)................ 13,900
-------
ASSET BACKED SECURITIES (9.6%)
AEROSPACE & DEFENSE (1.0%)
175 Aircraft Lease Portfolio Securitization Ltd.,
Series 1996-1, Class D 12.75%, 6/15/06......... 188
-------
FINANCE (3.3%)
(e)246 Commercial Financial Services, Inc., Series
1997-5, Class A1, 7.715% 6/15/05............... 248
(e,h)316 DLJ Mortgage Acceptance Corp., Series 1996-CF2,
Class S, 1.64%, 11/12/21....................... 27
</TABLE>
-----------------------
73
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
HIGH YIELD FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- -----------------------------------------------------------------------
<C> <S> <C>
FINANCE (CONT.)
$ (e)122 First Home Mortgage Acceptance Corp.,
Series 1996-B, Class C, 7.929%, 11/1/18........ $ 110
(e)223 Long Beach Auto Trust 1997-1, Class B, 14.22%,
10/26/03....................................... 223
-------
608
-------
RETAIL (3.9%)
150 DR Securitized Lease Trust, Series 1993-K1, Class
A2, 7.43%, 8/15/18............................. 134
488 DR Securitized Lease Trust, Series 1994-K1, Class
A1, 7.60%, 8/15/07............................. 479
100 DR Securitized Lease Trust, Series 1994-K1, Class
A2, 8.375%, 8/15/15............................ 98
-------
711
-------
SUPERMARKET (1.4%)
(e)245 CA FM Lease Trust 8.50%, 7/15/17................. 258
-------
TOTAL ASSET BACKED SECURITIES (COST $1,665)................... 1,765
-------
FOREIGN GOVERNMENT BONDS (4.2%)
BONDS (4.2%)
425 Republic of Argentina 5.50%, 3/31/23............. 312
(n)90 Republic of Argentina BOCON, Series 2, PIK,
5.375%, 9/1/02................................. 105
150 Republic of Colombia 8.70%, 2/15/16.............. 146
250 United Mexican States Discount Bond, 'B', 6.25%,
12/31/19....................................... 209
-------
TOTAL FOREIGN GOVERNMENT BONDS (COST $690).................... 772
-------
</TABLE>
<TABLE>
<CAPTION>
SHARES
<C> <S> <C>
- ----------
COMMON STOCKS (0.2%)
TELECOMMUNICATIONS (0.2%)
(a)1,494 Nextel Communications Inc., 'A' (COST $24)....... 39
-------
PREFERRED STOCKS (6.5%)
BROADCASTING (1.3%)
2,150 Sinclair Capital 11.625%......................... 237
-------
ENTERTAINMENT (5.2%)
848 Time Warner, Inc., 'M', 10.25%................... 955
-------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -----------------------------------------------------------------------
TELECOMMUNICATIONS (0.0%)
(a,e)4 IXC Communications, Inc., 12.50% PIK............. $ 5
-------
TOTAL PREFERRED STOCKS (COST $1,073).......................... 1,197
-------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
WARRANTS
<C> <S> <C>
- ----------
WARRANTS (0.1%)
TELECOMMUNICATIONS (0.1%)
(a,e)260 Globalstar Telecom, expiring 2/15/04............. 28
(a,e)1,600 Occidente Y Caribe, expiring 3/15/04............. --
-------
TOTAL WARRANTS (COST $0)...................................... 28
-------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- ----------
SHORT-TERM INVESTMENT (3.2%)
REPURCHASE AGREEMENT (3.2%)
$ 598 Chase Securities Inc. 5.95%, dated 12/31/97, due
1/2/98, to be repurchased at $598
collateralized by $545 U.S. Treasury Bonds,
7.875%, due 11/15/04, valued at $615 (COST
$598).......................................... 598
-------
TOTAL INVESTMENTS (99.2%) (COST $17,668)...................... 18,299
OTHER ASSETS IN EXCESS OF LIABILITIES (0.8%).................. 140
-------
NET ASSETS (100%)............................................. $18,439
-------
-------
</TABLE>
- ---------------
(a) -- Non-income producing security
(e) -- 144A Security -- certain conditions for public sale may exist.
(h) -- Variable/floating rate security -- rate disclosed is as of December
31, 1997.
(n) -- Step Bond -- coupon rate increases in increments to maturity. Rate
disclosed is as of December 31, 1997. Maturity date disclosed is the
ultimate maturity date.
PIK -- Payment-in-Kind. Income may be paid in additional securities or cash
at the discretion of the issuer.
- --------------
74
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
INTERNATIONAL MAGNUM FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW
(UNAUDITED)
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.
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1997)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Finland 3.1%
France 8.1%
Germany 8.7%
Italy 3.6%
Japan 16.6%
Netherlands 5.5%
Spain 3.6%
Sweden 4.0%
Switzerland 6.5%
United Kingdom 15.7%
Short-Term Investments 15.7%
Other 8.9%
</TABLE>
<TABLE>
<CAPTION>
TOTAL RETURNS**
-------------------------------------------------------------
AVERAGE ANNUAL
SIX MONTHS ONE YEAR SINCE INCEPTION
----------------- ----------------- -----------------
WITH WITHOUT WITH WITHOUT WITH WITHOUT
SALES SALES SALES SALES SALES SALES
CHARGE* CHARGE CHARGE* CHARGE CHARGE* CHARGE
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class A Shares -12.85% -7.52% -0.05% 6.05% 1.50% 5.57%
- ---------------------------------------------------------------------------------------
Class B Shares -12.43% -7.87% 0.20% 5.20% 2.15% 4.77%
- ---------------------------------------------------------------------------------------
Class C Shares -8.79% -7.88% 4.20% 5.20% 4.74% 4.74%
- ---------------------------------------------------------------------------------------
MSCI EAFE Index N/A -8.48% N/A 1.78% N/A 2.16%
- ---------------------------------------------------------------------------------------
</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 and assumes
dividends are reinvested net of withholding taxes.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
<TABLE>
<CAPTION>
TOP FIVE HOLDINGS
PERCENT OF
ISSUER COUNTRY NET ASSETS
- ----------------------------- ------------- --------------
<S> <C> <C>
Telecom Italia S.p.A. Italy 1.7%
Nestle S.A. (Registered) Switzerland 1.5%
Akzo Nobel N.V. Netherlands 1.3%
Nordbanken AB Sweden 1.2%
Reckitt & Coleman plc United 1.2%
Kingdom
</TABLE>
<TABLE>
<CAPTION>
TOP FIVE SECTORS
VALUE PERCENT OF
SECTOR (000) NET ASSETS
- -------------------- --------- -------------
<S> <C> <C>
Capital Equipment $ 15,410 19.3%
Consumer Goods 15,146 19.0%
Materials 10,632 13.3%
Finance 9,865 12.3%
Services 8,455 10.6%
</TABLE>
The International Magnum Fund seeks long-term capital appreciation by investing
primarily in equity securities of non-U.S. issuers in accordance with the EAFE
country weightings determined by the subadviser. 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 Western European nations, and certain developed countries.
For the six months ended December 31, 1997, the Fund generated a total return of
- -7.52 percent for the Class A shares at net asset value, as compared to a total
return of -8.48 percent for the Morgan Stanley Capital International (MSCI) EAFE
Index.
The second half of 1997 saw most international markets registering losses in
U.S. dollar terms as the turmoil in Asia continued to rattle investors around
the globe. While the contagion had its greatest impact on the nations in the
Pacific Rim, investors in more distant markets such as the United States and
Europe began to consider the effects of cheap Asian exports, slower global
growth, and lower Asian demand on corporate earnings.
The Asian currency crisis began with the devaluation of the Thai baht on July 2,
and quickly spread throughout the region. Countries that succumbed to the Asian
crisis, including Thailand, Malaysia, the Philippines, Indonesia, and South
Korea, share common traits. Companies in those countries have largely financed
themselves with readily available bank credit, and the borrowed funds were put
to work in unproductive ways that earned a less-than-economic return on
investment. Much of this debt was borrowed in U.S. dollars to take advantage of
lower U.S. interest rates, and as these currencies have devalued, corporate debt
obligations have ballooned, pushing many firms toward bankruptcy.
Because loans were often granted based on relationships and cronyism rather than
sound credit analysis, banks within these countries also have suffered, leading
to a banking crisis as well. Although the International Monetary Fund (IMF) has
stepped in to bolster the financial system and stabilize currencies in the
region, a lack of political will to implement the IMF's austere policies in
several countries has left the region vulnerable and sent investors fleeing--at
least until there are signs of real progress.
Virtually no country in the region escaped the debacle. Although the Hong Kong
dollar's peg to the U.S. dollar has stubbornly held despite speculators'
attacks, it has come at a high cost to the Hong Kong economy. In order to defend
its currency, the Hong Kong Monetary Authority was forced to
------------------
75
<PAGE>
MORGAN STANLEY
INTERNATIONAL MAGNUM FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
(UNAUDITED)
raise interest rates to painfully high levels in October, thereby putting
pressure on interest-sensitive stocks such as real estate and banking, sectors
that comprise the bulk of the Hong Kong market. As a result, Hong Kong stocks
fell nearly 29 percent during the fourth quarter. Even markets with relatively
healthy fundamentals were not spared; for the fourth quarter, the supposed "safe
haven" Singapore market fell 20.6 percent in U.S. dollar terms (10.0 percent in
local currency) while Australia declined 12.9 percent (3.2 percent in local
currency).
The Japanese market also experienced a difficult fourth quarter as the MSCI
Japan Index fell 19.8 percent in U.S. dollar terms and 13.6 percent in local
currency terms. December was the Japanese market's sixth consecutive month in
the red. Business, consumer, and investor confidence has plummeted, contributing
to the market's downward spiral. Sentiment also worsened as a string of
high-profile bankruptcies in the financial sector, including Sanyo Securities,
Hokkaido-Takushoku Bank and Yamaichi Securities (one of Japan's "big four"
brokerage houses) caught the market and the Japanese government by surprise. The
bankruptcies were caused in part by a credit crunch ahead of stricter capital
requirements for Japanese banks beginning in 1999 (delayed from 1998). Small and
mid-size companies are being especially hard hit by the banks' reticence to
lend. The market also was disappointed by the Japanese government's inaction;
the government thus far has failed to announce a meaningful plan to shore up the
financial sector or pass a fiscal stimulus package able to jump-start the
economy. And if domestic problems were not enough, the uncertainty in Asia and
particularly in Korea--one of Japan's major competitors--helped drive Japan's
equity markets to lows set in 1995.
Relatively speaking, the brightest spot during the reporting period was Europe.
The Swiss market benefited from the $25 billion merger of UBS and Swiss Bank
Corp., and from its heavy weighting in defensive pharmaceutical stocks.
Financial stocks throughout Europe performed well during the past several months
as interest rates have fallen and restructuring has just begun within the
industry. In addition, a "flight to quality" prompted by the Asian crisis saw
investors moving towards the more liquid markets and currencies of Germany,
Switzerland, and France. Exporters and other companies with exposure to Asia
also suffered during the fourth quarter with capital goods, electronics, autos,
metals, and paper all noticeably weak. Among the weakest European markets was
Finland, which suffered as Nokia, the cellular telephone manufacturer that
comprises one-third of the Finnish index, fell more than 10 percent in December
alone. On the positive side, restructuring and merger activity continues at a
robust pace in Europe, with six mergers/acquisitions worth approximately $87
billion announced on a single day in October. Industry consolidation should
continue as European Monetary Union forces companies to reevaluate their
competitive positions and seek partners across borders.
Against this backdrop, the International Magnum Fund outperformed the benchmark
MSCI EAFE Index. Midway through the reporting period, we further reduced our
exposure to both Asia and Japan, preferring to increase cash levels given our
bearish outlook. Our regional allocation, in which we were underweight in Japan
and Asia and neutral in Europe, contributed to outperformance, while stock
selection, particularly in Europe, provided an offset. Specifically, our
underweight in European financials and our exposure to smaller-capitalization
stocks in Germany and Switzerland were negatives for the portfolio.
Small-caps suffered as investors sought safety in the liquidity of large-cap
names. Poor performance from export-oriented companies such as SGS Thompson
Microelectronics, Volkswagen, and Philips Electronics, undermined returns. An
increase in interest rates in Hong Kong also hurt the performance of our
holdings in that market's property stocks. On the positive side, stock selection
in the U.K. and in Australia was strong, with British consumer-products stocks
Tate & Lyle and Unilever contributing to good performance.
Looking ahead, we expect the beginning of 1998 to be volatile, particularly as
the Asian crisis plays itself out. The financial sectors in Asia and Japan are
in fragile condition, and the world will be watching carefully to see how these
difficulties are resolved. The wild card in Asia is whether China and Hong Kong
will allow their currencies to devalue in light of the competitive devaluations
- --------------
76
<PAGE>
MORGAN STANLEY
INTERNATIONAL MAGNUM FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
(UNAUDITED)
sweeping the region. We do not believe such a devaluation is likely in the near
term; nonetheless, the mere possibility makes us cautious about the outlook for
the Hong Kong market and the region overall, because another round of
devaluations would likely ensue. Currently, we are underweight in Asia relative
to the MSCI EAFE Index, with the majority of our Asian holdings in Australia.
In Japan, we believe the government will come under increasing pressure to
implement policies to stimulate the domestic economy and reform the banking
sector. Thus far, however, the government's anti-deficit stance has precluded
any government spending package or meaningful tax cut, and no approach has been
announced to deal with the weakest banks or the huge amount of bad debt on bank
balance sheets. Therefore, despite valuations that have become increasingly
attractive, we will remain wary and underweight the Japanese market until we
begin to see signs of a change. Because of our bearish outlook for Japan and
Hong Kong, we have been holding a higher-than-average amount of cash, a policy
that we view as a temporary and defensive measure.
Of the developed international regions, we believe Europe offers the most
investment potential for the coming year. As a result, Europe currently
represents our largest weighting, with about two-thirds of the portfolio
invested there. Restructuring, consolidation, and deregulation should continue
as EMU approaches, with companies jockeying for better strategic position in the
new pan-European world. Additionally, with the introduction of the new euro
currency scheduled for 1999, interest rates will continue to converge with rates
falling in the peripheral nations and rising in the core countries. Although we
expect growth to slow as exports of European luxury and capital goods moderate
due to lower Asian demand, the overall environment is benign for European
equities. In particular, we are finding new investment opportunities in U.K.
companies offering the attractive combination of strong business franchises with
low capital requirements and managements focused on shareholder value.
Overall, we will continue to monitor conditions around the world, seeking the
best investment opportunities available. We strive to remain agile regarding
stock selection and will put cash to work as soon as we find suitable
opportunities to do so.
Francine J. Bovich
PORTFOLIO MANAGER
------------------
77
<PAGE>
MORGAN STANLEY
INTERNATIONAL MAGNUM FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -------------------------------------------------------------------------
COMMON STOCKS (83.8%)
AUSTRALIA (1.5%)
21,000 Australia & New Zealand Banking Group Ltd........ $ 139
18,600 Commonwealth Bank of Australia................... 213
11,000 Lend Lease Corp., Ltd............................ 215
15,500 National Australia Bank Ltd...................... 216
35,640 News Corp., Ltd.................................. 197
(a)112,500 Telstra Corp., Ltd............................... 237
-------
1,217
-------
AUSTRIA (0.5%)
6,600 Boehler-Udderholm AG............................. 387
-------
BELGIUM (0.7%)
10,830 G.I.B. Holdings Ltd.............................. 526
-------
DENMARK (1.3%)
7,700 BG Bank A/S...................................... 518
7,140 Unidanmark A/S 'A' (Registered).................. 524
-------
1,042
-------
FINLAND (3.1%)
(a)7,150 Amer-Yhtymae Oyj................................. 137
9,900 Huhtamaki Oyj 'I'................................ 409
3,460 Kone Oyj 'B'..................................... 419
80,000 Merita Ltd. 'A'.................................. 437
9,500 Metra Oyj 'B'.................................... 223
66,100 Rautaruukki Oyj.................................. 534
25,750 Valmet Oyj....................................... 355
-------
2,514
-------
FRANCE (8.1%)
2,000 Alcatel Alsthom.................................. 254
1,240 Bongrain S.A..................................... 523
5,442 Cie de Saint-Gobain.............................. 773
7,070 Elf Aquitaine S.A................................ 822
(a)9,200 France Telecom S.A............................... 334
3,900 Groupe Danone RFD................................ 697
9,100 Lafarge S.A...................................... 597
14,488 Legris Industries S.A............................ 503
3,500 Scor............................................. 167
(a)6,400 SGS-Thomson Microelectronics N.V................. 396
8,000 Total S.A. 'B'................................... 871
37,150 Usinor Sacilor................................... 537
-------
6,474
-------
GERMANY (8.7%)
16,800 BASF AG.......................................... 600
13,600 Bayer AG......................................... 505
1,440 Buderus AG....................................... 646
1,420 Dyckerhoff AG.................................... 364
21,610 Gerresheimer Glas AG............................. 303
2,700 Hornbach Holding AG.............................. 186
22,600 Lufthansa AG..................................... 425
8,920 Metro AG......................................... 316
(a)940 Philipp Holzmann AG.............................. 242
2,737 Plettac AG....................................... 377
1,200 Suedzucker AG.................................... 590
11,500 Veba AG.......................................... 783
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -------------------------------------------------------------------------
1,660 Viag AG.......................................... $ 909
1,270 Volkswagen AG.................................... 709
-------
6,955
-------
HONG KONG (1.3%)
31,000 Cheung Kong Holdings Ltd......................... 203
24,000 China Light & Power Co., Ltd..................... 133
24,000 Dao Heng Bank Group Ltd.......................... 60
43,200 Hong Kong Telecommunications Ltd................. 89
6,800 HSBC Holdings plc................................ 168
23,000 Hutchison Whampoa Ltd............................ 144
38,000 Ng Fung Hong Ltd................................. 40
17,000 Shanghai Industrial Holdings Ltd................. 63
9,000 Sun Hung Kai Properties Ltd...................... 63
8,000 Swire Pacific Ltd. 'A'........................... 44
-------
1,007
-------
IRELAND (0.8%)
41,000 Bank of Ireland.................................. 630
-------
ITALY (3.6%)
22,800 Editoriale L' Expresso S.p.A..................... 110
108,900 Magneti Marelli S.p.A............................ 186
36,200 Marzotto (Gaetano) & Figli S.p.A................. 452
52,400 Mediaset S.p.A................................... 258
191,900 Sogefi S.p.A..................................... 488
(a)307,824 Telecom Italia S.p.A............................. 1,357
-------
2,851
-------
JAPAN (16.6%)
43,000 Amada Co., Ltd................................... 160
31,000 Asahi Tec Corp................................... 49
19,000 Canon, Inc....................................... 443
14,000 Dai Nippon Printing Co. Ltd...................... 263
85,000 Daicel Chemical Industries Ltd................... 111
38,000 Daifuku Co., Ltd................................. 185
45,000 Daikin Industries Ltd............................ 170
4,190 Family Mart...................................... 150
16,000 Fuji Machine Manufacturing Co.................... 386
10,000 Fuji Photo Film Ltd.............................. 383
28,000 Fujitec Co., Ltd................................. 155
44,000 Fujitsu Ltd...................................... 472
68,000 Furukawa Electric................................ 291
12,000 Hitachi Credit Corp.............................. 198
65,000 Hitachi Ltd...................................... 463
13,000 Inabata & Co..................................... 41
50,000 Kaneka Corp...................................... 226
15,000 Kurita Water Industries.......................... 153
5,700 Kyocera Ltd...................................... 259
18,000 Kyudenko Co., Ltd................................ 91
11,000 Lintec Corp...................................... 170
27,000 Matsushita Electric Industrial Co., Ltd.......... 395
80,000 Mitsubishi Chemical Corp......................... 115
21,000 Mitsubishi Estate Co., Ltd....................... 229
68,000 Mitsubishi Heavy Industries Ltd.................. 284
22,000 Mitsumi Electric Co., Ltd........................ 314
5,000 Murata Manufacturing Co., Inc.................... 126
44,000 NEC Corp......................................... 469
23,000 Nifco, Inc....................................... 150
5,000 Nintendo Corp., Ltd.............................. 491
</TABLE>
- --------------
78
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
INTERNATIONAL MAGNUM FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- -------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
JAPAN (CONT.)
<TABLE>
<C> <S> <C>
1,000 Nippon Pillar Packing............................ $ 5
56 Nippon Telegraph & Telephone Corp................ 481
66,000 Nissan Motor Co.................................. 273
17,000 Nissha Printing Co., Ltd......................... 102
34,000 Ricoh Co., Ltd................................... 422
12,000 Rinnai Corp...................................... 181
9,000 Sangetsu Co., Ltd................................ 92
15,000 Sankyo Co., Ltd.................................. 339
27,000 Sanwa Shutter.................................... 136
24,000 Sekisui Chemical Co.............................. 122
22,000 Sekisui House Ltd................................ 141
9,000 Shimamura Co., Ltd............................... 157
38,000 Shin-Etsu Polymer Co., Ltd....................... 125
6,900 Sony Corp........................................ 613
12,000 Sumitomo Marine & Fire Insurance Co.............. 63
28,000 Suzuki Motor Co., Ltd............................ 253
6,000 TDK Corp......................................... 452
7,000 Tokyo Electron Ltd............................... 224
113,000 Toshiba Corp..................................... 470
16,000 Toyota Motor Corp................................ 459
60,000 Tsubakimoto Chain Co............................. 216
14,000 Yamaha Corp...................................... 159
18,000 Yamanuchi Pharmaceutical Co...................... 386
-------
13,263
-------
MALAYSIA (0.2%)
59,000 Tenaga Nasional Bhd.............................. 126
-------
NETHERLANDS (5.5%)
17,100 ABN Amro Holding N.V............................. 333
6,000 Akzo Nobel N.V................................... 1,035
(a)3,350 Benckiser N.V. 'B'............................... 139
19,480 ING Groep N.V.................................... 820
8,500 KLM Royal Dutch Airlines N.V..................... 314
2,400 Koninklijke Bijenkorf Beheer..................... 150
28,500 Koninklijke KNP BT N.V........................... 656
9,500 Koninklijke Van Ommeren N.V...................... 319
10,400 Phillips Electronics N.V......................... 624
-------
4,390
-------
NEW ZEALAND (0.1%)
(a)56,000 AMP NZ Office Trust.............................. 33
1,840 Fletcher Challenge Forest........................ 2
-------
35
-------
NORWAY (1.1%)
48,800 Saga Petroleum ASA 'B'........................... 740
4,850 Sparebanken...................................... 173
-------
913
-------
SINGAPORE (0.9%)
(a)6,200 Creative Technology Ltd.......................... 126
(a)850 Creative Technology Ltd.......................... 19
5,000 Development Bank of Singapore Ltd. (Foreign)..... 43
5,000 Electronic Resources Ltd......................... 5
(a)42,000 NatSteel Ltd..................................... 54
29,600 Oversea-Chinese Banking Corp., Ltd. (Foreign).... 172
10,000 Parkway Holdings Ltd............................. 23
5,000 Singapore Press Holdings (Foreign)............... 63
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -------------------------------------------------------------------------
58,000 SM Summit Holdings Ltd........................... $ 12
28,000 United Overseas Bank Ltd. (Foreign).............. 156
16,000 Venture Manufacturing Ltd........................ 45
21,000 WBL Corp., Ltd................................... 19
-------
737
-------
SPAIN (3.6%)
23,900 Banco Bilbao Vizcaya S.A......................... 773
58,700 Iberdrola S.A.................................... 773
19,750 Telefonica de Espana S.A......................... 564
70,200 Uralita S.A...................................... 802
-------
2,912
-------
SWEDEN (4.0%)
20,450 Esselte AB 'B'................................... 415
(a)175,600 Nordbanken AB.................................... 993
13,300 Pharmacia & Upjohn, Inc. Depository Shares....... 489
8,100 S.K.F. AB 'B'.................................... 173
11,100 Sparbanken Sverige AB 'A'........................ 252
22,600 Spectra-Physics AB 'A'........................... 428
14,000 Svenska Handelsbanken 'A'........................ 484
-------
3,234
-------
SWITZERLAND (6.5%)
(a)240 Ascom Holding AG (Bearer)........................ 309
290 Bobst AG (Bearer)................................ 427
1,910 Forbo Holding AG (Registered).................... 781
960 Holderbank Financiere Glaris AG 'B' (Bearer)..... 783
2,080 Merkur Holding AG (Registered)................... 439
790 Nestle S.A. (Registered)......................... 1,184
93 Novartis AG (Registered)......................... 151
80 Schindler Holding AG (Participating
Certificates).................................. 83
334 Schindler Holding AG (Registered)................ 359
317 Schweizerische Industrie-Gesellschaft Holding AG
(Registered)................................... 433
366 Sulzer AG (Registered)........................... 232
-------
5,181
-------
UNITED KINGDOM (15.7%)
(a)73,522 Aggreko plc...................................... 189
3,700 Associated British Foods plc..................... 32
31,230 B.A.T. Industries plc............................ 284
65,511 BG plc........................................... 296
37,862 Bank of Scotland................................. 349
18,800 Bass plc......................................... 292
49,200 Booker plc....................................... 259
200 Bowthorpe plc.................................... 1
82,300 British Telecommunications plc................... 647
(a)55,800 Bunzl plc........................................ 217
47,150 Burmah Castrol plc............................... 821
31,300 Charter plc...................................... 385
79,022 Christian Salvesen plc........................... 127
21,175 Commercial Union plc............................. 295
14,200 Danka Business Systems plc....................... 55
49,100 Diageo plc....................................... 452
13,200 Glynwed International plc........................ 56
49,900 Great Universal Stores plc....................... 629
121,100 Imperial Tobacco Group plc....................... 762
38,898 John Mowlem & Co. plc............................ 57
76,200 Kwik Save Group plc.............................. 367
</TABLE>
-----------------------
79
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
INTERNATIONAL MAGNUM FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- -------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
UNITED KINGDOM (CONT.)
<TABLE>
<C> <S> <C>
135,000 Medeva plc....................................... $ 359
45,700 Peninsular and Oriental Steam Navigation Co...... 520
45,200 Premier Farnell plc.............................. 325
208,600 Premier Oil plc.................................. 182
72,800 Racal Electronic plc............................. 319
63,268 Reckitt & Colman plc............................. 993
86,682 Royal & Sun Alliance Insurance Group plc......... 873
119,900 Scapa Group plc.................................. 459
50,350 Tate & Lyle plc.................................. 415
57,600 Unilever plc..................................... 493
47,900 Westminster Health Care Holdings plc............. 287
166,800 WPP Group plc.................................... 743
-------
12,540
-------
TOTAL COMMON STOCKS (COST $69,415).............................. 66,934
-------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- ------------
CONVERTIBLE DEBENTURE (0.0%)
NEW ZEALAND (0.0%)
$ (a)56 AMP Office Trust 7.50%, 6/30/03 (COST $33)....... 33
-------
TOTAL FOREIGN SECURITIES (83.8%) (COST $69,448)................. 66,967
-------
SHORT-TERM INVESTMENT (15.7%)
REPURCHASE AGREEMENT (15.7%)
12,568 Chase Securities, Inc., 5.95%, dated 12/31/97,
due 1/2/98, to be repurchased at $12,572,
collateralized by $11,370 U.S. Treasury Notes,
7.875%, due 11/15/04, valued at $12,826 (COST
$12,568)....................................... 12,568
-------
TOTAL INVESTMENT IN SECURITIES (99.5%) (COST $82,016)........... 79,535
-------
FOREIGN CURRENCY (0.9%)
GPB 102 British Pound.................................... 168
DEM 727 German Mark...................................... 404
FIM 345 Finnish Marka.................................... 63
ITL 18,517 Italian Lira..................................... 11
JPY 6,019 Japanese Yen..................................... 46
CHF 5 Swiss Franc...................................... 3
-------
TOTAL FOREIGN CURRENCY (COST $705).............................. 695
-------
TOTAL INVESTMENTS (100.4%) (COST $82,721)....................... 80,230
LIABILITIES IN EXCESS OF OTHER ASSETS (-0.4%)................... (341)
-------
NET ASSETS (100%)............................................... $79,889
-------
-------
</TABLE>
- ---------------
(a) -- Non-income producing security
RFD -- Ranked for Dividend
- --------------
80
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
INTERNATIONAL MAGNUM FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
DECEMBER 31, 1997
(UNAUDITED)
- --------------------------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE INFORMATION:
Under the terms of foreign currency contracts open at December 31, 1997, the
Portfolio 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>
$ 10 $ 10 1/2/98 DEM 18 $ 10 $ --
$ 180 180 1/2/98 ESP 27,325 179 (1)
$ 20 20 1/2/98 FRF 120 20 --
$ 371 371 1/2/98 GBP 224 368 (3)
$ 205 205 1/2/98 SEK 1,589 200 (5)
JPY 6,019 46 1/5/98 $ 46 46 --
JPY 372,595 2,868 1/29/98 $ 3,090 3,090 222
JPY 189,202 1,456 1/29/98 $ 1,545 1,545 89
JPY 363,508 2,801 2/5/98 $ 3,090 3,090 289
JPY 189,009 1,456 2/5/98 $ 1,545 1,545 89
BEF 1,317 36 2/26/98 $ 37 37 1
FRF 1,819 303 2/26/98 $ 315 315 12
DEM 198 111 2/26/98 $ 115 115 4
NLG 321 159 2/26/98 $ 165 165 6
CHF 484 334 2/26/98 $ 345 345 11
$ 37 37 2/26/98 BEF 1,317 35 (2)
$ 351 351 2/26/98 CHF 484 334 (17)
$ 116 116 2/26/98 DEM 198 110 (6)
$ 319 319 2/26/98 FRF 1,819 304 (15)
$ 167 167 2/26/98 NLG 321 159 (8)
SGD 794 469 3/5/98 $ 491 491 22
$ 494 494 3/5/98 SGD 794 469 (25)
SGD 735 434 3/18/98 $ 430 430 (4)
$ 77 77 3/18/98 SGD 130 77 --
--------- --------- -----
$ 12,820 $ 13,479 $ 659
--------- --------- -----
--------- --------- -----
</TABLE>
- ---------------
BEF -- Belgian Franc
GBP -- British Pound
FRF -- French Franc
DEM -- German Mark
JPY -- Japanese Yen
NLG -- Netherlands Guilder
SGD -- Singapore Dollar
ESP -- Spanish Peseta
SEK -- Swedish Krona
CHF -- Swiss Franc
- --------------------------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
- ------------------------------------------------------------------------------ --------- -------------
<S> <C> <C>
Capital Equipment............................................................. $ 15,410 19.3%
Consumer Goods................................................................ 15,146 19.0
Materials..................................................................... 10,632 13.3
Finance....................................................................... 9,865 12.3
Services...................................................................... 8,455 10.6
Energy........................................................................ 4,721 5.9
Multi-Industry................................................................ 2,738 3.4
--------- ---
$ 66,967 83.8%
--------- ---
--------- ---
</TABLE>
-----------------------
81
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
GOVERNMENT OBLIGATIONS MONEY MARKET FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW
(UNAUDITED)
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.
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1997)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Agency Obligations 51.4%
Variable Rate
Obligations 48.1%
Other 0.5%
</TABLE>
<TABLE>
<CAPTION>
TOP FIVE HOLDINGS
PERCENT OF
SECURITY INSTRUMENT NET ASSETS
- ---------------- --------------- --------------
<S> <C> <C>
Federal Home
Loan Mortgage
Corporation
Note 5.75%,
6/22/98 Agency 43.4%
Obligation
Federal National
Mortgage
Association
Discount Note
5.42%, 1/15/98 Agency 13.2%
Obligation
Federal National
Mortgage
Association
8.15%, 5/11/98 Agency 10.1%
Obligation
Federal National
Mortgage
Association
Discount Note
5.47%, 1/21/98 Agency 9.4%
Obligation
Federal National
Mortgage
Association
Discount Note
5.53%, 2/25/98 Agency 9.4%
Obligation
</TABLE>
The Government Obligations Money Market Fund's investment objective is to
provide a high level of current income consistent with maintaining liquidity and
stability of principal. It seeks to achieve this objective by investing in
short-term U.S. Treasury bills, notes, and other obligations issued or
guaranteed by the U.S. government, its agencies or instrumentalities, and
entering into repurchase agreements relating to such obligations.
The annualized seven-day yield and seven-day effective yield (which assumes all
dividends reinvested) for the Government Obligations Money Market Fund as of
December 31, 1997 were 5.01 percent and 5.14 percent, respectively. As with all
money market portfolios, the seven-day yields are not necessarily indicative of
future performance.
During the second half of 1997, the market was obsessed with the relative
strength of the U.S. economy. Investors speculated about how long the U.S. could
continue functioning at full employment without triggering inflation and when
the Federal Reserve might raise interest rates. One-year Treasury bills declined
as much as 20 basis points in the quarter ended September 30, and the money
market yield curve flattened dramatically. By the end of the quarter, the spread
between three-month and one-year Treasury bills compressed to only 34 basis
points.
The market followed a pattern of drifting in either direction within a
relatively tight range in response to conflicting economic data and each
approaching meeting of the Federal Open Market Committee (FOMC). This relative
"calm" in the market came to an abrupt end, however, on October 27 as Hong Kong
and most foreign stock markets tumbled dramatically in response to a region-wide
economic crisis, and U.S. stocks followed suit. As equity markets plummeted,
investors concluded that the Federal Reserve would shift its focus away from
U.S. economic fundamentals and turn its attention instead to world markets. In
light of these developments, the U.S. bond market rallied amid a global "flight
to quality."
The November employment data, released in early December, indicated that
employment remained very strong. But the inflation statistics that followed were
also positive, indicating that inflation remained under control. At this point,
the market began to rethink the Federal Reserve's need to act. The consensus
view emerged that if the Asian crisis had not occurred, the December FOMC
meeting would have resulted in a 25 basis point tightening. Instead, the Fed
left rates unchanged. During this period, market levels remained strong, and the
yield curve continued to flatten. By the end of December, the spread between
three-month and one-year Treasury bills was approximately 15 basis points.
- --------------
82
<PAGE>
MORGAN STANLEY
GOVERNMENT OBLIGATIONS MONEY MARKET FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
(UNAUDITED)
With no protection against possible Federal Reserve tightening built into the
front end of the yield curve, we found little value in the market, particularly
in the one-year area of the money market curve. Finally, anchored by a 5.5
percent funds rate, the entire yield curve has flattened, offering less
opportunity to enhance returns by rolling down the curve.
In managing the Government Obligations Money Market Fund, we work to maximize
the yield but also are conscious of changes in the relative asset size. Within
this context, we sought to maintain a neutral maturity structure that was in
keeping with our market outlook. The portfolio ended the reporting period with a
weighted average maturity of 61 days. The majority of the portfolio has been
invested in a combination of U.S. agency floating rate notes and discount notes.
We are pleased to report that the Fund continues to meet its goals of providing
as high a level of interest income as is consistent with maintaining liquidity
and stability of principal.
<TABLE>
<S> <C>
Abigail Jones Feder Ellen D. Harvey
PORTFOLIO MANAGER PORTFOLIO MANAGER
Christian G. Roth Scott F. Richard
PORTFOLIO MANAGER PORTFOLIO MANAGER
Daniel M. Nilanel
PORTFOLIO MANAGER
</TABLE>
------------------
83
<PAGE>
MORGAN STANLEY
GOVERNMENT OBLIGATIONS MONEY MARKET FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
<C> <S> <C>
- -------------------------------------------------------------------------
AGENCY OBLIGATIONS (51.4%)
FEDERAL FARM CREDIT BANK (5.7%)
$ 3,000 5.65%, 10/1/98................................... $ 2,997
---------
FEDERAL HOME LOAN BANK (3.8%)
2,000 5.80%, 12/18/98.................................. 2,000
---------
FEDERAL NATIONAL MORTGAGE ASSOCIATION (10.0%)
5,280 8.15%, 5/11/98................................... 5,325
---------
FEDERAL NATIONAL MORTGAGE ASSOCIATION
DISCOUNT NOTES (31.9%)
7,000 5.42%, 1/15/98................................... 6,986
5,000 5.47%, 1/21/98................................... 4,986
5,000 5.53%, 2/25/98................................... 4,958
---------
16,930
---------
TOTAL AGENCY OBLIGATIONS (COST $27,252)....................... 27,252
---------
VARIABLE RATE OBLIGATIONS (48.1%)
FEDERAL HOME LOAN MORTGAGE CORPORATION (48.1%)
(h) 23,000 5.75%, 6/22/98................................... 22,991
(h) 2,500 5.74%, 8/18/98................................... 2,499
---------
TOTAL VARIABLE RATE OBLIGATIONS (COST $25,490)................ 25,490
---------
TOTAL INVESTMENTS (99.5%) (COST $52,742)...................... 52,742
OTHER ASSETS IN EXCESS OF LIABILITIES (0.5%).................. 255
---------
NET ASSETS (100%)............................................. $ 52,997
---------
---------
</TABLE>
- ---------------
(h) -- Variable or floating rate security -- rate disclosed is as of December
31, 1997.
- --------------
84
The accompanying notes are an integral part of the financial statements.
<PAGE>
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.
MORGAN STANLEY
MONEY MARKET FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW
(UNAUDITED)
COMPOSITION OF NET ASSETS
(AT DECEMBER 31, 1997)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Asset Backed Commercial Paper 7.4%
Certificates of Deposit 11.6%
Commercial Paper 40.7%
Corporate Floating Rate Notes 2.5%
U.S. Government & Agency Obligations 27.3%
Other 10.5%
</TABLE>
<TABLE>
<CAPTION>
TOP FIVE HOLDINGS
PERCENT OF NET
SECURITY INSTRUMENT ASSETS
- ------------------- ---------------- --------------
<S> <C> <C>
Federal National
Mortgage
Association U.S. Government
Discount Note & Agency
5.70%, 1/5/98 Obligations 4.1%
Federal Home Loan
Mortgage
Corporation U.S. Government
Discount Note & Agency
5.70%, 1/9/98 Obligations 4.1%
Federal National
Mortgage
Association U.S. Government
Discount Note & Agency
5.70%, 1/16/98 Obligations 4.1%
Federal Home Loan
Mortgage
Corporation U.S. Government
Discount Note & Agency
5.66%, 2/6/98 Obligations 4.1%
Federal Home Loan
Mortgage
Corporation U.S. Government
Discount Note & Agency
5.66%, 2/12/98 Obligations 4.1%
</TABLE>
The Money Market Fund's investment objective is to provide as high a level of
current interest income as is consistent with maintaining liquidity and
stability of principal. Obligations held by the Money Market Fund will have
remaining maturities of 397 days or less. In pursuing its investment objective,
the Money Market Fund invests in a broad range of U.S. dollar-denominated
instruments, such as government, bank, and commercial obligations.
The annualized seven-day yield and seven-day effective yield (which assumes all
dividends reinvested) for the Money Market Fund as of December 31, 1997 were
5.06 percent and 5.19 percent, respectively. As with all money market
portfolios, the seven-day yields are not necessarily indicative of future
performance.
During the second half of 1997, the market was obsessed with the relative
strength of the U.S. economy. Investors speculated about how long the U.S. could
continue functioning at full employment without triggering inflation and when
the Federal Reserve might raise interest rates. One-year Treasury bills declined
as much as 20 basis points in the quarter ended September 30, and the money
market yield curve flattened dramatically. By the end of the quarter, the spread
between three-month and one-year Treasury bills compressed to only 34 basis
points.
The market followed a pattern of drifting in either direction within a
relatively tight range in response to conflicting economic data and each
approaching meeting of the Federal Open Market Committee (FOMC). This relative
"calm" in the market came to an abrupt end, however, on October 27 as Hong Kong
and most foreign stock markets tumbled dramatically in response to a region-wide
economic crisis, and U.S. stocks followed suit. As equity markets plummeted,
investors concluded that the Federal Reserve would shift its focus away from
U.S. economic fundamentals and turn its attention instead to world markets. In
light of these developments, the U.S. bond market rallied amid a global "flight
to quality."
The November employment data, released in early December, indicated that
employment remained very strong. But the inflation statistics that followed were
also positive, indicating that inflation remained under control. At this point,
the market began to rethink the Federal Reserve's need to act. The consensus
view emerged that if the Asian crisis had not occurred, the December FOMC
meeting would have resulted in a 25 basis point tightening. Instead, the Fed
left rates unchanged. During this period, market levels remained strong, and the
yield curve continued to flatten. By the end of December, the spread between
three-month and one-year Treasury bills was approximately 15 basis points.
------------------
85
<PAGE>
MORGAN STANLEY
MONEY MARKET FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
(UNAUDITED)
With no protection against possible Federal Reserve tightening built into the
front end of the yield curve, we found little value in the market, particularly
in the one-year area of the money market curve. Finally, anchored by a 5.5
percent funds rate, the entire yield curve has flattened, offering less
opportunity to enhance returns by rolling down the curve.
The weighted average maturity for the Fund remained neutral during the past six
months. As of December 31, the weighted average maturity was 49 days. Throughout
the reporting period, we invested the majority of the portfolio in high-quality
commercial paper, certificates of deposit, and floating-rate notes to maximize
the portfolio's yield. As opportunity presented itself, we selectively extended
a portion of the portfolio to lock in yield.
We are pleased to report that the Fund continues to meet its goal of providing
as high a level of interest income as is consistent with maintaining liquidity
and stability of principal, and that the Fund holds only high-quality securities
with more than 90 percent invested in securities rated A1+/P1 according to
Moody's or Standard & Poor's.
<TABLE>
<S> <C>
Abigail Jones Feder Ellen D. Harvey
PORTFOLIO MANAGER PORTFOLIO MANAGER
Christian G. Roth Scott F. Richard
PORTFOLIO MANAGER PORTFOLIO MANAGER
Daniel M. Nilanel
PORTFOLIO MANAGER
</TABLE>
- --------------
86
<PAGE>
MORGAN STANLEY
MONEY MARKET FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------------------
U.S. GOVERNMENT & AGENCY OBLIGATIONS (27.3%)
FEDERAL HOME LOAN MORTGAGE CORPORATION
DISCOUNT NOTES (12.4%)
$ 15,000 5.70%, 1/9/98.................................... $ 14,983
15,000 5.66%, 2/6/98.................................... 14,918
15,000 5.66%, 2/12/98................................... 14,903
---------
44,804
---------
FEDERAL NATIONAL MORTGAGE ASSOCIATION
DISCOUNT NOTES (14.9%)
15,000 5.70%, 1/5/98.................................... 14,993
15,000 5.70%, 1/16/98................................... 14,967
9,370 5.71%, 1/26/98................................... 9,334
15,000 5.62%, 3/12/98................................... 14,839
---------
54,133
---------
TOTAL U.S. GOVERNMENT & AGENCY OBLIGATIONS (COST $98,937).... 98,937
---------
CERTIFICATES OF DEPOSIT (11.6%)
BANKS (11.6%)
2,000 Australia & New Zealand Bank, New York 5.68%,
2/27/98........................................ 2,000
3,000 Bank Montreal, Chicago (Yankee) 5.80%, 11/6/98... 2,999
3,000 Barclays Bank 5.94%, 6/19/98..................... 3,001
2,000 Canadian Imperial Bank, New York 5.82%, 2/9/98... 2,000
3,000 Canadian Imperial Bank (Yankee) 5.94%,
10/23/98....................................... 3,002
3,000 Chase Manhattan Corp. 5.65%, 4/6/98.............. 3,000
5,000 Credit Suisse, First Boston 6.25%, 4/8/98........ 5,000
5,000 Deutsche Bank (Yankee) 5.85%, 3/13/98............ 5,000
2,000 National Westminster Bank 5.66%, 3/5/98.......... 1,999
5,000 Rabobank Nederland (Yankee) 6.20%, 4/10/98....... 4,999
3,000 Societe Generale Bank, New York 5.85%,
12/17/98....................................... 2,997
4,000 Swiss Bank, New York 5.83%, 12/16/98............. 3,998
2,000 Westdeutsche Landesbank 5.66%, 3/2/98............ 2,000
---------
TOTAL CERTIFICATES OF DEPOSIT (COST $41,995)................. 41,995
---------
ASSET BACKED COMMERCIAL PAPER (7.4%)
SINGLE PURPOSE CORPORATE (7.4%)
3,000 Asset Securitization Corp. 5.60%, 2/20/98........ 2,977
2,000 Asset Securitization Corp. 5.72%, 3/24/98........ 1,974
3,000 Citation Capital Corp. 5.75%, 1/28/98............ 2,989
3,000 Delaware Funding 5.74%, 1/16/98.................. 2,993
2,000 Delaware Funding 5.78%, 2/12/98.................. 1,987
5,000 Eiger Capital Corp. 5.85%, 1/16/98............... 4,989
2,129 Greenwich Funding 5.85%, 1/8/98.................. 2,127
7,000 Greenwich Funding 5.92%, 1/9/98.................. 6,992
---------
TOTAL ASSET BACKED COMMERCIAL PAPER (COST $27,028)........... 27,028
---------
COMMERCIAL PAPER (40.7%)
AUTOMOBILES (4.4%)
2,000 Associates Corp. 5.75%, 2/8/98................... 1,989
3,000 Associates Corp. 5.69%, 2/17/98.................. 2,978
3,000 Daimler-Benz North America Corp. 5.50%, 2/10/98.. 2,982
2,000 Daimler-Benz North America Corp. 5.75%, 2/18/98.. 1,987
3,000 Toyota Motor Credit Corp. 5.65%, 1/30/98......... 2,987
3,000 Toyota Motor Credit Corp. 5.76%, 3/8/98.......... 2,970
---------
15,893
---------
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------------------
BANKS (13.6%)
$ 2,000 Bank of America 5.80%, 1/20/98................... $ 1,994
3,000 Bank of America 5.70%, 1/29/98................... 2,987
2,000 Barclays Bank U.S. Funding Corp. 5.75%, 2/2/98... 1,990
5,000 Bayerische Landesbank 5.69%, 3/11/98............. 4,946
5,000 Bayerische Veriensbank 5.82%, 1/8/98............. 4,995
3,000 Commerzbank Finance 5.70%, 1/20/98............... 2,991
5,000 Dresdner U.S. Finance 5.75%, 2/3/98.............. 4,974
2,000 First Chicago Finance Corp. 5.77%, 2/9/98........ 1,988
3,000 First Chicago Finance Corp. 5.56%, 5/8/98........ 2,943
5,000 International Nederlander Finance 5.72%, 3/5/98.. 4,951
4,000 J.P. Morgan & Co. 5.64%, 6/18/98................. 3,895
3,000 Royal Bank of Scotland 5.59%, 1/27/98............ 2,988
2,700 Sun Trust Bank 5.88%, 1/16/98.................... 2,694
5,000 UBS Finance, Inc. 5.95%, 1/12/98................. 4,992
---------
49,328
---------
CONSUMER GOODS (3.6%)
5,000 HJ Heinz Co. 5.78%, 1/21/98...................... 4,985
5,000 Pfizer Inc. 5.92%, 1/22/98....................... 4,984
3,000 Warner Lambert Co. 5.49%, 3/17/98................ 2,966
---------
12,935
---------
ELECTRONICS (3.0%)
5,000 Electronic Data Systems 5.75%, 2/13/98........... 4,966
3,000 Panasonic Finance 5.55%, 3/4/98.................. 2,972
3,000 Siemens Capital Corp. 5.57%, 2/19/98............. 2,978
---------
10,916
---------
FINANCE (5.3%)
3,000 American Express Credit Corp. 5.49%, 2/5/98...... 2,984
5,000 CIT Group Holdings 6.00%, 1/20/98................ 4,985
2,000 Commercial Credit Corp. 5.75%, 2/2/98............ 1,990
3,000 Commercial Credit Corp. 5.55%, 2/9/98............ 2,982
3,300 General Capital Corp 5.80%, 1/22/98.............. 3,289
3,000 Transamerica Financial Corp. 5.65%, 1/23/98...... 2,990
---------
19,220
---------
INSURANCE (3.5%)
2,351 General Reinsurance Corp 5.72%, 4/23/98.......... 2,310
2,000 Prudential Funding 5.72%, 4/2/98................. 1,971
3,000 Metlife Funding Inc. 5.71%, 3/23/98.............. 2,962
3,000 USAA Capital Corp. 5.66%, 1/23/98................ 2,990
2,500 USAA Capital Corp. 5.57%, 2/6/98................. 2,486
---------
12,719
---------
INVESTMENT BANKING (1.1%)
4,000 Merrill Lynch 5.75%, 2/13/98..................... 3,973
---------
TELECOMMUNICATONS (4.9%)
6,000 AT&T Corp. 6.00%, 1/8/98......................... 4,995
5,000 AT&T Capital Corp. 5.73%, 3/9/98................. 4,948
4,000 Bell South Telecommunications 5.70%, 2/11/98..... 3,975
3,950 Southern New England Telephone 5.90%, 1/20/98.... 3,938
---------
17,856
---------
UTILITIES (1.3%)
5,000 National Rural Utilities 5.68%, 4/28/98.......... 4,908
---------
TOTAL COMMERCIAL PAPER (COST $147,748)....................... 147,748
---------
</TABLE>
-----------------------
87
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
MONEY MARKET FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
- ------------------------------------------------------------------------
<C> <S> <C>
CORPORATE FLOATING RATE NOTES (2.5%)
BANKS (1.7%)
$(h)3,000 Banc One, Dayton 6.22%, 8/21/98.................. $ 3,000
(h)3,000 Morgan Guaranty Trust, New York 5.63%,
3/25/98........................................ 3,000
---------
6,000
---------
ELECTRONICS (0.8%)
(h)3,000 IBM Credit Corp. 5.66%, 11/20/98................. 3,000
---------
TOTAL CORPORATE FLOATING RATE NOTES (COST $9,000)............ 9,000
---------
REPURCHASE AGREEMENT (10.5%)
37,961 J. P. Morgan Securities, Inc., 6.20%, dated
12/31/97, due 1/2/98, to be repurchased at
$37,974, collateralized by $38,148 U.S.
Treasury Notes 6.75%, due 6/30/99 valued at
$38,770 (COST $37,961)......................... 37,961
---------
TOTAL INVESTMENTS (100.0%) (COST $362,669)................... 362,669
OTHER ASSETS IN EXCESS OF LIABILITIES (0.0%)................. 144
---------
NET ASSETS (100%)............................................ $362,813
---------
---------
</TABLE>
- ---------------
(h) -- Variable/floating rate security -- rate disclosed is as of December
31, 1997.
- --------------
88
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
DECEMBER 31, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
GLOBAL
EQUITY GLOBAL WORLDWIDE
ALLO- GLOBAL FIXED ASIAN AMERICAN HIGH LATIN
CATION EQUITY INCOME GROWTH VALUE VALUE INCOME AMERICAN
FUND FUND FUND FUND FUND FUND FUND FUND
(000) (000) (000) (000) (000) (000) (000) (000)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
ASSETS:
Investments in Securities, at Value* (Note 1)
-- See accompanying portfolios $ 208,401 $600,108 $ 9,284 $124,497 $289,405 $211,990 $ 239,548 $120,413
Foreign Currency 224 1,656 6 2,197 -- -- -- 916
Cash -- -- 6 -- -- -- 783 26
Margin Deposit on Futures 2,728 -- -- -- -- -- -- --
Receivable for:
Investments Sold -- -- -- 5,028 6,740 673 2,593 772
Daily Variation on Futures Contracts 557 -- -- -- -- -- -- --
Securities Sold Short -- -- -- -- -- -- -- --
Fund Shares Sold 851 2,078 1 938 4,852 2,514 1,283 1,888
Dividends 570 677 -- 54 208 243 5 138
Interest 6 8 180 -- 4 11 5,108 1
Security Lending Income 23 -- -- -- -- -- -- --
Foreign Withholding Tax Reclaim 59 20 2 27 -- -- -- --
Net Unrealized Gain on Foreign Currency
Exchange Contracts 867 -- 22 484 -- -- -- --
Deferred Organizational Costs -- 1 -- 2 3 38 5 5
Due from Broker -- -- -- -- -- -- -- --
Receivable from Investment Adviser -- -- 44 -- -- -- -- --
Securities, at Value, Held as Collateral for
Securities Loaned 16,567 -- -- -- -- -- -- --
Other 8 -- -- 22 22 1 -- 259
---------- -------- ------- -------- -------- -------- --------- --------
Total Assets 230,861 604,548 9,545 133,249 301,234 215,470 249,325 124,418
---------- -------- ------- -------- -------- -------- --------- --------
LIABILITIES:
Payable for:
Investments Purchased 50 33,811 -- 111 10,378 4,274 6,862 3,068
Securities Sold Short, at Value (Proceeds --
$605) -- -- -- -- -- -- -- --
Fund Shares Redeemed 373 478 4 2,621 2,250 460 378 1,801
Bank Overdraft -- 7 -- 385 763 10 -- --
Dividends Declared 38 -- 7 1 -- -- 5,410 --
Investment Advisory Fees 93 484 -- 120 123 43 150 60
Administrative Fees 47 121 2 31 57 44 50 32
Custody Fees 98 25 10 149 31 64 44 95
Professional Fees 9 17 12 14 5 12 12 10
Distribution Fees 252 848 8 159 298 193 289 106
Shareholder Reporting Expenses 26 18 5 57 23 19 9 16
Transfer Agent Fees 9 24 2 14 11 10 9 8
Directors' Fees and Expenses 6 2 1 16 2 1 6 2
Securities Lending Expense 16 -- -- -- -- -- -- --
Filing and Registration Fees 8 36 -- 1 44 60 12 1
Deferred Country Tax -- -- -- 39 -- -- -- 5
Collateral on Securities Loaned 16,567 -- -- -- -- -- -- --
Net Unrealized Loss on Foreign Currency
Exchange Contracts -- 39 -- -- -- -- -- --
Net Unrealized Loss on Swap Agreement -- -- -- -- -- -- -- --
Other 1 -- 1 4 -- 1 6 1
---------- -------- ------- -------- -------- -------- --------- --------
Total Liabilities 17,593 35,910 52 3,722 13,985 5,191 13,237 5,205
---------- -------- ------- -------- -------- -------- --------- --------
NET ASSETS $ 213,268 $568,638 $ 9,493 $129,527 $287,249 $210,279 $ 236,088 $119,213
---------- -------- ------- -------- -------- -------- --------- --------
---------- -------- ------- -------- -------- -------- --------- --------
</TABLE>
- ---------------
* Includes repurchase agreements aggregating $32,681,000, $25,400,000,
$649,000, $22,945,000, $31,553,000, $12,585,000, $3,861,000,
$3,601,000 $5,507,000, $598,000, $12,568,000 and $37,961,000 for
Global Equity Allocation Fund, Global Equity Fund, Global Fixed Income
Fund, American Value Fund, Value Fund, Worldwide High Income Fund,
Latin American Fund, Aggressive Equity Fund, U.S. Real Estate Fund,
High Yield Fund, International Magnum Fund, and Money Market Fund,
respectively.
-----------------------
89
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
DECEMBER 31, 1997 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
GOVERNMENT
U.S. INTER- OBLIGATIONS
EMERGING AGGRESSIVE REAL HIGH NATIONAL MONEY MONEY
MARKETS EQUITY ESTATE YIELD MAGNUM MARKET MARKET
FUND FUND FUND FUND FUND FUND FUND
(000) (000) (000) (000) (000) (000) (000)
<S> <C> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------
ASSETS:
Investments in Securities, at Value* (Note 1)
-- See accompanying portfolios $159,328 $ 103,714 $41,001 $18,299 $79,535 $ 52,742 $362,669
Foreign Currency 9,925 -- -- -- 695 -- --
Cash -- -- 122 1 -- 259 --
Margin Deposit on Futures -- -- -- -- -- -- --
Receivable for:
Investments Sold 6,120 4,766 98 -- 48 -- --
Daily Variation on Futures Contracts -- -- -- -- -- -- --
Securities Sold Short -- 605 -- -- -- -- --
Fund Shares Sold 10,355 2,387 245 243 1,223 -- --
Dividends 429 50 247 -- 173 -- --
Interest 2 1 5 299 2 161 1,133
Security Lending Income -- -- -- -- -- -- --
Foreign Withholding Tax Reclaim -- -- -- -- 49 -- --
Net Unrealized Gain on Foreign Currency
Exchange Contracts -- -- -- -- 659 -- --
Deferred Organizational Costs 4 31 14 16 26 -- --
Due from Broker -- 303 -- -- -- -- --
Receivable from Investment Adviser -- -- 17 32 12 1 --
Securities, at Value, Held as Collateral for
Securities Loaned -- -- -- -- -- -- --
Other 11 39 -- -- 4 -- --
-------- ---------- ------- ------- ------ ---------- --------
Total Assets 186,174 111,896 41,749 18,890 82,426 53,163 363,802
-------- ---------- ------- ------- ------ ---------- --------
LIABILITIES:
Payable for:
Investments Purchased 420 4,542 417 102 1,976 -- --
Securities Sold Short, at Value (Proceeds --
$605) -- 591 -- -- -- -- --
Fund Shares Redeemed 3,239 75 3,785 6 318 -- --
Bank Overdraft 3,095 211 -- -- 45 -- 25
Dividends Declared 36 -- -- 289 -- 78 573
Investment Advisory Fees 62 4 -- -- -- -- 116
Administrative Fees 45 20 8 4 18 10 27
Custody Fees 238 33 44 15 50 8 18
Professional Fees 17 10 8 5 14 10 9
Distribution Fees 205 118 34 25 86 52 169
Shareholder Reporting Expenses 27 14 5 4 11 4 --
Transfer Agent Fees 9 7 2 1 5 -- 1
Directors' Fees and Expenses 6 1 1 -- 1 4 7
Securities Lending Expense -- -- -- -- -- -- --
Filing and Registration Fees 8 5 2 -- 12 -- 44
Deferred Country Tax 22 -- -- -- -- -- --
Collateral on Securities Loaned -- -- -- -- -- -- --
Net Unrealized Loss on Foreign Currency
Exchange Contracts 5 -- -- -- -- -- --
Net Unrealized Loss on Swap Agreements 581 -- -- -- -- -- --
Other 16 -- 1 -- 1 -- --
-------- ---------- ------- ------- ------ ---------- --------
Total Liabilities 8,031 5,631 4,307 451 2,537 166 989
-------- ---------- ------- ------- ------ ---------- --------
NET ASSETS $178,143 $ 106,265 $37,442 $18,439 $79,889 $ 52,997 $362,813
-------- ---------- ------- ------- ------ ---------- --------
-------- ---------- ------- ------- ------ ---------- --------
</TABLE>
- ------------------
90
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
DECEMBER 31, 1997 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
GLOBAL
EQUITY GLOBAL WORLDWIDE
ALLO- GLOBAL FIXED ASIAN AMERICAN HIGH LATIN
CATION EQUITY INCOME GROWTH VALUE VALUE INCOME AMERICAN
FUND FUND FUND FUND FUND FUND FUND FUND
(000) (000) (000) (000) (000) (000) (000) (000)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Capital Stock at Par $ 15 $ 57 $ 1 $ 16 $ 15 $ 21 $ 18 $ 9
Paid in Capital in Excess of Par 199,344 572,646 9,648 253,790 266,632 212,383 235,378 125,412
Undistributed (Distributions in Excess of) Net
Investment Income (915) 18 (75) (2,683) (638) (7) 747 (804)
Accumulated (Distributions in Excess of) Net
Realized Gain (Loss) (1,395) 640 (74) (87,866) 6,140 (576) 528 (7,086)
Unrealized Appreciation (Depreciation) on
Investments and Foreign Currency
Translations** 16,219 (4,723) (7) (33,730) 15,100 (1,542) (583) 1,682
---------- -------- ------- -------- -------- -------- --------- --------
NET ASSETS $ 213,268 $568,638 $ 9,493 $129,527 $287,249 $210,279 $ 236,088 $119,213
---------- -------- ------- -------- -------- -------- --------- --------
---------- -------- ------- -------- -------- -------- --------- --------
CLASS A SHARES:
Net Assets $ 74,593 $ 55,372 $ 5,851 $ 63,990 $106,826 $102,701 $ 82,139 $ 66,929
Shares Issued and Outstanding ($.001 par value)
(Authorized 2,625,000,000) 5,202 5,590 589 7,708 5,502 10,166 6,323 4,964
Net Asset Value and Redemption Price Per Share $ 14.34 $ 9.91 $ 9.93 $ 8.30 $ 19.41 $ 10.10 $ 12.99 $ 13.48
---------- -------- ------- -------- -------- -------- --------- --------
---------- -------- ------- -------- -------- -------- --------- --------
Maximum Sales Charge 5.75% 5.75% 4.75% 5.75% 5.75% 5.75% 4.75% 5.75%
Maximum Offering Price Per Share
(Net Asset Value Per Share X 100 / (100 -
maximum sales charge)) $ 15.21 $ 10.51 $ 10.43 $ 8.81 $ 20.59 $ 10.72 $ 13.64 $ 14.30
---------- -------- ------- -------- -------- -------- --------- --------
---------- -------- ------- -------- -------- -------- --------- --------
CLASS B SHARES:
Net Assets $ 58,639 $467,465 $ 1,539 $ 27,558 $107,301 $ 88,112 $ 103,847 $ 29,554
Shares Issued and Outstanding ($.001 par value)
(Authorized 2,625,000,000) 4,209 47,188 156 3,427 5,544 8,733 8,036 2,263
Net Asset Value and Offering Price Per Share*** $ 13.93 $ 9.91 $ 9.88 $ 8.04 $ 19.36 $ 10.09 $ 12.92 $ 13.06
---------- -------- ------- -------- -------- -------- --------- --------
---------- -------- ------- -------- -------- -------- --------- --------
CLASS C SHARES:
Net Assets $ 80,036 $ 45,801 $ 2,103 $ 37,979 $ 73,122 $ 19,466 $ 50,102 $ 22,730
Shares Issued and Outstanding ($.001 par value)
(Authorized 2,625,000,000) 5,688 4,623 213 4,732 3,777 1,931 3,875 1,739
Net Asset Value and Offering Price Per Share*** $ 14.07 $ 9.91 $ 9.87 $ 8.03 $ 19.36 $ 10.08 $ 12.93 $ 13.07
---------- -------- ------- -------- -------- -------- --------- --------
---------- -------- ------- -------- -------- -------- --------- --------
Investments at Cost, Including Foreign Currency $ 193,680 $606,694 $ 9,316 $160,851 $274,305 $213,532 $ 240,047 $119,640
---------- -------- ------- -------- -------- -------- --------- --------
---------- -------- ------- -------- -------- -------- --------- --------
</TABLE>
- ---------------
** Net of accrual for country tax of $38,000 for Asian Growth Fund,
$5,000 for Latin American Fund and $125,000 for Emerging Markets Fund.
*** Redemption price may be subject to a contingent deferred sales charge.
-----------------------
91
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
DECEMBER 31, 1997 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
GOVERNMENT
U.S. INTER- OBLIGATIONS
EMERGING AGGRESSIVE REAL HIGH NATIONAL MONEY MONEY
MARKETS EQUITY ESTATE YIELD MAGNUM MARKET MARKET
FUND FUND FUND FUND FUND FUND FUND
(000) (000) (000) (000) (000) (000) (000)
<S> <C> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Capital Stock at Par $ 19 $ 6 $ 2 $ 15 $ 6 $ 59 $ 363
Paid in Capital in Excess of Par 218,344 97,368 33,397 17,598 82,264 53,037 362,611
Undistributed (Distributions in Excess of) Net
Investment Income (1,380) (390) 12 41 (97) (7) (68)
Accumulated (Distributions in Excess of) Net
Realized Gain (Loss) (7,671) 3,627 338 154 (478) (92) (93)
Unrealized Appreciation (Depreciation) on
Investments and Foreign Currency
Translations** (31,169) 5,654 3,693 631 (1,806) -- --
-------- ---------- ------- ------- ------ ---------- --------
NET ASSETS $178,143 $ 106,265 $37,442 $18,439 $79,889 $ 52,997 $362,813
-------- ---------- ------- ------- ------ ---------- --------
-------- ---------- ------- ------- ------ ---------- --------
CLASS A SHARES:
Net Assets $ 95,359 $ 35,689 $20,768 $ 5,644 $36,918 $ 52,997 $362,813
Shares Issued and Outstanding ($.001 par value)
(Authorized 2,625,000,000) 10,106 2,003 1,237 448 2,915 53,096 362,974
Net Asset Value and Redemption Price Per Share $ 9.44 $ 17.82 $ 16.79 $ 12.59 $12.67 $ 1.00 $ 1.00
-------- ---------- ------- ------- ------ ---------- --------
-------- ---------- ------- ------- ------ ---------- --------
Maximum Sales Charge 5.75% 5.75% 5.75% 4.75% 5.75% -- --
Maximum Offering Price Per Share
(Net Asset Value Per Share X 100 / 100 -
maximum sales charge) $ 10.02 $ 18.91 $ 17.81 $ 13.22 $13.44 -- --
-------- ---------- ------- ------- ------ ---------- --------
-------- ---------- ------- ------- ------ ---------- --------
CLASS B SHARES:
Net Assets $ 43,549 $ 58,739 $12,764 $ 9,931 $33,824 -- --
Shares Issued and Outstanding ($.001 par value)
(Authorized 2,625,000,000) 4,716 3,340 763 791 2,682 -- --
Net Asset Value and Offering Price Per Share*** $ 9.23 $ 17.58 $ 16.73 $ 12.56 $12.61 -- --
-------- ---------- ------- ------- ------ ---------- --------
-------- ---------- ------- ------- ------ ---------- --------
CLASS C SHARES:
Net Assets $ 39,235 $ 11,837 $ 3,910 $ 2,864 $9,147 -- --
Shares Issued and Outstanding ($.001 par value)
(Authorized 2,625,000,000) 4,246 674 234 228 723 -- --
Net Asset Value and Offering Price Per Share*** $ 9.24 $ 17.57 $ 16.73 $ 12.56 $12.66 -- --
-------- ---------- ------- ------- ------ ---------- --------
-------- ---------- ------- ------- ------ ---------- --------
Investments at Cost, Including Foreign Currency $200,004 $ 98,075 $37,870 $17,668 $82,721 $ 52,742 $362,669
-------- ---------- ------- ------- ------ ---------- --------
-------- ---------- ------- ------- ------ ---------- --------
</TABLE>
- ------------------
92
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
(UNAUDITED)
<TABLE>
<CAPTION>
GLOBAL
EQUITY
ALLOCATION GLOBAL GLOBAL FIXED AMERICAN
FUND EQUITY FUND INCOME FUND ASIAN GROWTH VALUE FUND VALUE FUND
SIX MONTHS OCTOBER 29, SIX MONTHS FUND SIX SIX MONTHS JULY 7,
ENDED 1997* TO ENDED MONTHS ENDED ENDED 1997* TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1997 1997 1997 1997 1997
(000) (000) (000) (000) (000) (000)
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME:
Dividends $ 1,809 $ 1,084 $ -- $ 1,224 $ 959 $ 955
Interest 724 1,527 266 183 374 575
Security Lending 87 -- -- -- -- --
Less Foreign Taxes Withheld (89) (79) (2) (137) -- --
------------ ------------ ----- ------------ ------------ ------------
Total Income 2,531 2,532 264 1,270 1,333 1,530
------------ ------------ ----- ------------ ------------ ------------
EXPENSES:
Investment Advisory Fees 1,036 938 37 1,192 776 498
Less: Fees Waived (101) -- (37) -- (69) (193)
------------ ------------ ----- ------------ ------------ ------------
Net Investment Advisory Fees 935 938 -- 1,192 707 305
Administrative Fees 281 232 14 301 232 157
Custodian Fees 111 25 9 195 23 64
Filing and Registration Fees 8 36 -- -- 44 51
Directors' Fees and Expenses 2 1 -- 3 1 1
Professional Fees 13 20 12 1 11 18
Shareholder Reports 52 41 32 72 46 43
Transfer Agent Fees 55 24 10 115 41 16
Security Lending Fees 15 -- -- -- -- --
Distribution Fees
Class A 94 22 8 147 89 78
Class B 254 776 8 229 290 250
Class C 403 76 11 381 265 52
Amortization of Organizational Costs 6 13 6 2 2 31
Blue Sky Fees 32 16 24 55 41 68
Country Tax Expense -- -- -- 47 -- --
Interest Expense -- -- 2 52 -- --
Other 8 -- 1 8 2 1
Expenses Reimbursed by Adviser -- -- (49) -- -- --
------------ ------------ ----- ------------ ------------ ------------
Net Expenses 2,269 2,220 88 2,800 1,794 1,135
------------ ------------ ----- ------------ ------------ ------------
Net Investment Income (Loss) 262 312 176 (1,530) (461) 395
------------ ------------ ----- ------------ ------------ ------------
NET REALIZED GAIN (LOSS) ON:
Investments 13,773 -- (104) (79,275) 14,491 452
Foreign Currency Transactions 871 640 31 144 -- --
Futures 88
Securities Sold Short -- -- -- -- -- --
------------ ------------ ----- ------------ ------------ ------------
Net Realized Gain (Loss) 14,732 640 (73) (79,131) 14,491 452
------------ ------------ ----- ------------ ------------ ------------
CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION ON:
Investments (16,845) (4,859) 70 (69,450) 2,398 (1,542)
Foreign Currency Translations 498 136 41 591 -- --
Futures and Swaps 479
Securities Sold Short -- -- -- -- -- --
------------ ------------ ----- ------------ ------------ ------------
Change in Unrealized Appreciation/
Depreciation (15,868) (4,723) 111 (68,859) 2,398 (1,542)
------------ ------------ ----- ------------ ------------ ------------
Net Realized Gain (Loss) and Change in
Unrealized Appreciation/Depreciation (1,136) (4,083) 38 (147,990) 16,889 (1,090)
------------ ------------ ----- ------------ ------------ ------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ (874) $ (3,771) $ 214 $ (149,520) $ 16,428 $ (695)
------------ ------------ ----- ------------ ------------ ------------
------------ ------------ ----- ------------ ------------ ------------
<CAPTION>
WORLDWIDE LATIN
HIGH INCOME AMERICAN
FUND FUND
SIX MONTHS SIX MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
1997 1997
(000) (000)
<S> <C> <C>
- ----------------------------------------
INVESTMENT INCOME:
Dividends $ 86 $ 686
Interest 10,655 116
Security Lending -- --
Less Foreign Taxes Withheld -- --
------------ ------------
Total Income 10,741 802
------------ ------------
EXPENSES:
Investment Advisory Fees 850 767
Less: Fees Waived -- (100)
------------ ------------
Net Investment Advisory Fees 850 667
Administrative Fees 285 179
Custodian Fees 12 136
Filing and Registration Fees 12 1
Directors' Fees and Expenses 2 1
Professional Fees 21 20
Shareholder Reports 57 47
Transfer Agent Fees 43 36
Security Lending Fees -- --
Distribution Fees
Class A 105 94
Class B 473 123
Class C 238 116
Amortization of Organizational Costs 2 2
Blue Sky Fees 46 44
Country Tax Expense -- 120
Interest Expense 15 4
Other 10 5
Expenses Reimbursed by Adviser -- --
------------ ------------
Net Expenses 2,171 1,595
------------ ------------
Net Investment Income (Loss) 8,570 (793)
------------ ------------
NET REALIZED GAIN (LOSS) ON:
Investments 11,335 7,053
Foreign Currency Transactions 199 (338)
Futures
Securities Sold Short -- --
------------ ------------
Net Realized Gain (Loss) 11,534 6,715
------------ ------------
CHANGE IN UNREALIZED APPRECIATION/DEPREC
Investments (14,249) (12,183)
Foreign Currency Translations (76) --
Futures and Swaps
Securities Sold Short -- --
------------ ------------
Change in Unrealized Appreciation/
Depreciation (14,325) (12,183)
------------ ------------
Net Realized Gain (Loss) and Change in
Unrealized Appreciation/Depreciation (2,791) (5,468)
------------ ------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 5,779 $ (6,261)
------------ ------------
------------ ------------
</TABLE>
- ---------------
* Commencement of operations
-----------------------
93
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
(UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
GOVERNMENT
EMERGING AGGRESSIVE U.S. REAL HIGH YIELD OBLIGATIONS
MARKETS FUND EQUITY FUND ESTATE FUND FUND INTERNATIONAL MONEY MARKET
SIX MONTHS SIX MONTHS SIX MONTHS SIX MONTHS MAGNUM FUND FUND SIX
ENDED ENDED ENDED ENDED SIX MONTHS MONTHS ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, ENDED DECEMBER DECEMBER 31,
1997 1997 1997 1997 31, 1997 1997
(000) (000) (000) (000) (000) (000)
<S> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME:
Dividends $ 1,796 $ 361 $ 568 $ 39 $ 472 $ --
Interest 408 88 67 941 332 2,295
Security Lending -- -- -- -- -- --
Less Foreign Taxes Withheld (97) -- -- -- (57) --
------------ ------------ ------ ------ ------- ------
Total Income 2,107 449 635 980 747 2,295
------------ ------------ ------ ------ ------- ------
EXPENSES:
Investment Advisory Fees 1,383 378 158 85 289 183
Less: Fees Waived (208) (125) (96) (76) (69) (115)
------------ ------------ ------ ------ ------- ------
Net Investment Advisory Fees 1,175 253 62 9 220 68
Administrative Fees 293 106 41 29 97 41
Custodian Fees 421 21 27 8 71 16
Filing and Registration Fees 8 5 2 -- 12 --
Directors' Fees and Expenses 4 1 -- -- 1 1
Professional Fees 23 16 9 9 16 10
Shareholder Reports 61 38 27 33 34 29
Transfer Agent Fees 50 28 11 8 21 --
Security Lending Fees -- -- -- -- -- --
Distribution Fees
Class A 148 34 23 10 41 202
Class B 236 232 50 51 144 --
Class C 278 48 17 21 51 --
Amortization of Organizational Costs 2 5 8 3 4 --
Blue Sky Fees 59 50 18 12 27 56
Country Tax Expense 36 -- -- -- -- --
Interest Expense 21 -- -- -- -- --
Other 13 2 -- 2 1 1
Expenses Reimbursed by Adviser -- -- -- -- -- --
------------ ------------ ------ ------ ------- ------
Net Expenses 2,828 839 295 195 740 424
------------ ------------ ------ ------ ------- ------
Net Investment Income (Loss) (721) (390) 340 785 7 1,871
------------ ------------ ------ ------ ------- ------
NET REALIZED GAIN (LOSS) ON:
Investments (3,530) 11,143 1,693 679 (476) (1)
Foreign Currency Transactions 489 -- -- -- 50 --
Futures
Securities Sold Short -- (327) -- -- -- --
------------ ------------ ------ ------ ------- ------
Net Realized Gain (Loss) (3,041) 10,816 1,693 679 (426) (1)
------------ ------------ ------ ------ ------- ------
CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION ON:
Investments (51,389) 1,924 1,861 (164) (6,541) --
Foreign Currency Translations 476 -- -- -- 551 --
Futures and Swaps (581)
Securities Sold Short -- 251 -- -- -- --
------------ ------------ ------ ------ ------- ------
Change in Unrealized
Appreciation/Depreciation (51,494) 2,175 1,861 (164) (5,990) --
------------ ------------ ------ ------ ------- ------
Net Realized Gain (Loss) and Change in
Unrealized Appreciation/Depreciation (54,535) 12,991 3,554 515 (6,416) (1)
------------ ------------ ------ ------ ------- ------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ (55,256) $ 12,601 $ 3,894 $ 1,300 $ (6,409) $ 1,870
------------ ------------ ------ ------ ------- ------
------------ ------------ ------ ------ ------- ------
<CAPTION>
MONEY MARKET
FUND SIX
MONTHS ENDED
DECEMBER 31,
1997
(000)
<S> <C>
- ----------------------------------------
INVESTMENT INCOME:
Dividends $ --
Interest 5,451
Security Lending --
Less Foreign Taxes Withheld --
------
Total Income 5,451
------
EXPENSES:
Investment Advisory Fees 419
Less: Fees Waived (122)
------
Net Investment Advisory Fees 297
Administrative Fees 91
Custodian Fees 30
Filing and Registration Fees 44
Directors' Fees and Expenses 1
Professional Fees 10
Shareholder Reports 27
Transfer Agent Fees --
Security Lending Fees --
Distribution Fees
Class A 470
Class B --
Class C --
Amortization of Organizational Costs --
Blue Sky Fees 38
Country Tax Expense --
Interest Expense --
Other 3
Expenses Reimbursed by Adviser --
------
Net Expenses 1,011
------
Net Investment Income (Loss) 4,440
------
NET REALIZED GAIN (LOSS) ON:
Investments 6
Foreign Currency Transactions --
Futures
Securities Sold Short --
------
Net Realized Gain (Loss) 6
------
CHANGE IN UNREALIZED APPRECIATION/DEPREC
Investments --
Foreign Currency Translations --
Futures and Swaps --
Securities Sold Short --
------
Change in Unrealized
Appreciation/Depreciation --
------
Net Realized Gain (Loss) and Change in
Unrealized Appreciation/Depreciation 6
------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 4,446
------
------
</TABLE>
- ---------------
* Commencement of operations
- --------------
94
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
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
DECEMBER 31, 1997 JUNE 30, 1997
(000) (000)
<S> <C> <C>
- ------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 262 $ 245
Net Realized Gain 14,732 13,170
Change in Unrealized Appreciation/Depreciation (15,868) 17,251
---------- ----------
Net Increase (Decrease) in Net Assets Resulting
from Operations (874) 30,666
---------- ----------
DISTRIBUTIONS:
Net Investment Income:
Class A (1,628) (2,358)
Class B (1,028) (759)
Class C (1,187) (2,093)
---------- ----------
(3,843) (5,210)
---------- ----------
Net Realized Gain:
Class A (8,369) (2,101)
Class B (6,610) (751)
Class C (9,026) (2,262)
---------- ----------
(24,005) (5,114)
---------- ----------
Net Decrease in Net Assets Resulting from
Distributions (27,848) (10,324)
---------- ----------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 47,868 54,525
Distributions Reinvested 26,341 9,826
Redeemed (22,084) (36,345)
---------- ----------
Net Increase in Net Assets Resulting from
Capital Share Transactions 52,125 28,006
---------- ----------
Total Increase in Net Assets 23,403 48,348
NET ASSETS -- Beginning of Period 189,865 141,517
---------- ----------
NET ASSETS -- End of Period (Including
undistributed (distributions in excess of) net
investment income of $(915) and $2,666,
respectively) $ 213,268 $ 189,865
---------- ----------
---------- ----------
- ------------------------------------------------------------------------------------------
Capital Share Transactions:
(1) Class A:
---------------------
Shares:
Subscribed 749 1,091
Distributions Reinvested 658 293
Redeemed (593) (1,314)
---------- ----------
Net Increase in Class A Shares Outstanding 814 70
---------- ----------
---------- ----------
Dollars:
Subscribed $ 12,383 $ 16,569
Distributions Reinvested 9,235 4,157
Redeemed (9,651) (19,605)
---------- ----------
Net Increase $ 11,967 $ 1,121
---------- ----------
---------- ----------
Class B:
---------------------
Shares:
Subscribed 1,483 1,444
Distributions Reinvested 533 106
Redeemed (219) (160)
---------- ----------
Net Increase in Class B Shares Outstanding 1,797 1,390
---------- ----------
---------- ----------
Dollars:
Subscribed $ 23,968 $ 21,138
Distributions Reinvested 7,277 1,475
Redeemed (3,518) (2,336)
---------- ----------
Net Increase $ 27,727 $ 20,277
---------- ----------
---------- ----------
Class C:
---------------------
Shares:
Subscribed 714 1,160
Distributions Reinvested 713 300
Redeemed (553) (995)
---------- ----------
Net Increase in Class C Shares Outstanding 874 465
---------- ----------
---------- ----------
Dollars:
Subscribed $ 11,517 $ 16,818
Distributions Reinvested 9,829 4,194
Redeemed (8,915) (14,404)
---------- ----------
Net Increase $ 12,431 $ 6,608
---------- ----------
---------- ----------
- ------------------------------------------------------------------------------------------
</TABLE>
-----------------------
95
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
GLOBAL EQUITY FUND
(UNAUDITED)
<TABLE>
<CAPTION>
OCTOBER 29, 1997* TO
DECEMBER 31, 1997
(000)
<S> <C>
- ---------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 312
Net Realized Gain 640
Change in Unrealized Appreciation /Depreciation (4,723)
----------
Net Decrease in Net Assets Resulting from
Operations (3,771)
----------
DISTRIBUTIONS:
Net Investment Income:
Class A (88)
Class B (188)
Class C (18)
----------
Net Decrease in Net Assets Resulting from
Distributions (294)
----------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 575,992
Distributions Reinvested 276
Redeemed (3,565)
----------
Net Increase in Net Assets Resulting from
Capital Share Transactions 572,703
----------
Total Increase in Net Assets 568,638
NET ASSETS -- Beginning of Period --
----------
NET ASSETS -- End of Period (Including
undistributed net investment income of $18) $ 568,638
----------
----------
- ---------------------------------------------------------------------------
Capital Share Transactions:
(1) Class A:
---------------------
Shares:
Subscribed 5,643
Distributions Reinvested 8
Redeemed (61)
----------
Net Increase in Class A Shares Outstanding 5,590
----------
----------
Dollars:
Subscribed $ 56,243
Distributions Reinvested 78
Redeemed (603)
----------
Net Increase $ 55,718
----------
----------
Class B:
---------------------
Shares:
Subscribed 47,373
Distributions Reinvested 18
Redeemed (203)
----------
Net Increase in Class B Shares Outstanding 47,188
----------
----------
Dollars:
Subscribed $ 472,648
Distributions Reinvested 180
Redeemed (1,986)
----------
Net Increase $ 470,842
----------
----------
Class C:
---------------------
Shares:
Subscribed 4,721
Distributions Reinvested 2
Redeemed (100)
----------
Net Increase in Class C Shares Outstanding 4,623
----------
----------
Dollars:
Subscribed $ 47,101
Distributions Reinvested 18
Redeemed (976)
----------
Net Increase $ 46,143
----------
----------
</TABLE>
- -----------------
* Commencement of operations
- --------------------------------------------------------------------------------
- -----------
96
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
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
DECEMBER 31, 1997 JUNE 30, 1997
(000) (000)
<S> <C> <C>
- ---------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 176 $ 436
Net Realized Gain (Loss) (73) 111
Change in Unrealized Appreciation/Depreciation 111 (84)
------- ---------------
Net Increase in Net Assets Resulting from
Operations 214 463
------- ---------------
DISTRIBUTIONS:
Net Investment Income:
Class A (123) (218)
Class B (27) (46)
Class C (38) (74)
In Excess of Net Investment Income:
Class A -- (41)
Class B -- (9)
Class C -- (14)
------- ---------------
(188) (402)
------- ---------------
Net Realized Gain:
Class A (30) --
Class B (8) --
Class C (11) --
------- ---------------
(49) --
------- ---------------
Net Decrease in Net Assets Resulting from
Distributions (237) (402)
------- ---------------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 965 4,760
Distributions Reinvested 213 335
Redeemed (2,230) (6,304)
------- ---------------
Net Decrease in Net Assets Resulting from
Capital Share Transactions (1,052) (1,209)
------- ---------------
Total Decrease in Net Assets (1,075) (1,148)
NET ASSETS -- Beginning of Period 10,568 11,716
------- ---------------
NET ASSETS -- End of Period (Including
distributions in excess of net investment income
of $(75) and $(63), respectively) $ 9,493 $ 10,568
------- ---------------
------- ---------------
- ---------------------------------------------------------------------------------------
Capital Share Transactions:
(1) Class A:
--------------------
Shares:
Subscribed 44 256
Distributions Reinvested 15 22
Redeemed (114) (382)
------- ---------------
Net Decrease in Class A Shares Outstanding (55) (104)
------- ---------------
------- ---------------
Dollars:
Subscribed $ 440 $ 2,529
Distributions Reinvested 146 225
Redeemed (1,133) (3,839)
------- ---------------
Net Decrease $ (547) $ (1,085)
------- ---------------
------- ---------------
Class B:
--------------------
Shares:
Subscribed 26 100
Distributions Reinvested 3 4
Redeemed (46) (76)
------- ---------------
Net Increase (Decrease) in Class B Shares
Outstanding (17) 28
------- ---------------
------- ---------------
Dollars:
Subscribed $ 263 $ 999
Distributions Reinvested 28 41
Redeemed (459) (758)
------- ---------------
Net Increase (Decrease) $ (168) $ 282
------- ---------------
------- ---------------
Class C:
--------------------
Shares:
Subscribed 26 123
Distributions Reinvested 4 7
Redeemed (64) (170)
------- ---------------
Net Decrease in Class C Shares Outstanding (34) (40)
------- ---------------
------- ---------------
Dollars:
Subscribed $ 262 $ 1,232
Distributions Reinvested 39 69
Redeemed (638) (1,707)
------- ---------------
Net Decrease $ (337) $ (406)
------- ---------------
------- ---------------
- ---------------------------------------------------------------------------------------
</TABLE>
-----------------------
97
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
ASIAN GROWTH FUND
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
DECEMBER 31, 1997 JUNE 30, 1997
(000) (000)
<S> <C> <C>
- ---------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment (Loss) $ (1,530) $ (2,748)
Net Realized Gain (Loss) (79,131) (4,804)
Change in Unrealized of
Appreciation/Depreciation (68,859) (2,619)
---------- ---------------
Net (Decrease) in Net Assets Resulting from
Operations (149,520) (10,171)
---------- ---------------
DISTRIBUTIONS:
Net Realized Gain:
Class A (135) (33)
Class B (60) (10)
Class C (84) (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 (279) (8,523)
---------- ---------------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 51,643 114,562
Distributions Reinvested 258 8,035
Redeemed (125,261) (220,149)
---------- ---------------
Net (Decrease) in Net Assets Resulting from
Capital Share Transactions (73,360) (97,552)
---------- ---------------
Total (Decrease) in Net Assets (223,159) (116,246)
NET ASSETS -- Beginning of Period 352,686 468,932
---------- ---------------
NET ASSETS -- End of Period (Including net
investment loss of $(2,683) and $(1,153),
respectively) $ 129,527 $352,686
---------- ---------------
---------- ---------------
- ---------------------------------------------------------------------------------------
Capital Share Transactions:
(1) Class A:
---------------------
Shares:
Subscribed 3,200 4,724
Distributions Reinvested 15 243
Redeemed (6,061) (8,877)
---------- ---------------
Net Decrease in Class A Shares Outstanding (2,846) (3,910)
---------- ---------------
---------- ---------------
Dollars:
Subscribed $ 35,434 $ 77,015
Distributions Reinvested 125 3,930
Redeemed (74,289) (144,501)
---------- ---------------
Net Decrease $ (38,730) $(63,556)
---------- ---------------
---------- ---------------
Class B:
---------------------
Shares:
Subscribed 885 1,466
Distributions Reinvested 7 77
Redeemed (1,349) (803)
---------- ---------------
Net Increase (Decrease) in Class B Shares
Outstanding (457) 740
---------- ---------------
---------- ---------------
Dollars:
Subscribed $ 9,957 $ 23,406
Distributions Reinvested 55 1,210
Redeemed (15,713) (12,628)
---------- ---------------
Net Increase (Decrease) $ (5,701) $ 11,988
---------- ---------------
---------- ---------------
Class C:
---------------------
Shares:
Subscribed 616 883
Distributions Reinvested 10 184
Redeemed (2,987) (3,989)
---------- ---------------
Net Decrease in Class C Shares Outstanding (2,361) (2,922)
---------- ---------------
---------- ---------------
Dollars:
Subscribed $ 6,252 $ 14,140
Distributions Reinvested 78 2,895
Redeemed (35,259) (63,019)
---------- ---------------
Net Decrease $ (28,929) $(45,984)
---------- ---------------
---------- ---------------
- ---------------------------------------------------------------------------------------
</TABLE>
- -----------
98
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
AMERICAN VALUE FUND
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
DECEMBER 31, 1997 JUNE 30, 1997
(000) (000)
<S> <C> <C>
- ---------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income (Loss) $ (461) $ 424
Net Realized Gain 14,491 6,719
Change in Unrealized Appreciation /Depreciation 2,398 7,544
---------- ---------------
Net Increase in Net Assets Resulting from
Operations 16,428 14,687
---------- ---------------
DISTRIBUTIONS:
Net Investment Income:
Class A (122) (309)
Class B (28) (25)
Class C (26) (133)
In Excess of Net Investment Income:
Class A -- (1)
---------- ---------------
(176) (468)
---------- ---------------
Net Realized Gain:
Class A (5,303) (1,555)
Class B (5,203) (209)
Class C (3,628) (1,482)
---------- ---------------
(14,134) (3,246)
---------- ---------------
Net Decrease in Net Assets Resulting from
Distributions (14,310) (3,714)
---------- ---------------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 215,106 38,027
Distributions Reinvested 12,507 3,292
Redeemed (24,569) (13,557)
---------- ---------------
Net Increase in Net Assets Resulting from
Capital Share Transactions 203,044 27,762
---------- ---------------
Total Increase in Net Assets 205,162 38,735
NET ASSETS -- Beginning of Period 82,087 43,352
---------- ---------------
NET ASSETS -- End of Period (Including
distributions in excess of net investment income
of $(638) and $(1), respectively) $ 287,249 $ 82,087
---------- ---------------
---------- ---------------
- ---------------------------------------------------------------------------------------
Capital Share Transactions:
(1) Class A:
---------------------
Shares:
Subscribed 4,128 1,025
Distributions Reinvested 269 119
Redeemed (846) (538)
---------- ---------------
Net Increase in Class A Shares Outstanding 3,551 606
---------- ---------------
---------- ---------------
Dollars:
Subscribed $ 82,860 $ 16,463
Distributions Reinvested 5,049 1,785
Redeemed (16,781) (8,501)
---------- ---------------
Net Increase $ 71,128 $ 9,747
---------- ---------------
---------- ---------------
Class B:
---------------------
Shares:
Subscribed 4,691 714
Distributions Reinvested 239 15
Redeemed (258) (27)
---------- ---------------
Net Increase in Class B Shares Outstanding 4,672 702
---------- ---------------
---------- ---------------
Dollars:
Subscribed $ 93,977 $ 11,773
Distributions Reinvested 4,461 228
Redeemed (5,093) (420)
---------- ---------------
Net Increase $ 93,345 $ 11,581
---------- ---------------
---------- ---------------
Class C:
---------------------
Shares:
Subscribed 1,910 623
Distributions Reinvested 160 85
Redeemed (137) (312)
---------- ---------------
Net Increase in Class C Shares Outstanding 1,933 396
---------- ---------------
---------- ---------------
Dollars:
Subscribed $ 38,269 $ 9,791
Distributions Reinvested 2,997 1,279
Redeemed (2,695) (4,636)
---------- ---------------
Net Increase $ 38,571 $ 6,434
---------- ---------------
---------- ---------------
- ---------------------------------------------------------------------------------------
</TABLE>
-----------------------
99
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
VALUE FUND
(UNAUDITED)
<TABLE>
<CAPTION>
JULY 7, 1997* TO
DECEMBER 31, 1997
(000)
<S> <C>
- ----------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 395
Net Realized Gain 452
Change in Unrealized Appreciation /Depreciation (1,542)
----------
Net Decrease in Net Assets Resulting from
Operations (695)
----------
DISTRIBUTIONS:
Net Investment Income:
Class A (305)
Class B (76)
Class C (21)
----------
(402)
----------
Net Realized Gain:
Class A (502)
Class B (431)
Class C (95)
----------
(1,028)
----------
Net Decrease in Net Assets Resulting from
Distributions (1,430)
----------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 220,549
Distributions Reinvested 1,274
Redeemed (9,419)
----------
Net Increase in Net Assets Resulting from
Capital Share Transactions 212,404
----------
Total Increase in Net Assets 210,279
NET ASSETS -- Beginning of Period --
----------
NET ASSETS -- End of Period (Including
distributions in excess of net investment income
of $(7)) $ 210,279
----------
----------
- ----------------------------------------------------------------------
Capital Share Transactions:
(1) Class A:
---------------------
Shares:
Subscribed 10,704
Distributions Reinvested 75
Redeemed (613)
----------
Net Increase in Class A Shares Outstanding 10,166
----------
----------
Dollars:
Subscribed $ 109,270
Distributions Reinvested 748
Redeemed (6,257)
----------
Net Increase $ 103,761
----------
----------
Class B:
---------------------
Shares:
Subscribed 8,926
Distributions Reinvested 43
Redeemed (236)
----------
Net Increase in Class B Shares Outstanding 8,733
----------
----------
Dollars:
Subscribed $ 90,944
Distributions Reinvested 429
Redeemed (2,401)
----------
Net Increase $ 88,972
----------
----------
Class C:
---------------------
Shares:
Subscribed 1,996
Distributions Reinvested 10
Redeemed (75)
----------
Net Increase in Class C Shares Outstanding 1,931
----------
----------
Dollars:
Subscribed $ 20,335
Distributions Reinvested 97
Redeemed (761)
----------
Net Increase $ 19,671
----------
----------
- ----------------------------------------------------------------------
* Commencement of operations
</TABLE>
- -----------
100
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
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
DECEMBER 31, 1997 JUNE 30, 1997
(000) (000)
<S> <C> <C>
- ---------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 8,570 $ 13,435
Net Realized Gain 11,534 9,362
Change in Unrealized Appreciation /Depreciation (14,325) 14,412
---------- ---------------
Net Increase in Net Assets Resulting from
Operations 5,779 37,209
---------- ---------------
DISTRIBUTIONS:
Net Investment Income:
Class A (3,124) (5,678)
Class B (3,343) (4,269)
Class C (1,667) (3,020)
---------- ---------------
(8,134) (12,967)
---------- ---------------
Realized Gain:
Class A (6,916) (2,320)
Class B (8,787) (1,708)
Class C (4,231) (1,293)
---------- ---------------
(19,934) (5,321)
---------- ---------------
Net Decrease in Net Assets Resulting from
Distributions (28,068) (18,288)
---------- ---------------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 107,519 133,028
Distributions Reinvested 20,147 11,818
Redeemed (65,777) (63,040)
---------- ---------------
Net Increase in Net Assets Resulting from
Capital Share Transactions 61,889 81,806
---------- ---------------
Total Increase in Net Assets 39,600 100,727
NET ASSETS -- Beginning of Period 196,488 95,761
---------- ---------------
NET ASSETS -- End of Period (Including
undistributed net investment income of $747 and
$311, respectively) $ 236,088 $196,488
---------- ---------------
---------- ---------------
- ---------------------------------------------------------------------------------------
Capital Share Transactions:
(1) Class A:
---------------------
Shares:
Subscribed 3,723 5,082
Distributions Reinvested 580 423
Redeemed (3,342) (3,469)
---------- ---------------
Net Increase in Class A Shares Outstanding 961 2,036
---------- ---------------
---------- ---------------
Dollars:
Subscribed $ 53,448 $ 67,886
Distributions Reinvested 7,700 5,651
Redeemed (47,987) (46,537)
---------- ---------------
Net Increase $ 13,161 $ 27,000
---------- ---------------
---------- ---------------
Class B:
---------------------
Shares:
Subscribed 2,829 3,787
Distributions Reinvested 604 246
Redeemed (912) (622)
---------- ---------------
Net Increase in Class B Shares Outstanding 2,521 3,411
---------- ---------------
---------- ---------------
Dollars:
Subscribed $ 40,592 $ 50,939
Distributions Reinvested 7,924 3,287
Redeemed (12,982) (8,415)
---------- ---------------
Net Increase $ 35,534 $ 45,811
---------- ---------------
---------- ---------------
Class C:
---------------------
Shares:
Subscribed 932 1,057
Distributions Reinvested 344 217
Redeemed (336) (596)
---------- ---------------
Net Increase in Class C Shares Outstanding 940 678
---------- ---------------
---------- ---------------
Dollars:
Subscribed $ 13,479 $ 14,203
Distributions Reinvested 4,522 2,880
Redeemed (4,807) (8,088)
---------- ---------------
Net Increase $ 13,194 $ 8,995
---------- ---------------
---------- ---------------
- ---------------------------------------------------------------------------------------
</TABLE>
-----------------------
101
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
LATIN AMERICAN FUND
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
DECEMBER 31, 1997 JUNE 30, 1997
(000) (000)
<S> <C> <C>
- ---------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment (Loss) $ (793) $ (131)
Net Realized Gain 6,715 13,981
Change in Unrealized Appreciation/Depreciation (12,183) 10,200
---------- ---------------
Net Increase (Decrease) in Net Assets Resulting
from Operations (6,261) 24,050
---------- ---------------
DISTRIBUTIONS:
Net Investment Income:
Class A -- (117)
Class B -- (17)
Class C -- (13)
---------- ---------------
-- (147)
---------- ---------------
Net Realized Gain:
Class A (12,606) (2,192)
Class B (5,784) (359)
Class C (4,438) (727)
---------- ---------------
(22,828) (3,278)
---------- ---------------
Net Decrease in Net Assets Resulting from
Distributions (22,828) (3,425)
---------- ---------------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 93,970 114,111
Distributions Reinvested 20,741 3,304
Redeemed (85,469) (46,502)
---------- ---------------
Net Increase in Net Assets Resulitng from
Capital Share Transactions 29,242 70,913
---------- ---------------
Total Increase in Net Assets 153 91,538
NET ASSETS -- Beginning of Period 119,060 27,522
---------- ---------------
NET ASSETS -- End of Period (Including
undistributed (distribution in excess of) net
investment income of $(804) and $(11),
respectively) $ 119,213 $119,060
---------- ---------------
---------- ---------------
- ---------------------------------------------------------------------------------------
Capital Share Transactions:
(1) Class A:
---------------------
Shares:
Subscribed 3,418 6,162
Distributions Reinvested 941 187
Redeemed (4,250) (2,975)
---------- ---------------
Net Increase in Class A Shares Outstanding 109 3,374
---------- ---------------
---------- ---------------
Dollars:
Subscribed $ 58,970 $ 90,337
Distributions Reinvested 11,770 2,243
Redeemed (71,904) (41,558)
---------- ---------------
Net Increase (Decrease) $ (1,164) $ 51,022
---------- ---------------
---------- ---------------
Class B:
---------------------
Shares:
Subscribed 1,185 752
Distributions Reinvested 445 30
Redeemed (209) (104)
---------- ---------------
Net Increase in Class B Shares Outstanding 1,421 678
---------- ---------------
---------- ---------------
Dollars:
Subscribed $ 20,193 $ 11,139
Distributions Reinvested 5,385 353
Redeemed (3,340) (1,385)
---------- ---------------
Net Increase $ 22,238 $ 10,107
---------- ---------------
---------- ---------------
Class C:
---------------------
Shares:
Subscribed 876 856
Distributions Reinvested 296 60
Redeemed (629) (266)
---------- ---------------
Net Increase in Class C Shares Outstanding 543 650
---------- ---------------
---------- ---------------
Dollars:
Subscribed $ 14,807 $ 12,635
Distributions Reinvested 3,586 708
Redeemed (10,225) (3,559)
---------- ---------------
Net Increase $ 8,168 $ 9,784
---------- ---------------
---------- ---------------
- ---------------------------------------------------------------------------------------
</TABLE>
- -----------
102
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
EMERGING MARKETS FUND
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
DECEMBER 31, 1997 JUNE 30, 1997
(000) (000)
<S> <C> <C>
- ---------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment (Loss) $ (721) $ (538)
Net Realized Gain (Loss) (3,041) 14,993
Change in Unrealized Appreciation/Depreciation (51,494) 7,475
---------- ---------------
Net Increase (Decrease) in Net Assets Resulting
from Operations (55,256) 21,930
---------- ---------------
DISTRIBUTIONS:
Net Investment Income:
Class A -- (291)
Class B -- (52)
Class C -- (44)
---------- ---------------
-- (387)
---------- ---------------
Net Realized Gain:
Class A (8,584) (871)
Class B (4,292) (182)
Class C (3,969) (503)
---------- ---------------
(16,845) (1,556)
---------- ---------------
Net Decrease in Net Assets Resulting from
Distributions (16,845) (1,943)
---------- ---------------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 115,227 133,953
Distributions Reinvested 15,915 1,855
Redeemed (93,844) (111,716)
---------- ---------------
Net Increase in Net Assets Resulting from
Capital Share Transactions 37,298 24,092
---------- ---------------
Total Increase (Decrease) in Net Assets (34,803) 44,079
NET ASSETS -- Beginning of Period 212,946 168,867
---------- ---------------
NET ASSETS -- End of Period (Including
distributions in excess of net investment of
$(1,380) and $(659), respectively) $ 178,143 $212,946
---------- ---------------
---------- ---------------
- ---------------------------------------------------------------------------------------
Capital Share Transactions:
(1) Class A:
---------------------
Shares:
Subscribed 6,511 7,637
Distributions Reinvested 891 104
Redeemed (6,134) (8,424)
---------- ---------------
Net Increase (Decrease) in Class A Shares
Outstanding 1,268 (683)
---------- ---------------
---------- ---------------
Dollars:
Subscribed $ 78,917 $ 89,680
Distributions Reinvested 8,101 1,103
Redeemed (73,618) (96,827)
---------- ---------------
Net Increase (Decrease) $ 13,400 $ (6,044)
---------- ---------------
---------- ---------------
Class B:
---------------------
Shares:
Subscribed 2,075 2,028
Distributions Reinvested 457 20
Redeemed (531) (205)
---------- ---------------
Net Increase in Class B Shares Outstanding 2,001 1,843
---------- ---------------
---------- ---------------
Dollars:
Subscribed $ 26,980 $ 23,982
Distributions Reinvested 4,064 223
Redeemed (5,896) (2,355)
---------- ---------------
Net Increase $ 25,148 $ 21,850
---------- ---------------
---------- ---------------
Class C
---------------------
Shares:
Subscribed 720 1,753
Distributions Reinvested 421 51
Redeemed (1,268) (1,086)
---------- ---------------
Net Increase (Decrease) in Class C Shares
Outstanding (127) 718
---------- ---------------
---------- ---------------
Dollars:
Subscribed $ 9,330 $ 20,292
Distributions Reinvested 3,750 528
Redeemed (14,330) (12,534)
---------- ---------------
Net Increase (Decrease) $ (1,250) $ 8,286
---------- ---------------
---------- ---------------
- ---------------------------------------------------------------------------------------
</TABLE>
-----------------------
103
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
AGGRESSIVE EQUITY FUND
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
DECEMBER 31, 1997 JUNE 30, 1997
(000) (000)
<S> <C> <C>
- ---------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment (Loss) $ (390) $ (135)
Net Realized Gain 10,816 3,674
Change in Unrealized Appreciation/Depreciation 2,175 3,205
---------- -------
Net Increase in Net Assets Resulting from
Operations 12,601 6,744
---------- -------
DISTRIBUTIONS:
Net Investment Income:
Class A -- (16)
Class B -- (5)
Class C -- (5)
---------- -------
-- (26)
---------- -------
Net Realized Gain:
Class A (3,187) (711)
Class B (5,696) (452)
Class C (1,157) (439)
---------- -------
(10,040) (1,602)
---------- -------
Net Decrease in Net Assets Resulting from
Distributions (10,040) (1,628)
---------- -------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 41,232 57,588
Distributions Reinvested 9,563 1,037
Redeemed (13,404) (7,818)
---------- -------
Net Increase in Net Assets Resulting from
Capital Share Transactions 37,391 50,807
---------- -------
Total Increase in Net Assets 39,952 55,923
NET ASSETS -- Beginning of Period 66,313 10,390
---------- -------
NET ASSETS -- End of Period (Including
undistributed (distributions in excess of) net
investment income of $(390) and $0,
respectively.) $ 106,265 $ 66,313
---------- -------
---------- -------
- ---------------------------------------------------------------------------------------
Capital Share Transactions:
(1) Class A:
---------------------
Shares:
Subscribed 786 1,309
Distributions Reinvested 177 35
Redeemed (286) (392)
---------- -------
Net Increase in Class A Shares Outstanding 677 952
---------- -------
---------- -------
Dollars:
Subscribed $ 14,243 $ 20,966
Distributions Reinvested 3,064 522
Redeemed (5,151) (6,373)
---------- -------
Net Increase $ 12,156 $ 15,115
---------- -------
---------- -------
Class B:
---------------------
Shares:
Subscribed 1,254 1,905
Distributions Reinvested 314 18
Redeemed (269) (51)
---------- -------
Net Increase in Class B Shares Outstanding 1,299 1,872
---------- -------
---------- -------
Dollars:
Subscribed $ 22,628 $ 30,344
Distributions Reinvested 5,363 262
Redeemed (4,869) (818)
---------- -------
Net Increase $ 23,122 $ 29,788
---------- -------
---------- -------
Class C:
---------------------
Shares:
Subscribed 240 404
Distributions Reinvested 67 17
Redeemed (192) (42)
---------- -------
Net Increase in Class C Shares Outstanding 115 379
---------- -------
---------- -------
Dollars:
Subscribed $ 4,361 $ 6,278
Distributions Reinvested 1,136 252
Redeemed (3,384) (626)
---------- -------
Net Increase $ 2,113 $ 5,904
---------- -------
---------- -------
- ---------------------------------------------------------------------------------------
</TABLE>
- -----------
104
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
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
DECEMBER 31, 1997 JUNE 30, 1997
(000) (000)
<S> <C> <C>
- ---------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 340 $ 280
Net Realized Gain 1,693 2,077
Change in Unrealized Appreciation/Depreciation 1,861 1,622
------- -------
Net Increase in Net Assets Resulting from
Operations 3,894 3,979
------- -------
DISTRIBUTIONS:
Net Investment Income:
Class A (246) (162)
Class B (106) (57)
Class C (32) (31)
------- -------
(384) (250)
------- -------
Net Realized Gain:
Class A (1,796) (100)
Class B (1,083) (71)
Class C (334) (48)
------- -------
(3,213) (219)
------- -------
Net Decrease in Net Assets Resulting from
Distributions (3,597) (469)
------- -------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 17,674 23,984
Distributions Reinvested 3,326 268
Redeemed (8,171) (9,254)
------- -------
Net Increase in Net Assets Resulting from
Capital Share Transactions 12,829 14,998
------- -------
Total Increase in Net Assets 13,126 18,508
NET ASSETS -- Beginning of Period 24,316 5,808
------- -------
NET ASSETS -- End of Period (Including
undistributed net investment income of $12 and
$55, respectively.) $ 37,442 $ 24,316
------- -------
------- -------
- ---------------------------------------------------------------------------------------
Capital Share Transactions:
(1) Class A:
---------------------
Shares:
Subscribed 603 1,003
Distributions Reinvested 118 13
Redeemed (389) (257)
------- -------
Net Increase in Class A Shares Outstanding 332 759
------- -------
------- -------
Dollars:
Subscribed $ 10,309 $ 15,148
Distributions Reinvested 1,916 187
Redeemed (6,525) (3,998)
------- -------
Net Increase $ 5,700 $ 11,337
------- -------
------- -------
Class B:
---------------------
Shares:
Subscribed 319 441
Distributions Reinvested 66 4
Redeemed (57) (185)
------- -------
Net Increase in Class B Shares Outstanding 328 260
------- -------
------- -------
Dollars:
Subscribed $ 5,549 $ 6,607
Distributions Reinvested 1,069 54
Redeemed (1,004) (2,916)
------- -------
Net Increase $ 5,614 $ 3,745
------- -------
------- -------
Class C:
---------------------
Shares:
Subscribed 104 150
Distributions Reinvested 21 2
Redeemed (36) (149)
------- -------
Net Increase in Class C Shares Outstanding 89 3
------- -------
------- -------
Dollars:
Subscribed $ 1,816 $ 2,229
Distributions Reinvested 341 26
Redeemed (642) (2,339)
------- -------
Net Increase (Decrease) $ 1,515 $ (84)
------- -------
------- -------
- ---------------------------------------------------------------------------------------
</TABLE>
-----------------------
105
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
HIGH YIELD FUND
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
DECEMBER 31, 1997 JUNE 30, 1997
(000) (000)
<S> <C> <C>
- ---------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 785 $ 1,246
Net Realized Gain 679 312
Change in Unrealized Appreciation /Depreciation (164) 881
------- -------
Net Increase in Net Assets Resulting from
Operations 1,300 2,439
------- -------
DISTRIBUTIONS:
Net Investment Income:
Class A (286) (434)
Class B (358) (454)
Class C (138) (338)
------- -------
(782) (1,226)
------- -------
Realized Gain:
Class A (236) (20)
Class B (415) (24)
Class C (119) (20)
------- -------
(770) (64)
------- -------
Net Decrease in Net Assets Resulting from
Distributions (1,552) (1,290)
------- -------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 10,819 12,562
Distributions Reinvested 860 237
Redeemed (15,555) (2,025)
------- -------
Net Increase (Decrease) in Net Assets Resulting
from Capital Share Transactions (3,876) 10,774
------- -------
Total Increase (Decrease) in Net Assets (4,128) 11,923
NET ASSETS -- Beginning of Period 22,567 10,644
------- -------
NET ASSETS -- End of Period (Including
undistributed net investment income of $41 and
$38, respectively.) $ 18,439 $ 22,567
------- -------
------- -------
- ---------------------------------------------------------------------------------------
Capital Share Transactions:
(1) Class A:
---------------------
Shares:
Subscribed 274 461
Distributions Reinvested 24 10
Redeemed (548) (101)
------- -------
Net Increase (Decrease) in Class A Shares
Outstanding (250) 370
------- -------
------- -------
Dollars:
Subscribed $ 3,629 $ 5,790
Distributions Reinvested 301 131
Redeemed (7,228) (1,282)
------- -------
Net Increase (Decrease) $ (3,298) $ 4,639
------- -------
------- -------
Class B:
---------------------
Shares:
Subscribed 425 397
Distributions Reinvested 33 6
Redeemed (337) (20)
------- -------
Net Increase in Class B Shares Outstanding 121 383
------- -------
------- -------
Dollars:
Subscribed $ 5,615 $ 4,971
Distributions Reinvested 411 72
Redeemed (4,447) (249)
------- -------
Net Increase $ 1,579 $ 4,794
------- -------
------- -------
Class C:
---------------------
Shares:
Subscribed 119 144
Distributions Reinvested 12 3
Redeemed (289) (39)
------- -------
Net Increase (Decrease) in Class C Shares
Outstanding (158) 108
------- -------
------- -------
Dollars:
Subscribed $ 1,575 $ 1,800
Distributions Reinvested 148 35
Redeemed (3,880) (494)
------- -------
Net Increase (Decrease) $ (2,157) $ 1,341
------- -------
------- -------
- ---------------------------------------------------------------------------------------
</TABLE>
- -----------
106
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
INTERNATIONAL MAGNUM FUND
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JULY 1, 1996* TO
DECEMBER 31, 1997 JUNE 30, 1997
(000) (000)
<S> <C> <C>
- ----------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 7 $ 170
Net Realized Gain (Loss) (426) 770
Change in Unrealized Appreciation /Depreciation (5,990) 4,184
------- -------
Net Increase (Decrease) in Net Assets Resulting
from Operations (6,409) 5,124
------- -------
DISTRIBUTIONS:
Net Investment Income:
Class A (488) (52)
Class B (330) (45)
Class C (53) (43)
------- -------
(871) (140)
------- -------
Net Realized Gain:
Class A (33) (4)
Class B (31) (4)
Class C (9) (4)
------- -------
(73) (12)
------- -------
Net Decrease in Net Assets Resulting from
Distributions (944) (152)
------- -------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 53,554 47,034
Distributions Reinvested 849 50
Redeemed (16,493) (2,724)
------- -------
Net Increase in Net Assets Resulting from
Capital Share Transactions 37,910 44,360
------- -------
Total Increase in Net Assets 30,557 49,332
NET ASSETS -- Beginning of Period 49,332 --
------- -------
NET ASSETS -- End of Period (Including
undistributed (distributions in excess of) net
investment income of $(97) and $30,
respectively.) $ 79,889 $ 49,332
------- -------
------- -------
- ----------------------------------------------------------------------------------------
Capital Share Transactions:
(1) Class A:
---------------------
Shares:
Subscribed 1,800 1,722
Distributions Reinvested 38 1
Redeemed (502) (144)
------- -------
Net Increase in Class A Shares Outstanding 1,336 1,579
------- -------
------- -------
Dollars:
Subscribed $ 24,479 $ 21,512
Distributions Reinvested 473 14
Redeemed (6,583) (1,786)
------- -------
Net Increase $ 18,369 $ 19,740
------- -------
------- -------
Class B:
---------------------
Shares:
Subscribed 1,712 1,321
Distributions Reinvested 26 2
Redeemed (373) (6)
------- -------
Net Increase in Class B Shares Outstanding 1,365 1,317
------- -------
------- -------
Dollars:
Subscribed $ 23,249 $ 16,670
Distributions Reinvested 322 18
Redeemed (4,938) (73)
------- -------
Net Increase $ 18,633 $ 16,615
------- -------
------- -------
Class C:
---------------------
Shares:
Subscribed 429 728
Distributions Reinvested 4 1
Redeemed (372) (67)
------- -------
Net Increase in Class C Shares Outstanding 61 662
------- -------
------- -------
Dollars:
Subscribed $ 5,826 $ 8,852
Distributions Reinvested 54 18
Redeemed (4,972) (865)
------- -------
Net Increase $ 908 $ 8,005
------- -------
------- -------
- ----------------------------------------------------------------------------------------
* Commencement of operations
</TABLE>
-----------------------
107
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
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
DECEMBER 31, 1997 JUNE 30, 1997
(000) (000)
<S> <C> <C>
- ---------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 1,871 $ 5,375
Net Realized Gain (Loss) (1) 8
---------- ---------------
Net Increase in Net Assets Resulting from
Operations 1,870 5,383
---------- ---------------
DISTRIBUTIONS:
Net Investment Income (1,878) (5,375)
---------- ---------------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 150,181 359,068
Distributions Reinvested 1,788 4,349
Redeemed (193,732) (414,635)
---------- ---------------
Net Decrease in Net Assets Resulting from
Capital Share Transactions (41,763) (51,218)
---------- ---------------
Total Decrease in Net Assets (41,771) (51,210)
NET ASSETS -- Beginning of Period 94,768 145,978
---------- ---------------
NET ASSETS -- End of Period (Including
distributions in excess of net investment income
of $(7) and $0, respectively) $ 52,997 $ 94,768
---------- ---------------
---------- ---------------
- ---------------------------------------------------------------------------------------
Capital Share Transactions:
(1) Shares
Subscribed 150,181 359,068
Distributions Reinvested 1,788 4,349
Redeemed (193,732) (414,635)
---------- ---------------
Net Decrease in Shares Outstanding (41,763) (51,218)
---------- ---------------
---------- ---------------
- ---------------------------------------------------------------------------------------
</TABLE>
- -----------
108
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
MONEY MARKET FUND
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
DECEMBER 31, 1997 JUNE 30, 1997
(000) (000)
<S> <C> <C>
- ---------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 4,440 $ 8,859
Net Realized Gain 6 13
---------- ---------------
Net Increase in Net Assets Resulting from
Operations 4,446 8,872
---------- ---------------
DISTRIBUTIONS:
Net Investment Income (4,508) (8,859)
---------- ---------------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 535,228 677,641
Distributions Reinvested 3,865 7,110
Redeemed (314,640) (717,315)
---------- ---------------
Net Increase (Decrease) in Net Assets Resulting
from Capital Share Transactions 224,453 (32,564)
---------- ---------------
Total Increase (Decrease) in Net Assets 224,391 (32,551)
NET ASSETS -- Beginning of Period 138,422 170,973
---------- ---------------
NET ASSETS -- End of Period (Including
distributions in excess of net investment income
of $(68) and $0, respectively) $ 362,813 $138,422
---------- ---------------
---------- ---------------
- ---------------------------------------------------------------------------------------
Capital Share Transactions:
(1) Shares:
Subscribed 535,228 677,641
Distributions Reinvested 3,865 7,110
Redeemed (314,640) (717,315)
---------- ---------------
Net Increase (Decrease) in Shares Outstanding 224,453 (32,564)
---------- ---------------
---------- ---------------
- ---------------------------------------------------------------------------------------
</TABLE>
-----------------------
109
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
GLOBAL EQUITY ALLOCATION FUND
(UNAUDITED)
<TABLE>
<CAPTION>
CLASS A
--------------------------------------------------------------------------------------------
SIX MONTHS JANUARY 4,
ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED 1993*
SELECTED PER SHARE DATA DECEMBER 31, JUNE 30, JUNE 30, JUNE 30, JUNE 30, TO JUNE 30,
AND RATIOS 1997 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF PERIOD $ 16.57 $ 14.75 $ 12.60 $ 11.99 $ 11.09 $ 10.00
------------ ------------ ------------ ------------ ------------ ------------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income
(Loss) 0.06 0.10 0.19 0.12 0.10 0.04
Net Realized and
Unrealized Gain
(Loss) (0.10) 2.76 2.82 0.67 0.90 1.05
------------ ------------ ------------ ------------ ------------ ------------
Total From Investment
Operations (0.04) 2.86 3.01 0.79 1.00 1.09
------------ ------------ ------------ ------------ ------------ ------------
DISTRIBUTIONS
Net Investment Income (0.36) (0.55) (0.39) -- (0.03) --
In Excess of Net
Investment Income -- -- -- (0.05) -- --
Net Realized Gain (1.83) (0.49) (0.47) (0.13) (0.07) --
------------ ------------ ------------ ------------ ------------ ------------
Total Distributions (2.19) (1.04) (0.86) (0.18) (0.10) --
------------ ------------ ------------ ------------ ------------ ------------
NET ASSET VALUE, END OF
PERIOD $ 14.34 $ 16.57 $ 14.75 $ 12.60 $ 11.99 $ 11.09
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
TOTAL RETURN (1) (0.07)% 20.61% 24.62% 6.69% 9.02% 10.90%
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
RATIOS AND SUPPLEMENTAL
DATA
Net Assets, End of Period
(000's) $ 74,593 $ 72,704 $ 63,706 $ 42,586 $ 33,425 $ 10,434
Ratio of Expenses to
Average Net Assets 1.70%** 1.70% 1.70% 1.70% 1.70% 1.70%**
Ratio of Net Investment
Income (Loss) to
Average Net Assets 0.73%** 0.59% 0.71% 1.01% 0.98% 1.04%**
Portfolio Turnover Rate 44% 45% 44% 39% 30% 14%
Average Commission Rate #
Per Share $ 0.0143 $ 0.0021 N/A N/A N/A N/A
As a Percentage of
Trade Amount 0.07% 0.83% N/A N/A N/A N/A
- -------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary
Expense Limitation
During the Period
Per Share Benefit to
Net Investment Income $ 0.01 $ 0.03 $ 0.10 $ 0.04 $ 0.09 $ 0.08
Ratios Before Expense
Limitation:
Expenses to Average Net
Assets 1.81%** 1.90% 2.06% 2.03% 2.58% 3.65%**
Net Investment Income
(Loss) to Average Net
Assets 0.63%** 0.41% 0.35% 0.68% 0.10% (0.91)%**
- -------------------------------------------------------------------------------------------------------------------------
<CAPTION>
CLASS B
--------------------------------------------
SIX MONTHS AUGUST 1,
ENDED YEAR ENDED 1995+ TO
SELECTED PER SHARE DATA DECEMBER 31, JUNE 30, JUNE 30,
AND RATIOS 1997 1997 1996
<S> <C> <C> <C>
- -------------------------
NET ASSET VALUE,
BEGINNING OF PERIOD $ 16.15 $ 14.46 $ 13.01
------------ ------------ ------------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income
(Loss) (0.08) (0.05) 0.30
Net Realized and
Unrealized Gain
(Loss) (0.03) 2.73 1.98
------------ ------------ ------------
Total From Investment
Operations (0.11) 2.68 2.28
------------ ------------ ------------
DISTRIBUTIONS
Net Investment Income (0.28) (0.50) (0.35)
In Excess of Net
Investment Income -- -- --
Net Realized Gain (1.83) (0.49) (0.48)
------------ ------------ ------------
Total Distributions (2.11) (0.99) (0.83)
------------ ------------ ------------
NET ASSET VALUE, END OF
PERIOD $ 13.93 $ 16.15 $ 14.46
------------ ------------ ------------
------------ ------------ ------------
TOTAL RETURN (1) (0.52)% 19.64% 18.08%
------------ ------------ ------------
------------ ------------ ------------
RATIOS AND SUPPLEMENTAL
DATA
Net Assets, End of Period
(000's) $ 58,639 $ 38,962 $ 14,786
Ratio of Expenses to
Average Net Assets 2.45%** 2.45% 2.45%**
Ratio of Net Investment
Income (Loss) to
Average Net Assets (0.02)%** (0.11)% 0.45%**
Portfolio Turnover Rate 44% 45% 44%
Average Commission Rate #
Per Share $ 0.0143 $ 0.0021 N/A
As a Percentage of
Trade Amount 0.07% 0.83% N/A
- ------------------------------------------------------------------------------------------
Effect of Voluntary
Expense Limitation
During the Period
Per Share Benefit to
Net Investment Income $ 0.40 $ 0.09 $ 0.22
Ratios Before Expense
Limitation:
Expenses to Average Net
Assets 2.56%** 2.65% 2.81%**
Net Investment Income
(Loss) to Average Net
Assets (0.12)%** (0.30)% 0.09%**
- --------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS C
-------------------------------------------------------------------------------------------------
SIX MONTHS JANUARY 4,
ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED 1993*
SELECTED PER SHARE DATA DECEMBER 31, JUNE 30, JUNE 30, JUNE 30, JUNE 30, TO JUNE 30,
AND RATIOS 1997 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF PERIOD $ 16.24 $ 14.49 $ 12.43 $ 11.90 $ 11.05 $ 10.00
------------ ------------ ------------ ------------ ------------ ------------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income
(Loss) 0.00++ (0.03) 0.12 0.04 0.06 0.01
Net Realized and
Unrealized Gain
(Loss) (0.10) 2.73 2.75 0.65 0.86 1.04
------------ ------------ ------------ ------------ ------------ ------------
Total From Investment
Operations (0.10) 2.70 2.87 0.69 0.92 1.05
------------ ------------ ------------ ------------ ------------ ------------
DISTRIBUTIONS
Net Investment Income (0.24) (0.46) (0.33) -- -- --
In Excess of Net
Investment Income -- -- -- (0.03) -- --
Net Realized Gain (1.83) (0.49) (0.48) (0.13) (0.07) --
------------ ------------ ------------ ------------ ------------ ------------
Total Distributions (2.07) (0.95) (0.81) (0.16) (0.07) --
------------ ------------ ------------ ------------ ------------ ------------
NET ASSET VALUE, END OF
PERIOD $ 14.07 $ 16.24 $ 14.49 $ 12.43 $ 11.90 $ 11.05
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
TOTAL RETURN (1) (0.42)% 19.69% 23.65% 5.84% 8.34% 10.50%
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
RATIOS AND SUPPLEMENTAL
DATA
Net Assets, End of Period
(000's) $ 80,036 $ 78,199 $ 63,025 $ 40,460 $ 29,892 $ 6,995
Ratio of Expenses to
Average Net Assets 2.45%** 2.45% 2.45% 2.45% 2.45% 2.45%**
Ratio of Net Investment
Income (Loss) to
Average Net Assets (0.02)%** (0.16)% (0.04)% 0.25% 0.23% 0.29%**
Portfolio Turnover Rate 44% 45% 44% 39% 30% 14%
Average Commission Rate #
Per Share $ 0.0143 $ 0.0021 N/A N/A N/A N/A
As a Percentage of
Trade Amount 0.07% 0.83% N/A N/A N/A N/A
- -------------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary
Expense
Limitation During the
Period
Per Share Benefit to
Net Investment Income $ 0.01 $ 0.03 $ 1.16 $ 0.05 $ 0.12 $ 0.07
Ratios Before Expense
Limitation:
Expenses to Average Net
Assets 2.56%** 2.65% 2.81% 2.78% 3.34% 4.40%**
Net Investment Income
(Loss) to Average Net
Assets (0.11)%** (0.34)% (0.40)% (0.08)% (0.66)% (1.66)%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations
** Annualized
+ The Fund began offering Class B shares on August 1, 1995.
++ Amount per share is less than $0.01.
(1) Total return is calculated exclusive sale charges or deferred sales
charges. Total return for periods of less than one year are not
annualized.
# For fiscal years beginning on or after September 1, 1995, a portfolio
is required to disclose the average commission rate per share it paid
for trades on which commissions were charged.
- ------------------
110
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
GLOBAL EQUITY FUND
(UNAUDITED)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
----------------- ----------------- -----------------
OCTOBER 29, 1997* OCTOBER 29, 1997* OCTOBER 29, 1997*
SELECTED PER SHARE DATA AND RATIOS DECEMBER 31, 1997 DECEMBER 31, 1997 DECEMBER 31, 1997
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 $ 10.00 $ 10.00
------- ----------------- -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.02 0.00+ 0.00+
Net Realized and Unrealized (Loss) (0.09) (0.09) (0.09)
------- ----------------- -------
Total From Investment Operations (0.07) (0.09) (0.09)
------- ----------------- -------
DISTRIBUTIONS
Net Investment Income (0.02) (0.00)+ (0.00)+
------- ----------------- -------
Total Distributions (0.02) 0.00+ 0.00+
------- ----------------- -------
NET ASSET VALUE, END OF PERIOD $ 9.91 $ 9.91 $ 9.91
------- ----------------- -------
------- ----------------- -------
TOTAL RETURN (1) (0.74)% (0.86)% (0.86)%
------- ----------------- -------
------- ----------------- -------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 55,372 $ 467,465 $ 45,801
Ratio of Expenses to Average Net Assets 1.56%** 2.31%** 2.31%**
Ratio of Net Investment Income to
Average Net Assets 0.92%** 0.24%** 0.25%**
Portfolio Turnover Rate 0% 0% 0%
Average Commission Rate $ 0.0099 $ 0.0099 $ 0.0099
As a Percentage of Trade Amount 0.07% 0.07% 0.07%
- -------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense Limitation
During the Period
Per Share Benefit to Net Investment
Income $ -- $ -- $ --
Ratios Before Expense Limitation:
Expenses to Average Net Assets -- -- --
Net Investment Income to Average Net
Assets -- -- --
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations
** Annualized
+ The 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.
-----------------------
111
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
GLOBAL FIXED INCOME FUND
(UNAUDITED)
<TABLE>
<CAPTION>
CLASS A
--------------------------------------------------------------------------------------------
SIX MONTHS JANUARY 4,
ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED 1993*
SELECTED PER SHARE DATA DECEMBER 31, JUNE 30, JUNE 30, JUNE 30, JUNE 30, TO JUNE 30,
AND RATIOS 1997 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF PERIOD $ 9.95 $ 9.94 $ 10.23 $ 9.53 $ 10.55 $ 10.00
------------ ------------ ------------ ------------ ------------ ------------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income 0.19 0.44 0.53 0.56 0.52 0.25
Net Realized and
Unrealized Gain
(Loss) 0.04 (0.02) (0.01) 0.50 (0.42) 0.55
------------ ------------ ------------ ------------ ------------ ------------
Total From Investment
Operations 0.23 0.42 0.52 1.06 0.10 0.80
------------ ------------ ------------ ------------ ------------ ------------
DISTRIBUTIONS
Net Investment Income (0.20) (0.35) (0.79) (0.36) (0.50) (0.25)
In Excess of Net
Investment Income -- (0.06) (0.02) -- (0.12) --
Net Realized Gain (0.05) -- -- -- (0.47) --
In Excess of Net
Realized Gain -- -- -- -- (0.03) --
------------ ------------ ------------ ------------ ------------ ------------
Total Distributions (0.25) (0.41) (0.81) (0.36) (1.12) (0.25)
------------ ------------ ------------ ------------ ------------ ------------
NET ASSET VALUE, END OF
PERIOD $ 9.93 $ 9.95 $ 9.94 $ 10.23 $ 9.53 $ 10.55
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
TOTAL RETURN (1) 2.39% 4.27% 5.20% 11.41% 0.41% 8.02%
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
RATIOS AND SUPPLEMENTAL
DATA
Net Assets, End of Period
(000's) $ 5,851 $ 6,407 $ 7,432 $ 11,092 $ 10,369 $ 6,633
Ratio of Expenses to
Average Net Assets 1.45%** 1.45% 1.45% 1.45% 1.45% 1.45%**
Ratio of Net Investment
Income to Average Net
Assets 3.84%** 4.40% 5.02% 5.84% 4.70% 5.00%**
Portfolio Turnover Rate 37% 170% 223% 169% 168% 55%
- -------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary
Expense Limitation
During the Period
Per Share Benefit to
Net Investment Income $ 0.09 $ 0.12 $ 0.07 $ 0.07 $ 0.11 $ 0.07
Ratios Before Expense
Limitation:
Expenses to Average Net
Assets 3.23%** 2.57% 2.16% 2.22% 2.48% 2.88%**
Net Investment Income
to Average Net Assets 2.10%** 3.25% 4.31% 5.07% 3.67% 3.57%**
- -------------------------------------------------------------------------------------------------------------------------
<CAPTION>
CLASS B
--------------------------------------------
SIX MONTHS AUGUST 1,
ENDED YEAR ENDED 1995+ TO
SELECTED PER SHARE DATA DECEMBER 31, JUNE 30, JUNE 30,
AND RATIOS 1997 1997 1996
<S> <C> <C> <C>
- -------------------------
NET ASSET VALUE,
BEGINNING OF PERIOD $ 9.91 $ 9.91 $ 10.24
------------ ------------ ------------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income 0.12 0.41 0.64
Net Realized and
Unrealized Gain
(Loss) 0.07 (0.07) (0.26)
------------ ------------ ------------
Total From Investment
Operations 0.19 0.34 0.38
------------ ------------ ------------
DISTRIBUTIONS
Net Investment Income (0.17) (0.29) (0.69)
In Excess of Net
Investment Income -- (0.05) (0.02)
Net Realized Gain (0.05) -- --
In Excess of Net
Realized Gain -- -- --
------------ ------------ ------------
Total Distributions (0.22) (0.34) (0.71)
------------ ------------ ------------
NET ASSET VALUE, END OF
PERIOD $ 9.88 $ 9.91 $ 9.91
------------ ------------ ------------
------------ ------------ ------------
TOTAL RETURN (1) 1.99% 3.48% 3.76%
------------ ------------ ------------
------------ ------------ ------------
RATIOS AND SUPPLEMENTAL
DATA
Net Assets, End of Period
(000's) $ 1,539 $ 1,716 $ 1,440
Ratio of Expenses to
Average Net Assets 2.20%** 2.20% 2.20%**
Ratio of Net Investment
Income to Average Net
Assets 3.08%** 3.65% 3.38%**
Portfolio Turnover Rate 37% 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 3.98%** 3.37% 3.57%**
Net Investment Income
to Average Net Assets 1.32%** 2.45% 2.01%**
- --------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS C
--------------------------------------------------------------------------------------------
SIX MONTHS JANUARY 4,
ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED 1993*
SELECTED PER SHARE DATA DECEMBER 31, JUNE 30, JUNE 30, JUNE 30, JUNE 30, TO JUNE 30,
AND RATIOS 1997 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF PERIOD $ 9.90 $ 9.90 $ 10.20 $ 9.54 $ 10.56 $ 10.00
------------ ------------ ------------ ------------ ------------ ------------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income 0.16 0.39 0.37 0.49 0.43 0.21
Net Realized and
Unrealized Gain
(Loss) 0.03 (0.05) 0.08 0.47 (0.40) 0.55
------------ ------------ ------------ ------------ ------------ ------------
Total From Investment
Operations 0.19 0.34 0.45 0.96 0.03 0.76
------------ ------------ ------------ ------------ ------------ ------------
DISTRIBUTIONS
Net Investment Income (0.17) (0.29) (0.73) (0.30) (0.44) (0.20)
In Excess of Net
Investment Income -- (0.05) (0.02) -- (0.11) --
Net Realized Gain (0.05) -- -- -- (0.47) --
In Excess of Net
Realized Gain -- -- -- -- (0.03) --
------------ ------------ ------------ ------------ ------------ ------------
Total Distributions (0.22) (0.34) (0.75) (0.30) (1.05) (0.20)
------------ ------------ ------------ ------------ ------------ ------------
NET ASSET VALUE, END OF
PERIOD $ 9.87 $ 9.90 $ 9.90 $ 10.20 $ 9.54 $ 10.56
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
TOTAL RETURN (1) 1.99% 3.48% 4.47% 10.24% (0.25)% 7.61%
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
RATIOS AND SUPPLEMENTAL
DATA
Net Assets, End of Period
(000's) $ 2,103 $ 2,445 $ 2,844 $ 5,965 $ 5,407 $ 6,120
Ratio of Expenses to
Average Net Assets 2.20%** 2.20% 2.20% 2.20% 2.20% 2.20%**
Ratio of Net Investment
Income to Average Net
Assets 3.09%** 3.65% 4.35% 5.09% 3.95% 4.25%**
Portfolio Turnover Rate 37% 170% 223% 169% 168% 55%
- -------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary
Expense
Limitation During the
Period
Per Share Benefit to
Net Investment Income $ 0.09 $ 0.12 $ 0.06 $ 0.08 $ 0.12 $ 0.07
Ratios Before Expense
Limitation:
Expenses to Average Net
Assets 3.98%** 3.35% 2.87% 2.97% 3.29% 3.63%**
Net Investment Income
to Average Net Assets 1.35%** 2.48% 3.68% 4.32% 2.86% 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.
- ------------------
112
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
ASIAN GROWTH FUND
(UNAUDITED)
<TABLE>
<CAPTION>
CLASS A
--------------------------------------------------------------------------------------------
SIX MONTHS JUNE 23,
ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED 1993*
SELECTED PER SHARE DATA DECEMBER 31, JUNE 30, JUNE 30, JUNE 30, JUNE 30, TO JUNE 30,
AND RATIOS 1997 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF PERIOD $ 16.62 $ 17.15 $ 16.42 $ 15.50 $ 12.00 $ 12.00
------------ ------------ ------------ ------------ ------------ ------------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Loss (0.03) (0.06) (0.04) -- (0.03) --
Net Realized and
Unrealized Gain
(Loss) (8.27) (0.14) 0.77 1.43 3.53 --
------------ ------------ ------------ ------------ ------------ ------------
Total From Investment
Operations (8.30) (0.20) 0.73 1.43 3.50 --
------------ ------------ ------------ ------------ ------------ ------------
DISTRIBUTIONS
Net Realized Gain (0.02) -- -- (0.49) -- --
In Excess of Net
Realized Gain -- (0.33) -- (0.02) -- --
------------ ------------ ------------ ------------ ------------ ------------
(0.02) (0.33) -- (0.51) -- --
------------ ------------ ------------ ------------ ------------ ------------
NET ASSET VALUE, END OF
PERIOD $ 8.30 $ 16.62 $ 17.15 $ 16.42 $ 15.50 $ 12.00
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
TOTAL RETURN (1) (49.96)% (1.10)% 4.45% 9.50% 29.17% 0.00%
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
RATIOS AND SUPPLEMENTAL
DATA
Net Assets, End of Period
(000's) $ 63,990 $ 175,448 $ 248,009 $ 178,667 $ 138,212 $ 11,770
Ratio of Expenses to
Average Net Assets 1.97%** 1.84% 1.88% 1.90% 1.90% 1.90%**
Ratio of Net Investment
Income (Loss) to
Average Net Assets (0.91)%** (0.31)% (0.16)% 0.04% (0.24)% (0.81)%**
Portfolio Turnover Rate 71% 74% 38% 34% 34% 0%
Average Commission Rate #
Per Share $ 0.0088 $ 0.0110 N/A N/A N/A N/A
As a Percentage of
Trade Amount 0.41% 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)%**
Ratio of Expenses to
Average Net Assets
excluding country tax
expense 1.89%** -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------
<CAPTION>
CLASS B
--------------------------------------------
SIX MONTHS AUGUST 1,
ENDED YEAR ENDED 1995+
SELECTED PER SHARE DATA DECEMBER 31, JUNE 30, TO JUNE 30,
AND RATIOS 1997 1997 1996
<S> <C> <C> <C>
- -------------------------
NET ASSET VALUE,
BEGINNING OF PERIOD $ 16.17 $ 16.81 $ 16.51
------------ ------------ ------------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Loss (0.13) (0.15) (0.03)
Net Realized and
Unrealized Gain
(Loss) (7.98) (0.16) 0.33
------------ ------------ ------------
Total From Investment
Operations (8.11) (0.31) 0.30
------------ ------------ ------------
DISTRIBUTIONS
Net Realized Gain (0.02) -- --
In Excess of Net
Realized Gain -- (0.33) --
------------ ------------ ------------
(0.02) (0.33) --
------------ ------------ ------------
NET ASSET VALUE, END OF
PERIOD $ 8.04 $ 16.17 $ 16.81
------------ ------------ ------------
------------ ------------ ------------
TOTAL RETURN (1) (50.17)% (1.79)% 1.82%
------------ ------------ ------------
------------ ------------ ------------
RATIOS AND SUPPLEMENTAL
DATA
Net Assets, End of Period
(000's) $ 27,558 $ 62,786 $ 52,853
Ratio of Expenses to
Average Net Assets 2.72%** 2.59% 2.61%**
Ratio of Net Investment
Income (Loss) to
Average Net Assets (1.64)%** (1.04)% (0.52%)**
Portfolio Turnover Rate 71% 74% 38%
Average Commission Rate #
Per Share $ 0.0088 $ 0.0110 N/A
As a Percentage of
Trade Amount 0.41% 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 -- -- --
Ratio of Expenses to
Average Net Assets
excluding country tax
expense 2.64%** -- --
- ------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS C
--------------------------------------------------------------------------------------------
SIX MONTHS JUNE 23,
ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED 1993*
SELECTED PER SHARE DATA DECEMBER 31, JUNE 30, JUNE 30, JUNE 30, JUNE 30, TO JUNE 30,
AND RATIOS 1997 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF PERIOD $ 16.14 $ 16.78 $ 16.19 $ 15.40 $ 12.00 $ 12.00
------------ ------------ ------------ ------------ ------------ ------------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Loss (0.25) (0.24) (0.13) (0.12) (0.10) --
Net Realized and
Unrealized Gain
(Loss) (7.84) (0.07) 0.72 1.42 3.50 --
------------ ------------ ------------ ------------ ------------ ------------
Total From Investment
Operations (8.09) (0.31) 0.59 1.30 3.40 --
------------ ------------ ------------ ------------ ------------ ------------
DISTRIBUTIONS
Net Realized Gain (0.02) -- -- (0.49) -- --
In Excess of Net
Realized Gain -- (0.33) -- (0.02) -- --
------------ ------------ ------------ ------------ ------------ ------------
(0.02) (0.33) -- (0.51) -- --
------------ ------------ ------------ ------------ ------------ ------------
NET ASSET VALUE, END OF
PERIOD $ 8.03 $ 16.14 $ 16.78 $ 16.19 $ 15.40 $ 12.00
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
TOTAL RETURN (1) (50.14)% (1.79)% 3.64% 8.71% 28.33% 0.00%
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
RATIOS AND SUPPLEMENTAL
DATA
Net Assets, End of Period
(000's) $ 37,979 $ 114,460 $ 168,070 $ 139,497 $ 116,889 $ 8,491
Ratio of Expenses to
Average Net Assets 2.72%** 2.59% 2.63% 2.63% 2.65% 2.65%**
Ratio of Net Investment
(Loss) to Average Net
Assets (1.65)%** (1.06)% (0.94)% (0.77%) (0.99)% (1.56)%**
Portfolio Turnover Rate 71% 74% 38% 34% 34% 0%
Average Commission Rate #
Per Share $ 0.0088 $ 0.0110 N/A N/A N/A N/A
As a Percentage of
Trade Amount 0.41% 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)%**
Ratio of Expenses to
Average Net Assets
excluding country tax
expense 2.64%** -- -- -- -- --
</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 return for a periods of less than one year are
not annualized.
# For fiscal years beginning on or after September 1, 1995, a portfolio
is required to disclose the average commission rate per share it paid
for trades on which commissions were charged.
-----------------------
113
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
AMERICAN VALUE FUND
(UNAUDITED)
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------------------------
SIX MONTHS OCTOBER 18,
ENDED YEAR ENDED YEAR ENDED YEAR ENDED 1993*
SELECTED PER SHARE DATA DECEMBER 31, JUNE 30, JUNE 30, JUNE 30, TO JUNE 30,
AND RATIOS 1997 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF PERIOD $ 17.59 $ 14.63 $ 12.89 $ 11.70 $ 12.00
------------ ------------ ------------ ------------ ------------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income
(Loss) 0.03 0.20 0.27 0.27 0.17
Net Realized and
Unrealized Gain
(Loss) 2.87 4.05 1.94 1.44 (0.30)
------------ ------------ ------------ ------------ ------------
Total from Investment
Operations 2.90 4.25 2.21 1.71 (0.13)
------------ ------------ ------------ ------------ ------------
DISTRIBUTIONS
Net Investment Income (0.04) (0.20) (0.27) (0.28) (0.17)
In Excess of Net
Investment Income -- (0.00)++ (0.01) -- --
Net Realized Gain (1.04) (1.09) (0.19) (0.24) --
------------ ------------ ------------ ------------ ------------
Total Distributions (1.08) (1.29) (0.47) (0.52) (0.17)
------------ ------------ ------------ ------------ ------------
NET ASSET VALUE, END OF
PERIOD $ 19.41 $ 17.59 $ 14.63 $ 12.89 $ 11.70
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
TOTAL RETURN (1) 16.66% 30.68% 17.41% 15.01% (1.12)%
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
RATIOS AND SUPPLEMENTAL
DATA
Net Assets, End of Period
(000's) $ 106,826 $ 34,331 $ 19,674 $ 20,675 $ 10,717
Ratio of Expenses to
Average Net Assets 1.50%** 1.50% 1.50% 1.50% 1.50%**
Ratio of Net Investment
Income (Loss) to
Average Net Assets (0.05)%** 1.25% 1.90% 2.29% 2.14%**
Portfolio Turnover Rate 82% 73% 41% 23% 17%
Average Commission Rate # $ 0.0528 $ 0.0452 N/A N/A N/A
- ---------------------------------------------------------------------------------------------------------
Effect of Voluntary
Expense
Limitation During the
Period
Per Share Benefit to
Net Investment Income $ 0.03 $ 0.04 $ 0.04 $ 0.05 $ 0.08
Ratios Before Expense
Limitation:
Expenses to Average Net
Assets 1.57%** 1.76% 1.81% 1.96% 2.48%**
Net Investment Income
to Average Net Assets (0.13)%** 0.98% 1.59% 1.83% 1.16%**
- ---------------------------------------------------------------------------------------------------------
<CAPTION>
CLASS B
--------------------------------------------
SIX MONTHS AUGUST 1,
ENDED YEAR ENDED 1995+ TO
SELECTED PER SHARE DATA DECEMBER 31, JUNE 30, JUNE 30,
AND RATIOS 1997 1997 1996
<S> <C> <C> <C>
- -------------------------
NET ASSET VALUE,
BEGINNING OF PERIOD $ 17.59 $ 14.63 $ 13.37
------------ ------------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income
(Loss) (0.12) 0.09 0.15
Net Realized and
Unrealized Gain
(Loss) 2.94 4.05 1.46
------------ ------------ ------
Total from Investment
Operations 2.82 4.14 1.61
------------ ------------ ------
DISTRIBUTIONS
Net Investment Income (0.01) (0.09) (0.15)
In Excess of Net
Investment Income -- (0.00)++ (0.01)
Net Realized Gain (1.04) (1.09) (0.19)
------------ ------------ ------
Total Distributions (1.05) (1.18) (0.35)
------------ ------------ ------
NET ASSET VALUE, END OF
PERIOD $ 19.36 $ 17.59 $ 14.63
------------ ------------ ------
------------ ------------ ------
TOTAL RETURN (1) 16.25% 29.77% 12.29%
------------ ------------ ------
------------ ------------ ------
RATIOS AND SUPPLEMENTAL
DATA
Net Assets, End of Period
(000's) $ 107,301 $ 15,331 $ 2,485
Ratio of Expenses to
Average Net Assets 2.25%** 2.25% 2.25%**
Ratio of Net Investment
Income (Loss) to
Average Net Assets (0.76)%** 0.40% 1.18%**
Portfolio Turnover Rate 82% 73% 41%
Average Commission Rate # $ 0.0528 $ 0.0452 N/A
- ------------------------------------------------------------------------------------------
Effect of Voluntary
Expense
Limitation During the
Period
Per Share Benefit to
Net Investment Income $ 0.01 $ 0.06 $ 0.04
Ratios Before Expense
Limitation:
Expenses to Average Net
Assets 2.32%** 2.48% 2.61%**
Net Investment Income
to Average Net Assets (0.85)%** 0.14% 0.82%**
- --------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS C
----------------------------------------------------------------------------
SIX MONTHS OCTOBER 18,
ENDED YEAR ENDED YEAR ENDED YEAR ENDED 1993*
SELECTED PER SHARE DATA DECEMBER 31, JUNE 30, JUNE 30, JUNE 30, TO JUNE 30,
AND RATIOS 1997 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF PERIOD $ 17.59 $ 14.64 $ 12.89 $ 11.69 $ 12.00
------------ ------------ ------------ ------------ ------------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income
(Loss) (0.04) 0.08 0.16 0.17 0.11
Net Realized and
Unrealized Gain
(Loss) 2.86 4.05 1.94 1.44 (0.31)
------------ ------------ ------------ ------------ ------------
Total from Investment
Operations 2.82 4.13 2.10 1.61 (0.20)
------------ ------------ ------------ ------------ ------------
DISTRIBUTIONS
Net Investment Income (0.01) (0.09) (0.15) (0.17) (0.11)
In Excess of Net
Investment Income -- (0.00)++ (0.01) -- --
Net Realized Gain (1.04) (1.09) (0.19) (0.24) --
------------ ------------ ------------ ------------ ------------
Total Distributions (1.05) (1.18) (0.35) (0.41) (0.11)
------------ ------------ ------------ ------------ ------------
NET ASSET VALUE, END OF
PERIOD $ 19.36 $ 17.59 $ 14.64 $ 12.89 $ 11.69
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
TOTAL RETURN (1) 16.24% 29.67% 16.50% 14.13% (1.70)%
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
RATIOS AND SUPPLEMENTAL
DATA
Net Assets, End of Period
(000's) $ 73,122 $ 32,425 $ 21,193 $ 13,867 $ 7,237
Ratio of Expenses to
Average Net Assets 2.25%** 2.25% 2.25% 2.25% 2.25%**
Ratio of Net Investment
Income (Loss) to
Average Net Assets (0.82)%** 0.49% 1.17% 1.54% 1.39%**
Portfolio Turnover Rate 82% 73% 41% 23% 17%
Average Commission Rate # $ 0.0528 $ 0.0452 N/A N/A N/A
- ---------------------------------------------------------------------------------------------------------
Effect of Voluntary
Expense
Limitation During the
Period
Per Share Benefit to
Net Investment Income $ 0.00++ $ 0.04 $ 0.04 $ 0.05 $ 0.08
Ratios Before Expense
Limitation:
Expenses to Average Net
Assets 2.32%** 2.47% 2.58% 2.71% 3.28%**
Net Investment Income
to Average Net Assets (0.89)%** 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 portfolio
is required to disclose the average commission rate per share it paid
for trades on which commissions were charged.
- ------------------
114
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
VALUE FUND
(UNAUDITED)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------------ ------------ ------------
JULY 7, JULY 7, JULY 7,
1997* 1997* 1997*
DECEMBER 31, DECEMBER 31, DECEMBER 31,
SELECTED PER SHARE DATA AND RATIOS 1997 1997 1997
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 $ 10.00 $ 10.00
------------ ------------ ------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.03 0.01 0.01
Net Realized and Unrealized Gain 0.15 0.14 0.13
------------ ------------ ------------
Total From Investment Operations 0.18 0.15 0.14
------------ ------------ ------------
DISTRIBUTIONS
Net Investment Income (0.03) (0.01) (0.01)
Net Realized Gain (0.05) (0.05) (0.05)
------------ ------------ ------------
Total Distributions (0.08) (0.06) (0.06)
------------ ------------ ------------
NET ASSET VALUE, END OF PERIOD $ 10.10 $ 10.09 $ 10.08
------------ ------------ ------------
------------ ------------ ------------
TOTAL RETURN (1) 1.84% 1.51% 1.43%
------------ ------------ ------------
------------ ------------ ------------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 102,701 $ 88,112 $ 19,466
Ratio of Expenses to Average Net Assets 1.45%** 2.20%** 2.20%**
Ratio of Net Investment Income to
Average Net Assets 1.01%** 0.26%** 0.27%**
Portfolio Turnover Rate 15% 15% 15%
Average Commission Rate $ 0.0587 $ 0.0587 $ 0.0587
- ----------------------------------------------------------------------------------------
Effect of Voluntary Expense Limitation
During the Period
Per Share Benefit to Net Investment
Income $ 0.01 $ 0.01 $ 0.01
Ratios Before Expense Limitation:
Expenses to Average Net Assets 1.78%** 2.53%** 2.53%**
Net Investment Income to Average Net
Assets 0.70%** 0.06%** 0.06%**
</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.
-----------------------
115
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
WORLDWIDE HIGH INCOME FUND
(UNAUDITED)
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------------------------
SIX MONTHS APRIL 21,
ENDED YEAR ENDED YEAR ENDED YEAR ENDED 1994*
SELECTED PER SHARE DATA DECEMBER 31, JUNE 30, JUNE 30, JUNE 30, TO JUNE 30,
AND RATIOS 1997 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF PERIOD $ 14.26 $ 12.47 $ 11.57 $ 12.17 $ 12.00
------------ ------------ ------------ ------------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income 0.60 1.25 1.36 1.26 0.18
Net Realized and
Unrealized Gain
(Loss) (0.13) 2.30 0.80 (0.52) 0.16
------------ ------------ ------------ ------------ ------
Total From Investment
Operations 0.47 3.55 2.16 0.74 0.34
------------ ------------ ------------ ------------ ------
DISTRIBUTIONS
Net Investment Income (0.55) (1.25) (1.26) (1.22) (0.17)
Net Realized Gain (1.19) (0.51) -- (0.12) --
------------ ------------ ------------ ------------ ------
Total Distributions (1.74) (1.76) (1.26) (1.34) (0.17)
------------ ------------ ------------ ------------ ------
NET ASSET VALUE, END OF
PERIOD $ 12.99 $ 14.26 $ 12.47 $ 11.57 $ 12.17
------------ ------------ ------------ ------------ ------
------------ ------------ ------------ ------------ ------
TOTAL RETURN (1) 3.36% 30.29% 19.61% 6.87% 2.86%
------------ ------------ ------------ ------------ ------
------------ ------------ ------------ ------------ ------
RATIOS AND SUPPLEMENTAL
DATA
Net Assets, End of Period
(000's) $ 82,139 $ 76,439 $ 41,493 $ 14,819 $ 6,857
Ratio of Expenses to
Average Net Assets 1.43%** 1.52% 1.55% 1.55% 1.55%**
Ratio of Net Investment
Income to Average Net
Assets 8.05%** 9.73% 11.95% 11.53% 8.29%**
Portfolio Turnover Rate 67% 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 Investment Income
to Average Net Assets -- -- 11.81% 11.11% 6.61%**
- ---------------------------------------------------------------------------------------------------------
<CAPTION>
CLASS B
--------------------------------------------
SIX MONTHS AUGUST 1,
ENDED YEAR ENDED 1995+
SELECTED PER SHARE DATA DECEMBER 31, JUNE 30, TO JUNE 30,
AND RATIOS 1997 1997 1996
<S> <C> <C> <C>
- -------------------------
NET ASSET VALUE,
BEGINNING OF PERIOD $ 14.20 $ 12.44 $ 11.63
------------ ------------ ------------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income 0.47 1.07 1.18
Net Realized and
Unrealized Gain
(Loss) (0.06) 2.35 0.72
------------ ------------ ------------
Total From Investment
Operations 0.41 3.42 1.90
------------ ------------ ------------
DISTRIBUTIONS
Net Investment Income (0.50) (1.15) (1.09)
Net Realized Gain (1.19) (0.51) --
------------ ------------ ------------
Total Distributions (1.69) (1.66) (1.09)
------------ ------------ ------------
NET ASSET VALUE, END OF
PERIOD $ 12.92 $ 14.20 $ 12.44
------------ ------------ ------------
------------ ------------ ------------
TOTAL RETURN (1) 2.96% 29.14% 17.07%
------------ ------------ ------------
------------ ------------ ------------
RATIOS AND SUPPLEMENTAL
DATA
Net Assets, End of Period
(000's) $ 103,847 $ 78,340 $ 26,174
Ratio of Expenses to
Average Net Assets 2.18%** 2.27% 2.30%**
Ratio of Net Investment
Income to Average Net
Assets 7.30%** 8.86% 12.06%**
Portfolio Turnover Rate 67% 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 Investment Income
to Average Net Assets -- -- 11.89%**
- --------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS C
----------------------------------------------------------------------------
SIX MONTHS APRIL 21,
ENDED YEAR ENDED YEAR ENDED YEAR ENDED 1994*
SELECTED PER SHARE DATA DECEMBER 31, JUNE 30, JUNE 30, JUNE 30, TO JUNE 30,
AND RATIOS 1997 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------
Net Asset Value,
Beginning of Period $ 14.21 $ 12.45 $ 11.58 $ 12.16 $ 12.00
------------ ------------ ------------ ------------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income 0.53 1.16 1.30 1.17 0.17
Net Realized and
Unrealized Gain
(Loss) (0.12) 2.26 0.77 (0.50) 0.15
------------ ------------ ------------ ------------ ------
Total From Investment
Operations 0.41 3.42 2.07 0.67 0.32
------------ ------------ ------------ ------------ ------
DISTRIBUTIONS
Net Investment Income (0.50) (1.15) (1.20) (1.13) (0.16)
Net Realized Gain (1.19) (0.51) -- (0.12) --
------------ ------------ ------------ ------------ ------
Total Distributions (1.69) (1.66) (1.20) (1.25) (0.16)
------------ ------------ ------------ ------------ ------
NET ASSET VALUE, END OF
PERIOD $ 12.93 $ 14.21 $ 12.45 $ 11.58 $ 12.16
------------ ------------ ------------ ------------ ------
------------ ------------ ------------ ------------ ------
TOTAL RETURN (1) 2.88% 29.12% 18.71% 6.20% 2.62%
------------ ------------ ------------ ------------ ------
------------ ------------ ------------ ------------ ------
RATIOS AND SUPPLEMENTAL
DATA
Net Assets, End of Period
(000's) $ 50,102 $ 41,709 $ 28,094 $ 11,880 $ 6,081
Ratio of Expenses to
Average Net Assets 2.18%** 2.27% 2.30% 2.30% 2.30%**
Ratio of Net Investment
Income to Average Net
Assets 7.31%** 9.04% 11.40% 10.72% 7.54%**
Portfolio Turnover Rate 67% 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 Investment 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 return for periods of less than one year are not
annualized.
- ------------------
116
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
LATIN AMERICAN FUND
(UNAUDITED)
<TABLE>
<CAPTION>
CLASS A
---------------------------------------------------------------
SIX MONTHS JULY 6,
ENDED YEAR ENDED YEAR ENDED 1994*
SELECTED PER SHARE DATA DECEMBER 31, JUNE 30, JUNE 30, JUNE 30,
AND RATIOS 1997 1997 1996 1995
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF PERIOD $ 17.39 $ 12.63 $ 9.08 $ 12.00
------------ ------------ ------------ ------------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income
(Loss) (0.08) 0.02 0.10 (0.02)
Net Realized and
Unrealized Gain
(Loss) (0.60) 6.46 3.47 (2.70)
------------ ------------ ------------ ------------
Total From Investment
Operations (0.68) 6.48 3.57 (2.72)
------------ ------------ ------------ ------------
DISTRIBUTIONS
Net Investment Income -- -- (0.02) --
In Excess of Net
Investment Income -- (0.09) -- --
Net Realized Gain (3.23) (1.63) -- --
Return of Capital -- -- -- (0.20)
------------ ------------ ------------ ------------
Total Distributions (3.23) (1.72) (0.02) (0.20)
------------ ------------ ------------ ------------
NET ASSET VALUE, END OF
PERIOD $ 13.48 $ 17.39 $ 12.63 $ 9.08
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
TOTAL RETURN (1) (2.46)% 57.32% 39.35% (23.07)%
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
RATIOS AND SUPPLEMENTAL
DATA
Net Assets, End of Period
(000's) $ 66,929 $ 84,401 $ 18,701 $ 7,658
Ratio of Expenses to
Average Net Assets 2.30%** 2.24% 2.11% 2.46%**
Ratio of Net Investment
Income (Loss) to
Average Net Assets (1.03)%** (0.08)% 1.18% (0.44)%**
Portfolio Turnover Rate 155% 241% 131% 107%
Average Commission Rate #
Per Share $ 0.0008 $ 0.0006 N/A N/A
As a Percentage of
Trade Amount 0.26% 0.31% N/A N/A
- ---------------------------------------------------------------------------------------------
Effect of Voluntary
Expense Limitation
During the Period
Per Share Benefit to
Net Investment Income $ 0.01 $ 0.10 $ 0.09 $ 0.13
Ratios Before Expense
Limitation:
Expenses to Average Net
Assets 2.46%** 2.61% 3.28% 4.30%**
Net Investment Income
(Loss) to Average Net
Assets (1.18)%** (0.61)% 0.01% (2.26)%**
Ratio of Expenses to
Average Net Assets
excluding country tax
expense 2.10%** 2.10% 2.10% 2.10%**
- ---------------------------------------------------------------------------------------------
<CAPTION>
CLASS B
----------------------------------------------
SIX MONTHS AUGUST 1,
ENDED YEAR ENDED 1995+ TO
SELECTED PER SHARE DATA DECEMBER 31, JUNE 30, JUNE 30,
AND RATIOS 1997 1997 1996
<S> <C> <C> <C>
- -------------------------
NET ASSET VALUE,
BEGINNING OF PERIOD $ 16.99 $ 12.45 $ 9.58
------------ ------------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income
(Loss) (0.07) (0.03) 0.03
Net Realized and
Unrealized Gain
(Loss) (0.63) 6.28 2.84
------------ ------------ ------
Total From Investment
Operations (0.70) 6.25 2.87
------------ ------------ ------
DISTRIBUTIONS
Net Investment Income -- -- --
In Excess of Net
Investment Income -- (0.08) --
Net Realized Gain (3.23) (1.63) --
Return of Capital -- -- --
------------ ------------ ------
Total Distributions (3.23) (1.71) --
------------ ------------ ------
NET ASSET VALUE, END OF
PERIOD $ 13.06 $ 16.99 $ 12.45
------------ ------------ ------
------------ ------------ ------
TOTAL RETURN (1) (2.66)% 56.17% 29.26%
------------ ------------ ------
------------ ------------ ------
RATIOS AND SUPPLEMENTAL
DATA
Net Assets, End of Period
(000's) $ 29,554 $ 14,314 $ 2,041
Ratio of Expenses to
Average Net Assets 3.05%** 2.99% 2.87%**
Ratio of Net Investment
Income (Loss) to
Average Net Assets (1.67)%** (0.78)% 0.88%**
Portfolio Turnover Rate 155% 241% 131%
Average Commission Rate #
Per Share $ 0.0008 $ 0.0006 N/A
As a Percentage of
Trade Amount 0.26% 0.31% N/A
- ---------------------------------------------------------------------------------------------
Effect of Voluntary
Expense Limitation
During the Period
Per Share Benefit to
Net Investment Income $ 0.01 $ 0.02 $ 0.04
Ratios Before Expense
Limitation:
Expenses to Average Net
Assets 3.21%** 3.55% 3.89%**
Net Investment Income
(Loss) to Average Net
Assets (1.85)%** (1.34)% (0.14)%**
Ratio of Expenses to
Average Net Assets
excluding country tax
expense 2.85%** 2.85% 2.85%**
- ---------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS C
------------------------------------------------------------
SIX MONTHS JULY 6,
ENDED YEAR ENDED YEAR ENDED 1994*
SELECTED PER SHARE DATA DECEMBER 31, JUNE 30, JUNE 30, JUNE 30,
AND RATIOS 1997 1997 1996 1995
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF PERIOD $ 17.01 $ 12.43 $ 8.99 $ 12.00
------------ ------------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income
(Loss) (0.11) (0.07) 0.04 (0.08)
Net Realized and
Unrealized Gain
(Loss) (0.60) 6.31 3.40 (2.73)
------------ ------------ ------ ------
Total From Investment
Operations (0.71) 6.24 3.44 (2.81)
------------ ------------ ------ ------
DISTRIBUTIONS
In Excess of Net
Investment Income -- (0.03) -- --
Net Realized Gain (3.23) (1.63) -- --
Return of Capital -- -- -- (0.20)
------------ ------------ ------ ------
Total Distributions (3.23) (1.66) -- (0.20)
------------ ------------ ------ ------
NET ASSET VALUE, END OF
PERIOD $ 13.07 $ 17.01 $ 12.43 $ 8.99
------------ ------------ ------ ------
------------ ------------ ------ ------
TOTAL RETURN (1) (2.75)% 56.04% 38.26% (23.83)%
------------ ------------ ------ ------
------------ ------------ ------ ------
RATIOS AND SUPPLEMENTAL
DATA
Net Assets, End of Period
(000's) $ 22,730 $ 20,345 $ 6,780 $ 4,085
Ratio of Expenses to
Average Net Assets 3.05%** 2.99% 2.86% 3.20%**
Ratio of Net Investment
Income (Loss) to
Average Net Assets (1.75)%** (0.79)% 0.42% (1.16)%**
Portfolio Turnover Rate 155% 241% 131% 107%
Average Commission Rate #
Per Share $ 0.0008 $ 0.0006 N/A N/A
As a Percentage of
Trade Amount 0.26% 0.31% N/A N/A
- -----------------------------------------------------------------------------------------
Effect of Voluntary
Expense Limitation
During the Period
Per Share Benefit to
Net Investment Income $ 0.01 $ 0.05 $ 0.12 $ 0.12
Ratios Before Expense
Limitation:
Expenses to Average Net
Assets 3.21%** 3.40% 4.06% 5.20%**
Net Investment Income
(Loss) to Average Net
Assets (1.91)%** (1.36)% (0.78)% (3.16)%**
Ratio of Expenses to
Average Net Assets
excluding country tax
expense 2.85%** 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 return for periods of less than one year are not
annualized.
# For fiscal years beginning on or after September 1, 1995, a portfolio
is required to disclose the average commission rate per share it paid
for trades on which commissions were charged.
-----------------------
117
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
EMERGING MARKETS FUND
(UNAUDITED)
<TABLE>
<CAPTION>
CLASS A
---------------------------------------------------------------
SIX MONTHS JULY 6,
ENDED YEAR ENDED YEAR ENDED 1994* TO
SELECTED PER SHARE DATA DECEMBER 31, JUNE 30, JUNE 30, JUNE 30,
AND RATIOS 1997 1997 1996 1995
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF PERIOD $ 13.47 $ 12.06 $ 10.61 $ 12.00
------------ ------------ ------------ ------------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income
(Loss) (0.02) 0.01 0.05 0.05
Net Realized and
Unrealized Gain
(Loss) (3.01) 1.57 1.44 (1.44)
------------ ------------ ------------ ------------
Total From Investment
Operations (3.03) 1.58 1.49 (1.39)
------------ ------------ ------------ ------------
DISTRIBUTIONS
Net Investment Income -- -- (0.04) --
In Excess of Net
Investment Income -- (0.04) -- --
Net Realized Gain (1.00) (0.13) -- --
------------ ------------ ------------ ------------
Total Distributions (1.00) (0.17) (0.04) --
------------ ------------ ------------ ------------
NET ASSET VALUE, END OF
PERIOD $ 9.44 $ 13.47 $ 12.06 $ 10.61
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
TOTAL RETURN (1) (22.19)% 13.54% 14.16% (11.58)%
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
RATIOS AND SUPPLEMENTAL
DATA
Net Assets, End of Period
(000's) $ 95,359 $ 119,022 $ 114,850 $ 26,091
Ratio of Expenses to
Average Net Assets 2.20%** 2.21% 2.16% 2.33%**
Ratio of Net Investment
Income (Loss) to
Average Net Assets (0.31)%** (0.06)% 0.93% 0.81%**
Portfolio Turnover Rate 58% 82% 42% 32%
Average Commission Rate #
Per Share $ 0.0022 $ 0.0007 N/A N/A
As a Percentage of
Trade Amount 0.38% 0.39% N/A N/A
- ---------------------------------------------------------------------------------------------
Effect of Voluntary
Expense Limitation
During the Period
Per Share Benefit to
Net Investment Income $ 0.01 $ 0.03 $ 0.02 $ 0.04
Ratios Before Expense
Limitation:
Expenses to Average Net
Assets 2.40%** 2.41% 2.56% 3.10%**
Net Investment Income
(Loss) to Average Net
Assets (0.50)%** (0.27)% 0.53% 0.04%**
Ratio of Expenses to
Average Net Assets
excluding country tax
expense. 2.15%** 2.15% 2.15% 2.15%**
- ---------------------------------------------------------------------------------------------
<CAPTION>
CLASS B
----------------------------------------------
SIX MONTHS AUGUST 1,
ENDED YEAR ENDED 1995+ TO
SELECTED PER SHARE DATA DECEMBER 31, JUNE 30, JUNE 30,
AND RATIOS 1997 1997 1996
<S> <C> <C> <C>
- -------------------------
NET ASSET VALUE,
BEGINNING OF PERIOD $ 13.24 $ 11.94 $ 10.91
------------ ------------ ------------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income
(Loss) (0.02) (0.03) 0.01
Net Realized and
Unrealized Gain
(Loss) (2.99) 1.50 1.02
------------ ------------ ------------
Total From Investment
Operations (3.01) 1.47 1.03
------------ ------------ ------------
DISTRIBUTIONS
Net Investment Income -- -- --
In Excess of Net
Investment Income -- (0.04) --
Net Realized Gain (1.00) (0.13) --
------------ ------------ ------------
Total Distributions (1.00) (0.17) --
------------ ------------ ------------
NET ASSET VALUE, END OF
PERIOD $ 9.23 $ 13.24 $ 11.94
------------ ------------ ------------
------------ ------------ ------------
TOTAL RETURN (1) (22.50)% 12.67% 9.45%
------------ ------------ ------------
------------ ------------ ------------
RATIOS AND SUPPLEMENTAL
DATA
Net Assets, End of Period
(000's) $ 43,549 $ 35,966 $ 10,416
Ratio of Expenses to
Average Net Assets 2.95%** 2.96% 2.91%**
Ratio of Net Investment
Income (Loss) to
Average Net Assets (1.04)%** (0.64)% 0.30%**
Portfolio Turnover Rate 58% 82% 42%
Average Commission Rate #
Per Share $ 0.0022 $ 0.0007 N/A
As a Percentage of
Trade Amount 0.38% 0.39% N/A
- --------------------------------------------------------------------------------------------
Effect of Voluntary
Expense Limitation
During the Period
Per Share Benefit to
Net Investment Income $ 0.01 $ 0.01 $ 0.02
Ratios Before Expense
Limitation:
Expenses to Average Net
Assets 3.15%** 3.17% 3.31%**
Net Investment Income
(Loss) to Average Net
Assets (1.25)%** (0.87)% (0.10)%**
Ratio of Expenses to
Average Net Assets
excluding country tax
expense. 2.90%** 2.90% 2.90%**
- ---------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS C
------------------------------------------------------------
SIX MONTHS JULY 6,
ENDED YEAR ENDED YEAR ENDED 1994* TO
SELECTED PER SHARE DATA DECEMBER 31, JUNE 30, JUNE 30, JUNE 30,
AND RATIOS 1997 1997 1996 1995
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF PERIOD $ 13.26 $ 11.93 $ 10.53 $ 12.00
------------ ------------ ------------ ------------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment (Loss) (0.07) (0.08) (0.01) --
Net Realized and
Unrealized Gain
(Loss) (2.95) 1.55 1.41 (1.47)
------------ ------------ ------------ ------------
Total From Investment
Operations (3.02) 1.47 1.40 (1.47)
------------ ------------ ------------ ------------
DISTRIBUTIONS
Net Investment Income -- -- -- --
In Excess of Net
Investment Income -- (0.01) -- --
Net Realized Gain (1.00) (0.13) -- --
------------ ------------ ------------ ------------
Total Distributions (1.00) (0.14) -- --
------------ ------------ ------------ ------------
NET ASSET VALUE, END OF
PERIOD $ 9.24 $ 13.26 $ 11.93 $ 10.53
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
TOTAL RETURN (1) (22.48)% 12.66% 13.30% (12.25)%
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
RATIOS AND SUPPLEMENTAL
DATA
Net Assets, End of Period
(000's) $ 39,235 $ 57,958 $ 43,601 $ 22,245
Ratio of Expenses to
Average Net Assets 2.95%** 2.96% 2.91% 3.08%**
Ratio of Net Investment
Income (Loss) to
Average Net Assets (1.05)%** (0.79)% (0.11)% 0.06%**
Portfolio Turnover Rate 58% 82% 42% 32%
Average Commission Rate #
Per Share $ 0.0022 $ 0.0007 N/A N/A
As a Percentage of
Trade Amount 0.38% 0.39% N/A N/A
- -----------------------------------------------------------------------------------------
Effect of Voluntary
Expense
Limitation During the
Period
Per Share Benefit to
Net Investment Income $ 0.01 $ 0.02 $ 0.03 $ 0.04
Ratios Before Expense
Limitation:
Expenses to Average Net
Assets 3.15%** 3.17% 3.34% 3.90%**
Net Investment Income
(Loss) to Average Net
Assets (1.23)%** (1.00)% (0.54)% (0.76)%**
Ratio of Expenses to
Average Net Assets
excluding country tax
expense. 2.90%** 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 return for periods of less than one year are not
annualized.
# For fiscal years beginning on or after September 1, 1995, a portfolio
is required to disclose the average commission rate per share it paid
for trades on which commissions were charged.
- ------------------
118
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
AGGRESSIVE EQUITY FUND
(UNAUDITED)
<TABLE>
<CAPTION>
CLASS A CLASS B
-------------------------------------------- --------------------------------------------
SIX MONTHS JANUARY 2, SIX MONTHS JANUARY 2,
ENDED YEAR ENDED 1996* ENDED YEAR ENDED 1996*
SELECTED PER SHARE DATA DECEMBER 31, JUNE 30, TO JUNE 30, DECEMBER 31, JUNE 30, TO JUNE 30,
AND RATIOS 1997 1997 1996 1997 1997 1996
<S> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF PERIOD $ 16.98 $ 14.40 $ 12.00 $ 16.85 $ 14.38 $ 12.00
------------ ------------ ------------ ------------ ------------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income
(Loss) (0.04) 0.04 0.06 (0.08) (0.02) 0.03
Net Realized and
Unrealized Gain 2.81 3.95 2.40 2.74 3.86 2.39
------------ ------------ ------------ ------------ ------------ ------
Total From Investment
Operations 2.77 3.99 2.46 2.66 3.84 2.42
------------ ------------ ------------ ------------ ------------ ------
DISTRIBUTIONS
Net Investment Income -- (0.06) (0.06) -- (0.02) (0.04)
Net Realized Gain (1.93) (1.35) -- (1.93) (1.35) --
------------ ------------ ------------ ------------ ------------ ------
Total Distributions (1.93) (1.41) (0.06) (1.93) (1.37) (0.04)
------------ ------------ ------------ ------------ ------------ ------
NET ASSET VALUE, END OF
PERIOD $ 17.82 $ 16.98 $ 14.40 $ 17.58 $ 16.85 $ 14.38
------------ ------------ ------------ ------------ ------------ ------
------------ ------------ ------------ ------------ ------------ ------
TOTAL RETURN (1) 16.66% 28.93% 20.52% 16.26% 28.01% 20.18%
------------ ------------ ------------ ------------ ------------ ------
------------ ------------ ------------ ------------ ------------ ------
RATIOS AND SUPPLEMENTAL
DATA
Net Assets, End of Period
(000's) $ 35,689 $ 22,521 $ 5,382 $ 58,739 $ 34,382 $ 2,426
Ratio of Expenses to
Average Net Assets 1.50%** 1.57% 2.03%** 2.25%** 2.32% 2.67%**
Ratio of Net Investment
Income (Loss) to
Average Net Assets (0.43)%** (0.04)% 1.22%** (1.17)%** (0.83)% 0.43%**
Portfolio Turnover Rate 141% 241% 204% 141% 241% 204%
Average Commission Rate # $ 0.0581 $ 0.0536 N/A $ 0.0581 $ 0.0536 N/A
- -------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary
Expense
Limitation During the
Period
Per Share Benefit to
Net Investment Income $ 0.03 $ 0.22 $ 0.06 $ 0.02 $ 0.02 $ 0.07
Ratios Before Expense
Limitation:
Expenses to Average Net
Assets 1.79%** 2.38% 3.26%** 2.54%** 2.88% 3.79%**
Net Investment Income
to Average Net Assets (0.73)%** (0.85)% (0.01)%** (1.47)%** (1.43)% (0.69)%**
Ratio of Expenses to
Average Net Assets
excluding dividend
expense on securities
sold short 1.50%** 1.50% 1.50%** 2.25%** 2.25% 2.25%**
<CAPTION>
CLASS C
--------------------------------------------
SIX MONTHS JANUARY 2,
ENDED YEAR ENDED 1996*
SELECTED PER SHARE DATA DECEMBER 31, JUNE 30, TO JUNE 30,
AND RATIOS 1997 1997 1996
<S> <C> <C> <C>
- -------------------------
NET ASSET VALUE,
BEGINNING OF PERIOD $ 16.83 $ 14.37 $ 12.00
------------ ------------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income
(Loss) (0.08) (0.06) 0.03
Net Realized and
Unrealized Gain 2.75 3.89 2.38
------------ ------------ ------
Total From Investment
Operations 2.67 3.83 2.41
------------ ------------ ------
DISTRIBUTIONS
Net Investment Income -- (0.02) (0.04)
Net Realized Gain (1.93) (1.35) --
------------ ------------ ------
Total Distributions (1.93) (1.37) (0.04)
------------ ------------ ------
NET ASSET VALUE, END OF
PERIOD $ 17.57 $ 16.83 $ 14.37
------------ ------------ ------
------------ ------------ ------
TOTAL RETURN (1) 16.21% 28.04% 20.10%
------------ ------------ ------
------------ ------------ ------
RATIOS AND SUPPLEMENTAL
DATA
Net Assets, End of Period
(000's) $ 11,837 $ 9,410 $ 2,582
Ratio of Expenses to
Average Net Assets 2.25%** 2.32% 2.67%**
Ratio of Net Investment
Income (Loss) to
Average Net Assets (1.21)%** (0.77)% 0.44%**
Portfolio Turnover Rate 141% 241% 204%
Average Commission Rate # $ 0.0581 $ 0.0536 N/A
- ------------------------------------------------------------------------------------------
Effect of Voluntary
Expense
Limitation During the
Period
Per Share Benefit to
Net Investment Income $ 0.02 $ 0.07 $ 0.07
Ratios Before Expense
Limitation:
Expenses to Average Net
Assets 2.54%** 3.23% 3.80%**
Net Investment Income
to Average Net Assets (1.50)%** (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 portfolio
is required to disclose the average commission rate per share it paid
for trades on which commissions were charged.
-----------------------
119
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
U.S. REAL ESTATE FUND
(UNAUDITED)
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------
SIX MONTHS MAY 1, 1996*
ENDED YEAR ENDED TO
SELECTED PER SHARE DATA DECEMBER 31, JUNE 30, JUNE 30,
AND RATIOS 1997 1997 1996
<S> <C> <C> <C>
- ----------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF PERIOD $ 16.39 $ 12.52 $ 12.00
------------ ------------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income 0.21 0.37 0.08
Net Realized and
Unrealized Gain 2.02 4.03 0.48
------------ ------------ ------
Total From Investment
Operations 2.23 4.40 0.56
------------ ------------ ------
DISTRIBUTIONS
Net Investment Income (0.23) (0.29) (0.04)
Net Realized Gain (1.60) (0.24) --
------------ ------------ ------
Total Distributions (1.83) (0.53) (0.04)
------------ ------------ ------
NET ASSET VALUE, END OF
PERIOD $ 16.79 $ 16.39 $ 12.52
------------ ------------ ------
------------ ------------ ------
TOTAL RETURN (1) 13.83% 35.75% 4.63%
------------ ------------ ------
------------ ------------ ------
RATIOS AND SUPPLEMENTAL
DATA
Net Assets, End of Period
(000's) $ 20,768 $ 14,827 $ 1,829
Ratio of Expenses to
Average Net Assets 1.55%** 1.55% 1.55%**
Ratio of Net Investment
Income to Average Net
Assets 2.51%** 2.33% 4.11%**
Portfolio Turnover Rate 59% 143% 0%
Average Commission Rate # $ 0.0596 $ 0.0582 N/A
- ----------------------------------------------------------------------------
Effect of Voluntary
Expense Limitation
During the Period
Per Share Benefit to
Net Investment Income $ 0.05 $ 0.16 $ 0.08
Ratios Before Expense
Limitation:
Expenses to Average Net
Assets 2.16%** 2.51% 5.58%**
Net Investment Income
to Average Net Assets 1.90%** 1.36% 0.08%**
- ----------------------------------------------------------------------------
<CAPTION>
CLASS B
----------------------------------------------
SIX MONTHS MAY 1, 1996*
ENDED YEAR ENDED TO
SELECTED PER SHARE DATA DECEMBER 31, JUNE 30, JUNE 30,
AND RATIOS 1997 1997 1996
<S> <C> <C> <C>
- -------------------------
NET ASSET VALUE,
BEGINNING OF PERIOD $ 16.36 $ 12.52 $ 12.00
------------ ------------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income 0.10 0.15 0.07
Net Realized and
Unrealized Gain 2.03 4.12 0.48
------------ ------------ ------
Total From Investment
Operations 2.13 4.27 0.55
------------ ------------ ------
DISTRIBUTIONS
Net Investment Income (0.16) (0.19) (0.03)
Net Realized Gain (1.60) (0.24) --
------------ ------------ ------
Total Distributions (1.76) (0.43) (0.03)
------------ ------------ ------
NET ASSET VALUE, END OF
PERIOD $ 16.73 $ 16.36 $ 12.52
------------ ------------ ------
------------ ------------ ------
TOTAL RETURN (1) 13.40% 34.58% 4.54%
------------ ------------ ------
------------ ------------ ------
RATIOS AND SUPPLEMENTAL
DATA
Net Assets, End of Period
(000's) $ 12,764 $ 7,120 $ 2,197
Ratio of Expenses to
Average Net Assets 2.30%** 2.30% 2.30%**
Ratio of Net Investment
Income to Average Net
Assets 1.64%** 1.49% 3.35%**
Portfolio Turnover Rate 59% 143% 0%
Average Commission Rate # $ 0.0596 $ 0.0582 N/A
- ----------------------------------------------------------------------------
Effect of Voluntary
Expense Limitation
During the Period
Per Share Benefit to
Net Investment Income $ 0.04 $ 0.11 $ 0.07
Ratios Before Expense
Limitation:
Expenses to Average Net
Assets 2.91%** 3.39% 6.34%**
Net Investment Income
to Average Net Assets 1.02%** 0.39% (0.69)%**
- ----------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS C
----------------------------------------------
SIX MONTHS MAY 1, 1996*
ENDED YEAR ENDED TO
SELECTED PER SHARE DATA DECEMBER 31, JUNE 30, JUNE 30,
AND RATIOS 1997 1997 1996
<S> <C> <C> <C>
- ----------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF PERIOD $ 16.36 $ 12.52 $ 12.00
------------ ------------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income 0.10 0.20 0.07
Net Realized and
Unrealized Gain 2.03 4.07 0.48
------------ ------------ ------
Total From Investment
Operations 2.13 4.27 0.55
------------ ------------ ------
DISTRIBUTIONS
Net Investment Income (0.16) (0.19) (0.03)
Net Realized Gain (1.60) (0.24) --
------------ ------------ ------
Total Distributions (1.76) (0.43) (0.03)
------------ ------------ ------
NET ASSET VALUE, END OF
PERIOD $ 16.73 $ 16.36 $ 12.52
------------ ------------ ------
------------ ------------ ------
TOTAL RETURN (1) 13.36% 34.56% 4.54%
------------ ------------ ------
------------ ------------ ------
RATIOS AND SUPPLEMENTAL
DATA
Net Assets, End of Period
(000's) $ 3,910 $ 2,369 $ 1,782
Ratio of Expenses to
Average Net Assets 2.30%** 2.30% 2.30%**
Ratio of Net Investment
Income to Average Net
Assets 1.66%** 1.46% 3.39%**
Portfolio Turnover Rate 59% 143% 0%
Average Commission Rate # $ 0.0596 $ 0.0582 N/A
- ----------------------------------------------------------------------------
Effect of Voluntary
Expense Limitation
During the Period
Per Share Benefit to
Net Investment Income $ 0.03 $ 0.17 $ 0.08
Ratios Before Expense
Limitation:
Expenses to Average Net
Assets 2.91%** 3.58% 6.32%**
Net Investment Income
to Average Net Assets 1.09%** 0.16% (0.63)%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations
** Annualized
(1) Total return is calculated exclusive of sales charges or deferred
sales charges. Total returns for periods of less than one year are not
annualized.
# For fiscal years beginning on or after September 1, 1995, a portfolio
is required to disclose the average commission rate per share it paid
for trades on which commissions were charged.
- ------------------
120
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
HIGH YIELD FUND
(UNAUDITED)
<TABLE>
<CAPTION>
CLASS A CLASS B
---------------------------------------------- ----------------------------------------------
SIX MONTHS MAY 1, 1996* SIX MONTHS MAY 1, 1996*
ENDED YEAR ENDED TO ENDED YEAR ENDED TO
SELECTED PER SHARE DATA DECEMBER 31, JUNE 30, JUNE 30, DECEMBER 31, JUNE 30, JUNE 30,
AND RATIOS 1997 1997 1996 1997 1997 1996
<S> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF PERIOD $ 12.86 $ 11.92 $ 12.00 $ 12.86 $ 11.93 $ 12.00
------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income 0.64 1.07 0.13 0.45 0.98 0.12
Net Realized and
Unrealized Gain
(Loss) 0.15 0.99 (0.09) 0.27 0.99 (0.09)
------ ------ ------ ------ ------ ------
Total From Investment
Operations 0.79 2.06 0.04 0.72 1.97 0.03
------ ------ ------ ------ ------ ------
DISTRIBUTIONS
Net Investment Income (0.51) (1.07) (0.12) (0.47) (0.99) (0.10)
Net Realized Gain (0.55) (0.05) -- (0.55) (0.05) --
------ ------ ------ ------ ------ ------
Total Distributions (1.06) (1.12) (0.12) (1.02) (1.04) (0.10)
------ ------ ------ ------ ------ ------
NET ASSET VALUE, END OF
PERIOD $ 12.59 $ 12.86 $ 11.92 $ 12.56 $ 12.86 $ 11.93
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
TOTAL RETURN (1) 6.24% 18.12% 0.29% 5.67% 17.22% 0.21%
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
RATIOS AND SUPPLEMENTAL
DATA
Net Assets, End of Period
(000's) $ 5,644 $ 8,980 $ 3,907 $ 9,931 $ 8,617 $ 3,421
Ratio of Expenses to
Average Net Assets 1.25%** 1.25% 1.25%** 2.00%** 2.00% 2.00%**
Ratio of Net Investment
Income to Average Net
Assets 7.41%** 8.83% 6.85%** 6.70%** 7.99% 6.08%**
Portfolio Turnover Rate 37% 104% 10% 37% 104% 10%
- -------------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary
Expense Limitation
During the Period
Per Share Benefit to
Net Investment Income $ 0.06 $ 0.10 $ 0.04 $ 0.05 $ 0.10 $ 0.04
Ratios Before Expense
Limitation:
Expenses to Average Net
Assets 1.90%** 2.04% 3.51%** 2.65%** 2.82% 4.25%**
Net Investment Income
to Average Net Assets 6.76%** 8.04% 4.59%** 5.98%** 7.17% 3.83%**
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS C
----------------------------------------------
SIX MONTHS MAY 1, 1996*
ENDED YEAR ENDED TO
SELECTED PER SHARE DATA DECEMBER 31, JUNE 30, JUNE 30,
AND RATIOS 1997 1997 1996
<S> <C> <C> <C>
- ----------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF PERIOD $ 12.86 $ 11.93 $ 12.00
------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income 0.33 0.99 0.12
Net Realized and
Unrealized Gain
(Loss) 0.39 0.98 (0.09)
------ ------ ------
Total From Investment
Operations 0.72 1.97 0.03
------ ------ ------
DISTRIBUTIONS
Net Investment Income (0.47) (0.99) (0.10)
Net Realized Gain (0.55) (0.05) --
------ ------ ------
Total Distributions (1.02) (1.04) (0.10)
------ ------ ------
NET ASSET VALUE, END OF
PERIOD $ 12.56 $ 12.86 $ 11.93
------ ------ ------
------ ------ ------
TOTAL RETURN (1) 5.66% 17.21% 0.21%
------ ------ ------
------ ------ ------
RATIOS AND SUPPLEMENTAL
DATA
Net Assets, End of Period
(000's) $ 2,864 $ 4,970 $ 3,316
Ratio of Expenses to
Average Net Assets 2.00%** 2.00% 2.00%**
Ratio of Net Investment
Income to Average Net
Assets 6.52%** 8.03% 6.07%**
Portfolio Turnover Rate 37% 104% 10%
- ----------------------------------------------------------------------------
Effect of Voluntary
Expense Limitation
During the Period
Per Share Benefit to
Net Investment Income $ 0.03 $ 0.11 $ 0.04
Ratios Before Expense
Limitation:
Expenses to Average Net
Assets 2.65%** 2.88% 4.25%**
Net Investment Income
to Average Net Assets 5.89%** 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.
-----------------------
121
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
INTERNATIONAL MAGNUM FUND
(UNAUDITED)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
---------------------------- ---------------------------- ----------------------------
SIX MONTHS JULY 1, SIX MONTHS JULY 1, SIX MONTHS JULY 1,
ENDED 1996* TO ENDED 1996* TO ENDED 1996* TO
SELECTED PER SHARE DATA DECEMBER 31, JUNE 30, DECEMBER 31, JUNE 30, DECEMBER 31, JUNE 30,
AND RATIOS 1997 1997 1997 1997 1997 1997
<S> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF PERIOD $ 13.91 $ 12.00 $ 13.84 $ 12.00 $ 13.83 $ 12.00
------------ ------------ ------------ ------------ ------------ ------------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income
(Loss) (0.08) 0.17 (0.12) 0.10 (0.03) 0.06
Net Realized and
Unrealized Gain
(Loss) (0.97) 1.88 (0.97) 1.85 (1.05) 1.88
------------ ------------ ------------ ------------ ------------ ------------
Total From Investment
Operations (1.05) 2.05 (1.09) 1.95 (1.08) 1.94
------------ ------------ ------------ ------------ ------------ ------------
DISTRIBUTIONS
Net Investment Income (0.18) (0.13) (0.13) (0.10) (0.08) (0.10)
Net Realized Gain (0.01) (0.01) (0.01) (0.01) (0.01) (0.01)
------------ ------------ ------------ ------------ ------------ ------------
Total Distributions (0.19) (0.14) (0.14) (0.11) (0.09) (0.11)
------------ ------------ ------------ ------------ ------------ ------------
NET ASSET VALUE, END OF
PERIOD $ 12.67 $ 13.91 $ 12.61 $ 13.84 $ 12.66 $ 13.83
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
TOTAL RETURN (1) (7.52)% 17.30% (7.87)% 16.40% (7.88)% 16.27%
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
RATIOS AND SUPPLEMENTAL
DATA
Net Assets, End of Period
(000's) $ 36,918 $ 21,961 $ 33,824 $ 18,215 $ 9,147 $ 9,156
Ratio of Expenses to
Average Net Assets 1.65%** 1.65% 2.40%** 2.40% 2.40%** 2.40%
Ratio of Net Investment
Income (Loss) to
Average Net Assets 0.43%** 1.39% (0.33)%** 0.54% (0.31)%** 0.29%
Portfolio Turnover Rate 22% 22% 22% 22% 22% 22%
Average Commission Rate $ 0.0211 $ 0.0318 $ 0.0211 $ 0.0318 $ 0.0211 $ 0.0318
As a Percentage of Trade
Amount 0.23% 0.33% 0.23% 0.33% 0.23% 0.33%
- -------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary
Expense Limitation
During the Period
Per Share Benefit to
Net Investment Income $ 0.04 $ 0.11 $ 0.07 $ 0.17 $ 0.02 $ 0.21
Ratios Before Expense
Limitation:
Expenses to Average Net
Assets 1.84%** 2.50% 2.59%** 3.34% 2.59%** 3.45%
Net Investment Income
(Loss) to Average Net
Assets 0.23%** 0.52% (0.53)%** (0.42)% (0.48)%** (0.77)%
</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.
- ------------------
122
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
GOVERNMENT OBLIGATIONS MONEY MARKET FUND
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
SELECTED PER SHARE DATA DECEMBER 31, JUNE 30, JUNE 30, JUNE 30, JUNE 30, JUNE 30,
AND RATIOS 1997 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------------ ------------ ------------ ------------ ------------ ------------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income 0.0235 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 0.0235 0.0443 0.0453 0.0448 0.0254 0.0248
------------ ------------ ------------ ------------ ------------ ------------
DISTRIBUTIONS
Net Investment Income (0.0235) (0.0443) (0.0464) (0.0448) (0.0243) (0.0246)
Net Realized Gain -- -- (0.0001) -- (0.0011) (0.0002)
------------ ------------ ------------ ------------ ------------ ------------
Total Distributions (0.0235) (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 $ 1.00
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
TOTAL RETURN (1) 2.37% 4.53% 4.72% 4.58% 2.45% 2.51%
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
RATIOS AND SUPPLEMENTAL
DATA
Net Assets, End of Period
(000's) $ 52,997 $ 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% 0.95%
Ratio of Net Investment
Income to Average Net
Assets 4.65%* 4.43% 4.68% 4.61% 2.40% 2.50%
- -------------------------------------------------------------------------------------------------------------------------
Ratios Before Expense
Limitation:
Expenses to Average Net
Assets 1.24%* 1.27% 1.24% 1.12% 1.22% 1.19%
Net Investment Income
to Average Net Assets 4.37%* 4.10% 4.39% 4.44% 2.13% 2.26%
</TABLE>
- --------------------------------------------------------------------------------
* Annualized
(1) Total returns for periods of less than one year are not annualized.
-----------------------
123
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
MONEY MARKET FUND
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
SELECTED PER SHARE DATA DECEMBER 31, JUNE 30, JUNE 30, JUNE 30, JUNE 30, JUNE 30,
AND RATIOS 1997 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------------ ------------ ------------ ------------ ------------ ------------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income 0.0239 0.0450 0.0463 0.0446 0.0246 0.0243
Net Realized and
Unrealized Gain
(Loss) -- -- (0.0006) 0.0001 -- 0.0001
------------ ------------ ------------ ------------ ------------ ------------
Total From Investment
Operations 0.0239 0.0450 0.0457 0.0447 0.0246 0.0244
------------ ------------ ------------ ------------ ------------ ------------
DISTRIBUTIONS
Net Investment Income (0.0239) (0.0450) (0.0463) (0.0446) (0.0246) (0.0243)
Net Realized Gain -- -- -- (0.0001) -- (0.0001)
------------ ------------ ------------ ------------ ------------ ------------
Total Distributions (0.0239) (0.0450) (0.0463) (0.0447) (0.0246) (0.0244)
------------ ------------ ------------ ------------ ------------ ------------
NET ASSET VALUE, END OF
PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
TOTAL RETURN (1) 2.42% 4.60% 4.72% 4.55% 2.49% 2.47%
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
RATIOS AND SUPPLEMENTAL
DATA
Net Assets, End of Period
(000's) $ 362,813 $ 138,422 $ 170,973 $ 171,515 $ 176,599 $ 156,310
Ratio of Expenses to
Average Net Assets 0.98%* 0.98% 0.98% 0.98% 0.98% 0.98%
Ratio of Net Investment
Income to Average Net
Assets 4.78%* 4.50% 4.65% 4.45% 2.45% 2.44%
- -------------------------------------------------------------------------------------------------------------------------
Ratios Before Expense
Limitation:
Expenses to Average Net
Assets 1.12%* 1.27% 1.22% 1.18% 1.19% 1.20%
Net Investment Income
to Average Net Assets 4.65%* 4.20% 4.41% 4.25% 2.24% 2.22%
</TABLE>
- --------------------------------------------------------------------------------
* Annualized
(1) Total returns for periods of less than one year are not annualized.
- ------------------
124
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
NOTES TO FINANCIAL STATEMENTS
DECEMBER, 31 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
Morgan Stanley Fund, Inc. (the "Fund") was incorporated under the laws of
Maryland on August 14, 1992 and commenced operations on January 4, 1993. The
Fund is registered under the Investment Company Act of 1940, as amended, as an
open-end management investment company which offers redeemable shares of
diversified and non-diversified investment portfolios.
As of December 31, 1997, the Fund had fifteen separate, active investment
portfolios: Morgan Stanley Global Equity Allocation Fund, Morgan Stanley Global
Equity Fund, Morgan Stanley Global Fixed Income Fund, Morgan Stanley Asian
Growth Fund, Morgan Stanley American Value Fund, Morgan Stanley 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 Equity Fund", "Global
Fixed Income Fund," "Asian Growth Fund," "American Value Fund," " 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% (4.75% for shares sold in the Global Fixed Income Fund, Worldwide High
Income Fund and the High Yield Fund). For certain purchases of Class A shares
the front-end sales charge may be waived and a contingent deferred sales charge
of 1.00% imposed in the event of certain redemptions within one year of the
purchase. 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.
The Value Fund commenced operations on July 7, 1997 and the Global Equity Fund
commenced operations on October 29, 1997.
The Board of Trustees has approved the acquisition of the assets and liabilities
of the Morgan Stanley U.S. Real Estate Fund, Morgan Stanley Global Fixed Income
Fund, and the VKAC Global Equity Fund by the VKAC Real Estate Securities Fund,
VKAC Global Government Securities Fund, and the Morgan Stanley Global Equity
Allocation Fund, respectively. These transactions, subject to shareholder
approval, are expected to be completed by June, 1998.
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 using methods
determined 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
------------------
125
<PAGE>
MORGAN STANLEY FUNDS
NOTES TO FINANCIAL STATEMENTS (CONT.)
DECEMBER, 31 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
investment income, net realized capital gains and net unrealized appreciation,
as applicable, as the income and/or capital gains are earned. Taxes may also be
based on the movement of foreign currency and are accrued based on the value of
investments denominated in such currency.
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
PORTFOLIO (000)
- ------------------------------------- -----------------------
<S> <C>
Government Obligations Money
Market............................. $ 90
Money Market......................... 98
</TABLE>
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
- -----------------------
126
<PAGE>
MORGAN STANLEY FUNDS
NOTES TO FINANCIAL STATEMENTS (CONT.)
DECEMBER, 31 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
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
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: Certain Portfolios may sell securities short. A short sale is a
transaction in which the Portfolios sell securities it may or may not own, but
has borrowed, in anticipation of a decline in the market price of the
securities. The Portfolios are obligated to purchase securities at the market
price to replace the borrowed securities at the time of replacement. The
Portfolios 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
Portfolios' 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 Portfolios 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 Portfolios 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 December 31, 1997 is
as follows:
<TABLE>
<CAPTION>
VALUE OF LOANED VALUE OF
SECURITIES COLLATERAL
PORTFOLIO (000) (000)
- ------------------------------------- ----------------------- ----------
<S> <C> <C>
Global Equity Allocation............. $ 15,878 $ 16,567
</TABLE>
------------------
127
<PAGE>
MORGAN STANLEY FUNDS
NOTES TO FINANCIAL STATEMENTS (CONT.)
DECEMBER, 31 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
At December 31, 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 Sub-Adviser,
administers the security lending program and for its services the Fund incurred
fees in the amount of $14,808 for the six months ended December 31, 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 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. Van Kampen American
Capital, 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. FUTURES: Certain Portfolios may purchase and sell futures contracts. Futures
contracts provide for the sale by one party and purchase by another party of a
specified amount of a specified security, instrument or basket of instruments.
Futures contracts (secured by cash or government securities deposited with
brokers or custodians as "initial margin") are valued based upon their quoted
daily settlement prices; changes in initial settlement value (represented by
cash paid to or received from brokers as "variation margin") are accounted for
as unrealized appreciation (depreciation). When futures contracts are closed,
the difference between the opening value at the date of purchase and the value
at closing is recorded as realized gains or losses in the Statement of
Operations.
Certain Portfolios may use futures contracts in order to hedge against
unfavorable changes in the value of securities or to remain fully invested and
to reduce transaction costs. Futures contracts involve market risk in excess of
the amounts recognized in the Statement of Net Assets. Risks arise from the
possible movements in security values underlying these instruments. The change
in value of futures contracts primarily corresponds with the value of their
underlying instruments, which may not correlate with the change in value of the
hedged investments. In addition, there is the risk that a Portfolio may not be
able to enter into a closing transaction because of an illiquid secondary
market.
13. SWAP AGREEMENTS: Certain Portfolios may enter into swap agreements to
exchange the return generated by one security, instrument or basket of
instruments for the return generated by another security, instrument or basket
of instruments. The following summarizes swaps which may be entered into by the
Portfolios:
Interest Rate Swaps: Interest rate swaps involve the exchange of commitments to
pay and receive interest based on a notional principal amount. Net periodic
interest payments to be received or paid are accrued daily and are recorded in
the Statement of Operations as an adjustment to interest income. Interest rate
swaps are marked-to-market daily based upon quotations from market makers and
the change, if any, is recorded as unrealized appreciation or depreciation in
the Statement of Operations.
Total Return Swaps: Total return swaps involve commitments to pay interest in
exchange for a market-linked return based on a notional amount. To the extent
the total return of the security or index underlying the transaction exceeds or
falls short of the offsetting interest obligation, the Portfolio will receive a
payment from or make a payment to the counterparty, respectively. Total return
swaps are marked-to-market daily based upon quotations from market makers and
the change, if any, is recorded as unrealized gains
- -----------------------
128
<PAGE>
MORGAN STANLEY FUNDS
NOTES TO FINANCIAL STATEMENTS (CONT.)
DECEMBER, 31 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
or losses in the Statement of Operations. Periodic payments received or made at
the end of each measurement period, but prior to termination, are recorded as
realized gains or losses in the Statement of Operations.
Realized gains or losses on maturity or termination of interest rate and total
return swaps are presented in the Statement of Operations. Because there is no
organized market for these swap agreements, the value reported in the Statement
of Net Assets may differ from that which would be realized in the event the
Portfolio terminated its position in the agreement. Risks may arise upon
entering into these agreements from the potential inability of the
counterparties to meet the terms of the agreements and generally are limited to
the amount of net interest payments to be received and/or favorable movements in
the value of the underlying security, if any, at the date of default.
14. 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 six months 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: Van Kampen American Capital Investment Advisory Corp., (the
"Adviser") a wholly owned subsidiary of Van Kampen American Capital, Inc. (an
indirect wholly owned subsidiary of Morgan Stanley, Dean Witter, Discover &
Co.), Morgan Stanley Asset Management, Inc. ("MSAM" or a "Sub-Adviser") a wholly
owned subsidiary of Morgan Stanley, Dean Witter, Discover & Co., and Miller
Anderson & Sherred, LLP (a "Sub-Adviser") a wholly owned subsidiary of Morgan
Stanley, Dean Witter, Discover & Co. provide the Fund with investment advisory
services at a fee paid monthly and calculated at the annual rates based on
average daily net assets as 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 Equity........................ 1.00% 1.80% 2.55%
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%
Value................................ 0.80% 1.45% 2.20%
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................. 0.80% 1.65% 2.40%
Government Obligations Money Market.. 0.45% 0.95% N/A
Money Market......................... 0.45% 0.98% N/A
</TABLE>
C. ADMINISTRATOR: Van Kampen American Capital Investment Advisory Corp. (the
"Administrator") 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 the Adviser and The
------------------
129
<PAGE>
MORGAN STANLEY FUNDS
NOTES TO FINANCIAL STATEMENTS (CONT.)
DECEMBER, 31 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
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 the Adviser from the fee it
receives from the Fund. Transfer agency services are provided to the Fund by
ACCESS Investor Services, Inc., an affiliate of the Adviser.
D. DISTRIBUTOR: 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.
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; for Class A shares of each Portfolio redeemed less
than one year following such purchases and for Class B and Class C shares of
each Portfolio redeemed within one to five years following such purchase. For
the six months ended December 31, 1997, the Distributor has advised the Fund
that it earned initial sales charges of $1,847,924 for Class A shares and
deferred sales charges of $27,563, $1,068,171 and $144,849 for Class A shares,
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 six months ended December 31, 1997, the following Portfolios incurred
custody fees and had amounts payable to MSTC at December 31, 1997:
<TABLE>
<CAPTION>
MSTC CUSTODY CUSTODY FEES
FEES INCURRED PAYABLE TO MSTC
PORTFOLIO (000) (000)
- ------------------------------------- -------------------- -----------------------
<S> <C> <C>
Global Equity Allocation............. $ 108 $ 94
Global Equity........................ 25 25
Global Fixed Income.................. 6 7
Asian Growth......................... 193 148
Worldwide High Income................ 3 35
Latin American....................... 134 93
Emerging Markets..................... 417 225
International Magnum................. 68 47
</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 six months ended December 31, 1997, purchases
and sales of investment securities other than long-term U.S. Government
securities and short-term investments were:
<TABLE>
<CAPTION>
PURCHASES SALES
PORTFOLIO (000) (000)
- ------------------------------------- ----------------- --------
<S> <C> <C>
Global Equity Allocation............. $ 90,871 $ 97,476
Global Equity........................ 551,567 --
Global Fixed Income.................. 3,328 4,157
Asian Growth......................... 159,642 225,652
American Value....................... 305,357 137,017
Value................................ 195,717 14,190
Worldwide High Income................ 182,554 136,599
Latin American....................... 183,655 176,716
Emerging Markets..................... 122,995 111,868
Aggressive Equity.................... 136,310 111,569
U.S. Real Estate..................... 28,029 17,304
High Yield........................... 7,313 9,325
International Magnum................. 41,691 12,815
</TABLE>
Purchases and sales of long term U.S. Government securities during the six
months ended December 31, 1997 occurred in the Global Fixed Income Fund and
totaled $242,900 and $573,000, respectively.
G. OTHER: At December 31, 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.
- -----------------------
130
<PAGE>
MORGAN STANLEY FUNDS
NOTES TO FINANCIAL STATEMENTS (CONT.)
DECEMBER, 31 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
Foreign denominated assets and liabilities, including Portfolio securities and
foreign currency holdings, were translated at the following exchange rates as of
December 31, 1997:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Argentine Peso................ 0.99981 = $1.00
Australian Dollar............. 1.53504 = $1.00
Austrian Schilling............ 12.63150 = $1.00
Belgian Franc................. 37.05100 = $1.00
Brazilian Real................ 1,785.00000 = $1.00
British Pound................. 0.60853 = $1.00
Canadian Dollar............... 1.42945 = $1.00
Colombian Peso................ 1,296.65000 = $1.00
Danish Krone.................. 6.85190 = $1.00
Egyptian Pound................ 3.40250 = $1.00
Finnish Markka................ 5.45095 = $1.00
French Franc.................. 6.01850 = $1.00
German Mark................... 1.79895 = $1.00
Hong Kong Dollar.............. 7.74900 = $1.00
Hungarian Forint.............. 203.95500 = $1.00
Indian Rupee.................. 39.20000 = $1.00
Indonesian Rupiah............. 5,500.00000 = $1.00
Irish Punt.................... 0.70284 = $1.00
Italian Lira.................. 1,769.00000 = $1.00
Japanese Yen.................. 130.47500 = $1.00
Malaysian Ringgit............. 3.88950 = $1.00
Mexican Peso.................. 8.06000 = $1.00
Netherlands Guilder........... 2.02765 = $1.00
New Zealand Dollar............ 1.72221 = $1.00
Pakistan Rupee................ 44.00600 = $1.00
Peruvian Sol.................. 2.72550 = $1.00
Philippine Peso............... 40.50000 = $1.00
Polish Zloty.................. 3.52500 = $1.00
Portuguese Escudo............. 184.05000 = $1.00
Singapore Dollar.............. 1.68150 = $1.00
South African Rand............ 4.86650 = $1.00
South Korean Won.............. 1,695.00000 = $1.00
Spanish Peseta................ 152.35000 = $1.00
Swedish Krona................. 7.93990 = $1.00
Swiss Franc................... 1.46050 = $1.00
Taiwan Dollar................. 32.62500 = $1.00
Thai Baht..................... 48.15000 = $1.00
Turkish Lira.................. 207,250.00000 = $1.00
Venezuelan Bolivar............ 504.30000 = $1.00
</TABLE>
During the six months ended December 31, 1997, the Asian Growth Fund, Latin
American Fund, Emerging Markets Fund, International Magnum Fund and Global
Equity Fund incurred approximately $135,604, $36,936, $32,109, $167 and
$112,298, respectively, as brokerage commissions with Morgan Stanley & Co.
Incorporated, an affiliated broker/ dealer.
At December 31, 1997 the Global Equity Allocation Fund and Emerging Markets Fund
owned shares of affiliated funds for which the Funds earned dividend income of
approximately $195,000 and $87,000, respectively. The Global Equity Allocation
Fund and Emerging Markets Fund incurred losses totaling $1,465,000 and $148,000,
respectively on sales of shares in affiliated funds during the period.
Certain legal expenses are paid to Skadden, Arps, Slate, Meagher & Flom, counsel
to the Fund, of which a trustee of the Fund is an affiliated person.
At December 31, 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)
PORTFOLIO (000) (000) (000) (000)
- ------------------------- -------- ------- ---------- ---------------
<S> <C> <C> <C> <C>
Global Equity
Allocation............. $193,431 $ 25,896 $ (10,926) $ 14,970
Global Equity............ 604,967 22,898 (27,757) (4,859)
Global Fixed Income...... 9,310 213 (239) (26)
Asian Growth............. 158,645 3,651 (37,799) (34,148)
American Value........... 274,305 27,218 (12,118) 15,100
Value.................... 213,532 6,865 (8,407) (1,542)
Worldwide High Income.... 240,047 6,772 (7,271) (499)
Latin American........... 118,707 9,895 (8,189) 1,706
Emerging Markets......... 189,975 18,835 (49,482) (30,647)
Aggressive Equity........ 98,075 6,945 (1,306) 5,639
U.S. Real Estate......... 37,870 3,316 (185) 3,131
High Yield............... 17,668 1,002 (371) 631
International Magnum..... 82,016 4,242 (6,723) (2,481)
Government Obligations
Money Market........... 52,742 -- -- --
Money Market............. 362,669 -- -- --
</TABLE>
------------------
131
<PAGE>
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<PAGE>
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<PAGE>
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<PAGE>
FUNDS DISTRIBUTED BY VAN KAMPEN AMERICAN CAPITAL
- --------------------------------------------------------------------------------
EQUITY FUNDS
DOMESTIC
MS Aggressive Equity
VKAC Aggressive Growth
MS American Value
VKAC Comstock
VKAC Emerging Growth
VKAC Enterprise
VKAC Equity Income
VKAC Growth
VKAC Growth and Income
VKAC Harbor
VKAC Pace
VKAC Real Estate Securities
MS U.S. Real Estate
VKAC Utility
MS Value
INTERNATIONAL/GLOBAL
MS Asian Growth
MS Emerging Markets
MS Global Equity
VKAC Global Equity
MS Global Equity Allocation
VKAC Global Managed Assets
MS International Magnum
MS Latin American
FIXED-INCOME FUNDS
INCOME
VKAC Corporate Bond
MS Global Fixed Income
VKAC Global Government Securities
VKAC Government Securities
VKAC High Income Corporate Bond
MS High Yield
VKAC High Yield
VKAC Short-Term Global Income
VKAC Strategic Income
VKAC U.S. Government
VKAC U.S. Government Trust for Income
MS Worldwide High Income
TAX EXEMPT INCOME
VKAC California Insured Tax Free
VKAC Florida Insured Tax Free Income
VKAC High Yield Municipal
VKAC Insured Tax Free Income
VKAC Intermediate Term
Municipal Income
VKAC Municipal Income
VKAC New York Tax Free Income
VKAC Pennsylvania Tax Free Income
VKAC Tax Free High Income
CAPITAL PRESERVATION
VKAC Limited Maturity Government
VKAC Prime Rate Income Trust
VKAC Reserve
VKAC Senior Floating Rate
VKAC Tax Free Money
To find out more about any of these funds, ask
your financial adviser for a prospectus, which
contains more complete information, including
sales charges, risks, and expenses. Please read
it carefully before you invest or send money.
To view a current Van Kampen American Capital
or Morgan Stanley fund prospectus or to
receive additional fund information, choose
from one of the following:
- - visit our web site at WWW.VKAC.COM --
to view prospectuses, select INVESTORS'
PLACE, then DOWNLOAD A PROSPECTUS
- - call us at 1-800-341-2911 weekdays
from 7:00 a.m. to 7:00 p.m. Central time
(Telecommunications Device for the Deaf
users, call 1-800-421-2833)
- - e-mail us by visiting WWW.VKAC.COM
and selecting INVESTORS' PLACE
<PAGE>
MORGAN STANLEY FUNDS
- --------------------------------------------------------------------------------
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.
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 ADVISERS
Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas
New York, New York 10020
Miller Anderson & Sherrerd, LLP
One Tower Bridge
West Conshohocken, PA 19428
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.
