<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 25, 1998
1933 ACT REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM N-14
<TABLE>
<S> <C>
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. __ [ ]
POST-EFFECTIVE AMENDMENT NO. ____ [ ]
</TABLE>
---------------------
MORGAN STANLEY FUND, INC.
(Exact Name of Registrant as Specified in Amended and Restated Certificate of
Incorporation)
ONE PARKVIEW PLAZA
OAKBROOK TERRACE, ILLINOIS 60181
(Address of Principal Executive Offices)
TELEPHONE NUMBER: (680) 634-6000
---------------------
<TABLE>
<S> <C>
RONALD A. NYBERG, ESQ. COPIES TO:
EXECUTIVE VICE PRESIDENT, WAYNE W. WHALEN, ESQ.
GENERAL COUNSEL AND SECRETARY THOMAS A. HALE, ESQ.
VAN KAMPEN AMERICAN CAPITAL, INC. SKADDEN, ARPS, SLATE, MEAGHER & FLOM (ILLINOIS)
ONE PARKVIEW PLAZA 333 WEST WACKER
OAKBROOK TERRACE, ILLINOIS 60181 CHICAGO, ILLINOIS 60606
(Name and Address of Agent for Service)
</TABLE>
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
TITLE OF SECURITIES BEING REGISTERED: SHARES OF COMMON STOCK, PAR VALUE
$0.001 PER SHARE. NO FILING FEE IS DUE HEREWITH BECAUSE OF RELIANCE ON SECTION
24(F) OF THE INVESTMENT COMPANY ACT OF 1940.
================================================================================
<PAGE> 2
EXPLANATORY NOTE
This Registration Statement contains one Prospectus/Proxy Statement and one
Statement of Additional Information relating to one of the twenty-two investment
portfolios of the Registrant: Morgan Stanley Global Equity Allocation Fund. This
Registration Statement is organized as follows:
-- Cross Reference Sheet with respect to Morgan Stanley Global Equity
Allocation Fund
-- Questions and Answers to Shareholders of Van Kampen American Capital
Global Equity Fund
-- Notice of Special Meeting of Shareholders of Van Kampen American Capital
Global Equity Fund
-- Prospectus/Proxy Statement regarding the proposed Reorganization of Van
Kampen American Capital Global Equity Fund into Morgan Stanley Global
Equity Allocation Fund
-- Prospectus of Morgan Stanley Global Equity Allocation Fund
-- Statement of Additional Information regarding the proposed
Reorganization of Van Kampen American Global Equity Fund into Morgan
Stanley Global Equity Allocation Fund
-- Part C Information
-- Exhibits
<PAGE> 3
MORGAN STANLEY GLOBAL EQUITY ALLOCATION FUND
CROSS-REFERENCE SHEET PURSUANT TO RULE 481(A) OF REGULATION C
UNDER THE SECURITIES ACT OF 1933
<TABLE>
<CAPTION>
FORM N-14
ITEM NO. PROSPECTUS/PROXY STATEMENT CAPTION*
- --------- -----------------------------------
<S> <C> <C>
PART A INFORMATION REQUIRED IN THE PROSPECTUS/PROXY STATEMENT
Item 1. Beginning of Registration Statement and Outside Front
Cover Page of Prospectus/Proxy Statement........... Outside front cover page of
Prospectus/Proxy Statement
Item 2. Beginning and Outside Back Cover Page of
Prospectus/Proxy Statement......................... Outside back cover page of
Prospectus/Proxy Statement
Item 3. Fee Table, Synopsis Information and Risk Factors..... Summary; Risk Factors
Item 4. Information about the Transaction.................... Summary; The Proposed Reorganization
Item 5. Information about the Registrant..................... Outside front cover page of
Prospectus/Proxy Statement;
Summary; The Proposed
Reorganization; Other Information;
Exhibit A; Prospectus and
Statement of Additional
Information of the MS Global
Equity Allocation Fund
(incorporated by reference)
Item 6. Information about the Company Being Acquired......... Outside front cover page of
Prospectus/Proxy Statement;
Summary; Exhibit A; Prospectus and
Statement of Additional
Information of the VKAC Global
Equity Fund (incorporated by
reference)
Item 7. Voting Information................................... Other Information; Voting
Information and Requirements
Item 8. Interest of Certain Persons and Experts.............. Summary; The Proposed Reorganization
Item 9. Additional Information Required for Reoffering by
Persons Deemed to be Underwriters.................. Not applicable
PART B INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION
Item 10. Cover Page........................................... Cover Page
Item 11. Table of Contents.................................... Table of Contents
Item 12. Additional Information about the Registrant.......... Additional Information about the MS
Global Equity Allocation Fund;
Incorporation of Documents by
Reference
Item 13. Additional Information about the Company Being
Acquired........................................... Additional Information about the
VKAC Global Equity Fund;
Incorporation of Documents by
Reference
Item 14. Financial Statements................................. Financial Statements; Incorporation
of Documents by Reference
PART C OTHER INFORMATION
Items 15-17. Information required to be included in Part C is set forth under the appropriate item, so
numbered, in Part C of this Registration Statement.
</TABLE>
- ---------------
* References are to captions within the part of the registration statement to
which the particular item relates except as otherwise indicated.
<PAGE> 4
o APRIL 1998 o
IMPORTANT NOTICE
TO VAN KAMPEN AMERICAN CAPITAL
GLOBAL EQUITY
FUND SHAREHOLDERS
QUESTIONS
& ANSWERS
Although we recommend that you read the complete Prospectus/Proxy Statement,
for your convenience, we have provided a brief overview of the issues to be
voted on.
Q
WHY IS A SHAREHOLDER MEETING BEING HELD?
A
You are being asked to vote on a reorganization (the "Reorganization") of Van
Kampen American Capital Global Equity Fund (the "VKAC Global Equity Fund") into
Morgan Stanley Global Equity Allocation Fund (the "MS Global Equity Allocation
Fund"), a fund that pursues a similar investment objective.
Q
WHY IS THE REORGANIZATION BEING RECOMMENDED?
A
After several transactions in 1996 and 1997, Van Kampen American Capital, Inc.
("VKAC") has become an indirect wholly-owned subsidiary of Morgan Stanley, Dean
Witter, Discover & Co., Inc. VKAC through its subsidiaries acts as the adviser,
distributor and shareholder servicing agent of the Van Kampen American
Capital-sponsored family of retail funds. VKAC has recently also assumed
similar roles for the Morgan Stanley-sponsored family of retail funds. The
purpose of the proposed Reorganization is to permit the shareholders to (i)
achieve certain economies of scale from the combined fund's larger net asset
size upon consummation of the reorganization and the potentially lower
operating expenses associated therewith, (ii) eliminate the duplication of
services and expenses that currently exists as a result of the separate
operations of the funds and (iii) obtain potentially greater portfolio
diversity and potentially lower portfolio transaction costs.
Q
HOW WILL THE REORGANIZATION AFFECT ME?
A
Assuming shareholders of the VKAC Global Equity Fund approve the
Reorganization, the assets and liabilities of the VKAC Global Equity Fund will
be combined with those of the MS Global Equity Allocation Fund, and you will
become a shareholder of the MS Global Equity Allocation Fund. You will receive
shares of the MS Global Equity Allocation Fund equal in value (at the time of
issuance) to your shares of the VKAC Global Equity Fund.
<PAGE> 5
Q
WILL I HAVE TO PAY ANY SALES LOAD, COMMISSION OR OTHER SIMILAR FEE IN
CONNECTION WITH THE REORGANIZATION?
A
You will pay no sales loads or commissions in connection with the
Reorganization. If the Reorganization is completed, the costs associated with
the proposed Reorganization, including the costs associated with the
shareholder meeting, generally will be borne by the VKAC Global Equity Fund. As
more fully discussed in the combined Prospectus/Proxy Statement, the holding
period with respect to the contingent deferred sales charge applicable to Class
B shares or Class C shares of the MS Global Equity Allocation Fund acquired in
the Reorganization will be measured from the earlier of the time (i) the holder
purchased such Class B shares or Class C shares from the VKAC Global Equity
Fund or (ii) the holder purchased Class B shares or Class C shares of any other
Van Kampen American Capital or Morgan Stanley fund and subsequently exchanged
them for shares of the VKAC Global Equity Fund.
Q
HOW DO ADVISORY AND OTHER OPERATING FEES PAID BY THE MS GLOBAL EQUITY
ALLOCATION FUND COMPARE TO THOSE PAYABLE BY THE VKAC GLOBAL EQUITY FUND?
A
The VKAC Global Equity Fund is advised by Van Kampen American Capital Asset
Management, Inc. ("Asset Management"), a subsidiary of VKAC. The MS Global
Equity Allocation Fund is advised by Van Kampen American Capital Investment
Advisory Corp. ("Advisory Corp."), also a subsidiary of VKAC. Each fund is
subadvised by Morgan Stanley Asset Management, Inc. ("MSAM" or the
"Subadviser"), an indirect, wholly owned subsidiary of Morgan Stanley, Dean
Witter, Discover & Co., Inc. Management of the funds anticipates that, as a
result of the Reorganization, shareholders of the VKAC Global Equity Fund would
be subject to lower total operating expenses as a percentage of net assets.
Q
WHAT WILL I HAVE TO DO TO OPEN AN ACCOUNT IN THE MS GLOBAL EQUITY ALLOCATION
FUND? WHAT HAPPENS TO MY ACCOUNT IF THE REORGANIZATION IS APPROVED?
A
If the Reorganization is approved, your interest in shares of the VKAC Global
Equity Fund automatically will be converted into shares of the MS Global Equity
Allocation Fund, and we will send you written confirmation that this change has
taken place. You will receive the same class of shares of the MS Global Equity
Allocation Fund equal in value to your class of shares of the VKAC Global Equity
Fund. Holders of Class A shares of the VKAC Global Equity Fund will receive
Class A shares of the MS Global Equity Allocation Fund; holders of Class B
shares of the VKAC Global Equity Fund will receive Class B shares of the
MS Global Equity Allocation Fund; and holders of Class C shares of the VKAC
Global Equity Fund will receive Class C shares of the MS Global Equity
Allocation Fund. No certificates for MS Global Equity Allocation Fund shares
will be issued in connection with the Reorganization, although such
certificates will be available upon request. If you currently hold certificates
representing your shares of the VKAC Global Equity Fund, it is not necessary to
return such certificates; however, shareholders may want to present such
certificates to receive certificates of the MS Global Equity Allocation Fund (to
simplify proof of and to preserve the tax basis of separate lots of shares).
<PAGE> 6
ABOUT THE PROXY CARD
Please vote on each issue using blue or black ink to mark an X in one of the
boxes provided on the proxy card.
APPROVAL OF REORGANIZATION --
mark "For," "Against" or "Abstain"
OTHER BUSINESS - mark "For," "Against" or "Abstain"
Sign, date and return the proxy card in the enclosed postage-paid envelope. All
registered owners of an account, as shown in the address, must sign the card.
When signing as attorney, trustee, executor, administrator, custodian, guardian
or corporate officer, please indicate your full title.
PROXY
VAN KAMPEN AMERICAN CAPITAL GLOBAL EQUITY FUND
SPECIAL MEETING OF SHAREHOLDERS
SAMPLE
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
1. FOR [ ] AGAINST [ ] ABSTAIN [ ]
THE PROPOSAL TO APPROVE THE AGREEMENT AND PLAN OF REORGANIZATION XXXXXXXX.
2. FOR [ ] AGAINST [ ] ABSTAIN [ ]
TO ACT UPON ANY AND ALL OTHER BUSINESS.
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
<PAGE> 7
Q
WILL I HAVE TO PAY ANY FEDERAL TAXES AS A RESULT OF THE REORGANIZATION?
A
The Reorganization is intended to qualify as a "reorganization" within the
meaning of Section 368(a)(1) of the Internal Revenue Code of 1986, as amended.
If the Reorganization so qualifies, in general, a shareholder of the VKAC Global
Equity Fund will recognize no gain or loss upon the receipt solely of the
shares of the MS Global Equity Allocation Fund in connection with the
Reorganization. Additionally, the VKAC Global Equity Fund would not recognize
any gain or loss as a result of the transfer of all of its assets and
liabilities solely in exchange for the shares of the MS Global Equity Allocation
Fund or as a result of its liquidation.
Q
WHAT IF I REDEEM OR EXCHANGE MY SHARES OF THE VKAC GLOBAL EQUITY FUND
BEFORE THE REORGANIZATION TAKES PLACE?
A
If you choose to redeem or exchange your shares of the VKAC Global Equity Fund
before the Reorganization takes place, the redemption or exchange will be
treated as a normal redemption or exchange of shares and generally will be a
taxable transaction.
Q
WHERE DO I CALL FOR FURTHER INFORMATION?
A
Please call Investor Services at 1-800-341-2911 (Telecommunications Device for
the Deaf users may call 1-800-772-8889) weekdays from 7:00 a.m. to 7:00 p.m.
Central time.
<PAGE> 8
VAN KAMPEN AMERICAN CAPITAL
GLOBAL EQUITY FUND
ONE PARKVIEW PLAZA
OAKBROOK TERRACE, ILLINOIS 60181
(800) 421-5666
NOTICE OF SPECIAL MEETING
MAY 14, 1998
A Special Meeting of shareholders of Van Kampen American Capital Global Equity
Fund (the "VKAC Global Equity Fund") will be held at the offices of Van Kampen
American Capital, Inc., One Parkview Plaza, Oakbrook Terrace, Illinois 60181, on
Thursday, May 14, 1998 at 1:00 p.m. (the "Special Meeting"), for the following
purposes:
(1) To approve an Agreement and Plan of Reorganization pursuant to which the
VKAC Global Equity Fund would (i) transfer all of its assets to the Morgan
Stanley Global Equity Allocation Fund (the "MS Global Equity Allocation Fund")
in exchange solely for Class A, B and C shares of common stock of the MS
Global Equity Allocation Fund and the MS Global Equity Allocation Fund's
assumption of the liabilities of the VKAC Global Equity Fund, (ii) distribute
such shares of the MS Global Equity Allocation Fund to the holders of shares
of the VKAC Global Equity Fund and (iii) be dissolved.
(2) To transact such other business as may properly come before the Special
Meeting.
Shareholders of record as of the close of business on March 27, 1998 are
entitled to vote at the Special Meeting or any adjournment thereof.
For the Board of Trustees,
Ronald A. Nyberg
Secretary
, 1998
---------------------
PLEASE VOTE PROMPTLY BY SIGNING AND
RETURNING THE ENCLOSED PROXY.
---------------------
<PAGE> 9
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This Prospectus/Proxy Statement shall not constitute an offer to sell
or the solicitation of an offer to buy nor shall there be any sale of these
securities in any jurisdiction in which such offer, solicitation or sale would
be unlawful prior to registration or qualification under the securities laws of
any such jurisdiction.
SUBJECT TO COMPLETION -- DATED FEBRUARY 24, 1998
PROSPECTUS/PROXY STATEMENT
MORGAN STANLEY GLOBAL EQUITY ALLOCATION FUND
RELATING TO THE ACQUISITION OF ASSETS AND LIABILITIES OF
VAN KAMPEN AMERICAN CAPITAL
GLOBAL EQUITY FUND
This Prospectus/Proxy Statement is being furnished to shareholders of Van
Kampen American Capital Global Equity Fund (the "VKAC Global Equity Fund") and
relates to the special meeting of shareholders of the VKAC Global Equity Fund to
be held at the offices of Van Kampen American Capital, Inc., One Parkview Plaza,
Oakbrook Terrace, Illinois 60181 on Thursday, May 14, 1998 at 1:00 p.m. and at
any and all adjournments thereof (the "Special Meeting"). Shareholders of record
as of the close of business on , 1998 are entitled to vote at the Special
Meeting or any adjournment thereof. The purpose of the Special Meeting is to
approve or disapprove the proposed reorganization of the VKAC Global Equity Fund
(the "Reorganization") into the Morgan Stanley Global Equity Allocation Fund
(the "MS Global Equity Allocation Fund"). The Reorganization would result in
shareholders of the VKAC Global Equity Fund in effect exchanging their Class A,
B and C shares of the VKAC Global Equity Fund for corresponding Class A, B and C
shares of the MS Global Equity Allocation Fund. The purpose of the
Reorganization is to permit the shareholders to (i) achieve certain economies of
scale from the combined fund's larger net asset size upon consummation of the
Reorganization and the potentially lower operating expenses associated
therewith, (ii) eliminate the duplication of services and expenses that
currently exists as a result of the separate operations of the funds and (iii)
obtain greater portfolio diversity and potentially lower portfolio transaction
costs.
The MS Global Equity Allocation Fund is a series of the Morgan Stanley Fund,
Inc., an open-end management investment company organized as a Maryland
corporation (the "Morgan Stanley Fund"). The VKAC Global Equity Fund is a series
of Van Kampen American Capital World Portfolio Series Trust, an open-end
management investment company organized as a Delaware business trust (the "World
Portfolio Trust"). The investment objective of the MS Global Equity Allocation
Fund is to seek long-term capital appreciation by investing 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 which investment objective is similar to, but not
identical to, the investment objective of the VKAC Global Equity Fund. The
investment objective of the VKAC Global Equity Fund is to seek to provide
long-term growth of capital by investing in a diversified portfolio of equity
securities of companies located in any nation, including the United States.
There can be no assurance that either fund will achieve its investment
objective. The address, principal executive office and telephone number of the
MS Global Equity Allocation Fund and the VKAC Global Equity Fund is One Parkview
Plaza, Oakbrook Terrace, Illinois 60181, (630) 684-6000 or (800) 421-5666. The
enclosed proxy and this Prospectus/Proxy Statement are first being sent to VKAC
Global Equity Fund shareholders on or about , 1998.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE REGULATORS, NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE REGULATORS PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS/PROXY STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
---------------------
<PAGE> 10
This Prospectus/Proxy Statement sets forth concisely the information
shareholders of the VKAC Global Equity Fund should know before voting on the
Reorganization (in effect, investing in Class A, B or C shares of the MS Global
Equity Allocation Fund) and constitutes an offering of Class A, B and C shares
of common stock, par value $0.001 per share, of the MS Global Equity Allocation
Fund only. Please read it carefully and retain it for future reference. A
Statement of Additional Information dated , 1998, relating to this
Prospectus/Proxy Statement (the "Reorganization SAI") has been filed with the
Securities and Exchange Commission (the "SEC") and is incorporated herein by
reference. A Prospectus (the "MS Fund Prospectus") and Statement of Additional
Information containing additional information about the MS Global Equity
Allocation Fund, each dated October 28, 1997 (and as currently supplemented),
have been filed with the SEC and are incorporated herein by reference. A copy of
the MS Fund Prospectus accompanies this Prospectus/Proxy Statement. A Prospectus
(the "VKAC Fund Prospectus") and Statement of Additional Information containing
additional information about the VKAC Global Equity Fund, each dated September
28, 1997 (and as currently supplemented), have been filed with the SEC and are
incorporated herein by reference. Copies of the foregoing may be obtained
without charge by calling or writing the MS Global Equity Allocation Fund or the
VKAC Global Equity Fund at the telephone number or address shown above. If you
wish to request the Reorganization SAI, please ask for the "Reorganization SAI."
IN ADDITION, EACH OF THE MS GLOBAL EQUITY ALLOCATION FUND AND THE VKAC GLOBAL
EQUITY FUND WILL FURNISH, WITHOUT CHARGE, A COPY OF ITS MOST RECENT ANNUAL
REPORT AND ANY SUBSEQUENT SEMI-ANNUAL REPORT TO A SHAREHOLDER UPON REQUEST. ANY
SUCH REQUEST SHOULD BE DIRECTED TO VAN KAMPEN AMERICAN CAPITAL BY CALLING (800)
421-5666 OR BY WRITING THE RESPECTIVE FUND AT THE ADDRESS SHOWN ABOVE.
---------------------
No person has been authorized to give any information or make any
representation not contained in this Prospectus/Proxy Statement and, if so given
or made, such information or representation must not be relied upon as having
been authorized. This Prospectus/Proxy Statement does not constitute an offer to
sell or a solicitation of an offer to buy any securities in any jurisdiction in
which, or to any person to whom, it is unlawful to make such offer or
solicitation.
---------------------
The Morgan Stanley Fund on behalf of the MS Global Equity Allocation Fund and
the World Portfolio Trust on behalf of the VKAC Global Equity Fund are subject
to the informational requirements of the Securities Exchange Act of 1934, as
amended, and the Investment Company Act of 1940, as amended (the "1940 Act"),
and in accordance therewith file reports and other information with the SEC.
Such reports, other information and proxy statements filed by the Morgan Stanley
Fund on behalf of the MS Global Equity Allocation Fund and by the World
Portfolio Trust on behalf of the VKAC Global Equity Fund can be inspected and
copied at the public reference facilities maintained by the SEC at 450 Fifth
Street, N.W., Washington, D.C. 20549 and at its Regional Office at 500 West
Madison Street, Chicago, Illinois. Copies of such material can also be obtained
from the SEC's Public Reference Branch, Office of Consumer Affairs and
Information Services, Washington, D.C. 20549, at prescribed rates. In addition,
the SEC maintains a Web site (http://www.sec.gov) that contains reports, other
information and proxy statements filed by the Morgan Stanley Fund on behalf of
the MS Global Equity Allocation Fund and by the World Portfolio Trust on behalf
of the VKAC Global Equity Fund, such information is filed electronically with
the SEC through the SEC's Electronic Data Gathering, Analysis and Retrieval
system (EDGAR).
The date of this Prospectus/Proxy Statement is , 1998.
2
<PAGE> 11
THE PROPOSED REORGANIZATION
A. SUMMARY
The following is a summary of, and is qualified by reference to, the more
complete information contained in this Prospectus/Proxy Statement and the
information attached hereto or incorporated herein by reference. As discussed
more fully below and elsewhere in this Prospectus/Proxy Statement, the Board of
Trustees of the World Portfolio Trust (the "Board of Trustees") believes the
proposed Reorganization (as defined herein) is in the best interests of
shareholders of the VKAC Global Equity Fund. As a result of the Reorganization,
shareholders of the VKAC Global Equity Fund would acquire an interest in the MS
Global Equity Allocation Fund
Shareholders should read the entire Prospectus/Proxy Statement carefully
together with (i) the VKAC Fund Prospectus incorporated herein by reference and
(ii) the MS Fund Prospectus incorporated herein by reference and accompanying
this Prospectus/Proxy Statement. This Prospectus/Proxy Statement constitutes an
offering of Class A, B and C shares of the MS Global Equity Allocation Fund
only.
THE REORGANIZATION
This Prospectus/Proxy Statement is being furnished to shareholders of the VKAC
Global Equity Fund in connection with the proposed combination of the VKAC
Global Equity Fund with and into the MS Global Equity Allocation Fund pursuant
to the terms and conditions of the Agreement and Plan of Reorganization between
the VKAC Global Equity Fund and the MS Global Equity Allocation Fund (the
"Agreement"). The Agreement provides that the VKAC Global Equity Fund would (i)
transfer all of its assets to the MS Global Equity Allocation Fund in exchange
solely for Class A, B and C shares of common stock of the MS Global Equity
Allocation Fund and the MS Global Equity Allocation Fund's assumption of the
liabilities of the VKAC Global Equity Fund, (ii) dissolve pursuant to a plan of
liquidation and dissolution to be adopted by the Board of Trustees promptly
following the Closing (as defined herein) and (iii) as part of such dissolution,
distribute to each shareholder of the VKAC Global Equity Fund shares of the
respective class of shares of the MS Global Equity Allocation Fund equal in
value to their existing shares of the VKAC Global Equity Fund (collectively, the
"Reorganization").
The Board of Trustees has determined that the Reorganization is in the best
interests of shareholders of each class of shares of the VKAC Global Equity Fund
and that the interests of such shareholders will not be diluted as a result of
the Reorganization. Similarly, the Board of Directors of the Morgan Stanley Fund
(the "Board of Directors") has determined that the Reorganization is in the best
interests of the MS Global Equity Allocation Fund and that the interests of each
3
<PAGE> 12
class of shares of existing shareholders of the MS Global Equity Allocation Fund
will not be diluted as a result of the Reorganization. The Board of Trustees
unanimously approved the Reorganization and the Agreement on October 24, 1997.
The Board of Directors unanimously approved the Reorganization and the Agreement
on October 24, 1997.
The VKAC Global Equity Fund, as the primary beneficiary of the Reorganization,
generally will bear all of the costs of soliciting approval of the
Reorganization by its shareholders and related costs of the Reorganization in
the event the Reorganization is completed, including expenses incurred by the MS
Global Equity Allocation Fund. Payment of such expenses will reduce the amount
of Class A, B or C shares of the MS Global Equity Allocation Fund received by
shareholders of the VKAC Global Equity Fund on a pro rata basis. If the
Reorganization is not completed, VKAC (defined below) will bear the costs
associated with the Reorganization. See "THE PROPOSED
REORGANIZATION -- Expenses" below.
The Board of Trustees is asking shareholders of the VKAC Global Equity Fund to
approve the Reorganization at the Special Meeting to be held on Thursday, May
14, 1998. If shareholders of the VKAC Global Equity Fund approve the
Reorganization, it is expected that the Closing will be after the close of
business on May 31, 1998, but it may be at a different time as described herein.
THE BOARD OF TRUSTEES RECOMMENDS THAT YOU VOTE "FOR" THE REORGANIZATION.
APPROVAL OF THE REORGANIZATION REQUIRES THE FAVORABLE VOTE OF THE HOLDERS OF A
MAJORITY OF THE OUTSTANDING SHARES ENTITLED TO VOTE. SEE "VOTING INFORMATION AND
REQUIREMENTS" BELOW.
REASONS FOR THE PROPOSED REORGANIZATION
After several transactions in 1996 and 1997, Van Kampen American Capital, Inc.
("VKAC") has become an indirect wholly-owned subsidiary of Morgan Stanley, Dean
Witter, Discover & Co., Inc. VKAC through its subsidiaries acts as the adviser,
distributor and shareholder servicing agent of the Van Kampen American
Capital-sponsored family of retail funds. VKAC has recently also assumed similar
roles for the Morgan Stanley-sponsored family of retail funds. The Board of
Trustees believes that the proposed Reorganization would be in the best
interests of the shareholders of the VKAC Global Equity Fund because it would
permit the shareholders to (i) achieve certain economics of scale from the
combined fund's larger net asset size upon consummation of the Reorganization
and the potentially lower operating expenses associated therewith, (ii)
eliminate the duplication of services and expenses that currently exists as a
result of the separate operations of the funds and (iii) obtain greater
portfolio diversity and potentially lower portfolio transaction costs.
4
<PAGE> 13
In determining whether to recommend approval of the Reorganization to
shareholders of the VKAC Global Equity Fund, the Board of Trustees considered a
number of factors, including, but not limited to: (i) the capabilities and
resources of the funds' advisers, the funds' subadviser and other service
providers in the areas of marketing, investment and shareholder services; (ii)
the expenses and advisory fees applicable to the VKAC Global Equity Fund and the
MS Global Equity Allocation Fund before the Reorganization and the estimated
expense ratios of the MS Global Equity Allocation Fund after the Reorganization;
(iii) the comparative investment performance of the VKAC Global Equity Fund and
the MS Global Equity Allocation Fund; (iv) the terms and conditions of the
Agreement and whether the Reorganization would result in dilution of VKAC Global
Equity Fund or MS Global Equity Allocation shareholder interests; (v) the
advantages of eliminating duplication of effort in marketing funds having
similar investment objectives in addition to the economies of scale potentially
realized through the combination of the two funds; (vi) the compatibility of the
funds' investment objectives policies and practices; (vii) the compatibility of
the funds' service features available to shareholders, including the retention
of applicable holding periods and exchange privileges; (viii) the costs
estimated to be incurred by the respective funds as a result of the
Reorganization; and (ix) the anticipated tax consequences of the Reorganization.
In this regard, the Board of Trustees reviewed information provided by Van
Kampen American Capital Investment Advisory Corp. ("Advisory Corp."), the
investment adviser of the MS Global Equity Allocation Fund, Van Kampen American
Capital Asset Management, Inc. ("Asset Management"), the investment adviser of
the VKAC Global Equity Fund, and VKAC, the parent corporation of Advisory Corp.
and Asset Management, relating to the anticipated impact to the shareholders of
the VKAC Global Equity Fund as a result of the Reorganization. The Board
considered the probability that the elimination of duplicative operations and
the increase in asset levels of the combined fund after the Reorganization would
result in the following potential benefits for shareholders of the VKAC Global
Equity Fund, although there can, of course, be no assurances in this regard:
(1) Achievement of Economies of Scale and Reduced Per Share Expenses.
Combining the net assets of the VKAC Global Equity Fund with the assets of
the MS Global Equity Allocation Fund should lead to reduced total
operating expenses for shareholders of the VKAC Global Equity Fund, on a
per share basis, by allowing fixed and relatively fixed costs, such as
accounting, legal and printing expenses, to be spread over a larger asset
base. Any reductions in expenses on a per share basis should, in turn,
have a favorable effect on the relative total return to shareholders of
the VKAC Global Equity Fund. Management anticipates that the
Reorganization should lead to certain economies affecting the total
operating expenses of the MS Global Equity Fund.
5
<PAGE> 14
(2) Elimination of Separate Operations. Consolidating the VKAC Global Equity
Fund and the MS Global Equity Allocation Fund should eliminate the
duplication of services and expenses that currently exists as a result of
their separate operations. Consolidating the separate operations of the
VKAC Global Equity Fund with those of the MS Global Equity Allocation Fund
should promote more efficient operations on a more cost-effective basis.
(3) Benefits to the Portfolio Management Process. The larger net asset size
of the MS Global Equity Allocation Fund upon consummation of the
Reorganization should generally permit it to purchase larger individual
portfolio investments that may result in reduced transaction costs or more
favorable pricing and provide the opportunity for greater portfolio
diversity.
Based upon these and other factors, the Board of Trustees unanimously determined
that the Reorganization is in the best interests of the shareholders of the VKAC
Global Equity Fund.
COMPARISON OF THE MS GLOBAL EQUITY ALLOCATION FUND AND THE VKAC GLOBAL EQUITY
FUND
GENERAL. The MS Global Equity Allocation Fund and the VKAC Global Equity Fund
have similar investment objectives of seeking long-term capital appreciation.
Both funds seek to achieve their investment objective by investing in U.S. and
non-U.S. equity securities. Both funds use Morgan Stanley Asset Management, Inc.
as subadviser ("MSAM" or the "Subadviser") to employ a top-down investment
strategy that emphasizes country selection and weighting first and then
individual stock selection within each country trying to replicate a broad
market index for such country. The MS Global Equity Allocation Fund and VKAC
Global Equity Fund do have differences with respect to certain investment
practices as discussed in more detail below.
INVESTMENT OBJECTIVES AND POLICIES. The investment objective of the MS Global
Equity Allocation Fund as provided in the MS Fund Prospectus is to provide long-
term capital appreciation by investing in equity securities of U.S. and non-U.S.
in accordance with country weightings determined by the Subadviser and with
stock selection within each country designed to replicate a broad market index.
The investment objective of the VKAC Global Equity Fund as provided in the VKAC
Fund Prospectus is to provide long-term growth of capital by investing in an
internationally diversified portfolio of equity securities of companies located
in any nation, including the United States. As a matter of investment policy,
the VKAC Global Equity Fund also invests in accordance with country weightings
determined by the Subadviser and with stock selection within each country
designed to replicate a broad market index.
6
<PAGE> 15
Each fund seeks to achieve its investment objective by investing in an
internationally diversified portfolio of equity securities. Under normal market
conditions, at least 65% of each fund's total assets are invested in the equity
securities of companies located in at least three countries, including the
United States, as determined by the funds' adviser or the Subadviser
(collectively referred to herein as the "Adviser"). Each fund describes equity
securities to include common stocks, preferred stocks and warrants. The MS
Global Equity Allocation Fund description of equity securities also includes
convertible securities and allows for investment in convertible debt securities
that are rated investment grade (rated in one of the four highest rating
categories by a nationally recognized statistical rating organization) or, if
unrated, determined to be of comparable quality by the Adviser.
Each fund's Adviser determines country allocations for its fund on an ongoing
basis within policy ranges dictated by each country's market capitalization and
liquidity. Each fund invests in the United States and other industrialized
countries throughout the world that comprise the Morgan Stanley Capital
International World Index, which currently includes Australia, Austria, Belgium,
Canada, Denmark, Finland, France, Germany, Hong Kong, Italy, Japan, the
Netherlands, New Zealand, Norway, Singapore/Malaysia, Spain, Sweden,
Switzerland, the United Kingdom and the United States. In addition, each fund
may invest a portion of its assets in emerging country equity securities. The
funds each currently intend to invest in some or all of the following countries:
Argentina, Indonesia, Portugal, South Africa, Brazil, Malaysia, Philippines,
Thailand, India, Mexico, South Korea and Turkey.
By analyzing a variety of macroeconomic and political factors, the Adviser
develops fundamental projections on interest rates, currencies, corporate
profits and economic growth for each country. These country projections are then
used to determine what the Adviser believes to be a fair value for the stock
market of each country. Discrepancies between actual value and fair value, as
determined by the Adviser, provide an expected return for each stock market. The
expected return is adjusted by currency return expectations derived from the
Subadviser's purchasing-power parity exchange rate model to arrive at an
expected total return in U.S. Dollars. The final country allocation decision for
each fund is then reached by considering the expected total return in light of
various country specific considerations such as market size, volatility,
liquidity and country risk.
Within a particular country, investments are made through the purchase of
equity securities which, in the aggregate, replicate a broad market index, which
in most cases will be the Morgan Stanley Capital International ("MSCI") Index
for the particular country. The MSCI Indices measure the performance of stock
markets worldwide. The various MSCI Indices are based on the share prices of
companies listed on the local stock exchange of the specified country or
countries within a specified region. The combined market capitalization of
companies in these indices
7
<PAGE> 16
represent approximately 60 percent of the aggregate market value of the covered
stock exchanges. Companies included in the MSCI country index replicate the
industry composition of the local market and are a representative sampling of
large, medium and small companies, subject to liquidity. Non-domiciled companies
traded on the local exchange and companies with restricted float due to dominant
shareholders or cross-ownership are avoided. The Adviser may overweight or
underweight an industry segment of a particular index if it concludes this would
be advantageous to the respective funds.
[Each fund may purchase foreign securities in the form of American Depositary
Receipts ("ADRs") and European Depositary Receipts ("EDRs") or other securities
representing underlying shares of foreign companies.] Each fund may engage in
forward forward currency exchange contracts, options, futures and options on
futures. Each fund may enter into repurchase agreements. For temporary defensive
purposes, each fund may invest in cash, money market instruments and short-term
debt instruments and, with respect to the MS Global Equity Allocation Fund only,
medium-term debt instruments.
Each fund may invest a limited portion of its net assets in restricted
securities and illiquid securities; the VKAC Global Equity Fund limit on
illiquid and restricted securities is 10% of such Fund's net assets whereas the
MS Global Equity Allocation Fund limit on illiquid securities is 15% of such
Fund's net assets and the MS Global Equity Allocation Fund limit on restricted
securities is 10% of such Fund's net assets. Each fund allows for a limited
amount of lending of its portfolio securities; the VKAC Global Equity Fund limit
is 15% of such Fund's total assets whereas the MS Global Equity Allocation Fund
limit is at 33 1/3% of such Fund's total assets. Each fund allows for a limited
amount of borrowing; the VKAC Global Equity Fund limit is 33 1/3% of such Fund's
total assets for temporary borrowing to facilitate payment of redemption
requests whereas the MS Global Equity Allocation Fund limit is 10% of such
Fund's total assets for emergency or extraordinary purposes. [The VKAC Global
Equity Fund allows for short sales against the box whereas the MS Global Equity
Allocation Fund does not allow for short sales transactions.] The MS Global
Equity Allocation Fund allows for investment in zero coupon debt securities,
payment in kind securities, deferred payment securities, certain other
derivative transactions such as structured notes, caps, and floors and for
investment of up to 15% of the Fund's net assets in when-issued or delayed
delivery transactions. The MS Global Equity Allocation Fund does not allow for
any investment unseasoned issuers (companies which have together with their
predecessors a record of less than three years' continuous operations) whereas
the VKAC Global Equity Fund allows for investments in unseasoned companies
limited to 5% of its total assets. See "Risk Factors."
INVESTMENT ADVISERS AND SUBADVISER. The MS Global Equity Allocation Fund is
advised by Advisory Corp., which is a wholly-owned subsidiary of VKAC. The
8
<PAGE> 17
VKAC Global Equity Fund is advised by the Asset Management, which is also a
wholly-owned subsidiary of VKAC. VKAC is a diversified asset management company
with more than two million retail investor accounts, extensive capabilities for
managing institutional portfolios, and more than $57 billion under management or
supervision. Van Kampen American Capital's more than 60 open-end and 37
closed-end funds and more than 2,500 unit investment trusts are professionally
distributed by leading financial advisers nationwide. VKAC is an indirect
wholly-owned subsidiary of Morgan Stanley, Dean Witter, Discover & Co., Inc.
("MSDWD"). The principal office of Advisory Corp. and Asset Management is
located at One Parkview Plaza, Oakbrook Terrace, Illinois 60181.
Morgan Stanley Asset Management Inc. ("MSAM" or the "Subadviser") is the
investment subadviser of each fund. MSAM is an indirect wholly-owned subsidiary
of MSDWD. MSAM, with principal offices at 1221 Avenue of the Americas, New York,
NY 10020, conducts a worldwide portfolio management business. It provides a
broad range of portfolio management services to customers in the United States
and abroad.
MSDWD and various of its directly or indirectly owned subsidiaries, including
Morgan Stanley & Co. Incorporated, a registered broker-dealer and investment
adviser, and Morgan Stanley International are engaged in a wide range of
financial services. Their principal businesses include securities underwriting,
distribution and trading; merger, acquisition, restructuring and other corporate
finance advisory activities; merchant banking; stock brokerage and research
services; asset management; credit services; trading of futures, options,
foreign exchange, commodities and swaps (involving foreign exchange,
commodities, indices and interest rates); real estate advice, financing and
investing; and global custody, securities clearance services and securities
lending.
ADVISORY AND OTHER FEES. The contractual advisory fees of the MS Global Equity
Allocation Fund and the VKAC Global Equity Fund are the same. Each fund is
obligated to pay its respective adviser a monthly fee based on its average daily
net assets at the annual rate of 1.00%. While the VKAC Global Equity Fund
currently pays Asset Management at such rate, the MS Global Equity Allocation
Fund currently pays Advisory Corp. at an annual rate of 0.89% due to a voluntary
waiver by Advisory Corp. of a portion of the advisory fee. Each of Asset
Management and Advisory Corp. retains the right from time to time to charge all
or a portion of its management fee or to reimburse the respective fund for all
or a portion of its other expenses.
Subadvisory fees are paid to MSAM by the respective funds' adviser. The
subadvisory fees of the MS Global Equity Allocation Fund are as follows: if the
average daily net assets during the monthly period are less than or equal to
$500 million, then Advisory Corp. shall pay MSAM one-half of the total
investment advisory fee payable to Advisory Corp. by the Fund (after application
of any fee
9
<PAGE> 18
waivers in effect) for such monthly period; and if the average daily net assets
during the monthly period are greater than $500 million, then Advisory Corp.
shall pay MSAM a fee for such monthly period equal to the greater of (a)
one-half of what the total investment advisory fee payable to Advisory Corp. by
the Fund (after application of any fee waivers in effect) for such monthly
period would have been had the Fund's average daily net assets during such
period been equal to $500 million, or (b) forty-five percent of the total
investment advisory fee payable to Advisory Corp. by the Fund (after application
of any fee waivers in effect) for such monthly period. The subadvisory fees of
the VKAC Global Equity Fund are 50% of the compensation received by Asset
Management.
The total operating expenses (after fee waivers and expense reimbursements) of
the MS Global Equity Allocation Fund for the six month period ended December 31,
1997 (on an annualized basis) were 1.70%, 2.45% and 2.45% of the average daily
net assets attributable to Class A, B and C shares, respectively. Had no fee
waiver or expense reimbursement been in effect, the total operating expenses
during such period would have been 1.81%, 2.56% and 2.56% of the average daily
net assets attributable to Class A, B and C shares, respectively.
The total operating expenses for the VKAC Global Equity Fund for the six month
period ended November 30, 1997 (on an annualized basis) were 2.02%, 2.78% and
2.79% of the average daily net assets attributable to Class A, B and C shares,
respectively. There were no fee waivers or expense reimbursements in effect with
respect to the VKAC Global Equity Fund during such period.
Both the MS Global Equity Allocation Fund and the VKAC Global Equity Fund have
adopted substantially identical distribution plans (the "Distribution Plans")
pursuant to Rule 12b-1 under the 1940 Act and have adopted substantially
identical service agreements or plans (the "Service Plans"). Both the MS Global
Equity Allocation Fund and the VKAC Global Equity Fund can pay up to 0.75% of
their respective average daily net assets attributable to Class B and C shares
for reimbursement of certain distribution-related expenses. In addition, both
the MS Global Equity Allocation Fund and the VKAC Global Equity Fund can pay up
to 0.25% of the respective average daily net assets attributable to Class A, B
and C shares for the provision of ongoing services to shareholders. The
distributor of both the VKAC Global Equity Fund's shares and the MS Global
Equity Allocation Fund's shares is Van Kampen American Capital Distributors,
Inc. ("VKAC Distributors"). For a complete description of these arrangements
with respect to the MS Global Equity Allocation Fund, see the section of the MS
Fund Prospectus entitled "Management of the Company -- Distributor." For a
complete description of these arrangements with respect to the VKAC Global
Equity Fund, see the section of the VKAC Fund Prospectus entitled "The
Distribution and Service Plans."
10
<PAGE> 19
The table below sets forth (i) the fees and expenses paid by the MS Global
Equity Allocation Fund for the six months ended December 31, 1997 (on an
annualized basis) and the VKAC Global Equity Fund for the six months ended
November 30, 1997 (on an annualized basis) and (ii) pro forma expenses for the
combined fund.
11
<PAGE> 20
EXPENSE COMPARISON TABLE
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
-------------------------------------------- ------------------------------------------
MS GLOBAL EQUITY VKAC GLOBAL MS GLOBAL EQUITY VKAC GLOBAL
ALLOCATION FUND EQUITY FUND PRO FORMA ALLOCATION FUND EQUITY FUND PRO FORMA
---------------- ----------- --------- ---------------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchase
of a Share (as a percentage of
Offering Price)....................... 5.75%(1) 5.75% 5.75%(1) None None None
Maximum Deferred Sales Charge (as a
percentage of the lower of the
original purchase price or redemption
proceeds)............................. None None None 5.00%(2) 5.00%(2) 5.00%(2)
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net
assets)
Management Fees........................ 0.89%(4) 1.00% 1.00% 0.89%(4) 1.00% 1.00%
Rule 12b-1 Fees........................ 0.25% 0.25% 0.25% 1.00% 1.00% 1.00%
Other Expenses......................... 0.56% 0.77% 0.44% 0.56% 0.78% 0.44%
Total Fund Operating Expenses.......... 1.70%(4) 2.02% 1.69% 2.45%(4) 2.78% 2.44%
Expense Example of Total Operating
Expenses Assuming Redemption at the
End of the Period(5)
One Year.............................. $ 74 $ 77 $ 74 $ 75 $ 78 $ 75
Three Years........................... 108 117 108 106 116 106
Five Years............................ 144 160 144 146 162 145
Ten Years............................. 247 279 246 260 293 259
Expense Example of Total Operating
Expenses Assuming No Redemption at the
End of the Period(5)
One Year.............................. $ 74 $ 77 $ 74 $ 25 $ 28 $ 25
Three Years........................... 108 117 108 76 86 76
Five Years............................ 144 160 144 131 147 130
Ten Years............................. 247 279 246 260 293 259
<CAPTION>
CLASS C SHARES
------------------------------------------
MS GLOBAL EQUITY VKAC GLOBAL
ALLOCATION FUND EQUITY FUND PRO FORMA
---------------- ----------- ---------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchase
of a Share (as a percentage of
Offering Price)....................... None None None
Maximum Deferred Sales Charge (as a
percentage of the lower of the
original purchase price or redemption
proceeds)............................. 1.00%(3) 1.00%(3) 1.00%(3)
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net
assets)
Management Fees........................ 0.89%(4) 1.00% 1.00%
Rule 12b-1 Fees........................ 1.00% 1.00% 1.00%
Other Expenses......................... 0.56% 0.79% 0.44%
Total Fund Operating Expenses.......... 2.45%(4) 2.79% 2.44%
Expense Example of Total Operating
Expenses Assuming Redemption at the
End of the Period(5)
One Year.............................. $ 35 $ 38 $ 35
Three Years........................... 76 87 76
Five Years............................ 131 147 130
Ten Years............................. 279 312 278
Expense Example of Total Operating
Expenses Assuming No Redemption at the
End of the Period(5)
One Year.............................. $ 25 $ 28 $ 25
Three Years........................... 76 87 76
Five Years............................ 131 147 130
Ten Years............................. 279 312 278
</TABLE>
(See notes on the following page)
12
<PAGE> 21
Notes to Expense Comparison Table
(1) Class A shares of the MS Global Equity Allocation Fund received pursuant to
the Reorganization will not be subject to a sales charge upon purchase.
(2) Class B Shares of the MS Global Equity Allocation Fund and VKAC Global
Equity Fund are subject to a contingent deferred sales charge equal to
5.00% of the lesser of the then current net asset value or the original
purchase price on Class B Shares redeemed during the first year after
purchase, which charge is reduced to zero after a five year period as
follows: Year 1 -- 5.00%; Year 2 -- 4.00%; Year 3 -- 3.00%; Year
4 -- 2.50%; Year 5 -- 1.50%; Year 6 -- 0.00%.
(3) Class C shares of the MS Global Equity Allocation Fund and VKAC Global
Equity Fund are subject to a contingent deferred sales charge equal to
1.00% of the lesser of the then current net asset value or the original
purchase price on Class C shares redeemed during the first year after
purchase, which charge is reduced to zero thereafter.
(4) After expense reimbursement. In the absence of expense reimbursement,
"Management Fees" for the MS Global Equity Allocation Fund would have been
1.00% with respect to Class A, B and C shares and "Total Fund Operating
Expenses" for the MS Global Equity Allocation Fund would have been 1.81%,
2.56% and 2.56% with respect to Class A, B and C shares, respectively.
(5) Expense examples reflect what an investor would pay on a $1,000 investment,
assuming a 5% annual return with either redemption or no redemption at the
end of each time period as noted in the above table. The Pro Forma column
reflects expenses estimated to be paid on new shares purchased from the
combined fund subsequent to the Reorganization.
13
<PAGE> 22
DISTRIBUTION, PURCHASE, VALUATION, REDEMPTION AND EXCHANGE OF SHARES. Both the
MS Global Equity Allocation Fund and the VKAC Global Equity Fund offer three
classes of shares. The Class A shares of both the MS Global Equity Allocation
Fund and the VKAC Global Equity Fund are subject to an initial sales charge of
up to 5.75%. The initial sales charge applicable to Class A shares of the MS
Global Equity Allocation Fund will be waived for Class A shares acquired in the
Reorganization. Any subsequent purchases of Class A shares of the MS Global
Equity Allocation Fund after the Reorganization will be subject to an initial
sales charge of up to 5.75%, excluding Class A shares purchased through the
dividend reinvestment plan. Purchases of Class A shares of the MS Global Equity
Allocation Fund or the VKAC Global Equity Fund in amounts of $1,000,000 or more
are not subject to an initial sales charge, but a contingent deferred sales
charge of 1.00% may be imposed on certain redemptions made within the first year
after purchase.
The Class B shares of both the MS Global Equity Allocation Fund and the VKAC
Global Equity Fund do not incur a sales charge when they are purchased, but
generally are subject to a contingent deferred sales charge of 5.00% if redeemed
within the first year after purchase, which charge is reduced to zero after a
five year period.
The Class C shares of both the MS Global Equity Allocation Fund and the VKAC
Global Equity Fund do not incur a sales charge when purchased, but are subject
to a contingent deferred sales charge of 1.00% if redeemed within the first year
after purchase.
No contingent deferred sales charge will be imposed on Class B shares or Class
C shares of the VKAC Global Equity Fund in connection with the Reorganization.
The holding period and conversion period for Class B shares or Class C shares of
the MS Global Equity Allocation Fund received in connection with the
Reorganization will be measured from the earlier time (i) the holder purchased
such shares from the VKAC Global Equity Fund or (ii) the holder purchased such
shares from any other Van Kampen American Capital Fund or Morgan Stanley Fund
and subsequently exchanged them for shares of the VKAC Global Equity Fund.
Shares of the MS Global Equity Allocation Fund or the VKAC Global Equity Fund
may be purchased by check, by electronic transfer, by bank wire and by exchange
from certain other open-end mutual funds advised by Advisory Corp. or Asset
Management and distributed by VKAC Distributors. For a complete description
regarding purchase of shares and exchange of shares of the MS Global Equity
Allocation Fund, see the sections of the MS Fund Prospectus entitled "Purchase
of Shares" and "Shareholder Services--Exchange Privilege." For a complete
description regarding purchase of shares and exchange of shares of the VKAC
Global Equity Fund, see the sections of the VKAC Fund Prospectus entitled
"Purchase of Shares" and "Shareholder Services--Exchange Privilege".
14
<PAGE> 23
Shares of the MS Global Equity Allocation Fund and the VKAC Global Equity Fund
properly presented for redemption may be redeemed or exchanged at the next
determined net asset value per share (subject to any applicable deferred sales
charge). Shares of either the MS Global Equity Allocation Fund or the VKAC
Global Equity Fund may be redeemed or exchanged by mail or by special redemption
privileges (telephone exchange, telephone redemption, by check or electronic
transfer). If a shareholder of either fund attempts to redeem shares within a
short time after they have been purchased by check, the respective fund may
delay payment of the redemption proceeds until such fund can verify that payment
for the purchase of the shares has been (or will be) received.
No further purchases of the shares of the VKAC Global Equity Fund may be made
after the date on which the shareholders of the VKAC Global Equity Fund approve
the Reorganization, and the stock transfer books of the VKAC Global Equity Fund
will be permanently closed as of the date of Closing. Only redemption requests
and transfer instructions received in proper form by the close of business on
the day prior to the date of Closing will be fulfilled by the VKAC Global Equity
Fund. Redemption requests or transfer instructions received by the VKAC Global
Equity Fund after that date will be treated by the VKAC Global Equity Fund as
requests for the redemption or instructions for transfer of the shares of the MS
Global Equity Allocation Fund credited to the accounts of the shareholders of
the VKAC Global Equity Fund. Redemption requests or transfer instructions
received by the VKAC Global Equity Fund after the close of business on the day
prior to the date of Closing will be forwarded to the MS Global Equity
Allocation Fund. For a complete description of the redemption arrangements for
the MS Global Equity Allocation Fund, see the section of the MS Fund Prospectus
entitled "Redemption of Shares," and, for the VKAC Global Equity Fund, see the
section of the VKAC Fund Prospectus entitled "Redemption of Shares."
15
<PAGE> 24
CAPITALIZATION. The following table sets forth the capitalization of the MS
Global Equity Allocation Fund and the VKAC Global Equity Fund as of December 31,
1997, and the pro forma capitalization of the combined fund as if the
Reorganization had occurred on that date. These numbers may differ at the time
of Closing.
CAPITALIZATION TABLE AS OF DECEMBER 31, 1997
<TABLE>
<CAPTION>
MS GLOBAL EQUITY VKAC GLOBAL
ALLOCATION FUND EQUITY FUND PRO FORMA
---------------- ----------- ---------
<S> <C> <C> <C>
NET ASSETS (IN THOUSANDS)
Class A shares............. $ 74,593 $154,939 $229,407
Class B shares............. 58,639 135,321 193,847
Class C shares............. 80,036 14,433 94,457
----------- --------- -----------
Total............... $213,268 $304,693 $517,711
=========== ========= ===========
NET ASSET VALUE PER SHARE
Class A shares............. $ 14.34 $ 14.35 $ 14.34
Class B shares............. 13.93 13.76 13.93
Class C shares............. 14.07 13.91 14.07
SHARES OUTSTANDING (IN
THOUSANDS)
Class A shares............. 5,202 10,796 15,998
Class B shares............. 4,209 9,832 13,915
Class C shares............. 5,688 1,037 6,713
----------- --------- -----------
Total............... 15,099 21,665 36,626
=========== ========= ===========
SHARES AUTHORIZED
Class A shares............. 375,000,000 Unlimited 375,000,000
Class B shares............. 375,000,000 Unlimited 375,000,000
Class C shares............. 375,000,000 Unlimited 375,000,000
</TABLE>
PERFORMANCE INFORMATION. The average annual total returns for MS Global Equity
Allocation Fund for the one-year and three-year periods ended December 31, 1997
and for the period beginning January 4, 1993 (the date Class A shares of the MS
Global Equity Allocation Fund were first offered for sale to the public) through
December 31, 1997 were 9.73%, 14.07% and 12.83% with respect to its Class A
shares; for the one-year period ended December 31, 1997 and for the period
beginning August 21, 1995 (the date Class B shares of the MS Global Equity
Allocation Fund were first offered for sale to the public) through December 31,
1997 were 10.49%, and 14.11% with respect to its Class B shares; and for the
one-year and three-year periods ended December 31, 1997 and for the period
beginning January 4, 1993 (the date Class C shares of the MS Global Equity
Allocation were first offered to the public) through December 31, 1997 were
14.60%, 15.50% and 13.33% with respect to its Class C shares.
The average annual total returns for the VKAC Global Equity Fund for the
one-year, three-year and five-year periods ended December 31, 1997 and for the
period beginning
16
<PAGE> 25
August 5, 1991 (the date Class A shares of the VKAC Global Equity Fund were
first offered for sale to the public) through December 31, 1997 were 9.10%,
14.36%, 12.12% and 10.79% with respect to its Class A shares; for the one-year,
three-year and five-year periods ended December 31, 1997 and for the period
beginning November 15, 1991 (the date Class B shares of the VKAC Global Equity
Fund were first offered for sale to the public) through December 31, 1997 were
9.93%, 15.01%, 12.41% and 10.37% with respect to its Class B shares; and for the
one-year and three-year periods ended December 31, 1997 and for the period
beginning June 21, 1993 (the date Class C shares of the VKAC Global Equity Fund
were first offered for sale to the public) through December 31, 1997 were
13.99%, 15.76% and 12.47% with respect to its Class C shares.
The foregoing total returns include the effect of the maximum sales charge
applicable to sales of shares of both the MS Global Equity Allocation Fund and
the VKAC Global Equity Fund. The foregoing total returns also assume
reinvestment of all dividends and distributions. The total returns are not
necessarily indicative of future results. The performance of an investment
company is the result of conditions in the securities markets, portfolio
management and operating expenses. Although information such as that shown above
is useful in reviewing a fund's performance and in providing some basis for
comparison with other investment alternatives, it should not be used for
comparison with other investments using different reinvestment assumptions or
time periods. In the absence of expense reimbursements for the MS Global Equity
Allocation Fund, the MS Global Equity Allocation Fund's total returns would have
been reduced.
Management's discussion of the MS Global Equity Allocation Fund's and VKAC
Global Equity Fund's performance as of each funds' last fiscal year end are
attached hereto as Exhibit A.
OTHER SERVICE PROVIDERS. The transfer agent for each fund is ACCESS Investor
Services, Inc., a wholly-owned subsidiary of VKAC. The independent auditors for
each fund is Price Waterhouse LLP. The MS Global Equity Allocation Fund obtains
certain administrative services from Chase Global Funds Services Company, a
corporate affiliate of The Chase Manhattan Bank ("Chase"). The VKAC Global
Equity Fund obtains certain accounting and legal services from Advisory Corp.
and VKAC, respectively. The custodians for the MS Global Equity Allocation Fund
are Chase for domestic securities and cash and Morgan Stanley Trust Company, an
affiliate of the Adviser, for foreign assets. The custodian for the VKAC Global
Equity Fund is State Street Bank and Trust Company.
GOVERNING LAWS. The MS Global Equity Allocation Fund is a series of the Morgan
Stanley Fund, an open-end management investment company organized as a Maryland
corporation. The VKAC Global Equity Fund is a series of the World Portfolio
Trust, an open-end management investment company organized as a Delaware
business trust. While Maryland corporate law contains many provisions
specifically applicable to management investment companies and Delaware business
trust law
17
<PAGE> 26
is specifically drafted to accommodate some of the unique corporate governance
needs of management investment companies, certain statutory differences do exist
and the funds' organizational document contain certain differences summarized
below. Each fund is subject to federal securities laws, including the 1940 Act
and the rules and regulations promulgated by SEC thereunder, and applicable
state securities laws.
Consistent with Delaware law, the World Portfolio Trust has authorized the
issuance of an unlimited number of shares for the VKAC Global Equity Fund.
Consistent with Maryland law, the Morgan Stanley Fund has authorized a specific
number of shares available for the MS Global Equity Allocation Fund, however,
the Morgan Stanley Fund organizational documents provide directors with the
authority to increase or decrease the authorized number of shares, from time to
time, as they consider necessary. Both the World Portfolio Trust and the Morgan
Stanley Fund allow the trustees/directors to create one or more separate
investment portfolios and to establish a separate series of shares for each
portfolio and to further subdivide the shares of a series into one or more
classes.
In general, the rights associated with common shares of beneficial interest of
the World Portfolio Trust are similar to the rights associated with shares of
common stock of the Morgan Stanley Fund. An area of potential difference is
that, although shareholders of a Delaware business trust generally are not
personally liable for obligations of the trust under Delaware law (the Delaware
business trust law provides that shareholders of a Delaware business trust
should be entitled to the same limitation of liability as shareholders of
private, for profit corporations), similar statutory or other authority limiting
business trust shareholder liability does not apply in many other states, and a
shareholder subject to proceedings in courts in other states, which may not
apply Delaware law, may be subject to liability. To guard against this risk, the
World Portfolio Trust organizational documents (i) contain an express disclaimer
of shareholder liability for acts or obligations of the trust and require notice
of such disclaimer in each agreement, obligation or instrument entered into by
the trust and (ii) provide for shareholder indemnification out of the series or
fund property if any shareholder is held personally liable for the obligations
of the trust. Management of the VKAC Global Equity Fund believes the risk of
liability to a World Portfolio Trust shareholder beyond his or her investment is
remote.
Shareholders of a Maryland corporation currently have no personal liability
for the corporation's acts or obligations, except that a shareholder may be
liable to the extent that: (1) the dividends a shareholder receives exceed the
amount which properly could have been paid under Maryland law, (2) the
consideration paid to a shareholder by the Maryland corporation for stock was
paid in violation of Maryland law or (3) a shareholder otherwise receives any
distribution, payment or release which exceeds the amount which a shareholder
could properly receive under Maryland law.
18
<PAGE> 27
Neither fund is required, and neither fund anticipates, holdings annual
meetings of its shareholders. Both funds do have certain mechanics whereby
shareholders can call a special meeting of the respective fund. Shareholders
generally have the right to approve investment advisory agreements, elect
trustees/directors, change fundamental investment policies, ratify the selection
of independent auditors and vote on other matters required by law or deemed
desirable by trustees/directors.
The business of the World Portfolio Trust is supervised by nine trustees,
whereas the business of the Morgan Stanley Fund is supervised by the same nine
persons plus one additional person as director. The responsibilities, powers and
fiduciary duties of trustees under Delaware law are substantially the same as
those for directors under Maryland law. [Election of trustees by shareholders of
the World Portfolio Trust requires the vote of a plurality of the shares present
in person or by proxy at a meeting assuming a majority of such Trust's shares
are present. Election of directors by shareholders of the Morgan Stanley Fund
requires the vote of a majority of the shares present in person or by proxy at a
meeting assuming a majority of such Fund's shares are present.] For the World
Portfolio Trust and the Morgan Stanley Fund, trustee/director vacancies may be
filled by approval of a majority of the trustees/directors then in office
subject to provisions of the 1940 Act. Trustees/Directors terms are until the
later of the election of such person's successor or resignation or removal. Each
of the funds has substantially the same mandatory retirement age provisions for
trustees/directors. Trustees of the World Portfolio Trust may be removed with or
without cause by vote of 2/3's of the shares then outstanding or by vote of
2/3's of the number of trustees prior to such removal. Trustees of the Morgan
Stanley Fund may be removed with or without cause by vote of a majority of the
shares present or in person at a meeting.
The foregoing is only a summary of certain differences between the VKAC Global
Equity Fund under Delaware law and the MS Global Equity Allocation Fund under
Maryland law. It is not intended to be a complete list of differences and
shareholders should refer to the provisions of each fund's applicable
organizational documents for a more thorough comparison. Such documents are
filed are part of each fund's registration statements with the SEC and
shareholders may obtain copies of such documents as described on page 2 of this
prospectus/proxy statement.
B. RISK FACTORS
SIMILARITY OF RISKS
The investment objectives of the MS Global Equity Allocation Fund and the VKAC
Global Equity Fund are similar. The investment policies of the MS Global Equity
Allocation Fund and the VKAC Global Equity Fund are similar insofar as they each
invest, under normal market conditions, at least 65% of their respective net
assets in equity securities of issuers in at least three different countries.
Each of
19
<PAGE> 28
the Funds invests in securities of foreign issuers. Investment in securities of
foreign issuers, especially in securities of issuers in emerging countries,
involves somewhat different investment risks from those affecting securities of
U.S. issuers. There may be limited publicly available information with respect
to foreign issuers, and foreign issuers are not generally subject to uniform
accounting, auditing, and financial and other reporting standards and
requirements comparable to those applicable to domestic companies. Therefore
disclosure of certain material information may not be made and less information
may be available to investors investing in foreign countries than in the United
States. There may also be less government supervision and regulation of foreign
securities exchanges, brokers and listed companies than in the United States.
Many foreign securities markets have substantially less volume than U.S.
national securities exchanges, and securities of some foreign issuers are less
liquid and subject to greater price volatility than securities of comparable
domestic issuers. Brokerage commissions and other transaction costs on foreign
securities exchanges are generally higher than in the United States. Dividends
and interest paid by foreign issuers may be subject to withholding and other
foreign taxes, which may decrease the net return on foreign investments as
compared to dividends and interest paid to the funds by domestic companies.
Additional risks include future adverse political and income payable with
respect to foreign securities, possible seizure, nationalization or
expropriation of the foreign issuer or foreign deposits, and the possible
adoption of foreign governmental restrictions such as exchange controls. Also,
it may be more difficult to obtain a judgment in a court outside the United
States. Emerging countries may have less stable political environments than more
developed countries.
Each of the MS Global Equity Allocation Fund and the VKAC Global Equity Fund
also engages in certain common investment practices such as the purchase and
sale of [depositary receipts.] forward foreign currency exchange contracts,
options, futures, options on futures, engaging in repurchase agreements, limited
investing in restricted securities and illiquid securities, limited ability to
loan portfolio securities, and limited ability to borrow.
To the extent that the investment objectives and investment policies and
practices of the MS Global Equity Allocation Fund and the VKAC Global Equity
Fund are similar, the risks associated with an investment in the funds are
similar.
Investment in either of the MS Global Equity Allocation Fund or the VKAC
Global Equity Fund may not be appropriate for all investors. Neither fund is
intended to be a complete investment program, and investors should consider
their long-term investment goals and financial needs when making an investment
decision with respect to the funds. An investment in either fund is intended to
be a long-term investment and should not be used as a trading vehicle.
20
<PAGE> 29
DIFFERENCES IN RISKS
The MS Global Equity Allocation Fund and the VKAC Global Equity Fund have
similar investment practices and similar investment restrictions. To the extent
that the investment practices and restrictions for the funds are similar, the
risks associated with an investment in the MS Global Equity Allocation Fund and
the VKAC Global Equity Fund are similar. Nonetheless, investors are encouraged
to read carefully the sections of the MS Fund Prospectus entitled "Investment
Objective and Policies," "Additional Investment Information" and "Investment
Limitations" and the sections of the VKAC Fund Prospectus entitled "Investment
Objective and Policies" and "Investment Practices."
STRUCTURED NOTES, SWAPS, CAPS, FLOORS, COLLARS, WHEN-ISSUED, DELAYED DELIVERY,
PORTFOLIO SECURITIES LENDING, ZERO COUPON DEBT, PAYMENT IN KIND DEBT AND
DEFERRED PAYMENT DEBT. The MS Global Equity Allocation Fund may enter into
investment transactions involving structured notes, swaps, caps, floors,
collars, when-issued securities, delay delivery securities, lending of portfolio
securities, zero coupon debt, payment in kind debt and deferred payment debt.
The VKAC Global Equity Fund does not engage or engages to a lesser degree in
such transactions. Each of these transactions involve risks unique to such
transactions. For a complete description of such transactions and the associated
risks, see the appropriate subsections in the MS Global Equity Allocation Fund
Prospectus under the heading entitled "Additional Investment Information."
C. THE PROPOSED REORGANIZATION
The material features of the Agreement are summarized below. This summary does
not purport to be complete and is subject in all respects to the provisions of,
and is qualified in its entirety by reference to, the Agreement attached as
Appendix A to the Reorganization SAI, a copy of which may be obtained without
charge by calling the MS Global Equity Allocation Fund or the VKAC Global Equity
Fund at (800) 421-5666 and asking for the "Reorganization SAI".
TERMS OF THE AGREEMENT
Pursuant to the Agreement, the MS Global Equity Allocation Fund series of the
Morgan Stanley Fund would acquire all of the assets and the liabilities of the
VKAC Global Equity Fund series of the World Portfolio Trust on the date of the
Closing in consideration for Class A, B and C shares of the MS Global Equity
Allocation Fund.
Subject to the VKAC Global Equity Fund's shareholders approving of the
Reorganization, the closing (the "Closing") will occur within 15 business days
after the later of the receipt of all necessary regulatory approvals and the
final adjournment of the Special Meeting or such later date as soon as
practicable thereafter as
21
<PAGE> 30
the MS Global Equity Allocation Fund and the VKAC Global Equity Fund may
mutually agree.
On the date of Closing, the VKAC Global Equity Fund will transfer to the MS
Global Equity Allocation Fund all of the assets and liabilities of the VKAC
Global Equity Fund. The MS Global Equity Allocation Fund will in turn transfer
to the VKAC Global Equity Fund a number of its Class A, B and C shares equal in
value to the value of the net assets of the VKAC Global Equity Fund transferred
to the MS Global Equity Allocation Fund as of the date of Closing, as determined
in accordance with the valuation method described in the MS Global Equity
Allocation Fund's then current prospectus. In order to minimize any potential
for undesirable federal income and excise tax consequences in connection with
the Reorganization, the MS Global Equity Allocation Fund and the VKAC Global
Equity Fund may distribute on or before the Closing all or substantially all of
their respective undistributed net investment income (including net capital
gains) as of such date.
The VKAC Global Equity Fund expects to distribute the Class A, B and C shares
of the MS Global Equity Allocation Fund to the shareholders of the VKAC Global
Equity Fund promptly after the Closing and then dissolve pursuant to a plan of
dissolution adopted by the Board of Trustees.
The MS Global Equity Allocation Fund and the VKAC Global Equity Fund have made
certain standard representations and warranties to each other regarding their
respective capitalizations, status and conduct of business.
Unless waived in accordance with the Agreement, the obligations of the parties
to the Agreement are conditioned upon, among other things:
1. the approval of the Reorganization by the VKAC Global Equity Fund's
shareholders;
2. the absence of any rule, regulation, order, injunction or proceeding
preventing or seeking to prevent the consummation of the transactions
contemplated by the Agreement;
3. the receipt of all necessary approvals, registrations and exemptions
under federal and state laws;
4. the truth in all material respects as of the Closing of the
representations and warranties of the parties and performance and
compliance in all material respects with the parties' agreements,
obligations and covenants required by the Agreement;
5. the effectiveness under applicable law of the registration statement of
the MS Global Equity Allocation Fund of which this Prospectus/Proxy
Statement forms a part and the absence of any stop orders under the
Securities Act of 1933, as amended, pertaining thereto; and
6. the receipt of opinions of counsel relating to, among other things, the
tax free nature of the Reorganization.
22
<PAGE> 31
The Agreement may be terminated or amended by the mutual consent of the
parties either before or after approval thereof by the shareholders of the VKAC
Global Equity Fund, provided that no such amendment after such approval shall be
made if it would have a material adverse affect on the interests of VKAC Global
Equity Fund shareholders. The Agreement also may be terminated by the non-
breaching party if there has been a material misrepresentation, material breach
of any representation or warranty, material breach of contract or failure of any
condition to Closing.
The Board of Trustees recommends that you vote to approve the Reorganization,
as it believes the Reorganization is in the best interests of the VKAC Global
Equity Fund's shareholders and that the interests of the VKAC Global Equity
Fund's existing shareholders will not be diluted as a result of consummation of
the proposed Reorganization.
DESCRIPTION OF SECURITIES TO BE ISSUED
SHARES OF COMMON STOCK. Shares of common stock of the MS Global Equity
Allocation Fund being offered hereby are represented by transferable Class A, B
and C shares, par value $0.001 per share. The Amended and Restated Certificate
of Incorporation of the Morgan Stanley Fund permits the directors, as they deem
necessary or desirable, to create one or more separate investment portfolios and
to issue a separate series of shares for each portfolio and, subject to
compliance with the 1940 Act, to further sub-divide the shares of a series into
one or more classes of shares for such portfolio.
VOTING RIGHTS OF SHAREHOLDERS. Holders of common shares of the MS Global
Equity Fund are entitled to one vote per share on matters as to which they are
entitled to vote; however, separate votes generally are taken by each series on
matters affecting an individual series.
The MS Global Equity Allocation Fund operates as an investment portfolio of
the Morgan Stanley Fund, an open-end management investment company registered
with the SEC under the 1940 Act. The VKAC Global Equity Fund operates as a
series of the World Portfolio Trust, also an open-end management investment
company registered with the SEC under the 1940 Act. Therefore, in addition to
the specific voting rights described above, shareholders of the MS Global Equity
Allocation Fund, as well as shareholders of the VKAC Global Equity Fund, are
entitled, under current law, to vote with respect to certain other matters,
including changes in fundamental investment policies and restrictions and the
ratification of the selection of independent auditors. Moreover, under the 1940
Act, shareholders owning not less than 10% of the outstanding shares of the VKAC
Global Equity Fund or MS Global Equity Allocation Fund may request that the
respective board of trustees/directors call a shareholders' meeting for the
purpose of voting upon the removal of trustee(s).
23
<PAGE> 32
CONTINUATION OF SHAREHOLDER ACCOUNTS AND PLANS; SHARE CERTIFICATES
If the Reorganization is approved, the MS Global Equity Allocation Fund will
establish an account for each VKAC Global Equity Fund shareholder containing the
appropriate number of shares of the MS Global Equity Allocation Fund. The
shareholder services and shareholder programs of the MS Global Equity Allocation
Fund and the VKAC Global Equity Fund are substantially identical. Shareholders
of the VKAC Global Equity Fund who are accumulating VKAC Global Equity Fund
shares under the dividend reinvestment plan, or who are receiving payment under
the systematic withdrawal plan with respect to VKAC Global Equity Fund shares,
will retain the same rights and privileges after the Reorganization in
connection with the MS Global Equity Allocation Fund Class A, B or C shares
received in the Reorganization through substantially identical plans maintained
by the MS Global Equity Allocation Fund. [Van Kampen American Capital Trust
Company will continue to serve as custodian for the assets of VKAC Global Equity
Fund shareholders held in IRA accounts after the Reorganization. Such IRA
investors will be sent appropriate documentation to confirm Van Kampen American
Capital Trust Company's custodianship.]
It will not be necessary for shareholders of the VKAC Global Equity Fund to
whom certificates have been issued to surrender their certificates. Upon
dissolution of the VKAC Global Equity Fund, such certificates will become null
and void. However, VKAC Global Equity Fund shareholders holding such
certificates may want to present such certificates to receive certificates of
the MS Global Equity Allocation Fund (to simplify substantiation of and to
preserve the tax basis of separate lots of shares).
FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of the material federal income tax
consequences of the Reorganization to shareholders of the VKAC Global Equity
Fund and shareholders of the MS Global Equity Allocation Fund. The discussion
set forth below is for general information only and may not apply to a holder
subject to special treatment under the Internal Revenue Code of 1986, as amended
(the "Code"), such as a holder that is a bank, an insurance company, a dealer in
securities, a tax-exempt organization or that acquired its Class A, B and C
shares of the VKAC Global Equity Fund pursuant to the exercise of employee stock
options or otherwise as compensation. It is based upon the Code, legislative
history, Treasury regulations, judicial authorities, published positions of the
Internal Revenue Service (the "Service") and other relevant authorities, all as
in effect on the date hereof and all of which are subject to change or different
interpretations (possibly on a retroactive basis). This summary is limited to
shareholders who hold their VKAC Global Equity Fund shares as capital assets. No
advance rulings have been or will be sought from the Service regarding any
matter discussed in this
24
<PAGE> 33
Prospectus/Proxy Statement. Accordingly, no assurances can be given that the
Service could not successfully challenge the intended federal income tax
treatment described below. Shareholders should consult their own tax advisers to
determine the specific federal income tax consequences of all transactions
relating to the Reorganization, as well as the effects of state, local and
foreign tax laws and possible changes to the tax laws.
The Reorganization is intended to qualify as a "reorganization" within the
meaning of Section 368(a)(1) of the Code. It is a condition to closing that the
World Portfolio Trust receive an opinion from Skadden, Arps, Slate, Meagher &
Flom (Illinois) ("Skadden Arps") substantially to the effect that for federal
income tax purposes:
1. The acquisition by the MS Global Equity Allocation Fund of the assets of
the VKAC Global Equity Fund in exchange solely for Class A, B and C
shares of the MS Global Equity Allocation Fund and the assumption by the
MS Global Equity Allocation Fund of the liabilities of the VKAC Global
Equity Fund will qualify as a tax-free reorganization within the meaning
of Section 368(a)(1) of the Code.
2. No gain or loss will be recognized by the VKAC Global Equity Fund or the
MS Global Equity Allocation Fund upon the transfer to the MS Global
Equity Allocation Fund of the assets of the VKAC Global Equity Fund in
exchange solely for the Class A, B and C shares of the MS Global Equity
Allocation Fund and the assumption by the MS Global Equity Allocation
Fund of the liabilities of the VKAC Global Equity Fund.
3. The MS Global Equity Allocation Fund's basis in the VKAC Global Equity
Fund assets received in the Reorganization will, in each instance, equal
the basis of such assets in the hands of the VKAC Global Equity Fund
immediately prior to the transfer, and the MS Global Equity Allocation
Fund's holding period of such assets will, in each instance, include the
period during which the assets were held by the VKAC Global Equity Fund.
4. No gain or loss will be recognized by the shareholders of the VKAC Global
Equity Fund upon the exchange of their shares of the VKAC Global Equity
Fund for the Class A, B or C shares of the MS Global Equity Allocation
Fund.
5. The aggregate tax basis in the Class A, B and C shares of the MS Global
Equity Allocation Fund received by the shareholders of the VKAC Global
Equity Fund will be the same as the aggregate tax basis of the shares of
the VKAC Global Equity Fund surrendered in exchange therefor. See
"Continuation of Shareholder Accounts and Plans; Share Certificates"
above.
6. The holding period of the Class A, B and C shares of the MS Global Equity
Allocation Fund received by the shareholders of the VKAC Global Equity
25
<PAGE> 34
Fund will include the holding period of the shares of the VKAC Global
Equity Fund surrendered in exchange therefor if such surrendered shares
of the VKAC Global Equity Fund are held as capital assets by such
shareholder.
In rendering its opinion, Skadden Arps may rely upon certain representations
of the management of the MS Global Equity Allocation Fund and the VKAC Global
Equity Fund and assume that the Reorganization will be consummated as described
in the Agreement and that redemptions of shares of the VKAC Global Equity Fund
occurring prior to the Closing will consist solely of redemptions in the
ordinary course of business.
The MS Global Equity Allocation Fund intends to be taxed under the rules
applicable to regulated investment companies as defined in Section 851 of the
Code, which are the same rules currently applicable to the VKAC Global Equity
Fund and its shareholders.
EXPENSES
The expenses of the Reorganization, including expenses incurred by the MS
Global Equity Allocation Fund, generally will be borne by the VKAC Global Equity
Fund in the event the Reorganization is completed. Management of the funds
believes that shareholders of the VKAC Global Equity Fund are the primary
beneficiaries of benefits derived from the Reorganization. Management of the
VKAC Global Equity Fund and MS Global Equity Allocation Fund estimates total
Reorganization expenses at approximately $250,000. In the event the
Reorganization is not completed, VKAC will bear the costs associated with the
Reorganization. The Board of Trustees and Board of Directors have reviewed and
approved the foregoing arrangements regarding payment of expenses and other
charges relating to the Reorganization. [Discussion of Retirement to come --
Requires Tax Analysis]
As noted above, shareholders of the VKAC Global Equity Fund may redeem their
shares or exchange their shares for shares of certain other open-end mutual
funds advised by Advisory Corp. or Asset Management and distributed by VKAC
Distributors at any time prior to the closing of the Reorganization. See
"Distribution, Purchase, Valuation, Redemption and Exchange of Shares" above.
Redemptions and exchanges of shares generally are taxable transactions, unless
your account is not subject to taxation, such as an individual retirement
account or other tax-qualified retirement plan. Shareholders should consult with
their own tax advisers regarding potential transactions.
26
<PAGE> 35
RATIFICATION OF INVESTMENT OBJECTIVE, INVESTMENT POLICIES AND
RESTRICTIONS OF THE MS GLOBAL EQUITY ALLOCATION FUND
Approval of the Reorganization will constitute the ratification by VKAC Global
Equity Fund shareholders of the investment objective, investment policies and
restrictions, distribution plan and advisory agreement of the MS Global Equity
Allocation Fund. Approval of the Reorganization will constitute approval of
amendments to any of the fundamental investment restrictions of the VKAC Global
Equity Fund that might otherwise be interpreted as impeding the Reorganization,
but solely for the purpose of and to the extent necessary for, consummation of
the Reorganization.
LEGAL MATTERS
Certain legal matters concerning the federal income tax consequences of the
Reorganization and issuance of Class A, B and C shares of the MS Global Equity
Allocation Fund will be passed on by Skadden Arps, 333 West Wacker Drive,
Chicago, Illinois 60606, which serves as counsel to the MS Global Equity
Allocation Fund and the VKAC Global Equity Fund. Wayne W. Whalen, a partner of
Skadden Arps, is a Trustee of the World Portfolio Trust and a Director of the
Morgan Stanley Fund.
D. RECOMMENDATION OF THE BOARD
The Board of Trustees has unanimously approved the Agreement and has
determined that participation in the Reorganization is in the best interests of
shareholders of each class of shares of the VKAC Global Equity Fund. THE BOARD
OF TRUSTEES RECOMMENDS VOTING "FOR" THE PROPOSED REORGANIZATION.
OTHER INFORMATION
A. SHAREHOLDERS OF THE MS GLOBAL EQUITY ALLOCATION FUND
AND THE VKAC GLOBAL EQUITY FUND
At the close of business on March 27, 1998, there were Class A
shares, Class B shares and Class C shares, respectively, of
the MS Global Equity Allocation Fund. As of such date, the trustees and officers
of the MS Global Equity Allocation Fund as a group own less than 1% of the
shares of the MS Global Equity Allocation Fund. As of such date, no person was
known by the MS Global Equity Allocation Fund to own beneficially or of record
as much as 5% of the Class A, Class B or Class C shares [except as follows:]
At the close of business on March 27, 1998, the record date with respect to
the Special Meeting, there were Class A shares, Class B shares
and Class C shares, respectively, of the VKAC Global Equity Fund. As of
27
<PAGE> 36
such date, the trustees and officers of the VKAC Global Equity Fund as a group
own less than 1% of the outstanding shares of the VKAC Global Equity Fund. As of
such date, no person was known by the VKAC Global Equity Fund to own
beneficially or of record as much as 5% of the Class A, Class B or Class C
shares [except as follows:]
B. SHAREHOLDER PROPOSALS
As a general matter, the MS Global Equity Allocation Fund does not intend to
hold future regular annual or special meetings of its shareholders unless
required by the 1940 Act. In the event the Reorganization is not consummated,
the VKAC Global Equity Fund does not intend to hold future regular annual or
special meetings of its shareholders unless required by the 1940 Act. Any
shareholder who wishes to submit proposals for consideration at a meeting of
shareholders of the MS Global Equity Allocation Fund or the VKAC Global Equity
Fund should send such proposal to the respective fund at One Parkview Plaza,
Oakbrook Terrace, Illinois 60181. To be considered for presentation at a
shareholders' meeting rules promulgated by the SEC require that, among other
things, a shareholder's proposal must be received at the offices of the fund a
reasonable time before a solicitation is made. Timely submission of a proposal
does not necessarily mean that such proposal will be included.
VOTING INFORMATION AND REQUIREMENTS
Holders of shares of the VKAC Global Equity Fund are entitled to one vote per
share on matters as to which they are entitled to vote. The VKAC Global Equity
Fund does not utilize cumulative voting.
Each valid proxy given by a shareholder of the VKAC Global Equity Fund will be
voted by the persons named in the proxy in accordance with the instructions
marked thereon and as the persons named in the proxy may determine on such other
business as may come before the Special Meeting on which shareholders are
entitled to vote. If no designation is made, the proxy will be voted by the
persons named in the proxy as recommended by the Board "FOR" approval of the
Reorganization. Abstentions and broker non-votes do not count as votes "FOR" a
proposal and are treated as votes "AGAINST". A majority of the outstanding
shares entitled to vote on a proposal must be present in person or by proxy to
have a quorum to conduct business at the Special Meeting. Abstentions and broker
non-votes will be deemed present for quorum purposes.
Shareholders who execute proxies may revoke them at any time before they are
voted by filing with the VKAC Global Equity Fund a written notice of revocation,
by delivering a duly executed proxy bearing a later date, or by attending the
Special
28
<PAGE> 37
Meeting and voting in person. The giving of a proxy will not affect your right
to vote in person if you attend the Special Meeting and wish to do so.
It is not anticipated that any action will be asked of the shareholders of the
VKAC Global Equity Fund other than as indicated above, but if other matters are
properly brought before the Special Meeting, it is intended that the persons
named in the proxy will vote in accordance with their judgment.
APPROVAL OF THE REORGANIZATION WILL REQUIRE THE FAVORABLE VOTE OF THE HOLDERS
OF A MAJORITY OF THE OUTSTANDING SHARES OF THE VKAC GLOBAL EQUITY FUND ENTITLED
TO VOTE.
In the event that sufficient votes in favor of a proposal are not received by
the scheduled time of the Special Meeting, the persons named in the proxy may
propose and vote in favor of one or more adjournments of the Special Meeting to
permit further solicitation of proxies. If sufficient shares were present to
constitute a quorum, but insufficient votes had been cast in favor of a proposal
to approve it, proxies would be voted in favor of adjournment only if the Board
determined that adjournment and additional solicitation was reasonable and in
the best interest of the shareholders of the VKAC Global Equity Fund, taking
into account the nature of the proposal, the percentage of the votes actually
cast, the percentage of negative votes, the nature of any further solicitation
that might be made and the information provided to shareholders about the
reasons for additional solicitation. Any such adjournment will require the
affirmative vote of the holders of a majority of the outstanding shares voted at
the session of the Special Meeting to be adjourned.
Proxies of shareholders of the VKAC Global Equity Fund are solicited by the
Board. In order to obtain the necessary quorum at the Special Meeting,
additional solicitation may be made by mail, telephone, telegraph or personal
interview by representatives of Asset Management or VKAC, or by dealers or their
representatives. In addition, such solicitation servicing may also be provided
by First Data Investor Services Group, a solicitation firm located in Boston,
Massachusetts, at a cost estimated to be approximately $3,000, plus reasonable
expenses.
, 1998
PLEASE SIGN AND RETURN YOUR PROXY PROMPTLY.
YOUR VOTE IS IMPORTANT AND YOUR PARTICIPATION
IN THE AFFAIRS OF YOUR FUND DOES MAKE A DIFFERENCE.
29
<PAGE> 38
EXHIBIT A
MANAGEMENT'S DISCUSSION OF
MS GLOBAL EQUITY ALLOCATION FUND AND VKAC GLOBAL EQUITY FUND PERFORMANCE
Management's Discussion of the MS Global Equity Allocation Fund's Performance
as of the Annual Report dated June 30, 1997.
LETTER TO SHAREHOLDERS
MORGAN STANLEY
GLOBAL EQUITY ALLOCATION FUND
INVESTMENT OVERVIEW
(UNAUDITED)
COMPOSITION OF NET ASSETS (AT JUNE 30, 1997)
[PIE GRAPH]
<TABLE>
<S> <C>
AUSTRALIA 1.2
CANADA 4.5
FRANCE 4.3
GERMANY 5.3
HONG KONG 2.0
ITALY 2.8
JAPAN 16.1
KOREA 0.7
NETHERLANDS 1.5
SINGAPORE 1.8
SPAIN 3.0
SWEDEN 1.9
SWITZERLAND 2.1
UNITED KINGDOM 7.3
UNITED STATES 43.1
OTHER 2.4
</TABLE>
A-1
<PAGE> 39
<TABLE>
<CAPTION>
TOTAL RETURNS**
-------------------------------------
AVERAGE ANNUAL
ONE YEAR SINCE INCEPTION
----------------- -----------------
WITH WITHOUT WITH WITHOUT
SALES SALES SALES SALES
CHARGE* CHARGE CHARGE* CHARGE
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Shares 14.88% 20.61% 14.38% 15.90%
- -------------------------------------------------------------------------
Class B+ Shares 14.64% 19.64% 17.99% 19.77%
- -------------------------------------------------------------------------
Class C Shares 18.69% 19.69% 15.04% 15.04%
- -------------------------------------------------------------------------
MSCI World Index:
Class A & C Shares N/A 22.27% N/A 17.15%
Class B Shares N/A 22.27% N/A 18.29%
- -------------------------------------------------------------------------
</TABLE>
* The returns above are calculated using the applicable sales charge for Class
A shares and the applicable deferred sales charge for Class B and Class C
shares.
** Total returns for the Fund reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waivers and reimbursements, total
returns would be lower.
+ Class B shares have been offered since August 1, 1995.
The Morgan Stanley Capital International (MSCI) World Index is an unmanaged
index which includes securities listed on the stock exchanges of the U.S.,
Europe, Canada, Australia, New Zealand and the Far East and assumes dividends
are reinvested net of withholding tax.
A-2
<PAGE> 40
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT
[LINE GRAPH]
<TABLE>
<CAPTION>
GLOBAL EQUITY GLOBAL EQUITY
ALLOCATION ALLOCATION
MEASUREMENT PERIOD FUND - CLASS FUND - CLASS MSCI WORLD
(FISCAL YEAR COVERED) A C INDEX
<S> <C> <C> <C>
1/4/93 9525 10000 10000
6/30/93 10563 10939 11515
6/30/94 11516 11972 12696
6/30/95 12286 12671 14050
6/30/96 15311 15667 16640
6/30/97 18467 18752 20346
</TABLE>
TOP FIVE HOLDINGS
<TABLE>
<CAPTION>
PERCENT OF
ISSUER COUNTRY NET ASSETS
- -------------------------------------------------------------------------
<S> <C> <C>
General Electric Co. United States 1.7%
- -------------------------------------------------------------------------
Coca-Cola Co. United States 1.6%
- -------------------------------------------------------------------------
Microsoft Corp. United States 1.3%
- -------------------------------------------------------------------------
Morgan Stanley Asia-Pacific Fund, Inc. United States 1.2%
- -------------------------------------------------------------------------
Merck & Co., Inc. United States 1.2%
- -------------------------------------------------------------------------
</TABLE>
TOP FIVE SECTORS
<TABLE>
<CAPTION>
VALUE PERCENT OF
SECTOR (000) NET ASSETS
- ------------------------------------------------------------------------
<S> <C> <C>
Consumer Goods $40,454 21.3%
- ------------------------------------------------------------------------
Finance 37,011 19.4%
- ------------------------------------------------------------------------
Services 32,912 17.3%
- ------------------------------------------------------------------------
Capital Equipment 28,015 14.8%
- ------------------------------------------------------------------------
Energy 18,745 9.9%
- ------------------------------------------------------------------------
</TABLE>
In accordance with SEC regulations, Fund performance since inception as shown at
left assumes that: the maximum sales charge was deducted from the initial
investment of $10,000 in Class A shares; all recurring fees (including
management fees) were deducted; and all dividends and distributions were
reinvested. The graph presents the performance of Class A and Class C shares
which have been in existence since the Fund's inception. The performance of
Class B shares will vary based upon the different inception date and the sales
charge and fees assessed to that Class.
Past performance is not predictive of future performance.
A-3
<PAGE> 41
The Global Equity Allocation Fund invests in global equity markets, with
emphasis placed upon country rather than stock selection. This approach reflects
an investment philosophy that a diversified selection of securities representing
exposure to each country that we find attractive is, we believe, an effective
way to maximize the return and reduce the risk associated with global investing.
For the year ended June 30, 1997, the Fund had a total return exclusive of
sales charge of 20.61% for the Class A shares, 19.64% for the Class B shares and
19.69% for the Class C shares, and a total return with sales charge of 14.88%
for the Class A shares, 14.64% for the Class B shares and 18.69% for the Class C
shares, as compared to a total return of 22.27% for the Morgan Stanley Capital
International (MSCI) World Index (the "Index"). For the period from inception
through June 30, 1997, the average annual total return for the Fund exclusive of
sales charge was 15.90% for the Class A shares, 19.77% for the Class B shares,
and 15.04% for the Class C shares and 14.38% for the Class A shares, 17.99% for
the Class B shares, and 15.04% for the Class C shares with sales charge, as
compared to 17.15% for the Index since inception of the Class A and C shares and
18.29% for the Index since inception of the Class B shares.
Driven by liquidity and lower interest rates, global equity markets continued
their inexorable climb during the last year. Our neutral weighting in Japan hurt
portfolio returns, but was somewhat offset by the tilt out of the banking sector
and by the currency hedge against the yen. Within Europe, underweights to the
high flying, very fully valued Dutch and Swiss markets were offset by an
overweight to Spain and some tactical shifts in France and the U.K. During the
year we reduced the U.K. slightly before the election, and increased Italy
1%-2%. THE COUNTRY SPECIFIC PERFORMANCE RESULTS PROVIDED IN THIS OVERVIEW ARE AS
MEASURED BY THE MSCI WORLD INDEX AND ARE FOR INFORMATIONAL PURPOSES ONLY AND
SHOULD NOT BE CONSTRUED AS A GUARANTEE OF THE FUND'S FUTURE PERFORMANCE.
INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S
SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
PLEASE SEE THE PROSPECTUS FOR A DESCRIPTION OF CERTAIN RISK CONSIDERATIONS
ASSOCIATED WITH INTERNATIONAL INVESTING.
In June, we removed the underweight to Japanese banks as they rallied and
investors began to differentiate between high and low quality banks.
Importantly, Japanese real estate has bottomed and the possibility of further
loan securitization and international partnerships is high. From inception to
deletion of the bank tilt (8/23/96-6/26/97), banks returned -10.3%; Japan with
banks returned 2.8%, and Japan ex-banks returned 6.1% for a difference of 335
basis points.
A-4
<PAGE> 42
In Asia, our tactical maneuvering in Hong Kong added to returns as we
increased the allocation going into the July 1 handover to China. Our zero
weight in Malaysia added significantly to returns as the market fell
precipitously. Singapore, where we were overweight, disappointed with flat
returns, and New Zealand, an underperformer for most of the year, rallied 13.5%
on the back of interest rate reductions. We have no allocation to New Zealand
due to heavy exposure to NZ Telecom and pulp and paper, and we are benchmark
neutral in Australia. In early July we sold our small positions in Thailand and
Korea which had rallied 35% and 24% respectively, and took the opportunity to
exit these markets while both were cheap. Slow export growth and indications
that economic structural issues will take some time to be worked out diluted our
earlier enthusiasm for these markets.
Our slight underweight in North America was detrimental to overall returns.
The favorable economic environment of moderate growth, falling interest rates
and strong corporate earnings provided much of the momentum for the U.S. market.
During the year, currency hedging added to returns. We reduced the yen hedge
to zero at $/Y127, reinstated it at $/Y113 for a time and then reduced it back
to zero at $/Y113 by June 1997. Unlike the yen, continental European currencies
declined steadily against the dollar, falling by about 5%. In June, we removed
the Deutsche mark and Swiss franc hedges entirely and reduced currency hedges
against the French franc, Dutch guilder, and Spanish peseta. European currencies
should continue to weaken, but the Deutsche mark and the Swiss franc are subject
to periodic EMU related strength. Other European currencies have weakened
substantially and are beginning to gain support from economic recoveries. We
believe the yen is stuck in a trading range: bound by its trade surplus on one
side and low interest rates and weak economic fundamentals on the other.
INVESTMENT OUTLOOK:
Overall, the markets performed exceptionally well over the year, and we are
increasingly uneasy about valuation levels and the rate of change. With few
exceptions, European markets, appear to be in a demand-driven blow-off. Current
valuations leave no room for short term setbacks -- such as earnings
disappointments or further intransigence on pension and tax reform in Germany,
Italy, Spain and France. Since June 30, we have selectively been raising cash to
between 7% and 10%. Most of the monies have been shaved off of European weights
(the Netherlands, France, and the U.K.), and we have pulled back on Asian
markets such as Hong Kong and Singapore. We added a few percentage points to
Italy, a market which has underperformed, is undervalued, and should benefit
from lower short-term interest rates. The U.K. underweight is due to the impact
of sterling strength on profits, continued 1997 earnings downgrades and the
belief that short rates need to rise further.
A-5
<PAGE> 43
U.S.
In spite of the U.S. market's upward trend and a very good economic and
corporate backdrop, we remain cautious. Valuations are extended on all measures
and we believe the market's earnings growth expectations of 15% for the next 5
years are unrealistic. Global competition is fierce and foreign competitors have
the advantage of potential cost cutting and much weaker currencies than 6-12
months ago. We remain underweight in the U.S. as the probability of a market
setback increases. We believe that inflationary risk is low, while the converse
of a deflationary slowdown remains.
JAPAN
While it appears that the Japanese economy has withstood the effects of the
April 1 consumption tax hike, it has done so with the aid of the lagged effect
of a weak yen, loose monetary policy, and increased foreign demand. The June
Tankan survey showed that small and medium sized companies -- which employ 75%
of Japanese workers -- are still depressed. Japanese domestic demand needs to
improve in order for the market to broaden beyond the current focus on a few,
over-owned, high-growth exporters. Signs of personal income growth and improved
investment spending are positive. Continued government fiscal consolidation will
not be helpful, but a less splintered LDP may adopt bolder structural reforms.
EUROPE
In Europe, markets have been focused on economic growth and the likelihood
that neither France nor Germany will achieve the 3% deficit-to-GDP ratio for
Economic and Monetary Union (EMU). The much awaited budget of the new
Socialist-led French government alleviated many fears, as corporate taxes were
raised in an attempt to keep the country on course to join EMU. While German
political squabbling about strict adherence to the 3% level continues, we agree
with the consensus that EMU will go forward, but with a larger number of
countries and a weaker Euro. EMU, though not without its risks, should be very
positive for Europe. Productive capital allowed to flow freely across borders
without currency risk will increase competition for investment and jobs, lower
taxes on capital and improve wage and labor flexibility. We have already seen
evidence of corporate consolidation and government de-regulation in preparation,
and we believe the trend will continue.
ASIA
Asian news has been dominated by the devaluation of the Thai baht and its
contagion to the Philippines, Indonesia, Malaysia, Singapore and most recently
Hong Kong. While parallels to Mexico in 1994 are inevitable, they have limited
validity. Compared to Latin America, Asian average growth rates are much faster
A-6
<PAGE> 44
(4.5% versus 7.0%) and levels of indebtedness much lower (99% versus 203%).
Property price levels and current account deficits need to come down, but deep
recessions should not be necessary to maintain stability.
Though disruptive, softening the Asian currency peg to the U.S. dollar is a
long-term policy positive and an indication of financial market maturity. We
have gone to an underweight in the region because of reduced investor flows, the
competitive squeeze on profits, and the high Asian correlation with the U.S. in
market pullbacks. However, many Asian markets, like Malaysia and Singapore are
back at 1990 valuation levels. At a later date, underowned, more competitive,
and ignored -- they will be poised to outperform.
Barton M. Biggs
Portfolio Manager
Madhav Dhar
Portfolio Manager
Francine J. Bovich
Portfolio Manager
Ann D. Thivierge
Portfolio Manager
July 1997
A-7
<PAGE> 45
Management's Discussion of the VKAC Global Equity Fund's Performance as of the
Annual Report dated May 31, 1997.
LETTER TO SHAREHOLDERS
June 24, 1997
Dear Shareholder,
As you know, VK/AC Holding, Inc., the parent company of Van Kampen American
Capital, Inc., was acquired by Morgan Stanley Group Inc., a world leader in
asset management. More recently, on February 5, 1997, Morgan Stanley Group Inc.
and Dean Witter, Discover & Co. agreed to merge. The merger was completed on May
31, 1997, creating the combined company of Morgan Stanley, Dean Witter, Discover
& Co. Additionally, we are very pleased to announce that Philip N. Duff,
formerly of Morgan Stanley, has joined Van Kampen American Capital as president
and chief executive officer. I will continue as chairman.
Additionally, on April 1, 1997, Morgan Stanley Asset Management became
subadvisor for the Van Kampen American Capital Global Equity Fund. Unlike the
previous subadvisory agreement, which divided responsibility for domestic and
foreign portfolio management, Morgan Stanley Asset Management has assumed
complete responsibility for your Fund's holdings. As explained in your proxy
statement, we believe that the new advisory relationship is another positive
result of our acquisition by Morgan Stanley. We are confident that your
partnership with Morgan Stanley will continue to work to the benefit of our fund
shareholders.
MARKET REVIEW
Bolstered by generally solid economic growth and continued low inflation, most
global equity markets posted gains over the fiscal year. The Morgan Stanley
Capital International World Index climbed 14.6 percent in dollar terms, with
more than half of the increase coming since the beginning of the year.
Among developed markets, U.S. stocks gained 20.38 percent over the 12 months
ended May 31, 1997, based on the Wilshire 5000 Index. Equity prices in the
United States were supported by nearly perfect economic conditions.
First-quarter gross domestic product, the nation's total output of goods and
services, increased by a robust 5.6 percent annualized rate, the largest
quarterly gain in nine years. Despite rapid growth, inflation remained benign,
with consumer prices up just 2.5 percent over the 12 months through April.
Meanwhile, unemployment fell below 4.9 percent and consumer confidence soared to
its highest level in 27 years. Signs that the tight labor market was putting
upward pressure on wages led the Federal Reserve Board to raise interest rates
by one-quarter point in March.
A-8
<PAGE> 46
European equity markets also were strong, with the Morgan Stanley Europe Index
climbing 22.7 percent over the fiscal year. We believe that three factors
contributed to the strong performance of European stocks. First, most of Europe
is in the relatively early stage of an economic expansion. Second, downsizing in
many European companies -- while not as extensive as in the United States -- has
improved profitability. Finally, the progress towards European Monetary Union
(EMU) functioned as a brake on excessive spending as governments struggled to
reduce inflation and budget deficits to levels acceptable for EMU inclusion.
In the Pacific Basin, most equity markets continued to show the effects of a
regional slowdown in export growth. Hardest hit were South Korea and Thailand,
where political jitters and concerns about economic competitiveness caused sharp
sell-offs in stock prices. Excluding Japan, the Morgan Stanley Far East Index
fell 2.4 percent over the 12-month reporting period. Strong rallies in Hong Kong
and Taiwan signaled investor confidence that Chinese officials would allow Hong
Kong's free-market economy to operate without interference after political
control reverts to China in July.
Japan continued to struggle with an ailing financial system and excess
production capacity. Despite a weakened yen, which aided the country's export
sector, Japanese stocks fell nearly 16 percent over the fiscal year. Although
profitability has soared among larger firms, the benefits of Japan's export-led
recovery generally have not passed through to the country's smaller and
mid-sized companies. In an effort to jump-start its economy, the Bank of Japan
kept monetary policy extremely loose, with real short-term interest rates
falling to near zero.
ECONOMIC OUTLOOK
We expect economic growth to accelerate modestly worldwide, leading to mild
increases in global inflation and interest rates. Faster growth in consumer
spending should help corporate profits remain strong, providing a solid
underpinning for the relatively high price-to-earnings ratios currently found in
most global equity markets.
In Europe, we believe that progress towards monetary union will continue,
although the election of leftist political groups in France increases the
possibility that EMU will be delayed. As economic growth in Europe accelerates,
interest rates and inflation in core European countries could rise modestly. The
major beneficiaries of EMU will likely be Italy and Spain, where tighter fiscal
and monetary policies could ultimately put those economies on a path to stronger
growth with less inflation.
We expect many Pacific Basin countries to resume increasingly rapid growth
rates after the region's mild slowdown. Japanese stocks should benefit from a
gradually recovering economy, although the yen has likely bottomed against the
A-9
<PAGE> 47
U.S. dollar. We also anticipate that fiscal and monetary policy will be
tightened in Japan, exerting a mild drag on corporate profitability.
Closer to home, we expect the U.S. economy to grow at a moderate pace with
relatively low inflation. The benefits of corporate downsizing will likely
diminish in coming years, leading to somewhat slower rates of profit growth and
less spectacular year-over-year earnings comparisons. While we remain optimistic
about the long-term outlook for U.S. stocks, we are concerned that the recent
extraordinary pace of earnings growth may have created unrealistic expectations
among some investors.
Additional details about your Fund, including a question-and-answer section
with your portfolio management team, are provided in this report. We appreciate
your continued confidence in your investment with Van Kampen American Capital.
Sincerely,
<TABLE>
<S> <C>
Don G. Powell Dennis J. McDonnell
Chairman President
Van Kampen American Capital Van Kampen American Capital
Asset Management, Inc. Asset Management, Inc.
</TABLE>
PERFORMANCE RESULTS FOR THE PERIOD ENDED MAY 31, 1997
VAN KAMPEN AMERICAN CAPITAL GLOBAL EQUITY FUND
<TABLE>
<CAPTION>
A SHARES B SHARES C SHARES
-------- -------- --------
<S> <C> <C> <C>
Total Returns
One-year total return based on
NAV(1)............................ 17.67% 16.83% 16.82%
One-year total return(2)............ 10.93% 11.83% 15.82%
Five-year average annual total
return(2)......................... 10.21% 10.45% N/A
Life-of-Fund average annual total
return(2)......................... 11.09% 10.75% 13.31%
Commencement Date................... 08/05/91 11/15/91 06/21/93
</TABLE>
- ---------------
N/A = Not Applicable
(1) Assumes reinvestment of all distributions for the period and does not
include payment of the maximum sales charge (5.75% for A shares) or
contingent deferred sales charge for early withdrawal (5% for B shares and
1% for C shares).
(2) Standardized total return. Assumes reinvestment of all distributions for the
periods and includes payment of the maximum sales charge (A shares) or
contingent deferred sales charge for early withdrawal (B and C shares).
See the Prior Performance section of the current prospectus. Past performance
does not guarantee future results. Investment return and net asset value will
fluctuate with market conditions. Fund shares, when redeemed, may be worth more
or less than their original cost.
Market forecasts provided in this report may not necessarily come to pass.
A-10
<PAGE> 48
PORTFOLIO HIGHLIGHTS
VAN KAMPEN AMERICAN CAPITAL GLOBAL EQUITY FUND
TOP FIVE HOLDINGS AS A PERCENTAGE OF LONG-TERM INVESTMENTS
<TABLE>
<CAPTION>
AS OF AS OF
MAY 31, 1997 NOVEMBER 30, 1996
<S> <C> <C> <C>
General Electric Co. ........ 1.9% ................... N/A
Coca Cola Co. ............... 1.7% ................... N/A
Exxon Corp. ................. 1.4% ................... N/A
Korea Fund, Inc. ............ 1.4% ................... N/A
Microsoft Corp. ............. 1.3% ................... 0.6
</TABLE>
N/A=Not Applicable
ASSET ALLOCATION AS A PERCENTAGE OF TOTAL INVESTMENTS
<TABLE>
<CAPTION>
AS OF MAY 31, 1997 AS OF NOVEMBER 30, 1996
<S> <C> <C> <C>
Stocks..................... 96.2% Stocks..................... 91.6%
Repurchase Agreements...... 3.8% Repurchase Agreements...... 7.8%
Convertibles............... 0.6%
</TABLE>
TOP TEN COUNTRIES AS A PERCENTAGE OF LONG-TERM INVESTMENTS
<TABLE>
<CAPTION>
AS OF MAY 31, 1997 AS OF NOVEMBER 30, 1996
<S> <C> <C> <C>
United States.............. 47.0% United States.............. 32.9%
Japan...................... 12.8% Japan...................... 11.0%
United Kingdom............. 8.3% United Kingdom............. 8.3%
France..................... 5.4% France..................... 5.5%
Germany.................... 4.7% Germany.................... 4.8%
Canada..................... 4.4% Switzerland................ 4.6%
Singapore.................. 3.2% Netherlands................ 4.0%
Switzerland................ 3.1% Hong Kong.................. 3.7%
Spain...................... 2.2% Sweden..................... 2.8%
Hong Kong.................. 2.2% Italy...................... 2.7%
</TABLE>
A-11
<PAGE> 49
PUTTING YOUR FUND'S PERFORMANCE IN PERSPECTIVE
As you evaluate your progress toward achieving your financial goals, it is
important to track your investment portfolio's performance at regular intervals.
A good starting point is a comparison of your investment holdings to an
applicable benchmark, such as a broad-based market index. Such a comparison can:
- Illustrate the general market environment in which your investments
are being managed
- Reflect the impact of favorable market trends or difficult market
conditions
- Help you evaluate the extent to which your Fund's management team has
responded to the opportunities and challenges presented to them over
the period measured
For these reasons, you may find it helpful to review the chart below, which
compares your Fund's performance to that of the Morgan Stanley Capital
International World (MSCI) Index + Dividends over time. As a broad-based,
unmanaged statistical composite, this index does not reflect any commissions or
fees which would be incurred by an investor purchasing the securities it
represents. Similarly, its performance does not reflect any sales charges or
other costs which would be applicable to an actively managed portfolio, such as
that of the Fund.
A-12
<PAGE> 50
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
Van Kampen American Capital Global Equity Fund vs. Morgan Stanley Capital
International World (MSCI) Index + Dividends (August 31, 1991 through May 31,
1997)
[CHART]
The above chart reflects the performance of Class A shares of the Fund. The
performance of Class A shares will differ from that of other share classes of
the Fund because of the difference in sales charges and/or expenses paid by
shareholders investing in the different share classes. The Fund's performance
assumes reinvestment of all distributions and includes payment of the maximum
sales charge (5.75% for A shares).
While past performance is not indicative of future performance, the above
information provides a broader vantage point from which to evaluate the
discussion of the Fund's performance found in the following pages.
A-13
<PAGE> 51
PORTFOLIO MANAGEMENT REVIEW
VAN KAMPEN AMERICAN CAPITAL GLOBAL EQUITY FUND
The following is an interview with the management team of the Van Kampen
American Capital Global Equity Fund. Through March 31, 1997, the Fund was co-
managed by portfolio managers Jeff D. New, Van Kampen American Capital (U.S.
holdings), portfolio manager Peter Kysel, John Govett & Co. Limited
(international holdings), and Alan T. Sachtleban, Van Kampen American Capital,
chief investment officer for equity investments. As of April 1, 1997, the Fund
is managed by portfolio managers Barton M. Biggs, Madhav Dhar, Francine J.
Bovich, and Ann D. Thivierge, Morgan Stanley Asset Management Inc.
Q HOW WOULD YOU CHARACTERIZE THE MARKET CONDITIONS IN WHICH THE FUND
OPERATED DURING THE 12-MONTH PERIOD ENDED MAY 31, 1997?
A During the period, there were several prevailing trends in the global
marketplace:
- - Interest rates fell across Europe as countries worked to meet inflation and
budget deficit criteria required for inclusion into the European Monetary
Union (EMU), scheduled for January 1, 1999. The tight fiscal policies allowed
long-term interest rates to decline, especially in peripheral European
countries whose bond yields had previously included a larger inflation risk
factor. Lower interest rates, in turn provided a healthy environment for
equity prices. The following table displays changes in 10-year government bond
yields over the fiscal year:
<TABLE>
<CAPTION>
PERCENTAGE
MAY 31, 1997 MAY 31, 1996 CHANGE
<S> <C> <C> <C> <C> <C>
Italy................ 7.33% ............ 9.67% ............ -24.2%
Spain................ 6.68% ............ 9.25% ............ -27.8%
Germany.............. 5.93% ............ 6.51% ............ -8.9%
France............... 5.81% ............ 6.49% ............ -10.5%
Belgium.............. 6.01% ............ 6.72% ............ -10.6%
Netherlands.......... 5.78% ............ 6.39% ............ -9.5%
</TABLE>
- - Many Pacific Rim economies experienced a mild slowdown in growth rates,
primarily because of weak demand and pricing for electronic exports. Also,
Thailand and South Korea struggled with the loss of economic competitiveness
to lower-wage nations such as China, Vietnam, and Indonesia. Thailand's
massive trade deficit created fears that its currency would be devalued.
- - Economic growth in the United States surged in the first quarter, leading to
concerns that the Federal Reserve Board would raise interest rates
aggressively to head off possible inflation. Continued robust growth in
corporate profits
Please see footnotes on page three
A-14
<PAGE> 52
supported higher U.S. equity prices despite a mild increase in short- and
long-term interest rates over the fiscal year.
- - Japan's economy continued to recover at a moderate pace, held up in large part
by exports (due to the Weak Yen) and very loose monetary conditions.
Q
WHAT SIGNIFICANT INVESTMENT TECHNIQUES AND STRATEGIES WERE USED TO PURSUE
THE FUND'S INVESTMENT OBJECTIVES?
A
As a result of our top-down analysis of global markets, we took the
following approach to regional allocations at the end of the fiscal year,
relative to the Morgan Stanley Capital International (MSCI) World Index:
- - A neutral position in Europe, with a slight overweighting in Germany and Spain
- - A mild overweighting in developed Asia, especially in Singapore and Hong Kong
- - A moderate underweighting in both the United States and Japan
Q
HOW HAS THE FUND PERFORMED DURING THE REPORTING PERIOD?
A
We are pleased to report that the Fund achieved a 12-month total return
of 17.67 percent(1) (Class A shares at net asset value). This compares
favorably to the Morgan Stanley Capital International World Index, which
produced a total return of 8.87 percent during the same period. Please keep in
mind that the index is an unmanaged index used as a benchmark for general global
equity funds. It does not reflect any commissions or fees that would be paid by
an investor purchasing the securities it represents. Please refer to the chart
on page three for additional Fund performance results.
Q
WHAT IS YOUR OUTLOOK FOR THE MONTHS AHEAD?
A
We expect the rate of global economic activity to accelerate, with only a
moderate pick-up in inflation from current levels. We also anticipate
that consumer spending will increase, especially in Europe and Japan,
giving corporations some relief from the intense pricing pressures of recent
years. Overall, the pattern of moderate but accelerating growth with only mild
increases in inflation and interest rates will create a favorable backdrop for
global equity prices. In Europe, we anticipate that progress towards monetary
union will continue, although the election of leftist-leaning political groups
in France increases the risk of delay in implementation. We also believe that
growth in the Pacific Basin should rebound from its current cyclically depressed
level. In the United States, we find stock prices
Please see footnotes on page three
A-15
<PAGE> 53
to be generously valued, in part because of extreme optimism over the future
growth rate of corporate profits. Accordingly, we prefer to take a defensive
approach to the domestic equity market.
<TABLE>
<S> <C>
/s/ BARTON M. BIGGS /s/ MADHAV DHAR
Barton M. Biggs Madhav Dhar
Portfolio Manager Portfolio Manager
Morgan Stanley Asset Management Morgan Stanley Asset Management
Inc. Inc.
/s/ FRANCINE J. BOVICH /s/ ANN D. THIVIERGE
Francine J. Bovich Ann D. Thivierge
Portfolio Manager Portfolio Manager
Morgan Stanley Asset Management Morgan Stanley Asset Management
Inc. Inc.
</TABLE>
Please see footnotes on page three
A-16
<PAGE> 54
FUND SHAREHOLDERS--
FOR INFORMATION ON YOUR
EXISTING ACCOUNT PLEASE CALL
THE FUND'S TOLL-FREE
NUMBER--(800) 421-5666.
DEALERS--FOR INFORMATION
WITH RESPECT TO THE
REORGANIZATION CALL THE
DISTRIBUTOR'S TOLL-FREE
NUMBER--(800) 421-5666.
FOR SHAREHOLDER AND
DEALER INQUIRIES THROUGH
TELECOMMUNICATIONS
DEVICE FOR THE DEAF (TDD)
DIAL (800) 772-8889.
FOR AUTOMATED TELEPHONE
SERVICES DIAL (800) 421-5684.
MORGAN STANLEY GLOBAL
EQUITY ALLOCATION FUND
One Parkview Plaza
Oakbrook Terrace, IL 60181
Investment Adviser of the Morgan Stanley Global
Equity Allocation Fund
VAN KAMPEN AMERICAN CAPITAL
INVESTMENT ADVISORY CORP.
One Parkview Plaza
Oakbrook Terrace, IL 60181
Investment Subadviser of the Morgan Stanley Global Equity Allocation Fund
MORGAN STANLEY ASSET
MANAGEMENT, INC.
1221 Avenue of the Americas
New York, New York 10020
Distributor of the Morgan Stanley Global
Equity Allocation Fund
VAN KAMPEN AMERICAN CAPITAL
DISTRIBUTORS, INC.
One Parkview Plaza
Oakbrook Terrace, IL 60181
Transfer Agent of the Morgan Stanley Global
Equity Allocation Fund
ACCESS INVESTOR SERVICES, INC.
P.O. Box 418256
Kansas City, MO 64141-9256
Administrator and Domestic Custodian of the Morgan Stanley Global Equity
Allocation Fund
Chase Global Funds Services Company
73 Tremont Street
Boston, MA 02108-3913
Foreign Custodian of the Morgan Stanley Global Equity Allocation Fund
Morgan Stanley Trust Company
Brooklyn, NY
Legal Counsel of the Morgan Stanley Global
Equity Allocation Fund
SKADDEN, ARPS, SLATE,
MEAGHER & FLOM (ILLINOIS)
333 West Wacker Drive
Chicago, IL 60606
Independent Auditors of the Morgan Stanley Global
Equity Allocation Fund
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, NY 10036
<PAGE> 55
PROSPECTUS/PROXY STATEMENT
MORGAN STANLEY GLOBAL EQUITY ALLOCATION FUND
RELATING TO THE ACQUISITION OF ASSETS AND LIABILITIES OF
VAN KAMPEN AMERICAN CAPITAL
GLOBAL EQUITY FUND
, 1998
------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
THE PROPOSED REORGANIZATION......................................... 3
A. SUMMARY..................................................... 3
The Reorganization........................................ 3
Reasons for the Proposed Reorganization................... 4
Comparison of the MS Global Equity Allocation Fund and the
VKAC Global Equity Fund................................. 6
B. RISK FACTORS................................................ 19
Similarity of Risks....................................... 19
Differences in Risks...................................... 21
C. THE PROPOSED REORGANIZATION................................. 21
Terms of the Agreement.................................... 21
Description of Securities to be Issued.................... 23
Continuation of Shareholder Accounts and Plans; Share
Certificates.............................................. 24
Federal Income Tax Consequences........................... 24
Expenses.................................................. 26
Ratification of Investment Objective, Investment Policies
and Restrictions of the MS Global Equity Allocation
Fund.................................................... 27
Legal Matters............................................. 27
D. RECOMMENDATION OF THE BOARD................................. 27
OTHER INFORMATION................................................... 27
A. SHAREHOLDERS OF THE MS GLOBAL EQUITY ALLOCATION FUND AND THE
VKAC GLOBAL EQUITY FUND................................... 27
B. SHAREHOLDER PROPOSALS....................................... 28
VOTING INFORMATION AND REQUIREMENTS................................. 28
EXHIBIT A: MANAGEMENT'S DISCUSSION OF MS GLOBAL EQUITY ALLOCATION
FUND AND VKAC GLOBAL EQUITY FUND PERFORMANCE...................... A-1
</TABLE>
------------------------------------------------------------------------------
-- A WEALTH OF KNOWLEDGE - A KNOWLEDGE OF WEALTH --
VAN KAMPEN AMERICAN CAPITAL
------------------------------------------------------------------------------
<PAGE> 56
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor
may offers to buy be accepted prior to the time the registration statement
becomes effective. This Statement of Additional Information does not
constitute a prospectus.
SUBJECT TO COMPLETION -- DATED FEBRUARY 24, 1998
MORGAN STANLEY GLOBAL EQUITY ALLOCATION FUND
ONE PARKVIEW PLAZA
OAKBROOK TERRACE, ILLINOIS 60181
(630) 684-6000
---------------------
STATEMENT OF ADDITIONAL INFORMATION
MORGAN STANLEY GLOBAL EQUITY ALLOCATION FUND
RELATING TO THE ACQUISITION OF ASSETS AND LIABILITIES OF
VAN KAMPEN AMERICAN CAPITAL GLOBAL EQUITY FUND
DATED , 1998
---------------------
This Statement of Additional Information provides information about the
Morgan Stanley Global Equity Allocation Fund (the "MS Global Equity Allocation
Fund"), an investment portfolio of the Morgan Stanley Fund, Inc., an open-end
management investment company organized as a Maryland corporation (the "Morgan
Stanley Fund"), in addition to information contained in the Prospectus/Proxy
Statement of the MS Global Equity Allocation Fund, dated , 1998, which
also serves as the proxy statement of the Van Kampen American Capital Global
Equity Fund (the "VKAC Global Equity Fund"), a series of the Van Kampen American
Capital World Portfolio Series Trust, an open-end management investment company
organized as a Delaware business trust (the "World Portfolio Trust"), in
connection with the issuance of Class A, B and C shares of common stock the MS
Global Equity Allocation Fund to shareholders of the VKAC Global Equity Fund.
This Statement of Additional Information is not a prospectus. It should be read
in conjunction with the Prospectus/Proxy Statement, into which it has been
incorporated by reference and which may be obtained by contacting the MS Global
Equity Allocation Fund or VKAC Global Equity Fund located at One Parkview Plaza,
Oakbrook Terrace, Illinois 60181 (telephone no. (630) 684-6000 or (800)
421-5666).
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Proposed Reorganization of the VKAC Global Equity Fund...... 2
Additional Information About the MS Global Equity Allocation
Fund...................................................... 2
Additional Information About the VKAC Global Equity Fund.... 2
Financial Statements........................................ 2
Pro Forma Financial Statements.............................. 2
</TABLE>
The MS Global Equity Allocation Fund will provide, without charge, upon the
written or oral request of any person to whom this Statement of Additional
Information is delivered, a copy of any and all documents that have been
incorporated by reference in the registration statement of which this Statement
of Additional Information is a part.
1
<PAGE> 57
PROPOSED REORGANIZATION OF THE VKAC GLOBAL EQUITY FUND
The shareholders of the VKAC Global Equity Fund are being asked to approve
an acquisition of all the assets of the VKAC Global Equity Fund solely in
exchange for Class A, B and C shares of the MS Global Equity Allocation Fund and
the MS Global Equity Allocation Fund's assumption of the liabilities of the VKAC
Global Equity Fund (the "Reorganization") pursuant to an Agreement and Plan of
Reorganization by and between the Morgan Stanley Fund, on behalf of the MS
Global Equity Allocation Fund, and the World Portfolio Trust, on behalf of the
VKAC Global Equity Fund (the "Agreement"). A copy of the form of the Agreement
is attached hereto as Appendix A.
ADDITIONAL INFORMATION ABOUT THE MS GLOBAL EQUITY ALLOCATION FUND
Incorporated herein by reference in its entirety is the Statement of
Additional Information of the MS Global Equity Allocation Fund, dated October
28, 1997, as supplemented, attached as Appendix B to this Statement of
Additional Information.
ADDITIONAL INFORMATION ABOUT THE VKAC GLOBAL EQUITY FUND
Incorporated herein by reference in its entirety is the Statement of
Additional Information of the VKAC Global Equity Fund, dated September 28, 1997,
as supplemented, attached as Appendix C to this Statement of Additional
Information.
FINANCIAL STATEMENTS
Incorporated herein by reference in their respective entireties are (i) the
audited financial statements of the MS Global Equity Allocation Fund for the
fiscal year ended June 30, 1997, as included in Appendix B hereto, (ii) the
audited financial statements of the VKAC Global Equity Fund for fiscal year
ended May 31, 1997, as included in Appendix C hereto, (iii) the unaudited
financial statements of the MS Global Equity Allocation Fund for the six months
ended December 31, 1997, as included in Appendix D hereto, and (iv) the
unaudited financial statements of the VKAC Global Equity Fund for the six months
ended November 30, 1997, as included in Appendix E hereto.
PRO FORMA FINANCIAL STATEMENTS
Set forth in Appendix F hereto as unaudited pro forma financial statements
of the MS Global Equity Allocation Fund giving effect to the Reorganization
which include: (i) Pro Forma Condensed Statements of Assets and Liabilities at
December 31, 1997, (ii) Pro Forma Condensed Statement of Operations for the one
year period ended December 31, 1997 and (iii) Pro Forma Portfolio of Investments
at December 31, 1997.
2
<PAGE> 58
APPENDIX A
AGREEMENT AND PLAN OF REORGANIZATION
[TO COME]
<PAGE> 59
APPENDIX B
STATEMENT OF ADDITIONAL INFORMATION
OF
MORGAN STANLEY FUND, INC.
DATED OCTOBER 28, 1997
<PAGE> 60
MORGAN STANLEY FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
Morgan Stanley Fund, Inc. (the "Company") is an open-end management
investment company. The Company currently consists of twenty-two investment
portfolios designed to offer a range of investment choices (each, a "Fund" and
collectively, the "Funds"). The Company is designed to make available to
investors the expertise of (i) Van Kampen American Capital Investment Advisory
Corp. as adviser (the "Adviser") and administrator (the "Administrator") to the
Funds, (ii) Morgan Stanley Asset Management Inc. ("MSAM"), a sub-adviser (a
"Sub-Adviser") to the Funds, other than the Mid Cap Growth and Value Funds and
(iii) Miller, Anderson & Sherrerd, LLP ("MAS"), a sub-adviser (a "Sub-Adviser")
to the Mid Cap Growth and Value Funds. As of the date hereof, the Morgan Stanley
Emerging Markets Debt, Morgan Stanley Equity Growth, Morgan Stanley European
Equity, Morgan Stanley Global Equity, Morgan Stanley Growth and Income, Morgan
Stanley Japanese Equity, Morgan Stanley Mid Cap Growth and Morgan Stanley
Tax-Free Money Market Funds have not commenced a continuous offering of shares.
This Statement of Additional Information "SAI" is not a prospectus but
should be read in conjunction with the Company's prospectuses dated October 28,
1997, as amended and supplemented from time to time (each a "Prospectus" and
together, the "Prospectuses"). To obtain the Prospectuses, please call the
Morgan Stanley Fund, Inc. Services Group at:
1-800-341-2911
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INVESTMENT OBJECTIVES AND POLICIES...... 2
FEDERAL INCOME TAX...................... 15
FEDERAL TAX TREATMENT OF FORWARD
CURRENCY CONTRACTS AND EXCHANGE RATE
CONTRACTS.............................. 18
TAXES AND FOREIGN SHAREHOLDERS.......... 18
PURCHASE OF SHARES...................... 19
REDEMPTION OF SHARES.................... 19
INVESTMENT LIMITATIONS.................. 21
DETERMINING MATURITIES OF CERTAIN
INSTRUMENTS............................ 25
MANAGEMENT OF THE COMPANY............... 25
MONEY MARKET FUND NET ASSET VALUE....... 36
PORTFOLIO TRANSACTIONS.................. 36
PERFORMANCE INFORMATION................. 37
GENERAL INFORMATION..................... 44
DESCRIPTION OF SECURITIES AND RATINGS... 44
FINANCIAL STATEMENTS.................... 47
</TABLE>
Date: October 28, 1997
1
<PAGE> 61
INVESTMENT OBJECTIVES AND POLICIES
The following policies (listed in alphabetical order) supplement the
investment objectives and policies set forth in the Company's Prospectuses with
respect to the Company's twenty-two Funds: Morgan Stanley Global Fixed Income
Fund, Morgan Stanley Worldwide High Income Fund, Morgan Stanley High Yield Fund,
Morgan Stanley American Value Fund, Morgan Stanley Aggressive Equity Fund,
Morgan Stanley U.S. Real Estate Fund, Morgan Stanley Global Equity Allocation
Fund, Morgan Stanley Asian Growth Fund, Morgan Stanley Emerging Markets Fund,
Morgan Stanley Latin American Fund, Morgan Stanley International Magnum Fund,
Morgan Stanley Japanese Equity Fund, Morgan Stanley Growth and Income Fund,
Morgan Stanley European Equity Fund, Morgan Stanley Equity Growth Fund, Morgan
Stanley Global Equity Fund, Morgan Stanley Emerging Markets Debt Fund, Morgan
Stanley Mid Cap Growth Fund, Morgan Stanley Value Fund (collectively, the
"Non-Money Funds") and Morgan Stanley Money Market Fund, Morgan Stanley Tax-Free
Money Market Fund and Morgan Stanley Government Obligations Money Market Fund
(collectively, the "Money Market Funds"). For ease of reference, the words
"Morgan Stanley," which begin the name of each Fund, are not used hereinafter.
EMERGING COUNTRY DEBT SECURITIES
GENERAL. The Emerging Markets Debt and Worldwide High Income Funds'
definition of emerging country debt securities includes securities of companies
that may have characteristics and business relationships common to companies in
a country or countries other than an emerging country. As a result, the value of
the securities of such companies may reflect economic and market forces
applicable to other countries, as well as to an emerging country. The
Sub-Adviser believes, however, that investment in such companies will be
appropriate because the Funds will invest in those emerging market companies
which, in its view, have sufficiently strong exposure to economic and market
forces in an emerging country such that their value will tend to reflect
developments in such emerging country to a greater extent than developments in
another country or countries. For example, the Funds may invest in companies
organized and located in countries other than an emerging country, including
companies having their entire production facilities outside of an emerging
country, when securities of such companies meet one or more elements of the
Funds' definition of an emerging country debt security and so long as the
Sub-Adviser believes at the time of investment that the value of the company's
securities will reflect principally conditions in such emerging country.
The Emerging Markets Debt Fund and Worldwide High Income Fund are subject to
no restrictions on the maturities of the emerging country debt securities they
hold; those maturities may range from overnight to 30 years. The value of debt
securities held by a Fund generally will vary inversely to changes in prevailing
interest rates. A Fund's investments in fixed-rated debt securities with longer
terms to maturity are subject to greater volatility than the Fund's investments
in shorter-term obligations. Debt obligations acquired at a discount are subject
to greater fluctuations of market value in response to changing interest rates
than debt obligations of comparable maturities which are not subject to such
discount.
Government, government-related and restructured debt securities in emerging
markets will consist of (i) debt securities or obligations issued or guaranteed
by governments, governmental agencies or instrumentalities and political
subdivisions located in emerging countries (including participations in loans
between governments and financial institutions), (ii) debt securities or
obligations issued by government owned, controlled or sponsored entities located
in emerging countries, and (iii) interests in issuers organized and operated for
the purpose of restructuring the investment characteristics of instruments
issued by any of the entities described above. Such type of restructuring
involves the deposit with or purchase by an entity of specific instruments and
the issuance by that entity of one or more classes of securities backed by, or
representing interests in, the underlying instruments. Certain issuers of such
structured securities may be deemed to be "investment companies" as defined in
the Investment Company Act of 1940, as amended (the "1940 Act"). As a result, a
Fund's investment in such securities may be limited by certain investment
restrictions contained in the 1940 Act.
Investments in emerging country government debt securities involve special
risks. Certain emerging countries have historically experienced, and may
continue to experience, high rates of inflation, high interest rates, exchange
rate fluctuations, large amounts of external debt, balance of payments and trade
difficulties and extreme poverty and unemployment. The issuer or governmental
authority that controls the repayment of an emerging country's debt may not be
able or willing to repay the principal and/or interest when due in accordance
with the terms of such debt. As a result of the foregoing, a government obligor
may default on its obligations. If such an event occurs, a Fund may have limited
legal recourse against the issuer and/or guarantor. Remedies must, in some
cases, be pursued in the courts of the defaulting party itself, and the ability
of the holder of foreign government debt securities to obtain recourse may be
subject to the political climate in the relevant country. In addition, no
assurance can be given that the holders of commercial bank debt will not contest
payments to the holders of other foreign government debt obligations in the
event of default under their commercial bank loan agreements.
Debt securities of corporate issuers in emerging countries may include debt
securities or obligations issued (i) by banks located in emerging countries or
by branches of emerging country banks located outside the country or (ii) by
companies organized under the laws of an emerging country. Determinations as to
eligibility will be made by the Sub-Adviser based on publicly available
information and inquiries made to the issuer.
Ratings of a non-U.S. debt instrument, to the extent that those ratings are
undertaken, are related to evaluations of the country in which the issuer of the
instrument is located. Ratings generally take into account the currency in which
a non-U.S. debt instrument is denominated. Instruments issued by a foreign
government in other than the local currency, for example,
2
<PAGE> 62
typically have a lower rating than local currency instruments due to the
existence of an additional risk that the government will be unable to obtain the
required foreign currency to service its foreign currency-denominated debt. In
general, the ratings of debt securities or obligations issued by a non-U.S.
public or private entity will not be higher than the rating of the currency or
the foreign currency debt of the central government of the country in which the
issuer is located, regardless of the intrinsic creditworthiness of the issuer.
The Funds do not intend to invest in any security in a country where the
currency is not freely convertible to U.S. Dollars, unless the Fund has obtained
the necessary governmental licensing to convert such currency or other
appropriately licensed or sanctioned contractual guarantee to protect such
investment against loss of that currency's external value, or the Fund has a
reasonable expectation at the time the investment is made that such governmental
licensing or other appropriately licensed or sanctioned guarantee would be
obtained or that the currency in which the security is quoted would be freely
convertible at the time of any proposed sale of the security by the Fund.
The governments of some countries have been engaged in programs of selling
part or all of their stakes in government owned or controlled enterprises
("privatization"). The Sub-Adviser believes that privatization may offer
investors opportunities for significant capital appreciation and intends to
invest assets of the Fund in privatization in appropriate circumstances. In
certain countries, the ability of foreign entities, such as the Fund, to
participate in privatization may be limited by local law, or the terms on which
the Fund may be permitted to participate may be less advantageous than those for
local investors. There can be no assurance that governments will continue to
sell companies currently owned or controlled by them or that any privatization
programs in which the Fund participates will be successful.
Several Latin American countries have adopted debt conversion programs,
pursuant to which investors may use sovereign debt of a country, directly or
indirectly, to make investments in local companies. The terms of the various
programs vary from country to country although each program includes significant
restrictions on the application of the proceeds received in the conversion and
on the remittance of profits on the investment and of the invested capital. The
Fund may participate in Latin American debt conversion programs. The Sub-Adviser
will evaluate opportunities to enter into debt conversion transactions as they
arise.
BRADY BONDS. The Emerging Markets Debt Fund and Worldwide High Income Fund
may invest in certain debt obligations customarily referred to as "Brady Bonds,"
which are created through the exchange of existing commercial bank loans to
foreign entities for new obligations in connection with debt restructuring under
a plan introduced by former U.S. Secretary of the Treasury Nicholas F. Brady
(the "Brady Plan"). Brady Bonds have been issued only recently, and,
accordingly, do not have a long payment history. They may be collateralized or
uncollateralized and issued in various currencies (although most are U.S.
dollar-denominated) and they are actively traded in the over-the-counter
secondary market. A Fund may purchase Brady Bonds either in the primary or
secondary markets. The price and yield of Brady Bonds purchased in the secondary
market will reflect the market conditions at the time of purchase, regardless of
the stated face amount and the stated interest rate. With respect to Brady Bonds
with no or limited collateralization, a Fund will rely for payment of interest
and principal primarily on the willingness and ability of the issuing government
to make payment in accordance with the terms of the bonds.
U.S. Dollar-denominated, collateralized Brady Bonds, which may be fixed rate
par bonds or floating rate discount bonds, are generally collateralized in full
as to principal due at maturity by U.S. Treasury zero coupon obligations which
have the same maturity as the Brady Bonds. Interest payments on these Brady
Bonds generally are collateralized by cash or securities in an amount that, in
the case of fixed rate bonds, is equal to at least one year of rolling interest
payments or, in the case of floating rate bonds, initially is equal to at least
one year's rolling interest payments based on the applicable interest rate at
that time and is adjusted at regular intervals thereafter. Certain Brady Bonds
are entitled to "value recovery payments" in certain circumstances, which in
effect constitute supplemental interest payments but generally are not
collateralized. Brady Bonds are often viewed as having three or four valuation
components: (i) the collateralized repayment of principal at final maturity;
(ii) the collateralized interest payments; (iii) the uncollateralized interest
payments; and (iv) any uncollateralized repayment of principal at maturity
(these uncollateralized amounts constitute the "residual risk"). In the event of
a default with respect to collateralized Brady Bonds as a result of which the
payment obligations of the issuer are accelerated, the U.S. Treasury zero coupon
obligations held as collateral for the payment of principal will not be
distributed to investors, nor will such obligations be sold and the proceeds
distributed. The collateral will be held to the scheduled maturity of the
defaulted Brady Bonds by the collateral agent, at which time the face amount of
the collateral will equal the principal payments which would have then been due
on the Brady Bonds in the normal course. In addition, in light of the residual
risk of the Brady Bonds and, among other factors, the history of defaults with
respect to commercial bank loans by public and private entities of countries
issuing Brady Bonds, investments in Brady Bonds should be viewed as speculative.
EQUITY-LINKED SECURITIES
The Value, Mid Cap Growth, Global Equity, Equity Growth, Growth and Income
and Aggressive Equity Funds may invest in equity-linked securities, including,
among others, PERCS, ELKS, or LYONs, which are securities that are convertible
into, or the value of which is based upon the value of, equity securities upon
certain terms and conditions. The amount received by an investor at maturity of
such securities is not fixed but is based on the price of the underlying common
stock. It is not possible to predict how equity-linked securities will trade in
the secondary market or whether such market will be liquid or illiquid. The
3
<PAGE> 63
following are three examples of equity-linked securities. The Funds may invest
in the securities described below or other similar equity-linked securities.
There are certain risks of loss of principal in connection with investing in
equity-linked securities, as described in the following examples of certain
equity-linked securities.
Preferred Equity Redemption Cumulative Stock ("PERCS") convert into common
stock within three years regardless of the price at which the common stock
trades. If the common stock is trading at a price that is at or below the cap, a
Fund receives one share of common stock for each PERCS share. If the common
stock is trading at a price that is above the cap, the Fund receives less than
one share, with the conversion ratio adjusted so that the market value of the
common stock received by the Fund equals the cap. Accordingly, a Fund is subject
to the risk that if the price of the common stock is above the cap price at the
maturity of the PERCS, the Fund will lose the amount of the difference between
the price of the common stock and the cap. Such a loss could substantially
reduce the Fund's initial investment in the PERCS and any dividends that were
paid on the PERCS. PERCS also present risks based on payment expectations. If a
PERCS issuer redeems the PERCS, the Fund may have to replace the PERCS with a
lower yielding security, resulting in a decreased return for investors.
The principal amount that Equity-Linked Securities ("ELKS") holders receive
at maturity is based on the price of underlying common stock. If the common
stock is trading at a price that is at or below the cap, a Fund receives for
each ELKS share an amount equal to the average price of the common stock. If the
common stock is trading at a price that is above the cap, the Fund receives the
cap amount. Accordingly, a Fund is subject to the risk that if the price of the
common stock is above the cap price at the maturity of the ELKS, the Fund will
lose the amount of the difference between the price of the common stock and the
cap. Such a loss could substantially reduce the Fund's initial investment in the
ELKS and any dividends that were paid on the ELKS. An additional risk is that
the issuer may "reopen" the issue of ELKS and issue additional ELKS at a later
time or issue additional debt securities or other securities with terms similar
to those of the ELKS, and such issuances may affect the trading value of the
ELKS.
The principal amount that Liquid Yield Option Notes ("LYONs") holders
receive for LYONs, other than the lower-than-market yield at maturity, is based
on the price of underlying common stock. If the common stock is trading at a
price that is at or below the purchase price of the LYONs plus accrued original
issue discount, a Fund receives only the lower-than-market yield, assuming the
LYONs are not in default. If the common stock is trading at a price that is
above the purchase price of the LYON's plus accrued original issue discount, the
Fund will receive an amount above the lower-than-market yield on the LYONs,
based on how well the underlying common stock performs. LYONs also present risks
based on payment expectations. If a LYON's issuer redeems the LYONs, the Fund
may have to replace the LYONs with a lower yielding security, resulting in a
decreased return for investors.
EURODOLLAR AND YANKEE OBLIGATIONS
Eurodollar bank obligations are dollar-denominated certificates of deposit
and time deposits issued outside the U.S. capital markets by foreign branches of
banks and by foreign banks. Yankee bank obligations are dollar-denominated
obligations issued in the U.S. capital markets by foreign banks.
Eurodollar and Yankee obligations are subject to the same risks that pertain
to domestic issues, notably credit risk, market risk and liquidity risk.
Additionally, Eurodollar (and to a limited extent, Yankee) obligations are
subject to certain sovereign risks. One such risk is the possibility that a
sovereign country might prevent capital, in the form of dollars, from flowing
across its borders. Other risks include: adverse political and economic
developments; the extent and quality of government regulation of financial
markets and institutions; the imposition of foreign withholding taxes, and the
expropriation or nationalization of foreign issuers.
FOREIGN CURRENCY EXCHANGE-RELATED SECURITIES
Foreign currency warrants are warrants which entitle the holder to receive
from their issuer an amount of cash (generally, for warrants issued in the
United States, in U.S. Dollars) which is calculated pursuant to a predetermined
formula and based on the exchange rate between a specified foreign currency and
the U.S. Dollar as of the exercise date of the warrant. Foreign currency
warrants generally are exercisable upon their issuance and expire as of a
specified date and time. Foreign currency warrants have been issued in
connection with U.S. Dollar-denominated debt offerings by major corporate
issuers in an attempt to reduce the foreign currency exchange risk which, from
the point of view of prospective purchasers of the securities, is inherent in
the international fixed-income marketplace. Foreign currency warrants may
attempt to reduce the foreign exchange risk assumed by purchasers of a security
by, for example, providing for a supplemental payment in the event that the U.S.
Dollar depreciates against the value of a major foreign currency such as the
Japanese Yen or German Deutschmark. The formula used to determine the amount
payable upon exercise of a foreign currency warrant may make the warrant
worthless unless the applicable foreign currency exchange rate moves in a
particular direction (e.g., unless the U.S. Dollar appreciates or depreciates
against the particular foreign currency to which the warrant is linked or
indexed). Foreign currency warrants are severable from the debt obligations with
which they may be offered, and may be listed on exchanges. Foreign currency
warrants may be exercisable only in certain minimum amounts, and an investor
wishing to exercise warrants who possesses less than the minimum number required
for exercise may be required either to sell the warrants or to purchase
additional warrants, thereby incurring additional transaction costs. In the case
of any exercise of warrants, there may be a time delay between the time a holder
of
4
<PAGE> 64
warrants gives instructions to exercise and the time the exchange rate relating
to exercise is determined, during which time the exchange rate could change
significantly, thereby affecting both the market and cash settlement values of
the warrants being exercised. The expiration date of the warrants may be
accelerated if the warrants should be delisted from an exchange or if their
trading should be suspended permanently, which would result in the loss of any
remaining "time value" of the warrants (i.e., the difference between the current
market value and the exercise value of the warrants), and, in the case where the
warrants were "out-of-the-money," in a total loss of the purchase price of the
warrants. Warrants are generally unsecured obligations of their issuers and are
not standardized foreign currency options issued by the OCC. Unlike foreign
currency options issued by the OCC, the terms of foreign exchange warrants
generally will not be amended in the event of governmental or regulatory actions
affecting exchange rates or in the event of the imposition of other regulatory
controls affecting the international currency markets. The initial public
offering price of foreign currency warrants is generally considerably in excess
of the price that a commercial user of foreign currencies might pay in the
interbank market for a comparable option involving significantly larger amounts
of foreign currencies. Foreign currency warrants are subject to complex
political or economic factors.
Principal exchange rate linked securities are debt obligations the principal
on which is payable at maturity in an amount that may vary based on the exchange
rate between the U.S. Dollar and a particular foreign currency at or about that
time. The return on "standard" principal exchange rate linked securities is
enhanced if the foreign currency to which the security is linked appreciates
against the U.S. Dollar, and is adversely affected by increases in the foreign
exchange value of the U.S. Dollar; "reverse" principal exchange rate linked
securities are like the "standard" securities, except that their return is
enhanced by increases in the value of the U.S. Dollar and adversely impacted by
increases in the value of foreign currency. Interest payments on the securities
are generally made in U.S. Dollars at rates that reflect the degree of foreign
currency risk assumed or given up by the purchaser of the notes (i.e., at
relatively higher interest rates if the purchaser has assumed some of the
foreign exchange risk, or relatively lower interest rates if the issuer has
assumed some of the foreign exchange risk, based on the expectations of the
current market). Principal exchange rate linked securities may in limited cases
be subject to acceleration of maturity (generally, not without the consent of
the holders of the securities), which may have an adverse impact on the value of
the principal payment to be made at maturity.
Performance indexed paper is U.S. Dollar-denominated commercial paper the
yield of which is linked to certain foreign exchange rate movements. The yield
to the investor on performance indexed paper is between the U.S. Dollar and a
designated currency as of or about that time (generally, the index maturity two
days prior to maturity). The yield to the investor will be within a range
stipulated at the time of purchase of the obligation, generally with a
guaranteed minimum rate of return that is below, and a potential maximum rate of
return that is above, market yields on U.S. Dollar-denominated commercial paper,
with both the minimum and maximum rates of return on the investment
corresponding to the minimum and maximum values of the spot exchange rate two
business days prior to maturity.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
The U.S. Dollar value of the assets of the Global Equity, Global Equity
Allocation, Global Fixed Income, Asian Growth, Emerging Markets, Emerging
Markets Debt, Latin American, European Equity, Japanese Equity and International
Magnum Funds and to the extent they invest in assets denominated in foreign
currencies, the Value, Mid Cap Growth, American Value, Aggressive Equity, Growth
and Income, Equity Growth, Worldwide High Income and High Yield Funds may be
affected favorably or unfavorably by changes in foreign currency exchange rates
and exchange control regulations, and the Funds may incur costs in connection
with conversions between various currencies. The Funds will conduct their
foreign currency exchange transactions either on a spot (i.e., cash) basis at
the spot rate prevailing in the foreign currency exchange market, or through
entering into forward contracts to purchase or sell foreign currencies. A
forward foreign currency exchange contract (a "forward contract") involves an
obligation to purchase or sell a specific currency at a future date, which may
be any fixed number of days from the date of the contract agreed upon by the
parties, at a price set at the time of the contract. These contracts are traded
in the interbank market conducted directly between currency traders (usually
large commercial banks) and their customers. A forward contract generally has no
deposit requirement, and no commissions are charged at any stage for such
trades.
The Funds may enter into forward contracts in several circumstances. When a
Fund enters into a contract for the purchase or sale of a security denominated
in a foreign currency, or when a Fund anticipates the receipt in a foreign
currency of dividends or interest payments on a security which it holds, the
Fund may desire to "lock-in" the U.S. Dollar price of the security or the U.S.
Dollar equivalent of such dividend or interest payment, as the case may be. By
entering into a forward contract for a fixed amount of dollars, for the purchase
or sale of the amount of foreign currency involved in the underlying
transactions, the Fund will be able to protect itself against a possible loss
resulting from an adverse change in the relationship between the U.S. Dollar and
the subject foreign currency during the period between the date on which the
security is purchased or sold, or on which the dividend or interest payment is
declared, and the date on which such payments are made or received.
Additionally, when any of these Funds anticipates that the currency of a
particular foreign country may suffer a substantial decline against the U.S.
Dollar, it may enter into a forward contract for a fixed amount of dollars, to
sell the amount of foreign currency approximating the value of some or all of
such Fund's securities denominated in such foreign currency. The precise
matching of the forward contract amounts and the value of the securities
involved will not generally be possible since the future value of securities in
foreign currencies will change as a consequence of market movements in the value
of these securities between the date on which the forward contract is entered
into and the date it matures. The projection of short-term currency
5
<PAGE> 65
market movement is extremely difficult, and the successful execution of a
short-term hedging strategy is highly uncertain. A Fund will not enter into such
forward contracts or maintain a net exposure to such contracts where the
consummation of the contracts would obligate such Fund to deliver an amount of
foreign currency in excess of the value of such Fund's securities or other
assets denominated in that currency.
Under normal circumstances, consideration of the prospect for currency
parities will be incorporated into the long-term investment decisions made with
regard to overall diversification strategies. However, the management of the
Company believes that it is important to have the flexibility to enter into such
forward contracts when it determines that the best interests of the performance
of each Fund will thereby be served. Except in circumstances where segregated
accounts are not required by the 1940 Act and the rules adopted thereunder, the
Company's Custodian will place cash or liquid assets into a segregated account
of a Fund in an amount equal to the value of such Fund's total assets committed
to the consummation of forward contracts. If the value of the securities placed
in the segregated account declines, additional cash or assets will be placed in
the account on a daily basis so that the value of the account will be at least
equal to the amount of such Fund's commitments with respect to such contracts.
The Funds generally will not enter into a forward contract with a term of
greater than one year. At the maturity of a forward contract, a Fund may either
accept or make delivery of the currency specified in the contract or, prior to
maturity, enter into a closing purchase transaction involving the purchase or
sale of an offsetting contract. Closing purchase transactions with respect to
forward contracts are usually effected with the currency trader who is a party
to the original forward contract. A Fund will only enter into such a forward
contract if it is expected that there will be a liquid market in which to close
out such contract. There can, however, be no assurance that such a liquid market
will exist in which to close a forward contract, in which case the Fund may
suffer a loss.
It is impossible to forecast with absolute precision the market value of a
particular portfolio security at the expiration of the contract. Accordingly, it
may be necessary for a Fund to purchase additional foreign currency on the spot
market (and bear the expense of such purchase) if the market value of the
security is less than the amount of foreign currency that such Fund is obligated
to deliver and if a decision is made to sell the security and make delivery of
the foreign currency.
If a Fund retains the portfolio security and engages in an offsetting
transaction, such Fund will incur a gain or a loss (as described below) to the
extent that there has been movement in forward contract prices. Should forward
prices decline during the period between a Fund entering into a forward contract
for the sale of a foreign currency and the date it enters into an offsetting
contract for the purchase of the foreign currency, such Fund will realize a gain
to the extent that the price of the currency it has agreed to sell exceeds the
price of the currency it has agreed to purchase. Should forward prices increase,
such Fund would suffer a loss to the extent that the price of the currency it
has agreed to purchase exceeds the price of the currency it has agreed to sell.
The Funds are not required to enter into such transactions with regard to
their foreign currency-denominated securities. It also should be realized that
this method of protecting the value of portfolio securities against a decline in
the value of a currency does not eliminate fluctuations in the underlying prices
of the securities. It simply establishes a rate of exchange which one can
achieve at some future point in time. Additionally, although such contracts tend
to minimize the risk of loss due to a decline in the value of the hedged
currency, at the same time, they tend to limit any potential gain which might
result should the value of such currency increase.
In addition, Funds may cross-hedge currencies by entering into a transaction
to purchase or sell one or more currencies that are expected to decline in value
relative to other currencies to which a portfolio has or expects to have
portfolio exposure. These Funds may also engage in proxy hedging, which is
defined as entering into positions in one currency to hedge investments
denominated in another currency, where two currencies are economically linked. A
Fund's entry into forward contracts, as well as any use of proxy or cross
hedging techniques, will generally require the Fund to hold liquid securities or
cash equal to the Fund's obligations in a segregated account throughout the
duration of the contract.
FUTURES CONTRACTS
Futures contracts provide for the future sale by one party and purchase by
another party of a specified amount of a specific security or a specific
currency at a specified future time and at a specified price. Futures contracts,
which are standardized as to maturity date and underlying financial instrument,
index or currency, traded in the United States are traded on national futures
exchanges. Futures exchanges and trading are regulated under the Commodity
Exchange Act by the Commodity Futures Trading Commission ("CFTC"), a U.S.
Government agency.
Although futures contracts by their terms call for actual delivery or
acceptance of the underlying securities or currencies, in most cases the
contracts are closed out before the settlement date without the making or taking
of delivery. Closing out an open futures position is done by taking an opposite
position ("buying" a contract which has previously been "sold" or "selling" a
contract previously "purchased") in an identical contract to terminate the
position. Brokerage commissions are incurred when a futures contract is bought
or sold.
The Funds may sell indexed financial futures contracts in anticipation of or
during a market decline to attempt to offset the decrease in market value of
securities in its portfolio that might otherwise result. An index futures
contract is an agreement to
6
<PAGE> 66
take or make delivery of an amount of cash equal to the difference between the
value of the index at the beginning and at the end of the contract period.
Successful use of index futures will be subject to the Adviser's ability to
predict correctly movements in the direction of the relevant securities market.
No assurance can be given that the Adviser's judgment in this respect will be
correct.
The Emerging Markets, Latin American, European Equity, American Value,
Equity Growth, Emerging Markets Debt, Global Equity, Global Equity Allocation,
Aggressive Equity, Growth and Income, Value, Mid Cap Growth and Worldwide High
Income Funds may sell indexed financial futures contracts in anticipation of or
during a market decline to attempt to offset the decrease in market value of
securities in its portfolio that might otherwise result. If the Adviser believes
that a portion of a Fund's assets should be invested in emerging country
securities but such investments have not been fully made and the Adviser
anticipates a significant market advance, the Fund may purchase index futures in
order to gain rapid market exposure that may in part or entirely offset
increases in the cost of securities that it intends to purchase. In a
substantial majority of these transactions, the Fund will purchase such
securities upon termination of the futures position but, under unusual market
conditions, a futures position may be terminated without the corresponding
purchase of such securities.
Futures traders are required to make a good faith margin deposit in cash or
liquid securities with a broker or custodian to initiate and maintain open
positions in futures contracts. A margin deposit is intended to assure
completion of the contract (delivery or acceptance of the underlying security)
if it is not terminated prior to the specified delivery date. Minimal initial
margin requirements are established by the futures exchange and may be changed.
Brokers may establish deposit requirements which are higher than the exchange
minimums. Futures contracts are customarily purchased and sold for prices that
may range upward from less than 5% of the value of the contract being traded.
After a futures contract position is opened, the value of the contract is
marked-to-market daily. If the futures contract price changes to the extent that
the margin on deposit does not satisfy margin requirements, payment of an
additional "variation" margin will be required. Conversely, a change in the
contract value may reduce the required margin, resulting in a repayment of
excess margin to the contract holder. Variation margin payments are made to and
from the futures broker for as long as the contract remains open. The Funds
expect to earn interest income on its margin deposits.
Traders in futures contracts may be broadly classified as either "hedgers"
or "speculators." Hedgers use the futures markets primarily to offset
unfavorable changes in the value of securities otherwise held for investment
purposes or expected to be acquired by them. Speculators are less inclined to
own the underlying securities with futures contracts that they trade, and use
futures contracts with the expectation of realizing profits from market
fluctuations. The Funds intend to use futures contracts only for hedging
purposes.
Regulations of the CFTC applicable to the Funds require generally that all
futures transactions constitute bona fide hedging transactions. A Fund may
engage in futures transactions for other purposes so long as the aggregate
initial margin and premiums required for such transaction will not exceed 5% of
the liquidation value of the Fund's portfolio, after taking into account
unrealized profits and unrealized losses on any such contracts it has entered
into. The Funds will only sell futures contracts to protect securities owned
against declines in price or purchase contracts to protect against an increase
in the price of securities intended for purchase. As evidence of this hedging
interest, the Funds expect that approximately 75% of their respective futures
contracts will be "completed"; that is, equivalent amounts of related securities
will have been purchased or are being purchased by the Fund upon sale of open
futures contracts.
Although techniques other than the sale and purchase of futures contracts
could be used to control a Fund's exposure to market fluctuations, the use of
futures contracts may be a more effective means of hedging this exposure. While
the Funds will incur commission expenses in both opening and closing out futures
positions, these costs are lower than transaction costs incurred in the purchase
and sale of the underlying securities.
RESTRICTIONS ON THE USE OF FUTURES CONTRACTS. None of the Funds will enter
into futures contract transactions to the extent that, immediately thereafter,
the sum of its initial margin deposits on open contracts exceeds 5% of the
market value of its total assets. In addition, none of the Funds will enter into
futures contracts and options on futures contracts to the extent that the
notional value of its outstanding obligations to purchase securities under such
contracts would exceed 20% (50% for the Mid Cap Growth, Value, Equity Growth,
Emerging Markets Debt and Global Equity Funds) of its total assets. See also,
"Investment Limitations" for further restrictions applicable to the Funds.
RISK FACTORS IN FUTURES TRANSACTIONS. Positions in futures contracts may be
closed out only on an exchange which provides a secondary market for such
futures. However, there can be no assurance that a liquid secondary market will
exist for any particular futures contract at any specific time. Thus, it may not
be possible to close a futures position. In the event of adverse price
movements, a Fund would continue to be required to make daily cash payments to
maintain its required margin. In such situations, if a Fund has insufficient
cash, it may have to sell portfolio securities to meet its daily margin
requirement at a time when it may be disadvantageous to do so. In addition, the
Fund may be required to make delivery of the instruments underlying futures
contracts it holds. The inability to close options and futures positions also
could have an adverse impact on the Fund's ability to effectively hedge.
7
<PAGE> 67
The Funds will minimize the risk that they will be unable to close out a
futures contract by generally entering into futures which are traded on
recognized international or national futures exchanges and for which there
appears to be a liquid secondary market, however, the Funds may enter into
over-the-counter futures transactions to the extent permitted by applicable law.
The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required and the extremely high
degree of leverage involved in futures pricing. As a result, a relatively small
price movement in a futures contract may result in immediate and substantial
loss (as well as gain) to the investor. For example, if, at the time of
purchase, 10% of the value of the futures contract is deposited as margin, a
subsequent 10% decrease in the value of the futures contract would result in a
total loss of the margin deposit, before any deduction for the transaction
costs, if the account were then closed out. A 15% decrease would result in a
loss equal to 150% of the original margin deposit if the contract were closed
out. Thus, a purchase or sale of a futures contract may result in losses in
excess of the amount invested in the contract. However, because the Funds engage
in futures strategies only for hedging purposes, the Sub-Adviser does not
believe that the Funds are subject to the risks of loss frequently associated
with futures transactions. The Fund would presumably have sustained comparable
losses if, instead of the futures contract, the Fund had invested in the
underlying security or currency and sold it after the decline.
Utilization of futures transactions by a Fund does involve the risk of
imperfect or no correlation where the securities underlying futures contracts
have different maturities than the portfolio securities or currencies being
hedged. It is also possible that a Fund could both lose money on futures
contracts and also experience a decline in value of its portfolio securities.
There is also the risk of loss by a Fund of margin deposits in the event of
bankruptcy of a broker with whom the Fund has an open position in a futures
contract or related option.
Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day's settlement price at the end of a trading session. Once
the daily limit has been reached in a particular type of contract, no trades may
be made on that day at a price beyond that limit. The daily limit governs only
price movement during a particular trading day and therefore does not limit
potential losses, because the limit may prevent the liquidation of unfavorable
positions. Futures contract prices have occasionally moved to the daily limit
for several consecutive trading days with little or no trading, thereby
preventing prompt liquidation of futures positions and subjecting some futures
traders to substantial losses.
OPTIONS ON FOREIGN CURRENCIES
The Funds may attempt to accomplish objectives similar to those described
above with respect to forward foreign currency exchange contracts and futures
contracts for currency by means of purchasing put or call options on foreign
currencies on exchanges. A put option gives a Fund the right to sell a currency
at the exercise price until the expiration of the option. A call option gives a
Fund the right to purchase a currency at the exercise price until the expiration
of the option.
The Funds noted above may purchase and write options on foreign currencies
in a manner similar to that in which futures contracts on foreign currencies, or
forward contracts, will be utilized. For example, a decline in the dollar value
of a foreign currency in which portfolio securities are denominated will reduce
the dollar value of such securities, even if their value in the foreign currency
remains constant. In order to protect against such diminution in the value of
portfolio securities, the Funds may purchase put options on the foreign
currency. If the value of the currency does decline, the Funds will have the
right to sell such currency for a fixed amount in dollars and will thereby
offset, in whole or in part, the adverse effect on their portfolios which
otherwise would have resulted. Conversely, where a rise in the dollar value of a
currency in which securities to be acquired are denominated is projected,
thereby increasing the cost of such securities, the Funds may purchase call
options thereon. The purchase of such options could offset, at least partially,
the effects of the adverse movements in exchange rates. As in the case of other
types of options, however, the benefit to the Funds derived from purchases of
foreign currency options will be reduced by the amount of the premium and
related transaction costs. In addition, where currency exchange rates do not
move in the direction or to the extent anticipated, the Funds could sustain
losses on transactions in foreign currency options which would require them to
forego a portion or all of the benefits of advantageous changes in such rates.
Funds may write options on foreign currencies for the same purposes. For
example, where a Fund anticipates a decline in the dollar value of foreign
currency denominated securities due to adverse fluctuations in exchange rates it
could, instead of purchasing a put option, write a call option on the relevant
currency. If the anticipated decline occurs, the option will most likely not be
exercised, and the diminution in value of portfolio securities will be offset by
the amount of the premium received. Similarly, instead of purchasing a call
option to hedge against an anticipated increase in the dollar cost of securities
to be acquired, the Fund could write a put option on the relevant currency
which, if rates move in the manner projected, will expire unexercised and allow
the portfolio to hedge such increased cost up to the amount of the premium. As
in the case of other types of options, however, the writing of a foreign
currency option will constitute only a partial hedge up to the amount of the
premium, and only if rates move in the expected direction. If this does not
occur, the option may be exercised and the Fund would be required to purchase or
sell the underlying currency at a loss which may not be offset by the amount of
the premium. Through the writing of options on foreign currencies, the Fund also
may be required to forego all or a portion of the benefits which might otherwise
have been obtained from favorable movements in exchange rates.
8
<PAGE> 68
Funds may only write covered call options on foreign currencies. A call
option written on a foreign currency by the portfolio is "covered" if the Fund
owns the underlying foreign currency covered by the call, an absolute and
immediate right to acquire that foreign currency without additional cash
consideration (or for additional cash consideration held in a segregated account
by the Custodian) or upon conversion or exchange of other foreign currency held
in its portfolio. A written call option is also covered if the Fund has a call
on the same foreign currency and in the same principal amount as the call
written where the exercise price of the call held (a) is equal to or less than
the exercise price of the call written or (b) is greater than the exercise price
of the call written if the difference is maintained by the Fund in cash or other
liquid securities in a segregated account with the Custodian, or (c) maintains
in a segregated account cash or other liquid securities in an amount not less
than the value of the underlying foreign currency in U.S. Dollars,
marked-to-market daily.
Funds may also write call options on foreign currencies for cross-hedging
purposes. A call option on a foreign currency is for cross-hedging purposes if
it is designed to provide a hedge against a decline in the U.S. Dollar value of
a security which the portfolio owns or has the right to acquire due to an
adverse change in the exchange rate and which is denominated in the currency
underlying the option. In such circumstances, the Fund will either "cover" the
transaction as described above or collateralize the option by maintaining in a
segregated account with the Custodian, cash or other liquid securities in an
amount not less than the value of the underlying foreign currency in U.S.
Dollars marked-to-market daily.
Funds may combine forward contracts with investments in securities
denominated in other currencies in order to achieve desired credit and currency
exposures. Such combinations are generally referred to as synthetic securities.
For example, in lieu of purchasing a foreign bond, a Fund may purchase a U.S.
dollar-denominated security and at the same time enter into a forward contract
to exchange U.S. dollars for the contract's underlying currency at a future
date. By matching the amount of U.S. dollars to be exchanged with the
anticipated value of the U.S. dollar-denominated security, the Fund may be able
to lock in the foreign currency value of the security and adopt a synthetic
position reflecting the credit quality of the U.S. dollar-denominated security.
To the extent required by the rules and regulations of the Securities and
Exchange Commission ("SEC"), the Custodian of the Funds will place cash or other
liquid assets into a segregated account of a Fund in an amount equal to the
value of such Fund's total assets committed to the consummation of forward
foreign currency exchange contracts. If the value of the securities placed in
the segregated account declines, additional cash or liquid assets will be placed
in the account on a daily basis so that the value of the account will be at
least equal to the amount of such Fund's commitments with respect to such
contracts.
OPTIONS TRANSACTIONS
The Non-Money Market Funds may write (i.e., sell) covered call options which
give the purchaser the right to buy the underlying security covered by the
option from the Fund at the stated exercise price. A "covered" call option means
that so long as a Fund is obligated as the writer of the option, it will own (i)
the underlying securities subject to the option, or (ii) securities convertible
or exchangeable without the payment of any consideration into the securities
subject to the option.
A Fund will receive a premium from writing call options, which increases the
Fund's return on the underlying security in the event the option expires
unexercised or is closed out at a profit. By writing a call, a Fund will limit
its opportunity to profit from an increase in the market value of the underlying
security above the exercise price of the option for as long as the Fund's
obligation as writer of the option continues. Thus, in some periods a Fund will
receive less total return and in other periods greater total return from writing
covered call options than it would have received from its underlying securities
had it not written call options.
A Fund may sell put options to receive the premiums paid by purchasers and
to close out a long put option position. In addition, when the Adviser wishes to
purchase a security at a price lower than its current market price, a Fund may
write a covered put at an exercise price reflecting the lower purchase price
sought.
A Fund may purchase call options to close out a covered call position or to
protect against an increase in the price of a security it anticipates
purchasing. A Fund may purchase put options on securities which it holds in its
portfolio to protect itself against a decline in the value of the security. If
the value of the underlying security were to fall below the exercise price of
the put purchased in an amount greater than the premium paid for the option, the
Fund would incur no additional loss. A Fund may also purchase put options to
close out written put positions in a manner similar to call option closing
purchase transactions. There are no other limits on a Fund's ability to purchase
call and put options.
Unless the parties provide for it, there is no central clearing or guaranty
function in an OTC Option. As a result, if the Counterparty fails to make or
take delivery of the security, currency or other instrument underlying an OTC
Option it has entered into with a Fund or fails to make a cash settlement
payment due in accordance with the terms of that option, the Fund will lose any
premium it paid for the option as well as any anticipated benefit of the
transaction. Accordingly, the Sub-Adviser must assess the creditworthiness of
each such Counterparty or any guarantor of credit enhancement of the
Counterparty's credit to determine the likelihood that the terms of the OTC
Options will be satisfied. The staff of the SEC currently takes the position
that OTC Options purchased by a Fund or sold by it (the cost of the sell-back
plus the in-the-money amount, if any) are illiquid unless the Fund has entered
into a special arrangement to dispose of the security, and are subject to the
Fund's limitation on investing in illiquid securities.
9
<PAGE> 69
Investments in options involve some of the same considerations that are
involved in connection with investments in futures contracts (e.g., the
existence of a liquid secondary market). In addition, the purchase of an option
also entails the risk that changes in the value of the underlying security or
contract will not be fully reflected in the value of the option purchased.
Depending on the pricing of the option compared to either the futures contract
or securities, an option may or may not be less risky than ownership of the
futures contract or actual securities. In general, the market prices of options
can be expected to be more volatile than the market prices on the underlying
futures contract or securities. In the opinion of the Sub-Adviser, the risk that
a Fund will be unable to close out an options contract will be minimized by only
entering into options transactions for which there appears to be a liquid
secondary market.
COMBINED TRANSACTIONS
Funds may enter into multiples of the forwards, futures and options
transactions described above in which they are permitted to engage, including
multiple options transactions, multiple futures transactions, multiple foreign
currency transactions (including forward foreign currency exchange contracts)
and any combination of futures, options and foreign currency transactions,
instead of a single transaction, as part of a single hedging strategy when, in
the opinion of the Sub-Adviser, it is in the best interest of the Fund to do so.
A combined transaction, while part of a single strategy, may contain elements of
risk that are present in each of its component transactions and will be
structured in accordance with applicable Securities and Exchange Commission (the
"SEC") regulations and SEC staff guidelines.
RISKS OF OPTIONS ON FUTURES CONTRACTS, FORWARD CONTRACTS AND OPTIONS ON FOREIGN
CURRENCIES
Options on foreign currencies and forward contracts are not traded on
contract markets regulated by the CFTC or (with the exception of certain foreign
currency options) by the SEC. To the contrary, such instruments are traded
through financial institutions acting as market-makers, although foreign
currency options are also traded on certain national securities exchanges, such
as the Philadelphia Stock Exchange and the Chicago Board Options Exchange,
subject to SEC regulation. Similarly, options on currencies may be traded
over-the-counter. In an over-the-counter trading environment, many of the
protections afforded to exchange participants will not be available. For
example, there are no daily price fluctuation limits, and adverse market
movements could therefore continue to an unlimited extent over a period of time.
Although the purchase of an option cannot lose more than the amount of the
premium plus related transaction costs, this entire amount could be lost.
Moreover, the option writer and a trader of forward contracts could lose amounts
substantially in excess of their initial investments.
Options on foreign currencies traded on national securities exchanges are
within the jurisdiction of the SEC, as are other securities traded on such
exchanges. As a result, many of the protections provided to traders on organized
exchanges will be available with respect to such transactions. In particular,
all foreign currency option positions entered into on a national securities
exchange are cleared and guaranteed by the Options Clearing Corporation ("OCC"),
thereby reducing the risk of counterparty default. Furthermore, a liquid
secondary market in options traded on a national securities exchange may be more
readily available than in the over-the-counter market, potentially permitting a
Fund to liquidate open positions at a profit prior to exercise or expiration, or
to limit losses in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options, however,
is subject to the risks of the availability of a liquid secondary market
described above, as well as the risks regarding adverse market movements,
margining of options written, the nature of the foreign currency market,
possible intervention by governmental authorities and the effect of other
political and economic events. In addition, exchange-traded options of foreign
currencies involve certain risks not presented by the over-the-counter market.
For example, exercise and settlement of such options must be made exclusively
through the OCC, which has established banking relationships in applicable
foreign countries for this purpose. As a result, the OCC may, if it determines
that foreign governmental restrictions or taxes would prevent the orderly
settlement of foreign currency option exercises, or would result in undue
burdens on the OCC or its clearing member, impose special procedures on exercise
and settlement, such as technical changes in the mechanics of delivery of
currency, the fixing of dollar settlement prices or prohibitions, on exercise.
In addition, futures contracts, options on futures contracts, forward
contracts and options on foreign currencies may be traded on foreign exchanges.
Such transactions are subject to the risk of governmental actions affecting
trading in or the prices of foreign currencies or securities. The value of such
positions also could be adversely affected by (i) other complex foreign
political and economic factors, (ii) lesser availability than in the United
States of data on which to make trading decision, (iii) delays in the Fund's
ability to act upon economic events occurring in foreign markets during non
business hours in the United States, (iv) the imposition of different exercise
and settlement terms and procedures and margin requirements than in the United
States, and (v) lesser trading volume.
10
<PAGE> 70
GLOBAL INVESTING
Investors should recognize that investing in foreign securities involves
special considerations which are not typically associated with investing in
domestic securities. Since the securities of foreign issuers are frequently
denominated in foreign currencies, and since a Fund may temporarily hold
uninvested reserves in bank deposits in foreign currencies, a Fund will be
affected favorably or unfavorably by changes in currency rates and in exchange
control regulations, and may incur costs in connection with conversions between
various currencies. The investment policies of certain Funds permit entering
into forward foreign currency exchange contracts in order to hedge holdings and
commitments against changes in the level of future currency rates. Such
contracts involve an obligation to purchase or sell a specific currency at a
future date at a price set at the time of the contract.
Although the Funds will endeavor to achieve most favorable execution costs
in their portfolio transactions, fixed commissions on many foreign stock
exchanges are generally higher than negotiated commissions on U.S. exchanges. In
addition, it is expected that the expenses for custodian arrangements of a
Fund's foreign securities will be somewhat greater than the expenses for the
custodian arrangements for handling the U.S. securities of equal value.
Certain foreign governments levy withholding taxes against dividend and
interest income. Although in some countries a portion of these taxes are
recoverable, the non-recovered portion of foreign withholding taxes will reduce
the income received from investments in such countries. Additional risks of
foreign investing are set forth in the appropriate Prospectuses.
ILLIQUID SECURITIES
Illiquid securities are securities that cannot be disposed of within seven
business days at approximately the price they are being carried on a Fund's
books. This lack of a liquid secondary market may have an adverse impact on the
value of such securities and a Fund's ability to dispose of particular
securities when necessary to meet the Fund's liquidity needs or in response to a
specific economic event such as a deterioration in the creditworthiness of the
borrower. The lack of a liquid secondary market for securities also may make it
more difficult for a Fund to assign a value to these securities for purposes of
valuing the Fund's portfolio and calculating its net asset value.
INVESTMENT COMPANY SECURITIES
The 1940 Act, generally prohibits a Fund from acquiring more than 3% of the
outstanding voting shares of an investment company and limits such investments
to no more than 5% of the Fund's total assets in any one investment company and
no more than 10% in any combination of investment companies. The 1940 Act also
prohibits a Fund from acquiring in the aggregate more than 10% of the
outstanding voting shares of any registered closed-end investment company. A
Fund may not purchase shares of any affiliated investment company except as
permitted by the 1940 Act or other applicable law.
MORTGAGE-RELATED DEBT SECURITIES
Mortgage-related debt securities represent ownership interests in individual
pools of residential mortgage loans. These securities are designed to provide
monthly payments of interest and principal to the investor. Each mortgagor's
monthly payment to his lending institution on his residential mortgage is
"passed-through" to investors. Mortgage pools consist of whole mortgage loans or
participations in loans. The terms and characteristics of the mortgage
instruments are generally uniform within a pool but may vary among pools.
Lending institutions which originate mortgages for the pools are subject to
certain standards, including credit and underwriting criteria for individual
mortgages included in the pools.
The coupon rate of interest on mortgage-related securities is lower than the
interest rates paid on the mortgages included in the underlying pool, but only
by the amount of the fees paid to the mortgage pooler, issuer, and/or guarantor
of payment of the securities for the guarantee of the services of passing
through monthly payments to investors. Actual yield may vary from the coupon
rate, however, if mortgage-related securities are purchased at a premium or
discount, traded in the secondary market at a premium or discount, or to the
extent that mortgages in the underlying pool are prepaid as noted above. In
addition, interest on mortgage-related securities is earned monthly, rather than
semi-annually as is the case for traditional bonds, and monthly compounding may
tend to raise the effective yield earned on such securities.
MORGAN STANLEY CAPITAL INTERNATIONAL EAFE INDEX
The International Magnum Fund seeks to achieve its objective by investing
primarily in equity securities of non-U.S. issuers in accordance with the EAFE
country (defined below) weightings determined by the Sub-Adviser. After
establishing regional allocation strategies, the Sub-Adviser then selects equity
securities among issuers of a region. The Fund invests in countries (each an
"EAFE country") comprising the Morgan Stanley Capital International EAFE
(Europe, Australia and the Far East) Index (the "EAFE Index") and any countries
which have been publicly announced will be added to the EAFE Index.
The EAFE Index is one of seven International Indices, twenty National
Indices and thirty-eight Industry Indices making up the Morgan Stanley Capital
International Indices. The Morgan Stanley Capital International EAFE Index is
based on the share prices of 1,066 companies listed on the stock exchanges of
Europe, Australia, New Zealand and the Far East. "Europe" includes Austria,
Belgium, Denmark, Finland, France, Germany, Italy,
11
<PAGE> 71
The Netherlands, Norway, Spain, Sweden, Switzerland and the United Kingdom.
"Far East" includes Japan, Hong Kong and Singapore/Malaysia. It was announced
publicly that Portugal will be added to the EAFE Index in December, 1997.
MORGAN STANLEY CAPITAL INTERNATIONAL WORLD INDEX
The investment objective of the Global Equity Allocation Fund is to provide
long-term capital appreciation by investing in equity securities of U.S. and
non-U.S. issuers in accordance with country weightings determined by the
Sub-Adviser and with stock selection within each country designed to replicate a
broad market index. The Sub-Adviser determines country allocations for the Fund
on an ongoing basis within policy ranges dictated by each country's market
capitalization and liquidity. The Fund will invest in the United States and
industrialized countries throughout the world that comprise the Morgan Stanley
Capital International World Index (the "World Index"). The World Index is one of
the indices making up the Morgan Stanley Capital International Indices.
The World Index is based on the share prices of companies listed on the
stock exchanges of Australia, Austria, Belgium, Canada, Denmark, Finland,
France, Germany, Hong Kong, Italy, Japan, the Netherlands, New Zealand, Norway,
Singapore/ Malaysia, Spain, Sweden, Switzerland, the United Kingdom and the
United States.
OBLIGATIONS OF DOMESTIC BANKS, FOREIGN BANKS AND FOREIGN BRANCHES OF U.S. BANKS
For purposes of the Funds' investment policies with respect to bank
obligations, the assets of a bank or savings institution will be deemed to
include the assets of its domestic and foreign branches. Investments in bank
obligations will include obligations of domestic branches of foreign banks and
foreign branches of domestic banks. Such investments may involve risks that are
different from investments in securities of domestic branches of U.S. banks. See
the Prospectuses for a discussion of the risks of foreign investments. These
institutions may be subject to less stringent reserve requirements and to
different accounting, auditing, reporting and record keeping requirements than
those applicable to domestic branches of U.S. banks. The Money Market Funds will
invest in U.S. Dollar-denominated obligations of domestic branches of foreign
banks and foreign branches of domestic banks only when the Sub-Adviser believes
that the risks associated with such investment are minimal and that all
applicable quality standards have been satisfied.
PORTFOLIO TURNOVER
The portfolio turnover rate for a year is the lesser of the value of the
purchases or sales for the year divided by the average monthly market value of
the Fund for the year, excluding securities with maturities of one year or less.
The rate of portfolio turnover will not be a limiting factor when a Fund deems
it appropriate to purchase or sell securities for the portfolio. High rates of
portfolio turnover necessarily result in correspondingly heavier brokerage and
portfolio trading costs which are paid by the Funds. In addition to portfolio
trading costs, higher rates of portfolio turnover may result in the realization
of capital gains. See "Taxes" in the Prospectus for more information on
taxation.
REPURCHASE AGREEMENTS
The repurchase price under the repurchase agreements described in the
Prospectus generally equals the price paid by a Fund plus interest negotiated on
the basis of current short-term rates (which may be more or less than the rate
on the securities underlying the repurchase agreement). Securities subject to
repurchase agreements will be held by the Custodian in the Federal
Reserve/Treasury book-entry system or by another authorized securities
depository.
SECURITIES LENDING
Each Fund may lend its investment securities to qualified institutional
investors who need to borrow securities in order to complete certain
transactions, such as covering short sales, avoiding failures to deliver
securities or completing arbitrage operations. By lending its investment
securities, a Fund 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 during the term of the loan would be for the
account of the Fund. Each Fund may lend its investment securities to qualified
brokers, dealers, domestic and foreign banks or other financial institutions, so
long as the terms, structure and the aggregate amount of such loans are not
inconsistent with the 1940 Act, or the Rules and Regulations or interpretations
of the SEC thereunder, which currently require that (a) the borrower pledge and
maintain with the Fund collateral consisting of cash, an irrevocable letter of
credit issued by a domestic U.S. bank, or liquid securities having a value at
all times not less than 100% of the value of the securities loaned, including
accrued interest, (b) the borrower add to such collateral whenever the price of
the securities loaned rises (i.e., the borrower "marks to the market" on a daily
basis), (c) the loan be made subject to termination by the Fund at any time, and
(d) the Fund receive reasonable interest on the loan (which may include the Fund
investing any cash collateral in interest bearing short-term investments), any
distributions on the loaned securities and any increase in their market value.
There may be risks of delay in recovery of the securities or even loss of rights
in the collateral should the borrower of the securities fail financially.
However, loans will only be made to borrowers deemed by the Sub-Adviser to be of
good standing and when, in the judgment of
12
<PAGE> 72
the Sub-Adviser, the consideration which can be earned currently from such
securities loans justifies the attendant risk. All relevant facts and
circumstances, including the creditworthiness of the broker, dealer or
institution, will be considered in making decisions with respect to the lending
of securities, subject to review by the Directors.
At the present time, the Staff of the SEC does not object if an investment
company pays reasonable negotiated fees in connection with loaned securities, so
long as such fees are set forth in a written contract and approved by the
investment company's Directors. In addition, voting rights may pass with the
loaned securities, but if a material event will occur affecting an investment on
loan, the loan must be called and the securities voted.
STAND-BY COMMITMENTS
A Fund may enter into stand-by commitments with respect to obligations
issued by or on behalf of states, territories, and possessions of the United
States, the District of Columbia, and their political subdivisions, agencies,
instrumentalities and authorities (collectively, "Municipal Obligations") held
in its portfolio. Under a stand-by commitment, a dealer would agree to purchase,
at a Fund's option, a specified Municipal Obligation at its amortized cost value
to the Fund plus accrued interest, if any. Stand-by commitments may be
exercisable by a Fund at any time before the maturity of the underlying
Municipal Obligations and may be sold, transferred or assigned only with the
instruments involved.
The Funds expect that stand-by commitments will generally be available
without the payment of any direct or indirect consideration. However, if
necessary or advisable, a Fund may pay for a stand-by commitment either
separately in cash or by paying a higher price for portfolio securities which
are acquired subject to the commitment (thus reducing the yield to maturity
otherwise available for the same securities). The total amount paid in either
manner for outstanding stand-by commitments held by a Fund will not exceed 1/2
of 1% of the value of that Fund's total assets calculated immediately after each
stand-by commitment is acquired.
The Funds intend to enter into stand-by commitments only with dealers, banks
and broker-dealers which, in the Sub-Adviser's opinion, present minimal credit
risks and otherwise satisfy applicable quality standards. The Funds' reliance
upon the credit of these dealers, banks and broker-dealers will be secured by
the value of the underlying Municipal Obligations that are subject to the
commitment.
The Funds will acquire stand-by commitments solely to facilitate portfolio
liquidity and do not intend to exercise their right thereunder for trading
purposes. The acquisition of a stand-by commitment will not affect the valuation
or assumed maturity of the underlying Municipal Obligation which will continue
to be valued in accordance with the amortized cost method. The actual stand-by
commitment will be valued at zero in determining net asset value. Accordingly,
where a Fund pays directly or indirectly for a stand-by commitment, its cost
will be reflected as an unrealized loss for the period during which the
commitment is held by that Fund and will be reflected in realized gain or loss
when the commitment is exercised or expires.
STRIPPED MORTGAGE-BACKED SECURITIES
Stripped mortgage-backed securities ("SMBS") are derivative multiclass
mortgage securities. SMBS may be issued by agencies or instrumentalities of the
U.S. Government or by private originators of, or investors in, mortgage loans,
including savings and loan associations, mortgage banks, commercial banks,
investment banks and special purpose entities of the foregoing.
SMBS are usually structured with two classes that receive different
proportions of the interest and principal distributions on a pool of mortgage
assets. A common type of SMBS will have one class receiving some of the interest
and most of the principal from the mortgage assets, while the other class will
receive most of the interest and the remainder of the principal. In the most
extreme case, one class will receive all of the interest (the interest-only or
"IO" class), while the other class will receive all of the principal (the
principal-only or "PO" class). The yield to maturity on an IO class is extremely
sensitive to the rate of principal payments (including prepayments) on the
related underlying mortgage assets, and a rapid rate of principal payments may
have a material adverse effect on a Fund's yield to maturity from these
securities. If the underlying mortgage assets experience greater than
anticipated prepayments of principal, a Fund may fail to fully recoup its
initial investment in these securities even if the security is in one of the
highest rating categories.
Although SMBS are purchased and sold by institutional investors through
several investment banking firms acting as brokers or dealers, these securities
were only recently developed. As a result, established trading markets have not
yet developed and, accordingly, certain of these securities may be deemed
"illiquid" and subject to a Fund's limitations on investment in illiquid
securities.
SWAP CONTRACTS
The Non-Money Market Funds may enter into Swap Contracts. A swap is an
agreement to exchange the return generated by one instrument for the return
generated by another instrument. The payment streams are calculated by reference
to a specified index and agreed upon notional amount. The term "specified index"
includes currencies, fixed interest rates, prices, total return on interest rate
indices, fixed income indices, stock indices and commodity indices (as well as
amounts derived from arithmetic operations on these indices). For example, a
Fund may agree to swap the return generated by a fixed-income index for
13
<PAGE> 73
the return generated by a second fixed-income index. The currency swaps in which
a Fund may enter will generally involve an agreement to pay interest streams in
one currency based on a specified index in exchange for receiving interest
streams denominated in another currency. Such swaps may involve initial and
final exchanges that correspond to the agreed upon notional amount.
The swaps in which the noted Funds may engage also include rate caps, floors
and collars under which one party pays a single or periodic fixed amount(s) (or
premium), and the other party pays periodic amounts based on the movement of a
specified index. Swaps do not involve the delivery of securities, other
underlying assets, or principal. Accordingly, the risk of loss with respect to
swaps is limited to the net amount of payments that the Fund is contractually
obligated to make. If the other party to a swap defaults, the Fund's risk of
loss consists of the net amount of payments that the Fund is contractually
entitled to receive. Currency swaps usually involve the delivery of the entire
principal value of one designated currency in exchange for the other designated
currency. Therefore, the entire principal value of a currency swap is subject to
the risk that the other party to the swap will default on its contractual
delivery obligations. If there is a default by the counterparty, the Fund may
have contractual remedies pursuant to the agreements related to the transaction.
The swap market has grown substantially in recent years with a large number of
banks and investment banking firms acting both as principals and as agents
utilizing standardized swap documentation. As a result, the swap market has
become relatively liquid. Caps, floors, and collars are more recent innovations
for which standardized documentation has not yet been fully developed and,
accordingly, they are less liquid than swaps.
Funds will usually enter into swaps on a net basis, i.e., the two payment
streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. The Fund's obligations under a swap
agreement will be accrued daily (offset against any amounts owing to the
portfolio) and any accrued but unpaid net amounts owed to a swap counterparty
will be covered by the maintenance of a segregated account consisting of cash or
liquid securities, to avoid any potential leveraging of the Fund. To the extent
that these swaps, caps, floors, and collars are entered into for hedging
purposes, the Sub-Adviser believes such obligations do not constitute "senior
securities" under the 1940 Act and, accordingly, will not treat them as being
subject to the Fund's borrowing restrictions. Funds may enter into OTC
derivatives transactions (Swaps, Caps, Floors, Puts, etc., but excluding foreign
exchange contracts) with counterparties that are approved by the Sub-Adviser in
accordance with guidelines established by the Board of Directors. These
guidelines provide for a minimum credit rating for each counterparty and various
credit enhancement techniques (for example, collateralization of amounts due
from counterparties) to limit exposure to counterparties with ratings below AA.
The use of swaps is a highly specialized activity which involves investment
techniques and risks different from those associated with ordinary portfolio
securities transactions. If the Sub-Adviser is incorrect in its forecasts of
market values, interest rates, and currency exchange rates, the investment
performance of the portfolio would be less favorable than it would have been if
this investment technique were not used.
U.S. GOVERNMENT OBLIGATIONS
Examples of types of U.S. Government obligations include U.S. Treasury
Bills, Treasury Notes and Treasury Bonds and the obligations of Federal Home
Loan Banks, Federal Farm Credit Banks, Federal Land Banks, the Federal Housing
Administration, Farmers Home Administration, Export-Import Bank of the United
States, Small Business Administration, Federal National Mortgage Association,
Government National Mortgage Association, General Services Administration,
Student Loan Marketing Association, Central Bank for Cooperatives, Federal Home
Loan Mortgage Corporation, Federal Intermediate Credit Banks, Maritime
Administration, International Bank for Reconstruction and Development (the
"World Bank"), the Asian-American Development Bank and the Inter-American
Development Bank.
VARIABLE RATE DEMAND INSTRUMENTS
Variable rate demand instruments held by each Money Market Fund may have
maturities of more than 397 days, provided: (i) the Fund is entitled to the
payment of principal at any time, or during specified intervals not exceeding
397 days, upon giving the prescribed notice (which may not exceed 30 days), and
(ii) the rate of interest on such instruments is adjusted at periodic intervals
which may extend up to 397 days. In determining the weighted average maturity of
a Fund and whether a variable rate demand instrument has a remaining maturity of
397 days or less, each instrument will be deemed by the Fund to have a maturity
equal to the longer of the period remaining until its next interest rate
adjustment or the period remaining until the principal amount can be recovered
through demand. In determining whether an unrated variable rate demand
instrument is of comparable quality at the time of purchase to instruments rated
"high quality," the Sub-Adviser will follow guidelines adopted by the Company's
Board of Directors.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
Delivery of and payment for these securities may take as long as a month or
more after the date of the purchase commitment but will take place no more than
120 days after the trade date. Each Fund will maintain with the appropriate
Custodian a separate account with a segregated portfolio of cash or liquid
securities in an amount at least equal to these commitments. It is possible that
the market value at the time of settlement would be higher or lower than the
purchase price if the general level of interest rates has changed.
14
<PAGE> 74
ZERO COUPON BONDS
Zero coupon bonds is a term used to describe notes and bonds which have been
stripped of their unmatured interest coupons, or the coupons themselves, and
also receipts or certificates representing interest in such stripped debt
obligations and coupons. The timely payment of coupon interest and principal on
zero coupon bonds issued by the U.S. Treasury remains guaranteed by the "full
faith and credit" of the United States Government.
A zero coupon bond does not pay interest. Instead, it is issued at a
substantial discount to its "face value"--what it will be worth at maturity. The
difference between a security's issue or purchase price and its face value
represents the imputed interest an investor will earn if the security is held
until maturity. For tax purposes, a portion of this imputed interest is deemed
to be income received by zero coupon bondholders each year. Each Fund, which
expects to qualify as a regulated investment company, intends to pass along such
interest as a component of the Fund's distributions of net investment income.
Zero coupon bonds may offer investors the opportunity to earn higher yields
than those available on U.S. Treasury bonds of similar maturity. However, zero
coupon bond prices may also exhibit greater price volatility than ordinary debt
securities because of the manner in which their principal and interest is
returned to the investor.
Zero Coupon Treasury Bonds are sold under a variety of different names, such
as: Certificate of Accrual on Treasury Securities ("CATS"), Treasury Receipts
("TRs"), Separate Trading of Registered Interest and Principal of Securities
("STRIPS") and Treasury Investment Growth Receipts ("TIGERS").
FEDERAL INCOME TAX
The following is only a summary of certain additional federal tax
considerations generally affecting the Company and its shareholders that are not
described in the Company's prospectuses. No attempt is made to present a
detailed explanation of the federal, state or local tax treatment of the Company
or its shareholders, and the discussion here and in the Company's prospectuses
are not intended as tax advice or as a substitute for careful tax planning.
Each Fund is generally treated as a separate corporation for federal income
tax purposes, and thus the provisions of the Internal Revenue Code of 1986, as
amended (the "Code"), generally will be applied to each Fund separately, rather
than to the Company as a whole. Each Fund has qualified and intends to continue
to qualify to be treated for each taxable year as a regulated investment company
("RIC") under subchapter M of the Code.
The following discussion of federal income tax consequences is based on the
Code and the regulations issued thereunder as in effect on the date of this
Statement of Additional Information. Legislation and administrative changes or
court decisions may significantly change the conclusions expressed herein, and
may have a retroactive effect with respect to the transactions contemplated
herein.
In order to qualify for the special tax treatment afforded to RICs under
Subchapter M of the Code, each Fund must, among other things, (a) derive at
least 90% of its gross income each taxable year from dividends, interest,
payments with respect to securities loans, gains from the sale or other
disposition of stock, securities or foreign currencies, and certain other
related income, including, generally, gains from options, futures and forward
contracts (the "90% Gross Income Test"); (b) derive less than 30% of its gross
income each taxable year from the sale or other disposition of (i) stocks or
securities, (ii) options, futures or forward contracts (other than options,
futures or forward contracts on foreign currencies) and (iii) foreign currencies
(or options, futures or forward contracts on foreign currencies), but only if
not directly related to the Fund's principal business of investing in stocks or
securities (or options and futures with respect to stocks or securities) held
less than three months (the "Short-Short Gain Test"), and (c) diversify its
holdings so that, at the end of each fiscal quarter of the Company's taxable
year, (i) at least 50% of the market value of the Fund's total assets is
represented by cash, United States Government securities, securities of other
RICs, and other securities and cash items, with such other securities limited,
in respect of any one issuer, to an amount not greater than 5% of the value of
the Fund's total assets or 10% of the outstanding voting securities of such
issuer, and (ii) not more than 25% of the value of its total assets is invested
in the securities of any one issuer or two or more issuers which the Fund
controls and which are engaged in the same, similar, or related trades or
businesses (other than U.S. Government securities or the securities of other
RICs). For purposes of the 90% gross income requirement described above, foreign
currency gains may be excluded by regulation from income that qualifies under
the 90% requirement. The Short-Short Gain Test will no longer be applicable to
the Funds beginning on July 1, 1998.
In addition to the requirements described above, in order to qualify as a
RIC, a Fund must distribute at least 90% of its net investment income (which
generally includes dividends, taxable interest, and net short-term capital gains
less operating expenses) to shareholders. If a Fund meets all of the RIC
requirements, it will not be subject to federal income tax on any of its net
investment income or net capital gains (i.e., the excess of net long-term
capital gains over net short-term capital losses) that it distributes to
shareholders.
If a Fund fails to qualify as a RIC for any taxable year, it will be taxable
at regular corporate rates. In such case, distributions (including capital gain
dividends, which are distributions of net capital gains) will be taxable as
ordinary dividends to the extent of the Fund's current and accumulated earnings
and profits and such distributions generally will be eligible for the corporate
dividends received deductions.
15
<PAGE> 75
Each Fund will decide whether to distribute or to retain all or part of any
net capital gains in any year for reinvestment. If any such gains are retained,
the Fund will pay federal income tax thereon, and, if the Fund makes an
election, the shareholders will include such undistributed gains in their income
and shareholders subject to tax will be able to claim their share of the tax
paid by the Fund as a credit against their federal income tax liability.
A gain or loss realized by a shareholder on the sale or exchange of shares
of a Fund held as a capital asset will be capital gain or loss. For a summary of
the rates applicable to capital gains (including capital gain dividends), see
"Capital Gains Rates Under the 1997 Tax Act" below. Any loss recognized on a
sale or exchange will be disallowed to the extent the shares disposed of are
replaced within the 61-day period beginning 30 days before and ending 30 days
after the shares are disposed of. Any loss recognized by a shareholder on the
disposition of shares held 6 months or less is treated as a long-term capital
loss to the extent of any capital gain dividends received by the shareholder
with respect to such shares or any inclusion of undistributed capital gain with
respect to such shares.
Each Fund will generally be subject to a nondeductible 4% federal excise tax
to the extent it fails to distribute by the end of any calendar year at least
98% of its ordinary income and 98% of its capital gain net income (the excess of
short and long-term capital gains over short and long-term capital losses) for
the one-year period ending on October 31 of that year, plus certain other
amounts.
Each Fund is required by federal law to withhold 31% of reportable payments
(which may include dividends, capital gains dividends and redemptions) paid to
shareholders who have not certified on the Account Registration Form or on a
separate form supplied by the Fund, that the Social Security or Taxpayer
Identification Number provided is correct and that the shareholder is exempt
from backup withholding or is not currently subject to backup withholding.
CAPITAL GAINS RATES UNDER THE 1997 TAX ACT
Under the Taxpayer Relief Act of 1997 (the "1997 Tax Act"), the maximum tax
rates applicable to net capital gains recognized by individuals and other
non-corporate taxpayers are (i) the same as ordinary income rates for capital
assets held for one year or less, (ii) 28% for capital assets held for more than
one year but not more than 18 months and (iii) 20% for capital assets held for
more than 18 months. The maximum long-term capital gains rate for corporations
remains at 35%. Under the 1997 Tax Act, the Treasury is authorized to issue
regulations that address the application of the new capital gains rates to sales
and exchanges by RICs and to sales and exchanges of interests in RICs, but no
such regulations have been issued as of the date hereof. It is expected that the
new tax rates for capital gains under the 1997 Tax Act described above will
apply to distributions of capital gain dividends by the Funds as well as to
sales and exchanges of shares in the Funds. With respect to capital losses
recognized on dispositions of shares held six months or less where such losses
are treated as long-term capital losses to the extent of prior capital gain
dividends received on such shares (see discussion above regarding gains or
losses recognized on the sale or exchange of shares), it is unclear how such
capital losses offset the capital gains referred to above. Shareholders should
consult their own tax advisers as to the application of the new capital gains
rates to their particular circumstances.
ADDITIONAL CONSIDERATIONS FOR THE TAX-FREE MONEY MARKET FUND
In order for the Tax-Free Money Market Fund to pay exempt-interest dividends
during any taxable year, at the close of each quarter of its taxable year at
least 50% of the value of the Fund's assets must consist of certain tax-exempt
obligations. Exempt-interest dividends distributed to shareholders are not
included in the shareholder's gross income for regular federal income tax
purposes. Exempt-interest dividends may, however, be subject to the alternative
minimum tax (the "AMT") imposed by Section 55 of the Code and, in the case of
corporate taxpayers, the environmental tax (the "Environmental Tax") imposed by
Section 59A of the Code. The AMT and the Environmental Tax may be imposed in two
circumstances. First, exempt-interest dividends derived from certain "private
activity bonds" issued after August 7, 1986, will generally be an item of tax
preference (and therefore potentially subject to the AMT and/or the
Environmental Tax) for both corporate and non-corporate taxpayers. Second, in
the case of exempt-interest dividends received by corporate shareholders, all
exempt-interest dividends, regardless of when the bonds from which they are
derived were issued or whether they are derived from private activity bonds,
will be included in the corporation's "adjusted current earnings," as defined in
Section 56(g) of the Code, in calculating the corporation's alternative minimum
taxable income for purposes of determining the AMT and the Environmental Tax.
The deduction otherwise allowable to property and casualty insurance
companies for "losses incurred" will be reduced by an amount equal to a portion
of exempt-interest dividends received or accrued during any taxable year.
Foreign corporations engaged in a trade or business in the United States will be
subject to a "branch profits tax" on their "dividend equivalent amount" for the
taxable year, which will include exempt-interest dividends. Certain Subchapter S
corporations may also be subject to taxes on their "passive investment income,"
which could include exempt-interest dividends. Up to 85% (depending on the
taxpayer's income) of the Social Security benefits or railroad retirement
benefits received by an individual during any taxable year may be included in
the gross income of such individual depending upon the individual's "modified
adjusted gross income" (which includes exempt-interest dividends).
16
<PAGE> 76
The Tax-Free Money Market Fund may not be an appropriate investment for
persons (including corporations and other business entities) who are
"substantial users" (or persons related to such users) of facilities financed by
industrial development or private activity bonds. A "substantial user" is
defined generally to include certain persons who regularly use such a facility
in their trade or business. Such entities or persons should consult their tax
advisors before purchasing shares of this Fund.
Issuers of bonds purchased by the Tax-Free Money Market Fund (or the
beneficiary of such bonds) may have made certain representations or covenants in
connection with the issuance of such bonds to satisfy certain requirements of
the Code that must be satisfied subsequent to the issuance of such bonds.
Investors should be aware that exempt-interest dividends derived from such bonds
may become subject to federal income taxation retroactively to the date of
issuance thereof if such representations are determined to have been inaccurate
or if the issuer of such bonds (or the beneficiary of such bonds) fails to
comply with such covenants.
Distributions of net investment income received by the Tax-Free Money Market
Fund from investments in debt securities (other than interest on tax-exempt
Municipal Obligations) and any net short-term capital gains distributed by the
Fund will be taxable to shareholders as ordinary income and will not be eligible
for the dividends received deduction for corporate shareholders. Although the
Tax-Free Money Market Fund generally does not expect to receive net investment
income other than Tax-Exempt Interest, up to 20% of the net assets of the Fund
may be invested in Municipal Obligations that do not bear Tax-Exempt Interest,
and any taxable income recognized by the Fund will be distributed and taxed to
its shareholders.
PASSIVE FOREIGN INVESTMENT COMPANIES
A Fund may invest in the stock of "passive foreign investment companies"
("PFICs"). A PFIC is a foreign corporation that, in general, meets either of the
following tests: (i) at least 75% of its gross income is passive income or (ii)
an average of at least 50% of its assets produce, or are held for the production
of, passive income. Under certain circumstances, a RIC that holds stock of a
PFIC will be subject to federal income tax on (i) a portion of any "excess
distribution" received on such stock or (ii) any gain from a sale or disposition
of such stock (collectively, "PFIC income"), plus interest on such amounts, even
if the RIC distributes the PFIC income as a taxable dividend to its
shareholders. The balance of the PFIC income will be included in the RIC's
investment company taxable income and, accordingly, will not be taxable to it to
the extent that income is distributed to its shareholders. If a Fund invests in
a PFIC and elects to treat the PFIC as a "qualified electing fund," then in lieu
of the foregoing tax and interest obligation, the Fund would be required to
include in income each year its pro rata share of the qualified electing fund's
annual ordinary earnings and net capital gain, which most likely would have to
be distributed to satisfy the 90% distribution requirement and the distribution
requirement for avoiding income and excise taxes. In most instances it will be
very difficult to make this election due to certain requirements imposed with
respect to the election.
Under provisions of the 1997 Tax Act generally effective for taxable years
ending after 1997, a Fund that invests in PFIC stock may make an election to
annually mark-to-market certain publicly traded PFIC stock (a "PFIC
Mark-to-Market Election"). "Marking-to-market," in this context, means
recognizing as ordinary income or loss each year an amount equal to the
difference between the Fund's adjusted tax basis in such PFIC stock and its fair
market value. Losses will be allowed only to the extent of net mark-to-market
gain previously included by the Fund pursuant to the election for prior taxable
years. The Fund may be required to include in its taxable income for the first
taxable year in which it makes a PFIC Mark-to-Market Election an amount equal to
the interest charge that would otherwise accrue with respect to distributions
on, or dispositions of, the PFIC stock. This amount would not be deductible from
the Fund's taxable income. The PFIC Mark-to-Market Election applies to the
taxable year for which made and to all subsequent taxable years, unless the PFIC
stock ceases to be publicly traded or the Internal Revenue Service consents to
revocation of the election. By making the PFIC Mark-to-Market Election, the Fund
could ameliorate the adverse tax consequences arising from its ownership of PFIC
stock, but in any particular year may be required to recognize income in excess
of the distributions it receives from the PFIC and proceeds from the disposition
of PFIC stock.
FOREIGN INCOME TAX
It is expected that each Fund will be subject to foreign withholding taxes
with respect to its dividend and interest income from foreign countries, if any,
and a Fund may be subject to foreign income or other taxes with respect to other
income. So long as more than 50% in value of a Fund's total assets at the close
of the taxable year consists of stock or securities of foreign corporations, the
Fund may elect to treat certain foreign income taxes imposed on it under U.S.
federal income tax law as paid directly by its shareholders. A Fund will make
such an election only if it deems it to be in the best interest of its
shareholders and will notify shareholders in writing each year if it makes an
election and of the amount of foreign income taxes, if any, to be treated as
paid by the shareholders. If a Fund makes the election, shareholders will be
required to include in income their proportionate shares of the amount of
foreign income taxes treated as imposed on the Fund and will be entitled to
claim either a credit (subject to the limitations discussed below) or, if they
itemize deductions, a deduction for their shares of the foreign income taxes in
computing their federal income tax liability. No deductions will be allowed in
computing alternative minimum tax liability.
Shareholders who choose to utilize a credit (rather than a deduction) for
foreign taxes will be subject to the limitation that the credit may not exceed
the shareholder's U.S. tax (determined without regard to the availability of the
credit) attributable to foreign source taxable income. For this purpose, the
portion of dividends and distributions paid by a Fund from its foreign source
17
<PAGE> 77
income will be treated as foreign source income. A Fund's gains from the sale of
securities will generally be treated as derived from U.S. sources and certain
foreign currency gains and losses likewise will be treated as derived from U.S.
sources. The limitation on the foreign tax credit is applied separately to
foreign source "passive income," such as the portion of dividends received from
a Fund which qualifies as foreign source income. In addition, the foreign tax
credit is allowed to offset only 90% of the alternative minimum tax imposed on
corporations and individuals. Because of these limitations, shareholders may be
unable to claim a credit for the full amount of their proportionate shares of
the foreign income taxes paid by a Fund.
The foregoing is only a general description of the treatment of foreign
income taxes under the U.S. federal income tax laws. Because the availability of
a credit or deduction depends on the particular circumstances of each
shareholder, shareholders are advised to consult their own tax advisers.
CERTAIN INVESTMENT PRACTICES
Some of a Fund's investment practices, including those involving certain
risk management transactions and foreign currency transactions, may be subject
to special provisions of the Code that, among other things, defer the use of
certain losses of the Fund and affect the holding period of securities held by
the Fund and the character of gains or losses realized by the Fund. These
provisions may also require the Fund to recognize income or gain without
receiving cash with which to make distributions in amounts necessary to satisfy
the distribution requirements for avoiding federal income and excise taxes.
Thus, these provisions could affect the amount, timing and character of
distributions to shareholders. Each Fund engaging in such investment practices
will monitor its transactions and may make certain tax elections in order to
mitigate the effect of these rules and prevent disqualification of the Fund as a
RIC.
FEDERAL TAX TREATMENT OF FORWARD CURRENCY
CONTRACTS AND EXCHANGE RATE CONTRACTS
Except for certain hedging transactions, each Fund is required for federal
income tax purposes to recognize as gain or loss for each taxable year its net
unrealized gains and losses on certain forward currency and futures contracts as
of the end of each taxable year, as well as those actually realized during the
year. In most cases, any such gain or loss recognized with respect to a
regulated futures contract is considered to be 60% long-term capital gain or
loss and 40% short-term capital gain or loss, without regard to the holding
period of the contract. Proposed legislation would provide that amounts treated
as capital gain or loss pursuant to the foregoing sentence would be attributable
to property held for more than 18 months. See "Capital Gains Rates Under the
1997 Tax Act" above for a summary of the tax rates applicable to capital gains.
Forward currency futures contracts which are intended to hedge against a change
in the value of securities held by a Fund may affect the holding period of such
securities and, consequently, the nature of the gain or loss on such securities
upon disposition.
Any net gain realized from the closing out of futures contracts will
generally be qualifying income for purposes of the 90% Gross Income test. In
order to satisfy the Short-Short Gain test, however, a Fund will have to avoid
realizing gains on futures contracts and certain forward contracts held less
than three months and may be required to defer the closing out of futures
contracts beyond the time when it would otherwise be advantageous to do so. It
is anticipated that unrealized gains of such contracts that have been open for
less than three months as of the end of a Fund's taxable year and which are
treated as recognized for tax purposes at the end of the taxable year will not
be considered gains on securities held less than three months for purposes of
the Short-Short Gain test. The Short-Short Gain test will no longer be
applicable to the Funds beginning on July 1, 1998.
Gains or losses attributable to foreign currency contracts, or to
fluctuations in exchange rates that occur between the time the Fund accrues
interest or other receivables or accrues expenses or other liabilities
denominated in a foreign currency and the time the Fund actually collects such
receivables or pays such liabilities are treated as ordinary income or loss.
Similarly, gains or losses on disposition of debt securities denominated in a
foreign currency attributable to fluctuations in the value of the foreign
currency between the date of acquisition of the security and the date of
disposition also are treated as ordinary gain or loss. These gains or losses
increase or decrease the amount of a Fund's net investment income, if any,
available to be distributed to its shareholders as ordinary income.
TAXES AND FOREIGN SHAREHOLDERS
Taxation of a shareholder who, as to the United States, is a nonresident
alien individual, a foreign trust or estate, foreign corporation, or foreign
partnership ("Foreign Shareholder") depends on whether the income from the
Company is "effectively connected" with a U.S. trade or business carried on by
such shareholder.
If the income from the Company is not effectively connected with a U.S.
trade or business carried on by a Foreign Shareholder, distributions of ordinary
income will be subject to U.S. withholding tax at the rate of 30% (or lower
treaty rate) upon the gross amount of the dividend. Furthermore, Foreign
Shareholders will generally be exempt from United States federal income tax on
gains realized on the sale of shares of the Company, distributions of net
long-term capital gains, and amounts retained by the Company which are
designated as undistributed capital gains.
18
<PAGE> 78
If the income from the Company is effectively connected with a U.S. trade or
business carried on by a Foreign Shareholder, then distributions of net
investment income and net long-term capital gains, and any gains realized upon
the sale of shares of the Company, will be subject to U.S. federal income tax at
the rates applicable to United States citizens and residents or domestic
corporations.
The Company may be required to withhold U.S. federal income tax on
distributions that are otherwise exempt from withholding tax (or taxable at a
reduced treaty rate) unless the Foreign Shareholder complies with Internal
Revenue Service certification requirements.
The tax consequences to a Foreign Shareholder entitled to claim the benefits
of an applicable tax treaty may differ from those described here. Furthermore,
Foreign Shareholders are strongly urged to consult their own tax advisors with
respect to the particular tax consequences to them of an investment in the
Company.
PURCHASE OF SHARES
For Class A shares of the Non-Money Funds, the purchase price of shares is
based upon the net asset value per share plus the applicable sales charge, if
any, next determined after the purchase order is received. Class B shares and
Class C shares of the Non-Money Funds may be purchased at the net asset value
per share next determined after the purchase order is received. For all classes
of such Funds an order received prior to the regular close of the New York Stock
Exchange (the "NYSE") (currently, 4:00 p.m., Eastern Time) will be executed at
the price computed on the date of receipt; and an order received after the
regular close of the NYSE will be executed at the price computed on the next day
the NYSE is open. The purchase price of shares of the Non-Money Funds is based
on such price as further described in the Prospectuses under "Purchase of
Shares."
The purchase price of shares of the Money Market Funds is the net asset
value per share next determined after Federal Funds are available to such Fund.
A purchase of a Money Market Fund's shares by check is credited to the
shareholder's account at the price next determined after receipt of Federal
Funds on the day of receipt and will begin receiving dividends the following
day.
Shares of the Company may be purchased on any day the NYSE is open, except
that shares of the Money Market Funds may be purchased on any day when both the
NYSE and the Federal Reserve Banks are open. The NYSE is closed when the
following holidays are observed: New Year's Day, Martin Luther King, Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day and on the preceding Friday or subsequent
Monday when any of these holidays falls on a Saturday or Sunday, respectively.
Federal Reserve Banks are closed on Columbus Day and Veterans Day, in addition
to such NYSE holidays.
Each Fund reserves the right in its sole discretion (i) to suspend the
offering of its shares, (ii) to reject purchase orders when in the judgment of
management such rejection is in the best interest of the Company, and (iii) to
reduce or waive the minimum for initial and subsequent investments for certain
fiduciary accounts such as employee benefit plans or under circumstances where
certain economies can be achieved in sales of a Fund's shares.
REDEMPTION OF SHARES
Each Fund may suspend redemption privileges or postpone the date of payment
(i) during any period that the NYSE is closed, or trading on the NYSE is
restricted as determined by the SEC, (ii) during any period when an emergency
exists as defined by the rules of the SEC as a result of which it is not
reasonably practicable for a Fund to dispose of securities owned by it, or
fairly to determine the value of its assets, and (iii) for such other periods as
the SEC may permit. Additionally, if the Board of Directors determines that
payment wholly or partly in cash would be detrimental to the best interests of
the remaining shareholders of the Fund, the Company may pay the redemption
proceeds in whole or in part by a distribution-in-kind of readily marketable
securities held by the Funds in lieu of cash in conformity with applicable rules
of the SEC. Shareholders may incur brokerage charges upon the sale of portfolio
securities so received in payment of redemptions.
Any redemption may be more or less than the shareholder's cost depending on,
among other factors, the market value of the securities held by the Fund(s).
To protect your account and the Company from fraud, signature guarantees are
required for certain redemptions. Signature guarantees enable the Company to
verify the identity of the person who has authorized a redemption from your
account. Signature guarantees are required in connection with: (1) all
redemptions, regardless of the amount involved, when the proceeds are to be paid
to someone other than the registered owner(s) and/or registered address; and (2)
share transfer requests.
Eligible signature guarantor institutions generally include banks,
broker-dealers, credit unions, national securities exchanges, registered
securities associations, clearing agencies and savings associations, provided
that the institution is a member of the Securities Transfer Agents Medallion
Program or another recognized signature guarantee program. Notaries public are
not acceptable guarantors.
The signature guarantees must appear either: (1) on the written request for
redemption; (2) on a separate instrument for assignment ("stock power") which
should specify the total number of shares to be redeemed; or (3) on all stock
certificates tendered for redemption and, if shares held by the Company are also
being redeemed, on the letter or stock power.
19
<PAGE> 79
Redemption of shares held in broker street name may not be accomplished by
mail or telephone as described above. Shares held in broker street name may be
redeemed only by contacting the investment dealer, bank or financial services
firm ("Participating Dealer") that handles your account.
CONTINGENT DEFERRED SALES CHARGE -- CLASS A
For certain full service participant directed profit sharing and money
purchase plans and qualified 401(k) retirement plans and for investments in the
amount of $1,000,000 or more of Class A shares of the Non-Money Funds
("Qualified Purchaser"), the front-end sales charge will be waived and a
contingent deferred sales charge ("CDSC -- Class A") of 1.00% is imposed in the
event of certain redemptions within one year of the purchase. If a CDSC -- Class
A is imposed upon redemption, the amount of the CDSC -- Class A will be equal to
the lesser of 1.00% of the net asset value of the shares at the time of purchase
or 1.00% of the net asset value of the shares at the time of redemption.
The CDSC -- Class A will be imposed only if a Qualified Purchaser redeems an
amount which caused the value of the account to fall below the total dollar
amount of purchase payments made by the Qualified Purchaser without an initial
sales charge during the one year period prior to the redemption. The CDSC --
Class A will be waived in connection with redemptions by certain Qualified
Purchasers (e.g., in retirement plans qualified under Section 401(a) of the Code
and deferred compensation plans under Section 457 of the Code) required to
obtain funds to pay distributions to beneficiaries pursuant to the terms of the
plans. Such payments include, but are not limited to, death, disability,
retirement or separation from service. No CDSC -- Class A will be imposed on
exchanges between funds. For purposes of the CDSC -- Class A, when shares of one
fund are exchanged for shares of another fund, the purchase date for the shares
of the fund exchanged into will be assumed to be the date on which shares were
purchased in the fund from which the exchange was made. If the exchanged shares
themselves are acquired through an exchange, the purchase date is assumed to
carry over from the date of the original election to purchase shares subject to
a CDSC -- Class A rather than a front-end load sales charge. In determining
whether a CDSC -- Class A is payable, it is assumed that shares held the longest
are the first to be redeemed.
Cumulative Purchase Discounts and Letters of Intent apply to the net asset
value privilege. Also, in order to establish an amount of $1,000,000 or more, a
Qualified Purchaser may aggregate shares of the Participating Funds described in
the Prospectus.
WAIVER OF CLASS B AND CLASS C CONTINGENT DEFERRED SALES CHARGE ("CDSC -- CLASS B
AND C")
As described in the Prospectus under "Purchase of Shares," redemptions of
Class B shares and Class C shares of the Non-Money Funds will be subject to a
CDSC. The CDSC -- Class B and C may be waived on redemptions of Class B shares
and Class C shares in the circumstances described below:
(a) Redemption Upon Disability or Death
The Non-Money Funds will waive the CDSC -- Class B and C on redemptions
following the death or disability of a Class B shareholder and Class C
shareholder. An individual will be considered disabled for this purpose if he or
she meets the definition thereof in Section 72(m)(7) of the Internal Revenue
Code of 1986, as amended (the "Code"), which in pertinent part defines a person
as disabled if such person "is unable to engage in any substantial gainful
activity by reason of any medically determinable physical or mental impairment
which can be expected to result in death or to be of long-continued and
indefinite duration." While the Company does not specifically adopt the balance
of the Code's definition which pertains to furnishing the Secretary of Treasury
with such proof as he or she may require, the Distributor will require
satisfactory proof of death or disability before it determines to waive the CDSC
- -- Class B and C.
In cases of disability or death, the CDSC -- Class B and C will be waived
where the decedent or disabled person is either an individual shareholder or
owns the shares as a joint tenant with right of survivorship or is the
beneficial owner of a custodial or fiduciary account, and where the redemption
is made within one year of the death or initial determination of disability.
This waiver of the CDSC -- Class B and C applies to a total or partial
redemption, but only to redemptions of shares held at the time of the death or
initial determination of disability.
(b) Redemption in Connection with Certain Distributions from Retirement
Plans
The Company will waive the CDSC -- Class B and C when a total or partial
redemption is made in connection with certain distributions from retirement
plans. The charge will be waived upon the tax-free rollover or transfer of
assets to another retirement plan invested in one or more of the Participating
Funds; in such event, as described below, the Non-Money Fund will "tack" the
period for which the original shares were held on to the holding period of the
shares acquired in the transfer or rollover for purposes of determining what, if
any, CDSC -- Class B and C is applicable in the event that such acquired shares
are redeemed following the transfer or rollover. The charge also will be waived
on any redemption which results from the return of an excess contribution
pursuant to Section 408(d)(4) or (5) of the Code, the return of excess deferral
amounts pursuant to Code Section 401(k)(8) or 402(g)(2), or from the death or
disability of the employee (see Code Section 72(m)(7) and 72(t)(2)(A)(ii)). In
addition, the charge will be waived on any minimum distribution required to be
distributed in accordance with Code Section 401(a)(9).
20
<PAGE> 80
The Company does not intend to waive the CDSC -- Class B and C for any
distributions from IRAs or other retirement plans not specifically described
above.
INVESTMENT LIMITATIONS
Each current Fund of the Company has adopted certain investment policies
which are either fundamental investment limitations or non-fundamental
investment limitations. Fundamental investment limitations may not be changed
without the approval of the lesser of: (1) at least 67% of the voting securities
of the Fund present at a meeting if the holders of more than 50% of the
outstanding voting securities of the Fund are present or represented by proxy,
or (2) more than 50% of the outstanding voting securities of the Fund.
Non-fundamental investment limitations may be changed by the Board of Directors
of the Company.
For the purpose of adopting fundamental investment limitations the current
Funds have been divided into three separate groups, which limitations apply only
to the Funds that form a part of that group. The groups are comprised as
follows:
Category I Funds: Global Fixed Income, Worldwide High
Income, High Yield, American Value,
Aggressive Equity, U.S. Real Estate,
Global Equity Allocation, Asian Growth,
Emerging Markets, Latin American,
International Magnum, Japanese Equity,
Growth and Income and European Equity
Funds.
Category II Funds: Equity Growth, Global Equity, Emerging
Markets Debt, Mid Cap Growth and Value
Funds.
Money Market Funds: Money Market, Tax-Free Money Market and
Government Obligations Money Market
Funds.
CATEGORY I FUNDS
The following are fundamental investment limitations with respect to the
Category I Funds. No Category I Fund will:
(1) invest in commodities, except that each of the Emerging Markets Fund,
Latin American Fund, European Equity Fund, American Value Fund, Aggressive
Equity Fund, Growth and Income and Worldwide High Income Fund may invest in
futures contracts and options to the extent that not more than 5% of its total
assets are required as deposits to secure obligations under futures contracts
and not more than 20% of its total assets are invested in futures contracts and
options at any time;
(2) purchase or sell real estate or real estate limited partnerships,
although it may purchase and sell securities of companies which deal in real
estate and may purchase and sell securities which are secured by interests in
real estate, and except that the U.S. Real Estate Fund may invest in real estate
limited partnership interests, but may not invest in such interests that are not
publicly traded;
(3) underwrite the securities of other issuers;
(4) invest for the purpose of exercising control over management of any
company;
(5) invest more than 5% of its total assets in securities of companies
which have (with predecessors) a record of less than three years' continuous
operation;
(6) except with respect to the Latin American Fund and U.S. Real Estate
Fund, acquire any securities of companies within one industry if, as a result of
such acquisition, more than 25% of the value of the Fund's total assets would be
invested in securities of companies within such industry; provided, however,
that there shall be no limitation on the purchase of obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities;
(7) write or acquire options or interests in oil, gas or other mineral
exploration or development programs or leases;
(8) purchase on margin or sell short except as specified above in (1) and
except that the Emerging Markets Fund, Latin American Fund, European Equity
Fund, Aggressive Equity Fund and Worldwide High Income Fund may enter into short
sales in accordance with its investment objective and policies;
(9) purchase or retain securities of an issuer if those officers and
Directors of the Company or its investment adviser owning more than 1/2 of 1% of
such securities together own more than 5% of such securities;
(10) borrow, except from banks and as a temporary measure for extraordinary
or emergency purposes and then, in no event, in excess of 10% of the Fund's
total assets valued at the lower of market or cost and a Fund may not purchase
additional securities when borrowings exceed 5% of total assets, except that the
Worldwide High Income Fund, Latin American Fund and Growth and Income Fund may
enter into reverse repurchase agreements in accordance with its investment
objective and policies and except that each of the Latin American Fund,
Aggressive Equity Fund and Worldwide High Income Fund may borrow amounts up to
33 1/3% of its total assets (including the amount borrowed), less all
liabilities and indebtedness other than the borrowing;
(11) pledge, mortgage, or hypothecate any of its assets to an extent greater
than 10% of its total assets at fair market value, except that each of the Latin
American, Aggressive Equity and Worldwide High Income Funds may pledge, mortgage
or hypothecate its assets to secure borrowings in amounts up to 33 1/3% of its
assets (including the amount borrowed);
21
<PAGE> 81
(12) invest more than an aggregate of 15% of the total assets of the Fund,
determined at the time of investment, in illiquid assets, including repurchase
agreements having maturities of more than seven days or invest in fixed time
deposits with a duration of from two business days to seven calendar days if
more than 10% of the Fund's total assets would be invested in these time
deposits; provided, however, that no Fund shall invest (i) more than 10% of its
total assets in securities subject to legal or contractual restrictions on
resale and (ii) in fixed time deposits with a duration of over seven calendar
days;
(13) invest its assets in securities of any investment company, except by
purchase in the open market involving only customary brokers' commissions or in
connection with mergers, acquisitions of assets or consolidations and except as
may otherwise be permitted by the 1940 Act;
(14) issue senior securities;
(15) make loans except (i) by purchasing bonds, debentures or similar
obligations (including repurchase agreements, subject to the limitation
described in (12) above) which are publicly distributed, and (ii) by lending its
portfolio securities to banks, brokers, dealers and other financial institutions
so long as such loans are not inconsistent with the 1940 Act or the Rules and
Regulations or interpretations of the SEC thereunder;
(16) except for the Global Fixed Income Fund, Emerging Markets Fund, Latin
American Fund, Aggressive Equity Fund and U.S. Real Estate Fund, purchase more
than 10% of any class of the outstanding securities of any issuer; and
(17) except for the Global Fixed Income Fund, Emerging Markets Fund, Latin
American Fund, U.S. Real Estate Fund and Worldwide High Income Fund, purchase
securities of an issuer (except obligations of the U.S. Government and its
instrumentalities) if as the result, with respect to 75% of its total assets,
more than 5% of the Funds total assets, at market value, would be invested in
the securities of such issuer.
The following are non-fundamental investment limitations with respect to the
Category I Funds. As a matter of non-fundamental policy, no Category I Fund
will:
(1) purchase warrants if, by reason of such purchase, more than 5% of the
value of the Fund's net assets would be invested in warrants valued at the lower
of cost or market. Included in this amount, but not to exceed 2% of the value of
the Fund's net assets, may be warrants that are not listed on a nationally
recognized stock exchange;
(2) invest in oil, gas or other mineral leases; and invest up to 25% of its
total assets in privately placed securities, provided that it may not invest
more than 15% of its total assets in illiquid securities, including securities
for which there is no readily available market, and provided further that it
will not invest more than 10% of its total assets in securities which are
restricted from sale to the public without registration under the Securities Act
of 1933, as amended (the "1933 Act"), except securities that are not registered
under the 1933 Act but that can be offered and sold to qualified institutional
buyers under Rule 144A under the 1933 Act.
Each of the Global Fixed Income, Latin American, Aggressive Equity, U.S.
Real Estate and Worldwide High Income Funds will diversify its holdings so that,
at the close of each quarter of its taxable year, (i) at least 50% of the market
value of the Fund's total assets is represented by cash (including cash items
and receivables), U.S. Government securities, and other securities, with such
other securities limited, in respect of any one issuer, for purposes of this
calculation to an amount not greater than 5% of the value of the Fund's total
assets and 10% of the outstanding voting securities of such issuer, and (ii) not
more than 25% of the value of its total assets is invested in the securities of
any one issuer (other than U.S. Government securities).
The percentage limitations contained in these restrictions apply at the time
of purchase of securities. Future Funds of the Company may adopt different
limitations.
CATEGORY II FUNDS
The following are fundamental investment limitations with respect to the
Category II Funds. No Category II Fund will:
(1) invest in physical commodities or contracts on physical commodities,
except that any Fund may acquire physical commodities as a result of ownership
of securities or other instruments and may purchase or sell options or futures
contracts or invest in securities or other instruments backed by physical
commodities;
(2) purchase or sell real estate, although each Fund may purchase and sell
securities of companies which deal in real estate, other than real estate
limited partnerships, and may purchase and sell marketable securities which are
secured by interests in real estate;
(3) make loans except: (i) by purchasing debt securities in accordance with
their respective investment objectives and policies, or entering into repurchase
agreements, subject to the limitations described in non-fundamental investment
limitation (8) below, (ii) by lending their portfolio securities, and (iii) by
lending portfolio assets to other Funds, banks, brokers, dealers and other
financial institutions, so long as such loans are not inconsistent with the 1940
Act, the rules, regulations, interpretations or orders of the SEC and its staff
thereunder;
22
<PAGE> 82
(4) except for the Emerging Markets Debt Fund, with respect to 75% of each
Fund's assets, purchase a security if, as a result, the Fund would hold more
than 10% (taken at the time of such investment) of the outstanding voting
securities of any issuer;
(5) except for the Emerging Markets Debt Fund, with respect to 75% of each
Fund's assets, purchase securities of any issuer if, as a result, more than 5%
of the Fund's total assets, taken at market value at the time of such
investment, would be invested in the securities of such issuer except that this
restriction does not apply to securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities;
(6) issue any class of senior security or sell any senior security of which
it is the issuer, except that each Fund may borrow money as a temporary measure
for extraordinary or emergency purposes, provided that such borrowings do not
exceed 33 1/3% of the Fund's total assets (including the amount borrowed) less
liabilities (exclusive of borrowings) and except that the Emerging Markets Debt
Fund may borrow from banks in an amount not in excess of 33 1/3% of its total
assets (including the amount borrowed) less liabilities in accordance with its
investment objective and policies. The term "senior security" shall not include
any temporary borrowings that do not exceed 5% of the value of a Fund's total
assets at the time the Fund makes such temporary borrowing. Notwithstanding the
foregoing limitations on issuing or selling senior securities and borrowing, a
Fund may engage in investment strategies that obligate it either to purchase
securities or segregate assets, or enter into reverse repurchase agreements,
provided that it will segregate assets to cover its obligations pursuant to such
transactions in accordance with applicable rules, orders, or interpretations of
the SEC or its staff. This investment limitation shall not preclude a Fund from
issuing multiple classes of shares in reliance on SEC rules or orders.
(7) underwrite the securities of other issuers (except to the extent that a
Fund may be deemed to be an underwriter within the meaning of the 1933 Act in
connection with the disposition of restricted securities);
(8) Acquire any securities of companies within one industry, if as a result
of such acquisition, more than 25% of the value of the Fund's total assets would
be invested in securities of companies within such industry; provided, however,
that there shall be no limitation on the purchase of obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities, when any
such Fund adopts a temporary defensive position.
The following are non-fundamental investment limitations with respect to the
Category II Funds. As a matter of non-fundamental policy, no Category II Fund
will:
(1) purchase on margin, except for use of short-term credit as may be
necessary for the clearance of purchases and sales of securities, provided that
each Fund may make margin deposits in connection with transactions in options,
futures, and options on futures;
(2) sell short unless the Fund (i) owns the securities sold short, (ii) by
virtue of its ownership of other securities, has the right to obtain securities
equivalent in kind and amount to the securities sold and, if the right is
conditional, the sale is made upon the same conditions, or (ii) maintains in a
segregated account on the books of the Fund's custodian an amount that, when
combined with the amount of collateral deposited with the broker in connection
with the short sale, equals the current market value of the security sold short
or such other amount as the SEC or its staff may permit by rule, regulation,
order, or interpretation, except that the Emerging Markets Debt Fund may from
time to time sell securities short without limitation but consistent with
applicable legal requirements as stated in its Prospectus; provided that
transactions in futures contracts and options are not deemed to constitute
selling securities short;
(3) purchase or retain securities of an issuer if those Officers and
Directors of the Company or any of its investment advisers owning more than 1/2
of 1% of such securities together own more than 5% of such securities;
(4) borrow money other than from banks or other Funds of the Company,
provided that a Fund may borrow from banks or other Funds of the Company so long
as such borrowing is not inconsistent with the 1940 Act or the rules,
regulations, interpretations or orders of the SEC and its staff thereunder; or,
except for the Emerging Markets Debt Fund, purchase additional securities when
borrowings exceed 5% of total assets;
(5) pledge, mortgage or hypothecate assets in an amount greater than 10% of
its total assets in the case of the Equity Growth, Global Equity and Emerging
Markets Debt Funds or 50% of its total assets in the case of the Mid Cap Growth
and Value Funds, provided that each Fund may segregate assets without limit in
order to comply with the requirements of Section 18(f) of the 1940 Act and
applicable rules, regulations or interpretations of the SEC and its staff;
(6) invest more than an aggregate of 15% of the net assets of the Fund,
determined at the time of investment, in illiquid securities provided that this
limitation shall not apply to any investment in securities that are not
registered under the 1933 Act but that can be sold to qualified institutional
investors in accordance with Rule 144A under the 1933 Act and are determined to
be liquid securities under guidelines or procedures adopted by the Board of
Directors;
(7) invest for the purpose of exercising control over management of any
company;
(8) invest its assets in securities of any investment company, except by
purchase in the open market involving only customary brokers' commissions or in
connection with mergers, acquisitions of assets or consolidations and except as
may otherwise be permitted by the 1940 Act;
23
<PAGE> 83
(9) in the case of the Equity Growth, Global Equity, and Emerging Markets
Debt Funds, make loans as described in fundamental investment limitations 3(ii)
and 3(iii), above, in an amount exceeding 33 1/3% of its total assets; and
(10) in the case of the Emerging Markets Debt Fund, purchase a security if,
as a result, with respect to 50% of its assets, it would hold more than 10% of
the outstanding voting securities of an issuer or have more than 5% of its total
assets invested in securities of an issuer or, with respect to 100% of its
assets, it would have more than 25% of its total assets invested in securities
of the issuer, except that these limitations do not apply to investments in U.S.
Government securities.
Unless otherwise indicated, if a percentage limitation on investment or
utilization of assets as set forth above is adhered to at the time an investment
is made, a later change in percentage resulting from changes in the value or
total cost of the Fund's assets will not be considered a violation of the
restriction, and the sale of securities will not be required.
MONEY MARKET FUNDS
The following are fundamental investment limitations with respect to the
Money Market Funds. No Money Market Fund will:
(1) invest in commodities;
(2) purchase or sell real estate or real estate limited partnerships,
although it may purchase and sell securities of companies which deal in real
estate and may purchase and sell securities which are secured by interests in
real estate;
(3) underwrite the securities of other issuers;
(4) invest for the purpose of exercising control over management of any
company;
(5) invest more than 5% of its total assets in securities of companies
which have (with predecessors) a record of less than three years' continuous
operation, except that the Tax-Free Money Market Fund may not invest in private
activity bonds where the payment of principal and interest are the
responsibility of a company (including its predecessors) with less than three
years of continuous operations;
(6) acquire any securities of companies within one industry if, as a result
of such acquisition, more than 25% of the value of the Fund's total assets would
be invested in securities of companies within such industry; provided, however,
that there shall be no limitation on the purchase of obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities, or (in the
case of the Money Market Fund) instruments issued by U.S. banks or their
domestic branches;
(7) write or acquire options or interests in oil, gas or other mineral
exploration or development programs or leases;
(8) issue senior securities or borrow money, except for borrowing money
from banks for temporary purposes or (with respect to the Money Market Fund and
Government Obligations Fund) for reverse repurchase agreements, and then in
amounts not in excess of 10% of the value of the Fund's total assets at the time
of such borrowing, and only if after such borrowing there is asset coverage of
at least 300% for all borrowings of the Fund; or mortgage, pledge, hypothecate
or in any manner transfer as security for indebtedness any securities owned or
held by the Fund, any assets except as may be necessary in connection with
permitted borrowings and then, in amounts not in excess of 10% of the value of
the Fund's total assets at the time of the borrowing; or purchase portfolio
securities while borrowings in excess of 5% of the Fund's net assets are
outstanding. (This borrowing provision is not for investment leverage, but
solely to facilitate management of the Fund's securities by enabling the Fund to
meet redemption requests where the liquidation of portfolio securities is deemed
to be disadvantageous or inconvenient.);
(9) purchase securities on margin, except for short-term credit necessary
for clearance of portfolio transactions;
(10) make short sales of securities or maintain a short position or write or
sell puts, calls, straddles, spreads or combinations thereof;
(11) with respect to the Money Market Fund, invest in other investment
companies except to the extent permitted by the 1940 Act, provided that the Fund
may invest only in investment companies that are unaffiliated with the Fund; and
with respect to the Tax-Free Money Market Fund and Government Obligations Money
Market Fund, invest more than 10% of the value of the Fund's assets in other
investment companies that are unaffiliated with the Fund and then no more than
5% of the Fund's assets may be invested in any one money market fund;
(12) with respect to the Money Market Fund, purchase any securities other
than Money-Market Instruments, some of which may be subject to repurchase
agreements, but the Fund may make interest-bearing savings deposits in amounts
not in excess of 5% of the value of the Fund's assets and may make time
deposits;
(13) with respect to the Tax-Free Money Market Fund, under normal market
conditions invest less than 80% of its net assets in securities the interest on
which is exempt from the regular federal income tax and does not constitute an
item of tax preference for purposes of the federal alternative minimum tax
("Tax-Exempt Interest");
24
<PAGE> 84
(14) with respect to the Government Obligations Money Market Fund, purchase
securities other than U.S. Treasury bills, notes and other obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities, and
repurchase agreements relating to such obligations. There is no limit on the
amount of the Fund's assets which may be invested in the securities of any one
issuer of obligations that the Fund is permitted to purchase;
(15) purchase the securities of any one issuer (other than securities issued
or guaranteed by the U.S. Government, its agencies or instrumentalities, or
securities subject to unconditional demand features issued by a non-controlled
person) if immediately after and as a result at the time of purchase more than
5% of the Fund's total assets would be invested in the securities of such
issuer; except that, under applicable regulations, the Fund may invest more than
5% of its total assets in any one issuer for up to three business days;
(16) enter into repurchase agreements with more than seven days maturity if,
as a result, more than 10% of the value of its net assets would be invested in
these agreements and other investments for which market quotations are not
readily available or which are otherwise illiquid; and
(17) make loans, except that a Fund may purchase or hold debt obligations in
accordance with its investment objectives, policies and limitations and, with
respect to the Money Market and Government Obligations Money Market Funds, may
enter into repurchase agreements for securities, and may lend portfolio
securities against collateral, consisting of cash or securities which are
consistent with the Fund's permitted investments, which is equal at all times to
at least 100% of the value of the securities loaned. There is no investment
restriction on the amount of securities that may be loaned.
With respect to limitation (6) above concerning industry concentration, the
Money Market Fund will consider wholly-owned finance companies to be in the
industries of their parents if their activities are primarily related to
financing the activities of the parents, and will divide utility companies
according to their services. For example, gas, gas transmission, electric and
gas, electric and telephone will each be considered a separate industry.
The following are non-fundamental investment limitations with respect to the
Money Market Funds. As a matter of non-fundamental policy, no Money Market Fund
will:
(1) purchase puts, calls, straddles, spreads and any combination thereof if
by reason thereof the value of its aggregate investment in such derivative
securities will exceed 5% of its respective total assets;
(2) purchase warrants if, by reason of such purchase, more than 5% of the
value of the Fund's net assets would be invested in warrants valued at the lower
of cost or market. Included in this amount, but not to exceed 2% of the value of
the Fund's net assets, may be warrants that are not listed on a nationally
recognized stock exchange; and
(3) invest in oil, gas or other mineral leases.
The percentage limitations contained in these restrictions apply at the time
of purchase of securities. Future Funds of the Company may adopt different
limitations.
DETERMINING MATURITIES OF CERTAIN INSTRUMENTS
Generally, the maturity of a portfolio instrument shall be deemed to be the
period remaining until the date noted on the face of the instrument as the date
on which the principal amount must be paid, or in the case of an instrument
called for redemption, the date on which the redemption payment must be made.
However, instruments having variable or floating interest rates or demand
features may be deemed to have remaining maturities as follows: (1) a government
obligation with a variable rate of interest readjusted no less frequently than
annually may be deemed to have a maturity equal to the period remaining until
the next readjustment of the interest rate; (b) an instrument with a variable
rate of interest, the principal amount of which is scheduled on the face of the
instrument to be paid in one year or less, may be deemed to have a maturity
equal to the period remaining until the next readjustment of the interest rate;
(c) an instrument with a variable rate of interest that is subject to a demand
feature may be deemed to have a maturity equal to the longer of the period
remaining until the next readjustment of the interest rate or the period
remaining until the principal amount can be recovered through demand; (d) an
instrument with a floating rate of interest that is subject to a demand feature
may be deemed to have a maturity equal to the period remaining until the
principal amount can be recovered through demand; and (e) a repurchase agreement
may be deemed to have a maturity equal to the period remaining until the date on
which the repurchase of the underlying securities is scheduled to occur, or
where no date is specified, but the agreement is subject to demand, the notice
period applicable to a demand for the repurchase of the securities.
MANAGEMENT OF THE COMPANY
OFFICERS AND DIRECTORS
The Company's Officers, under the supervision of the Board of Directors,
manage the day-to-day operations of the Company. The Directors set broad
policies for the Company and choose its Officers. Two Directors and all of the
Officers of the Company are directors, officers or employees of the Adviser or
its affiliates. The other Directors have no affiliation with the Adviser,
Distributor or administrative services providers or their affiliates. The
Directors are also Trustees of other open-end
25
<PAGE> 85
funds advised by the Adviser or Van Kampen American Capital Asset Management,
Inc. ("Asset Management") (except for the Exchange Fund and the Common Sense
Trust) (collectively with the Company, the "Fund Complex") and Mr. Whalen is
also Trustee of many closed-end funds that are similarly managed. Officers of
the Company are generally officers of the other funds in the Fund Complex and
some or all of the other investment companies managed, administered, advised or
distributed by the Adviser or its affiliates. A list of the Directors and
Officers of the Company and a brief statement of their present positions and
principal occupations during the past five years is set forth below. Messrs.
Hegel, McDonnell, Nyberg, Wood, Sullivan, Dalmaso, Martin, Wetherell and Hill
are located at One Parkview Plaza, Oakbrook Terrace, IL 60181. The Company's
officers other than Messrs. Hegel, McDonnell, Nyberg, Wood, Sullivan, Dalmaso,
Martin, Wetherell, Hill and Stadler and Ms. Haigney are located at 2800 Post Oak
Blvd., Houston, TX 77056.
<TABLE>
<CAPTION>
NAME, ADDRESS AND
DATE OF BIRTH POSITION WITH COMPANY PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
- --------------------------- --------------------------------------------------------------------------------------
<S> <C> <C>
J. Miles Branagan Director Private investor, Co-founder, and prior to August 1996,
1632 Morning Mountain Road Chairman, Chief Executive Officer and President, MDT
Raleigh, NC 27614 Corporation (now known as Getinge/Castle, Inc. a subsidiary
Date of Birth: 07/14/32 of Getinge Industrier AB), a company which develops,
manufactures, markets and services medical and scientific
equipment. Director/Trustee of each of the funds in the Fund
Complex.
Richard M. DeMartini* Director President and Chief Operating Officer, Individual Asset
Dean Witter Capital Management Group, a division of Morgan Stanley, Dean Witter,
Two World Trade Center Discover & Co. ("MSDWD"). Member of the MSDWD Management
New York, NY 10048 Committee. Director of the InterCapital Funds. Trustee of
Date of Birth: 10/12/52 the TCW/DW Funds. Former Chairman of the Board of the NASDAQ
Stock Market, Inc. Former Vice Chairman of the Board of the
National Association of Securities Dealers, Inc.
Director/Trustee of each of the Funds in the Fund Complex.
Linda Hutton Heagy Director Co-Managing Partner of Heidrick & Struggles, an executive
Sears Tower search firm. Prior to 1997, Partner, Paul Ray Berndtson,
233 South Wacker Drive Inc., an executive recruiting and management consulting
Suite 7000 firm. Formerly, Executive Vice President of ABN AMRO, N.A.,
Chicago, IL 60606 a Dutch bank holding company. Prior to 1992, Executive Vice
Date of Birth: 06/03/48 President of La Salle National Bank. Trustee on The
University of Chicago Hospitals Board, The International
House Board and the Women's Board of the University of
Chicago. Director/ Trustee of each of the funds in the Fund
Complex.
R. Craig Kennedy Director President and Director, German Marshall Fund of the United
11 DuPont Circle, N.W. States. Formerly, advisor to the Dennis Trading Group Inc.
Washington, D.C. 20036 Prior to 1992, President and Chief Executive Officer.
Date of Birth: 02/29/52 Director and Member of the Investment Committee of the Joyce
Foundation, a private foundation. Director/Trustee of each
of the funds in the Fund Complex.
Jack E. Nelson Director President, Nelson Investment Planning Services, Inc., a
423 Country Club Drive financial planning company and registered investment
Winter Park, FL 32789 adviser. President, Nelson Investment Brokerage Services
Date of Birth: 02/13/36 Inc., a member of the National Association of Securities
Dealers, Inc. ("NASD") and Securities Investors Protection
Corp. ("SIPC"). Director/Trustee of each of the funds in the
Fund Complex.
</TABLE>
26
<PAGE> 86
<TABLE>
<CAPTION>
NAME, ADDRESS AND
DATE OF BIRTH POSITION WITH COMPANY PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
- --------------------------- --------------------------------------------------------------------------------------
<S> <C> <C>
Don G. Powell* Director Chairman, President, Chief Executive Officer and a Director
2800 Post Oak Blvd. of Van Kampen American Capital, Inc. ("VKAC"). Chairman,
Houston, TX 77056 Chief Executive Officer and a Director of the Adviser, Asset
Date of Birth: 10/19/39 Management and the Distributor. Chairman and a Director of
ACCESS Investors Services, Inc. ("ACCESS"). Director or
officer of certain other subsidiaries of VKAC. Chairman of
the Board of Governors and the Executive Committee of the
Investment Company Institute. Prior to November, 1996,
President, Chief Executive Officer and a Director of VK/AC
Holding, Inc. ("VKAC Holding"). Director/Trustee of each of
the funds in the Fund Complex advised by the Adviser and
prior to July 1996 President, Chief Executive Officer and a
Trustee/Director of funds in the Fund Complex at that time.
Jerome L. Robinson Director President, Robinson Technical Products Corporation, a
115 River Road manufacturer and processor of welding alloys, supplies and
Edgewater, NJ 07020 equipment. Director, Pacesetter Software, a software
Date of Birth: 10/10/22 programming company specializing in white collar
productivity. Director, Panasia Bank. Director/Trustee of
each of the funds in the Fund Complex.
Phillip Rooney Director Vice Chairman and Director of The Servicemaster Company, a
One Service Master Way business and consumer services company, since May 1997.
Downers Grove, IL 60515 Private investor, Director, Illinois Tool Works, Inc., a
Date of Birth: 07/08/44 manufacturing company. Director, Urban Shopping Centers
Inc., a retail mall management company; Director, Stone
Container Corp., a paper manufacturing company. Trustee,
University of Notre Dame. Formerly, President and Chief
Executive Officer, Waste Management, Inc., an environmental
services company, and prior to that, President and Chief
Operating Officer, Waste Management, Inc. Director/Trustee
of each of the funds in the Fund Complex.
Fernando Sisto Director Professor Emeritus and prior to 1995, Dean of the Graduate
155 Hickory Lane School, Stevens Institute of Technology. Director, Dynalysis
Closter, NJ 07624 of Princeton, a firm engaged in engineering research.
Date of Birth: 08/02/24 Director/ Trustee of each of the funds in the Fund Complex.
Wayne W. Whalen* Director and Chairman of Partner in the law firm of Skadden, Arps, Slate, Meagher &
333 West Wacker Drive the Board Flom (Illinois), legal counsel to the funds in the Fund
Chicago, IL 60606 Complex, open-end funds advised by Van Kampen American
Date of Birth: 08/22/39 Capital Management, Inc. and closed-end funds advised by the
Adviser. Director/Trustee of each of the funds in the Fund
Complex, open-end funds advised by Van Kampen Capital
Management, Inc. and closed-end funds advised by the
Adviser.
Dennis J. McDonnell President President and Director of VKAC. President, Chief Operating
Date of Birth: 05/20/42 Officer and a Director of the Adviser and American Capital.
Director or officer of certain other subsidiaries of VKAC.
Prior to November 1996, Executive Vice President and a
Director of VKAC Holding. President of each of the funds in
the Fund Complex. President, Chairman of the Board and
Trustee of other investment companies advised by the
Adviser, Asset Management or their affiliates.
</TABLE>
27
<PAGE> 87
<TABLE>
<CAPTION>
NAME, ADDRESS AND
DATE OF BIRTH POSITION WITH COMPANY PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
- --------------------------- --------------------------------------------------------------------------------------
<S> <C> <C>
Ronald A. Nyberg Vice President and Executive Vice President, General Counsel and Secretary of
Date of Birth: 07/29/53 Secretary VKAC. Executive Vice President, General Counsel, Assistant
Secretary and a Director of the Adviser, Asset Management
and the Distributor. Executive Vice President, General
Counsel and Assistant Secretary of ACCESS. Director or
officer of certain other subsidiaries of VKAC. Director of
ICI Mutual Insurance Co., a provider of insurance to members
of the Investment Company Institute. Prior to November 1996,
Executive Vice President, General Counsel and Secretary of
VKAC Holding. Vice President and Secretary of each of the
funds in the Fund Complex and certain other investment
companies advised by the Adviser, Asset Management or their
affiliates.
Peter W. Hegel Vice President Executive Vice President of the Adviser. Director of Asset
Date of Birth: 06/25/56 Management. Officer of certain other subsidiaries of VKAC.
Vice President of each of the funds in the Fund Complex and
certain other investment companies advised by the Adviser,
Asset Management or their affiliates.
Alan T. Sachtleben Vice President Executive Vice President of the Adviser and Asset
Date of Birth: 04/20/42 Management. Director of Asset Management, Director or
officer of certain other subsidiaries of VKAC. Vice
President of each of the funds in the Fund Complex and
certain other investment companies advised by the Adviser,
Asset Management or their affiliates.
Joseph P. Stadler Vice President Vice President of Morgan Stanley Asset Management Inc.;
1221 Avenue of the Americas Officer of various investment companies managed by Morgan
New York, NY 10020 Stanley Asset Management Inc. Previously with Price
Date of Birth: 06/07/54 Waterhouse LLP (accounting).
Paul R. Wolkenberg Vice President Executive Vice President of VKAC, Asset Management and the
Date of Birth: 11/10/44 Distributor. President, Chief Executive Officer and a
Director of ACCESS. Director or officer of certain other
subsidiaries of VKAC. Vice President of each of the funds in
the Fund Complex and certain other investment companies
advised by the Adviser, Asset Management or their
affiliates.
Edward C. Wood, III Vice President and Chief Senior Vice President of the Adviser and Asset Management.
Date of Birth: 01/11/56 Financial Officer Vice President and Chief Financial Officer of each of the
funds in the Fund Complex and certain other investment
companies advised by the Adviser, Asset Management or their
affiliates.
Curtis W. Morell Vice President and Chief Senior Vice President of the Adviser and Asset Management.
Date of Birth: 08/04/46 Accounting Officer Vice President and Chief Accounting Officer of each of the
funds in the Fund Complex and certain other investment
companies advised by the Adviser, Asset Management or their
affiliates.
John L. Sullivan Treasurer First Vice President of the Adviser and Asset Management.
Date of Birth: 08/20/55 Treasurer of each of the funds in the Fund Complex and
certain other investment companies advised by the Adviser,
Asset Management or their affiliates.
Tanya M. Loden Controller Vice President of the Adviser and Asset Management.
Date of Birth: 11/19/59 Controller of each of the funds in the Fund Complex and
other investment companies advised by the Adviser, Asset
Management or the affiliates.
</TABLE>
28
<PAGE> 88
<TABLE>
<CAPTION>
NAME, ADDRESS AND
DATE OF BIRTH POSITION WITH COMPANY PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
- --------------------------- --------------------------------------------------------------------------------------
<S> <C> <C>
Nicholas Dalmaso Assistant Secretary Vice President and Senior Attorney of VKAC, Vice President
Date of Birth: 03/01/65 and Assistant Secretary of the Adviser, Asset Management and
the Distributor. Officer of certain other subsidiaries of
VKAC. Assistant Secretary of each of the funds in the Fund
Complex and other investment companies advised by the
Adviser, Asset Management or the affiliates.
Huey P. Falgout, Jr. Assistant Secretary Assistant Vice President and Senior Attorney of VKAC,
Date of Birth: 11/15/63 Assistant Vice President and Assistant Secretary of the
Adviser, Asset Management, the Distributor and ACCESS.
Officer of certain other subsidiaries of VKAC, Assistant
Secretary of each of the funds in the Fund Complex and other
investment companies advised by the Adviser, Asset
Management or the affiliates.
Scott E. Martin Assistant Secretary Senior Vice President, Deputy General Counsel and Assistant
Date of Birth: 08/20/56 Secretary of VKAC, Senior Vice President, Deputy General
Counsel and Secretary of the Adviser, Asset Management, the
Distributor and ACCESS. Officer of certain other
subsidiaries of VKAC. Prior to November 1996, Senior Vice
President, Deputy General Counsel and Assistant Secretary of
VKAC Holding. Assistant Secretary of each of the funds in
the Fund Complex and other investment companies advised by
the Adviser, Asset Management or the affiliates.
Weston B. Wetherell Assistant Secretary Vice President, Associate General Counsel and Assistant
Date of Birth: 06/15/56 Secretary of VKAC, the Adviser, Asset Management and the
Distributor. Officer of certain other subsidiaries of VKAC.
Assistant Secretary of each of the funds in the Fund Complex
and other investment companies advised by the Adviser, Asset
Management or the affiliates.
Joanna Haigney Assistant Treasurer Assistant Vice President, Senior Manager of Fund
73 Tremont Street Administration and Compliance Services, Chase Global Funds
Boston, MA 02108 Services Company; Officer of various investment companies
Date of Birth: 10/10/66 managed by Morgan Stanley Asset Management Inc. Previously
with Coopers & Lybrand LLP.
Steven M. Hill Assistant Treasurer Assistant Vice President of the Adviser and Asset
Date of Birth: 10/16/64 Management. Assistant Treasurer of each of the funds in the
Fund Complex and other investment companies advised by the
Adviser, Asset Management or the affiliates.
M. Robert Sullivan Assistant Controller Assistant Vice President of the Adviser and Asset
Date of Birth: 03/30/33 Management. Assistant Controller of each of the funds in the
Fund Complex and other investment companies advised by the
Adviser, Asset Management or the affiliates.
</TABLE>
- --------------
* Such Directors are "interested persons" (within the meaning of Section
2(a)(19) of the 1940 Act). Messrs. DeMartini and Powell are interested persons
of the Adviser and the Funds because of their affiliation with the Adviser.
Mr. Whalen is an interested person of the Funds by reason of his firm acting
as legal counsel to the Funds.
Prior to the election of the current Directors on July 2, 1997, Messrs.
Barton M. Biggs, John D. Barrett, II, Gerard E. Jones, Warren J. Olsen, Andrew
McNally, IV, Samuel T. Reeves, Fergus Reid, Frederick O. Robertshaw and
Frederick B. Whittemore (the "Prior Directors") served as directors to the
Company. Until July 2, 1997, the Company was part of an open-end fund complex,
which also consisted of Morgan Stanley Institutional Fund, Inc. and Morgan
Stanley Universal Funds, Inc. (the "Prior Complex"). For the fiscal year ended
June 30, 1997, each director who was not an "interested person" of the Funds was
being paid an annual aggregate fee of $55,000 plus expenses for service as a
director of the funds in the Prior Complex and an additional annual aggregate
fee of $10,000 for service on the audit committee of the funds in the Prior
Complex. For the fiscal year ended June 30, 1997, individual trustees received
aggregate fees from the Funds and from the Prior Complex as shown in the table
below entitled "Compensation Table--Prior Directors".
As of the date of this SAI, each of the Directors is a director/trustee of
each of the 65 operating funds in the Fund Complex which includes the Funds (for
purposes of this action, the "MS Funds"), other open-end funds advised by the
Adviser (each a "VK Fund" and collectively the "VK Funds") and open-end funds
advised by Asset Management (each an "AC Fund" and
29
<PAGE> 89
collectively the "AC Funds"). Each director/trustee who is not an affiliated
person of VKAC, the Adviser, Asset Management, the Distributor, ACCESS or Morgan
Stanley (each a "Non-Affiliated Trustee") is compensated by an annual retainer
and meeting fees for services to the funds in the Fund Complex. Each fund in the
Fund Complex provides a deferred compensation plan to its Non-Affiliated
Trustees that allows director/trustees to defer receipt of their compensation
and earn a return on such deferred amounts based upon the return of the common
shares of the funds in the Fund Complex as more fully described below. As of the
date hereof, each VK Fund and AC Fund in the Fund Complex provides a retirement
plan to its Non-Affiliated Trustees that provides Non-Affiliated Trustees with
compensation after retirement, provided that certain eligibility requirements
are met as more fully described below. As of January 1, 1998, it is anticipated
that each Fund in the Fund Complex, except the money market series of the MS
Funds, will provide such a retirement plan to its Non-Affiliated Trustee.
The trustees recently reviewed and adopted a standardized compensation and
benefits program for each fund in the Fund Complex. Effective January 1, 1998,
the compensation of each Non-Affiliated Trustee includes an annual retainer in
an amount equal to $50,000 per calendar year, due in four quarterly installments
on the first business day of each quarter. Payment of the annual retainer is
allocated among the funds in the Fund Complex (except the money market series of
the MS Funds) on the basis of the relative net assets of each fund as of the
last business day of the preceding calendar quarter. Effective January 1, 1998,
the compensation of each Non-Affiliated Trustee includes a per meeting fee from
each fund in the Fund Complex (except the money market series of the MS Funds)
in the amount of $200 per quarterly or special meeting attended by the
Non-Affiliated Trustee, due on the date of the meeting, plus reasonable expenses
incurred by the Non-Affiliated Trustee in connection with his or her services as
a trustee, provided that no compensation will be paid in connection with certain
telephonic special meeting.
For the period until December 31, 1997, the compensation of each
Non-Affiliated Trustee from each VK Fund in the Fund Complex includes an annual
retainer in an amount equal to $2,500 per calendar year, due in four quarterly
installments on the first business day of each calendar quarter. Each
Non-Affiliated Trustee receives a per meeting fee from each VK Fund in the
amount of $125 per regular quarterly meeting attended by the Non-Affiliated
Trustee, due on the date of such meeting, plus reasonable expenses incurred by
the Non-Affiliated Trustee in connection with his or her services as a
director/trustee, provided that no compensation will be paid in connection with
certain telephonic special meetings.
For the period until December 31, 1997, the compensation of each
Non-Affiliated Trustee from the AC Funds in the Fund Complex includes an annual
retainer in an amount equal to $35,000 per calendar year, due in four quarterly
installments on the first business day of each calendar quarter. The AC Funds
pay each Non-Affiliated Trustee a per meeting fee in the amount of $2,000 per
regular quarterly meeting attended by the Non-Affiliated Trustee, due on the
date of such meeting, plus reasonable expenses incurred by the Non-Affiliated
Trustee in connection with his or her services as a director/trustee. Payment of
the annual retainer and the regular meeting fee is allocated among all of the AC
Funds (i) 50% on the basis of the relative net assets of each AC Fund to the
aggregate net assets of all the AC Funds and (ii) 50% equally to each AC Fund,
in each case as of the last business day of the preceding calendar quarter. Each
AC Fund which is the subject of a special meeting of the director/trustees
generally pays each Non-Affiliated Trustee a per meeting fee in the amount of
$125 per special meeting attended by the Non-Affiliated Trustee, due on the date
of such meeting, plus reasonable expenses incurred by the Non-Affiliated Trustee
in connection with his on her services as a director/trustee, provided that no
compensation will be paid in connection with certain telephonic special
meetings.
For the period from July 2, 1997 up to and including December 31, 1997, the
compensation of each Non-Affiliated Trustee from the MS Funds is intended to be
based generally on the compensation amounts and methodology used by such funds
prior to their joining the current Fund Complex on July 2, 1997. Each
trustee/director was elected as a director of the MS Funds on July 2, 1997.
Prior to July 2, 1997, the MS Funds were part of another fund complex (the
"Prior Complex") and the former directors of the MS Funds were paid an aggregate
fee allocated among the funds in the Prior Complex that resulted in individual
directors receiving total compensation between approximately $8,000 to $10,000
from the MS Funds during such funds' last fiscal year.
Each Non-Affiliated Trustee generally can elect to defer receipt of all or a
portion of the compensation earned by such Non-Affiliated Trustee until
retirement. Amounts deferred are retained by the fund and earn a rate of return
determined by reference to the return on the common shares of such fund or other
funds in the Fund Complex as selected by the respective Non-
Affiliated Trustee, with the same economic effect as if such Non-Affiliated
Trustee had invested in one or more funds in the Fund Complex. To the extent
permitted by the 1940 Act, the fund may invest to securities of those selected
by the Non-Affiliated Trustees in order to match the deferred compensation
obligation. The deferred compensation plan is not funded and obligations
thereunder represent general unsecured claims against the general assets of the
Company.
Each VK Fund and AC Fund in the Fund Complex has adopted a retirement plan.
Under the retirement plan, a Non-Affiliated Trustee who is receiving
director/trustee's compensation from the fund prior to such Non-Affiliated
Trustee's retirement, has at least 10 years of service (including years of
service prior to adoption of the retirement plan) and retires at or after
attaining the age of 60, is eligible to receive a retirement benefit equal to
$2,500 per year for each of the ten years following such director/trustee's
retirement from the fund. Trustees retiring prior to the age of 60 or with fewer
than 10 years but more than 5 years of service may receive reduced retirement
benefits from the fund. The retirement plan contains a Fund Complex retirement
benefit cap of $60,000 per year.
30
<PAGE> 90
The following table shows aggregate compensation paid to each of the
Company's Prior Directors by the Company and the Prior Complex, respectively,
for the fiscal year from July 1, 1996 to June 30, 1997.
COMPENSATION TABLE
PRIOR DIRECTORS
<TABLE>
<CAPTION>
PENSION OR TOTAL COMPENSATION
AGGREGATE RETIREMENT BENEFITS ESTIMATED ANNUAL FROM PRIOR COMPLEX
COMPENSATION ACCRUED AS PART OF BENEFITS UPON PAID TO
NAME OF PERSON, POSITION FROM FUNDS FUND EXPENSES RETIREMENT DIRECTORS++
- -------------------------------------------------- --------------- ------------------- ---------------- ------------------
<S> <C> <C> <C> <C>
Barton M. Biggs*
Director and Chairman of the Board................ $ 0 $0 $0 $ 0
John D. Barrett, II,*
Director.......................................... $10,070 $0 $0 $73,767
Gerard E. Jones,*
Director.......................................... $10,070 $0 $0 $80,867
Warren J. Olsen,*
Director and President............................ $ 0 $0 $0 $ 0
Andrew McNally, IV,*
Director.......................................... $ 0+ $0 $0 $63,767
Samuel T. Reeves,*
Director.......................................... $ 0+ $0 $0 $63,767
Fergus Reid,*
Director.......................................... $ 0+ $0 $0 $80,867
Frederick O. Robertshaw,**
Director.......................................... $ 8,714 $0 $0 $63,767
</TABLE>
- --------------
* Elected Director as of June 28, 1995; retired as of July 2, 1997.
+ The total amount of deferred compensation for Samuel T. Reeves, Fergus Reid
and Andrew McNally, IV was $8,714, $10,070, and $8,714, respectively.
++ The Prior Complex consisted of four investment companies including the
Company.
31
<PAGE> 91
The following table shows aggregate compensation paid to each of the
Company's current Directors by the Company for the fiscal year from July 1, 1996
to June 30, 1997 and from the Fund Complex for the calendar year ended December
31, 1996.
COMPENSATION TABLE
CURRENT DIRECTORS
<TABLE>
<CAPTION>
PENSION OR TOTAL COMPENSATION
AGGREGATE RETIREMENT BENEFITS ESTIMATED ANNUAL FROM FUND COMPLEX
COMPENSATION ACCRUED AS PART OF BENEFITS UPON PAID TO
NAME FROM FUNDS EXPENSES RETIREMENT DIRECTOR/TRUSTEE+
- -------------------------------------------------- --------------- ------------------- ---------------- ------------------
<S> <C> <C> <C> <C>
J. Miles Branagan*................................ $ 0** $0 $0 $104,875
Richard M. DeMartini*............................. $ 0** $0 $0 16,875
Linda Hutton Heagy*............................... $ 0** $0 $0 104,875
R. Craig Kennedy*................................. $ 0** $0 $0 104,875
Jack E. Nelson*................................... $ 0** $0 $0 97,875
Don G. Powell*.................................... $ 0** $0 $0 22,000
Jerome L. Robinson*............................... $ 0** $0 $0 101,625
Phillip Rooney*................................... $ 0** $0 $0 22,000
Dr. Fernando Sisto*............................... $ 0** $0 $0 104,875
Wayne W. Whalen*.................................. $ 0** $0 $0 104,875
</TABLE>
- --------------
* Elected Director as of July 2, 1997.
** Director received no compensation from the Funds for the fiscal year ended
June 30, 1997. See discussion preceding the table regarding anticipated
compensation for the fiscal year from July 1, 1997 to June 30, 1998.
+ The amounts in this column represent aggregate compensation from the 51 funds
in the Fund Complex as of December 31, 1996. Because funds in the Fund Complex
have different fiscal year-ends, the information for this column is presented
on a calendar year basis. The amounts for the calendar year ending December
31, 1997 will most likely be higher reflecting the addition of the Funds to
the Fund Complex. The Adviser and its affiliates also serve as investment
adviser for other investment companies; however, with the exception of Messrs.
Powell and Whalen, the director/trustees are not director/trustees of such
investment companies. Combining the Fund Complex with other investment
companies advised by the Adviser and its affiliates, Mr. Whalen received total
compensation of $243,375 during the calendar year ended December 31, 1996.
As of October 16, 1997, the Directors and officers as a group owned less
than 1% of the shares of the Funds.
INVESTMENT ADVISORY AND ADMINISTRATIVE AGREEMENTS
The Adviser is an indirect wholly-owned subsidiary of Morgan Stanley, Dean
Witter, Discover & Co. ("MSDWD"). The Adviser is a registered investment adviser
under the Investment Advisers Act of 1940, as amended, and has its offices at
One Parkview Plaza, Oakbrook Terrace, IL 60181 and 2800 Post Oak Boulevard,
Houston, TX 77056. Pursuant to the advisory agreement (the "Advisory Agreement")
between the Adviser and the Company, the Adviser provides investment services to
the Funds. Additionally, pursuant to the administration agreement (the
"Administration Agreement") between the Adviser and the Company, the Adviser
(the "Administrator") provides administrative services to the Funds. The
Advisory Agreement and Administration Agreement became effective as of July 2,
1997. The current Advisory Agreement and Administration Agreement are described
in more detail in the Company's prospectus. Prior to July 2, 1997, MSAM
(described below) was the adviser and administrator of each of the Funds except
Mid Cap Growth and Value Funds which were advised by MAS (described below). The
fees and expenses under the new Advisory Agreement and new Administration
Agreement are substantially similar to the predecessor agreements.
MSAM is an indirect wholly-owned subsidiary of MSDWD and acts as sub-adviser
pursuant to an investment sub-advisory agreement between MSAM and the Adviser to
each of the Company's Funds, other than the Mid Cap Growth and Value Funds. The
principal offices of the MSAM are located at 1221 Avenue of the Americas, New
York, NY 10020. As compensation for advisory services to the non-money Funds of
the Company for the fiscal years ended June 30, 1995, June 30, 1996 and June 30,
1997, MSAM, the prior adviser, earned fees of approximately $4,571,000 (and
voluntarily waived a portion of such fees equal to approximately $868,000),
$7,177,000 (and voluntarily waived a portion of such fees equal to approximately
$1,328,000) and $10,409,000 (and voluntarily waived a portion of such fees equal
to approximately $1,716,000), respectively. Further, for the fiscal years ended
June 30, 1995, June 30, 1996 and June 30, 1997, MSAM, as adviser for the PCS
Money Market Portfolio (the "Predecessor Money Market Portfolio") the
predecessor to the Money Market Fund received $611,754, $759,398 and $882,000,
respectively (net of voluntary fee waivers of $87,105, $153,797 and $579,000,
respectively) and as adviser for the PCS Government Obligations Money Market
Portfolio (the "Predecessor Government Obligations Money Market Portfolio") the
predecessor to the Government Obligations Money Market Fund received $897,867,
$395,312 and $542,000, respectively (net of voluntary fee waivers of $0, $45,251
and $392,000, respectively). For the fiscal years ended June 30, 1995, June 30,
1996 and June 30, 1997, the Company paid administrative fees to MSAM, the prior
administrator to the Funds, of approximately $1,500,000, $2,273,000 and
$3,187,000, respectively. For the fiscal years ended June 30, 1995 and June 30,
1996 and for the fiscal
32
<PAGE> 92
period from July 1, 1996 to September 26, 1996, PFPC Inc., which served as
administrator to the Predecessor Money Market Portfolio and Predecessor
Government Obligations Money Market Portfolio (the "Predecessor Portfolios"),
was paid aggregate administrative fees of $346,829, $273,252 and $73,440,
respectively.
MAS is an indirect wholly-owned subsidiary of MSDWD with its principal
offices located at One Tower Bridge, West Conshohocken, PA 19428. Pursuant to an
investment sub-advisory agreement between MAS and the Adviser, MAS provides
sub-advisory services to each of the Mid Cap Growth and Value Funds. MAS
provides investment services to employee benefit plans, endowment funds,
foundations, and other institutional investors and has served as investment
adviser to the MAS Funds, a registered open-end investment company, since 1984.
At September 30, 1996, MAS managed investments totaling approximately $37.5
billion. MAS did not receive any compensation as an adviser, sub-adviser or
administrator to the Funds from the Company prior to the end of the fiscal year
ended June 30, 1997.
Under sub-administration agreements between the Administrator and The Chase
Manhattan Bank ("Chase"), Chase Global Funds Services Company ("CGFSC," formerly
Mutual Funds Service Company, a corporate affiliate of Chase) provides certain
administrative services to the Company. For the fiscal years ended June 30,
1995, June 30, 1996 and June 30, 1997, the prior Administrator paid
Sub-Administration fees to Chase of approximately $2,004,678, $2,028,244 and
$2,011,782, respectively. CGFSC provides operational and administrative services
to investment companies with approximately $116 billion in assets and having
approximately 165,479 shareholder accounts as of June 30, 1997. CGFSC's business
address is 73 Tremont Street, Boston, MA 02108-3913.
DISTRIBUTION OF FUND SHARES
Prior to January 1, 1997, Morgan Stanley & Co. Incorporated ("Morgan
Stanley"), a wholly-owned subsidiary of MSDWD, served as the distributor of the
Company's shares pursuant to a Distribution Agreement with the Company and a
Plan of Distribution for each Money Market Fund and each class of each Non-Money
Fund pursuant to Rule 12b-1 under the 1940 Act (each, a "Plan" and collectively,
the "Plans"). Subsequent to January 1, 1997, Van Kampen American Capital
Distributors, Inc. (the "Distributor") replaced Morgan Stanley as distributor of
the Company's shares pursuant to a Distribution Agreement with the Company and
the Plans. Under each Plan the Company's distributor is entitled to receive from
the Funds a distribution fee, which is accrued daily and paid quarterly, of up
to 0.50% for each of the Money Market Funds and up to 0.75% of the Class B
shares and Class C shares of each of the Non-Money Funds, on an annualized
basis, of the average daily net assets of such Fund or classes. The Distributor
expects to allocate most of its fee to investment dealers, banks or financial
service firms that provide distribution, administrative or shareholder services
(a "Participating Dealer"). The actual amount of such compensation is agreed
upon by the Company's Board of Directors and by the Distributor. The Distributor
may, in its discretion, voluntarily waive from time to time all or any portion
of its distribution fee and the Distributor is free to make additional payments
out of its own assets to promote the sale of Fund shares.
The Plans obligate the Funds to accrue and pay to the Distributor the fee
agreed to under its Distribution Agreement. The Plans do not obligate the Funds
to reimburse the Distributor for the actual expenses the Distributor may incur
in fulfilling its obligations under the Plan. Thus, under each Plan, even if the
Distributor's actual expenses exceed the fee payable to it thereunder at any
given time, the Funds will not be obligated to pay more than that fee. If the
Distributor's actual expenses are less than the fee it receives, the Distributor
will retain the full amount of the fee. The Plans for the Class A, Class B and
Class C shares of the Non-Money Market Funds were most recently approved by the
Company's Board of Directors, including those directors who are not "interested
persons" of the Company as that term is defined in the 1940 Act and who have no
direct or indirect financial interest in the operation of a Plan or in any
agreements related thereto, on December 12, 1996 and the Plan for the Money
Market Funds was most recently approved at the same meeting.
33
<PAGE> 93
Morgan Stanley served as distributor of the Company until December 31, 1996
and the Distributor served as the distributor for the Company from January 1,
1997 through the fiscal year ended June 30, 1997. As compensation for providing
distribution services to the Company for the fiscal year ended June 30, 1997,
the Distributor and Morgan Stanley received aggregate fees of approximately
$8,204,000 which were attributable approximately as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
JUNE 30, 1997
FUND NAME (000)
- ------------------------------------------------------------------------------------------------- -------------------
<S> <C>
Global Equity Allocation Fund -- Class A......................................................... $ 160
Global Equity Allocation Fund -- Class B......................................................... 238
Global Equity Allocation Fund -- Class C......................................................... 679
Global Fixed Income Fund -- Class A.............................................................. 16
Global Fixed Income Fund -- Class B.............................................................. 16
Global Fixed Income Fund -- Class C.............................................................. 26
Asian Growth Fund -- Class A..................................................................... 509
Asian Growth Fund -- Class B..................................................................... 602
Asian Growth Fund -- Class C..................................................................... 1,424
Emerging Markets Fund -- Class A................................................................. 229
Emerging Markets Fund -- Class B................................................................. 180
Emerging Markets Fund -- Class C................................................................. 465
Latin American Fund -- Class A................................................................... 81
Latin American Fund -- Class B................................................................... 45
Latin American Fund -- Class C................................................................... 87
American Value Fund -- Class A................................................................... 58
American Value Fund -- Class B................................................................... 43
American Value Fund -- Class C................................................................... 233
Worldwide High Income Fund -- Class A............................................................ 152
Worldwide High Income Fund -- Class B............................................................ 491
Worldwide High Income Fund -- Class C............................................................ 351
Aggressive Equity Fund -- Class A................................................................ 28
Aggressive Equity Fund -- Class B................................................................ 105
Aggressive Equity Fund -- Class C................................................................ 55
High Yield Fund -- Class A....................................................................... 13
High Yield Fund -- Class B....................................................................... 57
High Yield Fund -- Class C....................................................................... 43
U.S. Real Estate Fund -- Class A................................................................. 19
U.S. Real Estate Fund -- Class B................................................................. 45
U.S. Real Estate Fund -- Class C................................................................. 22
International Magnum Fund -- Class A............................................................. 21
International Magnum Fund -- Class B............................................................. 68
International Magnum Fund -- Class C............................................................. 58
Japanese Equity Fund -- Class A(1)............................................................... N/A
Japanese Equity Fund -- Class B(1)............................................................... N/A
Japanese Equity Fund -- Class C(1)............................................................... N/A
Growth and Income Fund -- Class A(1)............................................................. N/A
Growth and Income Fund -- Class B(1)............................................................. N/A
Growth and Income Fund -- Class C(1)............................................................. N/A
European Equity Fund -- Class A(1)............................................................... N/A
European Equity Fund -- Class B(1)............................................................... N/A
European Equity Fund -- Class C(1)............................................................... N/A
Money Market Fund(2)............................................................................. 981
Tax-Free Money Market Fund(1).................................................................... N/A
Government Obligations Money Market Fund(2)...................................................... 604
Equity Growth Fund -- Class A(1)................................................................. N/A
Equity Growth Fund -- Class B(1)................................................................. N/A
Equity Growth Fund -- Class C(1)................................................................. N/A
Global Equity Fund -- Class A(1)................................................................. N/A
Global Equity Fund -- Class B(1)................................................................. N/A
Global Equity Fund -- Class C(1)................................................................. N/A
Emerging Markets Debt Fund -- Class A(1)......................................................... N/A
Emerging Markets Debt Fund -- Class B(1)......................................................... N/A
Emerging Markets Debt Fund -- Class C(1)......................................................... N/A
Mid Cap Growth Fund -- Class A(1)................................................................ N/A
Mid Cap Growth Fund -- Class B(1)................................................................ N/A
Mid Cap Growth Fund -- Class C(1)................................................................ N/A
Value Fund -- Class A(1)......................................................................... N/A
Value Fund -- Class B(1)......................................................................... N/A
Value Fund -- Class C(1)......................................................................... N/A
</TABLE>
- ------------------
(1) Not operational as of June 30, 1997.
(2) As compensation for providing distribution services to the Predecessor
Portfolios for the period from July 1, 1996 to September 26, 1996, Morgan
Stanley received fees from the Predecessor Money Market Portfolio in the
amount of $146,803 and from the Predecessor Government Obligations Money
Market Portfolio in the amount of $98,828. Such fees are included in the
amounts listed above.
CODE OF ETHICS
The Board of Directors of the Company has adopted a Code of Ethics under
Rule 17j-1 of the 1940 Act which incorporates the Code of Ethics of the Adviser
(together, the "Codes"). The Codes require that all employees of the Adviser and
Sub-Advisers preclear any personal securities investment (with limited
exceptions, such as government securities). The preclearance
34
<PAGE> 94
requirement and associated procedures are designed to identify any substantive
prohibition or limitation applicable to the proposed investment. The substantive
restrictions applicable to all employees of the Adviser include a ban on
acquiring any securities in a "hot" initial public offering and a prohibition
from profiting on short-term trading in securities. In addition, no employee may
purchase or sell any security that at the time is being purchased or sold (as
the case may be), or to the knowledge of the employee is being considered for
purchase or sale, by any fund advised by the Adviser or Sub-Adviser.
Furthermore, the Codes provide for trading "blackout periods" that prohibit
trading by investment personnel of the Company within periods of trading by the
Company in the same (or equivalent) security.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
The names and addresses of the holders of 5% or more of the outstanding
shares of any class of the Company as of October 16, 1997 and the percentage of
outstanding shares of such classes owned beneficially or of record by such
shareholders as of such date are, to Company management's knowledge, as follows:
AMERICAN VALUE FUND: Charles Schwab & Co., Inc., Exclusive Benefit of its
Customers, 101 Montgomery Street, San Francisco, CA 94104-4122 owned 7.118% of
the total outstanding Class A shares of such Fund.
Merrill Lynch, Pierce, Fenner & Smith for the Sole Benefit of its Customers,
4800 Deer Lake Dr. East 3rd Floor, Jacksonville, FL 32246-6484, owned 11.140% of
the total outstanding Class B shares of such Fund.
The following each held the percentage indicated of the total outstanding
Class C shares of such Fund: Merrill Lynch, Pierce, Fenner & Smith for the Sole
Benefit of its Customers, 4800 Deer Lake Dr. East, 3rd Floor, Jacksonville, FL
32246-6484, 6.538% and Morgan Stanley Group Inc., 1221 Avenue of the Americas,
New York, NY, 10020-1001, 6.130%.
GLOBAL EQUITY ALLOCATION FUND: Scott & Stringfellow PSP, Mutual
Funds/Clearing & Custody Account, P.O. Box 1575, Richmond, VA 23213, owned
5.253% of the total outstanding Class A shares of such Fund.
GLOBAL FIXED INCOME FUND: Lehman Brothers Inc., P.O. Box 29198, Brooklyn,
NY 11202, owned 34.20% of the total outstanding Class A shares of such Fund.
Charles Schwab & Co, Inc., Exclusive Benefit of its Customers, 101 Montgomery
Street, San Francisco, CA 94104 owned 5.945% of the total outstanding Class A
shares of such Fund.
The following each held the percentage indicated of the total outstanding
Class B shares of such Fund: ADVEST, Inc., 90 State House Square, Hartford, CT
06103-3702, 9.934%; Piper Jaffray as Custodian FBO Mary Lou Concialdi, 222 So.
9th St., Minneapolis, MN 55402-3389, 7.312%; Anna E. Fulmer Trustee for Anna E.
Fulmer Trust, U/A/D 8/2/93, 1124 Marine Way West, West Palm Beach, FL,
33408-3630, 7.051%; and Frank Burstein, 211 Linden Dr., Elkins Park, PA
19027-1341, 5.184%.
The following each held the percentage indicated of the total outstanding
Class C shares of such Fund: Geraldine M. Nemeth, Trustee, Trust U/A Dated
12/5/87, Geraldine M. Falkiner 1987, 1482 Indian Trails Parkway, Baraboo, WI
53913, 5.593%; Thomas B. Congdon and Constance B. Congdon, Joint Tenants, 4 Pine
St., Nantucket, MA 02554-3721, 5.222% and Smith Barney, Inc., 388 Greenwich
Street, New York, NY 10613-2375, 5.064%.
EMERGING MARKETS FUND: Charles Schwab & Co., Inc., Exclusive Benefit of its
Customers, 101 Montgomery Street, San Francisco, CA 94104, owned 29.877% of the
total outstanding Class A shares of such Fund.
GROWTH AND INCOME FUND: Van Kampen American Capital Generations Variable
Annuities, c/o American General Life Insurance Company, P.O. Box 1591, Houston,
TX 77251 owned 93.182% of the total outstanding Class B shares of such Fund; Van
Kampen American Capital Distributors Inc., One Chase Manhattan Plaza, 37th
Floor, New York, NY 10005 owned 6.818% of the total outstanding Class B shares
of such Fund.
HIGH YIELD FUND: Morgan Stanley Group, Inc., 1221 Avenue of the Americas,
New York, NY 10020, owned 39.419% of the total outstanding Class A shares of
such Fund and 26.384% of the total outstanding Class C shares of such Fund.
Nancy J. Dinardo Trust, Dinardo Family Trust, DTD 09/01/88, 323 North Ave,
Bridgeport, CT 06808-6126 owned 6.816% of the total outstanding Class C shares
of such Fund.
LATIN AMERICAN FUND: Merrill Lynch, Pierce, Fenner & Smith for the Sole
Benefit of its Customers, 4800 Deer Lake Drive East, 3rd Floor, Jacksonville, FL
32246-6484, owned 10.293% of the total outstanding Class C shares of such Fund.
U.S. REAL ESTATE FUND: The following each held the percentage indicated of
the total outstanding Class C shares of such Fund: Dain Bosworth Inc., FBO
Lancaster Ventures LLC, P.O. Box 6368, Lincoln, NE 58508-0368, 11.158% and MFSC
FEBO #CL7-625647, Hironaru Okamoto, Shigeno Okamoto, 32 Beverly Rd, Great Neck,
NY, 11021-1330, 7.443%.
INTERNATIONAL MAGNUM FUND: Morgan Stanley Group, Inc., 1221 Avenue of the
Americas, New York, NY 10020, owned 10.216% of the total outstanding Class A
shares of such Fund; Wachovia Bank NA Cust, FBO East Carolina University
Endowment and Foundation, 301 N. Main Street, P.O. Box 3073, Winston Salem, NC
27150, owned 9.190% of the total outstanding Class A shares of such Fund and
Charles Schwab & Co. Inc., Exclusive Benefit of its Customers, 101 Montgomery
Street, San Francisco, CA 94104-4122, owned 5.854% of the total outstanding
Class A shares of such Fund.
Van Kampen American Capital Trust Company, 2800 Post Oak Blvd, Houston,
Texas 77056, owned 5.406% of the total outstanding Class B shares of such Fund.
MONEY MARKET FUND: PFPC, Inc., 400 Bellevue Parkway, 2nd Floor, Wilmington,
DE 19809, owned 99.514% of the total outstanding shares of the Fund.*
GOVERNMENT OBLIGATIONS MONEY MARKET FUND: PFPC, Inc., 400 Bellevue Parkway,
2nd Floor, Wilmington, DE 19809, owned 99.979% of the total outstanding shares
of the Fund.*
35
<PAGE> 95
WORLDWIDE HIGH INCOME FUND: The following each held the percentage
indicated of the total outstanding Class A shares of such Fund: FTC & Co., P.O.
Box 173736, Denver, CO 80217-3738, 16.548% and Charles Schwab & Co., Inc.,
Exclusive Benefit of its Customers, 101 Montgomery Street, San Francisco, CA
94104-4122, 8.338%.
TAX-FREE MONEY MARKET FUND: N/A
JAPANESE EQUITY FUND: N/A
EUROPEAN EQUITY FUND: N/A
EQUITY GROWTH FUND: N/A
GLOBAL EQUITY FUND: N/A
EMERGING MARKETS DEBT FUND: N/A
MID CAP GROWTH FUND: N/A
VALUE FUND: Van Kampen American Capital Trust Company, 2800 Post Oak Blvd,
Houston, Texas 77056, owned 5.406% of the total outstanding Class C shares of
such Fund.
*The shareholder may be deemed a "controlling person" of the particular Fund
by virtue of its power to control the voting or disposition of the shares it
owns. As a result of its ownership position, the shareholder may be able to
control the outcome of matters voted on by shareholders of the Fund.
MONEY MARKET FUND NET ASSET VALUE
Each of the Money Market Funds seeks to maintain a stable net asset value
per share of $1.00. Each Fund uses the amortized cost method of valuing its
securities, which does not take into account unrealized gains or losses. The use
of amortized cost and the maintenance of a Fund's per share net asset value at
$1.00 is based on the Fund's election to operate under the provisions of Rule
2a-7 under the 1940 Act. As a condition of operating under that Rule, each of
the Money Market Funds must maintain a dollar-weighted average portfolio
maturity of 90 days or less, purchase only instruments having remaining
maturities of 397 days or less, and invest only in securities which are of
"eligible quality" as determined in accordance with regulations of the SEC.
The Rule also requires that the Directors, as a particular responsibility
within the overall duty of care owed to shareholders, establish procedures
reasonably designed, taking into account current market conditions and the
Funds' investment objectives, to stabilize the net asset value per share as
computed for the purposes of sales and redemptions at $1.00. These procedures
include periodic review, as the Directors deem appropriate and at such intervals
as are reasonable in light of current market conditions, of the relationship
between the amortized cost value per share and a net asset value per share based
upon available indications of market value. In such review, investments for
which market quotations are readily available are valued at the most recent bid
price or quoted yield available for such securities or for securities of
comparable maturity, quality and type as obtained from one or more of the major
market makers for the securities to be valued. Other investments and assets are
valued at fair value, as determined in good faith by, or under procedures
adopted by, the Directors.
In the event of a deviation of over 1/2 of 1% between a Fund's net asset
value based upon available market quotations or market equivalents and $1.00 per
share based on amortized cost, the Directors will promptly consider what action,
if any, should be taken. The Directors will also take such action as they deem
appropriate to eliminate or to reduce to the extent reasonably practicable any
material dilution or other unfair results which might arise from differences
between the two. Such action may include redemption in kind, selling instruments
prior to maturity to realize capital gains or losses or to shorten the average
maturity, withholding dividends, paying distributions from capital or capital
gains or utilizing a net asset value per share as determined by using available
market quotations.
There are various methods of valuing the assets and of paying dividends and
distributions from a money market fund. Each of the Money Market Funds values
its assets at amortized cost while also monitoring the available market bid
price, or yield equivalents. Since dividends from net investment income will be
declared daily and paid monthly, the net asset value per share of such Funds
will ordinarily remain at $1.00, but the Funds' daily dividends will vary in
amount. Net realized short-term capital gains, if any, less any capital loss
carryforwards, will be distributed whenever the Directors determine that such
distributions would be in the best interest of shareholders, but in any event,
at least once a year. The Money Market Funds do not expect to realize any
long-term capital gains. Should any such gains be realized, they will be
distributed annually, less any capital loss carryforwards.
PORTFOLIO TRANSACTIONS
The Investment Advisory Agreement and Investment Sub-Advisory Agreements
authorize each of the Adviser and Sub-Advisers (collectively for this discussion
only, the "Adviser") to select the brokers or dealers that will execute the
purchases and sales of investment securities for the Funds and direct the
Adviser to use its best efforts to obtain the best available price and
36
<PAGE> 96
most favorable execution with respect to all transactions for the Funds. The
Company has authorized the Adviser to pay higher commissions in recognition of
brokerage services which, in the opinion of the Adviser, are necessary for the
achievement of better execution, provided the Adviser believes this to be in the
best interest of the Company.
In purchasing and selling securities for the Funds, it is the Company's
policy to seek to obtain quality execution at the most favorable prices, through
responsible broker-dealers. In selecting broker-dealers to execute the
securities transactions for the Funds, consideration will be given to such
factors as the price of the security, the rate of the commission, the size and
difficulty of the order, the reliability, integrity, financial condition,
general execution and operational capabilities of competing broker-dealers, and
the brokerage and research services which they provide to the Company. Some
securities considered for investment by a Fund may also be appropriate for other
clients served by the Adviser. If purchase or sale of securities consistent with
the investment policies of a Fund and one or more of these other clients served
by the Adviser is considered at or about the same time, transactions in such
securities will be allocated among the Fund and clients in a manner deemed fair
and reasonable by the Adviser. Although there is no specified formula for
allocating such transactions, the various allocation methods used by the
Adviser, and the results of such allocations, are subject to periodic review by
the Company's Directors.
Subject to the overriding objective of obtaining the best execution of
orders, the Adviser may allocate a portion of the Company's portfolio brokerage
transactions to Morgan Stanley or broker affiliates of Morgan Stanley under
procedures adopted by the Board of Directors. For the three fiscal years ended
June 30, 1995, June 30, 1996 and June 30, 1997, the Company paid brokerage
commissions of approximately $115,622, $180,458 and $464,192, respectively, to
the Morgan Stanley, an affiliated broker-dealer. For the fiscal years ended June
30, 1995, June 30, 1996 and June 30, 1997, commissions paid to Morgan Stanley
represented approximately 7%, 6% and 7.98%, respectively, of the total amount of
brokerage commissions paid in such period and which were paid on transactions
that represented 3%, 2% and 7.10%, respectively, of the aggregate dollar amount
of transactions that incurred commissions paid by the Company during such
period.
Fund securities will not be purchased from, or through, or sold to or
through, the Adviser, the Sub-Advisers or Morgan Stanley or any "affiliated
persons," as defined in the 1940 Act, of Morgan Stanley when such entities are
acting as principals, except to the extent permitted by law.
PERFORMANCE INFORMATION
The Company may from time to time quote various performance figures to
illustrate the Funds' past performance.
Performance quotations by investment companies are subject to rules adopted
by the SEC, which require the use of standardized performance quotations. In the
case of total return, non-standardized performance quotations may be furnished
by the Company but must be accompanied by certain standardized performance
information computed as required by the SEC. Current yield and average annual
compounded total return quotations used by the Company are based on the
standardized methods of computing performance mandated by the SEC. An
explanation of those and other methods used by the Company to compute or express
performance follows.
TOTAL RETURN
From time to time the Funds may advertise total return. Total return figures
are based on historical earnings and are not intended to indicate future
performance. The average annual total return is determined by finding the
average annual compounded rates of return over 1-, 5-, and 10-year periods (or
over the life of the Fund) that would equate an initial hypothetical $1,000
investment to its ending redeemable value. The calculation assumes that all
dividends and distributions are reinvested when paid. The quotation assumes the
amount was completely redeemed at the end of each 1-, 5-, and 10- year period
(or over the life of the Fund) and the deduction of all applicable Company
expenses on an annual basis.
Total return figures are calculated according to the following formula:
<TABLE>
<S> <C> <C>
P(1+T)n = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of hypothetical $1,000 payment made at the beginning
of the 1-, 5-, or 10-year periods at the end of the 1-, 5-, or 10-year
periods (or fractional portion thereof).
</TABLE>
37
<PAGE> 97
Calculated using the formula above, the average annualized total return,
exclusive of a sales charge or deferred sales charge, for each of the Funds that
commenced operations prior to June 30, 1997 for the one-year period ended June
30, 1997 and for the period from the inception of each Fund through June 30,
1997 are as follows:
<TABLE>
<CAPTION>
ONE-YEAR INCEPTION
INCEPTION PERIOD ENDED THROUGH JUNE
DATE JUNE 30, 1997 30, 1997
--------- ------------- -------------
<S> <C> <C> <C>
Global Equity Allocation Fund
Class A Shares...................... 01/04/93 20.61% 15.90%
Class B Shares(1)................... 08/01/95 19.64% 19.77%
Class C Shares(1)................... 01/04/93 19.69% 15.04%
Global Fixed Income Fund
Class A Shares...................... 01/04/93 4.27% 6.48%
Class B Shares(1)................... 08/01/95 3.48% 3.78%
Class C Shares(1)................... 01/04/93 3.48% 5.64%
Asian Growth Fund
Class A Shares...................... 06/23/93 (1.10)% 9.89%
Class B Shares(1)................... 08/01/95 (1.79)% 0.00%(2)
Class C Shares(1)................... 06/23/93 (1.79)% 9.11%
American Value Fund
Class A Shares...................... 10/18/93 30.68% 16.23%
Class B Shares(1)................... 08/01/95 29.77% 21.72%
Class C Shares(1)................... 10/18/93 29.67% 15.32%
Worldwide High Income Fund
Class A Shares...................... 04/21/94 30.29% 18.35%
Class B Shares(1)................... 08/01/95 29.14% 24.02%
Class C Shares(1)................... 04/21/94 29.12% 17.39%
Emerging Markets Fund
Class A Shares...................... 07/06/94 13.54% 4.66%
Class B Shares(1)................... 08/01/95 12.67% 11.57%
Class C Shares(1)................... 07/06/94 12.66% 3.87%
Latin American Fund
Class A Shares...................... 07/06/94 57.32% 19.10%
Class B Shares(1)................... 08/01/95 56.17% 44.31%
Class C Shares(1)................... 07/06/94 56.04% 18.10%
Aggressive Equity Fund
Class A Shares...................... 01/02/96 28.93% 34.43%
Class B Shares...................... 01/02/96 28.01% 33.53%
Class C Shares...................... 01/02/96 28.04% 33.48%
U.S. Real Estate Fund
Class A Shares...................... 05/01/96 35.75% 35.17%
Class B Shares...................... 05/01/96 34.58% 33.88%
Class C Shares...................... 05/01/96 34.56% 34.05%
High Yield Fund
Class A Shares...................... 05/01/96 18.12% 15.67%
Class B Shares...................... 05/01/96 17.22% 14.83%
Class C Shares...................... 05/01/96 17.21% 14.82%
International Magnum Fund
Class A Shares...................... 07/01/96 17.30% 17.30%
Class B Shares...................... 07/01/96 16.40% 16.40%
Class C Shares...................... 07/01/96 16.27% 16.27%
Japanese Equity Fund
Class A Shares...................... N/A N/A N/A
Class B Shares...................... N/A N/A N/A
Class C Shares...................... N/A N/A N/A
Growth and Income Fund
Class A Shares...................... N/A N/A N/A
Class B Shares...................... N/A N/A N/A
Class C Shares...................... N/A N/A N/A
</TABLE>
38
<PAGE> 98
<TABLE>
<CAPTION>
ONE-YEAR INCEPTION
INCEPTION PERIOD ENDED THROUGH JUNE
DATE JUNE 30, 1997 30, 1997
--------- ------------- -------------
<S> <C> <C> <C>
European Equity Fund
Class A Shares...................... N/A N/A N/A
Class B Shares...................... N/A N/A N/A
Class C Shares...................... N/A N/A N/A
Equity Growth Fund
Class A Shares...................... N/A N/A N/A
Class B Shares...................... N/A N/A N/A
Class C Shares...................... N/A N/A N/A
Global Equity Fund
Class A Shares...................... N/A N/A N/A
Class B Shares...................... N/A N/A N/A
Class C Shares...................... N/A N/A N/A
Emerging Markets Debt Fund
Class A Shares...................... N/A N/A N/A
Class B Shares...................... N/A N/A N/A
Class C Shares...................... N/A N/A N/A
Mid Cap Growth Fund
Class A Shares...................... N/A N/A N/A
Class B Shares...................... N/A N/A N/A
Class C Shares...................... N/A N/A N/A
Value Fund
Class A Shares...................... N/A N/A N/A
Class B Shares...................... N/A N/A N/A
Class C Shares...................... N/A N/A N/A
Money Market Fund....................... 08/04/89 4.60% 4.64%
Tax-Free Money Market Fund.............. N/A N/A N/A
Government Obligations Money Market
Fund................................... 03/12/92 4.53% 3.72%
</TABLE>
- ------------------
The Japanese Equity, Growth and Income, European Equity, Equity Growth, Global
Equity, Emerging Markets Debt, Mid Cap Growth, Value and Tax-Free Money Market
Funds had not commenced operations in the fiscal year ended June 30, 1997.
(1) The Class B shares listed above were created on May 1, 1995. The original
Class B shares were renamed Class C shares, as listed above, on May 1, 1995.
The Class B shares commenced operations on August 1, 1995.
(2) Amount is less than 0.01.
YIELD FOR CERTAIN FUNDS
From time to time certain of the Funds may advertise yield.
Current yield reflects the income per share earned by a Fund's investments.
Current yield is determined by dividing the net investment income per share
earned during a 30-day base period by the maximum offering price per share on
the last day of the period and annualizing the result. Expenses accrued for the
period include any fees charged to all shareholders during the base period.
Current yield figures are obtained using the following formula:
<TABLE>
<S> <C> <C>
2[(a - b + 1) - 1]
Yield = ------------------
cd
where:
a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period that were entitled
to receive income distributions
d = the maximum offering price per share on the last day of the period
</TABLE>
The respective current yields for the following Funds 30-day period ended
June 30, 1997 were as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
FUND NAME SHARES SHARES SHARES
- ----------------------------------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
Global Fixed Income Fund 3.79% 3.23% 3.23%
Worldwide High Income Fund 7.76% 7.40% 7.40%
High Yield Fund 7.24% 6.84% 6.84%
</TABLE>
39
<PAGE> 99
CALCULATION OF YIELD FOR MONEY MARKET FUNDS
The current yield of the Money Market, Tax-Free Money Market and Government
Obligations Money Market Funds are calculated daily on a base period return for
a hypothetical account having a beginning balance of one share for a particular
period of time (generally 7 days). The return is determined by dividing the net
change (exclusive of any capital changes in such account) by its average net
asset value for the period, and then multiplying it by 365/7 to determine the
annualized current yield. The calculation of net change reflects the value of
additional shares purchased with the dividends by the Fund, including dividends
on both the original share and on such additional shares. The yields of the
Money Market Fund and Government Obligations Money Market Fund for the 7-day
period ended June 30, 1997 were 4.69% and 4.62% respectively. An effective
yield, which reflects the effects of compounding and represents an annualization
of the current yield with all dividends reinvested, may also be calculated for
each Fund by dividing the base period return by 7, adding 1 to the quotient,
raising the sum to the 365th power, and subtracting 1 from the result. The
effective yields of the Money Market Fund and Government Obligations Money
Market Fund for the 7-day period ended June 30, 1997 were 4.80% and 4.73%,
respectively.
The yield of a Fund will fluctuate. The annualization of a week's dividend
is not a representation by the Fund to what an investment in the Fund will
actually yield in the future. Actual yields will depend on such variables as
investment quality, average maturity, the type of instruments the Fund invests
in, changes in interest rates on instruments, changes in the expenses of the
Fund and other factors. Yields are one basis investors may use to analyze the
Funds, and other investment vehicles; however, yields of other investment
vehicles may not be comparable because of the factors set forth in the preceding
sentence, differences in the time periods compared, and differences in the
methods used in valuing fund instruments, computing net asset value and
calculating yield.
TAXABLE EQUIVALENT YIELD
It is easy to calculate your own taxable equivalent yield if you know your
tax bracket. The formula is:
<TABLE>
<S> <C> <C>
Tax Free Yield
- ------------------- = Your Taxable Equivalent
1 - Your Tax Bracket Yield
</TABLE>
For example, if you are in the 28% tax bracket and can earn a tax-free yield
of 7.5%, the taxable equivalent yield would be 10.42%. The table below indicates
the advantages of investments in Municipal Bonds for certain investors.
Tax-exempt rates of interest payable on a Municipal Bond (shown at the top of
each column) are equivalent to the taxable yields set forth opposite the
respective income tax levels, based on income tax rates effective for the tax
year 1997 under the Internal Revenue Code. There can, of course, be no guarantee
that the Tax-Free Money Market Fund will achieve a specific yield. Also, it is
possible that some portion of the Fund's dividends may be subject to federal
income taxes. A substantial portion, if not all, of such dividends may be
subject to state and local taxes.
TAXABLE EQUIVALENT YIELD TABLE
<TABLE>
<CAPTION>
SAMPLE LEVEL OF FEDERAL
TAXABLE INCOME INCOME TAXABLE EQUIVALENT RATES BASED ON TAX-EXEMPT YIELD OF:
- ------------------------------------ TAX ------------------------------------------------------------------
SINGLE RETURN JOINT RETURN BRACKETS 3% 4% 5% 6% 7% 8% 9% 10% 11%
- ----------------- ----------------- --------- ----- ----- ----- ----- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$0-$24,650 $0-$41,200 15% 3.53% 4.71% 5.88% 7.06% 8.24% 9.41% 10.59% 11.76% 12.94%
$24,650-$59,750 $41,200-$99,600 28% 4.17% 5.56% 6.94% 8.33% 9.72% 11.11% 12.50% 13.89% 15.28%
$59,750-$124,650 $99,600-$151,750 31% 4.35% 5.80% 7.25% 8.70% 10.14% 11.59% 13.04% 14.49% 15.94%
$124,650-$271,050 $151,750-$271,050 36% 4.69% 6.25% 7.81% 9.38% 10.94% 12.50% 14.06% 15.63% 17.19%
$271,050 and up $271,050 and up 39.6% 4.97% 6.62% 8.28% 9.93% 11.59% 13.23% 14.90% 16.56% 18.21%
</TABLE>
- --------------
* Net amount subject to 1997 Federal Income Tax after deductions and exemptions,
not indexed for 1997 income tax rates.
COMPARISONS
To help investors better evaluate how an investment in a Fund of Morgan
Stanley Fund, Inc. might satisfy their investment objective, advertisements
regarding the Company may discuss various measures of Fund performance as
reported by various financial publications. Advertisements may also compare
performance (as calculated above) to performance as reported by other
investments, indices and averages. The following publications may be used:
(a) Dow Jones Composite Average or its component averages -- an unmanaged
index composed of 30 blue-chip industrial corporation stocks (Dow Jones
Industrial Average), 15 utilities company stocks and 20 transportation stocks.
Comparisons of performance assume reinvestment of dividends.
(b) Standard & Poor's 500 Stock Index or its component indices -- unmanaged
index composed of 400 industrial stocks, 40 financial stocks, 40 utilities
company stocks and 20 transportation stocks. Comparisons of performance assume
reinvestment of dividends.
(c) The New York Stock Exchange composite or component indices -- unmanaged
indices of all industrial, utilities, transportation and finance company stocks
listed on the New York Stock Exchange.
40
<PAGE> 100
(d) Wilshire 5000 Equity Index or its component indices -- represents the
return on the market value of all common equity securities for which daily
pricing is available. Comparisons of performance assume reinvestment of
dividends.
(e) Lipper -- Capital Appreciation Index -- a composite of mutual funds
managed for maximum capital gains.
(f) Lipper -- Mutual Fund Performance Analysis and Lipper -- Fixed Income
Fund Performance Analysis -- measures total return and average current yield for
the mutual fund industry. Ranks individual mutual fund performance over
specified time periods, assuming reinvestment of all distributions, exclusive of
any applicable sales charges.
(g) Morgan Stanley Capital International EAFE Index -- an arithmetic, market
value-weighted average of the performance of over 1,000 securities on the stock
exchanges of countries in Europe, Australia and the Far East.
(h) Goldman Sachs 100 Convertible Bond Index -- currently includes 67 bonds
and 33 preferred. The original list of names was generated by screening for
convertible issues of $100 million or greater in market capitalization. The
index is priced monthly.
(i) Salomon Brothers GNMA Index -- includes pools of mortgages originated by
private lenders and guaranteed by the mortgage pools of the Government National
Association.
(j) Salomon Brothers High Grade Corporate Bond Index -- consists of publicly
issued, non-convertible corporate bonds rated AA or AAA. It is value-weighted,
total return index, including approximately 800 issues with maturities of 12
years or greater.
(k) Salomon Brothers Broad Investment Grade Bond Index -- is a
market-weighted index that contains approximately 4700 individually priced
investment grade corporate bonds rated BBB or better, United States
Treasury/agency issues and mortgage pass-through securities.
(l) Salomon Brothers World Bond Index -- measures the total return
performance of high-quality securities in major sectors of the international
bond market. The index covers approximately 600 bonds from 10 currencies:
<TABLE>
<S> <C>
Australian Dollars Netherlands Guilder
Canadian Dollars Swiss Francs
European Currency Units UK Pounds Sterling
French Francs U.S. Dollars
Japanese Yen German Deutsche Marks
</TABLE>
(m) J.P. Morgan Traded Global Bond Index -- is an unmanaged index of
government bond issues and includes Australia, Belgium, Canada, Denmark, France,
Germany, Italy, Japan, the Netherlands, Spain, Sweden, United Kingdom and United
States gross of withholding tax.
(n) Lehman LONG-TERM Treasury Bond Index -- is composed of all bonds covered
by the Lehman Treasury Bond Index with maturities of 10 years or greater.
(o) Lehman Aggregate Bond Index -- is an unmanaged index made up of the
Government/Corporate Index, the Mortgage-Backed Securities Index and the
Asset-Backed Securities Index.
(p) NASDAQ Industrial Index -- is composed of more than 3,000 industrial
issues. Ifmis a value-weighted index calculated on price change only and does
not include income.
(q) Composite Indices -- 70% Standard & Poor's 500 Stock Index and 30%
NASDAQ Industrial Index; 36% Standard & Poor's 500 Stock Index and 65% Salomon
Brothers High Grade Bond Index; and 65% Standard & Poor's 500 Stock Index and
35% Salomon Brothers High Grade Bond Index.
(r) CDA Mutual Fund Report, published by CDA Investment Technologies, Inc.
- -- analyzes price, current yield, risk, total return and average rate of return
(average annual compounded growth rate) over specified time periods for the
mutual fund industry.
(s) Mutual Fund Source Book, published by Morningstar, Inc. -- analyzes
price, yield, risk and total return for equity funds.
(t) Financial publications: Business Week, Changing Times, Financial World,
Forbes, Fortune, Money, Barron's, Consumer's Digest, Financial Times, Global
Investor, Investor's Daily, Lipper Analytical Services, Inc., Morningstar, Inc.,
New York Times, Personal Investor, Wall Street Journal and Weisenberger
Investment Companies Service -- publications that rate fund performance over
specified time periods.
(u) Consumer Price Index (or cost of Living Index), published by the United
States Bureau of Labor Statistics -- a statistical measure of change, over time,
in the price of goods and services in major expenditure groups.
(v) Stocks, Bonds, Bills and Inflation, published by Hobson Associates --
historical measure of yield, price and total return for common and small company
stock, long-term government bonds, Treasury bills and inflation.
(w) Savings and Loan Historical Interest Rates -- as published in the United
States Savings & Loan League Fact Book.
41
<PAGE> 101
(x) Historical data supplied by the research departments of First Boston
Corporation, the J.P. Morgan companies, Salomon Brothers, Merrill Lynch, Pierce,
Fenner & Smith, Lehman Brothers Inc. and Bloomberg L.P.
(y) The MSCI Combined Far East Free ex-Japan Index -- a
market-capitalization weighted index comprising stocks in Hong Kong, Indonesia,
Korea, Malaysia, Philippines, Taiwan and Thailand. Korea is included in the MSCI
Combined Far East Free ex-Japan Index at 20% of its market capitalization.
(z) CS First Boston High Yield Index -- generally includes over 180 issues
with an average maturity range of seven to ten years with a minimum
capitalization of $100 million. All issues are individually trader-priced
monthly.
(bb) Morgan Stanley Capital International World Index -- An arithmetic,
market value-weighted average of the performance of over 1,470 securities listed
on the stock exchanges of countries in Europe, Australia, New Zealand, the Far
East, Canada and the United States.
(cc) Morgan Stanley Capital International Emerging Markets Global Latin
American Index -- An unmanaged, arithmetic market value weighted average of the
performance of over 196 securities on the stock exchanges of Argentina, Brazil,
Chile, Colombia, Mexico, Peru and Venezuela. (Assumes reinvestment of
dividends.)
(dd) IFC Global Total Return Composite Index -- An unmanaged index of common
stocks and includes developing countries in Latin America, East and South Asia,
Europe, the Middle East and Africa (net of dividends reinvested).
(ee) EMBI+ -- Expanding on the EMBI, which includes only Bradys, the EMBI+
includes a broader group of Brady Bonds, loans, Eurobonds and U.S. Dollar local
markets instruments. A more comprehensive benchmark than EMBI, the EMBI+ covers
49 instruments from 14 countries. At $98 billion, its market cap is nearly 50%
higher than the EMBI's. The EMBI+ is not, however, intended to replace the EMBI
but rather to complement it. The EMBI continues to represent the most liquid,
most easily traded segment of the market, while the EMBI+ represents the broader
market, including more of the assets that investors typically hold in their
portfolios. Both of these indices are published daily.
(ff) The MSCI Latin America Global Index -- is a broad-based market cap
weighted composite index covering at least 60% of markets in Mexico, Argentina,
Brazil, Chile, Colombia, Peru and Venezuela (Assumes reinvestment of dividends).
(gg) Morgan Stanley Capital International Japan Index -- An unmanaged index
of common stocks (assumes dividends reinvested).
(hh) NAREIT Index -- An unmanaged market weighted index of tax qualified
REITs (excluding healthcare REITs) listed on the New York Stock Exchange,
American Stock Exchange and the NASDAQ National Market System, including
dividends.
(ii) Standard & Poor's 400 Mid Cap Index -- The Standard and Poor's Midcap
400 is a capitalization-weighted index that measures the performance of the
mid-range sector of the U.S. stock market where the medium market capitalization
is approximately $700 million.
(jj) Russell 2500 Index -- comprised of the bottom 500 stocks in the Russell
1000 Index which represents the universe of stocks from which most active money
managers typically select; and all the stocks in the Russell 2000 Index. The
largest security in the index has a market capitalization of approximately $1.3
billion.
In assessing such comparisons of performance an investor should keep in mind
that the composition of the investments in the reported indices and averages is
not identical to the composition of investments in the Company's Funds, that the
averages are generally unmanaged, and that the items included in the
calculations of such averages may not be identical to the formula used by the
Company to calculate its performance. In addition, there can be no assurance
that the Company will continue this performance as compared to such other
averages.
GENERAL PERFORMANCE INFORMATION
Each Fund's performance will fluctuate, unlike bank deposits or other
investments which pay a fixed yield for a stated period of time. Past
performance is not necessarily indicative of future return. Actual performance
will depend on such variables as portfolio quality, average portfolio maturity,
the type of portfolio instruments acquired, changes in interest rates, portfolio
expenses and other factors. Performance is one basis investors may use to
analyze a Fund as compared to other funds and other investment vehicles.
However, performance of other funds and other investment vehicles may not be
comparable because of the foregoing variables, and differences in the methods
used in valuing their portfolio instruments, computing net asset value and
determining performance.
From time to time, a Fund's performance may be compared to other mutual
funds tracked by financial or business publications and periodicals. For
example, a Fund may quote Morningstar, Inc. in its advertising materials.
Morningstar, Inc. is a mutual fund rating service that rates mutual funds on the
basis of risk-adjusted performance. Rankings that compare the performance of the
Funds to one another in appropriate categories over specific periods of time may
also be quoted in advertising.
Fund advertising may include data on historical returns of the capital
markets in the United States compiled or published by Ibbotson Associates of
Chicago, Illinois ("Ibbotson"), including returns on common stocks, small
capitalization stocks, long-term corporate bonds, intermediate-term government
bonds, long-term government bonds, Treasury bills, the U.S. rate of
42
<PAGE> 102
inflation (based on the Consumer Price Index), and combinations of various
capital markets. The performance of these capital markets is based on the
returns of different indices. The Funds may use the performance of these capital
markets in order to demonstrate general risk-versus-reward investment scenarios.
Performance comparisons may also include the value of a hypothetical investment
in any of these capital markets. The risks associated with the security types in
any capital market may or may not correspond directly to those of the Funds. The
Funds may also compare their performance to that of other compilations or
indices that may be developed and made available in the future.
The Funds may include in advertisements, charts, graphs or drawings which
illustrate the potential risks and rewards of investment in various investment
vehicles, including but not limited to, foreign securities, stocks, bonds,
treasury bills and shares of a Fund. In addition, advertisements may include a
discussion of certain attributes or benefits to be derived by an investment in a
Fund and/or other mutual funds, shareholder profiles and hypothetical investor
scenarios, timely information on financial management, tax and retirement
planning and various investment alternatives. Advertisements may include lists
of representative Morgan Stanley clients. The Funds may also from time to time
include discussions or illustrations of the effects of compounding in
advertisements. "Compounding" refers to the fact that, if dividends or other
distributions on a Fund investment are reinvested by being paid in additional
Fund shares, any future income or capital appreciation of a Fund would increase
the value, not only of the original investment in the Fund, but also of the
additional Fund shares received through reinvestment.
The Funds may include in its advertisements, discussions or illustrations of
the potential investment goals of a prospective investor (including materials
that describe general principles of investing, such as asset allocation,
diversification, risk tolerance, goal setting, questionnaires designed to help
create a personal financial profile, worksheets used to project savings needs
based on assumed rates of inflation and hypothetical rates of return and action
plans offering investment alternatives), investment management techniques,
policies or investment suitability of a Fund (such as value investing, market
timing, dollar cost averaging, asset allocation, constant ratio transfer,
automatic account rebalancing, the advantages and disadvantages of investing in
tax-deferred and taxable investments). Advertisements and sales materials
relating to a Fund may include information regarding the background and
experience of its portfolio managers; the resources, expertise and support made
available to the portfolio managers by Morgan Stanley or its affiliates; and the
portfolio managers' goals, strategies and investment techniques.
The Funds' advertisements may discuss economic and political conditions of
the United States and foreign countries, the relationship between sectors of the
U.S., a foreign, or the global economy and the U.S., a foreign, or the global
economy as a whole and the effects of inflation. The Funds may include
discussions and illustrations of the growth potential of various global markets
including, but not limited to, Africa, Asia, Europe, Latin America, North
America, South America, Emerging Markets and individual countries. These
discussions may include the past performance of the various markets or market
sectors; forecasts of population, gross national product and market performance;
and the underlying data which supports such forecasts. From time to time,
advertisements, sales literature, communications to shareholders or other
materials may summarize the substance of information contained in the Funds'
shareholder reports (including the investment composition of a Fund), as well as
the views of Morgan Stanley as to current market, economic, trade and interest
rate trends, legislative, regulatory and monetary developments, investment
strategies and related matters believed to be of relevance to a Fund.
The Funds may quote various measures of volatility and benchmark correlation
in advertising. The Funds may compare these measures to those of other funds.
Measures of volatility seek to compare the historical share price fluctuations
or total returns to those of a benchmark. Measures of benchmark correlation
indicate how valid a comparative benchmark may be. Measures of volatility and
correlation may be calculated using averages of historical data. A Fund may also
advertise its current interest rate sensitivity, duration, weighted average
maturity or similar maturity characteristics.
The Funds may advertise examples of the effects of periodic investment
plans, including the principle of dollar cost averaging. In such a program, an
investor invests a fixed dollar amount in a Fund at periodic intervals, thereby
purchasing fewer shares when prices are high and more shares when prices are
low. While such a strategy does not assure a profit or guard against loss in a
declining market, the investor's average cost per share can be lower than if
fixed numbers of shares are purchased at the same intervals. In evaluating such
a plan, investors should consider their ability to continue purchasing shares
during periods of low price levels.
From time to time marketing materials may provide a portfolio manager
update, an adviser update and discuss general economic conditions and outlooks.
The Funds' marketing materials may also show each Fund's asset class
diversification, top five sector holdings and ten largest holdings. Materials
may also mention how the Adviser believes the Fund compares relative to other
funds advised by the Adviser or distributed by the Distributor. Materials may
also discuss the Dalbar Financial Services study from 1984 to 1994 which
examined investor cash flow into and out of all types of mutual funds. The ten
year study found that investors who bought mutual fund shares and held such
shares outperformed investors who bought and sold. The Dalbar study conclusions
were consistent regardless if shareholders purchased their fund in direct or
sales force distribution channels. The study showed that investors working with
a professional representative have tended over time to earn higher returns than
those who invested directly. The Funds will also be marketed on the Internet.
43
<PAGE> 103
GENERAL INFORMATION
DESCRIPTION OF SHARES AND VOTING RIGHTS
The Company's Articles of Incorporation permit the Directors to issue 27.375
billion shares of common stock, par value $.001 per share, from an unlimited
number of Funds. Currently the Company is authorized to offer shares of
twenty-two Funds, nineteen of which have Class A, Class B and Class C shares.
The shares of each Fund of the Company are fully paid and non-assessable,
and, except as described in the Prospectuses, have no preference as to
conversion, exchange, dividends, retirement or other features. The shares of
each Fund of the Company have no pre-emptive rights. The shares of the Company
have non-cumulative voting rights, which means that the holders of more than 50%
of the shares voting for the election of Directors can elect 100% of the
Directors if they choose to do so. A shareholder is entitled to one vote for
each full share owned (and a fractional vote for each fractional share owned),
then standing in his name on the books of the Company.
DIVIDENDS AND DISTRIBUTIONS
The Company's policy is to distribute substantially all of each Fund's net
investment income, if any. Each Fund may choose to make sufficient distributions
of net capital gains to avoid liability for federal excise tax. A Fund will not
be subject to federal income tax on capital gains or ordinary income distributed
to shareholders so long as it qualifies as a RIC (see discussion under
"Dividends and Distributions" and "Taxes" in the Prospectus). However, the
Company may also choose to retain net realized capital gains and pay taxes on
such gains. The amounts of any income dividends or distributions cannot be
predicted.
Any dividend or distribution paid shortly after an investor purchases shares
of an Non-Money Market Fund will reduce the per share net asset value of that
Fund by the per share amount of the dividend or distribution. Furthermore, such
dividends or distributions, although in effect a return of capital, are subject
to income taxes to shareholders subject to taxes as set forth in the Prospectus.
As set forth in the Prospectus, unless the shareholder elects otherwise in
writing, all dividends and distributions of a Fund are automatically reinvested
in additional shares of that Fund at net asset value as of the business day
following the record date. This reinvestment policy will remain in effect until
the shareholder notifies the Transfer Agent in writing at least three days prior
to a record date that the shareholder has elected either the Income Option
(income dividends in cash and distributions in additional shares at net asset
value) or the Cash Option (both income dividends and distributions in cash). No
initial sales charge or CDSC is imposed on shares of any of the Funds, including
the Non-Money Funds, that are purchased through the automatic reinvestment of
dividends and distributions of a Fund.
Each Fund generally will be treated as a separate corporation (and hence as
a separate "regulated investment company") for federal tax purposes. Any net
capital gains of any Fund, whether or not distributed to investors, cannot be
offset against net capital losses of any other Fund.
CUSTODY ARRANGEMENTS
Chase serves as the Company's domestic custodian except with respect to the
Money Market Funds. Morgan Stanley Trust Company, Brooklyn, NY, acts as the
Company's custodian for foreign assets held outside the United States and
employs subcustodians who were approved by the Directors of the Company in
accordance with Rule 17f-5 adopted by the SEC under the 1940 Act. Morgan Stanley
Trust Company is an affiliate of Morgan Stanley, Dean Witter, Discover & Co. In
the selection of foreign subcustodians, the Directors consider a number of
factors, including, but not limited to, the reliability and financial stability
of the institution, the ability of the institution to provide efficiently the
custodial services required for the Company, and the reputation of the
institution in the particular country or region. PNC Bank, N.A. serves as the
Company's custodian for each of the Money Market Funds.
DESCRIPTION OF SECURITIES AND RATINGS
I. DESCRIPTION OF COMMERCIAL PAPER AND BOND RATINGS
EXCERPTS FROM MOODY'S INVESTORS SERVICE, INC. ("MOODY'S") DESCRIPTION OF
BOND RATINGS:
Aaa -- Bonds which are rated Aaa are judged to be the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or by an exceptionally
stable margin, and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
AA -- Bonds which are rated AA are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
Moody's applies numerical
44
<PAGE> 104
modifiers 1, 2 and 3 in the Aa and A rating categories. The modifier 1 indicates
that the security ranks at a higher end of the rating category, modifier 2
indicates a mid-range rating and the modifier 3 indicates that the issue ranks
at the lower end of the rating category.
A -- Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa -- Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba -- Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate, and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa -- Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca -- Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
EXCERPTS FROM STANDARD & POOR'S CORPORATION ("S&P") DESCRIPTION OF BOND
RATINGS:
AAA -- Bonds rated AAA have the highest rating assigned by Standard & Poor's
to a debt obligation and indicate an extremely strong capacity to pay principal
and interest.
AA -- Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only to a small degree.
A -- Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher rated
categories.
BBB -- Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than for debt in higher rated categories.
BB, B, CCC, CC -- Debt rated BB, B, CCC and CC is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and CC the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
C -- The rating C is reserved for income bonds on which no interest is being
paid.
D -- Debt rated D is in default, and payment of interest and/or repayment of
principal is in arrears.
DESCRIPTION OF MOODY'S RATINGS OF STATE AND MUNICIPAL NOTES: Moody's
ratings for state and municipal notes and other short-term obligations are
designated Moody's Investment Grade ("MIG"). Symbols used are as follows: MIG-1
- -- best quality, enjoying strong protection from established cash flows of funds
for their servicing or from established broad-based access to the market for
refinancing, or both; MIG-2 -- high quality with margins of protection ample
although not so large as in the preceding group.
DESCRIPTION OF MOODY'S HIGHEST COMMERCIAL PAPER RATING: Prime-1 ("P1") --
Judged to be of the best quality. Their short-term debt obligations carry the
smallest degree of investment risk.
EXCERPT FROM S&P'S RATING OF MUNICIPAL NOTES ISSUES: S-1+ -- very strong
capacity to pay principal and interest; SP-1 -- strong capacity to pay principal
and interest.
DESCRIPTION OF S&P'S HIGHEST COMMERCIAL PAPER RATING: A-1+ -- this
designation indicates the degree of safety regarding timely payment is
overwhelming. A-1 -- this designation indicates the degree of safety regarding
timely payment is very strong.
45
<PAGE> 105
WITH RESPECT TO RATINGS BY IBCA LTD., the designation A1 by IBCA, Ltd.
indicates that the obligation is supported by a very strong capacity for timely
repayment. Those obligations rated A1+ are supported by the highest capacity for
timely repayment. Obligations rated A2 are supported by a strong capacity for
timely repayment, although such capacity may be susceptible to adverse changes
in business, economic or financial conditions.
II. DESCRIPTION OF UNITED STATES GOVERNMENT SECURITIES
The term "United States Government securities" refers to a variety of
securities which are issued or guaranteed by the United States Government, and
by various instrumentalities which have been established or sponsored by the
United States Government.
United States Treasury securities are backed by the "full faith and credit"
of the United States. Securities issued or guaranteed by federal agencies and
United States Government sponsored instrumentalities may or may not be backed by
the full faith and credit of the United States. In the case of securities not
backed by the full faith and credit of the United States, the investor must look
principally to the agency or instrumentality issuing or guaranteeing the
obligation for ultimate repayment, and may not be able to assert a claim against
the United States itself in the event the agency or instrumentality does not
meet its commitment. Agencies which are backed by the full faith and credit of
the United States include the Export-Import Bank, Farmers Home Administration,
Federal Financing Bank, and others. Certain agencies and instrumentalities, such
as the Government National Mortgage Associates, are, in effect, backed by the
full faith and credit of the United States through provisions in their charters
that they may make "indefinite and unlimited" drawings on the Treasury, if
needed to service debt. Debt from certain other agencies and instrumentalities,
including the Federal Home Loan Bank and Federal National Mortgage Association,
are not guaranteed by the United States, but those institutions are protected by
the discretionary authority for the United States Treasury to purchase certain
amounts of their securities to assist the institution in meeting its debt
obligations. Finally, other agencies and instrumentalities, such as the Farm
Credit System and the Federal Home Loan Mortgage Corporation, are federally
chartered institutions under Government supervision, but their debt securities
are backed only by the creditworthiness of those institutions, not the United
States Government.
Some of the United States Government agencies that issue or guarantee
securities include the Export-Import Bank of the United States, Farmers Home
Administration, Federal Housing Administration, Maritime Administration, Small
Business Administration, and the Tennessee Valley Authority.
An instrumentality of the United States Government is a Government agency
organized under federal charter with Government supervision. Instrumentalities
issuing or guaranteeing securities include, among others, Federal Home Loan
Banks, the Federal Land Banks, Central Bank for Cooperatives, Federal Immediate
Credit Banks, and the Federal National Mortgage Association.
46
<PAGE> 106
MORGAN STANLEY
GLOBAL EQUITY ALLOCATION FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
JUNE 30, 1997
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS (92.3%)
AUSTRALIA (1.2%)
9,600 Amcor Ltd........................................ $ 64
5,200 Australian Gas Light Co., Ltd.................... 31
14,200 Australian National Industries Ltd............... 17
18,524 Boral Ltd........................................ 58
3,500 Brambles Industries Ltd.......................... 69
28,159 Broken Hill Proprietary Ltd...................... 414
8,110 Burns, Philip & Co., Ltd......................... 15
7,386 Coca-Cola Amatil Ltd............................. 96
16,181 Coles Myer Ltd................................... 84
4,800 CRA Ltd.......................................... 82
(a)10,550 Crown Ltd........................................ 17
16,300 CSR Ltd.......................................... 63
27,800 Fosters Brewing Corp............................. 52
18,051 General Property Trust........................... 36
9,255 Gio Australia Holdings Ltd....................... 29
18,537 Goodman Fielder Ltd.............................. 27
4,900 ICI Australia Ltd................................ 48
(a)3,600 Leighton Holdings Ltd............................ 18
3,926 Lend Lease Corp., Ltd............................ 83
24,389 MIM Holdings Ltd................................. 36
20,137 National Australia Bank Ltd...................... 289
4,346 Newcrest Mining Ltd.............................. 12
27,757 News Corp., Ltd.................................. 133
23,154 Normandy Mining Ltd.............................. 26
11,449 North Broken Hill Peko Ltd....................... 44
13,200 Pacific Dunlop Ltd............................... 39
14,000 Pioneer International Ltd........................ 54
3,300 Plutonic Resources Ltd........................... 10
2,900 Renison Goldfields Consolidated Ltd.............. 11
10,012 Santos Ltd....................................... 42
3,000 Smith (Howard) Ltd............................... 29
1,800 Sons of Gwalia Ltd............................... 7
9,499 Southcorp Holdings Ltd........................... 36
4,800 Tabcorp Holdings Ltd............................. 26
1,098 Westfield Trust.................................. 2
25,100 Westpac Banking Corp. Ltd........................ 151
14,690 WMC Ltd.......................................... 93
--------
2,343
--------
CANADA (4.5%)
5,800 Abitibi-Consolidated, Inc........................ 104
4,600 Agrium, Inc...................................... 53
6,800 Alcan Aluminum Ltd............................... 233
2,100 Avenor, Inc...................................... 41
8,200 Bank of Montreal................................. 320
7,500 Bank of Nova Scotia.............................. 329
13,200 Barrick Gold Corp................................ 287
20,100 BCE, Inc......................................... 559
10,300 Bombardier, Inc., 'A'............................ 233
4,300 CAE Inc.......................................... 34
1,800 Cameco Corp...................................... 68
12,900 Canadian Imperial Bank of Commerce............... 325
(a)3,700 Canadian Natural Resources Ltd................... 96
4,900 Canadian Occidental Petroleum Ltd................ 110
10,800 Canadian Pacific, Ltd............................ 307
2,900 Canadian Tire Corp., 'A'......................... 57
2,900 Cominco Ltd...................................... 77
(a)2,300 Corel Corp....................................... 15
1,900 Cott Corp........................................ 20
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
3,200 Dofasco, Inc..................................... $ 61
5,000 Domtar, Inc...................................... 44
4,900 Echo Bay Mines Ltd............................... 27
1,700 George Weston Ltd................................ 109
(a)7,700 Gulf Canada Resources, Ltd....................... 63
7,600 Imasco, Ltd...................................... 220
5,200 Imperial Oil Ltd................................. 266
5,000 Inco Ltd......................................... 149
1,800 IPL Energy, Inc.................................. 60
9,000 Laidlaw, Inc. 'B'................................ 124
2,200 Loewen Group, Inc................................ 76
4,900 MacMillan Bloedel Ltd............................ 67
2,200 Magna International, Inc., 'A'................... 132
6,000 Methanex Corp.................................... 56
2,500 Molson Companies Ltd., 'A'....................... 42
3,500 Moore Corp. Ltd.................................. 69
(a)4,900 Newbridge Networks Corp.......................... 210
7,600 Noranda, Inc..................................... 164
4,100 Norcen Energy Resources Ltd...................... 98
7,600 Northern Telecom Ltd............................. 685
17,000 Nova Corp........................................ 145
9,800 Petro............................................ 159
7,400 Placer Dome, Inc................................. 120
1,700 Potash Corp. of Saskatchewan Inc................. 128
4,200 Power Corp. of Canada............................ 103
(a)4,100 Provigo, Inc..................................... 23
4,300 Ranger Oil Ltd................................... 40
(a)4,100 Renaissance Energy Ltd........................... 114
(a)4,100 Repap Enterprises, Inc........................... 2
(a)6,000 Rogers Communication, Inc., 'B'.................. 38
9,700 Royal Bank of Canada............................. 439
(a)4,100 Talisman Energy, Inc............................. 126
3,700 Teck Corp., 'B'.................................. 75
11,100 The Seagram Co., Ltd............................. 446
18,000 Thomson Corp..................................... 415
7,500 Transcanada Pipelines, Ltd....................... 151
3,900 Westcoast Energy, Inc............................ 71
--------
8,585
--------
FRANCE (4.3%)
693 Accor S.A........................................ 104
2,750 Alcatel Alsthom.................................. 345
5,324 AXA S.A.......................................... 331
3,902 Banque Nationale de Paris RFD.................... 161
2,077 Banque Paribas................................... 144
750 BIC.............................................. 123
702 Bouygues......................................... 58
(a)482 Canal Plus....................................... 94
810 Carrefour S.A.................................... 589
1,700 Casino Guichard Perrachon........................ 84
25 Chargeurs International S.A...................... 1
500 Cie Bancaire S.A................................. 64
1,867 Cie de Saint-Gobain.............................. 272
67,520 Cie de Suez S.A.................................. 166
2,073 Cie Generale des Eaux............................ 266
5,650 Elf Aquitaine.................................... 610
750 Eridania Beghin-Say S.A.......................... 112
250 Essilor International............................ 67
1,568 Groupe Danone RFD................................ 259
1,239 Havas S.A........................................ 89
1,907 L'Air Liquide.................................... 303
</TABLE>
-----------------------
47
The accompanying notes are an integral part of the financial statements.
<PAGE> 107
MORGAN STANLEY
GLOBAL EQUITY ALLOCATION FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
JUNE 30, 1997
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
FRANCE (CONT.)
(a)1,342 L'Oreal.......................................... $ 566
2,243 Lafarge Coppee S.A............................... 140
585 Legrand S.A...................................... 103
1,905 LVMH Moet Hennessy Louis Vuitton................. 512
1,231 Lyonnaise des Eaux S.A........................... 124
3,287 Michelin (C.G.D.E.) 'B'.......................... 197
25 Pathe S.A........................................ 5
1,325 Pernod-Ricard.................................... 68
430 Pinault S.A...................................... 207
440 Promodes......................................... 171
1,155 PSA Peugeot Citroen S.A.......................... 112
6,762 Rhone-Poulenc S.A. 'A'........................... 276
60 Sagem............................................ 30
2,036 Sanofi S.A....................................... 200
2,997 Schneider S.A.................................... 160
729 Simco S.A........................................ 58
(a,d)30 Simco S.A. (New)................................. 2
65 Societe Eurafrance S.A........................... 27
1,589 Societe Generale................................. 177
125 Sodexho S.A...................................... 64
2,608 Thomson CSF S.A.................................. 67
4,705 Total S.A. 'B'................................... 476
5,590 Usinor Sacilor................................... 101
680 Worms et Compagnie............................... 40
--------
8,125
--------
GERMANY (5.1%)
900 adidas AG........................................ 101
(a)850 Agiv AG.......................................... 19
4,500 Allianz AG....................................... 962
50 AMB Aachener & Muenchener
Beteiligungs AG................................ 45
10,700 BASF AG.......................................... 395
13,600 Bayer AG......................................... 524
4,550 Bayerische Hypotheken Bank AG.................... 138
4,750 Bayerische Vereinsbank AG........................ 195
(a)1,600 Beiersdorf AG.................................... 86
(a)900 Bilfinger & Berger Bau AG........................ 38
150 Brau und Brunnen AG.............................. 12
550 CKAG Colonia Konz AG............................. 52
1,750 Continental AG................................... 44
9,200 Daimler-Benz AG.................................. 749
2,000 Degussa AG....................................... 106
9,200 Deutsche Bank AG................................. 540
38,770 Deutsche Telekom AG.............................. 953
8,050 Dresdner Bank AG................................. 282
850 Heidelberger Zement AG........................... 82
1,650 Hochtief AG...................................... 74
200 Karstadt AG...................................... 72
(a)1,150 Kloeckner-Humboldt-Deutz AG...................... 11
200 Linde AG......................................... 155
6,950 Lufthansa AG..................................... 134
250 MAN AG........................................... 78
650 Mannesmann AG.................................... 290
2,923 Merck KGAA....................................... 127
(a)1,860 METRO AG......................................... 203
153 Muenchener Rueckversicherungs (Registered)....... 434
300 Preussag AG...................................... 88
6,100 RWE AG........................................... 262
1,110 SAP AG........................................... 223
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
1,350 Schering AG...................................... $ 145
10,300 Siemens AG....................................... 617
(a)50 Starbag AG....................................... 5
750 Thyssen AG....................................... 180
9,050 VEBA AG.......................................... 511
550 Viag AG.......................................... 251
(a)128 Viag AG RFD...................................... 59
550 Volkswagen AG.................................... 417
--------
9,659
--------
HONG KONG (2.0%)
(a)10,000 Applied International Holdings Ltd............... 1
22,600 Bank of East Asia Ltd............................ 94
52,000 Cathay Pacific Airways Ltd....................... 108
37,000 Cheung Kong Holdings Ltd......................... 365
39,500 China Light & Power Co. Ltd...................... 224
28,000 Chinese Estate Holdings Ltd...................... 26
11,200 Giordano Holdings Ltd............................ 8
22,000 Hang Lung Development Corp....................... 40
31,100 Hang Seng Bank Ltd............................... 443
58,697 Hong Kong & China Gas Co......................... 117
3,200 Hong Kong Aircraft Engineering Co., Ltd.......... 12
22,500 Hong Kong Shanghai Hotels........................ 36
187,200 Hong Kong Telecomunications Ltd.................. 447
70,000 Hopewell Holdings Ltd............................ 44
61,000 Hutchison Whampoa Ltd............................ 528
17,000 Hysan Development Co............................. 50
7,000 Johnson Electric Holdings Ltd.................... 21
8,000 Miramar Hotel Investment Ltd..................... 15
30,133 New World Development Co., Ltd................... 180
26,000 Oriental Press Goup.............................. 11
7,000 Peregrine Investment Holdings.................... 14
28,000 Shangri-La Asia Ltd.............................. 34
22,961 Shun Tak Holdings Ltd............................ 14
30,000 South China Morning Post......................... 29
13,000 Stelux Holdings Ltd.............................. 3
38,000 Sun Hung Kai Properties Ltd...................... 457
25,500 Swire Pacific Ltd. 'A'........................... 230
8,000 Television Broadcasting Ltd...................... 36
37,000 Wharf Holdings Ltd............................... 160
6,000 Windsor Industrial............................... 2
4,300 Wing Lung Bank................................... 27
--------
3,776
--------
ITALY (2.8%)
25,672 Assicurazioni Generali S.p.A..................... 467
40,300 Banca Commerciale Italiana....................... 83
15,900 Banco Ambrosiano Veneto.......................... 46
5,660 Benetton Group S.p.A............................. 90
4,700 Cartiere Burgo S.p.A............................. 26
71,000 Credito Italiano S.p.A........................... 130
19,000 Edison S.p.A..................................... 95
222,000 Ente Nazionale Idrocarburi S.p.A................. 1,257
4,500 Falck............................................ 17
93,300 Fiat S.p.A....................................... 336
20,700 Fiat S.p.A. Di Risp NCS.......................... 39
(a)11,000 Impreglio S.p.A.................................. 7
24,600 Istituto Bancario San Paolo di Torina S.p.A...... 179
17,950 Istituto Mobiliare Italiano S.p.A................ 162
118,200 Istituto Nazionale delle Assicurazioni (INA)..... 180
6,800 Italcementi S.p.A................................ 42
</TABLE>
- --------------
48
The accompanying notes are an integral part of the financial statements.
<PAGE> 108
MORGAN STANLEY
GLOBAL EQUITY ALLOCATION FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
JUNE 30, 1997
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
ITALY (CONT.)
4,650 Italcementi S.p.A. NCS........................... $ 11
19,400 Italgas.......................................... 63
6,565 La Rinascente S.p.A.............................. 36
14,000 Magneti Marelli S.p.A............................ 24
33,500 Mediaset S.p.A................................... 142
14,050 Mediobanca S.p.A................................. 85
(a)83,108 Montedison S.p.A................................. 55
(a)28,900 Montedison S.p.A. Di Risp NCS.................... 19
(a)100,750 Olivetti Group................................... 29
44,640 Parmalat Finanziaria S.p.A....................... 63
45,000 Pirelli S.p.A.................................... 111
8,301 R.A.S............................................ 66
4,100 S.A.I............................................ 32
2,300 Sasib S.p.A...................................... 8
8,500 Sirti S.p.A...................................... 49
21,000 Snia BPD S.p.A................................... 19
42,500 Telecom Italia Di Risp S.p.A..................... 84
182,800 Telecom Italia Mobile S.p.A...................... 592
45,000 Telecom Italia Mobile S.p.A...................... 80
179,200 Telecom Italia S.p.A............................. 537
--------
5,261
--------
JAPAN (16.1%)
1,580 Advantest Corp................................... 121
20,000 Ajinomoto Co., Inc............................... 215
(a)12,000 Aoki Corp........................................ 14
1,600 Aoyama Trading Co., Ltd.......................... 51
39,000 Asahi Bank Ltd................................... 332
12,000 Asahi Breweries Ltd.............................. 179
36,000 Asahi Chemical Industry Co., Ltd................. 215
34,000 Asahi Glass Co................................... 338
70,000 Bank of Tokyo-Mitsubishi......................... 1,405
12,000 Bridgestone Corp................................. 279
15,000 Canon, Inc....................................... 408
7,000 Casio Computer Co., Ltd.......................... 61
19,000 Chiba Bank Ltd................................... 113
12,000 Chugai Pharmaceutical Ltd........................ 108
14,000 Dai Nippon Printing Co., Ltd..................... 317
13,000 Daiei, Inc....................................... 83
12,000 Daikin Industries Ltd............................ 109
12,000 Daiwa House Industry............................. 147
24,000 Daiwa Securities Co., Ltd........................ 189
70 East Japan Railway Co............................ 359
8,000 Ebara Corp....................................... 120
5,100 Fanuc Co......................................... 196
42,000 Fuji Bank........................................ 631
7,000 Fuji Photo Film Ltd.............................. 282
31,000 Fujitsu Ltd...................................... 430
9,000 Furukawa Electric................................ 57
16,000 Hankyu Corp...................................... 88
12,000 Hazama-Gumi...................................... 25
60,000 Hitachi Ltd...................................... 670
16,000 Honda Motor Co................................... 482
38,000 Industrial Bank of Japan......................... 590
7,000 Ito-Yokado Co., Ltd.............................. 406
37,000 Japan Airlines Co................................ 168
30,000 Japan Energy Corp................................ 79
13,000 Joyo Bank........................................ 72
6,000 Jusco Co......................................... 203
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
24,000 Kajima Corp...................................... $ 141
15,900 Kansai Electric Power Co......................... 307
22,000 KAO Corp......................................... 305
19,000 Kawasaki Steel Corp.............................. 62
29,000 Kinki Nippon Railway............................. 177
24,000 Kirin Brewery Co., Ltd........................... 249
24,000 Komatsu Ltd...................................... 195
36,000 Kubota Corp...................................... 176
24,000 Kumagai Gumi Co. Ltd............................. 40
3,600 Kyocera Corp..................................... 286
12,000 Kyowa Hakko Kogyo................................ 90
36,000 Marubeni Corp.................................... 163
3,000 Marui Co......................................... 56
36,000 Matsushita Electric Industries Ltd............... 726
36,000 Mitsubishi Chemical Corp......................... 118
33,000 Mitsubishi Corp.................................. 412
42,000 Mitsubishi Electric Corp......................... 235
26,000 Mitsubishi Estate Co., Ltd....................... 377
65,000 Mitsubishi Heavy Industries Ltd.................. 499
24,000 Mitsubishi Materials Corp........................ 96
22,000 Mitsubishi Trust & Banking Corp.................. 348
36,000 Mitsui & Co...................................... 346
24,000 Mitsui Engineering & Shipbuilding Co., Ltd....... 52
19,000 Mitsui Fudosan Co., Ltd.......................... 262
18,000 Mitsui Trust & Banking Corp...................... 136
13,000 Mitsukoshi Ltd................................... 93
4,000 Murata Manufacturing Co., Ltd.................... 159
(a)8,000 Mycal Corp....................................... 115
21,000 NEC Corp......................................... 293
12,000 NGK Insulators Ltd............................... 132
15,000 Nippon Denko Co., Ltd............................ 359
9,000 Nippon Express Co., Ltd.......................... 72
12,000 Nippon Fire & Marine Insurance Co................ 65
12,000 Nippon Light Metal Co............................ 44
12,000 Nippon Meat Packers, Inc......................... 155
34,000 Nippon Oil Co.................................... 186
133,000 Nippon Steel Corp................................ 425
179 Nippon Telegraph & Telephone ADR................. 1,719
36,000 Nippon Yusen Kabushiki Kaisha.................... 140
45,000 Nissan Motor Co., Ltd............................ 349
70,000 NKK Corp......................................... 150
31,000 Nomura Securities Co., Ltd....................... 428
14,000 Odakyu Electric Railway Co....................... 83
24,000 OJI Paper Co., Ltd............................... 149
53,000 Osaka Gas Co..................................... 152
12,000 Penta-Ocean Construction......................... 39
4,000 Pioneer Electronic Corp.......................... 97
1,000 Rohm Co.......................................... 103
47,000 Sakura Bank Ltd.................................. 360
9,000 Sankyo Co., Ltd.................................. 302
36,000 Sanyo Electric Co., Ltd.......................... 162
3,000 Secom Co......................................... 220
2,300 Sega Enterprises Ltd............................. 76
12,000 Sekisui House Ltd................................ 121
24,000 Sharp Corp....................................... 331
3,000 Shimano, Inc..................................... 63
5,000 Shin-Etsu Chemical Co............................ 133
17,000 Shinizu Corp..................................... 102
5,000 Shiseido Co., Ltd................................ 83
16,000 Shizuoka Bank.................................... 183
</TABLE>
-----------------------
49
The accompanying notes are an integral part of the financial statements.
<PAGE> 109
MORGAN STANLEY
GLOBAL EQUITY ALLOCATION FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
JUNE 30, 1997
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
JAPAN (CONT.)
(a)24,000 Showa Denko K.K.................................. $ 63
5,500 Sony Corp........................................ 480
47,000 Sumitomo Bank.................................... 771
48,000 Sumitomo Chemical Co............................. 217
24,000 Sumitomo Corp.................................... 228
16,000 Sumitomo Electric Industries..................... 268
5,000 Sumitomo Forestry................................ 55
43,000 Sumitomo Metal Industries........................ 122
11,000 Sumitomo Metal Mining Co......................... 78
12,000 Sumitomo Osaka Cement Co., Ltd................... 38
24,000 Taisei Corp., Ltd................................ 111
7,000 Taisho Pharmaceutical Co......................... 189
15,000 Takeda Chemical Industries....................... 422
24,000 Teijin Ltd....................................... 113
16,000 Tobu Railway Co.................................. 74
8,600 Tohoku Electric Power............................ 153
36,000 Tokai Bank....................................... 371
36,000 Tokio Marine & Fire Insurance Co................. 471
22,200 Tokyo Electric Power Co.......................... 467
1,000 Tokyo Electron Ltd............................... 48
48,000 Tokyo Gas Co..................................... 133
20,000 Tokyu Corp....................................... 124
16,000 Toppan Printing Co., Ltd......................... 251
36,000 Toray Industries, Inc............................ 257
12,300 Toto Ltd......................................... 151
24,000 Toyobo Ltd....................................... 64
52,000 Toyota Motor Corp................................ 1,534
24,000 Ube Industries Ltd............................... 70
24,000 Yamaichi Securities.............................. 71
22,000 Yasuda Trust & Banking........................... 84
--------
30,517
--------
KOREA (0.7%)
4,440 Cho Hung Bank Co................................. 30
(a)3,990 Commericial Bank of Korea........................ 21
3,080 Daewoo Corp...................................... 25
9,650 Daewoo Heavy Industries.......................... 79
(a)1,330 Daewoo Securities, Co............................ 24
980 Dong-Ah Construction Industrial Co............... 19
(a)4,530 Hanil Bank....................................... 25
(a)1,366 Hyundai Engineering & Construction Co. RFD....... 35
(d)1,090 Hyundai Motor Co., Ltd........................... 36
13,650 Korea Electric Power Corp........................ 407
4,100 Korea First Bank................................. 17
(a,d)100 Korea Mobile Telecommunications Corp.
(Foreign)...................................... 75
(d)3 Korea Mobile Telecommunications Corp............. 2
2,100 L.G. Chemical Ltd................................ 29
(d)2,550 Pohang Iron & Steel Ltd.......................... 261
1,600 Samsung Corp..................................... 22
(d)670 Samsung Display Devices Co....................... 37
(d)1,900 Samsung Electronics Co........................... 213
260 Tong Yang Cement Co.............................. 5
2,009 Yukong Ltd....................................... 49
--------
1,411
--------
NETHERLANDS (1.5%)
11,500 ABN-Amro Holdings N.V............................ 214
700 Akzo Nobel N.V................................... 96
5,800 Elsevier N.V..................................... 97
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
350 Heineken N.V..................................... $ 60
7,011 ING Groep N.V.................................... 323
813 KLM Royal Dutch Airlines N.V..................... 25
1,251 Koninklijke Ahold N.V............................ 106
287 Koninklijke Hoogovens............................ 16
900 Koninklijke KNP BT............................... 20
9,213 Koninklijke PTT Nederland N.V.................... 362
200 Nedlloyd Groep N.V............................... 6
2,900 Phillips Electronics N.V......................... 208
18,800 Royal Dutch Petroleum N.V........................ 979
296 Stork N.V........................................ 12
1,400 Unilever N.V..................................... 295
640 Wolters Kluwer N.V............................... 78
--------
2,897
--------
SINGAPORE (1.8%)
(d)11,000 Amcol Holdings Ltd............................... --
35,000 City Developments Ltd............................ 343
(a)4,000 Creative Technology Ltd.......................... 69
10,000 Cycle & Carriage Ltd............................. 104
41,000 DBS Land Ltd..................................... 130
21,000 Development Bank of Singapore.................... 264
13,000 First Capital Corp............................... 34
13,200 Fraser & Neave Ltd............................... 94
25,000 Hai Sun Hup Group Ltd............................ 18
21,000 Hotel Properties Ltd............................. 36
9,000 Inchcape Bhd..................................... 32
5,000 Jurong Shipyard Ltd.............................. 22
(a)32,000 Keppel Corp...................................... 142
(a)2,750 Keppel Corp. 'A'................................. 12
5,000 Metro Holdings Ltd............................... 16
15,000 NatSteel Ltd..................................... 38
38,000 Neptune Orient Lines Ltd......................... 34
37,920 Oversea-Chinese Banking Corp..................... 392
6,000 Overseas Union Enterprise Ltd.................... 28
14,000 Parkway Holdings Ltd............................. 63
3,000 Robinson & Co. Ltd............................... 16
6,600 Shangri-La Hotel Ltd............................. 20
39,000 Singapore Airlines Ltd. (Foreign)................ 349
8,600 Singapore Press Holdings (Foreign)............... 173
32,000 Singapore Technologies Industrial Corp........... 82
270,000 Singapore Telecommunications Ltd................. 499
15,000 Straits Trading Co., Ltd......................... 33
63,000 United Industrial Corp. Ltd...................... 48
36,000 United Overseas Bank Ltd. (Foreign).............. 370
24,000 United Overseas Land Ltd......................... 32
--------
3,493
--------
SPAIN (3.0%)
340 Acerinox S.A..................................... 64
4,800 Argentaria S.A................................... 269
7,820 Autopistas Concesionaria Espanola S.A............ 106
8,000 Banco Bilbao Vizcaya (Registered)................ 650
6,100 Banco Central Hispanoamericano S.A............... 223
21,900 Banco Santander S.A.............................. 675
400 Corporacion Financiera Alba S.A.................. 51
849 Corporacion Mapfre S.A........................... 45
1,550 Dragados y Construcciones S.A.................... 32
1,300 Ebro Agricolas, Compania de Alimentacion S.A..... 25
550 Empresa Nacional de Cellulosas S.A............... 10
10,000 Empresa Nacional de Electricidad S.A............. 840
</TABLE>
- --------------
50
The accompanying notes are an integral part of the financial statements.
<PAGE> 110
MORGAN STANLEY
GLOBAL EQUITY ALLOCATION FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
JUNE 30, 1997
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
SPAIN (CONT.)
317 Energia y Indsutrias Aragonesas.................. $ 2
(a)4,700 Ercros S.A....................................... 5
400 Fomento de Construcciones y Contratas S.A........ 51
1,300 Gas Natural SDG 'E'.............................. 284
(a)200 Gines Navarro Construction Co.................... 4
35,300 Iberdrola S.A.................................... 446
625 Inmobiliaria Metropolitana Vasco Central S.A..... 23
200 Portland Vaderrivas S.A.......................... 16
11,600 Repsol S.A....................................... 491
1,591 Sociedade General de Aguas
de Barcelona S.A............................... 65
(a)44 Sociedade General de Aguas de Barcelona, S.A.
RFD............................................ 2
1,000 Tabacalera S.A. 'A'.............................. 54
34,600 Telefonica de Espana............................. 1,001
8,100 Union Electrica Fenosa S.A....................... 74
2,400 Uralita S.A...................................... 27
1,376 Vallehermoso S.A................................. 37
650 Viscofan Industria Navarra de Envolturas
Celulosicas S.A................................ 15
348 Zardoya-Otis S.A................................. 46
--------
5,633
--------
SWEDEN (1.9%)
19,000 ABB AB 'A'....................................... 267
1,300 AGA AG 'A'....................................... 18
3,000 AGA AG 'B'....................................... 40
36,266 Astra AB 'A'..................................... 675
4,450 Atlas Copco AB 'A'............................... 116
1,700 Electrolux AB 'B'................................ 123
900 Esselte AB 'A'................................... 21
(a)850 Granges AB....................................... 11
5,000 Hennes & Mauritz AB 'B'.......................... 179
100 Scancem AB....................................... 4
2,100 Securitas AB, 'B'................................ 59
2,700 Skandia Group Forsakrings AB..................... 99
12,700 Skandinaviska Enskilda Banken, 'A'............... 137
3,000 Skanska AB, 'B'.................................. 133
3,000 SKF AB 'B'....................................... 78
7,350 Stora Kopparbergs Bergslags Aktiebolag........... 119
4,600 Svenska Cellulosa AB, 'B'........................ 98
5,000 Svenska Handelsbanken 'A'........................ 160
11,300 Swedish Match AB................................. 38
22,100 Telefonaktiebolaget LM Ericsson.................. 870
3,200 Trelleborg AB, 'B'............................... 52
9,400 Volvo AB, 'B'.................................... 252
--------
3,549
--------
SWITZERLAND (2.1%)
180 Adia S.A. (Bearer)............................... 69
60 Alusuisse-Lonza Holding AG (Registered).......... 62
95 BBC Brown Boveri AG (Bearer)..................... 144
1,850 CS Holding AG (Registered)....................... 238
5 Georg Fischer AG (Bearer)........................ 7
65 Holderbank Financiere Glaris AG, 'B' (Bearer).... 61
(a)65 Merkur Holding AG (Registered)................... 14
385 Nestle S.A. (Registered)......................... 508
630 Novartis AG (Registered)......................... 1,007
16 Roche Holding AG (Bearer)........................ 220
69 Roche Holding AG-Genusshein...................... 624
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
145 Schweizerische Rueckversicherungs-Gesellschaft
(Registered)................................... $ 205
55 SMH AG (Bearer).................................. 31
20 Societe Generale de Surveillance Holding S.A.
(Bearer)....................................... 43
40 Sulzer AG (Registered)........................... 34
(a)750 Swiss Bank Corp. (Registered).................... 201
35 SwissAir AG (Registered)......................... 39
205 Union Bank of Switzerland (Bearer)............... 234
200 Union Bank of Switzerland (Registered)........... 46
465 Zuerich Versicherungs-Gesellschaft
(Registered)................................... 185
--------
3,972
--------
UNITED KINGDOM (7.3%)
18,200 Abbey National plc............................... 249
11,665 Argyll Group plc................................. 67
9,100 Arjo Wiggins Appleton plc........................ 27
6,500 Associated British Foods plc..................... 56
22,589 Barclays plc..................................... 448
14,300 Bass plc......................................... 175
40,266 B.A.T Industries plc............................. 360
57,200 BG plc........................................... 210
9,127 BICC plc......................................... 27
16,856 Blue Circle Industries plc....................... 120
9,055 BOC Group plc.................................... 157
14,300 Boots Co. plc.................................... 168
9,100 BPB Industries plc............................... 49
6,468 British Aerospace plc............................ 144
15,628 British Airways plc.............................. 178
74,927 British Petroleum Co. plc........................ 932
20,800 British Sky Broadcasting Group plc............... 152
26,000 British Steel plc................................ 65
75,400 British Telecommunications plc................... 560
54,606 BTR plc.......................................... 187
3,856 Burmah Castrol plc............................... 65
32,462 Cable & Wireless plc............................. 297
14,335 Cadbury Schweppes plc............................ 128
9,360 Caradon plc...................................... 31
(a)57,200 Centrica plc..................................... 70
11,671 Coats Viyella plc................................ 24
9,056 Commercial Union plc............................. 95
6,500 Courtaulds plc................................... 37
1,272 De La Rue plc.................................... 8
37,700 General Electric plc............................. 225
7,767 GKN plc.......................................... 133
41,600 Glaxo Wellcome plc............................... 861
9,090 Granada Group plc................................ 120
28,572 Grand Metropolitan plc........................... 275
15,600 Great Universal Stores plc....................... 158
10,369 Guardian Royal Exchange plc...................... 47
28,600 Guinness plc..................................... 280
(a)7,768 Hanson plc....................................... 39
16,900 Harrisons & Crosfield plc........................ 31
28,570 HSBC Holdings plc................................ 847
11,700 Imperial Chemical Industries plc................. 163
15,613 Ladbroke Group plc............................... 61
10,400 Land Securities plc.............................. 147
10,400 Lasmo plc........................................ 45
15,600 Legal & General Group plc........................ 106
71,500 Lloyds TSB Group plc............................. 735
</TABLE>
-----------------------
51
The accompanying notes are an integral part of the financial statements.
<PAGE> 111
MORGAN STANLEY
GLOBAL EQUITY ALLOCATION FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
JUNE 30, 1997
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
UNITED KINGDOM (CONT.)
10,418 Lonrho plc....................................... $ 22
45,500 Marks & Spencer plc.............................. 377
7,800 MEPC plc......................................... 64
18,200 National Power plc............................... 158
9,098 North West Water plc............................. 100
10,757 Peninsular & Oriental Steam Navigation Co........ 107
19,478 Pilkington plc................................... 45
26,009 Prudential Corp. plc............................. 254
11,700 Rank Organization plc............................ 74
7,751 Redland plc...................................... 44
18,200 Reed International plc........................... 176
22,100 Reuters Holdings plc............................. 233
7,800 Rexam plc........................................ 33
3,900 RMC Group plc.................................... 63
18,212 Royal & Sun Alliance Insurance Group plc......... 135
6,454 Royal Bank of Scotland plc....................... 60
15,760 RTZ Corp. plc (Registered)....................... 275
20,772 Sainsbury (J) plc................................ 126
2,600 Schroders plc.................................... 71
12,993 Scottish Power plc............................... 84
26,000 Sears plc........................................ 29
8,051 Sedwick Group plc................................ 17
6,500 Slough Estates plc............................... 32
32,448 Smithkline Beecham plc........................... 597
6,476 Southern Electric plc............................ 48
18,185 Tarmac plc....................................... 38
10,354 Taylor Woodrow plc............................... 30
24,742 Tesco plc........................................ 153
9,144 Thames Water plc................................. 105
6,500 Thorn plc........................................ 18
6,517 Thorne EMI plc................................... 117
6,466 TI Group plc..................................... 56
9,100 Unilever plc..................................... 261
42,892 Vodafone Group plc............................... 209
11,700 Zeneca Group plc................................. 387
--------
13,957
--------
UNITED STATES (38.0%)
13,300 Abbott Laboratories.............................. 888
(a)13,000 Airtouch Communications, Inc..................... 356
5,800 Aluminum Co. of America.......................... 437
12,000 American Express Co.............................. 894
10,500 American Home Products Corp...................... 803
11,000 American International Group, Inc................ 1,643
29,500 American Telephone & Telegraph Co................ 1,034
9,300 Amoco Corp....................................... 809
(a)5,800 AMR Corp......................................... 537
(a)3,600 Applied Material, Inc............................ 255
3,100 Atlantic Richfield Co............................ 219
5,800 Automatic Data Processing, Inc................... 273
11,710 Banc One Corp.................................... 567
11,700 BankAmerica Corp................................. 755
1,900 Bankers Trust New York Corp...................... 165
10,800 Bell Atlantic Corp............................... 820
11,700 BellSouth Corp................................... 543
13,220 Boeing Co........................................ 701
14,900 Bristol-Myers Squibb Co.......................... 1,207
4,400 Campbell Soup Co................................. 220
5,800 Caterpillar, Inc................................. 623
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
12,800 Chevron Corp..................................... $ 946
9,700 Chrysler Corp.................................... 318
5,800 Chubb Corp....................................... 388
2,300 CIGNA Corp....................................... 408
(a)10,500 Cisco Systems, Inc............................... 705
9,500 Citicorp......................................... 1,145
44,300 Coca-Cola Co..................................... 2,990
13,600 Columbia HCA/Healthcare Corp..................... 535
11,700 Consolidated Edison Co. of New York, Inc......... 344
5,800 Cooper Industries, Inc........................... 289
5,800 Corning, Inc..................................... 323
4,100 CSX Corp......................................... 228
2,900 Deere & Co....................................... 159
8,600 Dow Chemical Co.................................. 749
(a)2,700 DSC Communications Corp.......................... 60
16,100 Du Pont (EI) de Nemours Co....................... 1,012
11,700 Duke Power Co.................................... 561
4,400 Dun & Bradstreet Corp............................ 116
11,700 Eastman Kodak Co................................. 898
2,200 Edison International............................. 55
9,600 Electronic Data Systems Corp..................... 394
9,048 Eli Lilly & Co................................... 989
7,800 Enron Corp....................................... 318
35,600 Exxon Corp....................................... 2,189
21,300 Federal National Mortgage Association............ 929
8,100 First Data Corp.................................. 356
5,400 Fleet Financial Group, Inc....................... 342
11,700 FPL Group, Inc................................... 539
4,500 Gannett Co., Inc................................. 444
44,300 General Electric Co.............................. 2,896
18,900 General Motors Corp.............................. 1,052
2,100 General RE Corp.................................. 382
5,800 Goodyear Tire & Rubber Co........................ 367
2,300 H&R Block, Inc................................... 74
10,850 H.J. Heinz Co.................................... 501
(a)900 Harrah's Entertainment, Inc...................... 16
17,800 Hewlett-Packard Co............................... 997
11,600 Home Depot, Inc.................................. 800
11,400 Intel Corp....................................... 1,617
11,100 International Business Machines Corp............. 1,001
8,800 International Paper Co........................... 427
6,900 J.C. Penney Co., Inc............................. 360
18,900 Johnson & Johnson................................ 1,217
(a)2,400 Kmart Corp....................................... 29
7,222 Lucent Technologies, Inc......................... 520
14,600 McDonald's Corp.................................. 705
22,100 Merck & Co., Inc................................. 2,287
(a)20,100 Microsoft Corp................................... 2,540
7,900 Minnesota Mining & Manufacturing Co.............. 806
9,000 Mobil Corp....................................... 629
3,500 Monsanto......................................... 151
5,800 Morgan (J.P.) & Co., Inc......................... 605
9,700 Motorola, Inc.................................... 737
11,700 NationsBank Corp................................. 755
4,600 Norfolk Southern Corp............................ 464
12,600 Norwest Corp..................................... 709
(a)7,200 Novell, Inc...................................... 50
2,500 Nucor Corp....................................... 141
(a)15,400 Oracle System Corp............................... 776
9,000 Pacific Gas & Electric Co........................ 218
</TABLE>
- --------------
52
The accompanying notes are an integral part of the financial statements.
<PAGE> 112
MORGAN STANLEY
GLOBAL EQUITY ALLOCATION FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
JUNE 30, 1997
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
UNITED STATES (CONT.)
11,300 Pfizer, Inc...................................... $ 1,350
12,300 Philip Morris Cos., Inc.......................... 546
3,600 PPG Industries, Inc.............................. 209
13,600 Procter & Gamble Co.............................. 1,921
11,600 Public Service Enterprise Group, Inc............. 290
7,200 Rockwell International Corp...................... 425
3,700 Salomon, Inc..................................... 206
13,243 SBC Communications, Inc.......................... 819
9,300 Schering-Plough Corp............................. 445
11,700 Sears, Roebuck & Co.............................. 629
17,600 Southern Co...................................... 385
10,600 Sprint Corp...................................... 558
5,800 Suntrust Banks, Inc.............................. 319
(a)10,300 Tele-Communications, Inc., 'A'................... 153
5,300 Texas Instruments, Inc........................... 446
11,700 Texas Utilities Co............................... 403
4,374 The Limited, Inc................................. 89
11,800 Time Warner, Inc................................. 569
(a)7,000 Toys `R' Us, Inc................................. 245
9,133 Travelers, Inc................................... 576
5,500 Union Pacific Corp............................... 388
(a)6,600 Viacom, Inc. 'B'................................. 198
33,200 Wal-Mart Stores, Inc............................. 1,123
12,609 Walt Disney Co................................... 1,012
3,400 Warner-Lambert Co................................ 422
1,500 Waste Management Inc............................. 48
1,700 Wells Fargo & Co................................. 458
15,600 Westinghouse Electric Corp....................... 361
6,000 Weyerhaeuser Co.................................. 312
9,000 WMX Technologies, Inc............................ 289
7,100 XEROX Corp....................................... 560
--------
72,061
--------
TOTAL COMMON STOCKS (COST $143,451)............................. 175,239
--------
PREFERRED STOCKS (0.2%)
AUSTRALIA (0.0%)
21,599 News Corp., Ltd.................................. 85
--------
GERMANY (0.2%)
4,150 RWE AG........................................... 145
776 SAP AG........................................... 160
--------
305
--------
ITALY (0.0%)
31,500 Fiat S.p.A....................................... 58
--------
UNITED STATES (0.0%)
(a)141 Aetna Life & Casualty 'C'........................ 13
--------
TOTAL PREFERRED STOCKS (COST $410).............................. 461
--------
INVESTMENT COMPANIES (5.1%)
UNITED STATES (5.1%)
(a,g)100,000 Morgan Stanley India Investment Fund, Inc........ 1,294
(g)70,000 Morgan Stanley Africa Investment Fund, Inc....... 1,251
(g)224,333 Morgan Stanley Asia-Pacific Fund, Inc............ 2,355
92,664 The Korea Fund, Inc.............................. 1,367
(g)95,900 The Latin American Discovery Fund, Inc........... 1,894
(g)92,853 The Thai Fund, Inc............................... 1,428
--------
TOTAL INVESTMENT COMPANIES (COST $9,653)........................ 9,589
--------
</TABLE>
<TABLE>
<CAPTION>
NO. OF VALUE
RIGHTS (000)
- --------------------------------------------------------------------------
<C> <S> <C>
RIGHTS (0.0%)
FRANCE (0.0%)
(a,d)30 Simco S.A., expiring 7/2/97...................... $ --
--------
ITALY (0.0%)
(a)4,565 Rinascente S.p.A., expiring 7/23/97.............. 1
--------
KOREA (0.0%)
(a,d)31 Samsung Electronics Co., expiring 7/1/97......... 2
--------
SPAIN (0.0%)
(a,d)625 Immobiliaria Metropolitana Vasco Central S.A.,
expiring 7/26/97............................... --
--------
SWITZERLAND (0.0%)
(a)40 Sulzer AG (Resistered), expiring 7/17/97......... --
--------
TOTAL RIGHTS (COST $0).......................................... 3
--------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
WARRANTS
- --------------------------------------------------------------------------
<C> <S> <C>
WARRANTS (0.0%)
FRANCE (0.0%)
(a)320 Casino Guichard Perrachon, expiring 12/31/99..... 5
(a)2,073 Compagnie Generale des Eaux, expiring 5/2/01..... 1
(a)5 Sodexho S.A., expiring 6/7/04.................... 1
--------
7
--------
HONG KONG (0.0%)
(a)2,000 Applied International Holdings Ltd., expiring
12/30/99....................................... --
(a)4,000 Hong Kong Shanghai Hotels, expiring 10/12/98..... 1
(a)1,400 Hysan Development Co., expiring 4/30/98.......... 1
(a)5,300 Oriental Press Group, expiring 10/2/98........... --
(a)1,230 Peregine Investment Holdings Ltd., expiring
5/15/98........................................ 1
(a)4,400 Stelux Holdings International Ltd., expiring
2/28/98........................................ --
--------
3
--------
ITALY (0.0%)
(a,d)578 La Rinascente S.p.A., expiring 12/31/99.......... --
(a)420 R.A.S. S.p.A. (Savings Shares), expiring
12/31/97....................................... 1
(a)880 R.A.S. S.p.A., expiring 12/31/97................. 2
--------
3
--------
SINGAPORE (0.0%)
(a)6,750 Keppel Land Ltd., expiring 12/12/00.............. 6
--------
SWITZERLAND (0.0%)
(a)45 Roche Holdings, expiring 5/5/98.................. 3
--------
TOTAL WARRANTS (COST $5)........................................ 22
--------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
UNITS
- --------------------------------------------------------------------------
<C> <S> <C>
UNITS (0.0%)
AUSTRALIA (0.0%)
(a)18,212 Westfield Trust (COST $31)....................... 37
--------
</TABLE>
-----------------------
53
The accompanying notes are an integral part of the financial statements.
<PAGE> 113
MORGAN STANLEY
GLOBAL EQUITY ALLOCATION FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
JUNE 30, 1997
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- --------------------------------------------------------------------------
<C> <S> <C>
CONVERTIBLE DEBENTURES (0.0%)
FRANCE (0.0%)
FRF 32 Casino Guichard Perrachon 4.50%, 7/12/01......... $ 16
29 Sanofi S.A. 4.00%, 1/1/00........................ 31
1 Sodexho S.A. 6.00%, 6/7/04....................... 4
--------
51
--------
ITALY (0.0%)
ITL 2,125 Mediobanca S.p.A. 6.00%, 12/31/02................ 1
--------
TOTAL CONVERTIBLE DEBENTURES (COST $38)......................... 52
--------
TOTAL FOREIGN & U.S. SECURITIES (97.6%) (COST $153,588)......... 185,403
--------
SHORT-TERM INVESTMENT (4.7%)
REPURCHASE AGREEMENT (4.7%)
UNITED STATES
$ 8,897 Chase Securities, Inc., 5.70%, dated 6/30/97, due
7/1/97, to be repurchased at $8,898,
collateralized by $9,420 U.S. Treasury Bonds,
5.625%, due 2/15/06, valued at $9,050 (COST
$8,897)........................................ 8,897
--------
TOTAL INVESTMENT IN SECURITIES (102.3%) (COST $162,485)......... 194,300
--------
FOREIGN CURRENCY (0.3%)
AUD 18 Australian Dollar................................ 14
ATS 4 Austrian Schilling............................... --
GBP 8 British Pound.................................... 13
CAD 67 Canadian Dollar.................................. 48
DEM 82 Deutsche Mark.................................... 47
FRF 540 French Franc..................................... 92
HKD 213 Hong Kong Dollar................................. 27
INR 98,939 Indonesian Rupiah................................ 41
ITL 362 Italian Lira..................................... --
JPY 8,611 Japanese Yen..................................... 75
NLG 65 Netherlands Guilder.............................. 33
SGD 12 Singapore Dollar................................. 8
KRW 18,262 South Korean Won................................. 21
SEK 329 Swedish Krona.................................... 43
CHF 46 Swiss Franc...................................... 32
--------
TOTAL FOREIGN CURRENCY (COST $498).............................. 494
--------
TOTAL INVESTMENTS (102.6%) (COST $162,983)...................... 194,794
LIABILITIES IN EXCESS OF OTHER ASSETS (-2.6%)................... (4,929)
--------
NET ASSETS (100%)............................................... $189,865
========
</TABLE>
- ---------------
(a) -- Non-income producing.
(d) -- Security valued at fair value -- see note A-1 to financial statements.
(g) -- The Fund is advised by an affiliate.
ADR -- American Depositary Receipt.
NCS -- Non Convertible Shares.
RFD -- Ranked for Dividend.
- --------------
54
The accompanying notes are an integral part of the financial statements.
<PAGE> 114
MORGAN STANLEY
GLOBAL EQUITY ALLOCATION FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
JUNE 30, 1997
- --------------------------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE INFORMATION:
Under the terms of foreign currency contracts open at June 30, 1997, the Fund is
obligated to deliver or is to receive foreign currency in exchange for U.S.
dollars as indicated below:
<TABLE>
<CAPTION>
CURRENCY IN EXCHANGE
TO DELIVER VALUE SETTLEMENT FOR VALUE NET UNREALIZED
(000) (000) DATE (000) (000) GAIN (LOSS) (000)
- ----------- --------- ----------- ------------- --------- -----------------
<S> <C> <C> <C> <C> <C>
$ 9 $ 9 7/1/97 ESP 1,393 $ 10 $ 1
JPY 3,492 31 7/1/97 $ 30 30 (1)
$ 1,886 1,886 7/2/97 ITL 3,174,993 1,868 (18)
$ 1,879 1,879 7/3/97 CAD 2,593 1,878 (1)
$ 2,241 2,241 7/30/97 DEM 3,861 2,220 (21)
DEM 1,931 1,110 7/30/97 $ 1,150 1,150 40
DEM 1,930 1,109 7/30/97 $ 1,150 1,150 41
$ 400 400 8/18/97 NLG 773 395 (5)
$ 890 890 8/18/97 CHF 1,238 853 (37)
$ 1,478 1,478 8/18/97 CHF 2,113 1,456 (22)
CHF 3,350 2,308 8/18/97 $ 2,358 2,358 50
NLG 2,206 1,129 8/18/97 $ 1,162 1,162 33
$ 7,077 7,077 8/25/97 JPY 803,534 7,072 (5)
JPY 803,534 7,072 8/25/97 $ 7,200 7,200 128
$ 2,193 2,193 8/29/97 DEM 3,764 2,169 (24)
DEM 3,764 2,168 8/29/97 $ 2,198 2,198 30
$ 1,770 1,770 9/15/97 FRF 10,246 1,753 (17)
FRF 21,933 3,753 9/15/97 $ 3,870 3,870 117
ESP 203,563 1,384 9/26/97 $ 1,400 1,400 16
--------- --------- -----
$ 39,887 $ 40,192 $ 305
========= ========= =====
</TABLE>
- ---------------
CAD -- Canadian Dollar
DEM -- Deutsche Mark
FRF -- French Franc
ITL -- Italian Lira
JPY -- Japanese Yen
NLG -- Netherlands Guilder
ESP -- Spanish Peseta
CHF -- Swiss Franc
- --------------------------------------------------------------------------------
SUMMARY OF FOREIGN & U.S. SECURITIES BY INDUSTRY CLASSIFICATION (UNAUDITED)
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
- ----------------------------------------------------------------------------- --------- -------------
<S> <C> <C>
Consumer Goods............................................................... $ 40,454 21.3%
Finance...................................................................... 37,011 19.4
Services..................................................................... 32,912 17.3
Capital Equipment............................................................ 28,015 14.8
Energy....................................................................... 18,745 9.9
Materials.................................................................... 13,023 6.9
Investment Companies......................................................... 9,589 5.1
Multi-Industry............................................................... 4,989 2.6
Gold Mines................................................................... 665 0.3
--------- ----
$ 185,403 97.6%
========= ====
</TABLE>
-----------------------
55
The accompanying notes are an integral part of the financial statements.
<PAGE> 115
MORGAN STANLEY
GLOBAL FIXED INCOME FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
JUNE 30, 1997
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ------------------------------------------------------------------------
<S> <C> <C>
FIXED INCOME SECURITIES (90.4%)
AUSTRALIAN DOLLAR (1.2%)
GOVERNMENT BOND
AUD 150 Government of Australia 9.75%, 3/15/02........... $ 128
-------
BRITISH POUND (7.2%)
GOVERNMENT BOND
GBP 400 United Kingdom 9.50%, 4/18/05.................... 760
-------
CANADIAN DOLLAR (2.7%)
GOVERNMENT BONDS
CAD 300 Government of Canada 7.50%, 3/1/01............... 232
60 Government of Canada 9.75%, 6/1/21............... 58
-------
TOTAL CANADIAN DOLLAR........................................ 290
-------
DANISH KRONE (2.4%)
GOVERNMENT BOND
DKK 1,500 Kingdom of Denmark 8.00%, 5/15/03................ 256
-------
DEUTSCHE MARK (16.5%)
CORPORATE BONDS
DEM 150 KFW International Finance, Inc. 7.50%, 1/24/00... 93
650 Landeskreditbank Baden-Wuerttemberg Financial
6.63%, 8/20/03................................. 402
-------
495
-------
GOVERNMENT BONDS
1,300 Bundesobligation 7.00%, 1/13/00.................. 803
100 Deutschland Republic 6.25%, 1/4/24............... 56
590 Treuhandanstalt 7.50%, 9/9/04.................... 383
-------
1,242
-------
TOTAL DEUTSCHE MARK.......................................... 1,737
-------
IRISH PUNT (1.1%)
GOVERNMENT BOND
IEP 70 Government of Ireland 8.00%, 8/18/06............. 116
-------
ITALIAN LIRA (5.2%)
GOVERNMENT BONDS
ITL 380,000 Buoni Poliennali Del Tes 10.50%, 7/15/00......... 250
60,000 Buoni Poliennali Del Tes 10.00%, 8/1/03.......... 41
150,000 Buoni Poliennali Del Tes 9.50%, 1/1/05........... 102
230,000 Buoni Poliennali Del Tes 9.50%, 2/1/06........... 158
-------
TOTAL ITALIAN LIRA........................................... 551
-------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ------------------------------------------------------------------------
<S> <C> <C>
JAPANESE YEN (11.9%)
EUROBONDS
JPY 15,000 European Investment Bank 6.63%, 3/15/00.......... $ 150
30,000 European Investment Bank 3.00%, 9/20/06.......... 273
25,000 Export Import Bank of Japan 4.38%, 10/1/03....... 246
27,000 Japan Development Bank 6.50%, 9/20/01............ 282
30,000 World Bank 4.75%, 12/20/04....................... 306
-------
TOTAL JAPANESE YEN........................................... 1,257
-------
SPANISH PESETA (3.4%)
GOVERNMENT BOND
ESP 50,000 Government of Spain 8.30%, 12/15/98.............. 354
-------
SWEDISH KRONA (7.9%)
GOVERNMENT BONDS
SEK 3,100 Government of Sweden 13.00%, 6/15/01............. 506
2,600 Government of Sweden 6.00%, 2/9/05............... 329
-------
TOTAL SWEDISH KRONA.......................................... 835
-------
UNITED STATES DOLLAR (30.9%)
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (30.9%)
U.S. TREASURY BONDS
$ 665 8.13%, 8/15/19................................... 758
40 7.63%, 2/15/25................................... 44
-------
802
-------
U.S. TREASURY NOTES
615 5.13%, 11/30/98.................................. 608
250 6.25%, 10/31/01.................................. 249
1,538 7.25%, 5/15/04................................... 1,603
-------
2,460
-------
TOTAL UNITED STATES DOLLAR................................... 3,262
-------
TOTAL FIXED INCOME SECURITIES (COST $9,641).................... 9,546
-------
FOREIGN CURRENCY (0.0%)
DEM 4 Deutsche Mark.................................... 2
ESP 193 Spanish Peseta................................... 1
-------
TOTAL FOREIGN CURRENCY (COST $3)............................... 3
-------
TOTAL INVESTMENTS (90.4%) (COST $9,644)........................ 9,549
OTHER ASSETS IN EXCESS OF LIABILITIES (9.6%)................... 1,019
-------
NET ASSETS (100%).............................................. $10,568
=======
</TABLE>
- --------------
56
The accompanying notes are an integral part of the financial statements.
<PAGE> 116
MORGAN STANLEY
GLOBAL FIXED INCOME FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
JUNE 30, 1997
- --------------------------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE INFORMATION:
Under the terms of foreign currency contracts open at June 30, 1997, the Fund is
obligated to deliver or is to receive foreign currency in exchange for U.S.
dollars as indicated below:
<TABLE>
<CAPTION>
CURRENCY IN EXCHANGE
TO DELIVER VALUE SETTLEMENT FOR VALUE NET UNREALIZED
(000) (000) DATE (000) (000) GAIN (LOSS) (000)
- ------------- --------- ----------- ------------- --------- -----------------
<S> <C> <C> <C> <C> <C>
DEM 718 $ 412 7/11/97 $ 415 $ 415 $ 3
ITL 180,000 106 7/11/97 $ 106 106 --
JPY 36,250 317 7/11/97 $ 317 317 --
JPY 48,923 428 7/11/97 $ 425 425 (3)
$ 106 106 7/11/97 ITL 180,000 106 --
$ 210 210 7/11/97 JPY 23,981 209 (1)
$ 328 328 7/11/97 JPY 36,250 317 (11)
$ 425 425 7/11/97 DEM 718 412 (13)
DEM 550 316 7/18/97 $ 318 318 2
ITL 175,000 103 7/18/97 $ 104 104 1
$ 103 103 7/18/97 ITL 175,000 103 --
$ 319 319 7/18/97 DEM 550 316 (3)
GBP 32 53 7/25/97 $ 53 53 --
IEP 80 121 7/25/97 $ 121 121 --
SEK 4,550 589 7/25/97 $ 593 593 4
--------- --------- -----
$ 3,936 $ 3,915 $ (21)
========= ========= =====
</TABLE>
- ---------------
GBP -- British Pound
DEM -- Deutsche Mark
IEP -- Irish Punt
ITL -- Italian Lira
JPY -- Japanese Yen
SEK -- Swedish Krona
-----------------------
57
The accompanying notes are an integral part of the financial statements.
<PAGE> 117
MORGAN STANLEY
ASIAN GROWTH FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
JUNE 30, 1997
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- -----------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (96.1%)
CHINA (1.1%)
2,048,000 Guangshen Railway Co., Ltd. 'H'.................. $ 899
3,105,000 Qingling Motors Co., 'H'......................... 1,603
147,000 Shenzhen Fangda Co., Ltd. 'B'.................... 213
(a)5,268,000 Zhejiang Expressway Co., Ltd. 'H'................ 1,278
--------
3,993
--------
HONG KONG (34.9%)
2,270,000 Cheung Kong Holdings Ltd......................... 22,415
432,000 China Merchants Holdings International Co.,
Ltd............................................ 1,344
3,068,000 China Resources Enterprises Ltd.................. 15,048
360,000 Dao Heng Bank Group Ltd.......................... 1,970
433,300 Hang Seng Bank Ltd............................... 6,180
1,517,000 Henderson Land Development Co., Ltd.............. 13,462
651,424 HSBC Holdings plc................................ 19,592
1,826,000 Hutchison Whampoa Ltd............................ 15,792
1,130,000 New World Development Co., Ltd................... 6,739
1,103,000 Ng Fung Hong Ltd................................. 1,651
1,831,000 Shanghai Industrial Holdings Ltd................. 11,392
613,100 Sun Hung Kai Properties Ltd...................... 7,379
--------
122,964
--------
INDONESIA (6.9%)
(a)1,271,000 Astra International (Foreign).................... 5,226
(a,d)3,226,697 Bank International Indonesia (Foreign)........... 2,786
(d)4,194,000 Bank Negara Indonesia (Foreign).................. 2,673
(d)788,000 Bimantara Citra (Foreign)........................ 1,377
(d)419,000 Gudang Garam (Foreign)........................... 1,757
(d)434,700 Hanjaya Mandala Sampoerna (Foreign).............. 1,658
(a,d)1,168,800 Indofood Sukses Makmur (Foreign)................. 2,692
(d)1,263,000 Matahari Putra Prima (Foreign)................... 2,545
(d)1,433,000 Mayora Indah (Foreign)........................... 810
(a,d)478,000 Putra Surya Multidana (Foreign).................. 762
(d)1,307,500 Telekomunikasi (Foreign)......................... 2,137
--------
24,423
--------
KOREA (7.6%)
(a)54,170 Hansol Paper Co.................................. 1,373
(d)114,420 Housing & Commercial Bank (Foreign).............. 2,136
(a)86,079 Kookmin Bank GDR................................. 1,818
(a,d)80,085 Kookmin Bank..................................... 1,477
111,720 Korea Electric Power............................. 3,334
23,980 LG Information & Communication (Foreign)......... 2,970
(d)35,362 Pohang Iron & Steel Ltd. (Foreign)............... 3,622
(d)58,419 Samsung Electronics Co. (Foreign)................ 6,540
(a,e)22,895 Samsung Electronics Co. GDR (New)................ 1,357
(d)136,257 Shinhan Bank Co., Ltd............................ 1,975
--------
26,602
--------
MALAYSIA (15.3%)
303,000 Arab Malaysian Corporation Bhd................... 1,129
3,292,000 Berjaya Group Bhd................................ 4,043
(a)255,000 Berjaya Sports Toto Bhd.......................... 1,202
1,201,000 Commerce Asset Holdings Bhd...................... 3,164
223,000 Dialog Group Bhd................................. 3,225
377,000 Edaran Otomobil Nasional Bhd..................... 3,211
665,400 Genting Bhd...................................... 3,190
880,000 IJM Corp. Bhd.................................... 1,848
521,000 Jaya Tiasa Holdings Bhd.......................... 2,622
<CAPTION>
VALUE
SHARES (000)
- -----------------------------------------------------------------------------
<S> <C> <C>
850,000 Leader Universal Holdings Bhd.................... $ 1,529
(a)62,000 Lityan Bhd....................................... 755
412,500 Malayan Banking Bhd.............................. 4,331
105,000 Malaysian International Shipping (Foreign)....... 273
(a)285,000 Malaysian Pacific Industries Bhd................. 1,242
323,000 Malaysian Resources Corp. Bhd.................... 889
742,000 Multi-Purpose Holdings Bhd....................... 1,041
580,000 Rashid Hussain Bhd............................... 3,677
1,391,000 Resorts World Bhd................................ 4,189
2,696,000 Sime Darby Bhd................................... 8,972
494,000 United Engineers Bhd............................. 3,562
--------
54,094
--------
PHILIPPINES (3.9%)
4,914,296 Ayala Land, Inc. 'B'............................. 4,518
(a)15,431,000 Digital Telecommunications Philippines, Inc...... 1,492
(a)5,118,400 DMCI Holdings, Inc............................... 1,688
(a)2,775,000 Fil-Estate Land, Inc............................. 810
3,048,200 JG Summit Holding 'B'............................ 624
529,365 Manila Electric 'B'.............................. 2,609
7,107,180 SM Prime Holdings, Inc........................... 2,102
--------
13,843
--------
SINGAPORE (11.7%)
239,500 Development Bank of Singapore (Foreign).......... 3,015
574,000 Electronic Resources Ltd......................... 903
431,000 Jurong Shipyard Ltd.............................. 1,869
2,712,000 NatSteel Ltd..................................... 6,905
313,238 Oversea-Chinese Banking Corp. (Foreign).......... 3,243
(a)889,000 Pacific Century Regional Development............. 1,237
642,000 Parkway Holdings Ltd............................. 2,874
415,400 Singapore Press Holdings (Foreign)............... 8,368
2,258,000 SM Summit Holdings Ltd........................... 1,706
(a)1,015,000 Super Coffeemix Manufacturing Ltd................ 845
282,000 United Overseas Bank Ltd. (Foreign).............. 2,900
(a)1,317,600 Want Want Holdings............................... 4,374
1,087,000 Wing Tai Holdings Ltd............................ 3,132
--------
41,371
--------
TAIWAN (11.4%)
(a)1,300,000 Acer, Inc........................................ 4,676
(a)522,000 Asustek Computer, Inc............................ 6,910
(a)288,600 Cathay Life Insurance Co., Ltd................... 1,651
(a)1,005,000 China Development Corp........................... 5,188
851,850 China Steel Corp................................. 901
(a)1,888,900 Compal Electronics, Inc.......................... 7,474
2,578,000 Far Eastern Textile, Ltd......................... 4,052
1,264,400 Formosa Plastics Corp............................ 3,047
1,000,000 Great Wall Enterprises Co........................ 791
(a)701,500 Kuoyang Construction............................. 1,691
1,120,000 Siliconware Precision Industries Co.............. 3,787
--------
40,168
--------
THAILAND (3.3%)
454,300 Bangkok Bank Co., Ltd. (Foreign)................. 3,122
197,000 Big C Supercenter Co., Ltd....................... 62
302,700 Eastern Water Resources Development.............. 351
61,000 ICC International Co., PCL (Foreign)............. 191
5,800 International Cosmetics (Foreign)................ 19
27,000 Matichon Public Co., Ltd......................... 63
</TABLE>
- -----------------------
58
The accompanying notes are an integral part of the financial statements.
<PAGE> 118
MORGAN STANLEY
ASIAN GROWTH FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
JUNE 30, 1997
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- -----------------------------------------------------------------------------
<S> <C> <C>
THAILAND (CONT.)
(d)219,000 Nation Multimedia Group Public Co., Ltd.
(Foreign)...................................... $ 465
(d)983,000 National Petrochemical Co., Ltd. (Foreign)....... 1,006
44,000 Quality House Co., Ltd. (Foreign)................ 16
267,000 Quality House Co., Ltd........................... 91
93,000 Robinson Department Store Co., Ltd. (Foreign).... 33
539,600 Siam Commercial Bank Co., Ltd. (Foreign)......... 2,208
(a,d)22,000 Sino Thai Engineering & Construction Co., Ltd.
(Foreign)...................................... 61
(a)42,000 Sino Thai Engineering & Construction Co., Ltd.... 117
546,000 Thai Farmer's Bank Public Co. (Foreign).......... 2,318
41,000 Thai Rung Union Car Co., Ltd..................... 148
(d)69,100 Thai Rung Union Car Co., Ltd. (Foreign).......... 249
35,000 Thai Storage Battery Co., Ltd. (Foreign)......... 35
174,900 Thai Theparos Food Product Co., Ltd. (Foreign)... 270
(d)149,000 United Communication Industry (Foreign).......... 615
--------
11,440
--------
TOTAL COMMON STOCKS (COST $303,930)................................ 338,898
--------
<CAPTION>
NO. OF
RIGHTS
- -----------------------------------------------------------------------------
<S> <C> <C>
RIGHTS (0.1%)
MALAYSIA (0.0%)
(a)239,200 Commerce Asset Holdings Bhd., expiring
7/23/97........................................ 8
(a,d)82,857 Rashid Hussain Bhd., expiring 12/31/02........... --
--------
8
--------
SINGAPORE (0.1%)
(a,d)287,000 Electronic Resources Ltd., expiring 7/21/97...... 191
--------
TOTAL RIGHTS (COST $0)............................................. 199
--------
<CAPTION>
NO. OF
WARRANTS
- -----------------------------------------------------------------------------
<S> <C> <C>
WARRANTS (0.0%)
INDONESIA (0.0%)
(a)286,818 PT Bank International Indonesia, expiring
1/17/00........................................ 112
--------
<CAPTION>
NO. OF VALUE
WARRANTS (000)
- -----------------------------------------------------------------------------
<S> <C> <C>
MALAYSIA (0.0%)
(a,d)149,500 Commerce Asset Holdings Bhd., expiring 6/27/98... $ 23
--------
TOTAL WARRANTS (COST $0)........................................... 135
--------
TOTAL FOREIGN SECURITIES (96.2%) (COST $303,930)................... 339,232
--------
<CAPTION>
FACE
AMOUNT
(000)
- -----------------------------------------------------------------------------
<S> <C> <C>
SHORT-TERM INVESTMENT (4.3%)
REPURCHASE AGREEMENT
$ 15,266 Chase Securities, Inc., 5.70%, dated
6/30/97, due 7/1/97, to be repurchased at
$15,268, collateralized by $16,160 U.S.
Treasury Bonds, 5.625%, due 2/15/06, valued at
$15,527 (COST $15,266)......................... 15,266
--------
TOTAL INVESTMENTS IN SECURITIES (100.5%) (COST $319,196)........... 354,498
--------
FOREIGN CURRENCY (0.9%)
HKD 15,383 Hong Kong Dollar................................. 1,986
IDR 889,930 Indonesian Rupiah................................ 366
MYR 904 Malaysian Ringgit................................ 358
PHP 1,403 Philippine Peso.................................. 53
SGD 19 Singapore Dollar................................. 13
KRW 391,442 South Korean Won................................. 441
--------
TOTAL FOREIGN CURRENCY (COST $3,217)............................... 3,217
--------
TOTAL INVESTMENTS (101.4%) (COST $322,413)......................... 357,715
LIABILITIES IN EXCESS OF OTHER ASSETS (-1.4%)...................... (5,029)
--------
NET ASSETS (100%).................................................. $352,686
========
</TABLE>
- ---------------
(a) -- Non-income producing.
(d) -- Security valued at fair value -- see note A-1 to financial statements.
(e) -- 144A Security -- certain conditions for public sale may exist.
GDR -- Global Depositary Receipt.
-----------------------
59
The accompanying notes are an integral part of the financial statements.
<PAGE> 119
MORGAN STANLEY
ASIAN GROWTH FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
JUNE 30, 1997
- --------------------------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE INFORMATION:
Under the terms of foreign currency contracts open at June 30, 1997, the Fund is
obligated to deliver or is to receive foreign currency in exchange for U.S.
dollars as indicated below:
<TABLE>
<CAPTION>
CURRENCY IN EXCHANGE
TO DELIVER VALUE SETTLEMENT FOR VALUE NET UNREALIZED
(000) (000) DATE (000) (000) GAIN (LOSS) (000)
- ------------- --------- ----------- ------------ --------- -----------------
<S> <C> <C> <C> <C> <C>
$ 1,542 $ 1,542 7/1/97 SGD 2,206 $ 1,542 $ --
$ 363 363 7/2/97 IDR 882,845 363 --
$ 91 91 7/2/97 THB 2365 91 --
THB 319,450 12,110 8/18/97 $ 12,032 12,032 (78)
--------- --------- -----
$ 14,106 $ 14,028 $ (78)
========= ========= =====
</TABLE>
- ---------------
IDR -- Indonesian Rupiah
SGD -- Singapore Dollar
THB -- Thai Baht
- --------------------------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION (UNAUDITED)
<TABLE>
<CAPTION>
PERCENT
OF
VALUE NET
INDUSTRY (000) ASSETS
- ---------------------------------------- -------- --------
<S> <C> <C>
Finance................................. $136,255 38.6%
Multi-Industry.......................... 52,458 14.9
Capital Equipment....................... 38,279 10.9
Consumer Goods.......................... 34,897 9.9
Services................................ 28,956 8.2
Energy.................................. 26,415 7.5
Materials............................... 21,972 6.2
-------- ----
$339,232 96.2%
======== ====
</TABLE>
- -----------------------
60
The accompanying notes are an integral part of the financial statements.
<PAGE> 120
MORGAN STANLEY
AMERICAN VALUE FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
JUNE 30, 1997
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ----------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (99.0%)
AEROSPACE (1.3%)
(a)3,500 Coltec Industries, Inc........................... $ 68
(a)7,400 Doncasters plc ADR............................... 171
10,300 Thiokol Corp..................................... 721
2,700 Triumph Group, Inc............................... 84
-------
1,044
-------
BANKING (9.2%)
4,800 AmSouth Bancorp.................................. 182
6,100 Astoria Financial Corp........................... 290
8,200 Comerica, Inc.................................... 558
13,600 Community First Bankshares, Inc.................. 522
14,400 First Hawaiian, Inc.............................. 491
9,200 Greenpoint Financial Corp........................ 612
4,600 MAF Bancorp, Inc................................. 193
13,200 National Commerce Bancorp........................ 290
22,800 North Fork Bancorp., Inc......................... 487
9,300 ONBANCorp, Inc................................... 474
7,919 Peoples Heritage Financial Group, Inc............ 300
14,300 Southtrust Corp.................................. 592
9,600 Summit Bancorp................................... 481
21,500 Trustmark Corp................................... 602
14,800 Union Planters Corp.............................. 768
5,700 UnionBanCal Corp................................. 410
6,500 Wilmington Trust Corp............................ 297
-------
7,549
-------
BUILDING (2.3%)
13,200 Ameron, Inc...................................... 747
10,900 Champion Enterprises, Inc........................ 164
4,300 City National Corp............................... 103
5,600 JLG Industries, Inc.............................. 76
9,300 Southdown, Inc................................... 406
(a)10,700 USG Corp......................................... 391
-------
1,887
-------
CAPITAL GOODS (2.9%)
19,100 Crane Co......................................... 799
18,600 Danka Business Systems plc....................... 760
7,900 Tecumseh Products 'A'............................ 473
(a)7,800 Tower Automotive, Inc............................ 335
-------
2,367
-------
CHEMICALS (2.7%)
26,000 Crompton & Knowles Corp.......................... 579
16,500 Dexter Corp...................................... 528
6,400 Fuller (H.B.) Co................................. 352
17,400 Quaker Chemical Corp............................. 302
12,000 Witco Corp....................................... 455
-------
2,216
-------
COMMUNICATIONS (1.0%)
(a)1,400 ADC Telecom, Inc................................. 47
(a)15,100 General Cable Corp............................... 387
(a)8,700 Hirsch International Corp. 'A'................... 194
10,600 Nextel Communications Inc. 'A'................... 201
-------
829
-------
COMPUTERS (3.9%)
(a)3,300 BMC Software, Inc................................ 183
(a)12,200 Cadence Design Systems, Inc...................... 409
<CAPTION>
VALUE
SHARES (000)
- ----------------------------------------------------------------------
<S> <C> <C>
(a)8,500 Ceridian Corp.................................... $ 359
(a)18,600 Gateway 2000, Inc................................ 603
(a)5,400 InaCom Corp...................................... 168
(a)26,500 Overland Data, Inc............................... 143
(a)9,300 Seagate Technology, Inc.......................... 327
(a)12,400 Tech Data Corp................................... 390
(a)18,700 Western Digital Corp............................. 591
-------
3,173
-------
CONSUMER--DURABLES (6.1%)
14,100 A.O. Smith Corp. 'B'............................. 501
24,400 Arvin Industries, Inc............................ 665
5,700 Callaway Golf Co................................. 202
(a)11,100 Furniture Brands International, Inc.............. 215
26,700 Guilford Mills, Inc.............................. 556
33,000 Herman Miller, Inc............................... 1,188
13,200 Interface, Inc................................... 292
(a)13,700 Lear Corp........................................ 608
7,700 MascoTech, Inc................................... 161
19,000 Stanhome, Inc.................................... 625
-------
5,013
-------
CONSUMER--RETAIL (9.5%)
6,800 Brylane, Inc..................................... 262
23,000 CVS Corp......................................... 1,179
6,900 Dean Foods Co.................................... 279
(a)2,900 Designer Holdings Ltd............................ 30
8,800 Family Dollar Stores, Inc........................ 240
(a)4,100 Fred Meyer, Inc.................................. 212
18,600 Hughes Supply, Inc............................... 744
2,300 Jostens, Inc..................................... 62
(a)15,300 Office Depot, Inc................................ 297
22,700 Pier 1 Imports, Inc.............................. 602
5,300 Polo Ralph Lauren Corp........................... 145
13,600 Richfood Holdings, Inc........................... 354
22,200 Ross Stores, Inc................................. 726
10,300 Springs Industries, Inc. 'A'..................... 543
31,600 TJX Companies, Inc............................... 833
(a)7,600 Valassis Communications, Inc..................... 182
8,100 VF Corp.......................................... 686
(a)21,000 Zale Corp........................................ 416
-------
7,792
-------
CONSUMER--SERVICE & GROWTH (0.4%)
4,800 Hertz Corp. 'A'.................................. 173
(a)7,000 Renters Choice, Inc.............................. 139
-------
312
-------
CONSUMER--STAPLES (3.3%)
(a)11,300 Boston Chicken, Inc.............................. 158
6,700 Consolidated Cigar Holdings, Inc................. 186
24,000 DIMON, Inc....................................... 636
3,300 Interstate Bakeries Corp......................... 196
(a)16,000 Standard Commercial Corp......................... 278
19,400 Tyson Foods, Inc. 'A'............................ 371
28,600 Universal Corp................................... 908
-------
2,733
-------
ENERGY (9.5%)
5,400 Apache Corp...................................... 176
1,800 Black Hills Corp................................. 51
</TABLE>
-----------------------
61
The accompanying notes are an integral part of the financial statements.
<PAGE> 121
MORGAN STANLEY
AMERICAN VALUE FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
JUNE 30, 1997
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ----------------------------------------------------------------------
<S> <C> <C>
ENERGY (CONT.)
(a)5,200 Cooper Cameron Corp.............................. $ 243
(a)5,300 Diamond Offshore Drilling, Inc................... 414
10,500 Eastern Enterprises.............................. 364
(a)19,400 ENSCO International Inc.......................... 1,023
16,200 National Fuel Gas Co............................. 679
14,700 Nicor, Inc....................................... 527
(a)40,100 Noble Drilling Corp.............................. 905
16,300 Oneok, Inc....................................... 525
10,000 Parker & Parsley Petroleum Co.................... 354
12,000 Santa Fe International Corp...................... 408
6,300 Sun Co., Inc..................................... 195
7,500 Transocean Offshore, Inc......................... 545
(a)5,800 Tuboscope Vetco International Corp............... 115
8,900 Ultramar Diamond Shamrock Corp................... 290
9,000 Union Texas Petroleum Holdings, Inc.............. 188
(a)6,100 Varco International, Inc......................... 197
14,000 Washington Gas Light Co.......................... 352
(a)4,800 Weatherford Enterra, Inc......................... 185
-------
7,736
-------
ENTERTAINMENT (0.3%)
(a)9,300 Imax Corp........................................ 230
-------
FINANCIAL--DIVERSIFIED (9.4%)
9,500 Bear Stearns Companies, Inc...................... 325
10,500 Capital One Financial Corp....................... 396
13,125 Equity Residential Properties Trust.............. 624
25,600 Everen Capital Corp.............................. 798
3,700 Duke Realty Investment, Inc. REIT................ 150
6,900 FINOVA Group, Inc................................ 528
12,900 First Financial Corp. (Wisconsin)................ 379
20,700 Franklin Resources, Inc.......................... 1,502
11,600 GATX Corp........................................ 670
6,800 Hartford Life, Inc. 'A'.......................... 255
(a)3,100 HealthCare Financial Partners, Inc............... 63
8,000 Kilroy Realty Corp. REIT......................... 202
21,000 Nationwide Financial Services, Inc. 'A'.......... 558
5,000 Paine Webber Group, Inc.......................... 175
3,400 Post Properties, Inc............................. 138
5,100 Torchmark Corp................................... 363
17,600 United Asset Management Co....................... 498
5,250 Wellsford Real Properties Inc.................... 58
-------
7,682
-------
HEALTH CARE (8.7%)
22,500 Beckman Instruments, Inc......................... 1,086
17,500 Bergen Brunswig Corp. 'A'........................ 488
(a)7,300 Biogen, Inc...................................... 247
13,514 Block Drug Co. 'A'............................... 591
(a)8,800 Coherent, Inc.................................... 392
(a)29,200 FPA Medical Management, Inc...................... 692
(a)5,700 Health Care & Retirement Corp.................... 190
11,100 Kinetic Concepts, Inc............................ 200
(a)7,700 Marquette Medical Systems........................ 169
(a)29,200 Nellcor Puritan Bennett, Inc..................... 529
(a)2,600 RoTech Medical Corp.............................. 52
42,300 Sullivan Dental Products, Inc.................... 772
13,600 Universal Health Services, Inc................... 524
<CAPTION>
VALUE
SHARES (000)
- ----------------------------------------------------------------------
<S> <C> <C>
(a)8,500 Vencor, Inc...................................... $ 359
(a)18,400 Wellpoint Health Networks, Inc................... 844
-------
7,135
-------
INDUSTRIAL (2.0%)
6,900 AGCO Corp........................................ 248
19,500 Barnes Group, Inc................................ 578
9,000 PACCAR, Inc...................................... 418
(a)7,800 Precision Drilling Corp.......................... 377
-------
1,621
-------
INSURANCE (1.3%)
6,700 Progressive Corp................................. 583
16,600 Reliance Group Holdings, Inc..................... 197
11,900 Western National Corp............................ 319
-------
1,099
-------
METALS (1.7%)
31,500 Birmingham Steel Corp............................ 488
10,300 Cleveland-Cliffs Iron Co......................... 420
8,800 Precision Castparts Corp......................... 525
-------
1,433
-------
PAPER & PACKAGING (2.8%)
16,500 Ball Corp........................................ 496
(a)14,200 Owens-Illinois, Inc.............................. 440
27,500 P.H. Glatfelter Co............................... 550
10,900 Potlatch Corp.................................... 493
8,700 Schweitzer-Mauduit International, Inc............ 327
-------
2,306
-------
SERVICES (11.5%)
(a)42,100 AccuStaff, Inc................................... 997
18,200 Angelica Corp.................................... 319
(a)14,700 BJ Services Co................................... 788
20,300 Bowne & Co....................................... 708
(a)25,400 CDI Corp......................................... 1,059
(a)5,300 Data Processing Resources Corp................... 124
(a)19,000 Fiserv, Inc...................................... 848
32,000 Journal Register Co.............................. 636
22,100 New England Business Services, Inc............... 582
26,800 Ogden Corp....................................... 583
13,600 McClatchy Newspapers, Inc........................ 399
3,300 New York Times Co., 'A'.......................... 163
27,000 Russ Berrie & Co., Inc........................... 592
(a)13,100 TETRA Technologies, Inc.......................... 324
(a)15,000 Tracor, Inc...................................... 377
14,300 True North Communications, Inc................... 354
(a)11,000 USA Waste Services, Inc.......................... 425
400 Washington Post Co. 'B'.......................... 159
-------
9,437
-------
TECHNOLOGY (5.6%)
8,100 Adobe Systems, Inc............................... 284
(a)10,600 Altera Corp...................................... 535
8,600 Dallas Semiconductor Corp........................ 338
(a)9,100 ESS Technology, Inc.............................. 122
(a)20,700 HMT Technology Corp.............................. 268
20,400 National Computer Systems, Inc................... 543
16,000 Park Electrochemical Corp........................ 421
21,800 Penn Engineering & Manufacturing Corp............ 428
(a)5,400 Solectron Corp................................... 378
</TABLE>
- --------------
62
The accompanying notes are an integral part of the financial statements.
<PAGE> 122
MORGAN STANLEY
AMERICAN VALUE FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
JUNE 30, 1997
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ----------------------------------------------------------------------
<S> <C> <C>
TECHNOLOGY (CONT.)
(a)17,400 Symantec Corp.................................... $ 339
7,500 Tektronix, Inc................................... 450
(a)8,600 Teradyne, Inc.................................... 338
6,200 Vishay Intertechnology, Inc...................... 179
-------
4,623
-------
TRANSPORTATION (2.5%)
20,000 Air Express International Corp................... 795
10,900 Airborne Freight Corp............................ 456
10,000 Arnold Industries, Inc........................... 170
(a)10,100 Offshore Logistics, Inc.......................... 191
(a)50,000 OMI Corp......................................... 478
-------
2,090
-------
UTILITIES (1.1%)
6,300 Public Service Co. (Colorado).................... 261
5,300 SJW Corp......................................... 278
19,600 Washington Water Power Co........................ 385
-------
924
-------
TOTAL COMMON STOCKS (COST $68,529)........................... 81,231
-------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ----------------------------------------------------------------------
<S> <C> <C>
SHORT-TERM INVESTMENT (3.0%)
REPURCHASE AGREEMENT (3.0%)
$ 2,523 Chase Securities, Inc., 5.70%, dated 6/30/97, due
7/1/97, to be repurchased at $2,523,
collateralized by $2,675 U.S. Treasury Bonds,
5.625%, due 2/15/06, valued at $2,570 (COST
$2,523)........................................ $ 2,523
-------
TOTAL INVESTMENTS (102.0%) (COST $71,052).................... 83,754
LIABILITIES IN EXCESS OF OTHER ASSETS (-2.0%)................ (1,667)
-------
NET ASSETS (100%)............................................ $82,087
=======
</TABLE>
- ---------------
(a) -- Non-income producing.
ADR -- American Depositary Receipt
REIT -- Real Estate Investment Trust.
-----------------------
63
The accompanying notes are an integral part of the financial statements.
<PAGE> 123
MORGAN STANLEY
WORLDWIDE HIGH INCOME FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
JUNE 30, 1997
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ------------------------------------------------------------------------------
<S> <C> <C>
FIXED INCOME SECURITIES (86.7%)
CORPORATE BONDS & NOTES (32.2%)
ARGENTINA(0.8%)
$ 1,500 Impsa S.A. 11.75%, 3/27/98....................... $ 1,559
--------
BRAZIL (2.4%)
(e)4,800 Banco Do Brasil 9.375%, 6/15/07.................. 4,788
--------
CANADA (0.7%)
100 Rogers Cablesystems, 10.125%, 9/1/12............. 107
865 Rogers Cablesystems, Series B, 10.00%, 3/15/05... 936
250 Rogers Communications, Inc. 9.125%,
1/15/06........................................ 252
--------
1,295
--------
COLOMBIA (0.5%)
(n)1,225 Occidente Y Caribe 0.00%, 3/15/04................ 909
--------
ECUADOR (1.6%)
(e)3,000 Consorcio Ecuadoriano 14.00%, 5/1/02............. 3,188
--------
JAMAICA (1.1%)
2,000 Mechala Group Jamaica, Ltd. Series B, 12.75%,
12/30/99....................................... 2,115
--------
MEXICO (3.1%)
(e)2,000 Cemex S.A. 12.75%, 7/15/06....................... 2,318
(e)2,000 Empresas ICA Sociedad Controladora S.A. 11.875%,
5/30/01........................................ 2,185
(n)2,200 Grupo Televisa S.A. 0.00%, 5/15/08............... 1,526
--------
6,029
--------
UNITED STATES (22.0%)
795 Advanced Micro Devices 11.00%, 8/1/03............ 886
660 Amersco Inc., Series 97-A 10.00%,
3/15/04........................................ 677
(e)1,100 Anthem Insurance 9.00%, 4/1/27................... 1,132
(e)870 Big Flower Press 8.875%, 7/1/07.................. 855
(n)1,350 Brooks Fiber Properties 0.00%, 3/1/06............ 920
(n)720 Brooks Fiber Properties 0.00%, 11/1/06........... 469
(e)150 Brooks Fiber Properties 10.00%, 6/1/07........... 153
(e)497 CA FM Lease Trust 8.50%, 7/15/17................. 509
1,115 Cablevision Systems Corp. 9.875%,
5/15/06........................................ 1,187
630 Cleveland Electric Illuminating Co. 8.375%,
12/1/11........................................ 635
(e)850 ComcastCorp. 9.50%, 5/1/07....................... 861
640 Courtyard By Marriott, Series B, 10.75%,
2/1/08......................................... 693
(n)390 Dial Call Communications Series B, 0.00%,
12/15/05....................................... 306
670 Digital Equipment Corp. 8.625%,
11/1/12........................................ 667
419 DR Securitized Lease Trust, Series 1993-K1, Class
A1, 6.66%, 8/15/10............................. 366
1,030 DR Securitized Lease Trust, Series 1994-K1, Class
A1, 7.60%, 8/15/07............................. 968
250 DR Securitized Lease Trust, Series 1994-K1, Class
A2, 8.38%, 8/15/15............................. 232
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ------------------------------------------------------------------------------
<S> <C> <C>
$ (n)500 Echostar Satellite Broadcast 0.00%,
3/15/04........................................ $ 356
(e)300 EES Coke Battery Co., Inc. 9.382%,
4/15/07........................................ 307
370 First Nationwide Bank 9.125%, 1/15/03............ 382
(e)365 First Nationwide Bank 10.625%, 10/1/03........... 401
825 Gaylord Container Corp. 11.50%,
5/15/01........................................ 868
(e)1,280 Globalstar LP/Capital 11.375%, 2/15/04........... 1,282
1,130 Grand Casinos, Inc. 10.125%, 12/1/03............. 1,181
625 HMC Acquisition Properties 9.00%,
12/15/07....................................... 635
(e)785 Horseshoe Gaming L.L.C. 9.375%,
6/15/07........................................ 795
950 Host Marriott Travel, Series B, 9.50%, 5/15/05... 992
(e)1,230 ISP Holdings, Inc. Series B, 9.00%, 10/15/03..... 1,272
635 IXC Communications, Inc. 12.50%,
10/1/05........................................ 726
(e)300 Jet Equipment Trust, Series C-1, 11.79%,
6/15/13........................................ 375
(e)300 Jet Equipment Trust, Series 1995-D, 11.44%,
11/1/14........................................ 374
265 Kmart Corp. 7.75%, 10/1/12....................... 243
350 Kmart Funding Corp. 8.80%, 7/1/10................ 346
188 Midland Cogeneration Ventures, Series C-91,
10.33%, 7/23/02................................ 201
482 Midland Cogeneration Ventures, Series C-94,
10.33%, 7/23/02................................ 516
305 Midland Funding II, Series A, 11.75%, 7/23/05.... 353
(e)200 Navistar Financial Corp. 9.00%, 6/1/02........... 205
(n)2,550 Nextel Communications 0.00%, 8/15/04............. 1,951
(n)990 Norcal Waste Systems, Inc. 13.00%,
11/15/05....................................... 1,124
660 Nuevo Energy Co. 9.50%, 4/15/06.................. 690
(e)750 Outdoor Systems 8.875%, 6/15/07.................. 728
900 Paramount Communications 8.25%,
8/1/22......................................... 861
(e)620 Qwest Communications International 10.875%,
4/1/07......................................... 673
(e)750 Riggs Capital Trust II 8.875%, 3/15/27........... 763
850 RJR Nabisco, Inc. 8.75%, 4/15/04................. 867
800 SD Warren Co., Series B, 12.00%,
12/15/04....................................... 896
(e)550 Sinclair Broadcast Group 9.00%, 7/15/07.......... 534
710 Snyder Oil Corp. 8.75%, 6/15/07.................. 706
1,345 Southland Corp. 5.00%, 12/15/03.................. 1,143
(e)825 Station Casinos, Inc. 9.75%, 4/15/07............. 816
(e,n)1,990 TCI Satellite Entertainment 0.00%,
2/15/07........................................ 1,184
1,225 Tele-Communications Inc. 9.25%,
1/15/23........................................ 1,275
(n)1,975 Teleport Communications 0.00%, 7/1/07............ 1,427
880 Tenet Healthcare Corp. 8.625%, 1/15/07........... 897
930 TLC Beatrice International Holdings 11.50%,
10/1/05........................................ 1,045
(e,n)350 Transamerican Energy 0.00%, 6/15/02.............. 252
</TABLE>
- --------------
64
The accompanying notes are an integral part of the financial statements.
<PAGE> 124
MORGAN STANLEY
WORLDWIDE HIGH INCOME FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
JUNE 30, 1997
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ------------------------------------------------------------------------------
<S> <C> <C>
UNITED STATES (CONT.)
$ 1,290 Viacom, Inc. 8.00%, 7/7/06....................... $ 1,255
900 Vintage Petroleum 8.625%, 2/1/09................. 897
--------
43,310
--------
TOTAL CORPORATE BONDS & NOTES (COST $60,490)...................... 63,193
--------
ASSET BACKED SECURITIES (0.8%)
UNITED STATES (0.8%)
(e)499 Aircraft Lease Portfolio Securitization Ltd.,
Series 1996-1, Class D, 12.75%, 6/15/06........ 538
(e)950 Long Beach Auto Trust 1997-1, Class B, 14.22%,
10/26/03....................................... 963
--------
TOTAL ASSET BACKED SECURITIES (COST $1,463)....................... 1,501
--------
COLLATERALIZED MORTGAGE OBLIGATIONS (0.3%)
UNITED STATES (0.3%)
(e,h)1,045 DLJ Mortgage Acceptance Corp., Series 1996-CF2,
Class S, IO, 1.64%, 11/12/21................... 94
(e)550 First Home Mortgage Acceptance Corp., Series
1996-B, Class C, 7.9289%, 11/1/18.............. 487
(d,f)103 PNC Mortgage Securities Corp. Series 1995-2,
Class B4, REMIC, 7.50%, 9/25/25................ 91
--------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS (COST $643)............. 672
--------
EUROBONDS (16.2%)
ARGENTINA (6.3%)
(e)2,500 Acindar Industria Argentina 11.75%,
11/12/98....................................... 2,606
3,500 Acindar Industria Argentina 11.25%,
2/15/04........................................ 3,725
(e)5,500 Republic of Argentina 11.75%, 2/12/07............ 6,134
--------
12,465
--------
BRAZIL (5.0%)
1,350 Comp Brazil De Projertos 12.50%,
12/22/97....................................... 1,377
(h)3,000 Federative Republic of Brazil 6.94%,
4/15/09........................................ 2,631
(n)7,284 Federative Republic of Brazil Series C, PIK
8.00%, 4/15/14................................. 5,857
--------
9,865
--------
BULGARIA (2.5%)
(h)2,250 Republic of Bulgaria Discount Bonds, 'A' 6.563%,
7/28/24........................................ 1,659
(h)4,500 Republic of Bulgaria Past Due Interest Bond
6.56%, 7/28/11................................. 3,254
--------
4,913
--------
VENEZUELA (2.4%)
(h)5,000 Republic of Venezuela Front Loaded Interest
Reduction Bond, 'A' 6.75%, 3/31/07............. 4,652
--------
TOTAL EUROBONDS (COST $28,073).................................... 31,895
--------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ------------------------------------------------------------------------------
<S> <C> <C>
FOREIGN GOVERNMENT & AGENCY OBLIGATIONS (25.8%)
ARGENTINA (2.0%)
$ (e)3,600 City of Buenos Aires 11.25%, 4/11/07............. $ 3,915
--------
BRAZIL (1.3%)
(h)2,000 Federative Republic of Brazil Debt Conversion 'L'
Bond, 6.938%, 4/15/12.......................... 1,655
920 Federative Republic of Brazil 10.125%, 5/15/27... 887
--------
2,542
--------
BULGARIA (2.5%)
8,500 Republic of Bulgaria Front Loaded Interest
Reduction Bond 2.25%, 7/28/12.................. 4,856
--------
CAYMAN ISLANDS (0.9%)
ZAR 8,000 National Financiera 17.00%, 2/26/99.............. 1,763
--------
ECUADOR (2.5%)
$ (h)7,000 Republic of Ecuador Past Due Interest Bond, PIK,
6.44%, 2/28/25................................. 5,005
--------
IVORY COAST (1.2%)
(e,n)6,800 Republic of Ivory Coast Front Loaded Interest
Reduction Bond 0.00%, 12/29/49................. 2,269
--------
JAMAICA (1.5%)
3,000 Government of Jamaica 12.00%, 7/19/99............ 3,000
--------
JORDAN (1.3%)
(e,h)3,000 Kingdom of Jordan 6.75%, 12/23/23................ 2,535
--------
MEXICO (2.7%)
4,800 United Mexican States 11.375%, 9/15/16........... 5,399
--------
PERU (4.3%)
(e,h)14,200 Republic of Peru Front Loaded Interest Reduction
Bond 3.25%, 3/7/17............................. 8,484
--------
RUSSIA (3.7%)
(e)6,764 Ministry of Finance Tranche IV GDR 3.00%,
5/14/03........................................ 4,539
(e)5,000 Ministry of Finance Tranche VI GDR 3.00%,
5/14/06........................................ 2,715
--------
7,254
--------
VENEZUELA (1.9%)
4,000 Republic of Venezuela Discount Bond 'L', 6.75%,
12/18/07....................................... 3,712
--------
TOTAL FOREIGN GOVERNMENT & AGENCY OBLIGATIONS
(COST $47,427).................................................. 50,734
--------
LOAN AGREEMENTS (7.9%)
ALGERIA (2.9%)
(h,r)6,500 Algeria Reprofiled Loan Agreement, 'A', 7.25%,
12/31/00....................................... 5,700
--------
GABON (2.6%)
(h)6,217 Republic of Gabon Syndicated Loan, 6.69%,
4/1/04......................................... 5,067
--------
</TABLE>
-----------------------
65
The accompanying notes are an integral part of the financial statements.
<PAGE> 125
MORGAN STANLEY
WORLDWIDE HIGH INCOME FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
JUNE 30, 1997
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ------------------------------------------------------------------------------
<S> <C> <C>
IVORY COAST (1.9%)
$ 750 Republic of Ivory Coast Syndicated Loan, Zero
Coupon, 12/31/00............................... $ 315
FRF 35,644 Republic of Ivory Coast Syndicated Loan, Zero
Coupon, 12/31/00............................... 2,874
DEM 2,210 Republic of Ivory Coast Syndicated Loan, Zero
Coupon, 12/31/00............................... 532
--------
3,721
--------
JAMAICA (0.5%)
$ (h)1,000 Republic of Jamaica Syndicated Loan, 6.63%,
12/1/05........................................ 930
--------
TOTAL LOAN AGREEMENTS (COST $14,313).............................. 15,418
--------
YANKEE BONDS (3.5% )
ARGENTINA (1.6%)
1,850 Bridas Corp. 12.50%, 11/15/99.................... 2,028
1,000 Metrogas S.A., Series A, 12.00%, 8/15/00......... 1,115
--------
3,143
--------
BRAZIL (1.7%)
3,000 Tevecap S.A. 12.625%, 11/26/04................... 3,244
--------
MEXICO (0.2%)
400 Grupo Industrial Durango 12.625%,
8/1/03......................................... 450
--------
TOTAL YANKEE BONDS (COST $6,240).................................. 6,837
--------
TOTAL FIXED INCOME SECURITIES (COST $158,649)....................... 170,250
--------
<CAPTION>
SHARES
- ------------------------------------------------------------------------------
<S> <C> <C>
EQUITY SECURITIES (1.8%)
PREFERRED STOCK (1.5%)
UNITED STATES (1.5%)
(e)5,610 Sinclair Capital 11.625%......................... 595
2,084 Time Warner, Inc., 'M', PIK 10.25%............... 2,287
--------
2,882
--------
CONVERTIBLE PREFERRED STOCK (0.3%)
UNITED STATES (0.3%)
6,800 TCI Communications, Inc. 5.00%, 7/31/06.......... 704
--------
NO. OF WARRANTS
WARRANTS (0.0%)
COLOMBIA (0.0%)
(a)4,900 Occidente Y Caribe, expiring 3/15/04............. --
--------
TOTAL EQUITY SECURITIES (COST $3,372)............................... 3,586
--------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ------------------------------------------------------------------------------
<S> <C> <C>
STRUCTURED INVESTMENT (3.4%)
BRAZIL (3.4%)
$ (f)8,000 Salomon Bros. Federative Republic of Brazil
Credit Linked Enhanced Access Note 9.00%,
1/5/99 (COST $6,844)........................... $ 6,768
--------
TOTAL FOREIGN AND U.S. SECURITIES (91.9%) (COST $168,865)........... 180,604
--------
SHORT-TERM INVESTMENTS (7.7%)
DISCOUNT NOTES (6.1%)
BULGARIA (3.7%)
(v)12,750 Republic of Bulgaria Stripped Discount Notes,
6.5625%, 8/20/97............................... 7,329
--------
ECUADOR (1.7%)
(v)6,000 Republic of Ecuador Stripped Discount Notes,
6.4375%, 9/29/97............................... 3,311
--------
MEXICO (0.7%)
(v)1,750 United Mexican States Stripped Discount Notes,
6.375%, 9/9/97................................. 1,268
--------
TOTAL DISCOUNT NOTES.............................................. 11,908
--------
REPURCHASE AGREEMENT (1.6%)
3,146 Chase Securities, Inc., 5.70%, dated 6/30/97, due
7/1/97, to be repurchased at $3,146
collateralized by $3,330, U.S. Treasury Bonds,
5.625%, due 2/15/06, valued at $3,200.......... 3,146
--------
TOTAL SHORT-TERM INVESTMENTS (COST $13,042)......................... 15,054
--------
TOTAL INVESTMENTS (99.6%) (COST $181,907)........................... 195,658
OTHER ASSETS IN EXCESS OF LIABILITIES (0.4%)........................ 830
--------
NET ASSETS (100%)................................................... $196,488
========
</TABLE>
- ---------------
(a) -- Non-income producing.
(d) -- Security is valued at fair value -- see note A-1 to financial
statements.
(e) -- 144A Security -- certain conditions for public sale may exist.
(f) -- Restricted as to public resale. Total value of restricted securities
at June 30, 1997 was $6,859 or 3.49% of net assets (Total cost
$6,926).
(h) -- Variable/floating rate security -- rate disclosed is as of June 30,
1997.
(n) -- Step Bond -- coupon rate increases in increments to maturity. Rate
disclosed is as of June 30, 1997. Maturity date disclosed is the
ultimate maturity date.
(r) -- Issuer is making partial interest payments.
(v) -- Yield at time of purchase.
DEM -- Deutsche Mark
FRF -- French Franc
GDR -- Global Depositary Receipt
IO -- Interest Only.
PIK -- Payment-In-Kind. Income may be received in additional securities or
cash at the discretion of the issuer.
REMIC -- Real Estate Mortgage Investment Conduit
ZAR -- South African Rand
- --------------
66
The accompanying notes are an integral part of the financial statements.
<PAGE> 126
MORGAN STANLEY
WORLDWIDE HIGH INCOME FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
JUNE 30, 1997
- --------------------------------------------------------------------------------
SUMMARY OF FOREIGN & U.S. SECURITIES BY INDUSTRY CLASSIFICATION (UNAUDITED)
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
- -------------------------------------------------------------------------------------- --------- -------------
<S> <C> <C>
Foreign Government & Agency Obligations............................................... $ 82,630 42.1%
Loan Agreements....................................................................... 15,418 7.9
Materials............................................................................. 12,074 6.1
Services.............................................................................. 10,924 5.5
Telecommunications.................................................................... 10,746 5.5
Finance............................................................................... 10,522 5.3
Broadcast--Radio & Television......................................................... 8,247 4.2
Multi-Industry........................................................................ 7,065 3.6
Structured Investment................................................................. 6,768 3.4
Consumer Goods........................................................................ 5,065 2.6
Capital Equipment..................................................................... 2,310 1.2
Collateralized Mortgage Obligations & Asset Backed Securities......................... 2,173 1.1
Utilities............................................................................. 1,705 0.9
Energy................................................................................ 1,648 0.8
Technology............................................................................ 1,554 0.8
Insurance............................................................................. 1,132 0.6
Transportation........................................................................ 623 0.3
--------- -----
$ 180,604 91.9%
========= =====
</TABLE>
-----------------------
67
The accompanying notes are an integral part of the financial statements.
<PAGE> 127
MORGAN STANLEY
LATIN AMERICAN FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
JUNE 30, 1997
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- -----------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (78.8%)
ARGENTINA (6.9%)
(a)604,405 Acindar.......................................... $ 1,548
216,577 Banco del Suquia................................. 843
(a)15,557 Disco ADR........................................ 616
5,499 Quilmes ADR...................................... 56
39,015 Quilmes Industrial ADR........................... 454
269,077 Siderar 'A'...................................... 1,103
(e)10,470 Siderar ADR...................................... 340
8,585 Telecom Argentina ADR............................ 451
36,271 Telefonica de Argentina ADR...................... 1,256
50,695 YPF ADR.......................................... 1,559
--------
8,226
--------
BRAZIL (29.6%)
84,100 Brahma ADR....................................... 1,288
23,059 CEMIG ADR........................................ 1,161
(e)683 CEMIG ADR........................................ 35
(a)9,835,918 CRT 'A'.......................................... 14,800
12,910 CVRD ADR......................................... 288
8,850,000 Eletrobras....................................... 4,949
63,195 Eletrobras ADR................................... 1,763
10,020 Eletrobras 'B' ADR............................... 298
19,723,000 Ericsson Telecomunicacoes........................ 1,172
780,000 Iven............................................. 533
1,317,000 Lightpar......................................... 525
(e)10,410 Lojas Arupua ADR................................. 173
30,050 Pao de Acucar ADR................................ 689
17,568,000 Telebras......................................... 2,382
27,081 Telebras ADR..................................... 4,110
30,250 Unibanco GDR..................................... 1,123
--------
35,289
--------
CHILE (8.2%)
20,250 Andina 'B' ADR................................... 423
76,455 CCU ADR.......................................... 1,677
51,085 Chilectra ADR.................................... 1,470
14,793 Enersis ADR...................................... 526
(a)32,805 Quinenco ADR..................................... 607
139,263 Santa Isabel ADR................................. 4,492
30,360 Unimarc ADR...................................... 569
--------
9,764
--------
COLOMBIA (2.0%)
2,676,443 Banco de Colombia................................ 981
193,250 Bavaria.......................................... 1,387
--------
2,368
--------
MEXICO (27.2%)
(a)272,607 Banacci 'B'...................................... 701
(a)166,310 Banacci 'L'...................................... 388
(a)399,810 Bancomer 'B'..................................... 193
(a,e)14,306 Bancomer 'B' ADR................................. 139
(a)448,015 Banorte 'B'...................................... 467
85,398 Carso 'A1'....................................... 595
552,354 Cemex CPO........................................ 2,402
28,435 Cemex CPO ADR.................................... 247
112,980 Cemex 'B'........................................ 553
102,320 Cemex 'B' ADR.................................... 985
70,645 Cifra 'B'........................................ $ 132
86,907 Cifra 'B' ADR.................................... 159
111,590 Cifra 'C'........................................ 179
24,155 Coca-Cola Femsa ADR.............................. 1,247
(a)1 Desc ADR......................................... --
(e)23,400 FEMSA ADR........................................ 139
1,059,645 FEMSA 'B'........................................ 6,319
38,250 Grupo Modelo 'C'................................. 265
16,065 Hylsamex GDR..................................... 480
1,278,645 Kimberly 'A'..................................... 5,126
175,725 Maseca 'B'....................................... 192
60,750 Maseca 'B' ADR................................... 1,002
22,025 Panamco.......................................... 724
462,930 Soriana 'B'...................................... 1,164
(a)29,265 TAMSA ADR........................................ 540
96,075 Telemex ADR...................................... 4,588
(a)114,849 Televisa CPO ADR................................. 3,489
--------
32,415
--------
PERU (2.0%)
66,725 Banco Weise ADR.................................. 433
8,010 Credicorp Ltd.................................... 176
431,857 Ferreyros........................................ 497
21,140 Luz Del Sur...................................... 25
46,200 Tel Peru 'B' ADR................................. 1,210
--------
2,341
--------
VENEZUELA (2.9%)
35,632 CANTV ADR........................................ 1,537
1,139,084 Electricidad de Caracas.......................... 1,825
7,785 Mavesa ADR....................................... 79
--------
3,441
--------
TOTAL COMMON STOCKS (COST $81,747)................................. 93,844
--------
PREFERRED STOCKS (17.7%)
BRAZIL (NON-VOTING STOCKS) (17.7%)
(a,d)8,115,000 Banco Nacional................................... --
3,012,000 Brahma........................................... 2,294
77,444,200 CEMIG............................................ 3,992
3,397,000 Coteminas........................................ 1,325
3,163,771 CPFL............................................. 526
41,187 CVRD............................................. 911
(a,d)31,997 CVRD 'B' ADR..................................... --
1,572,000 Eletrobras 'B'................................... 937
56,805,300 Lojas Arapua..................................... 923
24,618,000 Lojas Renner..................................... 1,262
13,872,000 Petrobras........................................ 3,853
33,506,383 Telebras......................................... 5,082
--------
TOTAL PREFERRED STOCKS (COST $19,314).............................. 21,105
--------
<CAPTION>
NO. OF
RIGHTS
- -----------------------------------------------------------------------------
<S> <C> <C>
RIGHTS (0.0%)
BRAZIL (0.0%)
(a)121 Lojas Arapua, expiring 12/31/97 (COST $0)........ --
--------
TOTAL FOREIGN SECURITIES (96.5%) (COST $101,061)................... 114,949
--------
</TABLE>
- --------------
68
The accompanying notes are an integral part of the financial statements.
<PAGE> 128
MORGAN STANLEY
LATIN AMERICAN FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
JUNE 30, 1997
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- -----------------------------------------------------------------------------
<S> <C> <C>
SHORT-TERM INVESTMENT (4.0%)
REPURCHASE AGREEMENT (4.0%)
$ 4,769 Chase Securities, Inc., 5.70%, dated 6/30/97, due
7/1/97, to be repurchased at $4,770,
collateralized by $5,050 U.S. Treasury Bonds,
5.625%, due 2/15/06, valued at $4,852 (COST
$4,769)........................................ $ 4,769
--------
TOTAL INVESTMENT IN SECURITIES (100.5%) (COST $105,830)............ 119,718
--------
FOREIGN CURRENCY (0.1%)
ARP 14 Argentine Peso................................... 15
COP 37,481 Colombian Peso................................... 34
MXP 740 Mexican Peso..................................... 93
VEB 2,254 Venezuelan Bolivar............................... 5
--------
TOTAL FOREIGN CURRENCY (COST $147)................................. 147
--------
<CAPTION>
VALUE
(000)
- -----------------------------------------------------------------------------
<S> <C> <C>
TOTAL INVESTMENTS (100.6%) (COST $105,977)......................... $119,865
LIABILITIES IN EXCESS OF OTHER ASSETS (-0.6%)...................... (805)
--------
NET ASSETS (100%).................................................. $119,060
========
</TABLE>
- ---------------
(a) -- Non-income producing.
(d) -- Security valued at fair value -- see note A-1 to financial statements.
(e) -- 144A Security -- certain conditions for public sale may exist.
ADR -- American Depositary Receipt
CPO -- Certificate of Participation
GDR -- Global Depositary Receipt
- --------------------------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION (UNAUDITED)
<TABLE>
<CAPTION>
PERCENT
OF
VALUE NET
INDUSTRY (000) ASSETS
- ---------------------------------------- -------- --------
<S> <C> <C>
Telecommunications...................... $ 35,415 29.7%
Energy.................................. 22,894 19.2
Consumer Goods.......................... 17,771 14.9
Materials............................... 14,522 12.2
Services................................ 12,829 10.8
Finance................................. 5,446 4.6
Capital Equipment....................... 3,075 2.6
Multi-Industry.......................... 2,997 2.5
-------- ---
$114,949 96.5%
======== ====
</TABLE>
-----------------------
69
The accompanying notes are an integral part of the financial statements.
<PAGE> 129
MORGAN STANLEY
EMERGING MARKETS FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
JUNE 30, 1997
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- -------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (82.4%)
ARGENTINA (2.4%)
(a)12,975 Nortel Inversora ADR............................. $ 352
36,212 Quilmes ADR...................................... 371
10,847 Telecom Argentina ADR............................ 569
81,130 Telefonica Argentina ADR......................... 2,809
35,145 YPF ADR.......................................... 1,081
--------
5,182
--------
BRAZIL (6.3%)
77,330 Brahma ADR....................................... 1,184
(a,e)2,140 Celesc GDS....................................... 297
(a)389,600 CRT 'A'.......................................... 586
5,020 CVRD ADR......................................... 112
5,517,000 Eletrobras....................................... 3,085
9,140 Eletrobras ADR................................... 271
35,990 Eletrobras ADR................................... 1,004
927,000 Lightpar......................................... 369
(e)14,225 Lojas Arupua ADR................................. 236
1,960 Pao de Acucar.................................... 45
(e)14,961 Pao de Acucar ADR................................ 340
9,198,000 Telebras......................................... 1,247
20,845 Telebras ADR..................................... 3,163
(a)550,397 Telesp........................................... 162
34,420 Unibanco GDR..................................... 1,278
--------
13,379
--------
CHILE (0.6%)
16,645 CCU ADR.......................................... 365
8,290 Enersis ADR...................................... 295
18,649 Santa Isabel ADR................................. 601
--------
1,261
--------
CHINA (0.3%)
412,000 Guangshen Railway Co. Ltd. 'H'................... 181
6,000 Guangshen Railway Co. Ltd. ADR................... 131
696,000 Zhenhai Refining & Chemical Co., Ltd............. 252
--------
564
--------
COLOMBIA (0.0%)
215,412 Banco de Colombia................................ 79
--------
EGYPT (1.5%)
7,916 Ameriyah Cement Co............................... 193
34,430 Commercial International Bank.................... 720
(a)24,250 Commercial International Bank GDR................ 506
9,170 Eastern Tobacco.................................. 232
(a)1,895 Egypt American Bank.............................. 75
5,775 Egyptian Finance & Industrial.................... 345
10,800 General Silo Storage............................. 281
10,475 Helwan Portland Cement........................... 222
3,200 Madinet Housing & Development.................... 226
1,950 North Cairo Flour Mills.......................... 102
7,375 Tora H. Portland Cement.......................... 187
--------
3,089
--------
HONG KONG (2.5%)
82,000 Cheung Kong Holdings Ltd......................... 810
(a)338,000 China Everbright Ltd. -- IHD Pacific Ltd......... 1,010
778,000 China Resources Beijing Land..................... 577
272,000 China Resources Enterprises Ltd.................. 1,334
50,000 Hutchison Whampoa Ltd............................ 432
68,000 New World Development Co., Ltd................... $ 406
130,000 Shanghai Industrial Holdings Ltd................. 809
--------
5,378
--------
HUNGARY (0.4%)
(a)3,601 BorsodChem Rt. GDR............................... 140
(a)16,416 MOL Magyar Olaj-es Gazipari Rt. GDR.............. 365
1,790 Pannonplast Rt................................... 90
(a)12,850 Tiszai Vegyi Kombinat Rt. GDR.................... 220
--------
815
--------
INDIA (9.2%)
413,150 Automotive Axles Ltd............................. 548
181,400 Bharat Heavy Electricals Ltd..................... 1,960
12,369 Century Textiles & Industries GDR................ 656
(a)75,000 Container Corp. of India Ltd..................... 1,095
50 E.I.D. Parry Ltd. GDR............................ --
(e)150,000 E.I.D. Parry Ltd. GDR............................ 375
201,600 Great Eastern Shipping GDR....................... 1,613
100,000 Gujarat Ambuja Cement GDR........................ 1,163
214,816 Gujarat Narmada Valley Fertilizers Co., Ltd.
GDR............................................ 537
504,000 Hindustan Development Corp. Ltd. GDR............. 126
24,400 Hoechst Shering Agrevo Ltd....................... 460
12,500 Housing Development Finance Corp., Ltd........... 1,426
75,000 India Cements Ltd. GDR........................... 244
13,700 Indian Rayon & Industries GDR.................... 173
(d,e)108,750 Indo Rama Synthetics Ltd. GDR.................... 544
152,000 ITC Ltd.......................................... 2,389
145,000 ITC Ltd. GDS..................................... 2,647
4,320 JCT Ltd. GDR..................................... 7
(e)160 JCT Ltd. GDR..................................... --
230,750 JK Corp. GDR..................................... 121
150,000 Mahanagar Telephone Nigam, Ltd................... 1,273
50,000 Mahindra & Mahindra Ltd. GDR..................... 744
100,000 Philips India Ltd................................ 243
21,150 Rane Madras Ltd.................................. 151
(a)27,750 Raymond Ltd. GDR................................. 120
(a)280,000 Sanghi Polyester Ltd. GDR........................ 147
317,000 SIV Industries GDR............................... 127
302,600 Tube Investments of India Ltd. GDR............... 265
60,550 United Phosphorus Ltd. GDR....................... 394
--------
19,548
--------
INDONESIA (4.7%)
(a)648,000 Astra International (Foreign).................... 2,664
(a,d)1,424,202 Bank International Indonesia (Foreign)........... 1,230
(d)1,998,000 Bank Negara Indonesia (Foreign).................. 1,273
(d)456,500 Bimantara Citra (Foreign)........................ 798
(d)248,000 Gudang Garam (Foreign)........................... 1,040
(a,d)309,000 Hanjaya Mandala Sampoerna (Foreign).............. 1,179
(d)501,203 Indah Kiat Pulp & Paper (Foreign)................ 294
(a,d)226,800 Indofood Sukses Makmur (Foreign)................. 522
(a,d)476,000 Matahari Putra Prima (Foreign)................... 959
99,000 Mayora Indah (Foreign)........................... 56
41,000 Putra Surya Multidana (Foreign).................. 65
--------
10,080
--------
ISRAEL (2.1%)
(a)112,600 Bank Hapoalim Ltd................................ 234
1 Elbit Medical Imaging Ltd........................ --
37,500 Elbit Systems Ltd................................ 448
</TABLE>
- --------------
70
The accompanying notes are an integral part of the financial statements.
<PAGE> 130
MORGAN STANLEY
EMERGING MARKETS FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
JUNE 30, 1997
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- -------------------------------------------------------------------------------
<S> <C> <C>
ISRAEL (CONT.)
680 First International Bank of Israel Ltd. '1'...... $ 98
893 First International Bank of Israel Ltd. '5'...... 688
8,600 Koor Industries Ltd.............................. 761
16,500 Koor Industries Ltd. ADR......................... 291
91,800 Osem Investment Ltd.............................. 487
467,800 Super Sol Ltd.................................... 1,501
--------
4,508
--------
KOREA (6.0%)
37,900 Cho Hung Bank Co., Ltd. GDR...................... 275
15,195 Cho Hung Bank Co., Ltd. (Foreign)................ 101
(a)19,760 Hansol Paper Co.................................. 501
(a)657 Hanwha Chemical Corp............................. 5
(a,d)47,810 Housing & Commercial Bank, Korea................. 892
(a)30,592 Hyundai Engineering & Construction Co.
(Foreign)...................................... 785
(a,d)31,292 Kookmin Bank..................................... 577
(a)37,775 Kookmin Bank GDR................................. 798
45,097 Korea Electric Power Corp........................ 1,346
25,600 Korea Exchange Bank.............................. 169
13,920 LG Information & Communication Ltd............... 1,724
11,070 Pohang Iron & Steel Co., Ltd. ADR................ 354
(d)10,026 Pohang Iron & Steel Co., Ltd..................... 1,027
(a,e)16,184 Samsung Electronics Co. GDS (New)................ 908
(d)23,691 Samsung Electronics Co. (Foreign)................ 2,652
(d)49,945 Shinhan Bank Co., Ltd. (Foreign)................. 724
--------
12,838
--------
MALAYSIA (1.1%)
214,000 Commerce Asset Holdings Bhd...................... 564
125,000 Genting Bhd...................................... 599
52,000 Rashid Hussain Bhd............................... 330
174,000 Resorts World Bhd................................ 524
45,000 United Engineers Bhd............................. 324
--------
2,341
--------
MEXICO (11.0%)
44,710 Apasco........................................... 320
(a)266,176 Banacci 'B'...................................... 685
(a)193,888 Banacci 'L'...................................... 453
600,692 Bancomer 'B'..................................... 290
(a,e)93,470 Bancomer 'B' ADR................................. 911
103,755 Carso 'A1'....................................... 723
29,110 Carso ADR........................................ 410
293,969 Cemex CPO........................................ 1,279
63,369 Cemex CPO ADR.................................... 550
64,440 Cemex 'B'........................................ 315
87,780 Cemex 'B' ADR.................................... 845
15,004 Cifra 'A'........................................ 28
122,675 Cifra 'C'........................................ 196
15,226 Desc ADR......................................... 443
851,140 FEMSA 'B'........................................ 5,076
(a)36,726 Gruma 'B'........................................ 170
(a,e)3,953 Gruma ADR........................................ 73
299,297 Kimberly 'A'..................................... 1,200
107,474 Maseca 'B'....................................... 118
125,040 Telemex 'L' ADR.................................. 5,971
(a)113,787 Televisa CPO GDR................................. 3,457
--------
23,513
--------
PAKISTAN (3.3%)
1,042,000 Fauji Fertilizer Co., Ltd........................ $ 2,049
(a)453,400 Hub Power Co..................................... 459
(a)181,500 Karachi Electric................................. 54
(a)150,000 Nishat Mills Ltd................................. 74
96,870 Pakistan State Oil Co., Ltd...................... 780
3,492,500 Pakistan Telecommunication Co.................... 2,657
(a)1,300,850 Sui Northern Gas Pipelines....................... 1,022
--------
7,095
--------
PERU (0.5%)
39,045 Tele Peru 'B' ADR................................ 1,022
--------
POLAND (1.5%)
(a)16,340 Agros Holdings S.A. 'D'.......................... 413
(a)8,300 Bank of Handlowy W Warszawie S.A................. 88
12,500 Bank Rozwoju Eksportu S.A........................ 262
(a)6,436 Bank Slaski S.A.................................. 460
223,822 Big Bank Inicjatyw............................... 269
15,750 Debica S.A....................................... 324
1,800 E. Wedel S.A..................................... 97
77,100 Elektrim S.A..................................... 671
(a)34,700 Exbud S.A........................................ 350
94,000 Polifarb Wroclaw S.A............................. 352
--------
3,286
--------
RUSSIA (7.6%)
(a)11,618,000 Edinaya Energetiches............................. 4,205
(a)23,900 Gazprom ADR...................................... 396
(a)1,622,000 Irkutskenergo.................................... 552
(a)110,000 Lukoil Holdings Co............................... 2,159
(a)14,000 Lukoil Holdings Co. ADR.......................... 1,105
(a)1,377,000 Moscow Energy (Mosenergo)........................ 1,929
(a)354,200 Rostelekom....................................... 1,374
(a,d,f)600 Storyfirst Communications........................ 1,500
42,000 Surgutneftegaz ADR............................... 2,248
(a)6,000 Tatneft ADR...................................... 639
--------
16,107
--------
SINGAPORE (0.4%)
(a)223,200 Want Want Holdings............................... 741
--------
SOUTH AFRICA (7.1%)
43,200 Amalgamated Banks of South Africa................ 310
110,800 Barlow Ltd....................................... 1,205
33,502 Bidvest Group Ltd................................ 258
13,300 De Beers Centenary AG............................ 491
4,100 Dreifontein Consolidation Ltd.................... 28
146,500 Ellerine Holdings, Ltd........................... 1,043
106,800 First National Bank Holdings, Ltd................ 918
(a)11,058 Foodcorp Limited................................. 84
300,600 Gencor Ltd....................................... 1,385
182,400 Illovo Sugar Ltd................................. 418
98,600 Malbak Ltd....................................... 156
2,454 New Clicks Holdings Ltd.......................... 3
90,000 Persetel Holdings Ltd............................ 633
246,000 Rembrandt Group Ltd.............................. 2,624
241,700 Reunert Ltd...................................... 828
349,100 Sasol Ltd........................................ 4,578
16,258 South African Druggists Ltd...................... 136
--------
15,098
--------
</TABLE>
-----------------------
71
The accompanying notes are an integral part of the financial statements.
<PAGE> 131
MORGAN STANLEY
EMERGING MARKETS FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
JUNE 30, 1997
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- -------------------------------------------------------------------------------
<S> <C> <C>
TAIWAN (4.0%)
(a)254,000 Acer, Inc........................................ $ 914
(a)202,500 Asustek Computer, Inc............................ 2,681
(a)98,000 China Development Corp........................... 506
(a)383,500 Compal Electronics, Inc.......................... 1,517
827,000 Far Eastern Textile, Ltd......................... 1,300
153,690 Formosa Plastics Corp............................ 370
(a)203,740 Kuoyang Construction............................. 491
203,000 Siliconware Precision Industries Co.............. 686
--------
8,465
--------
THAILAND (4.8%)
32,000 Advanced Information Services Co. Ltd............ 279
125,100 Advanced Information Services Co., Ltd.
(Foreign)...................................... 893
356,500 Bangkok Bank Co., Ltd. (Foreign)................. 2,450
5,000 Banpu Public Co., Ltd (Foreign).................. 73
88,700 Central Pattana Public Co., Ltd.................. 123
127,000 Industrial Finance (Foreign)..................... 162
(a)19,000 Lanna Lignite Public Co., Ltd.................... 134
3,000 Lanna Lignite Public Co., Ltd (Foreign).......... 20
95,000 National Finance & Securities Co................. 60
183,000 National Finance & Securities Co., Ltd.
(Foreign)...................................... 115
201,700 National Petrochemical Public Co., Ltd........... 206
(d)30,700 National Petrochemical Public Co., Ltd.
(Foreign)...................................... 31
5,000 Shinawatra Computer Co. Ltd...................... 35
(d)126,440 Shinawatra Computer Co., Ltd. (Foreign).......... 874
15,550 Siam Cement Co., Ltd. (Foreign).................. 269
324,800 Siam Commercial Bank Co. Ltd. (Foreign).......... 1,329
(a)537,300 Thai Farmers Bank Public Co., Ltd (Foreign)...... 2,282
43,000 Tipco Asphalt Public Company Ltd................. 224
141,000 United Communication Industry.................... 582
(d)9,000 United Communication Industry (Foreign).......... 37
--------
10,178
--------
TURKEY (4.1%)
5,388,750 Arcelik A.S...................................... 726
5,306,500 Bossa Ticaret ve Sanayii Isletmeleri A.S......... 120
1,545,750 Ege Biracilik Ve Malt Sanayii.................... 359
5,670,000 Erciyas Biracilik Ve Malt Sanayii................ 678
12,391,000 Eregli Demir Ve Celik Fabrikalari A.S............ 2,065
1,333,000 Guney Biraculik Ve Malt Sana..................... 75
(a)53,109,383 Turkiye Garanti Bankasi.......................... 2,002
(a)4,075,000 Vestel Elektronik Sanayii ve Ticaret A.S......... 228
(a)105,904,330 Yapi Ve Kredi Bankasi A.S........................ 2,424
--------
8,677
--------
VENEZUELA (0.2%)
75,000 C.A. La Electricidad de Caracas.................. 120
9,195 CANTV ADR........................................ 397
--------
517
--------
ZIMBABWE (0.8%)
550,450 Delta Corp....................................... 845
339,900 Meikles Africa Ltd............................... 836
--------
1,681
--------
TOTAL COMMON STOCKS (COST $160,489)..................................
175,442
--------
PREFERRED STOCKS (11.0%)
BRAZIL (NON-VOTING STOCKS) (10.5%)
41,968,584 Banco Bradesco................................... $ 423
(a,d)11,156,000 Banco Nacional................................... 1
4,609,099 Brahma........................................... 3,511
65,899,110 CEMIG............................................ 3,397
31,430 CEMIG ADR........................................ 1,582
(a)3,780,500 CRT.............................................. 5,689
1,256,000 Coteminas........................................ 490
1,697,000 Eletrobras 'B'................................... 1,012
1,948,200 Itaubanco........................................ 1,091
12,437,000 Lojas Arapua S.A................................. 202
6,448,000 Lojas Renner S.A................................. 331
(a)4,660,000 Pao de Acucar.................................... 106
8,858,000 Petrobras........................................ 2,460
11,381,390 Telebras......................................... 1,726
734,661 Telesp........................................... 240
--------
22,261
--------
RUSSIA (0.5%)
(a)450,000 Rostelekom....................................... 1,125
--------
TOTAL PREFERRED STOCKS (COST $18,578)................................ 23,386
--------
INVESTMENT COMPANIES (1.4%)
UNITED STATES (1.4%)
(g)34,265 Morgan Stanley Africa Investment Fund, Inc....... 612
(a,g)186,045 Morgan Stanley India Investment Fund, Inc........ 2,407
--------
TOTAL INVESTMENT COMPANIES (COST $2,379)............................. 3,019
--------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
RIGHTS
- -------------------------------------------------------------------------------
<S> <C> <C>
RIGHTS (0.0%)
BRAZIL (0.0%)
(a,d)130,370 CRT.............................................. 30
--------
INDONESIA (0.0%)
(a,d)451,083 Indah Kiat Pulp & Paper, expiring 7/11/02........ 79
--------
MALAYSIA (0.0%)
(a,d)42,800 Commerce Asset Holdings Bhd., expiring 7/23/97... 3
(a,d) Rashid Hussain Bhd., expiring 12/31/02........... --
--------
TOTAL RIGHTS (COST $0)............................................... 112
--------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
WARRANTS
- -------------------------------------------------------------------------------
<S> <C> <C>
WARRANTS (0.1%)
INDONESIA (0.0%)
(a)126,596 Bank International Indonesia, expiring 1/17/00... 49
(a,d)80,192 Indah Kiat Pulp & Paper, expiring 7/11/02........ 14
--------
63
--------
MALAYSIA (0.0%)
(a,d)26,750 Commerce Asset Holdings Bhd., expiring 7/23/97... --
--------
</TABLE>
- --------------
72
The accompanying notes are an integral part of the financial statements.
<PAGE> 132
MORGAN STANLEY
EMERGING MARKETS FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
JUNE 30, 1997
<TABLE>
<CAPTION>
NO. OF VALUE
WARRANTS (000)
- -------------------------------------------------------------------------------
<S> <C> <C>
THAILAND (0.1%)
(a)88,000 Thai Farmers Bank Public Co., Ltd, expiring
9/30/99........................................ $ 26
(a)102,487 Thai Farmers Bank Public Co., Ltd, expiring
9/15/02........................................ 45
--------
71
--------
TOTAL WARRANTS (COST $120)........................................... 134
--------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
- -------------------------------------------------------------------------------
<S> <C> <C>
FOREIGN GOVERNMENT BONDS (0.4%)
BULGARIA (0.4%)
$ (n)750 Bulgaria Front Loaded Interest Reduction Bond,
'A' 2.25%, 7/28/24............................. 428
400 Bulgaria Discount Bonds, 'A' (Euro) 6.563%,
7/28/24........................................ 295
--------
TOTAL FOREIGN GOVERNMENT BONDS (COST $495)........................... 723
--------
CONVERTIBLE DEBENTURE (0.1%)
INDIA (0.0%)
(a)120 Tata Iron & Steel Co. 2.25%, 4/1/99.............. 112
--------
SOUTH AFRICA (0.1%)
(a)14,600 Sasol 8.50%, 12/15/2099.......................... 182
--------
TOTAL CONVERTIBLE DEBENTURES (COST $306)............................. 294
--------
TOTAL FOREIGN SECURITIES (95.4%) (COST $182,367)..................... 203,110
--------
SHORT-TERM INVESTMENT (4.7%)
REPURCHASE AGREEMENT (4.7%)
9,936 Chase Securities, Inc., 5.70%, dated 6/30/97, due
7/1/97, to be repurchased at $9,938,
collateralized by $10,520 U.S. Treasury Bonds,
5.625%, due 2/15/06, value at $10,108 (COST
$9,936)........................................ 9,936
--------
TOTAL INVESTMENT IN SECURITIES (100.1%) (COST $192,303).............. 213,046
--------
</TABLE>
<TABLE>
<CAPTION>
AMOUNT VALUE
(000) (000)
- -------------------------------------------------------------------------------
<S> <C> <C>
FOREIGN CURRENCY (1.6%)
ARP 14 Argentine Peso................................... $ 14
BRL 745 Brazilian Real................................... 692
COP 7,025 Colombian Peso................................... 6
EGP 6 Egyptian Pound................................... 2
HKD 356 Hong Kong Dollar................................. 46
INR 60,094 Indian Rupee..................................... 1,679
IDR 147,154 Indonesian Rupiah................................ 61
MYR 27 Malaysian Ringgit................................ 11
MXP 245 Mexican Peso..................................... 31
PHP 343 Philippine Peso.................................. 13
PLZ 954 Polish Zloty..................................... 290
ZAR 4 South African Rand............................... 1
KRW 91,547 South Korean Won................................. 103
TWD 9,787 Taiwan Dollar.................................... 352
THB 4,960 Thai Baht........................................ 191
TRL 2,088,265 Turkish Lira..................................... 14
VEB 12,177 Venezuelan Bolivar............................... 25
--------
TOTAL FOREIGN CURRENCY (COST $3,537)................................. 3,531
--------
TOTAL INVESTMENTS (101.7%) (COST $195,840)........................... 216,577
LIABILITIES IN EXCESS OF OTHER ASSETS (-1.7%)........................ (3,631)
--------
NET ASSETS (100%).................................................... $212,946
========
</TABLE>
- ---------------
(a) -- Non-income producing.
(d) -- Securities valued at fair value -- see note A-1 to financial
statements.
(e) -- 144A Security -- certain conditions for public sale may exist.
(f) -- Restricted as to public resale. Total value of restricted securities
at June 30, 1997 was $1,500 or 0.70% of net assets (Total cost
$1,500).
(g) -- The Fund is advised by an affiliate.
(n) -- Step Bond -- coupon rate increases in increments to maturity. Rate
disclosed is as of June 30, 1997. Maturity date disclosed is the
ultimate maturity.
ADR -- American Depositary Receipt
CPO -- Certificate of Participation
GDR -- Global Depositary Receipt
GDS -- Global Depositary Shares
-----------------------
73
The accompanying notes are an integral part of the financial statements.
<PAGE> 133
MORGAN STANLEY
EMERGING MARKETS FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
JUNE 30, 1997
- --------------------------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE INFORMATION:
Under the terms of foreign currency contracts open at June 30, 1997, the Fund is
obligated to deliver or is to receive foreign currency in exchange for U.S.
dollars as indicated below:
<TABLE>
<CAPTION>
CURRENCY IN EXCHANGE
TO DELIVER VALUE SETTLEMENT FOR VALUE NET UNREALIZED
(000) (000) DATE (000) (000) GAIN (LOSS) (000)
- ------------ --------- ----------- ------------ --------- -----------------
<S> <C> <C> <C> <C> <C>
$ 344 $ 344 7/1/97 ZAR 1,552 $ 342 $ (2)
$ 182 182 7/1/97 ZAR 823 181 (1)
$ 303 303 7/2/97 THB 7,841 303 --
THB 10,728 407 8/18/97 $ 400 400 (7)
THB 50,782 1,925 8/18/97 $ 1,900 1,900 (25)
$ 925 925 8/19/97 THB 24,929 945 20
THB 54,917 2,081 8/19/97 $ 2,040 2,040 (41)
THB 42,767 1,602 9/16/97 $ 1,613 1,613 11
THB 76,873 2,881 9/16/97 $ 2,897 2,897 16
--------- --------- ---------
$ 10,650 $ 10,621 $ (29)
========= ========= =========
</TABLE>
- ---------------
THB -- Thai Baht
ZAR -- South African Rand
- --------------------------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION (UNAUDITED)
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
- ----------------------------------------------------------------------------- --------- -------------
<S> <C> <C>
Consumer Goods............................................................... $ 41,477 19.4%
Services..................................................................... 40,458 19.0
Finance...................................................................... 35,032 16.5
Energy....................................................................... 25,925 12.2
Multi-Industry............................................................... 20,185 9.5
Materials.................................................................... 20,033 9.4
Capital Equipment............................................................ 19,249 9.0
Foreign Government Bonds..................................................... 723 0.4
Gold Mines................................................................... 28 0.0
--------- ----
$ 203,110 95.4%
========= ====
</TABLE>
- --------------
74
The accompanying notes are an integral part of the financial statements.
<PAGE> 134
MORGAN STANLEY
AGGRESSIVE EQUITY FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
JUNE 30, 1997
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<S> <C> <C>
- --------------------------------------------------------------------------
COMMON STOCKS (94.9%)
CAPITAL GOODS (13.1%)
AEROSPACE & DEFENSE (13.1%)
17,500...... Boeing Co........................................ $ 929
(a)11,000... Litton Industries, Inc........................... 532
10,400...... McDonnell Douglas Corp........................... 712
21,700...... Textron, Inc..................................... 1,440
14,100...... Thiokol Corp..................................... 987
49,600...... United Technologies Corp......................... 4,117
--------
8,717
--------
CONSUMER--CYCLICAL (31.8%)
BROADCAST--RADIO & TELEVISION (1.9%)
(a)20,400... Clear Channel Communications, Inc................ 1,255
--------
FOOD SERVICE & LODGING (20.7%)
34,200...... Cracker Barrel Old Country Store, Inc............ 907
(a)212,700.. HFS, Inc......................................... 12,337
10,500...... McDonald's Corp.................................. 507
--------
13,751
--------
LEISURE RELATED (3.9%)
(a)61,500... GTECH Holdings Corp.............................. 1,983
34,700...... International Game Technology.................... 616
--------
2,599
--------
PUBLISHING (2.8%)
(a)126,100.. K-III Communications Corp........................ 1,513
6,700....... Time Warner, Inc................................. 323
--------
1,836
--------
RETAIL--GENERAL (2.5%)
24,200...... Home Depot, Inc.................................. 1,668
--------
TOTAL CONSUMER--CYCLICAL...................................... 21,109
--------
CONSUMER--STAPLES (13.0%)
BEVERAGES (3.9%)
113,700..... Coca-Cola Enterprises, Inc....................... 2,615
--------
HEALTH CARE SUPPLIES & SERVICES (2.0%)
12,900...... AETNA, Inc....................................... 1,321
--------
TOBACCO (7.1%)
106,300..... Philip Morris Cos., Inc.......................... 4,717
--------
TOTAL CONSUMER--STAPLES....................................... 8,653
--------
DIVERSIFIED (12.0%)
DIVERSIFIED (12.0%)
17,000...... Allied Signal, Inc............................... 1,428
(a)63 Berkshire Hathaway, Inc.......................... 2,974
27,000 ITT Industries, Inc.............................. 695
19,700 Loews Corp....................................... 1,972
45,500 Viad Corp........................................ 876
--------
7,945
--------
<CAPTION>
VALUE
SHARES (000)
<S> <C> <C>
- --------------------------------------------------------------------------
ENERGY (1.3%)
COAL, GAS, & OIL (1.3%)
(a)11,000 Diamond Offshore Drilling, Inc................... $ 859
--------
FINANCE (19.4%)
BANKING (7.0%)
15,000 BankAmerica Corp................................. 968
2,600 Chase Manhattan Corp............................. 252
10,300 Citicorp......................................... 1,242
8,133 Wells Fargo Co................................... 2,192
--------
4,654
--------
FINANCIAL SERVICES (4.4%)
14,000 American Express Co.............................. 1,043
7,700 Franklin Resources, Inc.......................... 559
10,100 Student Loan Marketing Association............... 1,283
--------
2,885
--------
INSURANCE (8.0%)
14,200 ACE Ltd.......................................... 1,049
21,700 CMAC Investment Corp............................. 1,036
(a)14,800 CNA Financial Corp............................... 1,560
13,100 MGIC Investment Corp............................. 628
7,500 Progressive Corp................................. 653
15,600 USF&G Corp....................................... 374
--------
5,300
--------
TOTAL FINANCE................................................. 12,839
--------
MATERIALS (1.0%)
CHEMICALS (1.0%)
11,000 Du Pont (EI) de Nemours Co....................... 692
--------
SERVICES (2.9%)
BUSINESS SERVICES (1.0%)
8,300 Xerox Corp....................................... 655
--------
TRANSPORTATION (1.9%)
(a)6,900 AMR Corp......................................... 638
(a)17,400 U.S. Airways Group Inc........................... 609
--------
1,247
--------
TOTAL SERVICES................................................ 1,902
--------
TECHNOLOGY (0.4%)
ELECTRONICS (0.4%)
8,600 Watkins Johnson Co............................... 264
--------
TOTAL COMMON STOCKS (COST $59,265)............................ 62,980
--------
</TABLE>
-----------------------
75
The accompanying notes are an integral part of the financial statements.
<PAGE> 135
MORGAN STANLEY
AGGRESSIVE EQUITY FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
JUNE 30, 1997
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<S> <C> <C>
- --------------------------------------------------------------------------
SHORT-TERM INVESTMENT (7.6%)
REPURCHASE AGREEMENT (7.6%)
$ 5,014 Chase Securities, Inc., 5.70%, dated 6/30/97, due
7/1/97, to be repurchased at $5,015,
collaterallized by $5,310 U.S. Treasury Bonds,
5.625%, due 2/15/06, valued at $5,102 (COST
$5,014)........................................ $ 5,014
--------
TOTAL INVESTMENTS (102.5%) (COST $64,279)....................... 67,994
LIABILITIES IN EXCESS OF OTHER ASSETS (-2.5%)................... (1,681)
--------
NET ASSETS (100%)............................................... $ 66,313
========
</TABLE>
- ---------------
(a) -- Non-income producing.
SECURITIES SOLD SHORT (NOTE A-6)
<TABLE>
<S> <C> <C>
VALUE
SHARES (000)
- ----------- ---------
98,300 CUC International, Inc. (TOTAL PROCEEDS $2,301) $ 2,537
=========
</TABLE>
- --------------
76
The accompanying notes are an integral part of the financial statements.
<PAGE> 136
MORGAN STANLEY
U.S. REAL ESTATE FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
JUNE 30, 1997
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<S> <C> <C>
- -----------------------------------------------------------------------
COMMON STOCKS (86.9%)
APARTMENT (19.7%)
2,500 Amli Residential Properties Trust REIT........... $ 59
13,700 Associated Estates Realty Corp. REIT............. 322
21,500 Avalon Properties, Inc. REIT..................... 615
20,200 Bay Apartment Communities, Inc. REIT............. 747
1,500 Columbus Realty Trust REIT....................... 34
26,700 Essex Property Trust, Inc. REIT.................. 858
13,400 Gables Residential Trust REIT.................... 338
18,800 Merry Land & Investment Co., Inc. REIT........... 408
15,900 Oasis Residential, Inc. REIT..................... 374
18,900 Security Capital Atlantic, Inc................... 452
2,600 Summit Properties, Inc. REIT..................... 54
(a)47,451 Wellsford Properties Inc......................... 522
-------
4,783
-------
HEALTHCARE (9.7%)
6,900 Alexandria Real Estate Equities, Inc. REIT....... 151
(a)15,600 ARV Assisted Living, Inc......................... 172
7,500 Health Care Property Investors, Inc. REIT........ 264
1,600 LTC Properties, Inc.............................. 29
43,200 Nationwide Health Properties, Inc................ 950
24,000 Omega Healthcare Investors, Inc.................. 785
-------
2,351
-------
LAND (1.9%)
45,424 Atlantic Gulf Communities Corp................... 289
(a)9,700 Catellus Development Corp........................ 176
-------
465
-------
LODGING/LEISURE (12.5%)
44,500 American General Hospitality Corp................ 1,101
(a)26,100 Extended Stay of America, Inc.................... 411
(a)24,500 Host Marriott Corp............................... 437
(a)31,700 John Q. Hammons Hotels, Inc...................... 293
(a)15,400 Servico, Inc..................................... 229
13,300 Starwood Lodging Trust REIT...................... 568
-------
3,039
-------
MANUFACTURED HOMES (6.6%)
41,148 Chateau Properties, Inc. REIT.................... 1,178
18,100 Manufactured Home Communities, Inc. REIT......... 417
-------
1,595
-------
OFFICE & INDUSTRIAL (20.7%)
INDUSTRIAL (3.3%)
2,750 EastGroup Properties, Inc. REIT.................. 55
8,800 Meridian Industrial Trust REIT................... 207
25,000 Pacific Gulf Properties, Inc. REIT............... 550
-------
812
-------
OFFICE (16.1%)
20,400 Arden Realty Group, Inc.......................... 530
14,500 Beacon Properties Corp. REIT..................... 484
6,400 Boston Properties, Inc........................... 176
39,466 Brandywine Realty Trust REIT..................... 799
500 Brookfield Properties Corp....................... 6
(a)19,900 Brookfield Properties Corp. Installment
Receipts....................................... 139
15,600 CarrAmerica Realty Corp. REIT.................... 449
10,400 Cornerstone Properties, Inc. REIT................ 160
24,400 Great Lakes REIT, Inc............................ 401
<CAPTION>
VALUE
SHARES (000)
<S> <C> <C>
- -----------------------------------------------------------------------
10,600 Koger Equity, Inc................................ $ 193
27,216 Trizec Hahn Corp................................. 582
-------
3,919
-------
OFFICE & INDUSTRIAL (1.3%)
6,400 Kilroy Realty Corp. REIT......................... 162
6,200 Prentiss Properties Trust REIT................... 159
-------
321
-------
TOTAL OFFICE & INDUSTRIAL..................................... 5,052
-------
RETAIL (14.5%)
REGIONAL MALL (9.8%)
44,100 First Union Real Estate Investments REIT......... 623
30,200 Taubman Center, Inc. REIT........................ 400
25,700 Urban Shopping Centers, Inc. REIT................ 819
32,500 Westfield America, Inc. REIT..................... 548
-------
2,390
-------
SHOPPING CENTER (4.7%)
11,300 Alexander Haagen Properties, Inc. REIT........... 184
40,500 Burnham Pacific Property Trust REIT.............. 557
6,200 Federal Realty Investment Trust REIT............. 167
2,700 IRT Property Co.................................. 32
900 Price, Inc. REIT................................. 33
200 Ramco-Gershenson Properties Trust REIT........... 4
11,900 Western Investment Real Estate Trust REIT........ 165
-------
1,142
-------
TOTAL RETAIL.................................................. 3,532
-------
SELF STORAGE (1.3%)
11,000 Shurgard Storage Centers, Inc. 'A' REIT.......... 308
-------
TOTAL COMMON STOCKS (COST $19,346)............................ 21,125
-------
PREFERRED STOCKS (1.0%)
LAND (0.3%)
(d,f)8,207 Atlantic Gulf Communities Corp................... 82
-------
RETAIL (0.7%)
SHOPPING CENTER (0.7%)
5,500 First Washington Realty Trust, Inc. 'A'.......... 168
-------
TOTAL PREFERRED STOCKS (COST $236)............................ 250
-------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
- -----------------------------------------------------------------------
<S> <C> <C>
CONVERTIBLE BONDS (0.5%)
OFFICE (0.5%)
$ 224 Brookfield Properties Corp. 6.00%, 2/14/07
(COST $86)..................................... 125
-------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
WARRANTS
- -----------------------------------------------------------------------
<S> <C> <C>
WARRANTS (0.0%)
LAND (0.0%)
(a,d)5,724 Atlantic Gulf Communities Class A, expiring
6/23/04........................................ --
(a,d)5,724 Atlantic Gulf Communities Class B, expiring
6/23/04........................................ --
(a,d)5,724 Atlantic Gulf Communities Class C, expiring
6/23/04........................................ --
-------
--
-------
TOTAL WARRANTS (COST $0)...................................... --
-------
</TABLE>
-----------------------
77
The accompanying notes are an integral part of the financial statements.
<PAGE> 137
MORGAN STANLEY
U.S. REAL ESTATE FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
JUNE 30, 1997
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<S> <C> <C>
- -----------------------------------------------------------------------
SHORT-TERM INVESTMENT (2.7%)
REPURCHASE AGREEMENT (2.7%)
$ 665 Chase Securities Inc., 5.70%, dated 6/30/97, due
7/1/97, to be repurchased at $665,
collateralized by $705 U.S. Treasury Bonds,
5.625%, due 2/15/06, valued at $677
(COST $665).................................... $ 665
-------
TOTAL INVESTMENTS (91.1%) (COST $20,333)...................... 22,165
OTHER ASSETS IN EXCESS OF LIABILITIES (8.9%).................. 2,151
-------
NET ASSETS (100%)............................................. $24,316
=======
</TABLE>
- ---------------
(a) -- Non-income producing.
(d) -- Security valued at fair value -- see note A-1 to financial statements.
(f) -- Restricted as to public resale. Total value of restricted securities
at June 30, 1997 was $82 or 0.34% of net assets. (Total cost $82)
REIT -- Real Estate Investment Trust.
- --------------
78
The accompanying notes are an integral part of the financial statements.
<PAGE> 138
MORGAN STANLEY
HIGH YIELD FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
JUNE 30, 1997
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<S> <C> <C>
- -----------------------------------------------------------------------
CORPORATE BONDS AND NOTES (64.2%)
AEROSPACE & DEFENSE (2.8%)
$ (e)200 Jet Equipment Trust, Series 1994-C1,
11.79%, 6/15/13.............................. $ 253
(e)300 Jet Equipment Trust, Series 1995-D,
11.44%, 11/1/14.............................. 374
-------
627
-------
BANKING (1.5%)
95 First Nationwide Holdings 9.125%, 1/15/03...... 98
225 First Nationwide Holdings 10.625%, 10/1/03..... 247
-------
345
-------
BROADCAST -- RADIO & TELEVISION (8.1%)
410 Cablevision Systems Corp. 9.875%, 5/15/06...... 437
(e)110 Comcast Cellular Corp. 9.50%, 5/1/07........... 111
(n)170 Echostar Satellite Broadcast 0.00%, 3/15/04.... 121
200 Paramount Communications 8.25%, 8/1/22......... 191
150 Rogers Cablesystems Ltd., 'B', 10.00%,
3/15/05...................................... 162
60 Rogers Communications, Inc. 9.125%, 1/15/06.... 61
(e)165 TV Azteca S.A. 10.50%, 2/15/07................. 169
600 Viacom, Inc. 8.00%, 7/7/06..................... 584
-------
1,836
-------
BUSINESS SERVICES (0.8%)
(e)205 Outdoor Systems 8.875%, 6/15/07................ 199
-------
CHEMICALS (1.4%)
315 ISP Holdings, Inc., Series B 9.00%, 10/15/03... 326
-------
COAL, GAS & OIL (1.1%)
255 Snyder Oil Corp. 8.75%, 6/15/07................ 254
-------
COMPUTERS (2.0%)
230 Advanced Micro Devices 11.00%, 8/1/03.......... 257
190 Digital Equipment Corp. 8.625%, 11/1/12........ 189
-------
446
-------
CONSUMER STAPLES (1.4%)
300 RJR Nabisco, Inc. 8.75%, 4/15/04............... 306
-------
DIVERSIFIED (1.0%)
225 Kmart Funding Corp. 8.80%, 7/1/10.............. 223
-------
ELECTRICAL EQUIPMENT (0.6%)
(e)125 EES Coke Battery Co., Inc. 9.382%, 4/15/07..... 128
-------
ENERGY (3.9%)
240 Nuevo Energy Co. 9.50%, 4/15/06................ 251
325 Quezon Power Ltd., 8.86%, 6/15/17.............. 325
(e,n)130 Transamerican Energy 0.00%, 6/15/02............ 93
220 Vintage Petroleum 8.625%, 2/1/09............... 219
-------
888
-------
ENVIRONMENTAL CONTROLS (2.7%)
103 Midland Cogeneration Ventures, Series C-91,
10.33%, 7/23/02.............................. 109
(n)450 Norcal Waste Systems, 'B', 13.00%, 11/15/05.... 511
-------
620
-------
FINANCE (2.4%)
140 Amersco Inc., Series 97-A, 10.00%, 3/15/04..... 144
150 HMC Acquisition Properties,'B', 9.00%,
12/15/07..................................... 152
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<S> <C> <C>
- -----------------------------------------------------------------------
$ (e)75 Navistar Financial Corp. 9.00%, 6/1/02......... $ 77
(e)170 Riggs Capital Trust II 8.875%, 3/15/27......... 173
-------
546
-------
FOOD SERVICE & LODGING (1.7%)
200 Courtyard By Marriott 10.75%, 2/1/08........... 216
150 Host Marriott Travel Plaza, 'B', 9.50%,
5/15/05...................................... 157
-------
373
-------
FOREST PRODUCTS & PAPER (2.5%)
(e)215 Asia Pulp & Paper Company Ltd. 12.00%,
12/29/49..................................... 220
305 SD Warren Co.,'B', 12.00%, 12/15/04............ 341
-------
561
-------
GAMING & LODGING (3.5%)
445 Grand Casinos, Inc. 10.125%, 12/1/03........... 465
320 Station Casinos Inc. 10.125%, 3/15/06.......... 323
-------
788
-------
HEALTH CARE SUPPLIES & SERVICES (1.0%)
220 Tenet Healthcare Corp. 8.625%, 1/15/07......... 224
-------
INSURANCE (1.5%)
(e)325 Anthem Insurance 9.00%, 4/1/27................. 335
-------
MULTI--INDUSTRY (2.0%)
(e)210 Multicanal S.A. 10.50%, 2/1/07................. 226
200 TLC Beatrice International Holdings 11.50%,
10/1/05...................................... 224
-------
450
-------
PACKAGING & CONTAINER (1.2%)
250 Gaylord Container Corp. 11.50%, 5/15/01........ 263
-------
RETAIL--GENERAL (2.3%)
95 Kmart Corp. 7.75%, 10/1/12..................... 87
500 Southland Corp. 5.00%, 12/15/03................ 425
-------
512
-------
TELECOMMUNICATIONS (17.6%)
(n)495 Brooks Fiber Properties, Inc. 0.00%, 3/1/06.... 337
(n)375 Brooks Fiber Properties, Inc. 0.00%, 11/1/06... 244
(n)185 Dial Call Communications 0.00%, 12/15/05....... 145
(e)360 Globalstar LP/Capital 11.375%, 2/15/04......... 361
175 IXC Communications, Inc., 'B', 12.50%,
10/1/05...................................... 200
100 Net Sat Servicos LTDA 12.75%, 8/5/04........... 109
(n)910 Nextel Communications 0.00%, 8/15/04........... 696
(n)400 Occidente Y Caribe 0.00%, 3/15/04.............. 297
(e)190 Qwest Communications International 10.875%,
4/1/07....................................... 207
(e,n)645 TCI Satellite Entertainment 0.00%, 2/15/07..... 384
420 Tele-Communications Inc. 9.25%, 1/15/23........ 437
25 Tele-Communications Inc. 8.75%, 2/15/23........ 25
(n)745 Teleport Communications 0.00%, 7/1/07.......... 538
-------
3,980
-------
UTILITIES (1.2%)
120 Cleveland Electric Illuminating 8.375%,
12/1/11...................................... 121
125 Midland Funding II, 'A', 11.75%, 7/23/05....... 145
-------
266
-------
TOTAL CORPORATE BONDS AND NOTES (COST $13,984)................ 14,496
-------
</TABLE>
-----------------------
79
The accompanying notes are an integral part of the financial statements.
<PAGE> 139
MORGAN STANLEY
HIGH YIELD FUND
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
JUNE 30, 1997
FACE
AMOUNT VALUE
(000) (000)
- -----------------------------------------------------------------------
<S> <C> <C>
ASSET BACKED SECURITIES (6.8%)
AEROSPACE & DEFENSE (0.8%)
$ 175 Aircraft Lease Portfolio Securitization Ltd.,
Series 1996-1, Class D, 12.75%, 6/15/06...... $ 188
-------
FINANCE (6.0%)
(e)248 CA FM Lease Trust 8.50%, 7/15/17............... 254
(e,h)323 DLJ Mortgage Acceptance Corp., Series 1996-CF2,
Class S, 1.64%, 11/12/21 IO.................. 29
150 DR Securitized Lease Trust, Series 1993-K1,
Class A2, 7.43%, 8/15/18..................... 125
504 DR Securitized Lease Trust, Series 1994-K1,
Class A1, 7.60%, 8/15/07..................... 474
100 DR Securitized Lease Trust, Series 1994-K1,
Class A2, 8.375%, 8/15/15.................... 93
(e)125 First Home Mortgage Acceptance Corp., Series
1996-B, Class C, 7.929%, 11/1/18............. 111
(e)250 Long Beach Auto Trust 1997-1, Class B, 14.22%,
10/26/03..................................... 254
-------
1,340
-------
TOTAL ASSET BACKED SECURITIES (COST $1,468)................... 1,528
-------
FOREIGN GOVERNMENT BONDS (7.6%)
BONDS (7.3%)
(h)350 Brazil Front Loaded Interest Reduction Bond,
Series 15, 4.50%, 4/15/09.................... 274
(n)625 Republic of Argentina 5.50%, 3/31/23........... 434
(h)90 Republic of Argentina BOCON, Series 2, PIK,
5.375%, 9/1/02............................... 106
245 Republic of Colombia 8.70%, 2/15/16............ 249
(h)500 Republic of Venezuela, Series W-A, 6.75%,
3/31/20...................................... 394
(h)250 United Mexican States Discount Bond, 'B',
6.25%, 12/31/19.............................. 193
-------
1,650
-------
LOAN AGREEMENTS (0.3%)
(v)75 Russia Interest Arrears Note, 12/31/99......... 57
-------
TOTAL FOREIGN GOVERNMENT BONDS (COST $1,576).................. 1,707
-------
<CAPTION>
SHARES
- -----------------------------------------------------------------------
<S> <C> <C>
CONVERTIBLE PREFERRED STOCK (1.2%)
BROADCAST--RADIO & TELEVISION (1.2%)
2,540 TCI Pacific Communications 5.00%, 7/31/06 (COST
$231)........................................ 263
-------
PREFERRED STOCKS (4.7%)
ENTERTAINMENT (3.7%)
755 Time Warner, Inc., 'M', 10.25%................. 829
-------
FINANCE (1.0%)
(e)2,150 Sinclair Capital, 11.625%...................... 228
-------
TOTAL PREFERRED STOCKS (COST $997)............................ 1,057
-------
<CAPTION>
NO. OF VALUE
WARRANTS (000)
- -----------------------------------------------------------------------
<S> <C> <C>
WARRANTS (0.0%)
TELECOMMUNICATIONS (0.0%)
(a,d,e)1,600 Occidente Y Caribe, expiring 3/15/04 (COST
$0).......................................... $ --
-------
<CAPTION>
NO. OF
RIGHTS
- -----------------------------------------------------------------------
<S> <C> <C>
RIGHTS (0.0%)
FOREIGN GOVERNMENT (0.0%)
(a,d)2,500 Republic of Venezuela, expiring 3/31/20........ --
(a,d)500,000 United Mexican States, expiring 12/31/19....... --
-------
TOTAL RIGHTS (COST $0)........................................ --
-------
<CAPTION>
FACE
AMOUNT
(000)
- -----------------------------------------------------------------------
<S> <C> <C>
SHORT-TERM INVESTMENTS (14.8%)
COMMERCIAL PAPER (12.1%)
$ 500 Case Equipment Loan Trust 5.58%, 8/7/97........ 496
500 Eiger Capital Corp. 5.54%, 7/15/97............. 499
500 J.C. Penney Inc. 5.45%, 8/11/97................ 497
500 Monsanto Co. 5.60%, 7/8/97..................... 499
500 Pacific Gas & Electric 5.57%, 8/1/97........... 498
250 RR Donnelly & Sons Corp. 5.53%, 7/8/97......... 250
-------
2,739
-------
REPURCHASE AGREEMENT (2.7%)
615 Chase Securities Inc., 5.70%, dated 6/30/97,
due 7/1/97, to be repurchased at $615,
collateralized by $655 U.S. Treasury Bonds,
5.625%, due 2/15/06, valued at $629.......... 615
-------
TOTAL SHORT-TERM INVESTMENTS (COST $3,354).................... 3,354
-------
TOTAL INVESTMENTS (99.3%) (COST $21,610)...................... 22,405
OTHER ASSETS IN EXCESS OF LIABILITIES (0.7%).................. 162
-------
NET ASSETS (100%)............................................. $22,567
=======
</TABLE>
- ---------------
(a) -- Non-income producing.
(d) -- Security valued at fair value -- see note A-1 to financial statements.
(e) -- 144A Security -- certain conditions for public sale may exist.
(h) -- Variable/Floating rate securities -- rate disclosed is as of June 30,
1997.
(n) -- Step Bond -- coupon rate increases in increments to maturity. Rate
disclosed is as of June 30, 1997. Maturity date disclosed is the
ultimate maturity date.
(v) -- When-issued security -- see note A-9 to financial statements.
IO -- Interest Only.
PIK -- Payment-In-Kind. Income may be received in additional securities or
cash at the discretion of the issuer.
- --------------
80
The accompanying notes are an integral part of the financial statements.
<PAGE> 140
MORGAN STANLEY
INTERNATIONAL MAGNUM FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
JUNE 30, 1997
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<S> <C> <C>
- -------------------------------------------------------------------------
COMMON STOCKS (90.1%)
AUSTRALIA (3.0%)
25,927 Amcor Ltd........................................ $ 172
28,800 Broken Hill Proprietary Co., Ltd................. 424
14,100 Commonwealth Bank of Australia................... 170
8,200 Lend Lease Corp. Ltd............................. 174
11,600 National Australia Bank Ltd...................... 166
35,640 News Corp., Ltd.................................. 171
35,200 WMC Ltd.......................................... 222
-------
1,499
-------
AUSTRIA (0.6%)
3,300 Boehler-Uddeholm AG.............................. 256
380 Radex-Heraklith Industriebet AG.................. 16
-------
272
-------
BELGIUM (0.5%)
5,300 G.I.B. Holdings Ltd.............................. 254
-------
DENMARK (1.3%)
6,100 BG Bank A/S...................................... 337
5,740 Unidanmark A/S 'A' (Registered).................. 323
-------
660
-------
FINLAND (1.9%)
(a)7,150 Amer-Yhtymae Oy.................................. 129
4,500 Huhtamaki Oy 'I'................................. 194
550 Kone Oy 'B'...................................... 66
39,200 Merita Ltd. 'A'.................................. 131
25,000 Rautaruukki Oy................................... 262
7,600 Valmet Oy........................................ 131
-------
913
-------
FRANCE (6.4%)
1,000 Alcatel Alsthom.................................. 125
3,100 Banque Nationale de Paris........................ 128
640 Bongrain S.A..................................... 250
2,600 Cie de Saint Gobain.............................. 379
2,900 Elf Aquitaine S.A................................ 313
1,640 Eridania Beghin-Say S.A.......................... 246
1,900 Groupe Danone RFD................................ 314
4,400 Lafarge S.A...................................... 274
5,400 Legris Industries S.A............................ 255
(a)2,500 SGS-Thomson Microelectronics N.V................. 198
3,900 Total S.A. 'B'................................... 394
14,650 Usinor Sacilor................................... 264
-------
3,140
-------
GERMANY (7.1%)
7,100 BASF AG.......................................... 262
6,600 Bayer AG......................................... 254
1,240 Buderus AG....................................... 689
15,500 Gerresheimer Glas AG............................. 260
19,300 Lufthansa AG..................................... 371
220 Mannesmann AG.................................... 98
(a)1,800 Metro AG......................................... 196
5,600 Veba AG.......................................... 316
860 Viag AG.......................................... 393
870 Volkswagen AG.................................... 660
-------
3,499
-------
<CAPTION>
VALUE
SHARES (000)
<S> <C>
- -------------------------------------------------------------------------
HONG KONG (3.6%)
35,000 Cheung Kong Holdings Ltd......................... $ 345
45,000 China Resources Enterprises Ltd.................. 221
21,000 Dao Heng Bank Group Ltd.......................... 115
19,000 Henderson Land Development Co., Ltd.............. 169
10,000 Hong Kong & Shanghai Bank Holdings plc........... 301
28,000 Hutchison Whampoa Ltd............................ 242
17,000 New World Development Co., Ltd................... 101
31,000 Shanghai Industrial Holdings Ltd................. 193
9,000 Sun Hung Kai Properties Ltd...................... 108
-------
1,795
-------
ITALY (2.1%)
34,000 Editoriale L'Expresso S.p.A...................... 113
22,300 Marzotto (Gaetano) & Figli S.p.A................. 187
(a)25,300 Olivetti......................................... 7
97,000 Sogefi S.p.A..................................... 245
72,000 Stet Societa Finanziaria Telefonica S.p.A........ 250
125,000 Telecom Italia S.p.A............................. 248
-------
1,050
-------
JAPAN (28.0%)
23,000 Amada Co., Ltd................................... 203
31,000 Asahi Tec Corp................................... 151
14,000 Canon, Inc....................................... 381
10,000 Dai Nippon Printing Co., Ltd..................... 226
40,000 Daicel Chemical Industries Ltd................... 155
15,000 Daifuku Co., Ltd................................. 198
20,000 Daikin Industries Ltd............................ 182
4,190 Family Mart...................................... 206
10,000 Fuji Machine Manufacturing Co.................... 362
9,000 Fuji Photo Film Ltd.............................. 362
15,000 Fujitec Co., Ltd................................. 178
28,000 Fujitsu Ltd...................................... 389
50,000 Furukawa Electric................................ 318
10,000 Hitachi Credit Corp.............................. 194
38,000 Hitachi Ltd...................................... 424
13,000 Inabata & Co..................................... 89
36,000 Kaneka Corp...................................... 226
10,000 Kurita Water Industries.......................... 266
4,700 Kyocera Ltd...................................... 373
18,000 Kyudenko Co., Ltd................................ 152
8,000 Lintec........................................... 146
19,000 Matsushita Electric Industries Ltd............... 383
50,000 Mitsubishi Chemical Corp......................... 163
13,000 Mitsubishi Estate Co., Ltd....................... 188
47,000 Mitsubishi Heavy Industries Ltd.................. 361
14,000 Mitsumi Electric Co., Ltd........................ 334
9,000 Murata Manufacturing Co., Ltd.................... 358
30,000 NEC Corp......................................... 419
13,000 Nifco, Inc....................................... 136
4,000 Nintendo Corp., Ltd.............................. 335
1,000 Nippon Pillar Packing............................ 9
39 Nippon Telegraph & Telephone Corp................ 374
27,000 Nissan Motor Co.................................. 209
12,000 Nissha Printing.................................. 138
30,000 Obayashi Corp.................................... 201
32,000 Ricoh Co., Ltd................................... 419
7,000 Rinnai........................................... 150
5,000 Sangetsu Co., Ltd................................ 105
13,000 Sankyo Co. Ltd................................... 437
</TABLE>
-----------------------
81
The accompanying notes are an integral part of the financial statements.
<PAGE> 141
MORGAN STANLEY
INTERNATIONAL MAGNUM FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
JUNE 30, 1997
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- -------------------------------------------------------------------------
JAPAN (CONT.)
<S> <C> <C>
25,000 Sanwa Shutter.................................... $ 227
15,000 Sekisui Chemical Co.............................. 152
20,000 Sekisui House Ltd................................ 202
3,000 Shimamura Co., Ltd............................... 107
5,600 Sony Corp........................................ 488
12,000 Sumitomo Marine & Fire Insurance Co.............. 98
18,000 Suzuki Motor Co., Ltd............................ 228
44,000 Taisei Corp., Ltd................................ 204
6,000 TDK Corp......................................... 440
8,500 Tokyo Electron Ltd............................... 407
56,000 Toshiba Corp..................................... 360
13,000 Toyota Motor Corp................................ 383
24,000 Tsubakimoto Chain................................ 147
8,000 Yamaha Corp...................................... 147
12,000 Yamanuchi Pharmaceutical Co...................... 323
-------
13,813
-------
MALAYSIA (1.9%)
73,000 Berjaya Group Bhd................................ 90
16,000 Berjaya Sports Toto Bhd.......................... 75
16,000 Commerce Asset Holding Bhd....................... 42
2,000 Dialog Group Bhd................................. 29
5,000 Edaran Otomobil Nasional Bhd..................... 43
6,000 Genting Bhd...................................... 29
4,000 Lityan Holdings Bhd.............................. 49
17,000 Magnum Corp. Bhd................................. 26
13,000 Malayan Banking Bhd.............................. 136
17,000 Malaysian Resources Corp. Bhd.................... 47
16,000 Rashid Hussain Bhd............................... 101
9,000 Resorts World Bhd................................ 27
40,000 Sime Darby Bhd................................... 133
14,000 United Engineers Ltd............................. 101
-------
928
-------
NETHERLANDS (4.6%)
13,600 ABN Amro Holding N.V............................. 253
2,900 Akzo Nobel N.V................................... 398
8,300 ING Groep N.V.................................... 383
4,200 KLM Royal Dutch Airlines N.V..................... 130
2,400 Koninklijke Bijenkorf Beheer..................... 168
4,700 Koninklijke Van Ommeren N.V...................... 183
12,700 N.V. Koninklijke KNP BT.......................... 289
6,500 Phillips Electronics N.V......................... 466
-------
2,270
-------
NEW ZEALAND (0.2%)
1,840 Fletcher Challenge Forest........................ 3
46,000 Fletcher Challenge Paper......................... 113
-------
116
-------
NORWAY (1.2%)
24,300 Den Norske Bank ASA.............................. 95
25,400 Saga Petroleum ASA 'B'........................... 444
(a)11,800 Storebrand ASA................................... 70
-------
609
-------
SINGAPORE (1.9%)
18,000 Datacraft Asia Ltd............................... 57
6,000 Development Bank of Singapore Ltd. (Foreign)..... 76
52,000 Electronic Resources Ltd......................... 82
<CAPTION>
VALUE
SHARES (000)
<S> <C> <C>
- -------------------------------------------------------------------------
44,000 NatSteel Ltd..................................... $ 112
7,600 Oversea-Chinese Banking Corp., Ltd. (Foreign).... 79
(a)34,000 Pacific Century Regional Development............. 47
10,000 Parkway Holdings Ltd............................. 45
58,000 SM Summit Holdings Ltd........................... 44
5,000 Singapore Press Holdings (Foreign)............... 101
71,000 Super Coffeemix Manufacturing Ltd................ 59
8,000 United Overseas Bank Ltd. (Foreign).............. 82
(a)19,200 Want Want Holdings............................... 64
22,000 Wing Tai Holdings Ltd............................ 63
-------
911
-------
SPAIN (2.9%)
3,900 Banco Bilbao Vizcaya............................. 317
25,100 Iberdrola S.A.................................... 317
13,400 Telefonica de Espana S.A......................... 388
34,400 Uralita S.A...................................... 384
-------
1,406
-------
SWEDEN (3.3%)
5,500 Esselte AB 'B'................................... 129
12,200 Nordbanken AB.................................... 410
3,900 Pharmacia & Upjohn, Inc. Depositary Shares....... 132
6,400 S.K.F. AB 'B'.................................... 166
5,300 Skandia Forsakrings AB........................... 195
9,000 Sparbanken Sverige AB 'A'........................ 200
10,100 Spectra-Physics AB 'A'........................... 182
6,400 Svenska Handelsbanken 'A'........................ 205
-------
1,619
-------
SWITZERLAND (7.1%)
(a)65 Ascom Holding AG (Bearer)........................ 91
(a)110 Baloise Holdings Ltd............................. 262
190 Bobst AG (Bearer)................................ 323
880 Forbo Holding AG (Registered).................... 380
410 Holderbank Financiere Glaris AG, 'B' (Bearer).... 387
390 Nestle S.A. (Registered)......................... 514
163 Novartis AG (Registered)......................... 261
1,080 Oerlikon-Buehrle Holding AG (Registered)......... 127
80 Schindler Holding AG (Participating
Certificates).................................. 100
85 Schindler Holding AG (Registered)................ 109
140 Schweizerische Industrie-Gesellschaft Holding AG
(Registered)................................... 208
550 Sulzer AG (Registered)........................... 471
790 Valora Holding AG (Registered)................... 168
270 Zuerich Versicherungs-Gesellschaft Holdings
(Registered)................................... 107
-------
3,508
-------
UNITED KINGDOM (12.5%)
30,400 Associated British Foods plc..................... 262
29,061 BAT Industries plc............................... 260
19,600 Bank of Scotland................................. 126
26,500 Bass plc......................................... 324
32,500 BG plc........................................... 119
37,400 British Telecommunications plc................... 278
23,050 Burmah Castrol plc............................... 390
55,122 Christian Salvesen plc........................... 259
64,400 Courtaulds Textiles plc.......................... 329
46,000 Grand Metropolitan plc........................... 443
61,300 Imperial Tobacco Group plc....................... 394
</TABLE>
- --------------
82
The accompanying notes are an integral part of the financial statements.
<PAGE> 142
MORGAN STANLEY
INTERNATIONAL MAGNUM FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
JUNE 30, 1997
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- -------------------------------------------------------------------------
<S> <C> <C>
UNITED KINGDOM (CONT.)
38,300 John Mowlem & Co. plc............................ $ 79
66,300 Kwik Save Group plc.............................. 334
12,700 Peninsular & Oriental Steam Navigation Co........ 126
5,400 Premier Farnell plc.............................. 42
32,600 Racal Electronics plc............................ 130
31,068 Reckitt & Coleman plc............................ 464
44,097 Royal & Sun Alliance Insurance Group plc......... 326
32,700 Scottish Hydro-Electric plc...................... 226
13,600 Southern Electric plc............................ 100
52,850 Tate & Lyle plc.................................. 393
15,900 Unilever plc..................................... 455
68,600 WPP Group plc.................................... 280
-------
6,139
-------
TOTAL COMMON STOCKS (COST $40,461).............................. 44,401
-------
PREFERRED STOCKS (1.4%)
GERMANY (1.4%)
725 Dyckerhoff AG.................................... 263
3,200 Hornbach Holding AG.............................. 267
340 Suedzucker AG.................................... 182
-------
TOTAL PREFERRED STOCKS (COST $610).............................. 712
-------
<CAPTION>
NO. OF
RIGHTS
- -------------------------------------------------------------------------
<S> <C> <C>
RIGHTS (0.0%)
MALAYSIA (0.0%)
(a,d)5,600 Commerce Asset Holdings Bhd., expiring 7/23/97... --
-------
SINGAPORE (0.0%)
(a,d)26,000 Electronic Resources Ltd., expiring 7/21/97...... 17
-------
SWITZERLAND (0.0%)
(a,d)330 Sulzer Media, expiring 7/17/97................... --
-------
TOTAL RIGHTS (COST $0).......................................... 17
-------
<CAPTION>
NO. OF
WARRANTS
- -------------------------------------------------------------------------
<S> <C> <C>
WARRANTS (0.0%)
MALAYSIA (0.0%)
(a,d)3,500 Commerce Asset Holdings Bhd., expiring 7/23/97... --
(a,d)2,285 Rashid Hussain Bhd., expiring 12/31/02........... --
-------
TOTAL WARRANTS (COST $0)........................................ --
-------
TOTAL FOREIGN SECURITIES (91.5%) (COST $41,071)................. 45,130
-------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- -------------------------------------------------------------------------
<S> <C> <C>
SHORT-TERM INVESTMENT (17.5%)
REPURCHASE AGREEMENT (17.5%)
$ 8,624 Chase Securities, Inc., 5.70%, dated 6/30/97, due
7/1/97, to be repurchased at $8,625,
collateralized by $9,130 U.S. Treasury Bonds,
5.625%, due 2/15/06, valued at $8,772 (COST
$8,624)........................................ $ 8,624
-------
TOTAL INVESTMENTS IN SECURITIES (109%) (COST $49,695)........... 53,754
-------
FOREIGN CURRENCY (0.3%)
ATS 19 Austrian Schilling............................... 2
BEF 727 Belgian Franc.................................... 20
FRF 564 French Franc..................................... 96
ITL 10,064 Italian Lira..................................... 6
JPY 3,355 Japanese Yen..................................... 29
MYR 3 Malaysian Ringgit................................ 1
ESP 1,299 Spanish Peseta................................... 9
-------
TOTAL FOREIGN CURRENCY (COST $164).............................. 163
-------
TOTAL INVESTMENTS (109.3%) (COST $49,859)....................... 53,917
LIABILITIES IN EXCESS OF OTHER ASSETS (-9.3%)................... (4,585)
-------
NET ASSETS (100%)............................................... $49,332
=======
</TABLE>
- ---------------
(a) -- Non-income producing.
(d) -- Security valued at fair value -- see note A-1 to financial statements.
RFD -- Ranked for Dividend.
-----------------------
83
The accompanying notes are an integral part of the financial statements.
<PAGE> 143
MORGAN STANLEY
INTERNATIONAL MAGNUM FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
JUNE 30, 1997
- --------------------------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE INFORMATION:
Under the terms of foreign currency contracts open at June 30, 1997, the Fund is
obligated to deliver or is to receive foreign currency in exchange for U.S.
dollars as indicated below:
<TABLE>
<CAPTION>
CURRENCY IN EXCHANGE
TO DELIVER VALUE SETTLEMENT FOR VALUE NET UNREALIZED
(000) (000) DATE (000) (000) GAIN (LOSS) (000)
- ----------- --------- ----------- ----------- --------- -----------------
<S> <C> <C> <C> <C> <C>
$ 45 $ 45 7/02/97 GBP 27 $ 45 $ --
CHF 117 80 8/18/97 $ 80 80 --
CHF 1,203 828 8/18/97 $ 846 846 18
FRF 325 56 8/18/97 $ 56 56 --
NLG 1,442 738 8/18/97 $ 758 758 20
$ 200 200 8/18/97 CHF 285 197 (3)
$ 250 250 8/18/97 NLG 484 248 (2)
JPY 364,376 3,207 8/25/97 $ 3,260 3,260 53
BEF 4,100 115 8/29/97 $ 116 116 1
DEM 1,101 634 8/29/97 $ 643 643 9
DEM 814 469 8/29/97 $ 475 475 6
$ 70 70 8/29/97 BEF 2,481 69 (1)
$ 300 300 8/29/97 DEM 515 297 (3)
FRF 4,501 770 9/15/97 $ 794 794 24
$ 200 200 9/15/97 FRF 1,158 198 (2)
--------- --------- ---------
$ 7,962 $ 8,082 $ 120
========= ========= =========
</TABLE>
- ---------------
BEF -- Belgian Franc
GBP -- British Pound
DEM -- Deutsche Mark
FRF -- French Franc
JPY -- Japanese Yen
NLG -- Netherlands Guilder
CHF -- Swiss Franc
- --------------------------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION (UNAUDITED)
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
- ------------------------------------------------------------------------------ --------- -------------
<S> <C> <C>
Capital Equipment............................................................. $ 13,097 26.5%
Consumer Goods................................................................ 10,089 20.5
Finance....................................................................... 6,784 13.8
Materials..................................................................... 5,300 10.7
Services...................................................................... 4,739 9.6
Energy........................................................................ 2,871 5.8
Multi-Industry................................................................ 2,027 4.1
Gold Mines.................................................................... 223 0.5
--------- ----
$ 45,130 91.5%
========= ====
</TABLE>
- --------------
84
The accompanying notes are an integral part of the financial statements.
<PAGE> 144
MORGAN STANLEY
GOVERNMENT OBLIGATIONS MONEY MARKET FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
JUNE 30, 1997
<TABLE>
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
<S> <C> <C>
- ------------------------------------------------------------------------
AGENCY OBLIGATIONS (87.0%)
FEDERAL HOME LOAN BANK DISCOUNT NOTES (15.7%)
$ 5,000 5.42%, 8/14/97................................... $ 4,967
10,000 5.56%, 9/2/97.................................... 9,903
---------
14,870
---------
FEDERAL HOME LOAN MORTGAGE CORPORATION DISCOUNT NOTES
(25.2%)
10,000 5.42%, 7/21/97................................... 9,970
5,000 5.44%, 8/1/97.................................... 4,977
4,000 5.53%, 8/5/97.................................... 3,978
5,000 5.43%, 8/6/97.................................... 4,973
---------
23,898
---------
FEDERAL NATIONAL MORTGAGE ASSOCIATION (46.1%)
DISCOUNT NOTES (40.8%)
5,000 5.53%, 7/2/97.................................... 4,999
10,000 5.52%, 7/18/97................................... 9,974
4,500 5.41%, 7/24/97................................... 4,484
5,000 5.53%, 8/11/97................................... 4,968
4,500 5.42%, 8/28/97................................... 4,461
10,000 5.59%, 10/20/97.................................. 9,828
---------
38,714
---------
DEBENTURE (5.3%)
5,000 5.69%, Series 97 AD, 11/13/97.................... 5,000
---------
TOTAL AGENCY OBLIGATIONS (COST $82,482)...................... 82,482
---------
REPURCHASE AGREEMENT (13.2%)
12,495 Goldman Sachs, 5.82%, dated 6/30/97, due 7/1/97,
to be repurchased at $12,497, collateralized by
$12,450 U.S. Treasury Bonds, 6.875%, due
8/15/25 valued at $12,830 (COST $12,495)....... 12,495
---------
TOTAL INVESTMENTS (100.2%) (COST $94,977).................... 94,977
LIABILITIES IN EXCESS OF OTHER ASSETS (-0.2%)................ (209)
---------
NET ASSETS (100%)............................................ $ 94,768
=========
</TABLE>
-----------------------
85
The accompanying notes are an integral part of the financial statements.
<PAGE> 145
MORGAN STANLEY
MONEY MARKET FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
JUNE 30, 1997
<TABLE>
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
<S> <C> <C>
- ------------------------------------------------------------------------
AGENCY OBLIGATIONS (2.2%)
FEDERAL HOME LOAN MORTGAGE CORPORATION DISCOUNT NOTES
(2.2%)
$ 3,000 5.98%, 4/8/98 (COST $2,995)...................... $ 2,995
--------
CERTFICATES OF DEPOSIT (22.0%)
BANKS (22.0%)
5,000 ABN-AMRO Bank (NY), Yankee, 6.12%, 7/14/97....... 5,000
2,500 ANZ (Delaware), Inc. 5.88%, 10/28/97............. 2,500
5,000 Credit Suisse (First Boston) 6.25%, 4/8/98....... 5,000
5,000 Deutsche Bank AG, Yankee, 5.85%, 3/13/98......... 5,000
2,500 Natwest plc, Yankee, 5.89%, 10/2/97.............. 2,500
5,000 Rabobank Nederland, Yankee, 6.20%, 4/10/98....... 4,998
3,000 Societe Generale Bank 6.16%, 9/8/97.............. 3,000
2,500 Sun Trust Banks 5.85%, 10/22/97.................. 2,500
--------
TOTAL CERTIFICATES OF DEPOSITS (COST $30,498)................ 30,498
--------
COMMERCIAL PAPER (41.8%)
AUTOMOBILES (3.6%)
5,000 Daimler-Benz AG 5.42%, 8/4/97.................... 4,974
--------
FINANCE (31.0%)
10,000 Asset Backed Capital Finance 5.66%, 7/22/97...... 9,967
6,000 Asset Securitization Corp. 5.63%, 7/1/97......... 6,000
6,000 CIT Group Holdings, Inc. 5.54%, 7/28/97.......... 5,975
6,000 John Deere Capital Inc. 5.58%, 7/3/97............ 5,998
10,000 Norwest Financial, Inc. 5.60%, 7/1/97............ 10,000
5,000 UBS Finance (Delaware) 6.20%, 7/1/97............. 5,000
--------
42,940
--------
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
- ------------------------------------------------------------------------
<S> <C> <C>
SERVICES (7.2%)
$ 10,000 Dun & Bradstreet Corp. 5.67%, 7/29/97............ $ 9,956
--------
TOTAL COMMERCIAL PAPER (COST $57,870)........................ 57,870
--------
VARIABLE RATE OBLIGATIONS (21.7%)
FEDERAL HOME LOAN MORTGAGE CORPORATION (10.8%)
(h)15,000 Federal Home Loan Mortgage 5.36%, 9/2/97......... 15,000
--------
STUDENT LOAN MARKETING ASSOCIATION (10.9%)
(h)15,000 Student Loan Marketing Association 5.42%,
10/30/97....................................... 15,002
--------
TOTAL VARIABLE RATE OBLIGATIONS (COST $30,002)............... 30,002
--------
REPURCHASE AGREEMENT (11.8%)
16,375 Goldman Sachs, 5.82%, dated 6/30/97, due 7/1/97,
to be repurchased at $16,378, collateralized by
$16,378 U.S. Treasury Bonds, 11.625%, due
11/15/04 valued at $16,815 (COST $16,375)...... 16,375
--------
TOTAL INVESTMENTS (99.5%) (COST $137,740).................... 137,740
OTHER ASSETS IN EXCESS OF LIABILITIES (0.5%)................. 682
--------
NET ASSETS (100%)............................................ $138,422
========
</TABLE>
- ---------------
(h) -- Variable or floating rate security -- rate disclosed is as of June 30,
1997.
- --------------
86
The accompanying notes are an integral part of the financial statements.
<PAGE> 146
MORGAN STANLEY FUNDS
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
JUNE 30, 1997
<TABLE>
<CAPTION>
GLOBAL
EQUITY GLOBAL WORLDWIDE U.S.
ALLO- FIXED ASIAN AMERICAN HIGH LATIN EMERGING AGGRESSIVE REAL
CATION INCOME GROWTH VALUE INCOME AMERICAN MARKETS EQUITY ESTATE
FUND FUND FUND FUND FUND FUND FUND FUND FUND
(000) (000) (000) (000) (000) (000) (000) (000) (000)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments in Securities, at
Value* (Note 1) -- See
accompanying portfolios $ 194,300 $ 9,546 $354,498 $ 83,754 $195,658 $119,718 $ 213,046 $ 67,994 $22,165
Foreign Currency 494 3 3,217 -- -- 147 3,531 -- --
Cash 9 679 -- -- 127 1,438 1,164 271 258
Receivable for:
Investments Sold 10,009 132 4,268 426 368 3,757 2,785 1,932 992
Securities Sold Short -- -- -- -- -- -- -- 2,301 --
Fund Shares Sold 1,974 63 549 2,286 2,176 2,859 1,280 1,315 988
Dividends 416 -- 245 91 48 297 674 54 87
Interest 2 214 -- -- 3,968 1 21 1 3
Security Lending Income 8 -- -- -- -- -- -- -- --
Foreign Withholding Tax Reclaim 53 3 21 -- -- -- 1 -- --
Net Unrealized Gain on Foreign
Currency Exchange Contracts 305 -- -- -- -- -- -- -- --
Deferred Organizational Costs 6 6 5 5 6 7 6 37 21
Due from Broker -- -- -- -- -- -- -- 1,155 --
Receivable from Investment Adviser -- 3 -- -- -- -- -- -- --
Securities, at Value, Held as
Collateral for Securities Loaned 29,822 -- -- -- -- -- -- -- --
Other 3 -- 26 -- 64 -- -- -- --
--------- ------- -------- -------- -------- -------- --------- ---------- -------
Total Assets 237,401 10,649 362,829 86,562 202,415 128,224 222,508 75,060 24,514
--------- ------- -------- -------- -------- -------- --------- ---------- -------
LIABILITIES:
Payable for:
Investments Purchased 15,821 -- 6,159 2,881 3,750 8,067 3,812 5,303 103
Securities Sold Short, at Value
(Proceeds -- $2,301) -- -- -- -- -- -- -- 2,537 --
Fund Shares Redeemed 1,091 6 1,760 1,053 1,354 367 4,210 684 1
Bank Overdraft 9 -- 316 284 -- 298 -- -- --
Dividends Declared -- -- -- -- -- -- -- -- --
Investment Advisory Fees 337 -- 862 96 327 176 472 85 20
Administrative Fees 43 3 73 16 40 28 50 13 5
Custody Fees 75 6 179 8 57 82 265 12 17
Professional Fees 45 27 91 27 49 31 61 22 22
Distribution Fees 211 9 365 77 227 73 201 70 20
Shareholder Reporting Expenses 55 4 151 29 47 12 47 14 7
Directors' Fees and Expenses 5 1 16 2 5 1 5 -- 1
Securities Lending Expense 18 -- -- -- -- -- -- -- --
Filing and Registration Fees 4 -- -- 2 12 11 4 6 2
Deferred Country Tax -- -- 93 -- -- 18 406 -- --
Collateral on Securities Loaned 29,822 -- -- -- -- -- -- -- --
Net Unrealized Loss on Foreign
Currency Exchange Contracts -- 21 78 -- -- -- 29 -- --
Other -- 4 -- -- 59 -- -- 1 --
--------- ------- -------- -------- -------- -------- --------- ---------- -------
Total Liabilities 47,536 81 10,143 4,475 5,927 9,164 9,562 8,747 198
--------- ------- -------- -------- -------- -------- --------- ---------- -------
NET ASSETS $ 189,865 $10,568 $352,686 $ 82,087 $196,488 $119,060 $ 212,946 $ 66,313 $24,316
========= ======= ======== ======== ======== ======== ========= ========== =======
<CAPTION>
GOVERNMENT
INTER- OBLIGATIONS
HIGH NATIONAL MONEY MONEY
YIELD MAGNUM MARKET MARKET
FUND FUND FUND FUND
(000) (000) (000) (000)
- -------------------------------------
ASSETS:
Investments in Securities, at
Value* (Note 1) -- See
accompanying portfolios $22,405 $53,754 $ 94,977 $137,740
Foreign Currency -- 163 -- --
Cash -- -- -- --
Receivable for:
Investments Sold 771 94 -- --
Securities Sold Short -- -- -- --
Fund Shares Sold 149 1,197 -- --
Dividends 42 92 -- --
Interest 326 1 38 1,020
Security Lending Income -- -- -- --
Foreign Withholding Tax Reclaim -- 30 -- --
Net Unrealized Gain on Foreign
Currency Exchange Contracts -- 120 -- --
Deferred Organizational Costs 19 29 -- --
Due from Broker -- -- -- --
Receivable from Investment Adviser -- -- 4 69
Securities, at Value, Held as
Collateral for Securities Loaned -- -- -- --
Other -- -- 1 1
------- ------- ---------- --------
Total Assets 23,712 55,480 95,020 138,830
------- ------- ---------- --------
LIABILITIES:
Payable for:
Investments Purchased 709 5,356 -- --
Securities Sold Short, at Value
(Proceeds -- $2,301) -- -- -- --
Fund Shares Redeemed 176 417 -- --
Bank Overdraft 183 225 -- --
Dividends Declared -- -- 94 149
Investment Advisory Fees 12 12 -- --
Administrative Fees 5 11 9 12
Custody Fees 7 44 4 9
Professional Fees 22 25 44 56
Distribution Fees 25 45 66 114
Shareholder Reporting Expenses 4 6 26 48
Directors' Fees and Expenses -- -- 4 7
Securities Lending Expense -- -- -- --
Filing and Registration Fees 2 7 -- --
Deferred Country Tax -- -- -- --
Collateral on Securities Loaned -- -- -- --
Net Unrealized Loss on Foreign
Currency Exchange Contracts -- -- -- --
Other -- -- 5 13
------- ------- ---------- --------
Total Liabilities 1,145 6,148 252 408
------- ------- ---------- --------
NET ASSETS $22,567 $49,332 $ 94,768 $138,422
======= ======= ========== ========
</TABLE>
-----------------------
87
The accompanying notes are an integral part of the financial statements.
<PAGE> 147
MORGAN STANLEY FUNDS
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
JUNE 30, 1997 (CONT.)
<TABLE>
<CAPTION>
GLOBAL
EQUITY GLOBAL WORLDWIDE U.S.
ALLO- FIXED ASIAN AMERICAN HIGH LATIN EMERGING AGGRESSIVE REAL
CATION INCOME GROWTH VALUE INCOME AMERICAN MARKETS EQUITY ESTATE
FUND FUND FUND FUND FUND FUND FUND FUND FUND
(000) (000) (000) (000) (000) (000) (000) (000) (000)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSETS CONSIST OF:
Capital Stock at Par $ 12 $ 1 $ 22 $ 5 $ 14 $ 7 $ 16 $ 4 $ 2
Paid in Capital in Excess of Par 147,222 10,700 327,144 63,598 173,493 96,171 181,049 59,979 20,569
Undistributed (Distributions in
Excess of) Net Investment Income 2,666 (63) (1,153) (1) 311 (11) (659) -- 55
Accumulated (Distributions in
Excess of) Net Realized Gain
(Loss) 7,878 48 (8,456) 5,783 8,928 9,027 12,215 2,851 1,858
Unrealized Appreciation
(Depreciation) on Investments and
Foreign Currency Translations** 32,087 (118) 35,129 12,702 13,742 13,866 20,325 3,479 1,832
--------- ------- -------- -------- -------- -------- --------- ---------- -------
NET ASSETS $ 189,865 $10,568 $352,686 $ 82,087 $196,488 $119,060 $ 212,946 $ 66,313 $24,316
========= ======= ======== ======== ======== ======== ========= ========== =======
CLASS A SHARES:
Net Assets $ 72,704 $ 6,407 $175,440 $ 34,331 $ 76,439 $ 84,401 $ 119,022 $ 22,521 $14,827
Shares Issued and Outstanding
($.001 par value) (Authorized
2,625,000,000) 4,388 644 10,554 1,951 5,362 4,855 8,838 1,326 905
Net Asset Value and Redemption
Price Per Share $ 16.57 $ 9.95 $ 16.62 $ 17.59 $ 14.26 $ 17.39 $ 13.47 $ 16.98 $ 16.39
========= ======= ======== ======== ======== ======== ========= ========== =======
Maximum Sales Charge 5.75% 4.75% 5.75% 5.75% 4.75% 5.75% 5.75% 5.75% 5.75%
Maximum Offering Price Per Share
(Net Asset Value Per Share X
100-maximum sales charge) $ 17.58 $ 10.45 $ 17.64 $ 18.66 $ 14.97 $ 18.45 $ 14.29 $ 18.02 $ 17.39
========= ======= ======== ======== ======== ======== ========= ========== =======
CLASS B SHARES:
Net Assets $ 38,962 $ 1,716 $ 62,786 $ 15,331 $ 78,340 $ 14,314 $ 35,966 $ 34,382 $ 7,120
Shares Issued and Outstanding
($.001 par value) (Authorized
2,625,000,000) 2,412 173 3,884 872 5,515 842 2,716 2,041 435
Net Asset Value and Offering Price
Per Share*** $ 16.15 $ 9.91 $ 16.17 $ 17.59 $ 14.20 $ 16.99 $ 13.24 $ 16.85 $ 16.36
========= ======= ======== ======== ======== ======== ========= ========== =======
CLASS C SHARES:
Net Assets $ 78,199 $ 2,445 $114,460 $ 32,425 $ 41,709 $ 20,345 $ 57,958 $ 9,410 $ 2,369
Shares Issued and Outstanding
($.001 par value) (Authorized
2,625,000,000) 4,814 247 7,093 1,844 2,935 1,196 4,372 559 145
Net Asset Value and Offering Price
Per Share*** $ 16.24 $ 9.90 $ 16.14 $ 17.59 $ 14.21 $ 17.01 $ 13.26 $ 16.83 $ 16.36
========= ======= ======== ======== ======== ======== ========= ========== =======
Investments at Cost, Including
Foreign Currency $ 162,983 $ 9,644 $322,413 $ 71,052 $181,907 $105,977 $ 195,840 $ 64,279 $20,333
========= ======= ======== ======== ======== ======== ========= ========== =======
<CAPTION>
GOVERNMENT
INTER- OBLIGATIONS
HIGH NATIONAL MONEY MONEY
YIELD MAGNUM MARKET MARKET
FUND FUND FUND FUND
(000) (000) (000) (000)
- -------------------------------------
<S> <C> <C> <C> <C>
NET ASSETS CONSIST OF:
Capital Stock at Par $ 18 $ 3 $ 95 $ 139
Paid in Capital in Excess of Par 21,471 44,357 94,764 138,382
Undistributed (Distributions in
Excess of) Net Investment Income 38 767 -- --
Accumulated (Distributions in
Excess of) Net Realized Gain
(Loss) 245 21 (91) (99)
Unrealized Appreciation
(Depreciation) on Investments and
Foreign Currency Translations** 795 4,184 -- --
------- ------- ---------- --------
NET ASSETS $22,567 $49,332 $ 94,768 $138,422
======= ======= ========== ========
CLASS A SHARES:
Net Assets $ 8,980 $21,961 $ 94,768 $138,422
Shares Issued and Outstanding
($.001 par value) (Authorized
2,625,000,000) 698 1,579 94,859 138,521
Net Asset Value and Redemption
Price Per Share $ 12.86 $ 13.91 $ 1.00 $ 1.00
======= ======= ========== ========
Maximum Sales Charge 4.75% 5.75% -- --
Maximum Offering Price Per Share
(Net Asset Value Per Share X
100-maximum sales charge) $ 13.50 $ 14.76 -- --
======= ======= ========== ========
Net Assets $ 8,617 $18,215 -- --
Shares Issued and Outstanding
($.001 par value) (Authorized
2,625,000,000) 670 1,317 -- --
Net Asset Value and Offering Price
Per Share*** $ 12.86 $ 13.84 -- --
======= ======= ========== ========
CLASS C SHARES:
Net Assets $ 4,970 $ 9,156 -- --
Shares Issued and Outstanding
($.001 par value) (Authorized
2,625,000,000) 386 662 -- --
Net Asset Value and Offering Price
Per Share*** $ 12.86 $ 13.83 -- --
Investments at Cost, Including
Foreign Currency $21,610 $49,859 $ 94,977 $137,740
======= ======= ========== ========
</TABLE>
- ---------------
* Includes repurchase agreements aggregating $8,897,000, $15,266,000,
2,523,000, $3,146,000, $4,769,000, $9,936,000, $5,014,000, $665,000,
$615,000, $8,624,000, $12,495,000 and $16,375,000 for Global Equity
Allocation Fund, Asian Growth Fund, American Value Fund, Worldwide
High Income Fund, Latin American Fund, Emerging Markets Fund,
Aggressive Equity Fund, U.S. Real Estate Fund, High Yield Fund,
International Magnum Fund, Government Obligations Money Market Fund
and Money Market Fund, respectively.
** Net of accrual for country tax of U.S. $93,000 for Asian Growth Fund
and $401,000 for Emerging Markets Fund.
*** Redemption price may be subject to a contingent deferred sales charge.
- ------------------
88
The accompanying notes are an integral part of the financial statements.
<PAGE> 148
MORGAN STANLEY FUNDS
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
YEAR ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
GLOBAL GLOBAL WORLDWIDE U.S.
EQUITY FIXED ASIAN AMERICAN HIGH LATIN EMERGING AGGRESSIVE REAL
ALLOCATION INCOME GROWTH VALUE INCOME AMERICAN MARKETS EQUITY ESTATE
FUND FUND FUND FUND FUND FUND FUND FUND FUND
(000) (000) (000) (000) (000) (000) (000) (000) (000)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends $ 3,489 $ -- $ 6,912 $ 1,309 $ 170 $ 893 $ 3,086 $ 295 $ 476
Interest 259 632 340 82 16,119 106 467 116 78
Security Lending 107 -- -- -- -- -- -- -- --
Less Foreign Taxes Withheld (254) (10) (963) -- -- -- (160) -- --
---------- -------- -------- -------- --------- -------- -------- ---------- --------
Total Income 3,601 622 6,289 1,391 16,289 999 3,393 411 554
---------- -------- -------- -------- --------- -------- -------- ---------- --------
EXPENSES:
Investment Advisory Fees 1,557 79 4,057 432 1,086 572 1,955 245 145
Less: Fees Waived (293) (79) -- (135) -- (248) (331) (204) (145)
---------- -------- -------- -------- --------- -------- -------- ---------- --------
Net Investment Advisory Fees 1,264 -- 4,057 297 1,086 324 1,624 41 --
Administrative Fees 473 34 1,080 139 388 151 445 76 42
Custody Fees 224 17 682 18 77 191 581 34 44
Filing and Registration Fees 5 -- 1 4 13 11 6 8 2
Directors' Fees and Expenses 8 2 21 3 7 3 9 2 2
Professional Fees 95 30 207 38 84 45 107 28 21
Shareholder Reports 92 11 262 47 77 20 76 30 4
Security Lending Fees 23 -- -- -- -- -- -- -- --
Dividend Expense for Securities
Sold Short -- -- -- -- -- -- -- 1 --
Distribution Fees
Class A 160 16 509 58 152 81 229 28 19
Class B 238 16 602 43 491 45 180 105 45
Class C 679 26 1,424 233 351 87 465 55 22
Amortization of Organizational
Costs 37 37 31 46 52 51 52 78 49
Blue Sky Fees 44 35 69 36 39 40 47 36 30
Country Tax Expense 3 -- -- -- -- 57 58 -- --
Interest Expense 1 3 64 -- 23 18 37 21 --
Other 10 3 28 5 14 6 15 3 2
Expenses Reimbursed by Adviser -- (44) -- -- -- -- -- -- (8)
---------- -------- -------- -------- --------- -------- -------- ---------- --------
Net Expenses 3,356 186 9,037 967 2,854 1,130 3,931 546 274
---------- -------- -------- -------- --------- -------- -------- ---------- --------
Net Investment Income (Loss) 245 436 (2,748) 424 13,435 (131) (538) (135) 280
---------- -------- -------- -------- --------- -------- -------- ---------- --------
NET REALIZED GAIN (LOSS) ON:
Investments 8,119 113 (4,389) 6,719 10,103 14,026 15,276 3,674 2,077
Foreign Currency Transactions 5,051 (2) (415) -- (741) (45) (283) -- --
---------- -------- -------- -------- --------- -------- -------- ---------- --------
Net Realized Gain (Loss) 13,170 111 (4,804) 6,719 9,362 13,981 14,993 3,674 2,077
---------- -------- -------- -------- --------- -------- -------- ---------- --------
CHANGE IN UNREALIZED
APPRECIATION/DEPRECIATION ON:
Investments 18,089 (60) (2,600) 7,544 14,410 10,222 7,857 3,365 1,622
Foreign Currency Translations (838) (24) (19) -- 2 (22) (382) -- --
Securities Sold Short -- -- -- -- -- -- -- (160) --
---------- -------- -------- -------- --------- -------- -------- ---------- --------
Change in Unrealized
Appreciation/ Depreciation 17,251 (84) (2,619) 7,544 14,412 10,200 7,475 3,205 1,622
---------- -------- -------- -------- --------- -------- -------- ---------- --------
Net Realized Gain (Loss) and Change
in Unrealized
Appreciation/Depreciation 30,421 27 (7,423) 14,263 23,774 24,181 22,468 6,879 3,699
---------- -------- -------- -------- --------- -------- -------- ---------- --------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS $ 30,666 $ 463 $(10,171) $ 14,687 $ 37,209 $ 24,050 $ 21,930 $ 6,744 $ 3,979
========== ======== ======== ======== ========= ======== ======== ========== ========
<CAPTION>
GOVERNMENT
HIGH INTERNATIONAL MONEY MONEY
YIELD MAGNUM MARKET MARKET
FUND FUND FUND FUND
(000) (000) (000) (000)
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends $ 54 $ 498 $ -- $ --
Interest 1,454 175 6,529 10,791
Security Lending -- -- -- --
Less Foreign Taxes Withheld -- (65) -- --
-------- ------ ---------- --------
Total Income 1,508 608 6,529 10,791
-------- ------ ---------- --------
EXPENSES:
Investment Advisory Fees 113 168 542 882
Less: Fees Waived (113) (168) (392) (579)
-------- ------ ---------- --------
Net Investment Advisory Fees -- -- 150 303
Administrative Fees 42 73 123 194
Custody Fees 17 97 25 46
Filing and Registration Fees 2 -- -- --
Directors' Fees and Expenses 2 2 1 5
Professional Fees 21 39 86 122
Shareholder Reports 1 6 23 45
Security Lending Fees -- -- -- --
Dividend Expense for Securities
Sold Short -- -- -- --
Distribution Fees
Class A 13 21 604 981
Class B 57 68 -- --
Class C 43 58 -- --
Amortization of Organizational
Costs 49 68 41 41
Blue Sky Fees 26 36 60 103
Country Tax Expense -- -- -- --
Interest Expense -- 1 -- --
Other 1 2 41 92
Expenses Reimbursed by Adviser (12) (33) -- --
-------- ------ ---------- --------
Net Expenses 262 438 1,154 1,932
-------- ------ ---------- --------
Net Investment Income (Loss) 1,246 170 5,375 8,859
-------- ------ ---------- --------
NET REALIZED GAIN (LOSS) ON:
Investments 312 33 8 13
Foreign Currency Transactions -- 737 -- --
-------- ------ ---------- --------
Net Realized Gain (Loss) 312 770 8 13
-------- ------ ---------- --------
CHANGE IN UNREALIZED
APPRECIATION/DEPRECIATION ON:
Investments 881 4,060 -- --
Foreign Currency Translations -- 124 -- --
Securities Sold Short -- -- -- --
-------- ------ ---------- --------
Change in Unrealized
Appreciation/ Depreciation 881 4,184 -- --
-------- ------ ---------- --------
Net Realized Gain (Loss) and Change
in Unrealized
Appreciation/Depreciation 1,193 4,954 8 13
-------- ------ ---------- --------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS $ 2,439 $5,124 $ 5,383 $ 8,872
======== ====== ========== ========
</TABLE>
-----------------------
89
The accompanying notes are an integral part of the financial statements.
<PAGE> 149
MORGAN STANLEY FUNDS
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
GLOBAL EQUITY ALLOCATION FUND
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JUNE 30, 1997 JUNE 30, 1996
(000) (000)
- -------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 245 $ 364
Net Realized Gain 13,170 11,649
Change in Unrealized
Appreciation/Depreciation 17,251 9,778
------------- -------------
Net Increase in Net Assets from
Operations 30,666 21,791
------------- -------------
DISTRIBUTIONS:
Net Investment Income:
Class A (2,358) (1,295)
Class B (759) (69)
Class C (2,093) (1,106)
------------- -------------
(5,210) (2,470)
------------- -------------
Net Realized Gain:
Class A (2,101) (1,591)
Class B (751) (96)
Class C (2,262) (1,624)
------------- -------------
(5,114) (3,311)
------------- -------------
Net Decrease in Net Assets
Resulting from Distributions (10,324) (5,781)
------------- -------------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 54,525 58,409
Distributions Reinvested 9,826 5,268
Redeemed (36,345) (21,216)
------------- -------------
Net Increase in Net Assets
Resulting from Capital Share
Transactions 28,006 42,461
------------- -------------
Total Increase in Net Assets 48,348 58,471
NET ASSETS -- Beginning of Year 141,517 83,046
------------- -------------
NET ASSETS -- End of Year (Including
undistributed net investment income
of $2,666 and $2,710, respectively) $ 189,865 $ 141,517
============= =============
- -------------------------------------------------------------------
Capital Share Transactions:
(1) Class A:
---------------------
Shares:
Subscribed 1,091 1,702
Distributions Reinvested 293 197
Redeemed (1,314) (960)
------------- -------------
Net Increase in Class A Shares
Outstanding 70 939
============= =============
Dollars:
Subscribed $ 16,569 $ 23,872
Distributions Reinvested 4,157 2,639
Redeemed (19,605) (13,331)
------------- -------------
Net Increase $ 1,121 $ 13,180
============= =============
Class B:
---------------------
Shares:
Subscribed 1,444 1,017
Distributions Reinvested 106 12
Redeemed (160) (7)
------------- -------------
Net Increase in Class B Shares
Outstanding 1,390 1,022
============= =============
Dollars:
Subscribed $ 21,138 $ 14,112
Distributions Reinvested 1,475 158
Redeemed (2,336) (100)
------------- -------------
Net Increase $ 20,277 $ 14,170
============= =============
Class C:
---------------------
Shares:
Subscribed 1,160 1,482
Distributions Reinvested 300 186
Redeemed (995) (575)
------------- -------------
Net Increase in Class C Shares
Outstanding 465 1,093
============= =============
Dollars:
Subscribed $ 16,818 $ 20,425
Distributions Reinvested 4,194 2,471
Redeemed (14,404) (7,785)
------------- -------------
Net Increase $ 6,608 $ 15,111
============= =============
- -------------------------------------------------------------------
</TABLE>
- -----------
90
The accompanying notes are an integral part of the financial statements.
<PAGE> 150
MORGAN STANLEY FUNDS
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
GLOBAL FIXED INCOME FUND
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JUNE 30, 1997 JUNE 30, 1996
(000) (000)
- -----------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 436 $ 772
Net Realized Gain 111 489
Change in Unrealized
Appreciation/Depreciation (84) (513)
------- ---------
Net Increase in Net Assets
Resulting from Operations 463 748
------- ---------
DISTRIBUTIONS:
Net Investment Income:
Class A (218) (771)
Class B (46) (21)
Class C (74) (399)
In Excess of Net Investment Income:
Class A (41) (23)
Class B (9) (1)
Class C (14) (12)
------- ---------
Net Decrease in Net Assets
Resulting from Distributions (402) (1,227)
------- ---------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 4,760 8,720
Distributions Reinvested 335 676
Redeemed (6,304) (14,258)
------- ---------
Net Decrease in Net Assets
Resulting from Capital Share
Transactions (1,209) (4,862)
------- ---------
Total Decrease in Net Assets (1,148) (5,341)
NET ASSETS -- Beginning of Year 11,716 17,057
------- ---------
NET ASSETS -- End of Year (Including
distributions in excess of net
investment income of $(63) and
$(36), respectively) $10,568 $ 11,716
======= =========
- -----------------------------------------------------------------------
Capital Share Transactions:
(1) Class A:
--------------------
Shares:
Subscribed 256 589
Distributions Reinvested 22 50
Redeemed (382) (975)
------- ---------
Net Decrease in Class A Shares
Outstanding (104) (336)
======= =========
Dollars:
Subscribed $ 2,529 5,929
Distributions Reinvested 225 507
Redeemed (3,839) (9,791)
------- ---------
Net Decrease $(1,085) $ (3,355)
======= =========
Class B:
--------------------
Shares:
Subscribed 100 150
Distributions Reinvested 4 1
Redeemed (76) (6)
------- ---------
Net Increase in Class B Shares
Outstanding 28 145
======= =========
Dollars:
Subscribed $ 999 1,496
Distributions Reinvested 41 14
Redeemed (758) (63)
------- ---------
Net Increase $ 282 $ 1,447
======= =========
Class C:
--------------------
Shares:
Subscribed 123 130
Distributions Reinvested 7 15
Redeemed (170) (443)
------- ---------
Net Decrease in Class C Shares
Outstanding (40) (298)
======= =========
Dollars:
Subscribed $ 1,232 $ 1,295
Distributions Reinvested 69 155
Redeemed (1,707) (4,404)
------- ---------
Net Decrease $ (406) $ (2,954)
======= =========
- -----------------------------------------------------------------------
</TABLE>
-----------------------
91
The accompanying notes are an integral part of the financial statements.
<PAGE> 151
MORGAN STANLEY FUNDS
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
ASIAN GROWTH FUND
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JUNE 30, 1997 JUNE 30, 1996
(000) (000)
- -----------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment (Loss) $ (2,748) $ (1,844)
Net Realized Gain (Loss) (4,804) 5,364
Change in Unrealized
Appreciation/Depreciation (2,619) 9,465
----------------- -------------
Net Increase (Decrease) in Net
Assets Resulting from Operations (10,171) 12,985
----------------- -------------
DISTRIBUTIONS:
Net Realized Gain:
Class A (33) --
Class B (10) --
Class C (24) --
In Excess of Net Realized Gain:
Class A (4,110) --
Class B (1,274) --
Class C (3,072) --
----------------- -------------
Net Decrease in Net Assets
Resulting from Distributions (8,523) --
----------------- -------------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 114,562 241,482
Distributions Reinvested 8,035 --
Redeemed (220,149) (103,699)
----------------- -------------
Net Increase (Decrease) in Net
Assets Resulting from Capital
Share Transactions (97,552) 137,783
----------------- -------------
Total Increase (Decrease) in Net
Assets (116,246) 150,768
NET ASSETS -- Beginning of Year 468,932 318,164
----------------- -------------
NET ASSETS -- End of Year (Including
net investment loss of $(1,153) and
$(160), respectively) $ 352,686 $ 468,932
================= =============
- -----------------------------------------------------------------------
Capital Share Transactions:
(1) Class A:
---------------------
Shares:
Subscribed 4,724 7,522
Distributions Reinvested 243 --
Redeemed (8,877) (3,936)
----------------- -------------
Net Increase (Decrease) in Class A
Shares Outstanding (3,910) 3,586
================= =============
Dollars:
Subscribed $ 77,015 $ 127,388
Distributions Reinvested 3,930 --
Redeemed (144,501) (65,894)
----------------- -------------
Net Increase (Decrease) $ (63,556) $ 61,494
----------------- -------------
Class B:
---------------------
Shares:
Subscribed 1,466 3,225
Distributions Reinvested 77 --
Redeemed (803) (81)
----------------- -------------
Net Increase in Class B Shares
Outstanding 740 3,144
================= =============
Dollars:
Subscribed $ 23,406 $ 54,005
Distributions Reinvested 1,210 --
Redeemed (12,628) (1,375)
----------------- -------------
Net Increase $ 11,988 $ 52,630
================= =============
Class C:
---------------------
Shares:
Subscribed 883 3,629
Distributions Reinvested 184 --
Redeemed (3,989) (2,229)
----------------- -------------
Net Increase (Decrease) in Class C
Shares Outstanding (2,922) 1,400
================= =============
Dollars:
Subscribed $ 14,140 $ 60,089
Distributions Reinvested 2,895 --
Redeemed (63,019) (36,430)
----------------- -------------
Net Increase (Decrease) $ (45,984) $ 23,659
================= =============
- -----------------------------------------------------------------------
</TABLE>
- -----------
92
The accompanying notes are an integral part of the financial statements.
<PAGE> 152
MORGAN STANLEY FUNDS
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
AMERICAN VALUE FUND
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JUNE 30, 1997 JUNE 30, 1996
(000) (000)
- -------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 424 $ 666
Net Realized Gain 6,719 2,783
Change in Unrealized
Appreciation/Depreciation 7,544 3,203
------------- -------------
Net Increase in Net Assets
Resulting from Operations 14,687 6,652
------------- -------------
DISTRIBUTIONS:
Net Investment Income:
Class A (309) (443)
Class B (25) (17)
Class C (133) (209)
In Excess of Net Investment Income:
Class A (1) (12)
Class B -- (1)
Class C -- (10)
------------- -------------
(468) (692)
------------- -------------
Net Realized Gain:
Class A (1,555) (331)
Class B (209) (20)
Class C (1,482) (252)
------------- -------------
(3,246) (603)
------------- -------------
Net Decrease in Net Assets
Resulting from Distributions (3,714) (1,295)
------------- -------------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 38,027 18,813
Distributions Reinvested 3,292 900
Redeemed (13,557) (16,260)
------------- -------------
Net Increase in Net Assets
Resulting from Capital Share
Transactions 27,762 3,453
------------- -------------
Total Increase in Net Assets 38,735 8,810
NET ASSETS -- Beginning of Year 43,352 34,542
------------- -------------
NET ASSETS -- End of Year (Including
distributions in excess of net
investment income of $(1) and
$(23), respectively) $ 82,087 $ 43,352
============= =============
- -------------------------------------------------------------------
Capital Share Transactions:
(1) Class A:
---------------------
Shares:
Subscribed 1,025 515
Distributions Reinvested 119 42
Redeemed (538) (816)
------------- -------------
Net Increase (Decrease) in Class A
Shares Outstanding 606 (259)
============= =============
Dollars:
Subscribed $ 16,463 $ 7,053
Distributions Reinvested 1,785 573
Redeemed (8,501) (11,471)
------------- -------------
Net Increase (Decrease) $ 9,747 $ (3,845)
============= =============
Class B:
---------------------
Shares:
Subscribed 714 174
Distributions Reinvested 15 3
Redeemed (27) (7)
------------- -------------
Net Increase in Class B Shares
Outstanding 702 170
============= =============
Dollars:
Subscribed $ 11,773 $ 2,376
Distributions Reinvested 228 36
Redeemed (420) (93)
------------- -------------
Net Increase $ 11,581 $ 2,319
============= =============
Class C:
---------------------
Shares:
Subscribed 623 685
Distributions Reinvested 85 21
Redeemed (312) (334)
------------- -------------
Net Increase in Class C Shares
Outstanding 396 372
============= =============
Dollars:
Subscribed $ 9,791 $ 9,384
Distributions Reinvested 1,279 291
Redeemed (4,636) (4,696)
------------- -------------
Net Increase $ 6,434 $ 4,979
============= =============
- -------------------------------------------------------------------
</TABLE>
-----------------------
93
The accompanying notes are an integral part of the financial statements.
<PAGE> 153
MORGAN STANLEY FUNDS
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
WORLDWIDE HIGH INCOME FUND
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JUNE 30, 1997 JUNE 30, 1996
(000) (000)
- -------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 13,435 $ 8,304
Net Realized Gain 9,362 4,060
Change in Unrealized Appreciation
/Depreciation 14,412 (637)
------------- -------------
Net Increase in Net Assets
Resulting from Operations 37,209 11,727
------------- -------------
DISTRIBUTIONS:
Net Investment Income:
Class A (5,678) (3,806)
Class B (4,269) (1,176)
Class C (3,020) (2,325)
------------- -------------
(12,967) (7,307)
------------- -------------
Realized Gain:
Class A (2,320) --
Class B (1,708) --
Class C (1,293) --
------------- -------------
(5,321) --
------------- -------------
Net Decrease in Net Assets
Resulting from Distributions (18,288) (7,307)
------------- -------------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 133,028 103,978
Distributions Reinvested 11,818 3,981
Redeemed (63,040) (43,317)
------------- -------------
Net Increase in Net Assets
Resulting from Capital Share
Transactions 81,806 64,642
------------- -------------
Total Increase in Net Assets 100,727 69,062
NET ASSETS -- Beginning of Year 95,761 26,699
------------- -------------
NET ASSETS -- End of Year (Including
undistributed net investment income
of $311 and $1,157, respectively) $ 196,488 $ 95,761
============= =============
- -------------------------------------------------------------------
Capital Share Transactions:
(1) Class A:
---------------------
Shares:
Subscribed 5,082 4,713
Distributions Reinvested 423 190
Redeemed (3,469) (2,858)
------------- -------------
Net Increase in Class A Shares
Outstanding 2,036 2,045
============= =============
Dollars:
Subscribed $ 67,886 $ 56,635
Distributions Reinvested 5,651 2,294
Redeemed (46,537) (34,479)
------------- -------------
Net Increase $ 27,000 $ 24,450
============= =============
Class B:
---------------------
Shares:
Subscribed 3,787 2,125
Distributions Reinvested 246 44
Redeemed (622) (65)
------------- -------------
Net Increase in Class B Shares
Outstanding 3,411 2,104
============= =============
Dollars:
Subscribed $ 50,939 $ 25,745
Distributions Reinvested 3,287 538
Redeemed (8,415) (797)
------------- -------------
Net Increase $ 45,811 $ 25,486
============= =============
Class C:
---------------------
Shares:
Subscribed 1,057 1,792
Distributions Reinvested 217 95
Redeemed (596) (656)
------------- -------------
Net Increase in Class C Shares
Outstanding 678 1,231
============= =============
Dollars:
Subscribed $ 14,203 $ 21,598
Distributions Reinvested 2,880 1,149
Redeemed (8,088) (8,041)
------------- -------------
Net Increase $ 8,995 $ 14,706
============= =============
- -------------------------------------------------------------------
</TABLE>
- -----------
94
The accompanying notes are an integral part of the financial statements.
<PAGE> 154
MORGAN STANLEY FUNDS
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
LATIN AMERICAN FUND
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JUNE 30, 1997 JUNE 30, 1996
(000) (000)
- -----------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income (Loss) $ (131) $ 163
Net Realized Gain 13,981 752
Change in Unrealized
Appreciation/Depreciation 10,200 5,112
----------------- -------------
Net Increase in Net Assets
Resulting from Operations 24,050 6,027
----------------- -------------
DISTRIBUTIONS:
Net Investment Income:
Class A -- (18)
In Excess of Net Investment Income:
Class A (117) --
Class B (17) --
Class C (13) --
----------------- -------------
(147) (18)
----------------- -------------
Net Realized Gain:
Class A (2,192) --
Class B (359) --
Class C (727) --
----------------- -------------
(3,278) --
----------------- -------------
Net Decrease in Net Assets
Resulting from Distributions (3,425) (18)
----------------- -------------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 114,111 19,885
Distributions Reinvested 3,304 15
Redeemed (46,502) (10,130)
----------------- -------------
Net Increase in Net Assets
Resulitng from Capital Share
Transactions 70,913 9,770
----------------- -------------
Total Increase in Net Assets 91,538 15,779
NET ASSETS -- Beginning of Year 27,522 11,743
----------------- -------------
NET ASSETS -- End of Year (Including
undistributed (distribution in
excess of) net investment income of
$(11) and $132, respectively) $ 119,060 $ 27,522
================= =============
- -----------------------------------------------------------------------
Capital Share Transactions:
(1) Class A:
---------------------
Shares:
Subscribed 6,162 1,373
Distributions Reinvested 187 1
Redeemed (2,975) (737)
----------------- -------------
Net Increase in Class A Shares
Outstanding 3,374 637
================= =============
Dollars:
Subscribed $ 90,337 $ 14,772
Distributions Reinvested 2,243 15
Redeemed (41,558) (7,673)
----------------- -------------
Net Increase $ 51,022 $ 7,114
================= =============
Class B:
---------------------
Shares:
Subscribed 752 169
Distributions Reinvested 30 --
Redeemed (104) (5)
----------------- -------------
Net Increase in Class B Shares
Outstanding 678 164
================= =============
Dollars:
Subscribed $ 11,139 $ 1,858
Distributions Reinvested 353 --
Redeemed (1,385) (52)
----------------- -------------
Net Increase $ 10,107 $ 1,806
================= =============
Class C:
---------------------
Shares:
Subscribed 856 316
Distributions Reinvested 60 --
Redeemed (266) (224)
----------------- -------------
Net Increase in Class C Shares
Outstanding 650 92
================= =============
Dollars:
Subscribed $ 12,635 $ 3,255
Distributions Reinvested 708 --
Redeemed (3,559) (2,405)
----------------- -------------
Net Increase $ 9,784 $ 850
================= =============
- -----------------------------------------------------------------------
</TABLE>
-----------------------
95
The accompanying notes are an integral part of the financial statements.
<PAGE> 155
MORGAN STANLEY FUNDS
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
EMERGING MARKETS FUND
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JUNE 30, 1997 JUNE 30, 1996
(000) (000)
- -------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income (Loss) $ (538) $ 465
Net Realized Gain (Loss) 14,993 (518)
Change in Unrealized
Appreciation/Depreciation 7,475 14,532
------------- -------------
Net Increase (Decrease) in Net
Assets Resulting from Operations 21,930 14,479
------------- -------------
DISTRIBUTIONS:
Net Investment Income:
Class A -- (142)
In Excess of Net Investment Income:
Class A (291) --
Class B (52) --
Class C (44) --
------------- -------------
(387) (142)
------------- -------------
Net Realized Gain:
Class A (871) --
Class B (182) --
Class C (503) --
------------- -------------
(1,556) --
------------- -------------
In Excess of Net Realized Gain:
Class A -- (3)
Class C -- (2)
------------- -------------
-- (5)
------------- -------------
Net Decrease in Net Assets
Resulting from Distributions (1,943) (147)
------------- -------------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 133,953 141,283
Distributions Reinvested 1,855 133
Redeemed (111,716) (35,217)
------------- -------------
Net Increase in Net Assets
Resulting from Capital Share
Transactions 24,092 106,199
------------- -------------
Total Increase in Net Assets 44,079 120,531
NET ASSETS -- Beginning of Year 168,867 48,336
------------- -------------
NET ASSETS -- End of Year (Including
undistributed (distributions in
excess of) net investment income of
$(659) and $306, respectively.) $ 212,946 $ 168,867
============= =============
- -------------------------------------------------------------------
Capital Share Transactions:
(1) Class A:
---------------------
Shares:
Subscribed 7,637 9,551
Distributions Reinvested 104 13
Redeemed (8,424) (2,502)
------------- -------------
Net Increase (Decrease) in Class A
Shares Outstanding (683) 7,062
============= =============
Dollars:
Subscribed $ 89,680 $ 106,764
Distributions Reinvested 1,103 131
Redeemed (96,827) (27,528)
------------- -------------
Net Increase (Decrease) $ (6,044) $ 79,367
============= =============
Class B:
---------------------
Shares:
Subscribed 2,028 883
Distributions Reinvested 20 --
Redeemed (205) (10)
------------- -------------
Net Increase in Class B Shares
Outstanding 1,843 873
============= =============
Dollars:
Subscribed $ 23,982 $ 9,848
Distributions Reinvested 223 --
Redeemed (2,355) (116)
------------- -------------
Net Increase $ 21,850 $ 9,732
============= =============
Class C:
---------------------
Shares:
Subscribed 1,753 2,245
Distributions Reinvested 51 --
Redeemed (1,086) (703)
------------- -------------
Net Increase in Class C Shares
Outstanding 718 1,542
============= =============
Dollars:
Subscribed $ 20,292 $ 24,671
Distributions Reinvested 528 2
Redeemed (12,534) (7,573)
------------- -------------
Net Increase $ 8,286 $ 17,100
============= =============
- -------------------------------------------------------------------
</TABLE>
- -----------
96
The accompanying notes are an integral part of the financial statements.
<PAGE> 156
MORGAN STANLEY FUNDS
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
AGGRESSIVE EQUITY FUND
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 2, 1996* TO
JUNE 30, 1997 JUNE 30, 1996
(000) (000)
- -----------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income (Loss) $ (135) $ 27
Net Realized Gain 3,674 943
Change in Unrealized
Appreciation/Depreciation 3,205 274
------- -------
Net Increase in Net Assets
Resulting from Operations 6,744 1,244
------- -------
DISTRIBUTIONS:
Net Investment Income:
Class A (16) (17)
Class B (5) (6)
Class C (5) (7)
------- -------
(26) (30)
------- -------
Net Realized Gain:
Class A (711) --
Class B (452) --
Class C (439) --
------- -------
(1,602) --
------- -------
Net Decrease in Net Assets
Resulting from Distributions (1,628) (30)
------- -------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 57,588 9,793
Distributions Reinvested 1,037 10
Redeemed (7,818) (627)
------- -------
Net Increase in Net Assets
Resulting from Capital Share
Transactions 50,807 9,176
------- -------
Total Increase in Net Assets 55,923 10,390
NET ASSETS -- Beginning of Year 10,390 --
------- -------
NET ASSETS -- End of Year $66,313 $10,390
======= =======
- -----------------------------------------------------------------------------
Capital Share Transactions:
(1) Class A:
---------------------
Shares:
Subscribed 1,309 410
Distributions Reinvested 35 1
Redeemed (392) (37)
------- -------
Net Increase in Class A Shares
Outstanding 952 374
======= =======
Dollars:
Subscribed $20,966 $ 5,351
Distributions Reinvested 522 9
Redeemed (6,373) (479)
------- -------
Net Increase $15,115 $ 4,881
======= =======
Class B:
---------------------
Shares:
Subscribed 1,905 170
Distributions Reinvested 18 --
Redeemed (51) (1)
------- -------
Net Increase in Class B Shares
Outstanding 1,872 169
======= =======
Dollars:
Subscribed $30,344 $ 2,086
Distributions Reinvested 262 --
Redeemed (818) (11)
------- -------
Net Increase $29,788 $ 2,075
======= =======
Class C:
---------------------
Shares:
Subscribed 404 190
Distributions Reinvested 17 --
Redeemed (42) (10)
------- -------
Net Increase in Class C Shares
Outstanding 379 180
======= =======
Dollars:
Subscribed $ 6,278 2,356
Distributions Reinvested 252 1
Redeemed (626) (137)
------- -------
Net Increase $ 5,904 $ 2,220
======= =======
- -----------------------------------------------------------------------------
* Commencement of operations
</TABLE>
-----------------------
97
The accompanying notes are an integral part of the financial statements.
<PAGE> 157
MORGAN STANLEY FUNDS
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
U.S. REAL ESTATE FUND
<TABLE>
<CAPTION>
YEAR ENDED MAY 1, 1996* TO
JUNE 30, 1997 JUNE 30, 1996
(000) (000)
- ---------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 280 $ 32
Net Realized Gain 2,077 --
Change in Unrealized
Appreciation/Depreciation 1,622 210
------------- ------
Net Increase in Net Assets
Resulting from Operations 3,979 242
------------- ------
DISTRIBUTIONS:
Net Investment Income:
Class A (162) (5)
Class B (57) (4)
Class C (31) (4)
------------- ------
(250) (13)
------------- ------
Net Realized Gain:
Class A (100) --
Class B (71) --
Class C (48) --
------------- ------
(219) --
------------- ------
Net Decrease in Net Assets
Resulting from Distributions (469) (13)
------------- ------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 23,984 5,578
Distributions Reinvested 268 1
Redeemed (9,254) --
------------- ------
Net Increase in Net Assets
Resulting from Capital Share
Transactions 14,998 5,579
------------- ------
Total Increase in Net Assets 18,508 5,808
NET ASSETS -- Beginning of Year 5,808 --
------------- ------
NET ASSETS -- End of Year (Including
undistributed net investment income
of $55 and $19, respectively.) $ 24,316 $ 5,808
============= ======
- ---------------------------------------------------------------------
Capital Share Transactions:
(1) Class A:
---------------------
Shares:
Subscribed 1,003 146
Distributions Reinvested 13 --
Redeemed (257) --
------------- ------
Net Increase in Class A Shares
Outstanding 759 146
============= ======
Dollars:
Subscribed $ 15,148 $ 1,753
Distributions Reinvested 187 1
Redeemed (3,998) --
------------- ------
Net Increase $ 11,337 $ 1,754
============= ======
Class B:
---------------------
Shares:
Subscribed 441 175
Distributions Reinvested 4 --
Redeemed (185) --
------------- ------
Net Increase in Class B Shares
Outstanding 260 175
============= ======
Dollars:
Subscribed $ 6,607 $ 2,116
Distributions Reinvested 54 --
Redeemed (2,916) --
------------- ------
Net Increase $ 3,745 $ 2,116
============= ======
Class C:
---------------------
Shares:
Subscribed 150 142
Distributions Reinvested 2 --
Redeemed (149) --
------------- ------
Net Increase in Class C Shares
Outstanding 3 142
============= ======
Dollars:
Subscribed $ 2,229 $ 1,709
Distributions Reinvested 26 --
Redeemed (2,339) --
------------- ------
Net Increase $ (84) $ 1,709
============= ======
- ---------------------------------------------------------------------
* Commencement of operations
</TABLE>
- -----------
98
The accompanying notes are an integral part of the financial statements.
<PAGE> 158
MORGAN STANLEY FUNDS
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
HIGH YIELD FUND
<TABLE>
<CAPTION>
YEAR ENDED MAY 1, 1996* TO
JUNE 30, 1997 JUNE 30, 1996
(000) (000)
- -------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 1,246 $ 110
Net Realized Gain (Loss) 312 (3)
Change in Unrealized Appreciation
/Depreciation 881 (86)
------- -------
Net Increase in Net Assets
Resulting from Operations 2,439 21
------- -------
DISTRIBUTIONS:
Net Investment Income:
Class A (434) (38)
Class B (454) (27)
Class C (338) (27)
------- -------
(1,226) (92)
------- -------
Realized Gain:
Class A (20) --
Class B (24) --
Class C (20) --
------- -------
(64) --
------- -------
Net Decrease in Net Assets
Resulting from Distributions (1,290) (92)
------- -------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 12,562 10,709
Distributions Reinvested 237 6
Redeemed (2,025) --
------- -------
Net Increase in Net Assets
Resulting from Capital Share
Transactions 10,774 10,715
------- -------
Total Increase in Net Assets 11,923 10,644
NET ASSETS -- Beginning of Year 10,644 --
------- -------
NET ASSETS -- End of Year (Including
undistributed net investment income
of $38 and $18, respectively.) $22,567 $10,644
======= =======
- -------------------------------------------------------------------------
Capital Share Transactions:
(1) Class A:
---------------------
Shares:
Subscribed 461 327
Distributions Reinvested 10 --
Redeemed (101) --
------- -------
Net Increase in Class A Shares
Outstanding 370 327
======= =======
Dollars:
Subscribed $ 5,790 $ 3,930
Distributions Reinvested 131 5
Redeemed (1,282) --
------- -------
Net Increase $ 4,639 $ 3,935
======= =======
Class B:
---------------------
Shares:
Subscribed 397 287
Distributions Reinvested 6 --
Redeemed (20) --
------- -------
Net Increase in Class B Shares
Outstanding 383 287
======= =======
Dollars:
Subscribed $ 4,971 $ 3,443
Distributions Reinvested 72 1
Redeemed (249) --
------- -------
Net Increase $ 4,794 $ 3,444
======= =======
Class C:
---------------------
Shares:
Subscribed 144 278
Distributions Reinvested 3 --
Redeemed (39) --
------- -------
Net Increase in Class C Shares
Outstanding 108 278
======= =======
Dollars:
Subscribed $ 1,800 $ 3,336
Distributions Reinvested 35 --
Redeemed (494) --
------- -------
Net Increase $ 1,341 $ 3,336
======= =======
- ------------------------------------------------------------------------
* Commencement of operations
</TABLE>
-----------------------
99
The accompanying notes are an integral part of the financial statements.
<PAGE> 159
MORGAN STANLEY FUNDS
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
INTERNATIONAL MAGNUM FUND
<TABLE>
<CAPTION>
JULY 1, 1996* TO
JUNE 30, 1997
(000)
- -------------------------------------------------------
<S> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 170
Net Realized Gain 770
Change in Unrealized
Appreciation/Depreciation 4,184
-------
Net Increase in Net Assets
Resulting from Operations 5,124
-------
DISTRIBUTIONS:
Net Investment Income:
Class A (52)
Class B (45)
Class C (43)
-------
(140)
-------
Net Realized Gain:
Class A (4)
Class B (4)
Class C (4)
-------
(12)
-------
Net Decrease in Net Assets
Resulting from Distributions (152)
-------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 47,034
Distributions Reinvested 50
Redeemed (2,724)
-------
Net Increase in Net Assets
Resulting from Capital Share
Transactions 44,360
-------
Total Increase in Net Assets 49,332
NET ASSETS -- Beginning of Period --
-------
NET ASSETS -- End of Period
(Including undistributed net
investment income of $767) $49,332
=======
- -------------------------------------------------------
Capital Share Transactions:
(1) Class A:
---------------------
Shares:
Subscribed 1,722
Distributions Reinvested 1
Redeemed (144)
-------
Net Increase in Class A Shares
Outstanding 1,579
=======
Dollars:
Subscribed $21,512
Distributions Reinvested 14
Redeemed (1,786)
-------
Net Increase $19,740
=======
Class B:
---------------------
Shares:
Subscribed 1,321
Distributions Reinvested 2
Redeemed (6)
-------
Net Increase in Class B Shares
Outstanding 1,317
=======
Dollars:
Subscribed $16,670
Distributions Reinvested 18
Redeemed (73)
-------
Net Increase $16,615
=======
Class C:
---------------------
Shares:
Subscribed 728
Distributions Reinvested 1
Redeemed (67)
-------
Net Increase in Class C Shares
Outstanding 662
=======
Dollars:
Subscribed $ 8,852
Distributions Reinvested 18
Redeemed (865)
-------
Net Increase $ 8,005
=======
- -------------------------------------------------------
* Commencement of operations
</TABLE>
- -----------
100
The accompanying notes are an integral part of the financial statements.
<PAGE> 160
MORGAN STANLEY FUNDS
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
GOVERNMENT OBLIGATIONS MONEY MARKET FUND
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JUNE 30, 1997 JUNE 30, 1996
(000) (000)
- -------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 5,375 $ 4,114
Net Realized Gain (Loss) 8 (99)
------------- -------------
Net Increase in Net Assets
Resulting from Operations 5,383 4,015
------------- -------------
DISTRIBUTIONS:
Net Investment Income (5,375) (4,114)
Net Realized Gain -- (12)
------------- -------------
Net Decrease in Net Assets
Resulting from Distributions (5,375) (4,126)
------------- -------------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 359,068 1,373,640
Distributions Reinvested 4,349 3,511
Redeemed (414,635) (1,298,567)
------------- -------------
Net Increase (Decrease) in Net
Assets Resulting from Capital
Share Transactions (51,218) 78,584
------------- -------------
Total Increase (Decrease) in Net
Assets (51,210) 78,473
NET ASSETS -- Beginning of Year 145,978 67,505
------------- -------------
NET ASSETS -- End of Year $ 94,768 $ 145,978
============= =============
- -------------------------------------------------------------------
Capital Share Transactions:
(1) Shares:
Subscribed 359,068 1,373,640
Distributions Reinvested 4,349 3,511
Redeemed (414,635) (1,298,567)
------------- -------------
Net Increase (Decrease) in Shares
Outstanding (51,218) 78,584
============= =============
- -------------------------------------------------------------------
</TABLE>
-----------------------
101
The accompanying notes are an integral part of the financial statements.
<PAGE> 161
MORGAN STANLEY FUNDS
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
MONEY MARKET FUND
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JUNE 30, 1997 JUNE 30, 1996
(000) (000)
- -------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 8,859 $ 7,849
Net Realized Gain (Loss) 13 (100)
------------- -------------
Net Increase in Net Assets
Resulting from Operations 8,872 7,749
------------- -------------
DISTRIBUTIONS:
Net Investment Income (8,859) (7,849)
------------- -------------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 677,641 1,390,774
Distributions Reinvested 7,110 7,425
Redeemed (717,315) (1,398,641)
------------- -------------
Net Increase (Decrease) in Net
Assets Resulting from Capital
Share Transactions (32,564) (442)
------------- -------------
Total Increase (Decrease) in Net
Assets (32,551) (542)
NET ASSETS -- Beginning of Year 170,973 171,515
------------- -------------
NET ASSETS -- End of Year $ 138,422 $ 170,973
============= =============
- -------------------------------------------------------------------
Capital Share Transactions:
(1) Shares:
Subscribed 677,641 1,390,774
Distributions Reinvested 7,110 7,425
Redeemed (717,315) (1,398,641)
------------- -------------
Net Increase (Decrease) in Shares
Outstanding (32,564) (442)
============= =============
- -------------------------------------------------------------------
</TABLE>
- -----------
102
The accompanying notes are an integral part of the financial statements.
<PAGE> 162
MORGAN STANLEY FUNDS
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
GLOBAL EQUITY ALLOCATION FUND
<TABLE>
<CAPTION>
CLASS A
-------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1995 JUNE 30, 1994
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.75 $ 12.60 $ 11.99 $ 11.09
------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) 0.10 0.19 0.12 0.10
Net Realized and Unrealized Gain
(Loss) 2.76 2.82 0.67 0.90
------- ------- ------- -------
Total From Investment Operations 2.86 3.01 0.79 1.00
------- ------- ------- -------
DISTRIBUTIONS
Net Investment Income (0.55) (0.39) -- (0.03)
In Excess of Net Investment Income -- -- (0.05) --
Net Realized Gain (0.49) (0.47) (0.13) (0.07)
------- ------- ------- -------
Total Distributions (1.04) (0.86) (0.18) (0.10)
------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD $ 16.57 $ 14.75 $ 12.60 $ 11.99
======= ======= ======= =======
TOTAL RETURN (1) 20.61% 24.62% 6.69% 9.02%
======= ======= ======= =======
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $72,704 $63,706 $42,586 $33,425
Ratio of Expenses to Average Net
Assets 1.70% 1.70% 1.70% 1.70%
Ratio of Net Investment Income to
Average Net Assets 0.59% 0.71% 1.01% 0.98%
Portfolio Turnover Rate 45% 44% 39% 30%
Average Commission Rate #
Per Share $0.0021 N/A N/A N/A
As a Percentage of Trade Amount 0.83% N/A N/A N/A
- -------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income $ 0.03 $ 0.10 $ 0.04 $ 0.09
Ratios Before Expense Limitation:
Expenses to Average Net Assets 1.90% 2.06% 2.03% 2.58%
Net Investment Income (Loss) to
Average Net Assets 0.40% 0.35% 0.68% 0.10%
- -------------------------------------------------------------------------------------------------------------------------
<CAPTION>
CLASS B
----------------------------------------
JANUARY 4, 1993* YEAR ENDED AUGUST 1, 1995+
SELECTED PER SHARE DATA AND RATIOS TO JUNE 30, 1993 JUNE 30, 1997 TO JUNE 30, 1996
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 $ 14.46 $ 13.01
------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) 0.04 (0.05) 0.30
Net Realized and Unrealized Gain
(Loss) 1.05 2.73 1.98
------- ------- -------
Total From Investment Operations 1.09 2.68 2.28
------- ------- -------
DISTRIBUTIONS
Net Investment Income -- (0.50) (0.35)
In Excess of Net Investment Income -- -- --
Net Realized Gain -- (0.49) (0.48)
------- ------- -------
Total Distributions -- (0.99) (0.83)
------- ------- -------
NET ASSET VALUE, END OF PERIOD $ 11.09 $ 16.15 $ 14.46
======= ======= =======
TOTAL RETURN (1) 10.90% 19.64% 18.08%
======= ======= =======
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $10,434 $38,962 $14,786
Ratio of Expenses to Average Net
Assets 1.70%** 2.45% 2.45%**
Ratio of Net Investment Income to
Average Net Assets 1.04%** (0.11)% 0.45%**
Portfolio Turnover Rate 14% 45% 44%
Average Commission Rate #
Per Share N/A $0.0021 N/A
As a Percentage of Trade Amount N/A 0.83% N/A
- -------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income $ 0.08 $ 0.09 $ 0.22
Ratios Before Expense Limitation:
Expenses to Average Net Assets 3.65%** 2.65% 2.81%**
Net Investment Income (Loss) to
Average Net Assets (0.91)%** (0.30)% 0.09%**
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS C
-------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1995 JUNE 30, 1994
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.49 $ 12.43 $ 11.90 $ 11.05
------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) (0.03) 0.12 0.04 0.06
Net Realized and Unrealized Gain
(Loss) 2.73 2.75 0.65 0.86
------- ------- ------- -------
Total From Investment Operations 2.70 2.87 0.69 0.92
------- ------- ------- -------
DISTRIBUTIONS
Net Investment Income (0.46) (0.33) -- --
In Excess of Net Investment Income -- -- (0.03) --
Net Realized Gain (0.49) (0.48) (0.13) (0.07)
------- ------- ------- -------
Total Distributions (0.95) (0.81) (0.16) (0.07)
------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD $ 16.24 $ 14.49 $ 12.43 $ 11.90
======= ======= ======= =======
TOTAL RETURN (1) 19.69% 23.65% 5.84% 8.34%
======= ======= ======= =======
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $78,199 $63,025 $40,460 $29,892
Ratio of Expenses to Average Net
Assets 2.45% 2.45% 2.45% 2.45%
Ratio of Net Investment Income to
Average Net Assets (0.16)% (0.04)% 0.25% 0.23%
Portfolio Turnover Rate 45% 44% 39% 30%
Average Commission Rate #
Per Share $0.0021 N/A N/A N/A
As a Percentage of Trade Amount 0.83% N/A N/A N/A
- -------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income $ 0.03 $ 1.16 $ 0.05 $ 0.12
Ratios Before Expense Limitation:
Expenses to Average Net Assets 2.65% 2.81% 2.78% 3.34%
Net Investment Income (Loss) to
Average Net Assets (0.34)% (0.40)% (0.08)% (0.66)%
<CAPTION>
JANUARY 4, 1993*
SELECTED PER SHARE DATA AND RATIOS TO JUNE 30, 1993
- ----------------------------------------------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
-------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) 0.01
Net Realized and Unrealized Gain
(Loss) 1.04
-------
Total From Investment Operations 1.05
-------
DISTRIBUTIONS
Net Investment Income --
In Excess of Net Investment Income --
Net Realized Gain --
-------
Total Distributions --
-------
NET ASSET VALUE, END OF PERIOD $ 11.05
=======
TOTAL RETURN (1) 10.50%
=======
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 6,995
Ratio of Expenses to Average Net
Assets 2.45%**
Ratio of Net Investment Income to
Average Net Assets 0.29%**
Portfolio Turnover Rate 14%
Average Commission Rate #
Per Share N/A
As a Percentage of Trade Amount N/A
- -------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income $ 0.07
Ratios Before Expense Limitation:
Expenses to Average Net Assets 4.40%**
Net Investment Income (Loss) to
Average Net Assets (1.66)%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations
** Annualized
+ The Fund began offering Class B shares on August 1, 1995.
(1) Total return is calculated exclusive of sales charges or deferred
sales charges. Total returns for periods of less than one year are not
annualized.
# For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose the average commission rate per share it paid for
trades on which commissions were charged.
-----------------------
103
The accompanying notes are an integral part of the financial statements.
<PAGE> 163
MORGAN STANLEY FUNDS
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
GLOBAL FIXED INCOME FUND
<TABLE>
<CAPTION>
CLASS A
-------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1995 JUNE 30, 1994
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.94 $10.23 $ 9.53 $ 10.55
------ ------ ------- -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.44 0.53 0.56 0.52
Net Realized and Unrealized Gain
(Loss) (0.02) (0.01) 0.50 (0.42)
------ ------ ------- -------
Total From Investment Operations 0.42 0.52 1.06 0.10
------ ------ ------- -------
DISTRIBUTIONS
Net Investment Income (0.35) (0.79) (0.36) (0.50)
In Excess of Net Investment Income (0.06) (0.02) -- (0.12)
Net Realized Gain -- -- -- (0.47)
In Excess of Net Realized Gain -- -- -- (0.03)
------ ------ ------- -------
Total Distributions (0.41) (0.81) (0.36) (1.12)
------ ------ ------- -------
NET ASSET VALUE, END OF PERIOD $ 9.95 $ 9.94 $ 10.23 $ 9.53
====== ====== ======= =======
TOTAL RETURN (1) 4.27% 5.20% 11.41% 0.41%
====== ====== ======= =======
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $6,407 $7,432 $11,092 $10,369
Ratio of Expenses to Average Net
Assets 1.45% 1.45% 1.45% 1.45%
Ratio of Net Investment Income to
Average Net Assets 4.40% 5.02% 5.84% 4.70%
Portfolio Turnover Rate 170% 223% 169% 168%
- -------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income $ 0.12 $ 0.07 $ 0.07 $ 0.11
Ratios Before Expense Limitation:
Expenses to Average Net Assets 2.57% 2.16% 2.22% 2.48%
Net Investment Income to Average
Net Assets 3.25% 4.31% 5.07% 3.67%
- -------------------------------------------------------------------------------------------------------------------------
<CAPTION>
CLASS B
------------------------------------------
JANUARY 4, 1993* YEAR ENDED AUGUST 1, 1995+ TO
SELECTED PER SHARE DATA AND RATIOS TO JUNE 30, 1993 JUNE 30, 1997 JUNE 30, 1996
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.00 $ 9.91 $10.24
------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.25 0.41 0.64
Net Realized and Unrealized Gain
(Loss) 0.55 (0.07) (0.26)
------ ------ ------
Total From Investment Operations 0.80 0.34 0.38
------ ------ ------
DISTRIBUTIONS
Net Investment Income (0.25) (0.29) (0.69)
In Excess of Net Investment Income -- (0.05) (0.02)
Net Realized Gain -- -- --
In Excess of Net Realized Gain -- -- --
------ ------ ------
Total Distributions (0.25) (0.34) (0.71)
------ ------ ------
NET ASSET VALUE, END OF PERIOD $10.55 $ 9.91 $ 9.91
====== ====== ======
TOTAL RETURN (1) 8.02% 3.48% 3.76%
====== ====== ======
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $6,633 $1,716 $1,440
Ratio of Expenses to Average Net
Assets 1.45%** 2.20% 2.20%**
Ratio of Net Investment Income to
Average Net Assets 5.00%** 3.65% 3.38%**
Portfolio Turnover Rate 55% 170% 223%
- -------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income $ 0.07 $ 0.13 $ 0.12
Ratios Before Expense Limitation:
Expenses to Average Net Assets 2.88%** 3.37% 3.57%**
Net Investment Income to Average
Net Assets 3.57%** 2.45% 2.01%**
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS C
-------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1995 JUNE 30, 1994
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.90 $10.20 $ 9.54 $ 10.56
------ ------ ------ -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.39 0.37 0.49 0.43
Net Realized and Unrealized Gain
(Loss) (0.05) 0.08 0.47 (0.40)
------ ------ ------ -------
Total From Investment Operations 0.34 0.45 0.96 0.03
------ ------ ------ -------
DISTRIBUTIONS
Net Investment Income (0.29) (0.73) (0.30) (0.44)
In Excess of Net Investment Income (0.05) (0.02) -- (0.11)
Net Realized Gain -- -- -- (0.47)
In Excess of Net Realized Gain -- -- -- (0.03)
------ ------ ------ -------
Total Distributions (0.34) (0.75) (0.30) (1.05)
------ ------ ------ -------
NET ASSET VALUE, END OF PERIOD $ 9.90 $ 9.90 $10.20 $ 9.54
====== ====== ====== =======
TOTAL RETURN (1) 3.48% 4.47% 10.24% (0.25)%
====== ====== ====== =======
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $2,445 $2,844 $5,965 $ 5,407
Ratio of Expenses to Average Net
Assets 2.20% 2.20% 2.20% 2.20%
Ratio of Net Investment Income to
Average Net Assets 3.65% 4.35% 5.09% 3.95%
Portfolio Turnover Rate 170% 223% 169% 168%
- -------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income $ 0.12 $ 0.06 $ 0.08 $ 0.12
Ratios Before Expense Limitation:
Expenses to Average Net Assets 3.35% 2.87% 2.97% 3.29%
Net Investment Income to Average
Net Assets 2.48% 3.68% 4.32% 2.86%
<CAPTION>
JANUARY 4, 1993*
SELECTED PER SHARE DATA AND RATIOS TO JUNE 30, 1993
- ----------------------------------------------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.00
------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.21
Net Realized and Unrealized Gain
(Loss) 0.55
------
Total From Investment Operations 0.76
------
DISTRIBUTIONS
Net Investment Income (0.20)
In Excess of Net Investment Income --
Net Realized Gain --
In Excess of Net Realized Gain --
------
Total Distributions (0.20)
------
NET ASSET VALUE, END OF PERIOD $10.56
======
TOTAL RETURN (1) 7.61%
======
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $6,120
Ratio of Expenses to Average Net
Assets 2.20%**
Ratio of Net Investment Income to
Average Net Assets 4.25%**
Portfolio Turnover Rate 55%
- -------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income $ 0.07
Ratios Before Expense Limitation:
Expenses to Average Net Assets 3.63%**
Net Investment Income to Average
Net Assets 2.82%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations
** Annualized
+ The Fund began offering Class B shares on August 1, 1995.
(1) Total return is calculated exclusive of sales charges or deferred
sales charges. Total returns for periods of less than one year are not
annualized.
- ------------------
104
The accompanying notes are an integral part of the financial statements.
<PAGE> 164
MORGAN STANLEY FUNDS
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
ASIAN GROWTH FUND
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED JUNE 23, 1993*
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1995 JUNE 30, 1994 TO JUNE 30, 1993
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $ 17.15 $ 16.42 $ 15.50 $ 12.00 $ 12.00
------------- ------------- ------------- ------------- -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Loss (0.06) (0.04) -- (0.03) --
Net Realized and Unrealized Gain
(Loss) (0.14) 0.77 1.43 3.53 --
------------- ------------- ------------- ------------- -------
Total From Investment Operations (0.20) 0.73 1.43 3.50 --
------------- ------------- ------------- ------------- -------
DISTRIBUTIONS
Net Realized Gain -- -- (0.49) -- --
In Excess of Net Realized Gain (0.33) -- (0.02) -- --
------------- ------------- ------------- ------------- -------
(0.33) -- (0.51) -- --
------------- ------------- ------------- ------------- -------
NET ASSET VALUE, END OF PERIOD $ 16.62 $ 17.15 $ 16.42 $ 15.50 $ 12.00
============= ============= ============= ============= =======
TOTAL RETURN (1) (1.10)% 4.45% 9.50% 29.17% 0.00%
============= ============= ============= ============= =======
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 175,440 $ 248,009 $ 178,667 $ 138,212 $ 11,770
Ratio of Expenses to Average Net
Assets 1.84% 1.88% 1.90% 1.90% 1.90%**
Ratio of Net Investment Income
(Loss) to Average Net Assets (0.31)% (0.16)% 0.04% (0.24)% (0.81)%**
Portfolio Turnover Rate 74% 38% 34% 34% 0%
Average Commission Rate #
Per Share $ 0.0110 N/A N/A N/A N/A
As a Percentage of Trade Amount 0.51% N/A N/A N/A N/A
- -------------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net
Investment Loss -- -- -- $ 0.03 $ 0.01
Ratios Before Expense Limitation:
Expenses to Average Net Assets -- -- -- 2.17% 11.83%**
Net Investment Income (Loss) to
Average Net Assets -- -- -- (0.51)% (10.74)%**
- -------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
CLASS B
---------------------------------------
YEAR ENDED AUGUST 1, 1995+ TO
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1997 JUNE 30, 1996
- ---------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $ 16.81 $ 16.51
------------- -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Loss (0.16) (0.03)
Net Realized and Unrealized Gain
(Loss) (0.15) 0.33
------------- -------
Total From Investment Operations (0.31) 0.30
------------- -------
DISTRIBUTIONS
Net Realized Gain -- --
In Excess of Net Realized Gain (0.33) --
------------- -------
(0.33) --
------------- -------
NET ASSET VALUE, END OF PERIOD $ 16.17 $ 16.81
============= =======
TOTAL RETURN (1) (1.79)% 1.82%
============= =======
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 62,786 $ 52,853
Ratio of Expenses to Average Net
Assets 2.59% 2.61%**
Ratio of Net Investment Income
(Loss) to Average Net Assets (1.04)% (0.52)%**
Portfolio Turnover Rate 74% %38
Average Commission Rate #
Per Share $ 0.0110 N/A
As a Percentage of Trade Amount 0.51% N/A
- ----------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net
Investment Loss -- --
Ratios Before Expense Limitation:
Expenses to Average Net Assets -- --
Net Investment Income (Loss) to
Average Net Assets -- --
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS C
-------------------------------------------------------------------------------------------
SELECTED PER SHARE DATA AND YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED JUNE 23, 1993*
RATIOS JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1995 JUNE 30, 1994 TO JUNE 30, 1993
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $ 16.78 $ 16.19 $ 15.40 $ 12.00 $ 12.00
------------- ------------- ------------- ------------- ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Loss (0.21) (0.13) (0.12) (0.10) --
Net Realized and Unrealized
Gain (Loss) (0.10) 0.72 1.42 3.50 --
------------- ------------- ------------- ------------- ------
Total From Investment
Operations (0.31) 0.59 1.30 3.40 --
------------- ------------- ------------- ------------- ------
DISTRIBUTIONS
Net Realized Gain -- -- (0.49) -- --
In Excess of Net Realized Gain (0.33) -- (0.02) -- --
------------- ------------- ------------- ------------- ------
(0.33) -- (0.51) -- --
------------- ------------- ------------- ------------- ------
NET ASSET VALUE, END OF PERIOD $ 16.14 $ 16.78 $ 16.19 $ 15.40 $ 12.00
============= ============= ============= ============= ======
TOTAL RETURN (1) (1.79)% 3.64% 8.71% 28.33% 0.00%
============= ============= ============= ============= ======
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period
(000's) $ 114,460 $ 168,070 $ 139,497 $ 116,889 $ 8,491
Ratio of Expenses to Average Net
Assets 2.59% 2.63% 2.63% 2.65% 2.65%**
Ratio of Net Investment Income
(Loss) to Average Net Assets (1.06)% (0.94)% (0.77)% (0.99)% (1.56)%**
Portfolio Turnover Rate 74% 38% 34% 34% % 0
Average Commission Rate #
Per Share $ 0.0110 N/A N/A N/A N/A
As a Percentage of Trade
Amount 0.51% N/A N/A N/A N/A
- --------------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net
Investment Loss -- -- -- $ 0.03 $ 0.02
Ratios Before Expense
Limitation:
Expenses to Average Net Assets -- -- -- 2.92% 12.64%**
Net Investment Income (Loss)
to Average Net Assets -- -- -- (1.26)% (11.55)%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations
** Annualized
+ The Fund began offering Class B shares on August 1, 1995.
(1) Total return is calculated exclusive of sales charges or deferred
sales charges. Total returns for a periods of less than one year are
not annualized.
# For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose the average commission rate per share it paid for
trades on which commissions were charged.
-----------------------
105
The accompanying notes are an integral part of the financial statements.
<PAGE> 165
MORGAN STANLEY FUNDS
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
AMERICAN VALUE FUND
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED OCTOBER 18, 1993*
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1995 TO JUNE 30, 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.63 $ 12.89 $ 11.70 $ 12.00
---------- ----------- ----------- -------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.20 0.27 0.27 0.17
Net Realized and Unrealized Gain
(Loss) 4.05 1.94 1.44 (0.30)
---------- ----------- ----------- -------------
Total from Investment Operations 4.25 2.21 1.71 (0.13)
---------- ----------- ----------- -------------
DISTRIBUTIONS
Net Investment Income (0.20) (0.27) (0.28) (0.17)
In Excess of Net Investment Income (0.00)++ (0.01) -- --
Net Realized Gain (1.09) (0.19) (0.24) --
---------- ----------- ----------- -------------
Total Distributions (1.29) (0.47) (0.52) (0.17)
---------- ----------- ----------- -------------
NET ASSET VALUE, END OF PERIOD $ 17.59 $ 14.63 $ 12.89 $ 11.70
========== =========== =========== =============
TOTAL RETURN (1) 30.68% 17.41% 15.01% (1.12)%
========== =========== =========== =============
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 34,331 $ 19,674 $ 20,675 $ 10,717
Ratio of Expenses to Average Net
Assets 1.50% 1.50% 1.50% 1.50%**
Ratio of Net Investment Income to
Average Net Assets 1.25% 1.90% 2.29% 2.14%**
Portfolio Turnover Rate 73% 41% 23% 17%
Average Commission Rate # $ 0.0452 N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income $ 0.04 $ 0.04 $ 0.05 $ 0.08
Ratios Before Expense Limitation:
Expenses to Average Net Assets 1.76% 1.81% 1.96% 2.48%**
Net Investment Income to Average
Net Assets 0.98% 1.59% 1.83% 1.16%**
- ------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
CLASS B
------------------------------------------
YEAR ENDED AUGUST 1, 1995+ TO
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1997 JUNE 30, 1996
- ---------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.63 $ 13.37
----------- ---------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.09 0.15
Net Realized and Unrealized Gain
(Loss) 4.05 1.46
----------- ---------
Total from Investment Operations 4.14 1.61
----------- ---------
DISTRIBUTIONS
Net Investment Income (0.09) (0.15)
In Excess of Net Investment Income (0.00)++ (0.01)
Net Realized Gain (1.09) (0.19)
----------- ---------
Total Distributions (1.18) (0.35)
----------- ---------
NET ASSET VALUE, END OF PERIOD $ 17.59 $ 14.63
=========== =========
TOTAL RETURN (1) 29.77% 12.29%
=========== =========
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 15,331 $ 2,485
Ratio of Expenses to Average Net
Assets 2.25% 2.25%**
Ratio of Net Investment Income to
Average Net Assets 0.40% 1.18%**
Portfolio Turnover Rate 73% 41%
Average Commission Rate # $ 0.0452 N/A
- ------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income $ 0.06 $ 0.04
Ratios Before Expense Limitation:
Expenses to Average Net Assets 2.48% 2.61%**
Net Investment Income to Average
Net Assets 0.14% 0.82%**
- ------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS C
-----------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED OCTOBER 18, 1993*
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1995 TO JUNE 30, 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.64 $ 12.89 $ 11.69 $ 12.00
------------- ----------- ----------- -----------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.08 0.16 0.17 0.11
Net Realized and Unrealized Gain
(Loss) 4.05 1.94 1.44 (0.31)
------------- ----------- ----------- -----------
Total from Investment Operations 4.13 2.10 1.61 (0.20)
------------- ----------- ----------- -----------
DISTRIBUTIONS
Net Investment Income (0.09) (0.15) (0.17) (0.11)
In Excess of Net Investment Income (0.00)++ (0.01) -- --
Net Realized Gain (1.09) (0.19) (0.24) --
------------- ----------- ----------- -----------
Total Distributions (1.18) (0.35) (0.41) (0.11)
------------- ----------- ----------- -----------
NET ASSET VALUE, END OF PERIOD $ 17.59 $ 14.64 $ 12.89 $ 11.69
============= =========== =========== ===========
TOTAL RETURN (1) 29.67% 16.50% 14.13% (1.70)%
============= =========== =========== ===========
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 32,425 $ 21,193 $ 13,867 $ 7,237
Ratio of Expenses to Average Net
Assets 2.25% 2.25% 2.25% 2.25%**
Ratio of Net Investment Income to
Average Net Assets 0.49% 1.17% 1.54% 1.39%**
Portfolio Turnover Rate 73% 41% 23% 17%
Average Commission Rate # $ 0.0452 N/A N/A N/A
- -------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income $ 0.04 $ 0.04 $ 0.05 $ 0.08
Ratios Before Expense Limitation:
Expenses to Average Net Assets 2.47% 2.58% 2.71% 3.28%**
Net Investment Income to Average
Net Assets 0.22% 0.84% 1.08% 0.36%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations
** Annualized
+ The Fund began offering Class B shares on August 1, 1995.
++ Amount is less than $0.01 per share
(1) Total return is calculated exclusive of sales charges or deferred
sales charges. Total returns for periods of less than one year are not
annualized.
# For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose the average commission rate per share it paid for
trades on which commissions were charged.
- ------------------
106
The accompanying notes are an integral part of the financial statements.
<PAGE> 166
MORGAN STANLEY FUNDS
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
WORLDWIDE HIGH INCOME FUND
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED APRIL 21, 1994*
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1995 TO JUNE 30, 1994
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.47 $11.57 $ 12.17 $ 12.00
------- ------ ------- -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 1.25 1.36 1.26 0.18
Net Realized and Unrealized Gain
(Loss) 2.30 0.80 (0.52) 0.16
------- ------ ------- -------
Total From Investment Operations 3.55 2.16 0.74 0.34
------- ------ ------- -------
DISTRIBUTIONS
Net Investment Income (1.25) (1.26) (1.22) (0.17)
Net Realized Gain (0.51) -- (0.12) --
------- ------ ------- -------
Total Distributions (1.76) (1.26) (1.34) (0.17)
------- ------ ------- -------
NET ASSET VALUE, END OF PERIOD $ 14.26 $12.47 $ 11.57 $ 12.17
======= ====== ======= =======
TOTAL RETURN (1) 30.29% 19.61% 6.87% 2.86%
======= ====== ======= =======
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $76,439 $41,493 $14,819 $ 6,857
Ratio of Expenses to Average Net
Assets 1.52% 1.55% 1.55% 1.55%**
Ratio of Net Investment Income to
Average Net Assets 9.73% 11.95% 11.53% 8.29%**
Portfolio Turnover Rate 157% 220% 178% 19%
- ----------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income $ -- $ 0.02 $ 0.05 $ 0.02
Ratios Before Expense Limitation:
Expenses to Average Net Assets -- 1.69% 1.97% 3.23%**
Net Invesment Income to Average Net
Assets -- 11.81% 11.11% 6.61%**
- ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
CLASS B
----------------------------------------
YEAR ENDED AUGUST 1, 1995+
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1997 TO JUNE 30, 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.44 $ 11.63
------- -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 1.07 1.18
Net Realized and Unrealized Gain
(Loss) 2.35 0.72
------- -------
Total From Investment Operations 3.42 1.90
------- -------
DISTRIBUTIONS
Net Investment Income (1.15) (1.09)
Net Realized Gain (0.51) --
------- -------
Total Distributions (1.66) (1.09)
------- -------
NET ASSET VALUE, END OF PERIOD $ 14.20 $ 12.44
======= =======
TOTAL RETURN (1) 29.14% 17.07%
======= =======
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $78,340 $26,174
Ratio of Expenses to Average Net
Assets 2.27% 2.30%**
Ratio of Net Investment Income to
Average Net Assets 8.86% 12.06%**
Portfolio Turnover Rate 157% 220%
- -------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income $ -- $ 0.02
Ratios Before Expense Limitation:
Expenses to Average Net Assets -- 2.47%**
Net Invesment Income to Average Net
Assets -- 11.89%**
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS C
----------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED APRIL 21, 1994*
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1995 TO JUNE 30, 1994
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 12.45 $ 11.58 $ 12.16 $ 12.00
-------- -------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 1.16 1.30 1.17 0.17
Net Realized and Unrealized Gain
(Loss) 2.26 0.77 (0.50) 0.15
-------- -------- ------- -------
Total From Investment Operations 3.42 2.07 0.67 0.32
-------- -------- ------- -------
Net Investment Income (1.15) (1.20) (1.13) (0.16)
Net Realized Gain (0.51) -- (0.12) --
-------- -------- ------- -------
Total Distributions (1.66) (1.20) (1.25) (0.16)
-------- -------- ------- -------
NET ASSET VALUE, END OF PERIOD $ 14.21 $ 12.45 $ 11.58 $ 12.16
======== ======== ======= ========
TOTAL RETURN (1) 29.12% 18.71% 6.20% 2.62%
======== ======== ======= ========
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 41,709 $ 28,094 $11,880 $ 6,081
Ratio of Expenses to Average Net
Assets 2.27% 2.30% 2.30% 2.30%**
Ratio of Net Investment Income to
Average Net Assets 9.04% 11.40% 10.72% 7.54%**
Portfolio Turnover Rate 157% 220% 178% 19%
- ----------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income $ -- $ 0.04 $ 0.05 $ 0.06
Ratios Before Expense Limitation:
Expenses to Average Net Assets -- 2.44% 2.74% 4.00%**
Net Invesment Income to Average Net
Assets -- 11.26% 10.28% 5.84%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations
** Annualized
+ The Fund began offering Class B shares on August 1, 1995.
(1) Total return is calculated exclusive of sales charges or deferred
sales charges. Total returns for periods of less than one year are not
annualized.
-----------------------
107
The accompanying notes are an integral part of the financial statements.
<PAGE> 167
MORGAN STANLEY FUNDS
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
LATIN AMERICAN FUND
<TABLE>
<CAPTION>
CLASS A CLASS B
---------------------------------------------------------- ----------------
YEAR ENDED YEAR ENDED JULY 6, 1994* YEAR ENDED
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1995 JUNE 30, 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.63 $ 9.08 $ 12.00 $ 12.45
------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.02 0.10 (0.02) (0.03)
Net Realized and Unrealized Gain
(Loss) 6.46 3.47 (2.70) 6.28
------- ------- ------- -------
Total From Investment Operations 6.48 3.57 (2.72) 6.25
------- ------- ------- -------
DISTRIBUTIONS
Net Investment Income -- (0.02) -- --
In Excess of Net Investment Income (0.09) -- -- (0.08)
Net Realized Gain (1.63) -- -- (1.63)
Return of Capital -- -- (0.20) --
------- ------- ------- -------
Total Distributions (1.72) (0.02) (0.20) (1.71)
------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD $ 17.39 $ 12.63 $ 9.08 $ 16.99
======= ======= ======= =======
TOTAL RETURN (1) 57.32% 39.35% (23.07)% 56.17%
======= ======= ======= =======
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $84,401 $18,701 $ 7,658 $14,314
Ratio of Expenses to Average Net
Assets 2.24% 2.11% 2.46%** 2.99%
Ratio of Net Investment Income (Loss)
to Average Net Assets (0.08)% 1.18% (0.44)%** (0.78)%
Portfolio Turnover Rate 241% 131% 107% 241%
Average Commission Rate #
Per Share $0.0006 N/A N/A $0.0006
As a Percentage of Trade Amount 0.31% N/A N/A 0.31%
- -------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income $ 0.10 $ 0.09 $ 0.13 $ 0.02
Ratios Before Expense Limitation:
Expenses to Average Net Assets 2.77% 3.28% 4.30%** 3.55%
Net Investment Income (Loss) to
Average Net Assets (0.61)% 0.01% (2.26)%** (1.34)%
Ratio of Expenses to Average Net
Assets excluding country tax
expense 2.10% 2.10% 2.10%** 2.85%
- -------------------------------------------------------------------------------------------------------------------------
<CAPTION>
AUGUST 1, 1995+ TO
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1996
- ------------------------------------------------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.58
------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.03
Net Realized and Unrealized Gain
(Loss) 2.84
------
Total From Investment Operations 2.87
------
DISTRIBUTIONS
Net Investment Income --
In Excess of Net Investment Income --
Net Realized Gain --
Return of Capital --
------
Total Distributions --
------
NET ASSET VALUE, END OF PERIOD $12.45
======
TOTAL RETURN (1) 29.26%
======
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $2,041
Ratio of Expenses to Average Net
Assets 2.87%**
Ratio of Net Investment Income (Loss)
to Average Net Assets 0.88%**
Portfolio Turnover Rate 131%
Average Commission Rate #
Per Share N/A
As a Percentage of Trade Amount N/A
- --------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income $ 0.04
Ratios Before Expense Limitation:
Expenses to Average Net Assets 3.89%**
Net Investment Income (Loss) to
Average Net Assets (0.14)%**
Ratio of Expenses to Average Net
Assets excluding country tax
expense 2.85%**
- ------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS C
----------------------------------------------------------
YEAR ENDED YEAR ENDED JULY 6, 1994*
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1995
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.43 $ 8.99 $12.00
------- ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (0.07) 0.04 (0.08)
Net Realized and Unrealized Gain
(Loss) 6.31 3.40 (2.73)
------- ------ ------
Total From Investment Operations 6.24 3.44 (2.81)
------- ------ ------
DISTRIBUTIONS
Net Investment Income -- -- --
In Excess of Net Investment Income (0.03) -- --
Net Realized Gain (1.63) -- --
Return of Capital -- -- (0.20)
------- ------ ------
Total Distributions (1.66) -- (0.20)
------- ------ ------
NET ASSET VALUE, END OF PERIOD $ 17.01 $12.43 $ 8.99
======= ====== ======
TOTAL RETURN (1) 56.04% 38.26% (23.83)%
======= ====== ======
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $20,345 $6,780 $4,085
Ratio of Expenses to Average Net
Assets 2.99% 2.86% 3.20%**
Ratio of Net Investment Income (Loss)
to Average Net Assets (0.79)% 0.42% (1.16)%**
Portfolio Turnover Rate 241% 131% 107%
Average Commission Rate #
Per Share $0.0006 N/A N/A
As a Percentage of Trade Amount 0.31% N/A N/A
- ----------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income $ 0.05 $ 0.12 $ 0.12
Ratios Before Expense Limitation:
Expenses to Average Net Assets 3.56% 4.06% 5.20%**
Net Investment Income (Loss) to
Average Net Assets (1.36)% (0.78)% (3.16)%**
Ratio of Expenses to Average Net
Assets excluding country tax
expense 2.85% 2.85% 2.85%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations
** Annualized
+ The Fund began offering Class B shares on August 1, 1995
(1) Total return is calculated exclusive of sales charges or deferred
sales charges. Total returns for periods of less than one year are not
annualized.
# For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose the average commission rate per share it paid for
trades on which commissions were charged.
- ------------------
108
The accompanying notes are an integral part of the financial statements.
<PAGE> 168
MORGAN STANLEY FUNDS
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
EMERGING MARKETS FUND
<TABLE>
<CAPTION>
CLASS A CLASS B
------------------------------------------------------- ----------------
YEAR ENDED YEAR ENDED JULY 6, 1994* YEAR ENDED
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1995 JUNE 30, 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.06 $ 10.61 $ 12.00 $ 11.94
---------------- ------------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) 0.01 0.05 0.05 (0.03)
Net Realized and Unrealized Gain
(Loss) 1.57 1.44 (1.44) 1.50
---------------- ------------- -------- --------
Total From Investment Operations 1.58 1.49 (1.39) 1.47
---------------- ------------- -------- --------
DISTRIBUTIONS
Net Investment Income -- (0.04) -- --
In Excess of Net Investment Income (0.04) -- -- (0.04)
Net Realized Gain (0.13) -- -- (0.13)
---------------- ------------- -------- --------
Total Distributions (0.17) (0.04) -- (0.17)
---------------- ------------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 13.47 $ 12.06 $ 10.61 $ 13.24
================ ============= ======== ========
TOTAL RETURN (1) 13.54% 14.16% (11.58)% 12.67%
================ ============= ======== ========
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 119,022 $ 114,850 $ 26,091 $ 35,966
Ratio of Expenses to Average Net
Assets 2.21% 2.16% 2.33%** 2.96%
Ratio of Net Investment Income (Loss)
to Average Net Assets (0.06)% 0.93% 0.81%** (0.64)%
Portfolio Turnover Rate 82% 42% 32% 82%
Average Commission Rate #
Per Share $ 0.0007 N/A N/A $ 0.0007
As a Percentage of Trade Amount 0.39% N/A N/A 0.39%
- ----------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income $ 0.03 $ 0.02 $ 0.04 $ 0.01
Ratios Before Expense Limitation:
Expenses to Average Net Assets 2.41% 2.56% 3.10%** 3.17%
Net Invesment Income (Loss) to
Average Net Assets (0.27)% 0.53% 0.04%** (0.87)%
Ratio of Expenses to Average Net
Assets excluding country tax
expense 2.15% 2.15% 2.15%** 2.90%
- ----------------------------------------------------------------------------------------------------------------------
<CAPTION>
AUGUST 1, 1995+ TO
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1996
- -------------------------------------------------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.91
--------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) 0.01
Net Realized and Unrealized Gain
(Loss) 1.02
--------
Total From Investment Operations 1.03
--------
DISTRIBUTIONS
Net Investment Income --
In Excess of Net Investment Income --
Net Realized Gain --
--------
Total Distributions --
--------
NET ASSET VALUE, END OF PERIOD $ 11.94
========
TOTAL RETURN (1) 9.45%
========
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 10,416
Ratio of Expenses to Average Net
Assets 2.91%**
Ratio of Net Investment Income (Loss)
to Average Net Assets 0.30%**
Portfolio Turnover Rate 42%
Average Commission Rate #
Per Share N/A
As a Percentage of Trade Amount N/A
- ----------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income $ 0.02
Ratios Before Expense Limitation:
Expenses to Average Net Assets 3.31%**
Net Invesment Income (Loss) to
Average Net Assets (0.10)%**
Ratio of Expenses to Average Net
Assets excluding country tax
expense 2.90%**
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS C
-------------------------------------------------------------
YEAR ENDED YEAR ENDED JULY 6, 1994* TO
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1995
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.93 $ 10.53 $ 12.00
-------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) (0.08) (0.01) --
Net Realized and Unrealized Gain
(Loss) 1.55 1.41 (1.47)
-------- -------- --------
Total From Investment Operations 1.47 1.40 (1.47)
-------- -------- --------
DISTRIBUTIONS
Net Investment Income -- -- --
In Excess of Net Investment Income (0.01) -- --
Net Realized Gain (0.13) -- --
-------- -------- --------
Total Distributions (0.14) -- --
-------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 13.26 $ 11.93 $ 10.53
======== ======== ========
TOTAL RETURN (1) 12.66% 13.30% (12.25)%
======== ======== ========
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 57,958 $ 43,601 $ 22,245
Ratio of Expenses to Average Net
Assets 2.96% 2.91% 3.08%**
Ratio of Net Investment Income (Loss)
to Average Net Assets (0.79)% (0.11)% 0.06%**
Portfolio Turnover Rate 82% 42% 32%
Average Commission Rate #
Per Share $ 0.0007 N/A N/A
As a Percentage of Trade Amount 0.39% N/A N/A
- -------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income $ 0.02 $ 0.03 $ 0.04
Ratios Before Expense Limitation:
Expenses to Average Net Assets 3.17% 3.34% 3.90%**
Net Invesment Income (Loss) to
Average Net Assets (1.00)% (0.54)% (0.76)%**
Ratio of Expenses to Average Net
Assets excluding country tax
expense 2.90% 2.90% 2.90%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations
** Annualized
+ The Fund began offering Class B shares on August 1, 1995.
(1) Total return is calculated exclusive of sales charges or deferred
sales charges. Total returns for periods of less than one year are not
annualized.
# For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose the average commission rate per share it paid for
trades on which commissions were charged.
-----------------------
109
The accompanying notes are an integral part of the financial statements.
<PAGE> 169
MORGAN STANLEY FUNDS
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
AGGRESSIVE EQUITY FUND
<TABLE>
<CAPTION>
CLASS A CLASS B
------------------------------------------- ----------------
YEAR ENDED JANUARY 2, 1996* TO YEAR ENDED
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.40 $12.00 $ 14.38
------- ------ -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) 0.01 0.06 (0.02)
Net Realized and Unrealized Gain 3.95 2.40 3.86
------- ------ -------
Total From Investment Operations 3.96 2.46 3.84
------- ------ -------
DISTRIBUTION:
Net Investment Income (0.03) (0.06) (0.02)
Net Realized Gain (1.35) -- (1.35)
------- ------ -------
Total Distributions (1.38) (0.06) (1.37)
------- ------ -------
NET ASSET VALUE, END OF PERIOD $ 16.98 $14.40 $ 16.85
======= ====== =======
TOTAL RETURN (1) 28.93% 20.52% 28.01%
======= ====== =======
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $22,521 $5,382 $34,382
Ratio of Expenses to Average Net
Assets 1.57% 2.03%** 2.32%
Ratio of Net Investment Income (Loss)
to
Average Net Assets (0.04)% 1.22%** (0.83)%
Portfolio Turnover Rate 241% 204% 241%
Average Commission Rate # $0.0536 N/A $0.0536
- ----------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income $ 0.22 $ 0.06 $ 0.02
Ratios Before Expense Limitation:
Expenses to Average Net Assets 2.38% 3.26%** 2.88%
Net Investment Income to Average
Net Assets (0.85)% (0.01)%** (1.43)%
Ratio of Expenses to Average Net
Assets
excluding dividend expense on
securities sold short 1.50% 1.50%** 2.25%
<CAPTION>
CLASS C
-------------------------------------------
JANUARY 2, 1996* TO YEAR ENDED JANUARY 2, 1996* TO
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1996 JUNE 30, 1997 JUNE 30, 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $12.00 $ 14.37 $12.00
------ ------- ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) 0.03 (0.06) 0.03
Net Realized and Unrealized Gain 2.39 3.89 2.38
------ ------- ------
Total From Investment Operations 2.42 3.83 2.41
------ ------- ------
DISTRIBUTION:
Net Investment Income (0.04) (0.02) (0.04)
Net Realized Gain -- (1.35) --
------ ------- ------
Total Distributions (0.04) (1.37) (0.04)
------ ------- ------
NET ASSET VALUE, END OF PERIOD $14.38 $ 16.83 $14.37
====== ======= ======
TOTAL RETURN (1) 20.18% 28.04% 20.10%
====== ======= ======
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $2,426 $ 9,410 $2,582
Ratio of Expenses to Average Net
Assets 2.67%** 2.32% 2.67%**
Ratio of Net Investment Income (Loss)
to
Average Net Assets 0.43%** (0.77)% 0.44%**
Portfolio Turnover Rate 204% 241% 204%
Average Commission Rate # N/A $0.0536 N/A
- ----------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income $ 0.07 $ 0.07 $ 0.07
Ratios Before Expense Limitation:
Expenses to Average Net Assets 3.79%** 3.23% 3.80%**
Net Investment Income to Average
Net Assets (0.69)%** (1.67)% (0.69)%**
Ratio of Expenses to Average Net
Assets
excluding dividend expense on
securities sold short 2.25%** 2.25% 2.25%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations
** Annualized
(1) Total return is calculated exclusive of sales charges or deferred
sales charges. Total returns for periods of less than one year are not
annualized.
# For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose the average commission rate per share it paid for
trades on which commissions were charged.
- ------------------
110
The accompanying notes are an integral part of the financial statements.
<PAGE> 170
MORGAN STANLEY FUNDS
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
U.S. REAL ESTATE FUND
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
--------------------------------- --------------------------------- -------------
YEAR ENDED MAY 1, 1996* TO YEAR ENDED MAY 1, 1996* TO YEAR ENDED
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1997
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.52 $ 12.00 $ 12.52 $ 12.00 $ 12.52
------------- ------ ------------- ------ -------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.37 0.08 0.15 0.07 0.20
Net Realized and Unrealized Gain 4.03 0.48 4.12 0.48 4.07
------------- ------ ------------- ------ -------------
Total From Investment Operations 4.40 0.56 4.27 0.55 4.27
------------- ------ ------------- ------ -------------
DISTRIBUTION:
Net Investment Income (0.29) (0.04) (0.19) (0.03) (0.19)
Net Realized Gain (0.24) -- (0.24) -- (0.24)
------------- ------ ------------- ------ -------------
Total Distributions (0.53) (0.04) (0.43) (0.03) (0.43)
------------- ------ ------------- ------ -------------
NET ASSET VALUE, END OF PERIOD $ 16.39 $ 12.52 $ 16.36 $ 12.52 $ 16.36
============= ====== ============= ====== =============
TOTAL RETURN (1) 35.75% 4.63% 34.58% 4.54% 34.56%
============= ====== ============= ====== =============
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 14,827 $ 1,829 $ 7,120 $ 2,197 $ 2,369
Ratio of Expenses to Average Net
Assets 1.55% 1.55%** 2.30% 2.30%** 2.30%
Ratio of Net Investment Income to
Average Net Assets 2.33% 4.11%** 1.49% 3.35%** 1.46%
Portfolio Turnover Rate 143% 0% 143% 0% 143%
Average Commission Rate # $ 0.0582 N/A $ 0.0582 N/A $ 0.0582
- -----------------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income $ 0.16 $ 0.08 $ 0.11 $ 0.07 $ 0.17
Ratios Before Expense Limitation:
Expenses to Average Net Assets 2.51% 5.58%** 3.39% 6.34%** 3.58%
Net Investment Income to Average
Net Assets 1.36% 0.08%** 0.39% (0.69)%** 0.16%
<CAPTION>
MAY 1, 1996* TO
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1996
- ------------------------------------------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.00
------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.07
Net Realized and Unrealized Gain 0.48
------
Total From Investment Operations 0.55
------
DISTRIBUTION:
Net Investment Income (0.03)
Net Realized Gain --
------
Total Distributions (0.03)
------
NET ASSET VALUE, END OF PERIOD $ 12.52
======
TOTAL RETURN (1) 4.54%
======
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 1,782
Ratio of Expenses to Average Net
Assets 2.30%**
Ratio of Net Investment Income to
Average Net Assets 3.39%**
Portfolio Turnover Rate 0%
Average Commission Rate # N/A
- --------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income $ 0.08
Ratios Before Expense Limitation:
Expenses to Average Net Assets 6.32%**
Net Investment Income to Average
Net Assets (0.63)%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations
** Annualized
(1) Total return is calculated exclusive of sales charges or deferred
sales charges. Total returns for periods of less than one year are not
annualized.
# For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose the average commission rate per share it paid for
trades on which commissions were charged.
-----------------------
111
The accompanying notes are an integral part of the financial statements.
<PAGE> 171
MORGAN STANLEY FUNDS
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
HIGH YIELD FUND
<TABLE>
<CAPTION>
CLASS A CLASS B
--------------------------------------- ---------------------------------------
YEAR ENDED MAY 1, 1996* TO YEAR ENDED MAY 1, 1996* TO
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1997 JUNE 30, 1996
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.92 $ 12.00 $ 11.93 $ 12.00
------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 1.07 0.13 0.98 0.12
Net Realized and Unrealized Gain
(Loss) 0.99 (0.09) 0.99 (0.09)
------ ------ ------ ------
Total From Investment Operations 2.06 0.04 1.97 0.03
------ ------ ------ ------
DISTRIBUTION:
Net Investment Income (1.07) (0.12) (0.99) (0.10)
Net Realized Gain (0.05) -- (0.05) --
------ ------ ------ ------
Total Distributions (1.12) (0.12) (1.04) (0.10)
------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 12.86 $ 11.92 $ 12.86 $ 11.93
====== ====== ====== ======
TOTAL RETURN (1) 18.12% 0.29% 17.22% 0.21%
====== ====== ====== ======
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 8,980 $ 3,907 $ 8,617 $ 3,421
Ratio of Expenses to Average Net
Assets 1.25% 1.25%** 2.00% 2.00%**
Ratio of Net Investment Income to
Average Net Assets 8.83% 6.85%** 7.99% 6.08%**
Portfolio Turnover Rate 104% 10% 104% 10%
- -----------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income $ 0.10 $ 0.04 $ 0.10 $ 0.04
Ratios Before Expense Limitation:
Expenses to Average Net Assets 2.04% 3.51%** 2.82% 4.25%**
Net Investment Income to Average
Net Assets 8.04% 4.59%** 7.17% 3.83%**
<CAPTION>
CLASS C
---------------------------------------
YEAR ENDED MAY 1, 1996* TO
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1997 JUNE 30, 1996
- ------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.93 $ 12.00
------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.99 0.12
Net Realized and Unrealized Gain
(Loss) 0.98 (0.09)
------ ------
Total From Investment Operations 1.97 0.03
------ ------
DISTRIBUTION:
Net Investment Income (0.99) (0.10)
Net Realized Gain (0.05) --
------ ------
Total Distributions (1.04) (0.10)
------ ------
NET ASSET VALUE, END OF PERIOD $ 12.86 $ 11.93
====== ======
TOTAL RETURN (1) 17.21% 0.21%
====== ======
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 4,970 $ 3,316
Ratio of Expenses to Average Net
Assets 2.00% 2.00%**
Ratio of Net Investment Income to
Average Net Assets 8.03% 6.07%**
Portfolio Turnover Rate 104% 10%
- -----------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income $ 0.11 $ 0.04
Ratios Before Expense Limitation:
Expenses to Average Net Assets 2.88% 4.25%**
Net Investment Income to Average
Net Assets 7.15% 3.82%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations
** Annualized
(1) Total return is calculated exclusive of sales charges or deferred
sales charges. Total returns for periods of less than one year are not
annualized.
- ------------------
112
The accompanying notes are an integral part of the financial statements.
<PAGE> 172
MORGAN STANLEY FUNDS
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
INTERNATIONAL MAGNUM FUND
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------------------- ------------------- -------------------
JULY 1, 1996* TO JULY 1, 1996* TO JULY 1, 1996* TO
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1997 JUNE 30, 1997 JUNE 30, 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.00 $ 12.00 $ 12.00
------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.17 0.10 0.06
Net Realized and Unrealized Gain 1.88 1.85 1.88
------- ------- -------
Total From Investment Operations 2.05 1.95 1.94
------- ------- -------
DISTRIBUTION:
Net Investment Income (0.13) (0.10) (0.10)
Net Realized Gain (0.01) (0.01) (0.01)
------- ------- -------
Total Distributions (0.14) (0.11) (0.11)
------- ------- -------
NET ASSET VALUE, END OF PERIOD $ 13.91 $ 13.84 $ 13.83
======= ======= =======
TOTAL RETURN (1) 17.30% 16.40% 16.27%
======= ======= =======
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 21,961 $ 18,215 $ 9,156
Ratio of Expenses to Average Net
Assets 1.65% 2.40% 2.40%
Ratio of Net Investment Income to
Average Net Assets 1.39% 0.54% 0.29%
Portfolio Turnover Rate 22% 22% 22%
Average Commission Rate #
Per Share $ 0.0318 $ 0.0318 $ 0.0318
As a Percentage of Trade Amount 0.33% 0.33% 0.33%
- -------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income $ 0.11 $ 0.17 $ 0.21
Ratios Before Expense Limitation:
Expenses to Average Net Assets 2.50% 3.34% 3.45%
Net Investment Income (Loss) to
Average Net Assets 0.52% (0.42)% (0.77)%
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations
(1) Total return is calculated exclusive of sales charges or deferred
sales charges. Total returns for periods of less than one year are not
annualized.
-----------------------
113
The accompanying notes are an integral part of the financial statements.
<PAGE> 173
MORGAN STANLEY FUNDS
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
GOVERNMENT OBLIGATIONS MONEY MARKET FUND
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1995 JUNE 30, 1994 JUNE 30, 1993
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------------- ------------- ------------- ------------- -------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.0443 0.0464 0.0448 0.0243 0.0246
Net Realized and Unrealized Gain
(Loss) -- (0.0011) -- 0.0011 0.0002
------------- ------------- ------------- ------------- -------------
Total From Investment Operations 0.0443 0.0453 0.0448 0.0254 0.0248
------------- ------------- ------------- ------------- -------------
DISTRIBUTIONS:
Net Investment Income (0.0443) (0.0464) (0.0448) (0.0243) (0.0246)
Net Realized Gain -- (0.0001) -- (0.0011) (0.0002)
------------- ------------- ------------- ------------- -------------
Total Distributions (0.0443) (0.0465) (0.0448) (0.0254) (0.0248)
------------- ------------- ------------- ------------- -------------
NET ASSET VALUE, END OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
============= ============= ============= ============= =============
TOTAL RETURN 4.53% 4.72% 4.58% 2.45% 2.51%
============= ============= ============= ============= =============
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 94,768 $ 145,978 $ 67,505 $ 102,551 $ 101,736
Ratio of Expenses to Average Net
Assets 0.95% 0.95% 0.95% 0.95% 0.95%
Ratio of Net Investment Income to
Average Net Assets 4.43% 4.68% 4.61% 2.40% 2.50%
- -------------------------------------------------------------------------------------------------------------------------------
Ratios Before Expense Limitation:
Expenses to Average Net Assets 1.27% 1.24% 1.12% 1.22% 1.19%
Net Investment Income to Average
Net Assets 4.10% 4.39% 4.44% 2.13% 2.26%
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ------------------
114
The accompanying notes are an integral part of the financial statements.
<PAGE> 174
MORGAN STANLEY FUNDS
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
MONEY MARKET FUND
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1995 JUNE 30, 1994
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.0450 0.0463 0.0446 0.0246
Net Realized and Unrealized Gain
(Loss) -- (0.0006) 0.0001 --
-------- -------- -------- --------
Total From Investment Operations 0.0450 0.0457 0.0447 0.0246
-------- -------- -------- --------
DISTRIBUTIONS:
Net Investment Income (0.0450) (0.0463) (0.0446) (0.0246)
Net Realized Gain -- -- (0.0001) --
-------- -------- -------- --------
Total Distributions (0.0450) (0.0463) (0.0447) (0.0246)
-------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ========
TOTAL RETURN 4.60% 4.72% 4.55% 2.49%
======== ======== ======== ========
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 138,422 $ 170,973 $ 171,515 $ 176,599
Ratio of Expenses to Average Net
Assets 0.98% 0.98% 0.98% 0.98%
Ratio of Net Investment Income to
Average Net Assets 4.50% 4.65% 4.45% 2.45%
- -------------------------------------------------------------------------------------------------------------------------
Ratios Before Expense Limitation:
Expenses to Average Net Assets 1.27% 1.22% 1.18% 1.19%
Net Investment Income to Average
Net Assets 4.20% 4.41% 4.25% 2.24%
- -------------------------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1993
- -------------------------------------------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.00
--------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.0243
Net Realized and Unrealized Gain
(Loss) 0.0001
--------
Total From Investment Operations 0.0244
--------
DISTRIBUTIONS:
Net Investment Income (0.0243)
Net Realized Gain (0.0001)
--------
Total Distributions (0.0244)
--------
NET ASSET VALUE, END OF PERIOD $ 1.00
========
TOTAL RETURN 2.47%
========
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 156,310
Ratio of Expenses to Average Net
Assets 0.98%
Ratio of Net Investment Income to
Average Net Assets 2.44%
- --------------------------------------------------------------------------
Ratios Before Expense Limitation:
Expenses to Average Net Assets 1.20%
Net Investment Income to Average
Net Assets 2.22%
- -------------------------------------------------------------------------------------------
</TABLE>
-----------------------
115
The accompanying notes are an integral part of the financial statements.
<PAGE> 175
MORGAN STANLEY FUNDS
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1997
- --------------------------------------------------------------------------------
Morgan Stanley Fund, Inc. (the "Fund") was incorporated under the laws of
Maryland on August 14, 1992 and commenced operations on January 4, 1993. The
Fund is registered under the Investment Company Act of 1940, as amended, as an
open-end management investment company which offers redeemable shares of
diversified and non-diversified investment portfolios.
As of June 30, 1997, the Fund had thirteen separate active investment
portfolios: Morgan Stanley Global Equity Allocation Fund, Morgan Stanley Global
Fixed Income Fund, Morgan Stanley Asian Growth Fund, Morgan Stanley American
Value Fund, Morgan Stanley Worldwide High Income Fund, Morgan Stanley Latin
American Fund, Morgan Stanley Emerging Markets Fund, Morgan Stanley Aggressive
Equity Fund, Morgan Stanley U.S. Real Estate Fund, Morgan Stanley High Yield
Fund, Morgan Stanley International Magnum Fund, Morgan Stanley Government
Obligations Money Market Fund and Morgan Stanley Money Market Fund (referred to
herein respectively as "Global Equity Allocation Fund," "Global Fixed Income
Fund," "Asian Growth Fund," "American Value Fund," "Worldwide High Income Fund,"
"Latin American Fund," "Emerging Markets Fund," "Aggressive Equity Fund," "U.S.
Real Estate Fund," "High Yield Fund," "International Magnum Fund," "Government
Obligations Money Market Fund" and "Money Market Fund," individually a
"Portfolio" and collectively as the "Portfolios").
The Fund currently offers three classes of shares, Class A, Class B and Class C
Shares (with the exception of the Government Obligations Money Market and Money
Market Funds). Class A shares are sold with a front-end sales charge of up to
5.75%. Class B shares are sold with a contingent deferred sales charge on
redemptions made within 5 years of purchase which declines annually from 5% for
redemptions made in year one, down to 1.50% in year five. The contingent
deferred sales charge is based on the lesser of the current market value of the
shares redeemed or the total cost of such shares. Class B shares will
automatically convert to Class A shares after the seventh year following
purchase. Class C shares are sold with a contingent deferred sales charge of 1%
for shares that are redeemed within one year of purchase, based on the lesser of
the current market value of the shares redeemed or the total cost of such
shares. All three classes of shares have identical voting, dividend, liquidation
and other rights. The Fund began offering the current Class B shares on August
1, 1995. Class B shares held prior to May 1, 1995 were renamed Class C shares.
On July 16, 1996, The Boards of Directors of the PCS Cash Fund, Inc. approved an
Agreement and Plan of Reorganization and Liquidation by and between the PCS Cash
Fund, Inc. (comprised of the PCS Government-Obligations Money Market Portfolio,
PCS Money Market Portfolio and PCS Tax-Free Money Market Portfolio) and Morgan
Stanley Fund, Inc. On September 26, 1996, all or substantially all of the PCS
Cash Fund, Inc.'s assets and liabilities were transferred to Morgan Stanley
Fund, Inc. in exchange for shares of Morgan Stanley Fund, Inc.
A. ACCOUNTING POLICIES: The following significant accounting policies are in
conformity with generally accepted accounting principles for investment
companies. Such policies are consistently followed by the Fund in the
preparation of the financial statements. Generally accepted accounting
principles require management to make estimates and assumptions that affect the
reported amounts and disclosures in the financial statements. Actual results may
differ from those estimates.
1. SECURITY VALUATION: Equity securities listed on a U.S. exchange and equity
securities traded on NASDAQ are valued at the latest quoted sales price on the
valuation date. Securities listed on a foreign exchange are valued at their
closing price. Unlisted securities and listed securities not traded on the
valuation date for which market quotations are readily available are valued at
the average of the mean between the current bid and asked prices obtained from
reputable brokers. Bonds and other fixed income securities may be valued
according to the broadest and most representative market. In addition, bonds and
other fixed income securities may be valued on the basis of prices provided by a
pricing service which are based primarily on institutional size trading in
similar groups of securities. Debt securities purchased with remaining
maturities of 60 days or less are valued at amortized cost, if it approximates
market value. Securities owned by the Government Obligations Money Market and
Money Market Funds are stated at amortized cost, which approximates market
value. All other securities and assets for which market values are not readily
available are valued at fair value as determined in good faith by the Board of
Directors, although the actual calculations may be done by others.
2. TAXES: It is each portfolio's intention to qualify as a regulated investment
company and distribute all of its taxable income. Accordingly, no provision for
Federal income taxes is required in the financial statements. A portfolio may be
subject to taxes imposed by countries in which it invests. Such taxes are
generally based on income and/or capital gains earned or repatriated. Taxes are
accrued and applied to net investment income, net realized capital gains and net
unrealized appreciation, as applicable, as the income and/or capital gains are
earned.
At June 30, 1997, the following Portfolios had available capital loss
carryforwards to offset future net capital gains, to the extent provided by U.S.
Federal income tax regulations, through the indicated expiration dates:
<TABLE>
<CAPTION>
EXPIRATION DATE
JUNE 30, 2004
PORTFOLIOS (000)
- ------------------------------------- -----------------------
<S> <C>
Government Obligations Money
Market............................. $ 90
Money Market......................... $ 98
</TABLE>
- -----------------------
116
<PAGE> 176
MORGAN STANLEY FUNDS
NOTES TO FINANCIAL STATEMENTS (CONT.)
JUNE 30, 1997
- --------------------------------------------------------------------------------
To the extent that capital loss carryforwards are used to offset any future net
capital gains realized during the carryforward period as provided by U.S.
Federal income tax regulations, no capital gains tax liability will be incurred
by a Portfolio for gains realized and not distributed. To the extent that
capital gains are so offset, such gains will not be distributed to shareholders.
Net capital and net currency losses incurred after October 31 and within the
taxable year are deemed to arise on the first business day of the Portfolio's
next taxable year. For the period from November 1, 1996 to June 30, 1997 certain
Portfolios incurred and elected to defer until July 1, 1997, for U.S. Federal
income tax purposes, net currency and capital losses of approximately:
<TABLE>
<CAPTION>
CURRENCY
AND CAPITAL
LOSSES
PORTFOLIO (000)
- ------------------------------------- -------------------
<S> <C>
Global Fixed Income.................. $ 83
Asian Growth......................... 8,841
Latin American....................... 11
Emerging Markets..................... 223
</TABLE>
3. REPURCHASE AGREEMENTS: In connection with transactions in repurchase
agreements, a bank as custodian for the Fund takes possession of the underlying
securities, with a market value at least equal to the amount of the repurchase
transaction, including principal and accrued interest. To the extent that any
repurchase transaction exceeds one business day, the value of the collateral is
marked-to-market on a daily basis to determine the adequacy of the collateral.
In the event of default on the obligation to repurchase, the Fund has the right
to liquidate the collateral and apply the proceeds in satisfaction of the
obligation. In the event of default or bankruptcy by the counterparty to the
agreement, realization and/or retention of the collateral or proceeds may be
subject to legal proceedings.
4. FOREIGN CURRENCY TRANSLATION AND FOREIGN INVESTMENTS: The books and records
of the Fund are maintained in U.S. dollars. Foreign currency amounts are
translated into U.S. dollars at the mean of the bid and asked prices of such
currencies against U.S. dollars last quoted by a major bank as follows:
- investments, other assets and liabilities at the prevailing rates of
exchange on the valuation date;
- investment transactions and investment income at the prevailing rates of
exchange on the dates of such transactions.
Although the net assets of the Fund are presented at the foreign exchange rates
and market values at the close of the period, the Fund does not isolate that
portion of the results of operations arising as a result of changes in the
foreign exchange rates from the fluctuations arising from changes in the market
prices of the securities held at period end. Similarly, the Fund does not
isolate the effect of changes in foreign exchange rates from the fluctuations
arising from changes in the market prices of securities sold during the period.
Accordingly, realized and unrealized foreign currency gains (losses) are
included in the reported net realized and unrealized gains (losses) on
investment transactions and balances. However, pursuant to U.S. Federal income
tax regulations, the foreign currency portion of gains and losses realized on
sales and maturities of foreign denominated debt securities is treated as
ordinary income for U.S. Federal income tax purposes.
Net realized gains (losses) on foreign currency transactions represent net
foreign exchange gains (losses) from forward foreign currency exchange
contracts, disposition of foreign currencies, currency gains or losses realized
between the trade and settlement dates on securities transactions, and the
difference between the amount of investment income and foreign withholding taxes
recorded on the Fund's books and the U.S. dollar equivalent amounts actually
received or paid. Net unrealized currency gains (losses) from valuing foreign
currency denominated assets and liabilities at period end exchange rates are
reflected as a component of unrealized appreciation (depreciation) on
investments and foreign currency translations in the Statement of Assets and
Liabilities. The change in net unrealized currency gains (losses) for the period
is reflected on the Statement of Operations.
The net assets of certain Portfolios include issuers located in emerging
markets. There will be certain considerations and risks of these investments not
typically associated with investments in the United States. Changes in currency
exchange rates will affect the value of and investment income from such
securities. The smaller size of the markets themselves, lesser liquidity and
greater volatility contribute to risks in valuation as compared with the U.S.
securities markets. Also there is often substantially less publicly available
information about these issuers. Emerging markets may be subject to a greater
degree of governmental involvement in the economy and greater economic and
political uncertainty. Accordingly the price which the Fund realizes upon the
sale of securities in such markets may not be equal to its value as presented in
the financial statements.
Prior governmental approval for foreign investments may be required under
certain circumstances in some countries, and the extent of foreign investment in
domestic companies may be subject to limitations in other countries. Foreign
ownership limitations also may be imposed by the charters of individual
companies to prevent, among other concerns, violation of foreign investment
limitations. As a result, an additional class of shares (identified as "Foreign"
in the Portfolio of Investments) may be created and offered for investment. The
"local" and "foreign" shares' market values may vary.
5. FOREIGN CURRENCY EXCHANGE CONTRACTS: Certain Portfolios may enter into
foreign currency exchange contracts to attempt to protect securities and related
receivables and payables against changes in future foreign currency exchange
------------------
117
<PAGE> 177
MORGAN STANLEY FUNDS
NOTES TO FINANCIAL STATEMENTS (CONT.)
JUNE 30, 1997
- --------------------------------------------------------------------------------
rates. A currency exchange contract is an agreement between two parties to buy
or sell currency at a set price on a future date. The market value of the
contract will fluctuate with changes in currency exchange rates. The contract is
marked-to-market daily and the change in market value is recorded by the
Portfolio as unrealized gain or loss. The Portfolio records realized gains or
losses when the contract is closed, equal to the difference between the value of
the contract at the time it was opened and the value of the contract at the time
it was closed. Risks may arise upon entering into these contracts from the
potential inability of counterparties to meet the terms of their contracts but
is generally limited to the amount of unrealized gain on the contracts, if any,
at the date of default. Risks may also arise from the unanticipated movements in
the value of a foreign currency relative to the U.S. dollar.
6. SHORT SALES: The Aggressive Equity Fund may sell securities short. A short
sale is a transaction in which the Portfolio sells securities it may or may not
own, but has borrowed, in anticipation of a decline in the market price of the
securities. The Portfolio is obligated to purchase securities at the market
price to replace the borrowed securities at the time of replacement. The
Portfolio may have to pay a premium to borrow the securities as well as pay
dividends or interests payable on the securities until they are replaced. The
Portfolio's obligation to replace the securities borrowed in connection with a
short sale will generally be secured by collateral deposited with the broker
that consists of cash, U.S. government securities or other liquid, high grade
debt obligations. In addition, the Portfolio will place in a segregated account
with its Custodian an amount of cash, U.S. government securities or other liquid
high grade debt obligations equal to the difference, if any, between (1) the
market value of the securities sold at the time they were sold short and (2) any
cash, U.S. government securities or other liquid high grade debt obligations
deposited as collateral with the broker in connection with the short sale (not
including the proceeds of the short sale). Short sales by the Portfolio involve
certain risks and special considerations. Possible losses from short sales
differ from losses that could be incurred from the purchase of a security,
because losses from short sales may be unlimited, whereas losses from purchases
cannot exceed the total amount invested.
7. PURCHASED OPTIONS: Certain Portfolios may purchase call or put options on
their portfolio securities. A Portfolio may purchase call options to protect
against an increase in the price of a security it anticipates purchasing. A
Portfolio may purchase put options on securities which it holds to protect
against a decline in the value of the security. Risks may arise from an
imperfect correlation between the change in market value of the securities held
by the Portfolio and the prices of options relating to the securities purchased
or sold by the Portfolio and from the possible lack of a liquid secondary market
for an option. The maximum exposure to loss for any purchased option is limited
to the premium initially paid for the option.
8. SECURITY LENDING: Certain Portfolios may lend investment securities to
qualified institutional investors who borrow securities in order to complete
certain transactions. By lending its investment securities, a Portfolio attempts
to increase its net investment income through the receipt of interest on the
loan. Any gain or loss in the market price of the securities loaned that might
occur and any interest earned or dividends declared during the term of the loan
would accrue to the account of the Portfolio. Risks of delay in recovery of the
securities or even loss of rights in the collateral may occur should the
borrower of the securities fail financially. Risks may also arise to the extent
that the value of the collateral decreases below the value of the securities
loaned.
Portfolios that lend securities receive cash, securities issued or guaranteed by
the U.S. Government or letters of credit as collateral in an amount equal to or
exceeding 100% of the current market value of the loaned securities. Any cash
received as collateral is invested in interest bearing repurchase agreements
with approved counterparties. A portion of the interest received on the
repurchase agreements is retained by the Fund and the remainder is rebated to
the borrower of the securities. The net amount of interest earned and interest
rebated is included in the Statement of Operations as interest income. The value
of loaned securities and related collateral outstanding at June 30, 1997 is as
follows:
<TABLE>
<CAPTION>
VALUE OF LOANED VALUE OF
SECURITIES COLLATERAL
PORTFOLIO (000) (000)
- ------------------------------------- ----------------------- ----------
<S> <C> <C>
Global Equity Allocation............. $ 26,175 $ 29,822
</TABLE>
At June 30, 1997, the Fund had invested the cash collateral in a repurchase
agreement with Goldman Sachs. Such repurchase agreement was collateralized by
U.S. Treasury obligations.
Morgan Stanley Trust Company, an affiliate of the Investment Adviser,
administers the security lending program and for its services the Fund incurred
fees in the amount of $23,000 for the year ended June 30, 1997.
9. FORWARD COMMITMENTS AND WHEN-ISSUED/DELAYED DELIVERY SECURITIES: Each
Portfolio may make forward commitments to purchase or sell securities. Payment
and delivery for securities which have been purchased or sold on a forward
commitment basis can take place a month or more (not exceeding 120 days) after
the date of the transaction. Additionally each Portfolio may purchase securities
on a when-issued or delayed delivery basis. Securities purchased on a
when-issued or delayed delivery basis are purchased for delivery beyond the
normal settlement date at a stated price and no income accrues to the Portfolio
on such securities prior to delivery. When the Portfolio enters into a purchase
transaction on a when-issued or delayed basis, it establishes a segregated
account in which it maintains liquid assets in an amount at least equal in value
to the Portfolio's commitments to purchase such securities. Purchasing
securities on a
- -----------------------
118
<PAGE> 178
MORGAN STANLEY FUNDS
NOTES TO FINANCIAL STATEMENTS (CONT.)
JUNE 30, 1997
- --------------------------------------------------------------------------------
forward commitment or when-issued or delayed delivery basis may involve a risk
that the market price at the time of delivery may be lower than the agreed upon
purchase price, in which case there could be an unrealized loss at the time of
delivery.
10. STRUCTURED SECURITIES: The Worldwide High Income Fund may invest in
interests in entities organized and operated solely for the purpose of
restructuring the investment characteristics of sovereign debt obligations. This
type of restructuring involves the deposit with or purchase by an entity of
specified instruments and the issuance by that entity of one or more classes of
securities ("Structured Securities") backed by, or representing interests in,
the underlying instruments. Structured Securities generally will expose the
Portfolio to credit risks equivalent to that of the underlying instruments.
Structured Securities are typically sold in private placement transactions with
no active trading market. Investments in Structured Securities may be more
volatile than their underlying instruments, however, any loss is limited to the
amount of the original investment.
11. ORGANIZATIONAL COSTS: The organizational costs of the Portfolios are being
amortized on a straight line basis over a period of five years beginning with
each respective Portfolio's commencement of operations. Morgan Stanley Asset
Management, Inc. has agreed that in the event any of its initial shares in a
Portfolio which comprised the Fund at its inception are redeemed, the proceeds
on redemption will be reduced by the pro-rata portion of any unamortized
organizational costs in the same proportion as the number of shares redeemed
bears to the initial shares held at the same time of redemption.
12. OTHER: Security transactions are accounted for on the date the securities
are purchased or sold. Realized gains and losses on the sale of investment
securities are determined on the specific identified cost basis. Dividend income
is recorded on the ex-dividend date (except for certain foreign dividends which
may be recorded as soon as the Portfolio is informed of such dividends), net of
applicable withholding taxes where recovery of such taxes is not reasonably
assured. Interest income is recognized on the accrual basis except where
collection is in doubt. Discounts and premiums on securities purchased are
amortized according to the effective yield method over their respective lives.
Most expenses of the Fund can be directly attributed to a particular Portfolio.
Expenses which cannot be directly attributed are apportioned among the
Portfolios based upon relative net assets. Income, expenses (other than class
specific expenses) and realized and unrealized gains or losses are allocated to
each class of shares based upon their relative net assets. Distributions from
the Portfolios are recorded on the ex-distribution date.
Certain Portfolios own shares of real estate investment trusts ("REITs") which
report information on the source of their distributions annually. A portion of
distributions received from REITs during the year is estimated to be a return of
capital and is recorded as a reduction of the cost of those securities.
The amount and the character of income and capital gain distributions to be paid
by the Fund are determined in accordance with Federal income tax regulations
which may differ from generally accepted accounting principles. These
differences are primarily due to differing book and tax treatment for foreign
currency transactions, net operating losses, foreign taxes on net realized
gains, deductibility of interest expense on short sales and gains on certain
securities of corporations designated as "passive foreign investment companies."
Permanent book and tax basis differences relating to shareholder distributions
may result in reclassification among undistributed net investment income (loss),
accumulated net realized gain (loss) and paid in capital.
Permanent book and tax basis differences, if any, are not included in ending
undistributed (distributions in excess of) net investment income for the purpose
of presenting net investment income (loss) per share in the Financial
Highlights.
B. ADVISER: Morgan Stanley Asset Management, Inc. (the "Adviser" or "MSAM"), a
wholly owned subsidiary of Morgan Stanley, Dean Witter, Discover & Co., provides
the Fund with investment advisory services at a fee paid quarterly (monthly for
the Government Obligations Money Market and Money Market Funds) and calculated
at the annual rates of average daily net assets indicated below. The Adviser has
agreed to reduce advisory fees payable to it and to reimburse the Portfolios, if
necessary, if the annual operating expenses, as defined, expressed as a
percentage of average daily net assets, exceed the maximum ratios indicated as
follows:
<TABLE>
<CAPTION>
CLASS B
CLASS A AND CLASS C
MAX. OPERATING MAX. OPERATING
PORTFOLIO ADVISORY FEE EXPENSE RATIO EXPENSE RATIO
- ------------------------------------- -------------------- ---------------------- ----------------------
<S> <C> <C> <C>
Global Equity Allocation............. 1.00% 1.70% 2.45%
Global Fixed Income.................. 0.75% 1.45% 2.20%
Asian Growth......................... 1.00% 1.90% 2.65%
American Value....................... 0.85% 1.50% 2.25%
Worldwide High Income................ 0.75% 1.55% 2.30%
Latin American....................... 1.25% 2.10% 2.85%
Emerging Markets..................... 1.25% 2.15% 2.90%
Aggressive Equity.................... 0.90% 1.50% 2.25%
U.S. Real Estate..................... 1.00% 1.55% 2.30%
High Yield........................... 0.75% 1.25% 2.00%
International Magnum................. 1.00% 1.65% 2.40%
Government Obligations Money Market.. 0.45% 0.95% N/A
Money Market......................... 0.45% 0.98% N/A
</TABLE>
------------------
119
<PAGE> 179
MORGAN STANLEY FUNDS
NOTES TO FINANCIAL STATEMENTS (CONT.)
JUNE 30, 1997
- --------------------------------------------------------------------------------
C. ADMINISTRATOR: MSAM also provides the Fund with administrative services
pursuant to an administrative agreement for a monthly fee which on an annual
basis equals 0.25% of the average daily net assets of each portfolio, plus
reimbursement of out-of-pocket expenses. Under an agreement between MSAM and The
Chase Manhattan Bank ("Chase"), through its affiliate Chase Global Funds
Services Company ("CGFSC"), Chase provides certain administrative services to
the Fund. Chase is compensated for such services by MSAM from the fee it
receives from the Fund.
Through December 13, 1996, the Administrative services provided by CGFSC
included transfer agency services. Effective December 14, 1996, transfer agency
services are provided to the Fund by ACCESS Investor Services, Inc., an
affiliate of MSAM.
Prior to September 26, 1996, Morgan Stanley Government Obligations Money Market
Fund and Morgan Stanley Money Market Fund, formerly referred to as PCS
Government Obligations Money Market Fund and PCS Money Market Fund, had an
Administration and Accounting Services Agreement with PFPC Inc., a wholly owned
subsidiary of the PNC Bank Corp. For administration services provided, PFPC Inc.
was entitled to receive from each Fund a fee, computed daily and payable
monthly, at an annual rate of 0.10% of the first $200 million of daily net
assets, 0.075% of the next $200 million of daily net assets, 0.05% of the next
$200 million of daily net assets and 0.03% of the daily net assets in excess of
$600 million.
Also, prior to September 26, 1996, PNC Bank Corp. served as custodian for each
of the Funds, and, PFPC Inc. served as the Fund's transfer agent.
D. DISTRIBUTOR: Through December 31, 1996 Morgan Stanley & Co. Incorporated,
then a wholly-owned subsidiary of Morgan Stanley Group, Inc. and an affiliate of
MSAM, served as the distributor of the Fund and provided all classes of each
Portfolio with distribution services pursuant to separate Distribution Plans in
accordance with Rule 12b-1 under the Investment Company Act of 1940 as amended.
Effective January 1, 1997, Van Kampen American Capital Distributors, Inc. ("the
Distributor"), a wholly owned subsidiary of Morgan Stanley, Dean Witter,
Discover & Co., serves as the Distributor of the Fund's shares. The Distributor
is entitled to receive from the Portfolios a distribution fee, which is accrued
daily and paid quarterly, of an amount of 0.25% of the Class A shares and up to
1.00%, on an annualized basis, of the average daily net assets attributable to
the Class B and Class C shares of each Portfolio. The Government Obligations
Money Market and Money Market Funds pay the Distributor a fee which is accrued
daily and paid monthly, up to 0.50%, on an annualized basis, of the average
daily net assets of those Portfolios.
Prior to September 26, 1996, Morgan Stanley Government Obligations Money Market
Fund and Morgan Stanley Money Market Fund, formerly referred to as PCS
Government Obligations Money Market Fund and PCS Money Market Fund, had a
Distribution Agreement with Morgan Stanley & Co. Incorporated (the
"Distributor"), a wholly owned subsidiary of Morgan Stanley Group, Inc. Under
the Agreement the Distributor was entitled to receive from each PCS Portfolio
compensation of its distribution costs at an annual rate of up to 0.50% of daily
net assets.
The Distributor may receive a front end sales charge for purchases of Class A
shares. In addition, the Distributor may receive a contingent deferred sales
charge for certain purchases of Class B and Class C shares of each Portfolio
redeemed within one to five years following such purchase. For the year ended
June 30, 1997, the Distributor has advised the Fund that it earned initial sales
charges of $4,004,439 for Class A shares and deferred sales charges of $73,809
and $207,030 for Class B shares and Class C shares, respectively.
E. CUSTODIAN: Morgan Stanley Trust Company ("MSTC"), a wholly owned subsidiary
of Morgan Stanley, Dean Witter, Discover & Co., acts as custodian for the Fund's
assets held outside the United States in accordance with a custodian agreement.
Custodian fees are computed and payable monthly based on assets held, investment
purchase and sales activity, an account maintenance fee, plus reimbursement for
certain out-of-pocket expenses.
For the year ended June 30, 1997, the following Portfolios incurred custody fees
and had amounts payable to MSTC at June 30, 1997:
<TABLE>
<CAPTION>
MSTC CUSTODY CUSTODY FEES
FEES INCURRED PAYABLE TO MSTC
FUND (000) (000)
- ------------------------------------- -------------------- -----------------------
<S> <C> <C>
Global Equity Allocation............. $ 202 $ 19
Global Fixed Income.................. 10 1
Asian Growth......................... 649 59
Worldwide High Income................ 40 4
Latin American....................... 174 13
Emerging Markets..................... 380 31
International Magnum................. 85 7
</TABLE>
In addition, a Portfolio may earn interest income or incur interest expense
relating to cash balances with MSTC.
F. PURCHASES AND SALES: For the year ended June 30, 1997, purchases and sales of
investment securities other than long-term U.S. Government securities and
short-term investments were:
<TABLE>
<CAPTION>
PURCHASES SALES
FUND (000) (000)
- ------------------------------------- ----------------- --------
<S> <C> <C>
Global Equity Allocation............. $ 94,822 $ 68,059
Global Fixed Income.................. 15,402 15,361
Asian Growth......................... 293,880 397,476
American Value....................... 62,195 36,646
Worldwide High Income................ 278,203 210,400
Latin American....................... 175,549 111,367
Emerging Markets..................... 156,210 122,696
Aggressive Equity.................... 106,672 61,287
U.S. Real Estate..................... 31,254 18,652
High Yield........................... 22,803 14,303
International Magnum................. 44,778 3,740
</TABLE>
- -----------------------
120
<PAGE> 180
MORGAN STANLEY FUNDS
NOTES TO FINANCIAL STATEMENTS (CONT.)
JUNE 30, 1997
- --------------------------------------------------------------------------------
Purchases and sales of long term U.S. Government securities during the year
ended June 30, 1997 occurred in the Global Fixed Income Fund and totaled
$3,483,000 and $2,452,000 respectively.
G. OTHER: At June 30, 1997, the net assets of certain Portfolios were
substantially comprised of foreign denominated securities and currency. Changes
in currency exchange rates will affect the U.S. dollar value of and investment
income from such securities.
Foreign denominated assets and liabilities, including Portfolio securities and
foreign currency holdings, were translated at the following exchange rates as of
June 30, 1997:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Argentine Peso................ 0.99984 = $1.00
Australian Dollar............. 1.32450 = $1.00
Austrian Shilling............. 12.25850 = $1.00
Belgian Franc................. 35.93000 = $1.00
Brazilian Real................ 1.07650 = $1.00
British Pound................. 0.60074 = $1.00
Canadian Dollar............... 1.38050 = $1.00
Colombian Peso................ 1,090.00000 = $1.00
Danish Krone.................. 6.63590 = $1.00
Deutsche Mark................. 1.74310 = $1.00
Egyptian Pound................ 3.39750 = $1.00
Finnish Markka................ 5.18660 = $1.00
French Franc.................. 5.87420 = $1.00
Hong Kong Dollar.............. 7.74680 = $1.00
Hungarian Forint.............. 187.21000 = $1.00
Indian Rupee.................. 35.75000 = $1.00
Indonesian Rupiah............. 2,431.00000 = $1.00
Irish Punt.................... 0.66094 = $1.00
Israeli Shekel................ 3.58440 = $1.00
Italian Lira.................. 1,699.20000 = $1.00
Japanese Yen.................. 114.54000 = $1.00
Malaysian Ringgit............. 2.52350 = $1.00
Mexican Peso.................. 7.94200 = $1.00
Netherlands Guilder........... 1.96080 = $1.00
New Zealand Dollar............ 1.47275 = $1.00
Norwegian Krona............... 7.32460 = $1.00
Pakistan Rupee................ 40.41950 = $1.00
Peruvian Sol.................. 2.65000 = $1.00
Philippine Peso............... 26.35000 = $1.00
Polish Zloty.................. 3.28500 = $1.00
Singapore Dollar.............. 1.42920 = $1.00
South Korean Won.............. 886.00000 = $1.00
South African Rand............ 4.53550 = $1.00
Spanish Peseta................ 147.20000 = $1.00
Swedish Krona................. 7.73080 = $1.00
Swiss Franc................... 1.45950 = $1.00
Taiwan Dollar................. 27.78000 = $1.00
Thai Baht..................... 25.88000 = $1.00
Turkish Lira.................. 148,450.00000 = $1.00
Venezuelan Bolivar............ 486.31000 = $1.00
</TABLE>
During the year ended June 30, 1997, the Asian Growth Fund, American Value Fund,
Latin American Fund, Emerging Markets Fund and International Magnum Fund
incurred approximately $326,000, $1,000, $41,000, $80,000 and $15,000,
respectively, as brokerage commissions with Morgan Stanley & Co. Incorporated,
an affiliated broker/ dealer.
At June 30, 1997 the Global Equity Allocation Fund and Emerging Markets Fund
owned shares of affiliated funds for which the Funds earned dividend income of
approximately $277,000 and $38,000, respectively. The Global Equity Allocation
Fund incurred losses totaling $40,000 on sales of shares in affiliated funds
during the period.
At June 30, 1997, cost and unrealized appreciation (depreciation) for U.S.
Federal income tax purposes of the investments of each Portfolio were:
<TABLE>
<CAPTION>
NET
APPRECIATION
COST APPREC. (DEPREC.) (DEPRECIATION)
FUND (000) (000) (000) (000)
- ------------------------- -------- ------- ---------- ---------------
<S> <C> <C> <C> <C>
Global Equity
Allocation............. $162,933 $ 37,092 $ (5,725) $ 31,367
Global Fixed Income...... 9,641 80 (175) (95)
Asian Growth............. 320,218 63,343 (29,063) 34,280
American Value........... 71,159 13,694 (1,099) 12,595
Worldwide High Income.... 181,907 14,332 (581) 13,751
Latin American........... 106,111 14,672 (1,064) 13,608
Emerging Markets......... 192,835 41,940 (21,729) 20,211
Aggressive Equity........ 64,703 4,073 (782) 3,291
U.S. Real Estate......... 20,342 1,897 (74) 1,823
High Yield............... 21,617 814 (26) 788
International Magnum..... 49,695 4,657 (598) 4,059
Government Obligations
Money Market........... 94,977 -- -- --
Money Market............. 137,740 -- -- --
</TABLE>
H. SUBSEQUENT EVENTS: At a Special Meeting of Shareholders held on July 2, 1997,
the Shareholders elected a new Board of Directors and approved, effective July
2, 1997, a new investment advisory agreement with Van Kampen American Capital
Investment Advisory Corp., a wholly-owned subsidiary of Morgan Stanley, Dean
Witter, Discover & Co., and a new sub-advisory agreement with Morgan Stanley
Asset Management Inc. Also effective July 2, 1997, the responsibilities of MSAM
as administrator to the Fund were assumed by Van Kampen American Capital
Investment Advisory Corp.
The Morgan Stanley Value Fund, an additional series of the Fund, has commenced
operations effective July 7, 1997.
------------------
121
<PAGE> 181
MORGAN STANLEY FUNDS
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Shareholders and Board of Directors of
Morgan Stanley Fund, Inc.
We have audited the accompanying statements of assets and liabilities, including
the portfolios of investments, of each of the portfolios constituting Morgan
Stanley Fund, Inc. (the "Fund") as of June 30, 1997, and the related statements
of operations and of changes in net assets and the financial highlights for the
year then ended. We have also audited the statements of changes in net assets
and the financial highlights for the Global Equity Allocation Portfolio, Global
Fixed Income Portfolio, Asian Growth Portfolio, American Value Portfolio,
Worldwide High Income Portfolio, Latin American Portfolio, Emerging Markets
Portfolio, Aggressive Equity Portfolio, U.S. Real Estate Portfolio, High Yield
Portfolio and International Magnum Portfolio (collectively the "non-money market
portfolios") for each of the earlier periods presented. These financial
statements are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements based on our audits. The
statements of changes in net assets for the year ended June 30, 1996 and the
financial highlights for each of the four years in the period ended June 30,
1996 for the Money Market Portfolio and Government Obligations Money Market
Portfolio (formerly separate portfolios of The PCS Cash Fund, Inc.) were audited
by other independent accountants whose report dated July 31, 1996 expressed an
unqualified opinion on those statements.
We conducted our audits in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities at June 30, 1997 by correspondence with the custodians and brokers
and the application of alternative auditing procedures where confirmations from
brokers were not received. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements present fairly, in all material
respects, the financial position of each of the portfolios constituting Morgan
Stanley Fund, Inc. at June 30, 1997, the results of their operations, the
changes in their net assets and the financial highlights for the year then
ended, and the changes in net assets and the financial highlights of the
non-money market portfolios for each of the earlier periods presented, in
conformity with generally accepted accounting principles.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
August 11, 1997
- -----------------------
122
<PAGE> 182
MORGAN STANLEY FUNDS
ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
SHAREHOLDER MEETING: (UNAUDITED)
Morgan Stanley Fund, Inc. shareholders voted on proposals at a special meeting
held on July 2, 1997. The description of each proposal and number of shares
voted are as follows:
<TABLE>
<CAPTION>
1. To elect the following Directors to serve the Fund effective July 2, 1997 until such time as their VOTED FOR
successors have been duly appointed. (000)
-----------
<S> <C>
J. Miles Branagan........................................................................................... 278,313
Richard M. DeMartini........................................................................................ 278,320
Linda Hutton Heagy.......................................................................................... 278,324
R. Craig Kennedy............................................................................................ 278,318
Jack E. Nelson.............................................................................................. 278,315
Don G. Powell............................................................................................... 278,303
Jerome T. Robinson.......................................................................................... 278,291
Phillip Rooney.............................................................................................. 278,310
Fernando Sisto.............................................................................................. 278,255
Wayne W. Whalen............................................................................................. 278,316
<CAPTION>
1. To elect the following Directors to serve the Fund effective July 2, 1997 until such time as their WITHHELD
successors have been duly appointed. (000)
-----------
<S> <C>
J. Miles Branagan........................................................................................... 1,129
Richard M. DeMartini........................................................................................ 1,123
Linda Hutton Heagy.......................................................................................... 1,118
R. Craig Kennedy............................................................................................ 1,125
Jack E. Nelson.............................................................................................. 1,128
Don G. Powell............................................................................................... 1,139
Jerome T. Robinson.......................................................................................... 1,152
Phillip Rooney.............................................................................................. 1,132
Fernando Sisto.............................................................................................. 1,187
Wayne W. Whalen............................................................................................. 1,127
</TABLE>
<TABLE>
<CAPTION>
2. Approval of the investment advisory agreement by and between the following and Van Kampen AFFIRMATIVE AGAINST
American Capital Investment Advisory Corp. (000) (000)
----------- -----------
<S> <C> <C>
Global Equity Allocation Fund................................................................. 7,571 37
Global Fixed Income Fund...................................................................... 838 0
Asian Growth Fund............................................................................. 16,453 157
American Value Fund........................................................................... 2,723 5
Worldwide High Income Fund.................................................................... 9,498 71
Latin American Fund........................................................................... 3,181 25
Emerging Markets Fund......................................................................... 10,520 52
Aggressive Equity Fund........................................................................ 1,707 15
U.S. Real Estate Fund......................................................................... 980 2
High Yield Fund............................................................................... 1,182 --
International Magnum Fund..................................................................... 1,733 1
Government Obligations Money Market Fund...................................................... 77,583 21
Money Market Fund............................................................................. 143,488 204
<CAPTION>
2. Approval of the investment advisory agreement by and between the following and Van Kampen ABSTAIN
American Capital Investment Advisory Corp. (000)
-----------
<S> <C>
Global Equity Allocation Fund................................................................. 128
Global Fixed Income Fund...................................................................... 20
Asian Growth Fund............................................................................. 209
American Value Fund........................................................................... 32
Worldwide High Income Fund.................................................................... 150
Latin American Fund........................................................................... 57
Emerging Markets Fund......................................................................... 160
Aggressive Equity Fund........................................................................ 26
U.S. Real Estate Fund......................................................................... 10
High Yield Fund............................................................................... 4
International Magnum Fund..................................................................... 41
Government Obligations Money Market Fund...................................................... 0
Money Market Fund............................................................................. 578
</TABLE>
<TABLE>
<CAPTION>
3. Approval of the investment sub-advisory agreement by and between Van Kampen Capital AFFIRMATIVE AGAINST
Investment Advisory Corp. and Morgan Stanley Asset Management, Inc. (000) (000)
----------- -----------
<S> <C> <C>
Global Equity Allocation Fund................................................................. 7,569 41
Global Fixed Income Fund...................................................................... 838 0
Asian Growth Fund............................................................................. 16,441 162
American Value Fund........................................................................... 2,719 5
Worldwide High Income Fund.................................................................... 9,488 72
Latin American Fund........................................................................... 3,178 27
Emerging Markets Fund......................................................................... 10,514 58
Aggressive Equity Fund........................................................................ 1,702 19
U.S. Real Estate Fund......................................................................... 981 2
High Yield Fund............................................................................... 1,182 --
International Magnum Fund..................................................................... 1,735 1
Government Obligations Money Market Fund...................................................... 77,583 21
Money Market Fund............................................................................. 143,488 204
<CAPTION>
3. Approval of the investment sub-advisory agreement by and between Van Kampen Capital ABSTAIN
Investment Advisory Corp. and Morgan Stanley Asset Management, Inc. (000)
-----------
<S> <C>
Global Equity Allocation Fund................................................................. 126
Global Fixed Income Fund...................................................................... 20
Asian Growth Fund............................................................................. 216
American Value Fund........................................................................... 36
Worldwide High Income Fund.................................................................... 159
Latin American Fund........................................................................... 58
Emerging Markets Fund......................................................................... 160
Aggressive Equity Fund........................................................................ 26
U.S. Real Estate Fund......................................................................... 8
High Yield Fund............................................................................... 4
International Magnum Fund..................................................................... 39
Government Obligations Money Market Fund...................................................... 0
Money Market Fund............................................................................. 578
</TABLE>
<TABLE>
<CAPTION>
4. To eliminate the Morgan Stanley Worldwide High Income Fund's fundamental policy regarding AFFIRMATIVE
diversification and to reclassify the Fund as "non-diversified". (000) AGAINST (000)
--------------- ---------------
<S> <C> <C>
Worldwide High Income Fund.................................................................... 6,033 204
<CAPTION>
4. To eliminate the Morgan Stanley Worldwide High Income Fund's fundamental policy regarding
diversification and to reclassify the Fund as "non-diversified". ABSTAIN (000)
---------------
<S> <C>
Worldwide High Income Fund.................................................................... 204
</TABLE>
------------------
123
<PAGE> 183
MORGAN STANLEY FUNDS
ADDITIONAL INFORMATION (CONT.)
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX INFORMATION: (UNAUDITED)
For the year ended June 30, 1997, the percentage of dividends that qualify for
the 70% dividend received deduction for corporate shareholders of the Global
Equity Allocation Fund, American Value Fund, Aggressive Equity Fund and High
Yield Fund is 15.81%, 92.51%, 7.28%, and 3.26%, respectively.
Global Equity Allocation Fund, Asian Growth Fund, American Value Fund, Latin
American Fund, Emerging Markets Fund and U.S. Real Estate Fund have designated
approximately $4,434,000, $8,522,000, $2,280,000, $1,429,000, $508,000 and
$1,000 as long-term capital gain for the fiscal year ended June 30, 1997.
Foreign taxes paid during the fiscal year ended June 30, 1997 amounting to
$254,000, $10,000, $963,000, $189,000 and $65,000 for Global Equity Allocation
Fund, Global Fixed Income Fund, Asian Growth Fund, Emerging Markets Fund and
International Magnum Fund, respectively, are expected to be passed through to
shareholders as foreign tax credits on Form 1099-DIV, which will be sent to
shareholders in late January 1998 for the year ended December 31, 1997. In
addition, for the year ended June 30, 1997, gross income derived from sources
within foreign countries amounted to $2,120,000, $489,000, $7,014,000,
$3,145,000 and $496,000 for Global Equity Allocation Fund, Global Fixed Income
Fund, Asian Growth Fund, Emerging Markets Fund and International Magnum Fund,
respectively.
For the year ended June 30, 1997, the percentage of income earned from direct
Treasury obligations was 22.94%, 25.73%, and 22.68% for the Global Fixed Income
Fund, Government Obligations Money Market Fund, and Money Market Fund,
respectively.
- -----------------------
124
<PAGE> 184
APPENDIX C
STATEMENT OF ADDITIONAL INFORMATION
OF
VAN KAMPEN AMERICAN CAPITAL
GLOBAL EQUITY FUND
September 28, 1997
<PAGE> 185
STATEMENT OF ADDITIONAL INFORMATION
VAN KAMPEN AMERICAN CAPITAL GLOBAL EQUITY FUND
Van Kampen American Capital Global Equity Fund (the "Fund") is a separate,
diversified series of Van Kampen American Capital World Portfolio Series Trust
(the "Trust"), an open-end management investment company. This Statement of
Additional Information is not a prospectus. This Statement of Additional
Information should be read in conjunction with the Fund's Prospectus (the
"Prospectus") dated as of the same date as this Statement of Additional
Information. This Statement of Additional Information does not include all the
information a prospective investor should consider before purchasing shares of
the Fund. Investors should obtain and read the Prospectus prior to purchasing
shares of the Fund. A Prospectus may be obtained without charge by writing or
calling Van Kampen American Capital Distributors, Inc. at One Parkview Plaza,
Oakbrook Terrace, Illinois 60181 or (800) 421-5666.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
General Information......................................... B-2
Investment Policies and Techniques.......................... B-3
Options, Futures Contracts and Related Options.............. B-3
Repurchase Agreements....................................... B-9
Loans of Portfolio Securities............................... B-9
Investment Restrictions..................................... B-9
Trustees and Officers....................................... B-11
Legal Counsel............................................... B-19
Investment Advisory Agreements.............................. B-19
Distributor................................................. B-20
Distribution and Service Plans.............................. B-21
Transfer Agent.............................................. B-22
Portfolio Transactions and Brokerage........................ B-22
Determination of Net Asset Value............................ B-23
Purchase and Redemption of Shares........................... B-24
Exchange Privilege.......................................... B-26
Tax Status of the Fund...................................... B-27
Fund Performance............................................ B-27
Other Information........................................... B-27
Report of Independent Accountants........................... B-29
Financial Statements........................................ B-30
Notes to Financial Statements............................... B-58
</TABLE>
THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED SEPTEMBER 28, 1997.
B-1
<PAGE> 186
GENERAL INFORMATION
Van Kampen American Capital World Portfolio Series Trust, formerly known as
American Capital World Portfolio Series, Inc. (the "Trust"), was originally
incorporated in Maryland on May 25, 1990. The Trust was reorganized under the
laws of the State of Delaware as a business trust and adopted its present name
as of August 31, 1995. The Trust currently is comprised of two series: Van
Kampen American Capital Global Equity Fund (the "Fund") and Van Kampen American
Capital Global Government Securities Fund.
Van Kampen American Capital Asset Management, Inc. (the "Adviser"), Van
Kampen American Capital Distributors, Inc. (the "Distributor"), and ACCESS
Investor Services, Inc. ("ACCESS") are wholly-owned subsidiaries of Van Kampen
American Capital, Inc. ("VKAC"), which is an indirect wholly-owned subsidiary of
Morgan Stanley, Dean Witter, Discover & Co. The principal office of the Fund,
the Adviser, the Distributor and VKAC is located at One Parkview Plaza, Oakbrook
Terrace, Illinois 60181.
[Morgan Stanley, Dean Witter, Discover & Co. and various of its directly or
indirectly owned subsidiaries, including Morgan Stanley Asset Management Inc.,
an investment adviser ("MSAM" or the "Subadviser"), Morgan Stanley & Co.
Incorporated, a registered broker-dealer and investment adviser, and Morgan
Stanley International, are engaged in a wide range of financial services. Their
principal businesses include securities underwriting, distribution and trading;
merger, acquisition, restructuring and other corporate finance advisory
activities; merchant banking; stock brokerage and research services; credit
services; asset management; trading of futures, options, foreign exchange,
commodities and swaps (involving foreign exchange, commodities, indices and
interest rates); real estate advice, financing and investing; and global
custody, securities clearance services and securities lending.
VKAC offers one of the industry's broadest lines of
investments -- encompassing mutual funds, closed-end funds and unit investment
trusts -- assets which have been entrusted to VKAC in more than 2 million
investor accounts. VKAC has one of the largest research teams (outside of the
rating agencies) in the country.
VKAC uses an investment process designed to attempt to produce consistently
good short-term results, which should help lead to superior long-term
performance.
Fully Invested: Money invested in a VKAC stock fund will normally be fully
invested in the market to attempt to maximize the potential for long-term
returns. The importance of being fully invested can be illustrated by the
following comparison. By missing the 30 best months during the past 69 years,
the value of $1.00 invested in 1926 was $19.48 at the end of 1996, compared to
$1,370.95 for $1.00 that was invested for the entire period (Source: Micropal,
Inc.). Of course, past performance is no guarantee of future results.
Broadly Diversified: A broadly diversified portfolio usually reduces risk
and increases relative stability. Since VKAC's goal is consistency, a broadly
diversified portfolio across industries is emphasized. VKAC stock funds are
varied both in terms of the number of industries and the number of stocks within
each industry in which they invest. Generally, the stock funds invest in twelve
broad economic sectors, and in many individual stocks within each sector.
Clearly Defined: The basic characteristics of VKAC funds are determined by
a pre-defined profile which remains constant over time.
As of September 15, 1997, no person was known by the Fund to own
beneficially or to hold of record 5% or more of the outstanding Class A shares,
Class B shares or Class C shares of the Fund, except as follows:
<TABLE>
<CAPTION>
AMOUNT OF
OWNERSHIP AT CLASS PERCENTAGE
NAME AND ADDRESS OF HOLDER SEPTEMBER 15, 1997 OF SHARES OWNERSHIP
-------------------------- ------------------ --------- ----------
<S> <C> <C> <C>
Van Kampen American Capital Trust Company 2,262,552 A 25.08%
2800 Post Oak Blvd. 2,369,231 B 28.26%
Houston, TX 77056 147,055 C 16.76%
</TABLE>
Van Kampen American Capital Trust Company acts as custodian for certain
employee benefit plans and independent retirement accounts.
B-2
<PAGE> 187
INVESTMENT POLICIES AND TECHNIQUES
The following disclosures supplement disclosures set forth under the same
caption in the Prospectus and do not, standing alone, present a complete
explanation of the matters disclosed.
The investment objective of the Fund is to seek to provide long-term growth
of capital.
The Fund may invest in the securities of foreign issuers in the form of
American Depositary Receipts (ADRs), European Depositary Receipts (EDRs) or
other securities convertible into securities of foreign issuers. These
securities may not necessarily be denominated in the same currency as the
securities into which they may be converted but rather in the currency of the
market in which they are traded. ADRs are receipts typically issued by an
American bank or trust company which evidence ownership of underlying securities
issued by a foreign corporation. EDRs are receipts issued in Europe by banks or
depositories which evidence a similar ownership arrangement. Generally, ADRs in
registered form, are designed for use in United States securities markets and
EDRs, in bearer form, are designed for use in European securities markets.
OPTIONS, FUTURES CONTRACTS AND RELATED OPTIONS
The Fund may engage in transactions in options, futures contracts and
related options on futures contracts. Set forth below is certain additional
information regarding options, futures contracts and related options. See
Prospectus for further information.
WRITING CALL AND PUT OPTIONS
Purpose. The principal reason for writing options is to obtain, through
receipt of premiums, a greater current return or total return than would be
realized on the underlying securities alone. Such returns could be expected to
fluctuate because premiums earned from an option writing program and dividend or
interest income yields on portfolio securities vary as economic and market
conditions change. Writing options on portfolio securities is also likely to
result in a substantially higher portfolio turnover.
Writing Options. The purchaser of a call option pays a premium to the
writer (i.e., the seller) for the right to buy the underlying security from the
writer at a specified price during a certain period. The Fund would write call
options either on a covered basis or for cross-hedging purposes. A call option
is covered if, at all times during the option period, the Fund would own or have
the right to acquire securities of the type that it would be obligated to
deliver if any outstanding option were exercised. An option is for cross-hedging
purposes if it is not covered by the security subject to the option, but is
designed to provide a hedge against another security which the Fund owns or has
the right to acquire. In such circumstances, the Fund collateralizes the option
by maintaining in a segregated account with the Fund's Custodian, cash or liquid
securities in an amount not less than the market value of the underlying
security, marked to market daily, while the option is outstanding.
The purchaser of a put option pays a premium to the writer (i.e., the
seller) for the right to sell the underlying security to the writer at a
specified price during a certain period. The Fund would write put options only
on a secured basis, which means that, at all times during the option period, the
Fund would maintain in a segregated account with its Custodian cash or liquid
securities in an amount of not less than the exercise price of the option, or
would hold a put on the same underlying security at an equal or greater exercise
price.
The Fund intends to limit its ability to write options such that the
aggregate value of the securities underlying the calls or the obligations
underlying the puts determined as of the date the options are sold shall not
exceed 25% of its net assets.
Closing Purchase Transactions and Offsetting Transactions. In order to
terminate its position as a writer of a call or put option, the Fund could enter
into a "closing purchase transaction", which is the purchase of a call (put) on
the same underlying security and having the same exercise price and expiration
date as the call (put) previously written by the Fund. The Fund would realize a
gain (loss) if the premium plus commission paid in the closing purchase
transaction is less (greater) than the premium it received on the sale of the
option. The Fund would also realize a gain if an option it has written lapses
unexercised.
B-3
<PAGE> 188
The Fund could write options that are listed on an exchange as well as
options which are privately negotiated in over-the-counter transactions. The
Fund could close out its position as writer of an option only if a liquid
secondary market exists for options of that series, but there is no assurance
that such a market will exist, particularly in the case of over-the-counter
options, since they can be closed out only with the other party to the
transaction. Alternatively, the Fund could purchase an offsetting option, which
would not close out its position as a writer, but would provide an asset of
equal value to its obligation under the option written. If the Fund is not able
to enter into a closing purchase transaction or to purchase an offsetting option
with respect to an option it has written, it will be required to maintain the
securities subject to the call or the collateral underlying the put until a
closing purchase transaction can be entered into (or the option is exercised or
expires), even though it might not be advantageous to do so.
Risks of Writing Options. By writing a call option, the Fund loses the
potential for gain on the underlying security above the exercise price while the
option is outstanding; by writing a put option the Fund might become obligated
to purchase the underlying security at an exercise price that exceeds the then
current market price.
PURCHASING CALL AND PUT OPTIONS
The Fund could purchase call options to protect (i.e., hedge) against
anticipated increases in the prices of securities it wishes to acquire.
Alternatively, call options could be purchased for capital appreciation. Since
the premium paid for a call option is typically a small fraction of the price of
the underlying security, a given amount of funds will purchase call options
covering a much larger quantity of such security than could be purchased
directly. By purchasing call options, the Fund could benefit from any
significant increase in the price of the underlying security to a greater extent
than had it invested the same amount in the security directly. However, because
of the very high volatility of option premiums, the Fund would bear a
significant risk of losing the entire premium if the price of the underlying
security did not rise sufficiently, or if it did not do so before the option
expired.
Put options may be purchased to protect (i.e., hedge) against anticipated
declines in the market value of either specific portfolio securities or of the
Fund's assets generally. Alternatively, put options may be purchased for capital
appreciation in anticipation of a price decline in the underlying security and a
corresponding increase in the value of the put option. The purchase of put
options for capital appreciation involves the same significant risk of loss as
described above for call options.
In any case, the purchase of options for capital appreciation would
increase the Fund's volatility by increasing the impact of changes in the market
price of the underlying securities on the Fund's net asset value.
The Fund may purchase either listed or over-the-counter options.
OPTIONS ON STOCK INDEXES
Options on stock indexes are similar to options on stock, but the delivery
requirements are different. Instead of giving the right to take or make delivery
of stock at a specified price, an option on a stock index gives the holder the
right to receive an amount of cash which amount will depend upon the closing
level of the stock index upon which the option is based being greater than (in
the case of a call) or less than (in the case of a put) the exercise price of
the option. The amount of cash received will be the difference between the
closing price of the index and the exercise price of the option, multiplied by a
specified dollar multiple. The writer of the option is obligated, in return for
the premium received, to make delivery of this amount.
Some stock index options are based on a broad market index such as the
Standard & Poor's 500 or the New York Stock Exchange Composite Index, or a
narrower index such as the Standard & Poor's 100. Indexes are also based on an
industry or market segment such as the AMEX Oil and Gas Index or the Computer
and Business Equipment Index. A stock index fluctuates with changes in the
market values of the stocks included in the index. Options are currently traded
on The Chicago Board Options Exchange, the American Stock Exchange and other
exchanges. The Fund may write or purchase options which are listed on an
exchange as well as options which are traded over-the-counter.
B-4
<PAGE> 189
Gain or loss to the Fund on transactions in stock index options will depend
on price movements in the stock market generally (or in a particular industry or
segment of the market) rather than price movements of individual securities. As
with stock options, the Fund may offset its position in stock index options
prior to expiration by entering into a closing transaction on an exchange, or it
may let the option expire unexercised.
FOREIGN CURRENCY OPTIONS
The Fund may purchase and write options on foreign currencies to reduce the
risk of currency exchange fluctuation. Premiums paid for such put and call
options will be limited to no more than five percent of the Fund's net assets at
any given time. Options on foreign currencies operate similarly to options on
securities, and are traded primarily in the over-the-counter market, although
options on foreign currencies are traded on United States and foreign exchanges.
Exchange-traded options are expected to be purchased by the Fund from time to
time and over-the-counter options may also be purchased, but only when the
Adviser believes that a liquid secondary market exists for such options,
although there can be no assurance that a liquid secondary market will exist for
a particular option at any specific time. Options on foreign currencies are
affected by all of those factors which influence foreign exchange rates and
investment generally. See "Investment Practices and Restrictions -- Using
Options, Futures Contracts and Related Options" in the Prospectus.
The value of a foreign currency option is dependent upon the value of the
underlying foreign currency relative to the U.S. dollar. As a result, the price
of the option position may vary with changes in the value of either or both
currencies and has no relationship to the investment merits of a foreign
security. Because foreign currency transactions occurring in the interbank
market (conducted directly between currency traders, usually large commercial
banks, and their customers) involve substantially larger amounts than those that
may be involved in the use of foreign currency options, investors may be
disadvantaged by having to deal in an odd lot market (generally consisting of
transactions of less than $1 million) for the underlying foreign currencies at
prices that are less favorable than for round lots.
There is no systematic reporting of last sale information for foreign
currencies and there is no regulatory requirement that quotations available
through dealers or other market sources be firm or revised on a timely basis.
Quotation information available is generally representative of very large
transactions in the interbank market and thus may not reflect relatively smaller
transactions (i.e., less than $1 million) where rates may be less favorable. The
interbank market in foreign currencies is a global, around-the-clock market. To
the extent that the U.S. options markets are closed while the markets for the
underlying currencies remain open, significant price and rate movements may take
place in the underlying markets that cannot be reflected in the options markets.
FUTURES CONTRACTS
The Fund may engage in transactions involving futures contracts and related
options in accordance with the rules and interpretations of the Commodity
Futures Trading Commission ("CFTC") under which the Fund would be exempt from
registration as a "commodity pool".
A stock index futures contract is an agreement pursuant to which a party
agrees to take or make delivery of cash equal to a specified dollar amount
multiplied by the difference between the stock index value at a specified time
and the price at which the futures contract originally was struck. No physical
delivery of the underlying stocks in the index is made.
Currently, stock index futures contracts can be purchased with respect to
the Standard & Poor's 500 Stock Index on the Chicago Mercantile Exchange
("CME"), the New York Stock Exchange Composite Index on the New York Futures
Exchange and the Value Line Stock Index on the Kansas City Board of Trade.
Differences in the stocks included in the indexes may result in differences in
correlation of the futures contracts with movements in the value of the
securities being hedged.
The Fund also may invest in foreign stock index futures traded outside the
United States. Foreign stock index futures traded outside the United States
include the Nikkei Index of 225 Japanese stocks traded on the
B-5
<PAGE> 190
Singapore International Monetary Exchange ("Nikkei Index"), Osaka Index of 50
Japanese stocks traded on the Osaka Exchange, Financial Times Stock Exchange
Index of the 100 largest stocks on the London Stock Exchange, the All Ordinaries
Share Price Index of 307 stocks on the Sydney, Melbourne Exchanges, Hang Seng
Index of 33 stocks on the Hong Kong Stock Exchange, Barclays Share Price Index
of 40 stocks on the New Zealand Stock Exchange and Toronto Index of 35 stocks on
the Toronto Stock Exchange. Futures and futures options on the Nikkei Index are
traded on the CME and United States commodity exchanges may develop futures and
futures options on other indices of foreign securities. Futures and options on
United States devised index of foreign stocks are also being developed.
Investments in securities of foreign entities and securities denominated in
foreign currencies involve risks not typically involved in domestic investment,
including fluctuations in foreign exchange rates, future foreign political and
economic developments, and the possible imposition of exchange controls or other
foreign or United States governmental laws or restrictions applicable to such
investments.
Initial and Variation Margin. In contrast to the purchase or sale of a
security, no price is paid or received upon the purchase or sale or a futures
contract. Initially, the Fund will be required to deposit with its Custodian in
an account in the broker's name an amount of cash or liquid securities equal to
a percentage (which will normally range upwards of 2%) of the contract amount.
This amount is known as initial margin. The nature of initial margin in futures
transactions is different from that of margin in securities transactions in that
futures contract margin does not involve the borrowing of funds by the customer
to finance the transaction. Rather, the initial margin is in the nature of a
performance bond or good faith deposit on the contract, which is returned to the
Fund upon termination of the futures contract and satisfaction of its
contractual obligations. Subsequent payments to and from the broker, called
variation margin, are made on a daily basis as the price of the underlying
securities or index fluctuates, making the long and short positions in the
futures contract more or less valuable, a process known as marking to market.
For example, when the Fund has purchased a futures contract and the price
of the underlying security or index rises, that position increases in value, and
the Fund receives from the broker a variation margin payment equal to that
increase in value. Conversely, where the Fund purchases a futures contract and
the value of the underlying security or index declines, the position is less
valuable, and the Fund is required to make a variation margin payment to the
broker.
At any time prior to expiration of the futures contract, the Fund may elect
to terminate the position by taking an opposite position. A final determination
of variation margin is then made, additional cash is required to be paid by or
released to the Fund, and the Fund realizes a loss or a gain.
Futures Strategies. When the Fund anticipates a significant market or
market sector advance, the purchase of a futures contract affords a hedge
against not participating in the advance at a time when the Fund is not fully
invested ("anticipatory hedge"). Such purchase of a futures contract would serve
as a temporary substitute for the purchase of individual securities, which may
be purchased in an orderly fashion once the market has stabilized. As individual
securities are purchased, an equivalent amount of futures contracts could be
terminated by offsetting sales. The Fund may sell futures contracts in
anticipation of or in a general market or market sector decline that may
adversely affect the market value of the Fund's securities ("defensive hedge").
To the extent that the Fund's portfolio of securities changes in value in
correlation with the underlying security or index, the sale of futures contracts
substantially reduces the risk to the Fund of a market decline and, by so doing,
provide an alternative to the liquidation of securities positions in the Fund
with attendant transaction costs. Ordinarily commissions on futures transactions
are lower than transaction costs incurred in the purchase and sale of
securities.
In the event of the bankruptcy of a broker through which the Fund engages
in transactions in options, futures or related options, the Fund could
experience delays or losses in liquidating open positions purchased or incur a
loss of all or part of its margin deposits with the broker. Transactions are
entered into by the Fund only with brokers or financial institutions deemed
creditworthy by the Adviser.
Special Risks Associated with Futures Transactions. There are several
risks connected with the use of futures contracts as a hedging device. These
include the risk of imperfect correlation between movements in
B-6
<PAGE> 191
the price of the futures contracts and of the underlying securities, currency or
index, the risk of market distortion, the illiquidity risk and the risk of error
in anticipating price movement.
There may be an imperfect correlation (or no correlation) between movements
in the price of the futures contracts and of the securities being hedged. The
risk of imperfect correlation increases as the composition of the securities
being hedged diverges from the securities, currency or index upon which the
futures contract is based. If the price of the futures contract moves less than
the price of the securities being hedged, the hedge will not be fully effective.
To compensate for the imperfect correlation, the Fund could buy or sell futures
contracts in a greater (lesser) dollar amount than the dollar amount of
securities being hedged if the historical volatility of the securities being
hedged is greater than the historical volatility of the securities, currency or
index underlying the futures contract. Conversely, the Fund could buy or sell
futures contracts in a lesser dollar amount than the dollar amount of the
securities being hedged if the historical volatility of the securities being
hedged is less than the historical volatility of the securities, currency or
index underlying the futures contract. It is also possible that the value of
futures contracts held by the Fund could decline at the same time as portfolio
securities being hedged; if this occurred, the Fund would lose money on the
futures contract in addition to suffering a decline in value in the portfolio
securities being hedged.
There is also the risk that the price of futures contracts may not
correlate perfectly with movements in the securities, currencies or index
underlying the futures contract due to certain market distortions. First, all
participants in the futures market are subject to margin depository and
maintenance requirements. Rather than meet additional margin depository
requirements, investors may close futures contracts through offsetting
transactions, which could distort the normal relationship between the futures
market and the securities or index underlying the futures contract. Second, from
the point of view of speculators, the deposit requirements in the futures market
are less onerous than margin requirements in securities markets. Therefore,
increased participation by speculators in the futures markets may cause
temporary price distortions. Due to the possibility of price distortion in the
futures markets and because of the imperfect correlation between movements in
the securities underlying them, a correct forecast of general market trends by
the Adviser may still not result in a successful hedging transaction.
There is also the risk that futures markets may not be sufficiently liquid.
Futures contracts may be closed out only on an exchange or board of trade that
provides a market for such futures contracts. Although the Fund intends to
purchase or sell futures only on exchanges and boards of trade where there
appears to be an active secondary market, there can be no assurance that an
active secondary market will exist for any particular contract or at any
particular time. In the event of such illiquidity, it might not be possible to
close a futures position and, in the event of adverse price movement, the Fund
would continue to be required to make daily payments on variation margin. Since
the securities being hedged would not be sold until the related futures contract
is sold, an increase, if any, in the price of the securities may to some extent
offset losses on the related futures contract. In such event, the Fund would
lose the benefit of the appreciation in value of the securities.
Successful use of futures is also subject to the Adviser's ability to
correctly predict the direction of movements in the market. For example, if the
Fund hedges against a decline in the market, and market prices instead advance,
the Fund will lose part or all of the benefit of the increase in value of its
securities holdings because it will have offsetting losses in futures contracts.
In such cases, if the Fund has insufficient cash, it may have to sell portfolio
securities at a time when it is disadvantageous to do so in order to meet the
daily variation margin.
Although the Fund intends to enter into futures contracts only if there is
an active market for such contracts, there is no assurance that an active market
will exist for the contracts at any particular time. Most U.S. futures exchanges
and boards of trade limit the amount of fluctuation permitted in futures
contract prices during a single trading day. Once the daily limit has been
reached in a particular contract, no trades may be made that day at a price
beyond that limit. It is possible that futures contract prices would move to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and subjecting some
traders to substantial losses. In such event, and in the event of adverse price
movements, the Fund would be required to make daily cash payments of variation
margin. In such
B-7
<PAGE> 192
circumstances, an increase in the value of the portion of the portfolio being
hedged, if any, may partially or completely offset losses on the futures
contract. However, as described in the Prospectus, there is no guarantee that
the price of the securities being hedged will, in fact, correlate with the price
movements in a futures contract and thus provide an offset to losses on the
futures contract.
The Fund will not enter into a futures contract or related option (except
for closing transactions) for other than for bona fide hedging purposes if,
immediately thereafter, the sum of the amount of its initial margin and premiums
on open futures contracts and options thereon would exceed 5% of the Fund's
total assets (taken at current value); however, in the case of an option that is
in-the-money at the time of the purchase, the in-the-money amount may be
excluded in calculating the 5% limitation. Certain state securities laws to
which the Fund may be subject may further restrict the Fund's ability to engage
in transactions in futures contracts and related options.
OPTIONS ON FUTURES CONTRACTS
The Fund could also purchase and write options on futures contracts.
Options on futures contracts to be written or purchased by the Fund will be
traded on United States or foreign exchanges or over-the-counter. An option on a
futures contract gives the purchasers the right, in return for the premium paid,
to assume a position in a futures contract (a long position if the option is a
call and a short position if the option is a put), at a specified exercise price
at any time during the option period. As a writer of an option on a futures
contract, the Fund would be subject to initial margin and maintenance
requirements similar to those applicable to futures contracts. In addition, net
option premiums received by the Fund are required to be included as initial
margin deposits. When an option on a futures contract is exercised, delivery of
the futures position is accompanied by cash representing the difference between
the current market price of the futures contract and the exercise price of the
option. The Fund could purchase put options on futures contracts in lieu of, and
for the same purposes as the sale of a futures contract; at the same time, it
could write put options at a lower strike price (a "put bear spread") to offset
part of the cost of the strategy to such Fund. The purchase of call options on
futures contracts is intended to serve the same purpose as the actual purchase
of the futures contract.
RISKS OF TRANSACTIONS IN OPTIONS ON FUTURES CONTRACTS
In addition to the risks described above which apply to all options
transactions, there are several special risks relating to options on futures.
The Adviser will not purchase options on futures on any exchange unless in the
Adviser's opinion, a liquid secondary exchange market for such options exists.
Compared to the use of futures, the purchase of options on futures involves less
potential risk to the Fund because the maximum amount at risk is the premium
paid for the options (plus transaction costs). However, there may be
circumstances, such as when there is no movement in the level of the index or in
the price of the underlying security, when the use of an option on a future
would result in a loss to the Fund when the use of a future would not.
ADDITIONAL RISKS OF OPTIONS AND FUTURES TRANSACTIONS
Each of the United States exchanges and boards of trade has established
limitations governing the maximum number of call or put options on the same
underlying security or futures contract (whether or not covered) which may be
written by a single investor, whether acting alone or in concert with others
(regardless of whether such options are written on the same or different
exchanges or are held or written on one or more accounts or through one or more
brokers). Option positions of all investment companies advised by the Adviser
are combined for purposes of these limits. An exchange or board of trade may
order the liquidation of positions found to be in violation of these limits and
it may impose other sanctions or restrictions. These position limits may
restrict the number of listed options which the Fund may write.
B-8
<PAGE> 193
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with domestic or foreign
banks or broker-dealers deemed to be creditworthy by the Adviser under
guidelines approved by the Trustees. A repurchase agreement is a short-term
investment in which the purchaser (i.e., the Fund) acquires ownership of a debt
security and the seller agrees to repurchase the obligation at a future time and
set price, usually not more than seven days from the date of purchase, thereby
determining the yield during the purchaser's holding period. Repurchase
agreements are fully collateralized by the underlying debt securities and are
considered to be loans under the Investment Company Act of 1940, as amended
("1940 Act"). The Fund pays for such securities only upon physical delivery or
evidence of book entry transfer to the account of a custodian or bank acting as
agent. The seller under a repurchase agreement will be required to maintain the
value of the underlying securities marked to market daily at not less than the
repurchase price. The underlying securities (normally securities of the U.S.
Government, or its agencies and instrumentalities) may have maturity dates
exceeding one year. The Fund does not bear the risk of a decline in value of the
underlying securities unless the seller defaults under its repurchase
obligation. In the event of a bankruptcy or other default of a seller of a
repurchase agreement, the Fund could experience both delays in liquidating the
underlying securities and loss including: (a) possible decline in the value of
the underlying security during the period while the Fund seeks to enforce its
rights thereto, (b) possible lack of access to income on the underlying security
during this period, and (c) expenses of enforcing its rights. See "Investment
Practices -- Repurchase Agreements" in the Prospectus for further information.
LOANS OF PORTFOLIO SECURITIES
The Fund may lend portfolio securities to unaffiliated brokers, dealers and
financial institutions provided that cash or liquid securities equal in value to
100% of the market value of the securities loaned are deposited by the borrower
with the Fund and are marked to market daily. While such securities are on loan,
the borrower is required to pay the Fund any income accruing thereon.
Furthermore, the Fund may invest the cash collateral in portfolio securities
thereby increasing the return to the Fund as well as increasing the market risk
to the Fund. The Fund will not lend its portfolio securities if such loans are
not permitted by the laws or regulations of any state in which its shares are
qualified for sale. However, should the Fund believe that lending securities is
in the best interests of its shareholders, it would consider withdrawing it
shares from sale in any such state.
Loans would be made for short-term purposes and subject to termination by
the Fund in the normal settlement time, currently three business days after
notice, or by the borrower on one day's notice. Borrowed securities must be
returned when the loan is terminated. Any gain or loss in the market price of
the borrowed securities which occurs during the term of the loan inures to the
Fund and its shareholders, but any gain can be realized only if the borrower
does not default. The Fund may pay reasonable finders', administrative and
custodial fees in connection with a loan.
INVESTMENT RESTRICTIONS
The Fund has adopted the following restrictions which may not be changed
without approval by the vote of a majority of its outstanding voting shares
which is defined by the 1940 Act as the lesser of (i) 67% or more of the voting
securities present at the meeting, if the holders of more than 50% of the
outstanding voting securities are present or represented by proxy; or (ii) more
than 50% of the outstanding voting securities. The percentage limitations
contained in the restrictions and policies set forth herein apply at the time of
purchase of securities. These restrictions provide that the Fund shall not:
1. Engage in the underwriting of securities of other issuers, except that
the Fund may sell an investment position even though it may be deemed
to be an underwriter under the federal securities laws.
2. Purchase any security (other than obligations of the United States
Government, its agencies, or instrumentalities) if more than 25% of its
total assets (taken at current value) would then be invested in a
single industry.
B-9
<PAGE> 194
3. Invest more than 5% of its total assets (taken at current value) in
securities of a single issuer other than the United States Government,
its agencies or instrumentalities, or hold more than 10% of the
outstanding voting securities of an issuer, except that the Fund may
purchase securities of other investment companies to the extent
permitted by (i) the 1940 Act, as amended from time to time, (ii) the
rules and regulations promulgated by the SEC under the 1940 Act, as
amended from time to time, or (iii) an exemption or other relief from
the provisions of the 1940 Act.
4. Borrow money except temporarily from banks to facilitate payment of
redemption requests and then only in amounts not exceeding 33 1/3% of
its net assets, or pledge more than 10% of its net assets in connection
with permissible borrowings or purchase additional securities when
money borrowed exceeds 5% of its net assets. Margin deposits or
payments in connection with the writing of options or in connection
with the purchase or sale of forward contracts, futures, foreign
currency futures and related options are not deemed to be a pledge or
other encumbrance.
5. Lend money except through the purchase of (i) United States and foreign
government securities, commercial paper, bankers' acceptances,
certificates of deposit and similar evidences of indebtedness, both
foreign and domestic, and (ii) repurchase agreements; or lend
securities in an amount exceeding 15% of the total assets of the Fund.
The purchase of a portion of an issue of securities described under (i)
above distributed publicly, whether or not the purchase is made on the
original issuance, is not considered the making of a loan.
6. Make short sales of securities, unless at the time of the sale it owns
or has the right to acquire an equal amount of such securities;
provided that this prohibition does not apply to the writing of options
or the sale of forward contracts, futures, foreign currency futures or
related options.
7. Purchase securities on margin but the Fund may obtain such short-term
credits as may be necessary for the clearance of purchases and sales of
securities. The deposit or payment by the Fund of initial or
maintenance margin in connection with forward contracts, futures,
foreign currency futures or related options is not considered the
purchase of a security on margin.
8. Buy or sell real estate or interests in real estate including real
estate limited partnerships, provided that the foregoing prohibition
does not apply to a purchase and sale of publicly traded (i) securities
which are secured by real estate, (ii) securities representing
interests in real estate, and (iii) securities of companies principally
engaged in investing or dealing in real estate.
9. Make investments for the purpose of exercising control or management
although the Fund retains the right to vote securities held by it,
except that the Fund may purchase securities of other investment
companies to the extent permitted by (i) the 1940 Act, as amended from
time to time, (ii) the rules and regulations promulgated by the SEC
under the 1940 Act, as amended from time to time, or (iii) an exemption
or other relief from the provisions of the 1940 Act.
10. Invest in commodities or commodity contracts, except that the Fund may
enter into transactions in options, futures contracts or related
options including foreign currency futures contracts and related
options and forward contracts.
11. Issue senior securities, as defined in the 1940 Act, except that this
restriction shall not be deemed to prohibit the Fund from (i) making
and collateralizing any permitted borrowings, (ii) making any permitted
loans of its portfolio securities or (iii) entering into repurchase
agreements, utilizing options, futures contracts, options on futures
contracts, forward contracts, forward commitments and other investment
strategies and instruments that would be considered "senior securities"
but for the maintenance by the Fund of a segregated account with its
custodian or some other form of "cover".
In addition to the foregoing fundamental policies which may not be changed
without shareholder approval, the Fund is subject to the following policies
which may be amended by the Trustees and which apply at the time of purchase of
portfolio securities.
1. The Fund may not invest in securities issued by other investment
companies except as part of a merger, reorganization or other
acquisition and except to the extent permitted by (i) the 1940 Act,
B-10
<PAGE> 195
as amended from time to time, (ii) the rules and regulations
promulgated by the SEC under the 1940 Act, as amended from time to
time, or (iii) an exemption or other relief from the provisions of the
1940 Act.
2. The Fund may not invest more than 5% of its net assets in warrants or
rights valued at the lower of cost or market, nor more than 2% of its
net assets in warrants or rights (valued on such basis) which are not
listed on the New York or American Stock Exchanges. Warrants or rights
acquired in units or attached to other securities are not subject to
the foregoing limitation.
3. The Fund may not invest in securities of any company if any officer or
trustee of the Trust or of the Adviser owns more than 0.50% of the
outstanding securities of such company, and such officers and trustees
who own more than 0.50% own in the aggregate more than 5% of the
outstanding securities of such issuer.
4. The Fund may not invest in interests in oil, gas, or other mineral
exploration or development programs or invest in oil, gas, or mineral
leases, except that the Fund may acquire securities of public companies
which themselves are engaged in such activities.
5. The Fund may not invest more than 5% of its total assets in securities
of unseasoned issuers which have been in operation directly or through
predecessors for less than three years, except that the Fund may
purchase securities of other investment companies to the extent
permitted by (i) the 1940 Act, as amended from time to time, (ii) the
rules and regulations promulgated by the SEC under the 1940 Act, as
amended from time to time, or (iii) an exemption or other relief from
the provisions of the 1940 Act.
6. The Fund may not purchase or otherwise acquire any security if, as a
result, more than 10% of its net assets (taken at current value) would
be invested in securities that are illiquid by virtue of the absence of
a readily available market. This policy includes repurchase agreements
maturing in more than seven days and over-the-counter options held by
the Fund and that portion of assets used to cover such options. This
policy does not apply to restricted securities eligible for resale
pursuant to Rule 144A under the Securities Act of 1933 (the "1933 Act")
which the Trustees or the Adviser under Board approved guidelines, may
determine are liquid nor does it apply to other securities, for which,
notwithstanding legal or contractual restrictions on resale, a liquid
market exists. Also excluded from this limitation on restricted
securities are securities purchased by the Fund issued by other
investment companies to the extent permitted by (i) the 1940 Act, as
amended from time to time, (ii) the rules and regulations promulgated
by the SEC under the 1940 Act, as amended from time to time, or (iii)
an exemption or other relief from the provisions of the 1940 Act.
TRUSTEES AND OFFICERS
The tables below list the trustees and officers of the Trust (of which the
Fund is a separate series) and other executive officers of the Fund's investment
adviser and their principal occupations for the last five years and their
affiliations, if any, with VK/AC Holding, Inc. ("VKAC Holding"), Van Kampen
American Capital, Inc. ("Van Kampen American Capital" or "VKAC"), Van Kampen
American Capital Investment Advisory Corp. ("Advisory Corp."), Van Kampen
American Capital Asset Management, Inc. ("Asset Management"), Van Kampen
American Capital Distributors, Inc., the distributor of the Fund's shares (the
"Distributor") and ACCESS Investors Services Inc., the Fund's transfer agent
("ACCESS"). Advisory Corp. and Asset Management sometimes are referred to herein
collectively as the "Advisers". For purposes
B-11
<PAGE> 196
hereof, the term "Fund Complex" includes each of the open-end investment
companies advised by the Advisers (excluding the Van Kampen American Capital
Exchange Fund and the Common Sense Trust).
TRUSTEES
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
--------------------- --------------------------
<S> <C>
J. Miles Branagan......................... Private investor. Co-founder, and prior to August 1996,
1632 Morning Mountain Road Chairman, Chief Executive Officer and President, MDT
Raleigh, NC 27614 Corporation (now known as Getinge/Castle, Inc., a
Date of Birth: 07/14/32 subsidiary of Getinge Industrier AB), a company which
develops, manufactures, markets and services medical and
scientific equipment. Trustee/Director of each of the
funds in the Fund Complex.
Richard M. DeMartini*..................... President and Chief Operating Officer, Dean Witter
Two World Trade Center Capital, a division of Dean Witter Reynolds Inc. Mr.
66th Floor DeMartini is a Director of InterCapital Funds, Dean
New York, NY 10048 Witter Distributors, Inc. and Dean Witter Trust Company.
Date of Birth: 10/12/52 Trustee of the TCW/DW Funds. Director of the National
Healthcare Resources, Inc. Formerly Vice Chairman of the
Board of the National Association of Securities Dealers,
Inc. and Chairman of the Board of the Nasdaq Stock
Market, Inc. Trustee/Director of each of the funds in the
Fund Complex.
Linda Hutton Heagy........................ Co-Managing Partner of Heidrick & Stuggles, an executive
Sears Tower search firm. Prior to 1997, Partner, Ray & Berndtson,
233 South Wacker Drive Inc. An executive recruiting and management consulting
Suite 7000 firm. Formerly, Executive Vice President of ABN AMRO,
Chicago, IL 60606 N.A., a Dutch bank holding company. Prior to 1992,
Date of Birth: 06/03/48 Executive Vice President of La Salle National Bank.
Trustee on the University of Chicago Hospitals Board, The
International House Board and the Women's Board of the
University of Chicago. Trustee/Director of each of the
funds in the Fund Complex.
R. Craig Kennedy.......................... President and Director, German Marshall Fund of the
11 DuPont Circle, N.W. United States. Formerly, advisor to the Dennis Trading
Washington, D.C. 20036 Group Inc. Prior to 1992, President and Chief Executive
Date of Birth: 02/29/52 Officer, Director and Member of the Investment Committee
of the Joyce Foundation, a private foundation.
Trustee/Director of each of the funds in the Fund
Complex.
Jack E. Nelson............................ President, Nelson Investment Planning Services, Inc., a
423 Country Club Drive financial planning company and registered investment
Winter Park, FL 32789 adviser. President, Nelson Ivest Brokerage Services Inc.,
Date of Birth: 02/13/36 a member of the National Association of Securities
Dealers, Inc. ("NASD") and Securities Investors
Protection Corp. ("SIPC"). Trustee/Director of each of
the funds in the Fund Complex.
Jerome L. Robinson........................ President, Robinson Technical Products Corporation, a
115 River Road manufacturer and processor of welding alloys, supplies
Edgewater, NJ 07020 and equipment. Director, Pacesetter Software, a software
Date of Birth: 10/10/22 programming company specializing in white collar
productivity. Director, Panasia Bank. Trustee/Director of
each of the funds in the Fund Complex.
</TABLE>
B-12
<PAGE> 197
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
--------------------- --------------------------
<S> <C>
Phillip B. Rooney......................... Vice Chairman and Director of The ServiceMaster Company,
One ServiceMaster Way a business and consumer services. Director of Illinois
Downers Grove, IL 60515 Tool Works, Inc., a manufacturing company; the Urban
Date of Birth: 07/08/44 Shopping Centers Inc., a retail mall management company;
and Stone Container Corp., a paper manufacturing company.
Trustee, University of Notre Dame. Formerly, President
and Chief Executive Officer, Waste Management Inc., an
environmental services company, and prior to that
President and Chief Operating Officer, Waste Management
Inc. Trustee/Director of each of the funds in the Fund
Complex.
Fernando Sisto............................ Professor Emeritus and, prior to 1995, Dean of the
155 Hickory Lane Graduate School, Stevens Institute of Technology.
Closter, NJ 07624 Director, Dynalysis of Princeton, a firm engaged in
Date of Birth: 08/02/24 engineering research. Trustee/Director of each of the
funds in the Fund Complex.
Wayne W. Whalen*.......................... Partner in the law firm of Skadden, Arps, Slate, Meagher
333 West Wacker Drive & Flom (Illinois), legal counsel to the funds in the Fund
Chicago, IL 60606 Complex, open-end funds advised by Van Kampen American
Date of Birth: 08/22/39 Capital Management, Inc. and closed-end funds advised by
Advisory Corp. Trustee/Director of each of the funds in
the Fund Complex, open-end funds advised by Van Kampen
American Capital Management, Inc. and closed-end funds
advised by Advisory Corp.
</TABLE>
- ---------------
* Such trustee is an "interested person" (within the meaning of Section 2(a)(19)
of the 1940 Act). Mr. Whalen is an interested person of the Fund by reason of
his firm currently acting as legal counsel to the Fund and is an interested
person of Asset Management with respect to certain funds advised by Asset
Management by reason of his firm in the past acting as legal counsel to Asset
Management. Mr. DeMartini is an interested person of the Fund and the Advisers
by reason of his position with Dean Witter Capital and its affiliates.
OFFICERS
Messrs. McDonnell, Hegel, Nyberg, Wood, Sullivan, Dalmaso, Martin,
Wetherell and Hill are located at One Parkview Plaza, Oakbrook Terrace, IL
60181. The Fund's other officers are located at 2800 Post Oak Blvd., Houston, TX
77056.
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
------------ ----------------- ---------------------
<S> <C> <C>
Dennis J. McDonnell......... President President and a Director of VKAC.
Date of Birth: 05/20/42 President, Chief Operating Officer and a
Director of the Advisers. Director or
officer of certain other subsidiaries of
VKAC. Prior to November 1996, Executive
Vice President and a Director of VKAC
Holding. President of each of the funds in
the Fund Complex. President, Chairman of
the Board and Trustee of other investment
companies advised by the Advisers or their
affiliates.
</TABLE>
B-13
<PAGE> 198
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
------------ ----------------- ---------------------
<S> <C> <C>
Peter W. Hegel.............. Vice President Executive Vice President of the Advisers.
Date of Birth: 06/25/56 Director of Asset Management. Officer of
certain other subsidiaries of VKAC. Vice
President of each of the funds in the Fund
Complex and certain other investment
companies advised by the Advisers or their
affiliates.
Curtis W. Morell............ Vice President and Chief Senior Vice President of the Advisers, Vice
Date of Birth: 08/04/46 Accounting Officer President and Chief Accounting Officer of
each of the funds in the Fund Complex and
certain other investment companies advised
by the Advisers or their affiliates.
Ronald A. Nyberg............ Vice President and Secretary Executive Vice President, General Counsel
Date of Birth: 07/29/53 and Secretary of VKAC. Executive Vice
President, General Counsel, Assistant
Secretary and a Director of the Advisers
and the Distributor. Executive Vice
President, General Counsel and Assistant
Secretary of ACCESS. Director or officer of
certain other subsidiaries of VKAC.
Director of ICI Mutual Insurance Co., a
provider of insurance to members of the
Investment Company Institute. Prior to
November 1996, Executive Vice President,
General Counsel and Secretary of VKAC
Holding. Vice President and Secretary of
each of the funds in the Fund Complex and
certain other investment companies advised
by the Advisers or their affiliates.
Don G. Powell Chairman, President, Chief Executive
2800 Post Oak Blvd. Officer and a Director of VKAC. Chairman,
Houston, TX 77056 Chief Executive Officer and a Director of
Date of Birth: 10/19/39 the Advisers and the Distributor. Chairman
and a Director of ACCESS. Director or
officer of certain other subsidiaries of
VKAC. Chairman of the Board of Governors
and the Executive Committee of the
Investment Company Institute. Prior to
November, 1996, President, Chief Executive
Officer and a Director of VKAC Holding.
President, Chief Executive Officer and a
Trustee/Director of certain investment
companies advised by Asset Management and
prior to July 1996, President, Chief
Executive Officer and a Trustee of the
funds in the Fund Complex and closed-end
investment companies advised by Advisory
Corp.
Alan T. Sachtleben.......... Vice President Executive Vice President of the Advisers.
Date of Birth: 04/20/42 Director of Asset Management. Director or
officer of certain other subsidiaries of
VKAC. Vice President of each of the funds
in the Fund Complex and certain other
investment companies advised by the
Advisers or their affiliates.
</TABLE>
B-14
<PAGE> 199
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
------------ ----------------- ---------------------
<S> <C> <C>
Paul R. Wolkenberg.......... Vice President Executive Vice President of the VKAC, the
Date of Birth: 11/10/44 Advisers and the Distributor. President,
Chief Executive Officer and a Director of
ACCESS. Director or officer of certain
other subsidiaries of VKAC. Vice President
of each of the funds in the Fund Complex
and certain other investment companies
advised by the Advisers or their
affiliates.
Edward C. Wood III.......... Vice President and Chief Senior Vice President of the Advisers. Vice
Date of Birth: 01/11/56 Financial Officer President and Chief Financial Officer of
each of the funds in the Fund Complex and
certain other investment companies advised
by the Advisers or their affiliates.
John L. Sullivan............ Treasurer First Vice President of the Advisers.
Date of Birth: 08/20/55 Treasurer of each of the funds in the Fund
Complex and certain other investment
companies advised by the Advisers or their
affiliates.
Tanya M. Loden.............. Controller Vice President of the Advisers. Controller
Date of Birth: 11/19/59 of each of the funds in the Fund Complex
and other investment companies advised by
the Advisers or the affiliates.
Nicholas Dalmaso............ Assistant Secretary Vice President and Assistant Secretary of
Date of Birth: 03/01/65 VKAC. Vice President and Assistant
Secretary of the Advisers and the
Distributor. Officer of certain other
subsidiaries of VKAC. Assistant Secretary
of each of the funds in the Fund Complex
and other investment companies advised by
the Advisers or the affiliates.
Huey P. Falgout, Jr......... Assistant Secretary Assistant Vice President and Senior
Date of Birth: 11/15/63 Attorney of VKAC. Assistant Vice President
and Assistant Secretary of the Advisers,
the Distributor and ACCESS. Officer of
certain other subsidiaries of VKAC.
Assistant Secretary of each of the funds in
the Fund Complex and other investment
companies advised by the Advisers or the
affiliates.
Scott E. Martin............. Assistant Secretary Senior Vice President, Deputy General
Date of Birth: 08/20/56 Counsel and Assistant Secretary of VKAC.
Senior Vice President, Deputy General
Counsel and Secretary of the Advisers, the
Distributor and ACCESS. Officer of certain
other subsidiaries of VKAC. Prior to
November 1996, Senior Vice President,
Deputy General Counsel and Assistant
Secretary of VKAC Holding. Assistant
Secretary of each of the funds in the Fund
Complex and other investment companies
advised by the Advisers or the affiliates.
</TABLE>
B-15
<PAGE> 200
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
------------ ----------------- ---------------------
<S> <C> <C>
Weston B. Wetherell......... Assistant Secretary Vice President, Associate General Counsel
Date of Birth: 06/15/56 and Assistant Secretary of VKAC, the
Advisers and the Distributor. Officer of
certain other subsidiaries of VKAC.
Assistant Secretary of each of the funds in
the Fund Complex and other investment
companies advised by the Advisers or the
affiliates.
Steven M. Hill.............. Assistant Treasurer Assistant Vice President of the Advisers.
Date of Birth: 10/16/64 Assistant Treasurer of each of the funds in
the Fund Complex and other investment
companies advised by the Advisers or the
affiliates.
M. Robert Sullivan.......... Assistant Controller Assistant Vice President of the Advisers.
Date of Birth: 03/30/33 Assistant Controller of each of the funds
in the Fund Complex and other investment
companies advised by the Advisers or the
affiliates.
</TABLE>
Each trustee/director holds the same position with each of the funds in the
Fund Complex. As of the date of this Statement of Additional Information, there
are 65 operating funds in the Fund Complex. For purposes of the following
compensation and benefits discussion, the Fund Complex is divided into the
following three groups: the funds advised by Asset Management (the "AC Funds"),
the funds advised by Advisory Corp. excluding funds organized as series of the
Morgan Stanley Fund, Inc. (the "VK Funds") and the funds advised by Advisory
Corp. organized as series of the Morgan Stanley Fund, Inc. (the "MS Funds").
Each trustee/director who is not an affiliated person of VKAC, the Advisers, the
Distributor, ACCESS or Morgan Stanley (each a "Non-Affiliated Trustee") is
compensated by an annual retainer and meeting fees for services to the funds in
the Fund Complex. Each fund in the Fund Complex provides a deferred compensation
plan to its Non-Affiliated Trustees that allows trustees/directors to defer
receipt of their compensation and earn a return on such deferred amounts. Each
of the AC Funds and VK Funds provides a retirement plan to its Non-Affiliated
Trustees that provides Non-Affiliated Trustees with compensation after
retirement, provided that certain eligibility requirements are met as more fully
described below.
The compensation of each Non-Affiliated Trustee from the AC Funds includes
an annual retainer in an amount equal to $35,000 per calendar year, due in four
quarterly installments on the first business day of each calendar quarter. The
AC Funds pay each Non-Affiliated Trustee a per meeting fee in the amount of
$2,000 per regular quarterly meeting attended by the Non-Affiliated Trustee, due
on the date of such meeting, plus reasonable expenses incurred by the
Non-Affiliated Trustee in connection with his or her services as a trustee.
Payment of the annual retainer and the regular meeting fee is allocated among
the AC Funds (i) 50% on the basis of the relative net assets of each AC Fund to
the aggregate net assets of all the AC Funds and (ii) 50% equally to each AC
Fund, in each case as of the last business day of the preceding calendar
quarter. Each AC Fund which is the subject of a special meeting of the trustees
generally pays each Non-Affiliated Trustee a per meeting fee in the amount of
$125 per special meeting attended by the Non-Affiliated Trustee, due on the date
of such meeting, plus reasonable expenses incurred by the Non-Affiliated Trustee
in connection with his or her services as a trustee, provided that no
compensation will be paid in connection with certain telephonic special
meetings.
The compensation of each Non-Affiliated Trustee from each VK Fund includes
an annual retainer in an amount equal to $2,500 per calendar year, due in four
quarterly installments on the first business day of each calendar quarter. Each
Non-Affiliated Trustee receives a per meeting fee from each VK Fund in the
amount of $125 per regular quarterly meeting attended by the Non-Affiliated
Trustee, due on the date of such meeting, plus reasonable expenses incurred by
the Non-Affiliated Trustee in connection with his or her services as a trustee.
Each Non-Affiliated Trustee receives a per meeting fee from each VK Fund in the
amount of $125 per special meeting attended by the Non-Affiliated Trustee, due
on the date of such meeting,
B-16
<PAGE> 201
plus reasonable expenses incurred by the Non-Affiliated Trustee in connection
with his or her services as a trustee, provided that no compensation will be
paid in connection with certain telephonic special meetings.
The compensation of each Non-Affiliated Trustee from the MS Funds is
intended to be based generally on the compensation amounts and methodology used
by such funds prior to their joining the current Fund Complex on July 2, 1997.
Each trustee/director was elected as a director of the MS Funds on July 2, 1997.
Prior to July 2, 1997, the MS Funds were part of another fund complex (the
"Prior Complex") and the former directors of the MS Funds were paid an aggregate
fee allocated among the funds in the Prior Complex that resulted in individual
directors receiving total compensation between approximately $8,000 to $10,000
from the MS Funds during such funds' last fiscal year.
The trustees/directors are currently in the process of reviewing and
seeking to standardize compensation and benefits across the Fund Complex.
The trustees/directors approved an aggregate compensation cap with respect
to funds in the Fund Complex of $84,000 per Non-Affiliated Trustee per year
(excluding any retirement benefits) for the period July 22, 1995 through
December 31, 1996, subject to the net assets and the number of funds in the Fund
Complex as of July 21, 1995 and certain other exceptions. For the calendar year
ended December 31, 1996, certain trustees/directors received aggregate
compensation from the funds in the Fund Complex over $84,000 due to compensation
received but not subject to the cap, including compensation from new funds added
to the Fund Complex after July 22, 1995 and certain special meetings in 1996. In
addition, each of Advisory Corp. or Asset Management, as the case may be, agreed
to reimburse each fund in the Fund Complex through December 31, 1996 for any
increase in the aggregate compensation over the aggregate compensation paid by
such fund in its 1994 fiscal year, provided that if a fund did not exist for the
entire 1994 fiscal year appropriate adjustments will be made.
Each Non-Affiliated Trustee generally can elect to defer receipt of all or
a portion of the compensation earned by such Non-Affiliated Trustee until
retirement. Amounts deferred are retained by the Fund and earn a rate of return
determined by reference to the return on the common shares of such Fund or other
funds in the Fund Complex as selected by the respective Non-Affiliated Trustee,
with the same economic effect as if such Non-Affiliated Trustee had invested in
one or more funds in the Fund Complex. To the extent permitted by the 1940 Act,
the Fund may invest in securities of those funds selected by the Non-Affiliated
Trustees in order to match the deferred compensation obligation. The deferred
compensation plan is not funded and obligations thereunder represent general
unsecured claims against the general assets of the Fund.
Each AC Fund and VK Fund has adopted a retirement plan. Under the
retirement plan, a Non-Affiliated Trustee who is receiving compensation from
such Fund prior to such Non-Affiliated Trustee's retirement, has at least 10
years of service (including years of service prior to adoption of the retirement
plan) and retires at or after attaining the age of 60, is eligible to receive a
retirement benefit equal to $2,500 per year for each of the ten years following
such retirement from such Fund. Non-Affiliated Trustees retiring prior to the
age of 60 or with fewer than 10 years but more than 5 years of service may
receive reduced retirement benefits from such Fund. Each trustee/director has
served as a member of the Board of Trustees of the Fund since he or she was
first appointed or elected in the year set forth below. The retirement plan
contains a Fund Complex retirement benefit cap of $60,000 per year. Asset
Management has reimbursed each AC Fund for the expenses related to the
retirement plan through December 31, 1996.
B-17
<PAGE> 202
Additional information regarding compensation and benefits for trustees is
set forth below. As indicated in the notes accompanying the table, the amounts
relate to either the Fund's most recently completed fiscal year or the Fund
Complex' most recently completed calendar year ended December 31, 1996.
COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL
COMPENSATION
YEAR FIRST PENSION OR ESTIMATED MAXIMUM BEFORE DEFERRAL
APPOINTED OR AGGREGATE COMPENSATION RETIREMENT BENEFITS ANNUAL BENEFITS FROM FUND
ELECTED TO THE BEFORE DEFERRAL FROM THE ACCRUED AS PART OF FROM THE FUND UPON COMPLEX PAID
NAME(1) BOARD FUND(2) EXPENSES(3) RETIREMENT(4) TO TRUSTEE(5)
------- -------------- ------------------------ ------------------- ------------------ ---------------
<S> <C> <C> <C> <C> <C>
J. Miles Branagan* 1991 $1,534 691 2,500 $104,875
Linda Hutton Heagy* 1995 $1,534 69 2,500 104,875
Dr. Roger Hilsman 1991 $ 764 1,452 1,500 103,750
R. Craig Kennedy* 1995 $1,534 45 2,500 104,875
Donald C. Miller 1995 $ 764 0 0 104,875
Jack E. Nelson* 1995 $1,284 314 2,500 97,875
Jerome L. Robinson* 1995 $1,534 0 0 101,625
Phillip B. Rooney* 1997 $ 260 0 2,500 0
Dr. Fernando Sisto* 1991 $1,534 1,661 2,500 104,875
Wayne W. Whalen* 1995 $1,534 218 2,500 104,875
William S. Woodside 1991 $ 764 3,176 1,500 104,875
</TABLE>
- ---------------
* Currently a member of the Board of Trustees. Mr. Phillip B. Rooney became a
member of the Board of Trustees effective April 14, 1997 and thus does not
have a full fiscal year of information to report.
(1) Persons not designated by an asterisk are not currently members of the Board
of Trustees, but were members of the Board of Trustees during the Fund's
most recently completed fiscal year. Messrs. Hilsman, Miller and Woodside
retired from the Board of Trustees on December 31, 1996. Messrs. DeMartini,
McDonnell and Powell, also trustees of the Fund during all or a portion of
the Fund's last fiscal year, are not included in the compensation table
because they are affiliated persons of the Advisers and are not eligible for
compensation or retirement benefits from the Fund.
(2) The amounts shown in this column represent the Aggregate Compensation before
Deferral with respect to the Fund's fiscal year ended May 31, 1997. The
following trustees deferred compensation from the Fund during the fiscal
year ended May 31, 1997: Mr. Branagan, $902; Ms. Heagy, $930; Mr. Kennedy,
$260; Mr. Miller, $632; Mr. Nelson, $1,152; Mr. Robinson, $1,110; and Mr.
Whalen, $1,152. Amounts deferred are retained by the Fund and earn a rate of
return determined by reference to either the return on the common shares of
the Fund or other funds in the Fund Complex as selected by the respective
Non-Affiliated Trustee, with the same economic effect as if such
Non-Affiliated Trustee had invested in one or more funds in the Fund
Complex. To the extent permitted by the 1940 Act, each Fund may invest in
securities of those funds selected by the Non-Affiliated Trustees in order
to match the deferred compensation obligation. The cumulative deferred
compensation (including interest) accrued with respect to each trustee from
the Fund as of May 31, 1997 is as follows: Mr. Branagan, $904; Ms. Heagy,
$1,748; Mr. Kennedy, $1,163; Mr. Miller, $1,355; Mr. Nelson, $1,937; Mr.
Robinson, $1,965; Mr. Sisto, $4,933; and Mr. Whalen, $2,075. The deferred
compensation plan is described above the Compensation Table.
(3) The amounts shown in this column represent the Retirement Benefits accrued
by the Fund during its fiscal year ended May 31, 1997. The retirement plan
is described above the Compensation Table.
(4) For Messrs. Hilsman, Miller and Woodside, this is the actual annual benefits
payable by the Fund in each year of the 10-year period since such trustee's
retirement. For the remaining trustees, this is the estimated maximum annual
benefits payable by the Fund in each year of the 10-year period commencing
in the year of such trustee's retirement from the Fund assuming: the trustee
has 10 or more years of service on the Board of Trustees (including years of
service prior to the adoption of the retirement plan) and retires at or
after attaining the age of 60. Trustees retiring prior to the age of 60 or
with fewer than 10 years of service for the Fund may receive reduced
retirement benefits from the Fund. The actual annual benefit may be
B-18
<PAGE> 203
less if the trustee is subject to the Fund Complex retirement benefit cap or
if the trustee is not fully vested at the time of retirement.
(5) The amounts shown in this column represent the aggregate compensation paid
by all 51 operating investment companies in the Fund Complex as of December
31, 1996 before deferral by the trustees under the deferred compensation
plan. Because the funds in the Fund Complex have different fiscal year ends,
the amounts shown in this column are presented on a calendar year basis. As
described in the narrative preceding the table, the Fund Complex has
increased in size since December 31, 1996. It is likely the aggregate
compensation for the calendar year ending December 31, 1997 will be higher
due to the increase in the size of the Fund Complex. As of the date of this
Statement of Additional Information, the trustee/directors are in the
process of reviewing and seeking to standardize compensation and benefits
across the Fund Complex. Certain trustees deferred all or a portion of their
aggregate compensation from the Fund Complex during the calendar year ended
December 31, 1996. The deferred compensation earns a rate of return
determined by reference to the return on the shares of the funds in the Fund
Complex as selected by the respective Non-Affiliated Trustee, with the same
economic effect as if such Non-Affiliated Trustee had invested in one or
more funds in the Fund Complex. To the extent permitted by the 1940 Act, the
Fund may invest in securities of those investment companies selected by the
Non-Affiliated Trustees in order to match the deferred compensation
obligation. The trustees' Fund Complex compensation cap covered the period
July 22, 1995 through December 31, 1996. For the calendar year ended
December 31, 1996, certain trustees received compensation over $84,000 in
the aggregate due to compensation received but not subject to the cap,
including compensation from new funds added to the Fund Complex after July
22, 1995 and certain special meetings in 1996. The Advisers and their
affiliates also serve as investment adviser for other investment companies;
however, with the exception of Messrs. McDonnell, Powell and Whalen, the
trustees were not trustees of such investment companies. Combining the Fund
Complex with other investment companies advised by the Advisers and their
affiliates, Mr. Whalen received Total Compensation of $243,375 during the
calendar year ended December 31, 1996.
As of September 15, 1997, the trustees and officers of the Fund as a group
owned less than 1% of the shares of the Fund.
LEGAL COUNSEL
Skadden, Arps, Slate, Meagher & Flom (Illinois).
INVESTMENT ADVISORY AGREEMENTS
The Trust and the Adviser are parties to an investment advisory agreement
(the "Advisory Agreement"). Under the Advisory Agreement, the Trust retains the
Adviser to manage the investment of its assets and to place orders for the
purchase and sale of its portfolio securities. The Adviser is responsible for
obtaining and evaluating economic, statistical and financial data and for
formulating and implementing investment programs in furtherance of the Fund's
investment objective. The Adviser also furnishes at no cost to the Fund (except
as noted herein) the services of sufficient executive and clerical personnel for
the Fund as are necessary to prepare registration statements, prospectuses,
shareholder reports, and notices and proxy solicitation material. In addition,
the Adviser furnishes at no cost to the Fund the services of a President of the
Fund, one or more Vice Presidents as needed, and a Secretary.
The Adviser has entered into a subadvisory agreement (the "Sub-advisory
Agreement") with the Subadviser to assist it in performing its investment
advisory functions. The Subadviser, subject to the overall review by the Adviser
and the Fund's trustees, is responsible for recommending the optimal
geographical equity allocation among various markets and currencies and is
responsible for providing advice with respect to specific investments in such
markets, including the Fund's investment in domestic securities. The Adviser and
Subadviser are hereinafter sometimes referred to as the "Adviser."
Under the Advisory Agreement, the Trust bears the cost of its accounting
services, which include maintaining its financial books and records and
calculating its daily net asset value. The costs of such accounting services
include the salaries and overhead expenses of a Treasurer or other principal
financial
B-19
<PAGE> 204
officer and the personnel operating under his direction. Charges are allocated
among the investment companies advised or subadvised by the Adviser. A portion
of these amounts were paid to the Adviser or its parent in reimbursement of
personnel, office space, facilities and equipment costs attributable to the
provision of accounting services to the Trust. The services provided by the
Adviser are at cost. The Trust also pays shareholder service agency fees,
distribution fees, service fees, custodian fees, legal and auditing fees, the
costs of reports to shareholders and all other ordinary expenses not
specifically assumed by the Adviser. The Advisory Agreement also provides that
the Adviser shall not be liable to the Fund for any actions or omissions if it
acted without willful misfeasance, bad faith, negligence or reckless disregard
of its obligations.
Under the Advisory Agreement, the Trust pays to the Adviser, as
compensation for the services rendered, facilities furnished, and expenses paid
by it, a fee payable monthly, computed at the annual rate of 1.00% of average
daily net assets of the Fund. For its services, the Subadviser receives from the
Adviser a fee at the annual rate of 50% of the compensation received by the
Adviser.
The average net asset value for purposes of computing the advisory fee is
determined by taking the average of all determinations of net asset value for
each business day during a given calendar month. Such fee is payable for each
calendar month as soon as practicable after the end of that month. The fee
payable to the Adviser is reduced by any commissions, tender solicitation and
other fees, brokerage or similar payments received by the Adviser or any other
direct or indirect majority-owned subsidiary of VK/AC Holding, Inc. in
connection with the purchase and sale of portfolio investments of the Trust,
less any direct expenses incurred by such subsidiary of VK/AC Holding, Inc. in
connection with obtaining such payments. The Adviser agrees to use its best
efforts to recapture tender solicitation fees and exchange offer fees for the
Trust's benefit and to advise the Trustees of the Trust of any other
commissions, fees, brokerage or similar payments which may be possible for the
Adviser or any direct or indirect majority-owned subsidiary of VK/AC Holding,
Inc. to receive in connection with the Fund's portfolio transactions or other
arrangements which may benefit the Fund.
The Advisory Agreement also provides that, in the event the ordinary
business expenses of the Trust, calculated separately for each series, for any
fiscal year should exceed the most restrictive expense limitation applicable in
the states where the Trust's shares are qualified for sale, the compensation due
the Adviser will be reduced by the amount of such excess and that, if a
reduction in and refund of the advisory fee is insufficient, the Adviser will
pay the Trust monthly an amount sufficient to make up the deficiency, subject to
readjustment during the fiscal year. Ordinary business expenses include the
investment advisory fee and other operating costs paid by the Trust except (1)
interest and taxes, (2) brokerage commissions, (3) certain litigation and
indemnification expenses as described in the Advisory Agreement and (4) payments
made by the Fund pursuant to its distribution plans.
The Advisory Agreement may be continued from year to year if specifically
approved at least annually (a)(i) by the Fund's Trustees or (ii) by vote of a
majority of the Fund's outstanding voting securities and (b) by the affirmative
vote of a majority of the Trustees who are not parties to the agreement or
interested persons of any such party by votes cast in person at a meeting called
for such purpose. The Advisory Agreement provides that it shall terminate
automatically if assigned and that it may be terminated without penalty by
either party on not more than 60 days' nor less than 30 days' written notice.
During the fiscal years ended May 31, 1995, 1996 and 1997 the Adviser
received $1,200,835, $1,605,816 and $2,342,104, respectively, in advisory fees
from the Fund. For such periods the Fund paid $28,800, $31,987 and $25,800,
respectively, for accounting services.
DISTRIBUTOR
The Distributor acts as the principal underwriter of the Trust's shares
pursuant to a written agreement (the "Distribution and Service Agreement"). The
Distributor has the exclusive right to distribute shares of the Fund through
authorized dealers. The Distributor's obligation is an agency or "best efforts"
arrangement under which the Distributor is required to take and pay for only
such shares of the Funds as may be sold to the public. The Distributor is not
obligated to sell any stated number of shares. The Distributor bears the cost of
printing (but not typesetting) prospectuses used in connection with this
offering and certain other costs,
B-20
<PAGE> 205
including the cost of supplemental sales literature and advertising. The
Distribution and Service Agreement is renewable from year to year if approved
(a) by the Fund's Trustees or by a vote of a majority of the Fund's outstanding
voting securities and (b) by the affirmative vote of a majority of the Trustees
who are not parties to the Distribution and Service Agreement or interested
persons of any party, by votes cast in person at a meeting called for such
purpose. The Distribution and Service Agreement provides that it will terminate
if assigned, and that it may be terminated without penalty by either party on 60
days' written notice.
<TABLE>
<CAPTION>
AMOUNTS
TOTAL UNDERWRITING RETAINED
COMMISSIONS BY DISTRIBUTOR
------------------ --------------
<S> <C> <C>
Fiscal Year Ended May 31, 1997.............................. $656,636 $86,208
Fiscal Year Ended May 31, 1996.............................. $491,380 $34,742
Fiscal Year Ended May 31, 1995.............................. $399,444 $ 1,104
</TABLE>
DISTRIBUTION AND SERVICE PLANS
The Fund has adopted a distribution plan (the "Distribution Plan") with
respect to each class of its shares pursuant to Rule 12b-1 under the 1940 Act.
The Fund also has adopted a service plan (the "Service Plan") with respect to
each class of its shares. The Distribution Plan and the Service Plan sometimes
are referred to herein as the "Plans". The Plans provide that the Fund may spend
a portion of the Fund's average daily net assets attributable to each class of
shares in connection with distribution of the respective class of shares and in
connection with the provision of ongoing services to shareholders of such class,
respectively. The Distribution Plan and the Service Plan are being implemented
through an agreement (the "Distribution and Service Agreement") with the
Distributor of each class of the Fund's shares, sub-agreements between the
Distributor and members of the NASD who are acting as securities dealers and
NASD members or eligible non-members who are acting as brokers or agents and
similar agreements between the Fund and financial intermediaries who are acting
as brokers (collectively, "Selling Agreements") that may provide for their
customers or clients certain services or assistance, which may include, but not
be limited to, processing purchase and redemption transactions, establishing and
maintaining shareholder accounts regarding the Fund, and such other services as
may be agreed to from time to time and as may be permitted by applicable
statute, rule or regulation. Brokers, dealers and financial intermediaries that
have entered into sub-agreements with the Distributor and sell shares of the
Fund are referred to herein as "financial intermediaries."
The Distributor must submit quarterly reports to the Board of Trustees of
the Trust, of which the Fund is a series, setting forth separately by class of
shares all amounts paid under the Distribution Plan and the purposes for which
such expenditures were made, together with such other information as from time
to time is reasonably requested by the Trustees. The Plans provide that they
will continue in full force and effect from year to year so long as such
continuance is specifically approved by a vote of the Trustees, and also by a
vote of the disinterested Trustees, cast in person at a meeting called for the
purpose of voting on the Plans. Each of the Plans may not be amended to increase
materially the amount to be spent for the services described therein with
respect to any class of shares without approval by a vote of a majority of the
outstanding voting shares of such class, and all material amendments to either
of the Plans must be approved by the Trustees and also by the disinterested
Trustees. Each of the Plans may be terminated with respect to any class of
shares at any time by a vote of a majority of the disinterested Trustees or by a
vote of a majority of the outstanding voting shares of such class.
For the fiscal year ended May 31, 1997, the Fund's aggregate expenses under
the Class B Plan were $1,046,812 or 1.00% of the Class B shares' average net
assets. Such expenses were paid to reimburse the Distributor for the following
payments: $786,179 for commissions and transaction fees paid to financial
intermediaries in respect of sales of Class B shares of the Fund and $260,633
for fees paid to financial intermediaries for servicing Class B shareholders and
administering the Plans. For the fiscal year ended May 31, 1997, the Fund's
aggregate expenses under the Plans for Class C shares were $107,843 or 1.00% of
the Class C shares' average net assets. Such expenses were paid to reimburse the
Distributor for the following payments: $45,347 for commissions and transaction
fees paid to financial intermediaries in respect of sales of
B-21
<PAGE> 206
Class C shares of the Fund and $62,496 for fees paid to financial intermediaries
for servicing Class C shareholders and administering the Class C Plan.
TRANSFER AGENT
During the fiscal years ended May 31, 1995, 1996 and 1997, ACCESS,
shareholder service agent and dividend distributing agent for the Fund, received
fees aggregating $586,655, $852,280 and $1,045,500, respectively, for these
services. These services are provided at cost plus a profit.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Adviser is responsible for decisions to buy and sell securities for the
Fund and for the placement of its portfolio business and the negotiation of the
commissions paid on such transactions. It is the policy of the Adviser to seek
the best security price available with respect to each transaction. In
over-the-counter transactions, orders are placed directly with a principal
market maker unless it is believed that a better price and execution can be
obtained by using a broker. Except to the extent that the Fund may pay higher
brokerage commissions for brokerage and research services (as described below)
on a portion of its transactions executed on securities exchanges, the Adviser
seeks the best security price at the most favorable commission rate. In
selecting broker/dealers and in negotiating commissions, the Adviser considers
the firm's reliability, the quality of its execution services on a continuing
basis and its financial condition. When more than one firm is believed to meet
these criteria, preference may be given to firms which also provide research
services to the Fund or the Adviser.
Consistent with the Rules of Fair Practice of the NASD and subject to
seeking best execution and such other policies as the Trustees may determine,
the Adviser may consider sales of shares of the Funds and of the other Van
Kampen American Capital mutual funds as a factor in the selection of firms to
execute portfolio transactions for the Funds.
Section 28(e) of the Securities Exchange Act of 1934 ("Section 28(e)")
permits an investment adviser, under certain circumstances, to cause an account
to pay a broker or dealer who supplies brokerage and research services, a
commission for effecting a securities transaction in excess of the amount of
commission another broker or dealer would have charged for effecting the
transaction. Brokerage and research services include (a) furnishing advice as to
the value of securities, the advisability of investing in, purchasing or selling
securities, and the availability of securities or purchasers or sellers of
securities, (b) furnishing analyses and reports concerning issuers, industries,
securities, economic factors and trends, portfolio strategy, and the performance
of accounts and (c) effecting securities transactions and performing functions
incidental thereto (such as clearance, settlement and custody).
Pursuant to provisions of the Advisory Agreement and the Sub-advisory
Agreement, the Fund's Trustees have authorized the Adviser to cause the Fund to
incur brokerage commissions in an amount higher than the lowest available rate
in return for research services provided to the Adviser. The Adviser is of the
opinion that the continued receipt of supplemental investment research services
from brokers is essential to its provision of high quality portfolio management
services to the Fund. The Adviser undertakes that such higher commissions will
not be paid by the Fund unless (a) the Adviser determines in good faith that the
amount is reasonable in relation to the services in terms of the particular
transaction or in terms of the Adviser's overall responsibilities with respect
to the accounts as to which they exercise investment discretion, (b) such
payment is made in compliance with the provisions of Section 28(e) and other
applicable state and federal laws, and (c) in the opinion of the Adviser, the
total commissions paid by the Fund are reasonable in relation to the expected
benefits to the Fund over the long term. The investment advisory fee paid by the
Fund under the Advisory Agreement is not reduced as a result of the Adviser's
receipt of research services.
The Adviser places portfolio transactions for other advisory accounts,
including other investment companies. Research services furnished by firms
through which the Fund effects its securities transactions may be used by the
Adviser in servicing all of their accounts; not all of such services may be used
by the Adviser in connection with the Fund. In the opinion of the Adviser, the
benefits from research services to each of the accounts (including the Fund)
managed by the Adviser cannot be measured separately. Because the
B-22
<PAGE> 207
volume and nature of the trading activities of the accounts are not uniform, the
amount of commissions in excess of the lowest available rate paid by each
account for brokerage and research services will vary. However, in the opinion
of the Adviser, such costs to the Fund will not be disproportionate to the
benefits received by the Fund on a continuing basis.
The Adviser seeks to allocate portfolio transactions equitably whenever
concurrent decisions are made to purchase or sell securities by the Fund and
another advisory account. In some cases, this procedure could have an adverse
effect on the price or the amount of securities available to the Fund. In making
such allocations among the Fund and other advisory accounts, the main factors
considered by the Adviser is the respective investment objectives, the relative
size of portfolio holdings of the same or comparable securities, the
availability of cash for investment, the size of investment commitments
generally held, and opinions of the persons responsible for recommending the
investment.
For the fiscal years ended May 31, 1995, 1996 and 1997, the Fund paid
$937,870, $666,564 and $1,020,461, respectively, in brokerage commissions on
portfolio transactions.
Effective October 31, 1996, Morgan Stanley Group Inc. became an affiliate
of the Adviser. Effective May 31, 1997, Dean Witter Discover & Co. became an
affiliate of the Adviser. For the fiscal year ended May 31, 1997, the Fund paid
Morgan Stanley Group Inc. or its affiliates $8,633 in brokerage commission
representing 1% of transactions with affiliates to total commissions.
DETERMINATION OF NET ASSET VALUE
The net asset value per share is determined as of the close of the New York
Stock Exchange (the "Exchange") (currently 4:00 p.m., New York Time) on each
business day on which the Exchange is open. The net asset value of Fund shares
is computed by dividing the value of all securities plus other assets, less
liabilities, by the number of shares outstanding, and adjusting to the nearest
cent per share.
Trading in securities on European and Far Eastern securities exchanges and
over-the-counter markets is normally completed well before the close of business
on each business day in New York (i.e., a day on which the Exchange is open). In
addition, European or Far Eastern securities trading generally or in a
particular country or countries may not take place on all business days in New
York. Furthermore, trading takes place on all business days in Japanese markets
on certain Saturdays and in various foreign markets on days which are not
business days in New York and on which the Fund's net asset value is not
calculated and on which the Fund does not effect sales, redemptions and
repurchases of its shares. There may be significant variations in the net asset
value of Fund shares on days when net asset value is not calculated and on which
shareholders cannot redeem on account of changes in prices of stocks traded in
foreign stock markets.
The Fund calculates net asset value per share, and therefore effects sales,
redemptions and repurchases of its shares, as of the close of the Exchange once
on each day on which the Exchange is open. Such calculation does not take place
contemporaneously with the determination of the prices of the majority of the
portfolio securities used in such calculation. If events materially affecting
the value of such securities occur between the time when their price is
determined and the time when the Fund's net asset value is calculated, such
securities will be valued at fair value as determined in good faith by the
Trustees.
The net asset value of the Fund is computed by (i) valuing securities
listed or traded on a national securities exchange at the last reported sale
price, or if there has been no sale that day at the last reported bid price,
using prices as of the close of trading on the Exchange, (ii) valuing unlisted
securities for which over-the-counter market quotations are readily available at
the most recent bid price as supplied by the National Association of Securities
Dealers Automated Quotations ("NASDAQ") or by broker/dealers, and (iii) valuing
any securities for which market quotations are not readily available and any
other assets at fair value as determined in good faith by the Trustees. Options
on stocks, options on stock indexes, and stock index futures contracts and
options thereon, which are traded on exchanges, are valued at their last sale or
settlement price as of the close of such exchanges, or, if no sales are
reported, at the mean between the last reported bid and asked prices. Debt
securities with a remaining maturity of 60 days or less are valued on an
amortized cost basis which approximates market value.
B-23
<PAGE> 208
The assets belonging to the Class A shares, the Class B shares and the
Class C shares will be invested together in a single portfolio. The net asset
value of each class will be determined separately by subtracting the expenses
and liabilities allocated to that class from the assets belonging to that class.
PURCHASE AND REDEMPTION OF SHARES
The following information supplements the section in the Fund's Prospectus
captioned "Purchase of Shares."
CLASS A SHARES -- REDUCED SALES CHARGES
THE DEALER MUST NOTIFY THE DISTRIBUTOR AT THE TIME AN ORDER IS PLACED FOR A
PURCHASE WHICH WOULD QUALIFY FOR THE REDUCED CHARGE ON THE BASIS OF PREVIOUS
PURCHASES. SIMILAR NOTIFICATION MUST BE MADE IN WRITING WHEN SUCH AN ORDER IS
PLACED BY MAIL. The reduced sales charge will not be applied if such
notification is not furnished at the time of the order. The reduced sales charge
will also not be applied should a review of the records of the Distributor or
ACCESS fail to confirm the representations concerning the investor's holdings.
LETTER OF INTENT
The Fund will shares totalling 5% of the dollar amount of the Letter of
Intent to be held by ACCESS in the name of the shareholder. The Letter of Intent
does not obligate the investor to purchase the indicated amount. In the event
the Letter of Intent goal is not achieved within the thirteen-month period, the
investor is required to pay the difference between sales charges otherwise
applicable to the purchases made during this period and sales charges actually
paid. Such payment may be made directly to the Distributor or, if not paid, the
Distributor will liquidate sufficient escrow shares to obtain such difference.
If the goal is exceeded in an amount which qualifies for a lower sales charge, a
price adjustment is made by refunding to the investor in shares of the Fund, the
amount of excess sales charges, if any, paid during the thirteen-month period.
REDEMPTION OF SHARES
Redemptions are not made on days during which the Exchange is closed. The
right of redemption may be suspended and the payment therefor may be postponed
for more than seven days during any period when (a) the Exchange is closed for
other than customary weekends or holidays; (b) trading on the Exchange is
restricted; (c) an emergency exists as a result of which disposal by the Fund of
securities owned by it is not reasonably practicable or it is not reasonably
practicable for the Fund to fairly determine the value of its net assets; or (d)
the SEC, by order, so permits.
CONTINGENT DEFERRED SALES CHARGE -- CLASS A
For purposes of the CDSC -- Class A, when shares of one fund are exchanged
for shares of another fund, the purchase date for the shares of the fund
exchanged into will be assumed to be the date on which shares were purchased in
the fund from which the exchange was made. If the exchanged shares themselves
are acquired through an exchange, the purchase date is assumed to carry over
from the date of the original election to purchase shares subject to a
CDSC -- Class A rather than a front-end load sales charge. In determining
whether a CDSC -- Class A is payable, it is assumed that shares held the longest
are the first to be redeemed.
B-24
<PAGE> 209
WAIVER OF CLASS B AND CLASS C CONTINGENT DEFERRED SALES CHARGE ("CDSC -- CLASS B
AND C")
As described in the Prospectus under "Purchase of Shares," redemptions of
Class B shares and Class C shares will be subject to a CDSC. The CDSC -- Class B
and C may be waived on redemptions of Class B shares and Class C shares in the
circumstances described below:
(a) Redemption Upon Disability or Death
The Fund will waive the CDSC -- Class B and C on redemptions following the
death or disability of a Class B shareholder and Class C shareholder. An
individual will be considered disabled for this purpose if he or she meets the
definition thereof in Section 72(m)(7) of the Code, which in pertinent part
defines a person as disabled if such person "is unable to engage in any
substantial gainful activity by reason of any medically determinable physical or
mental impairment which can be expected to result in death or to be of long-
continued and indefinite duration." While the Fund does not specifically adopt
the balance of the Code's definition which pertains to furnishing the Secretary
of Treasury with such proof as he or she may require, the Distributor will
require satisfactory proof of death or disability before it determines to waive
the CDSC -- Class B and C.
In cases of disability or death, the CDSC -- Class B and C will be waived
where the decedent or disabled person is either an individual shareholder or
owns the shares as a joint tenant with right of survivorship or is the
beneficial owner of a custodial or fiduciary account, and where the redemption
is made within one year of the death or initial determination of disability.
This waiver of the CDSC -- Class B and C applies to a total or partial
redemption, but only to redemptions of shares held at the time of the death or
initial determination of disability.
(b) Redemption in Connection with Certain Distributions from Retirement
Plans
The Fund will waive the CDSC -- Class B and C when a total or partial
redemption is made in connection with certain distributions from Retirement
Plans. The charge will be waived upon the tax-free rollover or transfer of
assets to another Retirement Plan invested in one or more of Van Kampen American
Capital funds; in such event, as described below, the Fund will "tack" the
period for which the original shares were held onto the holding period of the
shares acquired in the transfer or rollover for purposes of determining what, if
any, CDSC -- Class B and C is applicable in the event that such acquired shares
are redeemed following the transfer or rollover. The charge also will be waived
on any redemption which results from the return of an excess contribution
pursuant to Section 408(d)(4) or (5) of the Code, the return of excess deferral
amounts pursuant to Code Section 401(k)(8) or 402(g)(2), or from the death or
disability of the employee (see Code Section 72(m)(7) and 72(t)(2)(A)(ii)). In
addition, the charge will be waived on any minimum distribution required to be
distributed in accordance with Code Section 401(a)(9).
The Fund does not intend to waive the CDSC -- Class B and C for any
distributions from IRAs or other Retirement Plans not specifically described
above.
(c) Redemption Pursuant to a Fund's Systematic Withdrawal Plan
A shareholder may elect to participate in a systematic withdrawal plan
("Plan") with respect to the shareholder's investment in the Fund. Under the
Plan, a dollar amount of a participating shareholder's investment in the Fund
will be redeemed systematically by the Fund on a periodic basis, and the
proceeds mailed to the shareholder. The amount to be redeemed and frequency of
the systematic withdrawals will be specified by the shareholder upon his or her
election to participate in the Plan. The CDSC -- Class B and C will be waived on
redemptions made under the Plan.
The amount of the shareholder's investment in a Fund at the time the
election to participate in the Plan is made with respect to the Fund is
hereinafter referred to as the "initial account balance." The amount to be
systematically redeemed from the Fund without the imposition of a CDSC -- Class
B and C may not exceed a maximum of 12% annually of the shareholder's initial
account balance. The Fund reserves the right to change the terms and conditions
of the Plan and the ability to offer the Plan.
B-25
<PAGE> 210
(d) Involuntary Redemptions of Shares in Accounts that Do Not Have the
Required Minimum Balance
The Fund reserves the right to redeem shareholder accounts with balances of
less than a specified dollar amount as set forth in the Prospectus. Prior to
such redemptions, shareholders will be notified in writing and allowed a
specified period of time to purchase additional shares to bring the account up
to the required minimum balance. The Fund will waive the CDSC -- Class B and C
upon such involuntary redemption.
(e) Reinvestment of Redemption Proceeds in Shares of the Same Fund Within
180 Days After Redemption
A shareholder who has redeemed Class C shares of a Fund may reinvest at net
asset value, with credit for any CDSC -- Class C paid on the redeemed shares,
any portion or all of his or her redemption proceeds (plus that amount necessary
to acquire a fractional share to round off his or her purchase to the nearest
full share) in Class C shares of the Fund, provided that the reinvestment is
effected within 180 days after such redemption and the shareholder has not
previously exercised this reinvestment privilege with respect to Class C shares
of the Fund. Shares acquired in this manner will be deemed to have the original
cost and purchase date of the redeemed shares for purposes of applying the
CDSC -- Class C to subsequent redemptions.
(f) Redemption by Adviser
The Fund may waive the CDSC -- Class B and C when a total or partial
redemption is made by the Adviser with respect to its investments in the Fund.
EXCHANGE PRIVILEGE
The following supplements the discussion of "Shareholder
Services -- Exchange Privilege" in the Prospectus:
By use of the exchange privilege, the investor authorizes ACCESS to act on
telephonic, telegraphic or written exchange instructions from any person
representing himself to be the investor or the agent of the investor and
believed by ACCESS to be genuine. Van Kampen American Capital and its
subsidiaries, including ACCESS, and the Fund employ procedures considered by
them to be reasonable to confirm that instructions communicated by telephone are
genuine. Such procedures include requiring certain personal identification
information prior to acting upon telephone instructions, tape recording
telephone communications, and providing written confirmation of instructions
communicated by telephone. If reasonable procedures are employed, neither Van
Kampen American Capital, ACCESS nor the Fund will be liable for following
telephone instructions which it reasonably believes to be genuine. Van Kampen
American Capital, ACCESS and the Fund may be liable for any losses due to
unauthorized or fraudulent instructions if reasonable procedures are not
followed.
For purposes of determining the sales charge rate previously paid on Class
A shares, all sales charges paid on the exchanged security and on any security
previously exchanged for such security or for any of its predecessors shall be
included. If the exchange security was acquired through reinvestment, that
security is deemed to have been sold with a sales charge rate equal to the rate
previously paid on the security on which the dividend or distribution was paid.
If a shareholder exchanges less than all of his securities, the security upon
which the highest sales charge rate was previously paid is deemed exchanged
first.
Exchange requests received on a business day prior to the time shares of
the funds involved in the request are priced will be processed on the date of
receipt. "Processing" a request means that shares in the fund from which the
shareholder is withdrawing an investment will be redeemed at the net asset value
per share next determined on the date of receipt. Shares of the new Fund into
which the shareholder is investing will also normally be purchased at the net
asset value per share, plus any applicable sales charge, next determined on the
date of receipt. Exchange requests received on a business day after the time
shares of the funds involved in the request are priced will be processed on the
next business day in the manner described herein.
A prospectus of any of these mutual funds may be obtained from any
authorized dealer or the Distributor. An investor considering an exchange to one
of such funds should refer to the prospectus for additional information
regarding such fund.
B-26
<PAGE> 211
TAX STATUS OF THE FUND
The Trust and each of its series, including the Fund, will be treated as
separate corporations for federal income tax purposes. The Fund has qualified
and intends to continue to qualify each year and to elect to be treated as a
regulated investment company under the Code. If the Fund so qualifies and
distributes each year to its shareholders at least 90% of its net investment
income (including tax-exempt interest, taxable income and net short-term capital
gain, but not net capital gains, which are the excess of net long-term capital
gains over net short-term capital losses) in each year, it will not be required
to pay federal income taxes on any income distributed to shareholders. The Fund
intends to distribute at least the minimum amount of net investment income
necessary to satisfy the 90% distribution requirement. The Fund will not be
subject to federal income tax on any net capital gains distributed to
shareholders.
FUND PERFORMANCE
The Fund's average annual total return (computed in the manner described in
the Prospectus) for Class A shares of the Fund for (i) the one year period May
31, 1997 was 10.93%; (ii) the five year period ending May 31, 1997 was 10.21%;
and (iii) the 5 year, 9 1/2 month period since August 5, 1991, the commencement
of investment operations, through May 31, 1997 was 11.09%. The Fund's average
annual total return (computed in the manner described in this Prospectus) for
Class B shares of the Fund for (i) the one year period ending May 31, 1997 was
11.83%; (ii) the five year period ending May 31, 1997 was 10.45%; and (iii) the
5 year, 6 1/2 month period since November 15, 1991, the commencement of
distribution for Class B shares of the Fund, through May 31, 1997 was 10.75%.
The Fund's average annual total return for Class C shares of the Fund for (i)
the one year period ending May 31, 1997 was 15.82% and (ii) the 3 year, 11 1/2
month period since June 21, 1993, the commencement of distribution for Class C
shares of the Fund, through May 31, 1997 was 13.31%. These results are based on
historical earnings and asset value fluctuations and are not intended to
indicate future performance. Such information should be considered in light of
the Fund's investment objectives and policies as well as the risks incurred in
the Fund's investment practices. Future results will be affected by changes in
the general level of prices of securities available for purchase and sale by the
Fund.
Total return is computed separately for Class A shares, Class B shares and
Class C shares.
The Fund may, from time to time: (1) illustrate the benefits of
tax-deferral by comparing taxable investments to investments made through
tax-deferred retirement plans; (2) illustrate in graph or chart form, or
otherwise, the benefits of dollar cost averaging by comparing investments made
pursuant to a systematic investment plan to investments made in a rising market;
and (3) in reports or other communications to shareholders or in advertising
material, illustrate the benefits of compounding at various assumed rates of
return. Such illustrations may be in the form of charts or graphs and will not
be based on historical returns experienced by the Fund.
The Fund seeks to remain fully invested and diversified across many
industries to attempt to achieve consistent performance. From time to time
marketing materials may provide a portfolio manager update, an adviser update
and/or discuss general economic conditions and outlooks. The Fund's marketing
materials may also show the Fund's asset class diversification, top five sector
holdings and ten largest holdings. Materials may also mention how Van Kampen
American Capital believes the Fund compares relative to other Van Kampen
American Capital funds. Materials may also discuss the Dalbar Financial Services
study from 1984 to 1994 which examined investor cash flow into and out of all
types of mutual funds. The ten year study found that investors who bought mutual
fund shares and held such shares outperformed investors who bought and sold. The
Dalbar study conclusions were consistent regardless if shareholders purchased
their funds in direct or sales force distribution channels. The study showed
that investors working with a professional representative have tended over time
to earn higher returns than those who invested directly. The Fund will also be
marketed on the Internet.
OTHER INFORMATION
CUSTODY OF ASSETS -- State Street Bank and Trust Company, 225 Franklin Street,
Boston, Massachusetts 02110 serves as Custodian for the Trust. It is also
anticipated that foreign sub-custodians will be used for
B-27
<PAGE> 212
certain of the Fund's investments in foreign securities. Any such sub-custodian
shall be utilized pursuant to an agreement between the Custodian and the foreign
sub-custodian that has been approved as required pursuant to Rule 17f-5 under
the 1940 Act. The Custodian and sub-custodians generally domestically, and
frequently abroad, do not actually hold certificates for the securities in their
custody, but instead have book records with domestic and foreign securities
depositories, which in turn have book records with the transfer agents of the
issuers of the securities.
SHAREHOLDER REPORTS -- Semiannual statements are furnished to shareholders, and
annually such statements are audited by the independent accountants.
INDEPENDENT ACCOUNTANTS -- Price Waterhouse LLP, 1201 Louisiana, Suite 2900,
Houston, Texas 77002, the independent accountants for the Fund, performs an
annual audit of the Fund's financial statements.
B-28
<PAGE> 213
Report of Independent Accountants
To the Shareholders and Board of Trustees of
Van Kampen American Capital Global Equity Fund
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Van Kampen American Capital Global
Equity Fund (the "Fund"), a series of Van Kampen American Capital World
Portfolio Series Trust, at May 31, 1997, and the results of its operations, the
changes in its net assets and the financial highlights for each of the periods
presented, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits, which included confirmation of
securities at May 31, 1997 by correspondence with the custodian and brokers and
the application of alternative auditing procedures where confirmations from
brokers were not received, provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Houston, Texas
July 14, 1997
B-29
<PAGE> 214
Portfolio of Investments
May 31, 1997
<TABLE>
<CAPTION>
================================================================================
Number
Description of Shares Market Value
- --------------------------------------------------------------------------------
<S> <C> <C>
Common Stocks 93.4%
Austria 0.1%
Scala ECE (b)...................................... 1,289 $188,395
Slovenske Energeticke Strojarne (b)................ 13,000 137,754
--------
326,149
--------
Bermuda 0.0%
Applied International Holdings (b)................. 20,000 1,600
--------
Canada 4.1%
Abitibi Price, Inc. (b)............................ 4,800 86,328
Agrium, Inc........................................ 6,100 82,779
Alcan Aluminum..................................... 9,700 347,507
Avenor, Inc........................................ 2,900 56,669
Bank of Montreal................................... 11,200 426,779
Bank of Nova Scotia................................ 9,900 410,201
Barrick Gold Corp.................................. 16,900 426,873
BCE, Inc........................................... 29,800 783,984
Bombardier, Inc., Class B.......................... 13,300 279,149
Cae, Inc........................................... 5,400 42,404
Cameco Corp........................................ 2,500 97,434
Canadian Imperial Bank............................. 8,500 205,164
Canadian Natural Resources (b)..................... 4,700 123,308
Canadian Occidental Petroleum...................... 6,200 140,226
Canadian Pacific................................... 14,800 393,110
Canadian Tire, Class A............................. 5,200 97,474
Cominco............................................ 3,700 103,098
Corel Corp (b)..................................... 3,000 17,696
Cott Corp.......................................... 2,000 18,311
Dofasco, Inc....................................... 4,000 73,098
Domtar, Inc........................................ 3,600 28,139
Echo Bay Mines..................................... 6,200 38,141
Gulf Canada Resource (b)........................... 9,700 87,754
Imasco............................................. 10,600 296,895
Imperial Oil....................................... 7,100 344,286
Inco............................................... 6,900 226,721
</TABLE>
B-30 See Notes to Financial Statements
<PAGE> 215
Portfolio of Investments (Continued)
May 31, 1997
<TABLE>
<CAPTION>
=========================================================================================
Number
Description of Shares Market Value
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Canada (Continued)
IPL Energy, Inc............................................. 2,300 $ 72,744
Laidlaw, Inc., Class B Non Voting........................... 12,300 166,469
Loewen Group, Inc........................................... 2,600 85,807
Macmillan Bloedel........................................... 6,500 94,087
Magna International, Inc.................................... 3,200 171,383
Methanex Corp. (b).......................................... 7,800 70,565
Molson Companies, Class A................................... 3,300 56,724
Moore Corp.................................................. 5,100 113,686
Newbridge Networks Corp. (b)................................ 6,500 258,739
Noranda, Inc................................................ 10,700 238,518
Norcen Energy Resources..................................... 5,200 125,136
Northern Telecom............................................ 10,300 861,377
Nova Corp................................................... 21,800 180,654
Petro....................................................... 12,400 215,387
Placer Dome, Inc............................................ 9,400 171,101
Potash Corporation of Saskatchewan, Inc..................... 1,900 154,701
Power Corporation of Canada................................. 5,800 133,068
Provigo, Inc. (b)........................................... 5,200 28,038
Ranger Oil.................................................. 8,400 88,152
Renaissance Energy (b)...................................... 5,100 160,009
Repap Enterprises, Inc. (b)................................. 5,100 2,178
Rogers Communications, Inc., Class B (b).................... 8,700 50,058
Royal Bank of Canada........................................ 12,800 553,984
Seagram..................................................... 14,700 590,468
Talisman Energy, Inc. (b)................................... 5,200 169,921
Teck Corp., Class B Subordinated Voting..................... 4,700 104,089
Thomson Corp................................................ 25,700 571,029
Transcanada Pipelines....................................... 9,500 183,578
Westcoast Energy, Inc....................................... 4,900 88,836
Weston George............................................... 2,700 163,169
---------
1,157,183
---------
Czech Republic 0.0%
Prazske Pivovary............................................ 24,000 144,260
---------
</TABLE>
B-31 See Notes to Financial Statements
<PAGE> 216
Portfolio of Investments (Continued)
May 31, 1997
<TABLE>
<CAPTION>
================================================================================
Number
Description of Shares Market Value
- --------------------------------------------------------------------------------
<S> <C> <C>
France 5.0%
Accor................................................. 1,700 $ 235,514
Air Liquide........................................... 2,850 436,783
Alcatel Alsthom....................................... 5,900 638,572
AXA-UAP............................................... 12,200 729,938
BIC................................................... 1,450 213,435
Bouygues.............................................. 1,300 112,517
BQE National Paris.................................... 8,550 350,759
Canal Plus............................................ 950 160,894
Carrefour............................................. 1,500 984,484
Cie Bancaire.......................................... 1,100 121,723
Cie De St Gobain...................................... 3,400 469,262
Cie De Suez........................................... 5,650 288,048
Cie Fin Paribas....................................... 3,400 218,852
CSF Thomson........................................... 4,650 132,464
Danone................................................ 3,050 458,984
Eaux Cie Generale..................................... 4,350 534,842
Eaux Cie Generale Warrants, expiring 5/21/02 (b)...... 3,550 2,428
Elf Aquitaine......................................... 10,750 1,074,144
Erid Beghin Say....................................... 1,150 160,912
Essilor International................................. 425 107,748
Havas................................................. 2,600 175,146
L'Oreal............................................... 2,700 979,548
Lafarge............................................... 3,950 252,407
Legrand............................................... 1,200 193,052
LVMH (Moet Hennessy Louis Vuitton) (b)................ 3,400 823,122
Lyonnaise des Eaux.................................... 2,500 245,472
Michelin (CGDE), Class B.............................. 5,950 324,877
Pernod Ricard......................................... 2,650 126,429
Peugeot............................................... 2,300 227,427
Pin Printemps Redo.................................... 850 356,215
Promodes.............................................. 800 270,841
Sagem................................................. 125 62,775
Saint Louis........................................... 425 97,959
</TABLE>
B-32 See Notes to Financial Statements
<PAGE> 217
Portfolio of Investments (Continued)
May 31, 1997
<TABLE>
<CAPTION>
================================================================================
Number
Description of Shares Market Value
- --------------------------------------------------------------------------------
<S> <C> <C>
France (Continued)
Sanofi............................................... 4,200 $ 364,389
Schneider............................................ 6,000 288,124
Societe Generale..................................... 3,700 410,712
Sodexho Alliance..................................... 275 127,628
Total, Class B....................................... 9,450 864,060
Usinor Sacilor....................................... 10,350 155,216
-----------
13,777,702
-----------
Germany 4.3%
Adidas............................................... 1,400 147,036
AGIV (b)............................................. 1,350 24,803
Amb Aach & Mun Bet................................... 100 92,563
BASF................................................. 16,500 608,215
Bayerische........................................... 21,000 814,025
Bayerische Hypotheden-und-Wechsel-Bank............... 7,050 223,780
Bayerische Vereinsbank............................... 7,400 304,382
Beiersdorf, Class A.................................. 2,450 130,449
Bilfinger & Berger BAU............................... 1,400 54,473
Brau Und Brunnen (b)................................. 250 18,577
CKAG Colonia Konzern................................. 800 77,234
Continental.......................................... 2,800 63,615
Daimler Benz......................................... 14,300 1,100,257
Degussa.............................................. 2,500 121,482
Deutsche Telekom..................................... 60,000 1,330,525
Dresdner Bank........................................ 12,450 435,615
Heidelberg Zement (b)................................ 1,350 126,382
Hochtief............................................. 2,600 109,531
Karstadt............................................. 300 105,845
Klockner Humb Deut................................... 1,800 17,694
Linde................................................ 300 206,249
Lufthansa............................................ 10,800 171,943
Man.................................................. 400 114,446
Mannesmann........................................... 1,050 426,365
Merck KGaA........................................... 4,550 187,021
</TABLE>
B-33 See Notes to Financial Statements
<PAGE> 218
Portfolio of Investments (Continued)
May 31, 1997
<TABLE>
<CAPTION>
================================================================================
Number
Description of Shares Market Value
- --------------------------------------------------------------------------------
<S> <C> <C>
Germany (Continued)
Metro................................................ 2,900 $ 317,217
Muenchener Rueckversicherungs - Gesellschaft......... 200 509,040
Preussag............................................. 500 131,648
RWE.................................................. 9,400 400,398
SAP.................................................. 1,700 303,177
Schering............................................. 2,050 205,828
Siemens.............................................. 16,000 901,808
Strabag (b).......................................... 100 8,484
Thyssen.............................................. 1,100 249,722
Veba................................................. 14,000 791,294
Viag................................................. 800 364,168
Volkswagen........................................... 800 516,763
-----------
11,712,054
-----------
Hong Kong 2.1%
Bank of East Asia (b)................................ 22,600 82,251
Cathay Pacific Air................................... 85,000 127,799
Cheung Kong Holdings................................. 64,000 654,578
China Light & Power Co............................... 53,500 267,897
Chinese Estates Holdings............................. 48,000 48,629
Giordano International............................... 18,000 10,802
Hang Lung Development Co............................. 36,000 68,994
Hang Seng Bank....................................... 55,600 667,329
Hong Kong & China Gas Co. (ADR)...................... 97,200 169,349
Hong Kong & Shang Hotels............................. 37,000 57,301
Hong Kong Aircraft................................... 5,600 17,092
Hong Kong Telecommunications......................... 314,000 694,986
Hopewell Holdings.................................... 125,000 69,772
HSBC Holdings........................................ 1,315 39,882
Hutchison Whampoa.................................... 97,000 807,447
Hysan Development.................................... 31,000 103,420
Johnson Electric Holdings (b)........................ 11,500 33,913
Miramar Hotel & Investment........................... 17,000 32,361
Oriental Press Group................................. 42,000 14,364
</TABLE>
B-34 See Notes to Financial Statements
<PAGE> 219
Portfolio of Investments (Continued)
May 31, 1997
<TABLE>
<CAPTION>
========================================================================================
Number
Description of Shares Market Value
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Hong Kong (Continued)
Peregrine Investment......................................... 11,000 $ 19,591
Shangri-La Asia.............................................. 46,000 58,179
Shun Tak Holdings............................................ 48,000 31,593
Stelux Holdings International................................ 30,000 5,653
Sth China Morn Pst........................................... 54,000 51,920
Sun Hung Kai Properties...................................... 65,000 799,026
Swire Pacific, Class A....................................... 45,000 377,492
Television Broadcast......................................... 13,000 56,708
Wharf Holdings............................................... 63,000 282,132
Wing Lung Bank............................................... 5,280 30,323
Winsor Industrial............................................ 10,000 2,181
-----------
5,682,964
-----------
Hungary 0.1%
Tiszai Vegyi Kombinat Rt (GDR) (b)........................... 27,000 395,550
-----------
Italy 1.8%
Assic Generali............................................... 26,500 453,539
BCA Comm Italiana............................................ 42,000 82,664
BCO Ambros Veneto............................................ 16,000 39,423
Benetton Group............................................... 5,500 76,928
Burgo Cartiere............................................... 5,000 29,154
Credito Italiano............................................. 72,500 107,823
Edison....................................................... 19,000 90,041
ENI.......................................................... 229,000 1,141,993
Falck Acciaierie & Ferriere Lombarde......................... 5,000 19,254
Fiat......................................................... 97,000 318,000
Fiat Di Risp................................................. 22,000 38,561
Fiat Priv.................................................... 33,000 55,797
IMI.......................................................... 18,250 159,618
Impregilo (b)................................................ 10,000 7,283
Instituto Bancario San Paolo................................. 25,000 157,204
Instituto Nazionale delle Assicurazioni...................... 122,000 168,479
Italcementi.................................................. 7,000 40,712
Italcementi Di Risp.......................................... 4,500 11,088
</TABLE>
B-35 See Notes to Financial Statements
<PAGE> 220
Portfolio of Investments (Continued)
May 31, 1997
<TABLE>
<CAPTION>
========================================================================================
Number
Description of Shares Market Value
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Italy (Continued)
Italgas........................................................ 19,000 $ 58,476
Magneti Marelli................................................ 15,000 23,902
Mediaset....................................................... 34,500 148,429
Montedison (b)................................................. 85,000 51,919
Montedison Di Risp (b)......................................... 30,000 19,121
Olivetti & C. (b).............................................. 105,000 30,550
Parmalat Finanz (b)............................................ 45,000 64,136
Pirelli........................................................ 50,000 108,885
Ras............................................................ 8,500 64,711
Rinascente LA.................................................. 7,000 33,875
Sasib.......................................................... 5,000 16,879
Sirti.......................................................... 9,000 51,813
Snia BPD....................................................... 20,000 16,406
Societa Assicuratrice Industriale.............................. 4,000 28,092
Telecom Italia Di Risp......................................... 45,000 98,793
Telecom Italia Mob............................................. 190,000 557,290
Telecom Italia Mob Di Risp..................................... 45,000 78,610
Telecom Italia Ord............................................. 185,000 509,325
-----------
4,958,773
-----------
Japan 12.0%
Advantest...................................................... 2,000 136,024
Ajinomoto Co., Inc............................................. 28,000 281,322
Aoki Corp. (b)................................................. 13,000 15,629
Aoyama Trading Co.............................................. 2,100 65,281
Asahi Bank..................................................... 22,000 143,770
Asahi Breweries................................................ 15,000 204,809
Asahi Chemical Industry Co..................................... 45,000 250,408
Asahi Glass Co................................................. 43,000 417,261
Bank of Tokyo.................................................. 42,600 738,961
Bridgestone Corp............................................... 16,000 361,357
Canon, Inc..................................................... 19,000 481,322
Casio Computer Co.............................................. 9,000 70,794
Chiba Bank..................................................... 12,000 62,344
</TABLE>
B-36 See Notes to Financial Statements
<PAGE> 221
\
Portfolio of Investments (Continued)
May 31, 1997
<TABLE>
<CAPTION>
========================================================================================
Number
Description of Shares Market Value
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Japan (Continued)
Chiyoda Corp................................................ 2,000 $ 9,412
Chugai Pharm Co. (b)........................................ 16,000 135,749
Dai Nippon Printing......................................... 20,000 400,172
Daiei, Inc. (b)............................................. 18,000 117,475
Daikin Industries........................................... 15,000 145,556
Daiwa House Industries...................................... 15,000 176,471
Daiwa Securities............................................ 31,000 228,141
Denso Corp.................................................. 19,000 474,796
East Japan Railway.......................................... 90 444,397
Ebara Corp.................................................. 11,000 159,639
Fanuc....................................................... 6,500 231,644
Fuji Bank................................................... 26,000 334,908
Fuji Photo Film Co.......................................... 10,000 387,291
Fujitsu (b)................................................. 39,000 475,569
Furukawa Electric........................................... 17,000 100,730
Hankyu Corp................................................. 21,000 109,103
Hazama Corp................................................. 15,000 28,338
Hitachi..................................................... 76,000 809,274
Honda Motor Co.............................................. 20,000 587,377
Ind Bank Japan.............................................. 22,000 264,491
Ito Yokado Co............................................... 10,000 570,202
Japan Air Lines Co. (b)..................................... 53,000 224,835
Japan Energy Corp........................................... 38,000 95,286
Joyo Bank................................................... 8,000 39,158
Jusco Co.................................................... 8,000 269,987
Kajima Corp................................................. 31,000 173,302
Kansai Electric Power....................................... 20,300 381,769
Kao Corp.................................................... 28,000 379,906
Kawasaki Steel Corp......................................... 48,000 140,970
Kinki Nippon Railway........................................ 37,000 222,095
Kirin Brewery Co............................................ 31,000 306,140
Komatsu..................................................... 31,000 234,264
Kubota Corp................................................. 45,000 206,741
</TABLE>
B-37 See Notes to Financial Statements
<PAGE> 222
Portfolio of Investments (Continued)
May 31, 1997
<TABLE>
<CAPTION>
========================================================================================
Number
Description of Shares Market Value
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Japan (Continued)
Kumagai Gumi Co............................................. 31,000 $ 50,580
Kyocera Corp................................................ 4,500 324,216
Kyowa Hakko Kogyo........................................... 15,000 106,655
Marubeni Corp............................................... 45,000 191,284
Marui Co.................................................... 7,000 130,442
Matsushita Electric Industries.............................. 45,000 846,286
Mitsubishi Chemical......................................... 45,000 136,797
Mitsubishi Corp............................................. 42,000 494,118
Mitsubishi Electric Corp.................................... 53,000 300,386
Mitsubishi Estate........................................... 33,000 450,580
Mitsubishi Heavy Industries................................. 83,000 597,286
Mitsubishi Materials Corp................................... 31,000 120,060
Mitsubishi Trust & Banking Corp............................. 13,000 186,432
Mitsui & Co................................................. 45,000 398,025
Mitsui Engineering & Ship Building Co. (b).................. 31,000 57,235
Mitsui Trust & Banking Co................................... 13,000 97,793
Mitsukoshi.................................................. 17,000 119,562
Murata Manufacturing Co..................................... 5,000 197,939
Mycal Corp.................................................. 10,000 144,268
NEC Corp.................................................... 31,000 431,258
NGK Insulators.............................................. 15,000 146,844
Nippon Express Co........................................... 19,000 147,660
Nippon Fire & Marine Insurance.............................. 15,000 71,232
Nippon Light Metal.......................................... 15,000 58,609
Nippon Meat Packer.......................................... 15,000 182,911
Nippon Oil Co............................................... 45,000 227,995
Nippon Steel Corp........................................... 170,000 497,810
Nippon Telegraph & Telephone Corp........................... 185 1,763,418
Nippon Yusen Kabushiki Kaisha............................... 45,000 185,487
Nissan Fire & Marine Insurance.............................. 2,350 11,039
Nissan Motor Co............................................. 58,000 384,508
NKK Corp.................................................... 89,000 175,019
Nomura Securities........................................... 39,000 462,173
</TABLE>
B-38 See Notes to Financial Statements
<PAGE> 223
Portfolio of Investments (Continued)
May 31, 1997
<TABLE>
<CAPTION>
========================================================================================
Number
Description of Shares Market Value
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Japan (Continued)
Odakyu Electric Railway....................................... 18,000 $ 99,699
Oji Paper Co.................................................. 31,000 179,158
Osaka Gas Co.................................................. 67,000 176,058
Penta Ocean Construction...................................... 15,000 49,077
Pioneer Electronic............................................ 5,000 123,658
Rohm Co....................................................... 2,000 207,814
Sakura Bank................................................... 34,000 203,504
Sanyo Electric Co............................................. 45,000 189,738
Secom Co...................................................... 3,000 215,887
Sega Enterprises.............................................. 3,000 100,472
Sekisui House................................................. 15,000 146,844
Sharp Corp.................................................... 30,000 386,432
Shimano, Inc.................................................. 4,000 76,599
Shimizu Corp.................................................. 22,000 130,923
Shin Etsu Chemical Co......................................... 7,000 175,526
Shiseido Co................................................... 7,000 102,190
Shizuoka Bank................................................. 10,000 96,179
Showa Denko K.K. (b).......................................... 31,000 78,532
Softbank Corp................................................. 700 47,308
Sony Corp..................................................... 7,000 589,695
Sumitomo Bank................................................. 27,000 373,293
Sumitomo Chemical............................................. 61,000 252,486
Sumitomo Corp................................................. 31,000 274,195
Sumitomo Electric Industries.................................. 21,000 330,013
Sumitomo Forestry............................................. 6,000 65,436
Sumitomo Metal Industries..................................... 78,000 198,935
Sumitomo Metal Mining Co...................................... 15,000 104,465
Sumitomo Osaka Cement Co...................................... 16,000 48,227
Taisei Corp................................................... 31,000 132,838
Taisho Pharmacy Co............................................ 9,000 225,676
Takeda Chemical Industries.................................... 19,000 481,322
Teijin........................................................ 31,000 130,708
Tobu Railway Co............................................... 21,000 94,135
</TABLE>
B-39 See Notes to Financial Statements
<PAGE> 224
Portfolio of Investments (Continued)
May 31, 1997
<TABLE>
<CAPTION>
================================================================================
Number
Description of Shares Market Value
- --------------------------------------------------------------------------------
<S> <C> <C>
Japan (Continued)
Tohoku Electric Power................................ 10,900 $ 186,269
Tokai Bank........................................... 22,000 180,988
Tokio Marine & Fire Insurance Co..................... 45,000 529,412
Tokyo Dome Corp...................................... 3,000 45,084
Tokyo Electric Power................................. 28,300 539,511
Tokyo Electron....................................... 2,000 100,816
Tokyo Gas Co......................................... 61,000 155,577
Tokyu Corp........................................... 26,000 148,699
Toppan Printing Co................................... 21,000 288,536
Toray Industries, Inc................................ 45,000 306,054
Toto................................................. 15,000 168,742
Toyobo Co............................................ 31,000 78,798
Toyota Motor Corp.................................... 70,000 2,007,729
Ube Industries....................................... 31,000 87,849
Yamaichi Securities Co............................... 31,000 87,849
Yasuda Trust & Banking............................... 15,000 45,084
-----------
32,834,396
-----------
Netherlands 1.5%
ABN Amro Holdings.................................... 18,800 347,152
Ahold Koninklijke.................................... 2,300 174,549
Akzo Nobel........................................... 1,100 146,304
Elsevier............................................. 9,900 167,360
Getronics............................................ 1,200 40,884
Heineken............................................. 700 118,372
ING Groep NV......................................... 10,922 482,329
KLM Royal Dutch Air Lines............................ 1,300 37,529
Koninklijke KNP BT................................... 1,500 30,897
Koninklijke Nedlloyd................................. 400 9,800
OCE.................................................. 302 39,350
Philips Electronic................................... 4,800 262,408
Royal Dutch Petroleum Co............................. 7,300 1,409,119
Royal PTT (ADR)...................................... 6,400 223,709
</TABLE>
B-40 See Notes to Financial Statements
<PAGE> 225
Portfolio of Investments (Continued)
May 31, 1997
<TABLE>
<CAPTION>
================================================================================
Number
Description of Shares Market Value
- --------------------------------------------------------------------------------
<S> <C> <C>
Netherlands (Continued)
Stork.................................................. 500 $ 22,107
Unilever............................................... 2,200 422,835
Wolters Kluwer......................................... 1,000 120,208
-----------
4,054,912
-----------
Singapore 3.0%
City Developments...................................... 85,000 790,394
Creative Technologies Corp. (b)........................ 9,000 166,748
Cycle & Carriage....................................... 25,000 253,443
DBS Land............................................... 16,000 55,932
Development Bank of Singapore.......................... 52,000 650,773
First Capital Corp..................................... 31,000 85,395
Fraser & Neave......................................... 32,000 255,051
Hai Sun Hup Group...................................... 60,000 42,369
Hotel Properties....................................... 50,000 85,646
Inchcape Berhad........................................ 21,000 77,816
Jurong Shipyard........................................ 12,000 54,115
Keppel Corp............................................ 77,000 355,310
Keppel Corp., Class A (b).............................. 4,750 21,918
Metro Holdings......................................... 12,000 38,593
Natsteel............................................... 36,000 94,637
Neptune Orient Lines................................... 92,000 82,976
Overseas Chinese Bank.................................. 75,000 933,371
Overseas Union Enterprise.............................. 16,000 76,627
Parkway Holdings....................................... 35,000 173,740
Robinson & Co.......................................... 6,000 30,203
Shangri-La Hotel....................................... 17,000 51,108
Singapore Airlines..................................... 95,000 810,320
Singapore Press Holdings............................... 22,000 438,370
Singapore Technologies Industrial Corp................. 78,000 217,045
Singapore Telecommunications........................... 654,000 1,179,697
Straits Trading Co..................................... 37,000 86,401
United Industrial Corp................................. 151,000 122,464
United Overseas Bank................................... 87,000 894,148
</TABLE>
B-41 See Notes to Financial Statements
<PAGE> 226
- --------------------------------------------------------------------------------
Portfolio of Investments (Continued)
- --------------------------------------------------------------------------------
May 31, 1997
<TABLE>
<CAPTION>
================================================================================
Number
Description of Shares Market Value
- --------------------------------------------------------------------------------
<S> <C> <C>
Singapore (Continued)
United Overseas Land..................................... 58,000 $ 90,834
------------
8,215,444
------------
Spain 2.1%
Acerinox................................................. 500 84,740
Aguas De Barcelona....................................... 1,700 68,677
Argentaria Corp.......................................... 5,120 255,008
Autopistas Cesa.......................................... 8,200 100,969
BCO Bilbao Vizcaya....................................... 9,100 644,604
BCO Central Hispan....................................... 6,600 212,984
BCO Santander............................................ 6,500 554,407
Corp Fin Alba............................................ 600 65,993
Corporacion Mapfre....................................... 1,100 58,896
Dragados Y Construction.................................. 2,300 44,549
Ebro Agricolas........................................... 2,000 38,323
Emp Nac Electricid (b)................................... 10,400 794,245
Empresa Nacl Celul....................................... 900 13,292
Ercros (b)............................................... 6,900 5,298
Fom Const Y Contra....................................... 600 66,782
Gas Natural SDG.......................................... 1,500 285,971
Iberdrola................................................ 37,700 462,905
Metrovacesa.............................................. 900 34,989
Portland Valderriv....................................... 300 20,794
Repsol................................................... 12,200 510,584
Tabacalera, Class A...................................... 1,500 76,162
Telefonica De Espana..................................... 38,000 1,096,154
Union Electrica Fenosa................................... 11,800 104,483
Uralita.................................................. 2,100 20,338
Vallehermoso............................................. 1,700 42,923
Viscofan Envoltura....................................... 900 18,179
Zardoya Otis............................................. 400 50,083
------------
5,732,332
------------
Sweden 2.0%
ABB, Class A............................................. 32,000 431,417
</TABLE>
B-42 See Notes to Financial Statements
<PAGE> 227
Portfolio of Investments (Continued)
May 31, 1997
<TABLE>
<CAPTION>
================================================================================
Number
Description of Shares Market Value
- --------------------------------------------------------------------------------
<S> <C> <C>
Sweden (Continued)
AGA, Class A........................................... 2,700 $ 36,227
AGA, Class B........................................... 4,700 61,848
Astra, Class A......................................... 60,000 967,592
Atlas Copco, Class A................................... 7,400 198,576
Electrolux, Class B.................................... 2,900 172,851
Ericsson Telephonaktiebolaget LM, Class B (b).......... 36,800 1,291,361
Esselte, Class A....................................... 1,500 34,253
Granges (b)............................................ 1,450 18,052
Hennes & Mauritz, Class B.............................. 8,000 261,121
Securitas, Class B..................................... 3,600 89,638
Skand Enskilda Banking, Class A........................ 21,100 217,773
Skandia Foersaekrings.................................. 4,600 162,310
Skanska, Class B....................................... 4,900 197,234
SKF, Class B........................................... 4,800 110,847
Stora Kopparbergs, Class A............................. 12,200 180,217
Svenska Cellulosa, Class B............................. 7,500 157,234
Svenska Handelsbkn, Class A (b)........................ 8,200 222,159
Swedish Match.......................................... 18,800 61,121
Trelleborg, Class B.................................... 5,300 91,966
Volvo.................................................. 15,600 431,701
-----------
5,395,498
-----------
Switzerland 2.9%
ABB.................................................... 210 287,927
Adecco................................................. 420 157,752
Alusuisse Lonza Holdings............................... 130 122,529
Credit Suisse Group.................................... 4,300 539,625
Georg Fischer.......................................... 20 28,523
Holderbk Fn Glarus..................................... 160 140,300
Nestle................................................. 900 1,118,328
Novartis (b)........................................... 1,466 1,987,235
Roche Holdings Bearer.................................. 37 485,880
Roche Holdings Genusscheine............................ 158 1,403,304
Sairgroup (b).......................................... 80 81,446
</TABLE>
B-43 See Notes to Financial Statements
<PAGE> 228
Portfolio of Investments (Continued)
May 31, 1997
<TABLE>
<CAPTION>
================================================================================
Number
Description of Shares Market Value
- --------------------------------------------------------------------------------
<S> <C> <C>
Switzerland (Continued)
Schw Bankgesellsch..................................... 480 $ 525,953
Schweiz Bankverein (b)................................. 1,730 415,278
SGS Holdings........................................... 40 88,534
SMH.................................................... 120 70,743
Sulzer................................................. 90 70,785
Ubs Schw Bkgesell (b).................................. 500 109,433
Valora Holdings........................................ 150 33,412
Zuerich Versicherun.................................... 1,080 396,498
-----------
8,063,485
-----------
Thailand 0.6%
Siam Cement Co......................................... 39,000 851,487
Telecomasia (b)........................................ 135,000 153,971
Thai Military Bank Public Co........................... 501,600 618,061
-----------
1,623,519
-----------
United Kingdom 7.8%
Abbey National......................................... 28,500 411,672
Arjo Wiggins Apple..................................... 14,200 38,560
Associated British Foods............................... 10,200 94,441
B.A.T Industries....................................... 63,100 565,144
Barclays............................................... 34,600 672,982
Bass................................................... 22,400 291,863
BG..................................................... 89,500 298,675
BICC................................................... 14,200 39,490
Blue Circle Industries................................. 26,400 181,725
BOC Group.............................................. 14,200 238,564
Boots Co............................................... 22,400 259,434
BPB.................................................... 14,200 80,257
British Aerospace...................................... 10,200 207,404
British Airways........................................ 24,400 283,396
British Petroleum...................................... 115,900 1,384,050
British Sky Broadcast.................................. 32,500 305,701
British Steel.......................................... 40,700 100,868
British Telecommunications............................. 118,000 855,128
</TABLE>
B-44 See Notes to Financial Statements
<PAGE> 229
Portfolio of Investments (Continued)
May 31, 1997
<TABLE>
<CAPTION>
================================================================================
Number
Description of Shares Market Value
- --------------------------------------------------------------------------------
<S> <C> <C>
United Kingdom (Continued)
BTR ................................................ 85,400 $ 278,008
Burmah Castrol ..................................... 6,100 105,775
Cable & Wireless ................................... 50,900 415,493
Cadbury Schweppes .................................. 22,400 200,805
Caradon ............................................ 14,670 51,116
Centrica (b) ....................................... 89,500 92,970
Coats Viyella ...................................... 18,300 36,223
Commercial Union ................................... 14,200 159,584
Courtaulds ......................................... 10,200 56,064
De Lousiana Rue .................................... 2,000 16,031
EMI Group .......................................... 10,200 195,557
General Electric ................................... 59,000 336,840
GKN ................................................ 12,200 211,150
Glaxo Wellcome ..................................... 65,100 1,301,361
Granada Group ...................................... 14,200 201,629
Grand Metropolitan ................................. 44,700 415,338
Great University Stores ............................ 24,400 257,451
Guardian Royal Exchange ............................ 16,300 74,661
Guinness ........................................... 44,800 417,000
Hanson ............................................. 12,200 63,066
Harrison & Crosfield ............................... 26,400 52,688
HSBC Holdings (ADR) ................................ 44,700 1,333,761
Imperial Chemical Industries ....................... 18,300 243,980
Ladbroke Group ..................................... 24,400 91,804
Lasmo .............................................. 16,300 65,328
Legal & General Group .............................. 24,400 176,424
Lloyds TSB Group ................................... 111,900 1,125,315
Lonrho ............................................. 16,300 36,130
Marks & Spencer .................................... 71,200 591,974
MEPC ............................................... 12,200 102,981
National Power ..................................... 28,500 257,819
North West Water (b) ............................... 14,200 162,372
P & O Finance (b) .................................. 16,300 169,786
</TABLE>
See Notes to Financial Statements
B-45
<PAGE> 230
Portfolio of Investments (Continued)
May 31, 1997
<TABLE>
<CAPTION>
================================================================================
Number
Description of Shares Market Value
- --------------------------------------------------------------------------------
<S> <C> <C>
United Kingdom (Continued)
Pilkington ......................................... 30,500 $ 62,367
Prudential Corp. ................................... 40,700 410,129
Rank Group ......................................... 18,300 128,726
Redland ............................................ 12,200 65,061
Reed International ................................. 26,600 261,592
Reuters Holdings ................................... 34,600 388,281
Rexam .............................................. 12,200 57,278
Rio Tinto .......................................... 24,400 419,107
RMC Group .......................................... 6,100 91,106
Royal Bank Scot Group .............................. 10,200 100,448
Royal Sun Alliance ................................. 28,500 214,927
Safeway ............................................ 18,300 108,070
Sainsbury J Finance ................................ 32,500 186,611
Schroders .......................................... 4,100 114,690
Scottish Power ..................................... 20,300 127,186
Sears .............................................. 40,700 51,433
Sedgwick Group ..................................... 12,200 24,947
Slough Estates ..................................... 10,200 52,894
Smithkline Beecham ................................. 50,900 875,117
Southern Electric .................................. 10,200 67,577
Tarmac ............................................. 28,500 58,977
Taylor Woodrow ..................................... 16,300 55,297
Tesco .............................................. 38,600 236,790
Thames Water ....................................... 14,200 159,526
Thorn .............................................. 10,200 25,529
TI Group ........................................... 10,200 95,276
Unilever ........................................... 14,200 379,797
Vodafone Group ..................................... 67,100 298,564
Zeneca Group ....................................... 18,300 555,915
------------
21,279,056
------------
United States 44.0%
Abbott Laboratories, Inc. (a) ...................... 18,600 1,171,800
AirTouch Communications, Inc. (b) .................. 18,300 510,113
</TABLE>
See Notes to Financial Statements
B-46
<PAGE> 231
Portfolio of Investments (Continued)
May 31, 1997
<TABLE>
<CAPTION>
================================================================================
Number
Description of Shares Market Value
- --------------------------------------------------------------------------------
<S> <C> <C>
United States (Continued)
Aluminum Company of America ........................ 8,200 $ 603,725
American Express Co. (a) ........................... 17,300 1,202,350
American Home Products Corp. ....................... 14,600 1,113,250
American International Group, Inc. (a) ............. 15,700 2,125,387
Amoco Corp. (a) .................................... 13,400 1,197,625
AMR Corp. (b) ...................................... 8,200 814,875
Applied Materials, Inc. (b) ........................ 5,400 352,350
AT&T Corp. (a) ..................................... 41,800 1,541,375
Atlantic Richfield Co. ............................. 4,300 625,650
Automatic Data Processing, Inc. .................... 8,200 402,825
BancOne Corp. ...................................... 16,400 709,300
BankAmerica Corp. (a) .............................. 15,500 1,811,562
Bankers Trust New York Corp. ....................... 2,500 211,563
Bell Atlantic Corp. (a) ............................ 15,500 1,085,000
BellSouth Corp. .................................... 17,900 812,213
Boeing Co. (a) ..................................... 9,700 1,020,925
Bristol-Myers Squibb Co. ........................... 13,000 953,875
Campbell Soup Co. .................................. 6,100 280,600
Caterpillar, Inc. .................................. 8,200 800,525
Chevron Corp. (a) .................................. 18,100 1,267,000
Chrysler Corp. ..................................... 13,800 438,150
Chubb Corp. ........................................ 8,200 500,200
CIGNA Corp. ........................................ 3,500 608,125
Cisco Systems, Inc. (b) ............................ 11,500 779,125
Citicorp (a) ....................................... 13,300 1,521,187
Coca Cola Co. ...................................... 63,100 4,306,575
Columbia / HCA Healthcare Corp. .................... 18,100 662,913
Consolidated Edison Co. ............................ 16,400 477,650
Cooper Industries, Inc. ............................ 8,200 418,200
Corning, Inc. ...................................... 8,200 413,075
CSX Corp. .......................................... 5,900 312,700
Deere & Co. ........................................ 4,100 209,613
Dow Chemical Co. ................................... 12,100 1,008,837
</TABLE>
See Notes to Financial Statements
B-47
<PAGE> 232
Portfolio of Investments (Continued)
May 31, 1997
<TABLE>
<CAPTION>
================================================================================
Number
Description of Shares Market Value
- --------------------------------------------------------------------------------
<S> <C> <C>
United States (Continued)
DSC Communications Corp. (b) ....................... 3,900 $ 99,694
Du Pont (E. I.) de Nemours & Co. ................... 22,600 2,460,575
Duke Power Co. ..................................... 16,400 738,000
Dun & Bradstreet Corp. ............................. 6,200 161,975
Eastman Kodak Co. .................................. 16,400 1,359,150
Edison International ............................... 8,300 194,013
Electronic Data Systems Corp. ...................... 13,700 512,038
Enron Corp. ........................................ 11,300 460,475
Exxon Corp. ........................................ 62,400 3,697,200
Federal National Mortgage Association .............. 27,900 1,217,137
First Data Corp. ................................... 11,600 464,000
Fleet Financial Group, Inc. ........................ 7,700 470,663
FPL Group, Inc. .................................... 16,400 762,600
Gannett, Inc. ...................................... 6,200 573,500
General Electric Co. ............................... 79,800 4,817,925
General Motors Corp. ............................... 26,500 1,517,125
General Reinsurance Corp. (b) ...................... 2,700 473,175
Gillette Co. ....................................... 11,500 1,022,062
Goodyear Tire & Rubber Co. ......................... 8,200 479,700
H & R Block, Inc. .................................. 3,500 115,500
Harrahs Entertainment, Inc. (b) .................... 1,500 27,938
Heinz, H. J. & Co. ................................. 15,600 670,800
Hewlett Packard Co. ................................ 25,500 1,313,250
Home Depot, Inc. ................................... 15,500 976,500
Intel Corp. ........................................ 15,400 2,333,100
International Business Machines Corp. .............. 31,600 2,733,400
International Paper Co. ............................ 12,300 590,400
JC Penney, Inc. .................................... 9,900 509,850
Johnson & Johnson, Inc. ............................ 33,300 1,993,837
JP Morgan & Co., Inc. .............................. 8,200 881,500
Kmart Corp. (b) .................................... 3,500 49,000
Korea Fund, Inc. ................................... 262,500 3,609,375
Latin American Discovery Fund, Inc. ................ 157,300 2,929,712
</TABLE>
See Notes to Financial Statements
B-48
<PAGE> 233
Portfolio of Investments (Continued)
May 31, 1997
<TABLE>
<CAPTION>
================================================================================
Number
Description of Shares Market Value
- --------------------------------------------------------------------------------
<S> <C> <C>
United States (Continued)
Lilly Eli & Co. (b) ................................ 12,600 $ 1,171,800
Limited, Inc. ...................................... 6,100 123,525
Lucent Technologies, Inc. .......................... 15,700 998,912
McDonalds Corp. .................................... 20,500 1,030,125
Merck & Co., Inc. .................................. 29,900 2,687,262
Microsoft Corp. (b) ................................ 27,300 3,385,200
Minnesota Mining & Manufacturing Co. ............... 14,000 1,284,500
Mobil Corp. ........................................ 12,500 1,748,437
Monsanto Co. ....................................... 5,300 233,200
Morgan Stanley Asia Pacific Fund, Inc. ............. 300,000 3,150,000
Morgan Stanley India Investment Fund (b) ........... 174,100 1,958,625
Motorola, Inc. ..................................... 16,300 1,081,912
NationsBank Corp. .................................. 16,400 965,550
Norfolk Southern Corp. ............................. 6,300 611,888
Norwest Corp. ...................................... 17,900 957,650
Novell, Inc. (b) ................................... 10,100 79,538
Nucor Corp. ........................................ 3,700 218,300
Oracle Systems Corp. (b) ........................... 21,900 1,021,087
PepsiCo, Inc. ...................................... 42,600 1,565,550
Pfizer, Inc. ....................................... 15,300 1,573,987
PG&E Corp. ......................................... 24,200 559,625
Philip Morris Cos., Inc. ........................... 48,900 2,151,600
PPG Industries, Inc. ............................... 5,400 313,875
Procter & Gamble Co. ............................... 20,900 2,881,587
Public Service Enterprise Group .................... 16,300 403,425
Rockwell International Corp. ....................... 10,100 651,450
Salomon, Inc. ...................................... 5,400 289,575
SBC Communications, Inc. ........................... 18,600 1,088,100
Schering Plough Corp. .............................. 12,500 1,134,375
Sears Roebuck & Co. ................................ 15,400 756,525
Southern Co. ....................................... 25,300 537,625
Sprint Corp. ....................................... 15,300 747,788
SunTrust Banks, Inc. ............................... 8,200 437,675
</TABLE>
See Notes to Financial Statements
B-49
<PAGE> 234
Portfolio of Investments (Continued)
May 31, 1997
<TABLE>
<CAPTION>
================================================================================
Number
Description of Shares Market Value
- --------------------------------------------------------------------------------
<S> <C> <C>
United States (Continued)
Tele-Communications International, Inc., Class A (b)..... 25,700 $ 388,713
Texas Instruments, Inc................................... 7,300 656,088
Texas Utilities Co....................................... 16,400 563,750
Time Warner, Inc......................................... 16,500 767,250
Toys R Us, Inc. (b)...................................... 9,900 308,138
Travelers Group, Inc..................................... 11,666 640,172
Union Pacific Corp....................................... 7,900 535,225
Viacom, Inc., Class B (b)................................ 9,500 282,031
Wal-Mart Stores, Inc..................................... 58,300 1,734,425
Walt Disney Co........................................... 17,900 1,465,562
Warner-Lambert Co........................................ 4,200 423,150
Waste Management, Inc.................................... 14,600 463,550
Wells Fargo & Co......................................... 2,300 606,050
Westinghouse Electric Corp............................... 22,000 445,500
Weyerhaeuser Co.......................................... 8,300 413,963
Xerox Corp............................................... 10,000 677,500
------------
120,656,747
------------
Total Common Stocks..................................... 256,011,624
------------
Preferred Stocks 0.2%
France 0.0%
Casino Guichard Perrach.................................. 3,400 153,143
Germany 0.2%
RWE...................................................... 6,400 222,433
SAP, Non Voting (ADR).................................... 1,150 209,262
------------
431,695
------------
Total Preferred Stocks.................................. 584,838
------------
Total Long-Term Investments 93.6% (Cost $230,596,409).... 256,596,462
------------
</TABLE>
B-50 See Notes to Financial Statements
<PAGE> 235
- --------------------------------------------------------------------------------
Portfolio of Investments (Continued)
- --------------------------------------------------------------------------------
May 31, 1997
<TABLE>
<CAPTION>
================================================================================
Description Market Value
- --------------------------------------------------------------------------------
<S> <C>
Repurchase Agreement 3.7%
State Street Bank & Trust Co. ($10,223,000 par, collateralized by
U.S. Government obligations in a pooled cash account,
dated 05/30/97 to be sold on 06/02/97 at $10,227,260)............. $ 10,223,000
------------
Foreign Currency 0.6% (Various Denominations, Cost $1,545,888).... 1,550,824
------------
Other Assets in Excess of Liabilities 2.1%........................ 5,693,631
------------
Net Assets 100.0%................................................. $274,063,917
============
</TABLE>
(a) Assets segregated as collateral for open futures and forward transactions.
(b) Non-income producing security as this security currently does not declare
dividends.
ADR - American Depository Receipt
GDR - Global Depository Receipt
B-51 See Notes to Financial Statements
<PAGE> 236
Statement of Assets and Liabilities
May 31, 1997
<TABLE>
<CAPTION>
===================================================================================================
<S> <C>
Assets:
Long-Term Investments, at Market Value (Cost $230,596,409).......................... $256,596,462
Repurchase Agreements (Cost $10,223,000)............................................ 10,223,000
Foreign Currency, at Market Value (Cost $1,545,888)................................. 1,550,824
Cash................................................................................ 241
Receivables:
Securities Sold................................................................... 6,366,453
Dividends......................................................................... 687,506
Fund Shares Sold.................................................................. 446,015
Variation Margin on Futures....................................................... 145,656
Interest.......................................................................... 3,258
Forward Currency Contracts.......................................................... 1,097,685
Other............................................................................... 16
------------
Total Assets...................................................................... 277,117,116
------------
Liabilities:
Payables:
Securities Purchased.............................................................. 1,823,802
Fund Shares Repurchased........................................................... 523,314
Distributor and Affiliates........................................................ 240,562
Investment Advisory Fee........................................................... 225,539
Accrued Expenses.................................................................... 200,451
Deferred Compensation and Retirement Plans.......................................... 39,531
------------
Total Liabilities................................................................. 3,053,199
------------
Net Assets.......................................................................... $274,063,917
============
Net Assets Consist of:
Capital............................................................................. $209,367,174
Net Unrealized Appreciation on Securities........................................... 26,931,817
Accumulated Net Realized Gain on Securities......................................... 38,644,391
Accumulated Distributions in Excess of Net Investment Income........................ (879,465)
------------
Net Assets.......................................................................... $274,063,917
============
Maximum Offering Price Per Share:
Class A Shares:
Net asset value and redemption price per share
(Based on net assets of $136,924,605 and 8,645,220
shares of beneficial interest issued and outstanding............................ $ 15.84
Maximum sales charge (5.75%* of offering price)................................... .97
------------
Maximum offering price to public.................................................. $ 16.81
============
Class B Shares:
Net asset value and offering price per share (Based on net assets of $124,096,728
and 8,101,269 shares of beneficial interest issued and outstanding)............. $ 15.32
============
Class C Shares:
Net asset value and offering price per share (Based on net assets of $13,042,584
and 843,377 shares of beneficial interest issued and outstanding)............... $ 15.46
============
</TABLE>
*On sales of $50,000 or more, the sales charge will be reduced.
See Notes to Financial Statements
B-52
<PAGE> 237
Statement of Operations
For the Year Ended May 31, 1997
<TABLE>
<CAPTION>
======================================================================================
<S> <C>
Investment Income:
Dividends (Net of foreign withholding taxes of $283,517)................. $ 3,102,509
Interest (Net of foreign withholding taxes of $132)...................... 732,388
-----------
Total Income............................................................ 3,834,897
-----------
Expenses:
Investment Advisory Fee.................................................. 2,342,104
Distribution (12b-1) and Service Fees (Attributed to Classes A, B and C
of $296,505, $1,048,239 and $107,844, respectively)..................... 1,452,588
Shareholder Services..................................................... 1,224,045
Custody.................................................................. 425,755
Legal.................................................................... 18,378
Trustees Fees and Expenses............................................... 11,611
Amortization of Organizational Expenses.................................. 1,964
Other.................................................................... 319,443
-----------
Total Expenses.......................................................... 5,795,888
Less Expenses Reimbursed................................................ 8,800
-----------
Net Expenses............................................................ 5,787,088
-----------
Net Investment Loss..................................................... $(1,952,191)
===========
Realized and Unrealized Gain/Loss on Securities:
Realized Gain/Loss on Securities:
Investments............................................................. $39,309,793
Futures................................................................. 108,610
Foreign Currency Transactions........................................... 2,694,435
-----------
Net Realized Gain on Securities.......................................... 42,112,838
-----------
Unrealized Appreciation/Depreciation on Securities:
Beginning of the Period................................................. 27,741,970
-----------
End of the Period:
Investments............................................................ 26,000,053
Futures................................................................ (167,954)
Forward Currency Contracts............................................. 1,097,685
Foreign Currency Translation........................................... 2,033
-----------
26,931,817
-----------
Net Unrealized Depreciation on Securities During the Period.............. (810,153)
-----------
Net Realized and Unrealized Gain on Securities........................... $41,302,685
===========
Net Increase in Net Assets from Operations............................... $39,350,494
===========
</TABLE>
B-53 See Notes to Financial Statements
<PAGE> 238
Statement of Changes in Net Assets
For the Years Ended May 31, 1997 and 1996
<TABLE>
<CAPTION>
==============================================================================================
Year Ended Year Ended
May 31, 1997 May 31, 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
From Investment Activities:
Operations:
Net Investment Loss........................................... $ (1,952,191) $ (1,152,058)
Net Realized Gain on Securities............................... 42,112,838 14,354,171
Net Unrealized Appreciation/Depreciation on Securities
During the Period............................................ (810,153) 18,388,865
------------- -------------
Change in Net Assets from Operations.......................... 39,350,494 31,590,978
------------- -------------
Distributions in Excess of Net Investment Income*............. (1,377,948) -0-
Distributions from Net Realized Gain on Securities*........... (6,599,826) (3,883,160)
------------- -------------
Total Distributions........................................... (7,977,774) (3,883,160)
------------- -------------
Net Change in Net Assets from Investment Activities........... 31,372,720 27,707,818
------------- -------------
From Capital Transactions:
Proceeds from Shares Sold..................................... 127,851,283 97,189,154
Net Asset Value of Shares Issued Through Dividend Reinvestment 7,550,550 3,650,871
Cost of Shares Repurchased.................................... (101,392,502) (51,230,990)
------------- -------------
Net Change in Net Assets from Capital Transactions............ 34,009,331 49,609,035
------------- -------------
Total Increase in Net Assets.................................. 65,382,051 77,316,853
Net Assets:
Beginning of the Period....................................... 208,681,866 131,365,013
------------- -------------
End of the Period (Including accumulated distributions in
excess of net investment income of $879,465 and
$297,886, respectively)...................................... $ 274,063,917 $208,681,866
============= =============
</TABLE>
<TABLE>
<CAPTION>
Year Ended Year Ended
*Distributions by Class May 31, 1997 May 31, 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Distributions in Excess of Net Investment Income:
Class A Shares............................................... $ (1,133,880) $ -0-
Class B Shares............................................... (221,577) -0-
Class C Shares............................................... (22,491) -0-
------------- -------------
$ (1,377,948) $ -0-
============= =============
Distributions from Net Realized Gain on Securities:
Class A Shares............................................... $ (3,319,275) $ (1,775,643)
Class B Shares............................................... (2,976,985) (1,920,148)
Class C Shares............................................... (303,566) (187,369)
------------- -------------
$ (6,599,826) $ (3,883,160)
============= =============
</TABLE>
See Notes to Financial Statements
B-54
<PAGE> 239
Financial Highlights
The following schedule presents financial highlights for one share of the Fund
outstanding throughout the periods indicated.
================================================================================
<TABLE>
<CAPTION>
Year Ended May 31,
--------------------------------------------------
Class A Shares 1997 1996(a) 1995(a) 1994 1993(a)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period................. $ 13.98 $11.79 $11.67 $ 10.76 $10.44
------- ------ ------ ------- ------
Net Investment Loss.................................... (.064) (.04) (.04) (.06) (.055)
Net Realized and Unrealized Gain on
Securities............................................ 2.460 2.561 .42 1.0125 .7775
------- ------ ------ ------- ------
Total from Investment Operations......................... 2.396 2.521 .38 .9525 .7225
------- ------ ------ ------- ------
Less:
Distributions in Excess of Net Investment Income....... .137 -0- -0- -0- -0-
Distributions from and in excess of Net
Realized Gain on Securities........................... .401 .331 .26 .0425 .4025
------- ------ ------ ------- ------
Total Distributions...................................... .538 .331 .26 .0425 .4025
------- ------ ------ ------- ------
Net Asset Value, End of the Period....................... $15.838 $13.98 $11.79 $ 11.67 $10.76
======= ====== ====== ======= ======
Total Return (b)......................................... 17.67% 21.85% 3.36% 9.17% 7.13%
Net Assets at End of the Period (In millions)............ $ 136.9 $106.7 $ 60.1 $ 41.8 $ 12.7
Ratio of Expenses to Average Net Assets (c).............. 2.09% 2.22% 2.29% 2.46% 2.93%
Ratio of Net Investment Loss to Average Net
Assets (c)............................................. (.46%) (.30%) (.35%) (.46%) (.57%)
Portfolio Turnover....................................... 144% 94% 120% 116% 120%
Average Commission Rate per Equity Share
Traded (d)............................................. $ .0206 $.0199 -- -- --
</TABLE>
(a) Based on average month-end shares outstanding.
(b) Total Return is based upon Net Asset Value which does not include payment
of the maximum sales charge or contingent deferred sales charge.
(c) For the year ended May 31, 1993, the Ratios of Expenses and Net Investment
Loss to Average Net Assets would have been 3.28% and (.92%), respectively,
had VKAC not reimbursed certain expenses of the Fund. The impact on the
Ratios due to VKAC's reimbursement of certain expenses for other periods
presented was less than 0.01%.
(d) Represents the average brokerage commission paid per equity share traded
during the period for trades where commissions were applicable. This
disclosure was not required in fiscal years prior to 1996.
B-55 See Notes to Financial Statements
<PAGE> 240
Financial Highlights (Continued)
The following schedule presents financial highlights for one share of the Fund
outstanding throughout the periods indicated.
================================================================================
<TABLE>
<CAPTION>
Year Ended May 31,
--------------------------------------------------
Class B Shares 1997 1996(a) 1995(a) 1994 1993(a)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period..................... $ 13.53 $11.50 $11.48 $10.67 $10.46
------- ------ ------ ------ ------
Net Investment Loss........................................ (.139) (.14) (.13) (.13) (.135)
Net Realized and Unrealized
Gain on Securities....................................... 2.358 2.501 .41 .9825 .7475
------- ------ ------ ------ ------
Total from Investment Operations............................. 2.219 2.361 .28 .8525 .6125
------- ------ ------ ------ ------
Less:
Distributions in Excess of Net Investment Income........... .030 -0- -0- -0- -0-
Distributions from and in Excess of Net
Realized Gain on Securities.............................. .401 .331 .26 .0425 .4025
------- ------ ------ ------ ------
Total Distributions.......................................... .431 .331 .26 .0425 .4025
------- ------ ------ ------ ------
Net Asset Value, End of the Period........................... $15.318 $13.53 $11.50 $11.48 $10.67
======= ====== ====== ====== ======
Total Return (b)............................................. 16.83% 20.90% 2.62% 8.21% 6.15%
Net Assets at End of the Period (In millions)................ $124.1 $ 92.8 $ 64.7 $ 48.8 $ 6.9
Ratio of Expenses to Average Net Assets (c).................. 2.86% 2.99% 3.05% 3.21% 3.88%
Ratio of Net Investment Loss to Average Net
Assets (c)................................................. (1.22%) (1.11%) (1.11%) (1.19%) (1.41%)
Portfolio Turnover........................................... 144% 94% 120% 116% 120%
Average Commission Rate per Equity Share
Traded (d)................................................. $ .0206 $.0199 -- -- --
</TABLE>
(a) Based on average month-end shares outstanding.
(b) Total Return is based upon Net Asset Value which does not include payment
of the maximum sales charge or contingent deferred sales charge.
(c) For the year ended May 31, 1993, the Ratios of Expenses and Net Investment
Loss to Average Net Assets would have been 4.50% and (2.02%), respectively,
had VKAC not reimbursed certain expenses of the Fund. The impact on the
Ratios due to VKAC's reimbursement of certain expenses for the other
periods presented was less than 0.01%.
(d) Represents the average brokerage commission paid per equity share traded
during the period for trades where commissions were applicable. This
disclosure was not required in fiscal years prior to 1996.
B-56 See Notes to Financial Statements
<PAGE> 241
Financial Highlights (Continued)
<TABLE>
<CAPTION>
The following schedule presents financial highlights for one share of the Fund
outstanding throughout the periods indicated.
=========================================================================================================
June 21, 1993
Year Ended May 31, (Commencement
-------------------------------- of Distribution)
Class C Shares 1997 1996(a) 1995(a) to May 31, 1994(a)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of
the Period................................... $ 13.66 $ 11.61 $ 11.59 $ 10.29
------- ------- ------- --------
Net Investment Loss.......................... (.137) (.14) (.13) (.13)
Net Realized and Unrealized
Gain on Securities......................... 2.372 2.521 .41 1.4725
------- ------- ------- --------
Total from Investment Operations............... 2.235 2.381 .28 1.3425
------- ------- ------- --------
Less:
Distributions in Excess of Net
Investment Income.......................... .030 -0- -0- -0-
Distributions from and in Excess of
Net Realized Gain on Securities............ .401 .331 .26 .0425
------- ------- ------- --------
Total Distributions............................ .431 .331 .26 .0425
------- ------- ------- --------
Net Asset Value, End of the Period............. $15.464 $ 13.66 $ 11.61 $ 11.59
======= ======= ======= ========
Total Return (b)............................... 16.82% 20.87% 2.60% 13.06%*
Net Assets at End of the Period
(In millions)................................ $ 13.0 $ 9.2 $ 6.6 $ 5.1
Ratio of Expenses to Average
Net Assets (c)............................... 2.87% 3.00% 3.05% 3.21%
Ratio of Net Investment Loss
to Average Net Assets (c).................... (1.23%) (1.10%) (1.13%) (1.15%)
Portfolio Turnover............................. 144% 94% 120% 116%
Average Commission Rate per
Equity Share Traded (d)...................... $ .0206 $ .0199 -- --
</TABLE>
*Non-Annualized
(a) Based on average month-end shares outstanding.
(b) Total Return is based upon Net Asset Value which does not include payment
of the maximum sales charge or contingent deferred sales charge.
(c) The impact on the Ratios of Expenses and Net Investment Loss to Average Net
Assets due to VKAC's reimbursement of certain expenses was less than 0.01%.
(d) Represents the average brokerage commission paid per equity share traded
during the period for trades where commissions were applicable. This
disclosure was not required in fiscal years prior to 1996.
B-57 See Notes to Financial Statements
<PAGE> 242
- --------------------------------------------------------------------------------
Notes to Financial Statements
- --------------------------------------------------------------------------------
May 31, 1997
================================================================================
1. Significant Accounting Policies
Van Kampen American Capital Global Equity Fund (the "Fund") is organized as a
series of Van Kampen American Capital World Portfolio Series Trust, a Delaware
business trust, and is registered as a diversified open-end management
investment company under the Investment Company Act of 1940, as amended. The
Fund's investment objective is to provide long-term growth of capital by
investing in an internationally diversified portfolio of equity securities.
Investments in foreign securities involve certain risks not ordinarily
associated with investments in securities of domestic issuers, including
fluctuations in foreign exchange rates, future political and economic
developments, and the possible imposition of exchange controls or other foreign
governmental laws or restrictions. The Fund commenced investment operations on
August 5, 1991. The distribution of the Fund's Class B and Class C shares
commenced on November 15, 1991 and June 21, 1993, respectively.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
A. Security Valuation--Investments in securities listed on a securities
exchange are valued at their sale price as of the close of such securities
exchange. Unlisted securities and listed securities for which the last sales
price is not available are valued at the last bid price. Fixed income
investments are stated at value using market quotations. For those securities
where quotations or prices are not available, valuations are determined in
accordance with procedures established in good faith by the Board of Trustees.
Short-term securities with remaining maturities of 60 days or less are valued
at amortized cost.
B. Security Transactions--Security transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis.
The Fund may invest in repurchase agreements, which are short-term
investments in which the Fund acquires ownership of a debt security and the
seller agrees to repurchase the security at a future time and specified price.
The Fund may invest independently in repurchase agreements, or transfer
uninvested cash balances into a pooled cash account along with other investment
companies advised by Van Kampen American Capital Asset Management, Inc. (the
"Adviser") or its affiliates, the daily aggregate of which is invested in
repurchase agreements. Repurchase agreements are fully collateralized by the
underlying debt security. The Fund will make payment for such securi-
B-58
<PAGE> 243
- --------------------------------------------------------------------------------
Notes to Financial Statements (Continued)
- --------------------------------------------------------------------------------
May 31, 1997
================================================================================
ties only upon physical delivery or evidence of book entry transfer to the
account of the custodian bank. The seller is required to maintain the value of
the underlying security at not less than the repurchase proceeds due the Fund.
C. Investment Income--Dividend income is recorded on the ex-dividend date and
interest income is recorded on an accrual basis. Original issue discount is
amortized over the life of each applicable security. Premiums on debt
securities are not amortized. Market discounts are recognized at the time of
sale as realized gains for book purposes and ordinary income for tax purposes.
D. Currency Translation--Assets and liabilities denominated in foreign
currencies and commitments under forward currency contracts are translated into
U.S. dollars based on quoted exchange rates as of noon Eastern Time. Purchases
and sales of portfolio securities are translated at the rate of exchange
prevailing when such securities were acquired or sold. Income and expenses are
translated at rates prevailing when accrued. Gains and losses on the sale of
securities are not segregated for financial reporting purposes between amounts
arising from changes in exchange rates and amounts arising from changes in the
market prices of securities. Realized gain and loss on foreign currency
includes the net realized amount from the sale of currency and the amount
realized between trade date and settlement date on security transactions.
E. Organizational Expenses--The Fund has reimbursed Van Kampen American Capital
Distributors, Inc. or its affiliates (collectively "VKAC") for costs incurred
in connection with the Fund's organization in the amount of approximately
$75,000. These costs were amortized over the 60 month period ended September
30, 1996.
F. Federal Income Taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute substantially all of its taxable income to its
shareholders. Therefore, no provision for federal income taxes is required.
At May 31, 1997, for federal income tax purposes, cost of long- and short-
term investments is $242,822,509; the aggregate gross unrealized appreciation
is $31,431,024 and the aggregate gross unrealized depreciation is $4,953,516,
resulting in net unrealized appreciation on investments, futures, forward
currency contracts and foreign currency of $26,477,508.
G. Distribution of Income and Gains--The Fund declares and pays dividends
annually from net investment income and from net realized gains on securities,
if any. Net investment income for federal income tax purposes includes gains
and losses realized on transactions in foreign cur-
B-59
<PAGE> 244
- --------------------------------------------------------------------------------
Notes to Financial Statements (Continued)
- --------------------------------------------------------------------------------
May 31, 1997
================================================================================
rencies. These realized gains and losses are included as net realized gains or
losses for financial reporting purposes.
Due to inherent differences in the recognition of income, expenses and
realized gains/losses under generally accepted accounting principles and
federal income tax purposes, the following permanent differences between book
and tax basis reporting for the 1997 fiscal year have been identified and
appropriately reclassified as follows:
Accumulated Undistributed Net Investment Income.... $ 2,748,560(a)(b)(c)
Accumulated Net Realized Gain/Loss on Securities... $(2,679,453)(a)(b)
Capital $ (69,107)(c)
(a) Represents $2,694,435 of realized gains and losses on transactions in
foreign currencies which are included as ordinary income for federal
income tax purposes. These realized gains and losses are included in net
realized gain/loss on securities for financial reporting purposes.
(b) Represents $14,982 of capital gains tax paid on a foreign equity security.
This item is recognized as an expense for federal income tax purposes but
as a component of realized loss for book purposes.
(c) Represents $69,107 of expenses recognized for financial reporting
purposes, but which are not deductible for federal income tax purposes.
2. Investment Advisory Agreement and Other Transactions with Affiliates Under
the terms of the Fund's Investment Advisory Agreement, the Adviser will provide
investment advice and facilities to the Fund for an annual fee payable monthly.
Investment advisory fees are calculated monthly, based on the average daily net
assets of the Fund at the annual rate of 1.00%. On April 1, 1997, the Adviser
entered into a subadvisory agreement with Morgan Stanley Asset Management Inc.
(the "Subadviser") to provide advisory services to the Fund and the Adviser
with respect to the Fund's investments. Prior to April 1, 1997, the Fund's
Subadviser was John Govett & Co., Ltd. The Adviser pays 50% of its investment
advisory fee to the Subadviser.
Certain legal expenses are paid to Skadden, Arps, Slate, Meagher & Flom
(Illinois), counsel to the Fund, of which a trustee of the Fund is an affiliated
person.
For the year ended May 31, 1997, the Fund recognized expenses of
approximately $25,800 representing VKAC's cost of providing accounting services
to the Fund. These services are provided by VKAC at cost.
ACCESS Investor Services, Inc. ("ACCESS"), an affiliate of the Adviser,
serves as the shareholder servicing agent for the Fund. For the year ended May
31, 1997, the Fund recognized expenses of approximately $1,045,500,
representing ACCESS' cost of providing transfer agency and shareholder services
plus a profit.
Additionally, for the year ended May 31, 1997, the Fund paid VKAC
approximately $70,200 related to the direct cost of consolidating the VKAC
open-end fund complex. Payment was contingent upon the realization by the Fund
of cost efficiencies in shareholder services resulting from the consolidation.
B-60
<PAGE> 245
Notes to Financial Statements (Continued)
May 31, 1997
================================================================================
Certain officers and trustees of the Fund are also officers and directors
of VKAC. The Fund does not compensate its officers or trustees who are officers
of VKAC.
The Fund provides deferred compensation and retirement plans for its
trustees who are not officers of VKAC. Under the deferred compensation plan,
trustees may elect to defer all or a portion of their compensation to a later
date. Benefits under the retirement plan are payable for a ten-year period and
are based upon each trustee's years of service to the Fund. The maximum annual
benefit per Trustee under the plan is equal to $2,500. The Adviser reimbursed
the fund for these Plan expenses for the calendar year 1996.
For the year ended May 31, 1997, the Fund paid brokerage commissions to
Morgan Stanley Group Inc. of $8,633.
At the end of the period, the Fund owned the following Morgan Stanley
Funds which were managed by the Subadviser:
<TABLE>
<CAPTION>
Transactions During the Period
------------------------------
% of Cost of Proceeds
Net Assets Purchases of Sales
======================================================================================================
<S> <C> <C> <C>
Latin America Discovery Fund, Inc................................ 1.07% $2,468,695 $0
Morgan Stanley Asia Pacific Fund, Inc............................ 1.15% $2,965,000 $0
Morgan Stanley India Investment Fund............................. 0.71% $1,849,666 $0
</TABLE>
At May 31, 1997, VKAC owned 53,680 Class A shares of the Fund.
3. Capital Transactions
The Fund has outstanding three classes of shares of beneficial interest,
Classes A, B and C, each with a par value of $.01 per share. There are an
unlimited number of shares of each class authorized.
At May 31, 1997, capital aggregated $103,173,521, $95,878,421 and
$10,315,232 for Classes A, B and C, respectively. For the year ended May 31,
1997, transactions were as follows:
<TABLE>
<CAPTION>
Shares Value
======================================================================
Sales:
<S> <C> <C>
Class A................................... 6,134,539 $ 89,228,576
Class B................................... 2,431,724 34,006,661
Class C................................... 326,525 4,616,046
--------- ------------
Total Sales.................................... 8,892,788 $127,851,283
========= ============
Dividend Reinvestment:
Class A................................... 304,883 $ 4,257,239
Class B................................... 221,179 2,997,101
Class C................................... 21,652 296,210
--------- ------------
Total Dividend Reinvestment.................... 547,714 $ 7,550,550
========= ============
</TABLE>
B-61
<PAGE> 246
- --------------------------------------------------------------------------------
Notes to Financial Statements (Continued)
- --------------------------------------------------------------------------------
May 31, 1997
================================================================================
<TABLE>
<CAPTION>
Shares Value
- ------------------------------------------------------------
<S> <C> <C>
Repurchases:
Class A.................... (5,426,393) $ (79,299,631)
Class B.................... (1,408,797) (19,584,581)
Class C.................... (176,672) (2,508,290)
---------- -------------
Total Repurchases............... (7,011,862) $(101,392,502)
========== =============
</TABLE>
At May 31, 1996, capital aggregated $89,022,332, $78,490,170 and
$7,914,448 for Classes A, B and C, respectively. For the year ended May 31,
1996, transactions were as follows:
<TABLE>
<CAPTION>
Shares Value
- ------------------------------------------------------------
<S> <C> <C>
Sales:
Class A.................... 4,966,925 $ 63,861,473
Class B.................... 2,370,872 29,925,908
Class C.................... 268,622 3,401,773
--------- -------------
Total Sales..................... 7,606,419 $ 97,189,154
========= =============
Dividend Reinvestment:
Class A.................... 136,185 $ 1,683,743
Class B.................... 150,464 1,807,274
Class C.................... 13,189 159,854
--------- -------------
Total Dividend Reinvestment..... 299,838 $ 3,650,871
========= =============
Repurchases:
Class A.................... (2,565,199) $ (32,888,196)
Class B.................... (1,288,844) (16,089,389)
Class C.................... (181,673) (2,253,405)
--------- -------------
Total Repurchases............... (4,035,716) $ (51,230,990)
========= =============
</TABLE>
Class B and C shares are offered without a front-end sales charge, but are
subject to a contingent deferred sales charge (CDSC). The CDSC will be imposed
on most redemptions made within five years of the purchase for Class B and one
year of the purchase for Class C as detailed in the following schedule. The
Class B and C shares bear the expense of their respective deferred sales
arrangements, including higher distribution and service fees and incremental
transfer agency costs.
B-62
<PAGE> 247
Notes to Financial Statements (Continued)
May 31, 1997
================================================================================
<TABLE>
<CAPTION>
Contingent Deferred
Sales Charge
-------------------
Year of Redemption Class B Class C
================================================================================
<S> <C> <C>
First...................................................... 5.00% 1.00%
Second..................................................... 4.00% None
Third...................................................... 3.00% None
Fourth..................................................... 2.50% None
Fifth...................................................... 1.50% None
Sixth and Thereafter....................................... None None
</TABLE>
For the year ended May 31, 1997, VKAC, as Distributor for the Fund,
received commissions on sales of the Fund's Class A shares of approximately
$87,000 and CDSC on the redeemed shares of approximately $174,500. Sales
charges do not represent expenses of the Fund.
4. Investment Transactions
During the period, the cost of purchases and proceeds from sales of
investments, excluding short-term investments, were $338,593,160 and
$315,447,959, respectively.
5. Derivative Financial Instruments
A derivative financial instrument in very general terms refers to a security
whose value is "derived" from the value of an underlying asset, reference rate
or index.
The Fund has a variety of reasons to use derivative instruments, such as
to attempt to protect the Fund against possible changes in the market value of
its portfolio, manage the portfolio's effective yield, foreign currency
exposure, or generate potential gain. All of the Fund's portfolio holdings,
including derivative instruments, are marked to market each day with the change
in value reflected in the unrealized appreciation/depreciation on securities.
Upon disposition, a realized gain or loss is recognized accordingly, except when
taking delivery of a security underlying a futures or forward contract. In this
instance, the recognition of gain or loss is postponed until the disposal of the
security underlying the futures or forward contract.
Summarized below are the specific types of derivative financial instruments
used by the Fund.
A. Futures Contracts-A futures contract is an agreement involving the delivery
of a particular asset on a specified future date at an agreed upon price. The
Fund generally invests in stock index futures. These contracts are generally
used to provide the return of an index without purchasing all the securities
underlying the index or to manage the Fund's overall exposure to the equity
markets.
Upon entering into future contracts, the Fund maintains, in a segregated
account with its custodian, securities with a value equal to its obligation
under the futures contracts. During the period
B-63
<PAGE> 248
Notes to Financial Statements (Continued)
May 31, 1997
================================================================================
the futures contract is open, payments are received from or made to the broker
based upon changes in the value of the contract (the variation margin).
Transactions in futures contracts for the year ended May 31, 1997, were as
follows:
<TABLE>
<CAPTION>
Contracts
===============================================================================
<S> <C>
Outstanding at May 31, 1996........................................... 0
Futures Opened........................................................ 50
Futures Closed........................................................ (25)
----
Outstanding at May 31, 1997........................................... 25
====
</TABLE>
The futures contracts outstanding as of May 31, 1997, and the description
and unrealized depreciation are as follows:
<TABLE>
<CAPTION>
Unrealized
Contracts Depreciation
===============================================================================
<S> <C> <C>
Long June 1997 CAC 40 Index Future Contracts
(Current Notional Value of $513,400 per contract).... 25 $167,954
==== ========
</TABLE>
B. Forward Currency Contracts-These instruments are commitments to purchase or
sell a foreign currency at a future date at a negotiated forward rate. The gain
or loss arising from the difference between the original value of the contract
and the closing value of such contract is included as a component of realized
gain/loss on foreign currency.
At May 31, 1997, the Fund has outstanding forward currency contracts as
follows:
<TABLE>
<CAPTION>
Unrealized
Original Current Appreciation/
Description Value Value Depreciation
================================================================================
<S> <C> <C> <C>
Long Contracts
British Pound Sterling,
2,667,912 expiring 07/16/97...........$ 4,354,032 $ 4,359,896 $ 5,864
German Mark,
5,700,500 expiring 07/30/97........... 3,310,203 3,349,994 39,791
Japanese Yen,
1,816,065,372 expiring
07/18/97-01/26/98..................... 14,909,244 16,033,345 1,124,101
</TABLE>
B-64
<PAGE> 249
Notes to Financial Statements (Continued)
May 31, 1997
===============================================================================
<TABLE>
<CAPTION>
Unrealized
Original Current Appreciation/
Description Value Value Depreciation
=================================================================================
Long Contracts (Continued)
<S> <C> <C> <C>
Swiss Franc,
2,783,100 expiring 08/18/97......... $ 2,000,000 $ 1,985,189 $ (14,811)
Short Contracts
British Pound Sterling,
2,667,912 expiring 07/16/97......... 4,000,000 4,359,896 (359,896)
German Mark,
11,401,560 expiring 07/30/97........ 6,900,000 6,700,316 199,684
French Franc,
45,948,432 expiring 09/15/97........ 8,108,356 8,009,107 99,249
Japanese Yen,
2,740,235,772 expiring
07/18/97-01/26/98................... 24,141,822 24,082,060 59,762
Netherlands Guilder,
3,454,320 expiring 08/18/97......... 1,820,267 1,806,622 13,645
Spanish Peseta,
375,238,689 expiring 06/13/97....... 2,624,636 2,595,994 28,642
Swiss Franc,
7,721,085 expiring 08/18/97......... 5,409,115 5,507,461 (98,346)
----------
$1,097,685
==========
</TABLE>
6. Distribution and Service Plans
The Fund and its shareholders have adopted a distribution plan pursuant to Rule
12b-1 under the Investment Company Act of 1940 and a service plan (collectively
the "Plans"). The Plans govern payments for the distribution of the Fund's
shares, ongoing shareholder services and maintenance of shareholder accounts.
Annual fees under the Plans of up to .25% of Class A net assets and 1.00%
each of Class B and Class C net assets are accrued daily. Included in these
fees for the year ended May 31, 1997, are payments to VKAC of approximately
$908,900.
B-65
<PAGE> 250
APPENDIX D
SEMI-ANNUAL REPORT
FOR
MORGAN STANLEY FUNDS
DATED DECEMBER 31, 1997 (UNAUDITED)
[TO COME]
<PAGE> 251
APPENDIX E
VAN KAMPEN AMERICAN CAPITAL GLOBAL EQUITY FUND
FINANCIAL STATEMENTS
NOVEMBER 30, 1997 (UNAUDITED)
<PAGE> 252
Portfolio of Investments
November 30, 1997 (Unaudited)
<TABLE>
<CAPTION>
Number
Description of Shares Market Value
- ----------- --------- ------------
<S> <C> <C>
COMMON STOCKS 84.9%
AUSTRALIA 0.0%
Broken Hill Proprietary Co. .. 981 $ 8,994
Coles Myer ................... 3,587 17,635
GIO Australia Holding ........ 281 679
M.I.M. Holdings .............. 370 268
----------
27,576
----------
AUSTRIA 0.9%
AMS Austria Mikros ........... 400 24,175
Austrian Airlines (b) ........ 2,200 46,980
Bau Holding .................. 600 34,329
BBAG Oest Brau Bet ........... 800 38,680
Bk Austria (b) ............... 9,166 427,544
Bohler Uddeholm .............. 1,500 101,293
BWT Benckiser ................ 200 31,186
Creditanstalt Bank ........... 2,000 103,147
EA-Generali .................. 700 165,277
Flughafen Wien ............... 3,300 134,478
Lenzing (b) .................. 500 27,197
Mayr-Melnhof Karton (b) ...... 1,700 95,209
Oest Elektrizitats, Class A .. 4,100 328,410
OMV .......................... 3,200 416,429
Radex-Heraklith .............. 1,900 68,899
Steyr-Daimler-Puch ........... 1,400 39,881
VA Technologie ............... 1,700 256,038
Wienerberger Baust ........... 1,200 233,197
----------
2,572,349
----------
CANADA 4.2%
Abitibi Consolidated, Inc. (b) 8,300 107,221
Agrium, Inc. ................. 6,800 68,508
Air Canada, Inc. (b) ......... 6,900 65,883
</TABLE>
See Notes to Financial Statements
E-1
<PAGE> 253
Portfolio of Investments (Continued)
November 30, 1997 (Unaudited)
<TABLE>
<CAPTION>
Number
Description of Shares Market Value
- ----------- --------- ------------
<S> <C> <C>
CANADA (CONTINUED)
Alcan Aluminum ................... 10,100 $271,584
Avenor, Inc. ..................... 3,200 48,864
Bank of Montreal ................. 12,200 522,056
Bank of Nova Scotia .............. 11,100 481,609
Barrick Gold Corp. ............... 19,600 322,688
BCE, Inc. ........................ 28,900 874,497
Bombardier, Inc., Class B ........ 14,800 305,487
Cae, Inc. ........................ 6,300 49,981
Cameco Corp. ..................... 2,600 92,365
Canadian Imperial Bank ........... 19,100 569,909
Canadian Natural Resources (b) ... 4,800 105,732
Canadian Occidental Petroleum .... 7,300 161,955
Canadian Pacific ................. 16,000 452,136
Canadian Tire, Class A ........... 4,300 88,303
Cominco .......................... 3,800 62,028
Corel Corp. (b) .................. 3,400 7,877
Cott Corp. ....................... 2,800 27,718
Dofasco, Inc. .................... 4,700 72,924
Domtar, Inc. ..................... 7,400 50,135
Echo Bay Mines ................... 7,300 16,657
Gulf Canada Resource (b) ......... 11,400 80,037
Imasco ........................... 9,900 352,740
Imperial Oil ..................... 7,800 464,106
Inco ............................. 7,300 138,379
IPL Energy, Inc. ................. 2,700 115,253
Laidlaw, Inc., Class B Non Voting 13,400 172,633
Loewen Group, Inc. ............... 3,200 78,632
MacMillan Bloedel ................ 7,200 76,330
Magna International, Inc., Class A 3,300 207,821
Methanex Corp. (b) ............... 8,100 67,957
</TABLE>
See Notes to Financial Statements
E-2
<PAGE> 254
Portfolio of Investments (Continued)
November 30, 1997 (Unaudited)
<TABLE>
<CAPTION>
Number
Description of Shares Market Value
- ----------- --------- ------------
<S> <C> <C>
CANADA (CONTINUED)
Molson Cos., Class A ................... 3,700 $ 67,540
Moore Corp. ............................ 5,200 81,047
Newbridge Networks Corp. (b) ........... 7,000 294,871
Noranda, Inc. .......................... 11,300 189,609
Norcen Energy Resources ................ 11,400 140,064
Northern Telecom ....................... 10,900 979,535
Nova Corp. ............................. 25,300 237,129
Petro .................................. 13,500 240,741
Placer Dome, Inc. ...................... 9,800 118,686
Potash Corporation of Saskatchewan, Inc. 2,500 196,581
Power Corporation of Canada ............ 6,100 186,724
Provigo, Inc. (b) ...................... 6,100 32,334
Ranger Oil ............................. 6,300 44,010
Renaissance Energy (b) ................. 6,000 125,742
Repap Enterprises, Inc. (b) ............ 5,100 537
Rogers Communications, Inc., Class B (b) 8,100 36,396
Royal Bank of Canada ................... 14,400 770,372
Seagram ................................ 16,400 527,918
Suncor Energy, Inc. .................... 3,700 121,766
Talisman Energy, Inc. (b) .............. 6,200 182,167
Teck Corp., Class B .................... 4,000 58,132
TELUS Corp. ............................ 5,000 107,417
Thomson Corp. .......................... 26,700 674,834
Transcanada Pipelines .................. 11,200 234,718
Westcoast Energy, Inc. ................. 5,700 128,058
Weston George .......................... 2,200 172,991
-----------
12,529,924
-----------
FRANCE 4.6%
Accor .................................. 1,250 236,309
Air Liquide ............................ 2,350 369,819
Alcatel Alsthom ........................ 4,700 589,162
</TABLE>
See Notes to Financial Statements
E-3
<PAGE> 255
Portfolio of Investments (Continued)
November 30, 1997 (Unaudited)
<TABLE>
<CAPTION>
Number
Description of Shares Market Value
- ----------- --------- ------------
<S> <C> <C>
FRANCE (CONTINUED)
AXA-UAP ....................................... 10,000 $ 725,696
BQE National Paris ............................ 6,666 325,209
BIC ........................................... 2,100 145,744
Bouygues ...................................... 899 90,916
Canal Plus .................................... 1,070 186,148
Carrefour ..................................... 1,250 668,906
Cie Bancaire .................................. 900 134,467
Cie De St. Gobain ............................. 2,779 377,544
Cie Fin Paribas ............................... 3,500 252,867
Danone ........................................ 2,450 390,951
Eaux Cie Generale ............................. 4,027 532,085
Eaux Cie Generale, Warrants expiring 5/2/01 (b) 3,550 2,171
Elf Aquitaine ................................. 8,150 945,700
Erid Beghin Say ............................... 950 147,731
Essilor International ......................... 350 97,590
Eurafrance .................................... 125 50,395
France Telecom (b) ............................ 30,800 1,131,137
Havas ......................................... 2,361 154,179
Imetal ........................................ 500 59,289
L'Oreal ....................................... 2,100 803,957
Lafarge ....................................... 3,050 201,497
Lagardere S.C.A ............................... 3,500 100,791
Legrand ....................................... 1,000 190,571
LVMH (Moet Hennessy Louis Vuitton) (b) ........ 2,750 474,226
Lyonnaise des Eaux ............................ 3,856 414,778
Michelin (CGDE), Class B ...................... 3,916 210,948
Pathe ......................................... 275 53,013
Pernod Ricard ................................. 2,150 109,261
Peugeot ....................................... 1,650 186,430
Pin Printemps Redo ............................ 675 345,315
Promodes ...................................... 600 220,555
</TABLE>
See Notes to Financial Statements
E-4
<PAGE> 256
Portfolio of Investments (Continued)
November 30, 1997 (Unaudited)
<TABLE>
<CAPTION>
Number
Description of Shares Market Value
- ----------- --------- ------------
<S> <C> <C>
FRANCE (CONTINUED)
Rhone-Poulenc ............ 10,679 $ 480,105
Sagem .................... 150 67,564
Sanofi ................... 3,400 340,386
Schneider ................ 4,200 224,823
Simco .................... 775 55,139
Societe Generale ......... 3,094 406,712
Sodexho Alliance ......... 250 133,498
Thomson CSF .............. 3,850 111,392
Total, Class B ........... 7,550 792,946
Usinor Sacilor ........... 7,950 124,974
Valeo .................... 2,100 138,878
----------
13,801,774
----------
GERMANY 4.9%
Adidas ................... 1,400 197,278
AGIV (b) ................. 1,350 27,712
Allianz .................. 6,500 1,542,529
Amb Aach & Mun Bet ....... 100 102,580
BASF ..................... 16,500 583,839
Bayerische Hypotheden Bank 7,050 305,827
Bayerische Vereinsbank ... 7,400 439,552
Bayerische ............... 21,000 777,244
Beiersdorf, Class A ...... 2,450 102,807
Bilfinger & Berger BAU ... 1,400 51,523
Brau Und Brunnen (b) ..... 250 20,839
CKAG Colonia Konzern ..... 800 67,593
Continental .............. 2,800 70,893
Daimler Benz ............. 14,300 1,012,799
Degussa .................. 2,500 115,963
Deutsche Bank ............ 14,150 907,494
Deutsche Telekom ......... 60,000 1,216,331
Dresdner Bank ............ 12,450 482,892
</TABLE>
See Notes to Financial Statements
E-5
<PAGE> 257
Portfolio of Investments (Continued)
November 30, 1997 (Unaudited)
<TABLE>
<CAPTION>
Number
Description of Shares Market Value
- ----------- --------- ------------
<S> <C> <C>
GERMANY (CONTINUED)
Heidelberg Zement (b) ..................... 1,485 $ 116,206
Hochtief .................................. 2,600 107,627
Karstadt .................................. 300 104,281
Klockner Humb Deut ........................ 1,800 12,248
Linde ..................................... 300 186,958
Lufthansa ................................. 10,800 205,160
Man ....................................... 400 119,081
Mannesmann ................................ 1,050 488,829
Merck KGaA ................................ 4,550 165,642
Metro ..................................... 6,960 319,683
Muenchener Ruckversicherungs-Gesellschaft . 2,000 624,894
Preussag .................................. 500 143,039
RWE ....................................... 9,400 460,805
SAP ....................................... 1,700 494,528
Schering .................................. 2,050 201,106
Siemens ................................... 16,000 939,495
Strabag (b) ............................... 100 6,589
Thyssen ................................... 1,100 261,979
Veba ...................................... 14,000 831,982
Viag ...................................... 800 406,555
Volkswagen ................................ 800 453,643
----------
14,676,025
----------
ITALY 3.2%
Assic Generali ............................ 40,250 902,827
BCA Comm Italiana ......................... 64,000 183,380
BCO Ambros Veneto ......................... 25,000 81,907
BCO Ambros Veneto, Warrants expiring 1/2/98 25,000 84,020
Benetton Group ............................ 8,220 124,664
Burgo Cartiere ............................ 7,000 41,330
Credito Italiano .......................... 110,000 301,176
Edison .................................... 29,000 157,123
ENI ....................................... 348,000 2,031,524
</TABLE>
See Notes to Financial Statements
E-6
<PAGE> 258
Portfolio of Investments (Continued)
November 30, 1997 (Unaudited)
<TABLE>
<CAPTION>
Number
Description of Shares Market Value
- ----------- --------- ------------
<S> <C> <C>
ITALY (CONTINUED)
Falck Acciaierie & Ferriere Lombarde ..................... 5,000 $ 21,736
Fiat ..................................................... 146,700 423,738
Fiat Di Risp ............................................. 32,400 51,388
Fiat Priv ................................................ 49,700 76,238
Impregilo (b) ............................................ 15,000 10,758
Instituto Bancario San Paolo ............................. 38,500 318,909
Instituto Mobiliare Italiano ............................. 27,750 289,939
Instituto Nazionale delle Assicurazioni .................. 184,000 320,591
Italcementi .............................................. 10,500 66,797
Italcementi Di Risp ...................................... 7,000 17,910
Italgas .................................................. 30,000 115,741
Magneti Marelli .......................................... 22,500 36,663
Mediaset ................................................. 52,500 259,224
Mediobanca Rinascente Risp, Warrants expiring 12/31/99 (b) 1,400 605
Mediobanca ............................................... 22,000 153,708
Montedison (b) ........................................... 125,000 103,325
Montedison Di Risp (b) ................................... 40,000 22,621
Olivetti & C. (b) ........................................ 156,000 87,502
Parmalat Finanz (b) ...................................... 70,000 101,096
Pirelli .................................................. 70,000 173,829
RAS ...................................................... 13,000 120,965
Rinascente ............................................... 10,400 78,863
Rinascente, Warrants expiring 11/30/99 ................... 1,400 1,722
Sasib .................................................... 7,000 19,227
Sirti .................................................... 13,500 81,271
Snia BPD ................................................. 30,000 29,869
Societa Assicuratrice Industriale ........................ 6,000 60,779
Telecom Italia ........................................... 159,720 995,731
Telecom Italia Di Risp ................................... 43,779 172,576
Telecom Italia Mob ....................................... 287,500 1,164,106
Telecom Italia Mob Di Risp ............................... 67,500 147,694
----------
9,433,072
----------
</TABLE>
See Notes to Financial Statements
E-7
<PAGE> 259
Portfolio of Investments (Continued)
November 30, 1997 (Unaudited)
<TABLE>
<CAPTION>
Number
Description of Shares Market Value
- ----------- --------- ------------
<S> <C> <C>
JAPAN 8.3%
Advantest ................................. 1,800 $ 124,537
Ajinomoto Co., Inc. ....................... 24,000 218,139
Aoki Corp. (b) ............................ 14,000 3,291
Aoyama Trading Co. ........................ 1,900 48,384
Asahi Breweries ........................... 14,000 196,357
Asahi Chemical Industry Co. ............... 42,000 180,999
Asahi Glass Co. ........................... 40,000 255,436
Bank of Tokyo ............................. 132,600 1,922,116
Bridgestone Corp. ......................... 14,000 303,859
Canon, Inc. ............................... 17,000 410,264
Casio Computer Co. ........................ 8,000 63,937
Chiba Bank ................................ 4,000 15,608
Chugai Pharm Co. (b) ...................... 14,000 87,209
Dai Nippon Printing ....................... 16,000 317,179
Daiei, Inc. (b) ........................... 15,000 64,995
Daikin Industries ......................... 14,000 73,606
Daiwa House Industries .................... 14,000 112,987
Denso Corp. ............................... 17,000 310,362
East Japan Railway ........................ 82 372,654
Ebara Corp. ............................... 9,000 100,137
Fanuc ..................................... 5,900 221,900
Fuji Photo Film Co. ....................... 8,000 287,718
Fujitsu (b) ............................... 36,000 403,369
Furukawa Electric ......................... 10,000 48,893
Hankyu Corp. .............................. 19,000 90,813
Hazama Corp. .............................. 14,000 8,337
Hitachi ................................... 69,000 489,285
Honda Motor Co. ........................... 18,000 651,597
Ito Yokado Co. ............................ 9,000 406,190
Japan Air Lines Co. (b) ................... 43,000 133,759
Japan Energy Corp. ........................ 35,000 52,380
Jusco Co. ................................. 7,000 117,375
Kajima Corp. .............................. 28,000 92,145
</TABLE>
See Notes to Financial Statements
E-8
<PAGE> 260
Portfolio of Investments (Continued)
November 30, 1997 (Unaudited)
<TABLE>
<CAPTION>
Number
Description of Shares Market Value
- ----------- --------- ------------
<S> <C> <C>
JAPAN (CONTINUED)
Kansai Electric Power .................... 18,600 $316,255
Kao Corp. ................................ 25,000 333,007
Kawasaki Steel Corp. ..................... 22,000 36,200
Kinki Nippon Railway ..................... 33,000 182,809
Kirin Brewery Co. ........................ 28,000 215,663
Komatsu .................................. 28,000 168,055
Kubota Corp. ............................. 42,000 145,128
Kumagai Gumi Co. ......................... 28,000 18,868
Kyocera Corp. ............................ 4,200 202,719
Kyowa Hakko Kogyo ........................ 14,000 70,206
Long-Term Credit Bank of Japan ........... 35,000 58,962
Marubeni Corp. ........................... 42,000 104,979
Marui Co. ................................ 3,000 47,013
Matsushita Electric Industries ........... 42,000 654,887
Mitsubishi Chemical ...................... 42,000 81,943
Mitsubishi Corp. ......................... 39,000 304,360
Mitsubishi Electric Corp. ................ 49,000 135,530
Mitsubishi Heavy Industries .............. 76,000 298,938
Mitsubishi Materials Corp. ............... 28,000 63,185
Mitsubishi Trust & Banking Corp. ......... 37,000 492,850
Mitsui & Co. ............................. 42,000 291,902
Mitsui Engineering & Ship Building Co. (b) 28,000 24,791
Mitsukoshi ............................... 15,000 42,311
Murata Manufacturing Co. ................. 5,000 150,049
Mycal Corp. .............................. 9,000 74,045
NEC Corp. ................................ 24,000 253,869
NGK Insulators ........................... 14,000 130,539
Nippon Express Co. ....................... 11,000 57,575
Nippon Fire & Marine Insurance ........... 14,000 43,330
Nippon Light Metal ....................... 13,000 24,549
Nippon Meat Packer ....................... 14,000 183,193
Nippon Oil Co. ........................... 40,000 139,471
Nippon Steel Corp. ....................... 155,000 286,621
</TABLE>
See Notes to Financial Statements
E-9
<PAGE> 261
Portfolio of Investments (Continued)
November 30, 1997 (Unaudited)
<TABLE>
<CAPTION>
Number
Description of Shares Market Value
- ----------- --------- ------------
<S> <C> <C>
JAPAN (CONTINUED)
Nippon Telegraph & Telephone Corp. ........ 209 $1,719,491
Nippon Yusen Kabushiki Kaisha ............. 42,000 128,674
Nissan Fire & Marine Insurance ............ 350 1,316
Nissan Motor Co. .......................... 53,000 230,480
NKK Corp. ................................. 81,000 81,873
Odakyu Electric Railway ................... 16,000 77,101
Oji Paper Co. ............................. 28,000 116,498
Osaka Gas Co. ............................. 62,000 138,453
Penta Ocean Construction .................. 14,000 24,243
Pioneer Electronic ........................ 4,000 69,579
Rohm Co. .................................. 1,000 98,727
Sakura Bank ............................... 97,000 338,977
Sankyo Co ................................. 11,000 350,793
Sanwa Bank ................................ 46,000 504,603
Sanyo Electric Co. ........................ 42,000 118,472
Secom Co. ................................. 3,000 188,051
Sega Enterprises .......................... 2,700 60,082
Sekisui House ............................. 14,000 100,701
Sharp Corp. ............................... 28,000 187,361
Shimano, Inc. ............................. 4,000 91,518
Shimizu Corp. ............................. 20,000 64,251
Shin Etsu Chemical Co. .................... 6,000 142,449
Shiseido Co. .............................. 6,000 81,332
Showa Denko K.K. (b) ...................... 28,000 41,465
Softbank Corp. ............................ 700 12,615
Sony Corp. ................................ 6,400 546,601
Sumitomo Chemical ......................... 56,000 186,484
Sumitomo Corp. ............................ 28,000 176,611
Sumitomo Electric Industries .............. 19,000 254,574
Sumitomo Forestry ......................... 6,000 40,431
Sumitomo Metal Industries ................. 50,000 101,861
Sumitomo Metal Mining Co. ................. 13,000 51,745
Sumitomo Osaka Cement Co. ................. 14,000 26,656
</TABLE>
See Notes to Financial Statements
E-10
<PAGE> 262
Portfolio of Investments (Continued)
November 30, 1997 (Unaudited)
<TABLE>
<CAPTION>
Number
Description of Shares Market Value
- ----------- --------- ------------
<S> <C> <C>
JAPAN (CONTINUED)
Taisei Corp. .............................. 20,000 $ 64,721
Taisho Pharmacy Co. ....................... 8,000 200,588
Takeda Chemical Industries ................ 17,000 496,846
Teijin .................................... 28,000 73,497
Tobu Railway Co. .......................... 19,000 66,249
Tohoku Electric Power ..................... 10,000 151,224
Tokyu Corp. ............................... 23,000 98,217
Tokyo Electric Power ...................... 25,900 464,729
Tokyo Electron ............................ 2,000 76,631
Tokyo Gas Co. ............................. 56,000 133,830
Tokyo Marine & Fire Insurance Co. ......... 42,000 398,198
Toppan Printing Co. ....................... 19,000 257,551
Toray Industries, Inc. .................... 42,000 190,872
Toto ...................................... 14,000 128,345
Toyobo Co. ................................ 28,000 42,782
Toyota Motor Corp. ........................ 61,000 1,758,903
Ube Industries ............................ 28,000 50,460
----------
24,827,330
----------
NETHERLANDS 1.5%
ABN Amro Holdings ......................... 19,362 369,255
Ahold Koninklijke ......................... 7,108 189,566
Akzo Nobel ................................ 1,100 193,509
Elsevier .................................. 9,900 167,383
Getronics ................................. 1,200 41,242
Heineken .................................. 700 118,528
ING Groep NV .............................. 11,207 455,656
KLM Royal Dutch Air Lines ................. 1,316 47,348
Koninklijke KNP BT ........................ 1,500 32,381
Koninklijke Nedlloyd ...................... 400 9,198
Koninklijke PTT Nederland ................. 6,660 267,432
OCE ....................................... 303 34,534
Philips Electronic ........................ 4,800 317,134
Royal Dutch Petroleum Co. ................. 29,200 1,520,757
</TABLE>
See Notes to Financial Statements
E-11
<PAGE> 263
Portfolio of Investments (Continued)
November 30, 1997 (Unaudited)
<TABLE>
<CAPTION>
Number
Description of Shares Market Value
- ----------- --------- ------------
<S> <C> <C>
NETHERLANDS (CONTINUED)
Stork ..................................... 500 $ 18,316
Unilever .................................. 8,800 511,890
Wolters Kluwer ............................ 1,010 133,714
---------
4,427,843
---------
NORWAY 0.5%
Aker RGI .................................. 3,200 56,512
Bergesen, Series A ........................ 2,800 71,836
Bergesen, Series B ........................ 1,200 30,370
Christiania Bank .......................... 27,000 97,241
Dyno Industrier ........................... 1,500 28,993
Elkem ..................................... 2,600 36,877
Hafslund .................................. 4,800 28,701
Helikopter Services Group ................. 1,000 11,402
Kvaerner .................................. 2,000 98,729
Leif Hoegh & Co. .......................... 1,600 31,371
Ncl Holdings (b) .......................... 6,600 24,688
Norsk Hydro ............................... 11,300 582,175
Norske Skogsindustrier .................... 1,500 45,888
Orkla ..................................... 2,300 198,292
Petroleum Geo-Services (b) ................ 1,600 103,012
Storebrand (b) ............................ 14,000 95,197
Unitor .................................... 1,000 12,932
---------
1,554,216
---------
PORTUGAL 1.0%
Banco Comercial Portugues ................. 15,000 316,315
Banco Espirito Santo E Comercial .......... 7,900 222,226
Banco Totta E Acores ...................... 5,700 107,547
Bpi Soc Gestora ........................... 7,600 168,912
Cimpor-Cimentos de Portugal ............... 8,000 202,619
CIN Corp Ind Norte ........................ 400 24,839
Corticeira Amorim ......................... 1,500 17,064
Elec De Portugal (b) ...................... 35,200 636,218
INAPA Investimentos Participacoese Gestao . 500 16,648
</TABLE>
See Notes to Financial Statements
E-12
<PAGE> 264
Portfolio of Investments (Continued)
November 30, 1997 (Unaudited)
<TABLE>
<CAPTION>
Number
Description of Shares Market Value
- ----------- --------- ------------
<S> <C> <C>
PORTUGAL (CONTINUED)
Jeronimo Martins ........................................ 2,300 $ 72,689
Jeronimo Martins, Common Rights callable through 12/31/97 2,300 72,689
Portucel Industrial Empressa Productora de Celulose ..... 8,600 55,265
Portugal Telecom ........................................ 22,000 1,013,319
Soares Da Costa (b) ..................................... 1,100 8,546
Sonae Investimentos ..................................... 4,000 149,501
UNICER-Uniao Cervejeira ................................. 1,000 15,649
---------
3,100,046
---------
SPAIN 2.1%
Acerinox ................................................ 500 78,130
Aguas De Barcelona ...................................... 1,721 69,845
Argentaria, SA .......................................... 5,120 317,618
Autopistas Cesa ......................................... 8,610 114,908
BCO Bilbao Vizcaya ...................................... 27,300 824,804
BCO Central Hispan ...................................... 13,200 253,182
BCO Santander ........................................... 19,500 589,800
Corp Fin Alba ........................................... 600 64,784
Corp Mapfre ............................................. 1,100 53,705
Dragados Y Construction ................................. 2,300 48,897
Ebro Agricolas .......................................... 2,000 34,605
Emp Nac Electricid (b) .................................. 41,600 782,563
Empresa Nacl Celul ...................................... 900 14,607
Ercros (b) .............................................. 6,900 7,034
Fom Const Y Contra ...................................... 2,400 95,285
Gas Natural SDG ......................................... 6,000 296,962
Iberdrola ............................................... 37,700 481,648
Metrovacesa ............................................. 945 40,751
Portland Valderriv ...................................... 300 24,445
Repsol .................................................. 12,200 527,731
Tabacalera, Class A ..................................... 1,500 114,681
Telefonica De Espana .................................... 38,000 1,095,835
Union Electrica Fenosa .................................. 11,800 118,309
</TABLE>
See Notes to Financial Statements
E-13
<PAGE> 265
Portfolio of Investments (Continued)
November 30, 1997 (Unaudited)
<TABLE>
<CAPTION>
Number
Description of Shares Market Value
- ----------- --------- ------------
<S> <C> <C>
SPAIN (CONTINUED)
Uralita .................................... 2,100 $ 24,435
Vallehermoso ............................... 1,700 49,879
Viscofan Envoltura ......................... 900 22,212
Zardoya Otis ............................... 400 46,543
---------
6,193,198
---------
SWEDEN 2.0%
ABB, Class A ............................... 32,000 408,211
AGA, Class A ............................... 2,700 36,016
AGA, Class B ............................... 4,700 59,043
Astra, Class A ............................. 60,000 1,041,248
Atlas Copco, Class A ....................... 7,400 227,132
Electrolux, Class B ........................ 2,900 228,349
Ericsson Telefonaktiebolaget LM, Class B (b) 36,800 1,501,263
Esselte, Class A ........................... 1,500 29,139
Granges (b) ................................ 1,450 23,098
Hennes & Mauritz, Class B .................. 8,000 369,876
Securitas, Class B ......................... 3,600 108,166
Skandia Foersaekrings ...................... 4,600 242,466
Skandinaviska Enskilda Banken, Class A ..... 21,100 248,669
Skanska, Class B ........................... 4,900 201,800
SKF, Class B ............................... 4,800 112,517
Stora Kopparbergs, Class A ................. 12,200 161,950
Svenska Cellulosa, Class B ................. 7,500 164,638
Svenska Handelsbkn, Class A (b) ............ 8,200 288,856
Swedish Match .............................. 18,800 63,547
Trelleborg, Class B ........................ 5,300 74,131
Volvo, Class B ............................. 15,600 416,189
---------
6,006,304
---------
SWITZERLAND 3.5%
ABB ........................................ 250 332,620
Adecco ..................................... 450 132,557
Alusuisse-Lonza Holding .................... 140 128,531
</TABLE>
See Notes to Financial Statements
E-14
<PAGE> 266
Portfolio of Investments (Continued)
November 30, 1997 (Unaudited)
<TABLE>
<CAPTION>
Number
Description of Shares Market Value
- ----------- --------- ------------
<S> <C> <C>
Switzerland (Continued)
Credit Suisse Group ....... 6,000 $ 877,402
Georg Fischer ............. 30 41,240
Holderbk Fn Glarus ........ 170 148,205
Nestle .................... 970 1,427,311
Novartis (b) .............. 1,566 2,501,998
Roche Holdings Bearer ..... 40 608,781
Roche Holdings Genusscheine 171 1,530,341
Sairgroup (b) ............. 90 117,471
SGS Holdings .............. 45 84,079
SMH ....................... 130 71,027
Sulzer .................... 100 66,068
Swiss Bank Corp. (b) ...... 1,860 534,205
Swiss Reinsurance ......... 350 571,714
Ubs Schw Bkgesell (b) ..... 570 144,519
Union Bank of Switzerland . 510 649,215
Valora Holding ............ 170 35,769
Zurich Versicherun ........ 1,170 492,355
----------
10,495,408
----------
UNITED KINGDOM 9.3%
Abbey National ............ 34,200 545,836
Arjo Wiggins Apple ........ 17,050 48,665
Associated British Foods .. 12,225 112,628
B.A.T Industries .......... 75,625 679,487
Barclays .................. 41,500 1,000,877
Bass ...................... 26,825 385,091
BG ........................ 94,720 454,323
BG, Class B (b) ........... 107,350 52,578
BICC ...................... 17,050 44,345
Blue Circle Industiries ... 31,725 182,173
BOC Group ................. 17,050 272,120
Boots Co. ................. 26,825 394,151
BPB ....................... 17,050 97,330
British Aerospace ......... 12,225 333,653
</TABLE>
See Notes to Financial Statements
E-15
<PAGE> 267
Portfolio of Investments (Continued)
November 30, 1997 (Unaudited)
<TABLE>
<CAPTION>
Number
Description of Shares Market Value
- ----------- --------- ------------
<S> <C> <C>
UNITED KINGDOM (CONTINUED)
British Airways ............ 29,275 $ 265,507
British Petroleum .......... 140,163 1,917,444
British Sky Broadcast ...... 39,025 290,001
British Steel .............. 48,800 113,943
British Telecommunications . 141,550 1,092,522
BTR ........................ 102,500 355,746
Burmah Castrol ............. 7,300 122,920
Cable & Wireless ........... 61,025 554,491
Cadbury Schweppes .......... 26,825 278,624
Caradon .................... 19,170 60,544
Centrica (b) ............... 107,350 155,921
Coats Viyella .............. 21,975 38,227
Commercial Union ........... 17,050 234,685
Courtaulds ................. 12,225 56,366
De Lousiana Rue ............ 2,450 16,551
EMI Group .................. 12,860 96,868
General Electric ........... 70,775 460,796
GKN ........................ 14,600 317,348
Glaxo Wellcome ............. 78,075 1,714,192
Granada Group .............. 17,050 243,900
Grand Metropolitan ......... 44,700 406,912
Great University Stores .... 29,275 343,626
Guardian Royal Exchange .... 19,525 93,981
Guinness ................... 44,800 406,309
Hanson ..................... 14,675 74,726
Harrison & Crosfield ....... 31,725 63,493
HSBC Holdings (ADR) ........ 53,700 1,308,714
Imperial Chemical Industries 21,975 325,115
Ladbroke Group ............. 29,275 133,001
Land Securities ............ 19,525 317,557
Lasmo ...................... 19,525 86,726
Legal & General Group ...... 29,275 249,685
Lloyds TSB Group ........... 134,175 1,529,606
</TABLE>
See Notes to Financial Statements
E-16
<PAGE> 268
Portfolio of Investments (Continued)
November 30, 1997 (Unaudited)
<TABLE>
<CAPTION>
Number
Description of Shares Market Value
- ----------- --------- ------------
<S> <C> <C>
UNITED KINGDOM (CONTINUED)
Lonrho ................... 19,525 $ 30,338
Marks & Spencer .......... 85,375 878,117
MEPC ..................... 14,675 132,350
National Power ........... 34,200 326,635
North West Water (b) ..... 17,050 219,136
P & O Finance (b) ........ 19,525 211,375
Pilkington ............... 36,575 79,685
Prudential Corp. ......... 48,800 525,029
Rank Group ............... 21,975 128,227
Redland .................. 14,675 84,516
Reed International ....... 33,725 359,121
Reuters Holdings ......... 41,500 468,197
Rexam .................... 14,675 71,875
Rio Tinto ................ 29,275 353,514
RMC Group ................ 7,300 110,468
Royal Bank Scot Group .... 12,225 140,605
Royal Sun Alliance ....... 34,200 307,863
Safeway .................. 21,975 120,248
Sainsbury J Finance ...... 39,025 320,979
Schroders ................ 4,850 139,741
Scottish Power ........... 24,425 198,007
Sears .................... 48,800 40,385
Sedgwick Group ........... 14,675 30,981
Slough Estates ........... 12,225 71,335
Smithkline Beecham ....... 127,975 1,188,754
Southern Electric ........ 12,225 92,704
Tarmac ................... 34,200 66,424
Taylor Woodrow ........... 19,525 57,708
Tesco .................... 46,325 374,370
Thames Water ............. 17,050 256,850
Thorn .................... 11,892 30,026
TI Group ................. 12,225 98,795
</TABLE>
See Notes to Financial Statements
E-17
<PAGE> 269
Portfolio of Investments (Continued)
November 30, 1997 (Unaudited)
<TABLE>
<CAPTION>
Number
Description of Shares Market Value
- ----------- --------- ------------
<S> <C> <C>
UNITED KINGDOM (CONTINUED)
Unilever .............................. 70,750 $ 557,718
Vodafone Group ........................ 80,525 538,555
Zeneca Group .......................... 21,975 701,447
----------
27,642,190
----------
UNITED STATES 38.9%
Abbott Laboratories, Inc. ............. 6,000 390,000
AccuStaff, Inc. (b) ................... 2,600 76,863
Adobe Systems, Inc. ................... 3,300 138,600
Advanced Fibre Communications, Inc. (b) 2,200 56,925
AGCO Corp. ............................ 2,600 71,175
Air Express International Corp. ....... 2,400 68,850
Air Products & Chemicals, Inc. ........ 900 69,019
Airborne Freight Corp. ................ 1,400 89,163
ALBANK Financial Corp. ................ 1,800 83,250
Albertsons, Inc. ...................... 5,000 221,875
Alcan Aluminum ........................ 600 16,163
Allegheny Teldyne, Inc. ............... 200 5,150
Allen Telecom, Inc. (b) ............... 1,700 34,531
Allergan, Inc. ........................ 2,900 98,238
Allied Waste Industries, Inc. (b) ..... 3,400 74,375
AlliedSignal, Inc. .................... 6,800 252,450
Allstate Corp. ........................ 6,300 541,012
Alltel Corp. .......................... 5,600 222,600
Aluminum Company of America ........... 100 6,725
ALZA Corp. (b) ........................ 3,000 80,063
AMBAC, Inc. ........................... 2,700 108,337
American Bankers Insurance Group, Inc. 2,000 81,000
American Express Co. .................. 5,800 457,475
American General Corp. ................ 1,300 70,038
American Greetings Corp. .............. 10,000 367,500
American Home Products Corp. .......... 9,700 677,787
American International Group, Inc. .... 6,600 665,362
</TABLE>
See Notes to Financial Statements
E-18
<PAGE> 270
Portfolio of Investments (Continued)
November 30, 1997 (Unaudited)
<TABLE>
<CAPTION>
Number
Description of Shares Market Value
- ----------- --------- ------------
<S> <C> <C>
UNITED STATES (CONTINUED)
American Power Conversion Corp. (b) ....................... 2,000 $ 60,750
American Stores Co. ....................................... 5,600 110,950
Ameritech Corp. ........................................... 5,200 400,725
Amoco Corp. ............................................... 5,400 486,000
AMP, Inc. ................................................. 3,200 139,000
AMR Corp. (b) ............................................. 700 84,831
AMRESCO, Inc. (b) ......................................... 1,900 53,200
Andrew Corp. (b) .......................................... 3,600 95,400
Anheuser Busch Cos., Inc. ................................. 7,100 306,631
Apple Computer (b) ........................................ 3,300 58,575
Applied Materials, Inc. (b) ............................... 9,600 316,800
AptarGroup, Inc. .......................................... 1,800 102,600
Armstrong World Industries, Inc. .......................... 2,200 151,662
Arvin Industries, Inc. .................................... 2,300 79,350
ASARCO, Inc. .............................................. 3,500 87,063
Ashland, Inc. ............................................. 3,500 163,406
Associated Banc-Corp ...................................... 1,900 94,525
Astoria Financial Corp. ................................... 2,300 126,787
AT&T Corp. ................................................ 18,900 1,056,037
Atlantic Richfield Co. .................................... 1,600 130,400
Atmel Corp. (b) ........................................... 3,700 83,019
Automatic Data Processing, Inc. ........................... 4,600 258,750
Avery Dennison Corp. ...................................... 900 37,688
Avnet, Inc. ............................................... 3,200 212,000
Avon Products, Inc. ....................................... 2,600 150,312
AVX Corp. ................................................. 2,400 64,650
Baker Hughes, Inc. ........................................ 2,300 96,313
Baldor Electric Co., Common Rights Callable Through 5/25/98 3,600 111,375
Ballard Medical Products .................................. 3,000 69,188
BancOne Corp. ............................................. 6,000 308,250
Bank of New York, Inc. .................................... 5,400 290,250
BankAmerica Corp. ......................................... 10,400 759,200
BankBoston Corp. .......................................... 3,600 320,850
</TABLE>
See Notes to Financial Statements
E-19
<PAGE> 271
Portfolio of Investments (Continued)
November 30, 1997 (Unaudited)
<TABLE>
<CAPTION>
Number
Description of Shares Market Value
<S> <C> <C>
UNITED STATES (CONTINUED)
Bankers Trust New York Corp. ................................. 1,300 $ 154,131
Bard (C.R.), Inc. ............................................ 6,100 182,619
Barnes & Noble, Inc. (b) ..................................... 3,800 117,562
Bausch & Lomb, Inc. .......................................... 5,100 202,087
Baxter International, Inc. ................................... 3,000 151,875
Becton, Dickinson & Co. ...................................... 10,100 520,781
Belden, Inc. ................................................. 2,200 72,875
Bell Atlantic Corp. .......................................... 7,700 687,225
BellSouth Corp. .............................................. 11,000 602,250
Belo (A.H.) Corp. ............................................ 2,600 128,212
Bemis, Inc. .................................................. 1,200 50,550
Beneficial Corp. ............................................. 1,500 116,437
Bergen Brunswig Corp., Class A ............................... 1,900 81,581
Berkley (W.R.) Corp. ......................................... 2,600 108,225
Betz Dearborn, Inc., Common Rights Callable through 9/19/98 .. 1,900 115,662
Beverly Enterprises, Inc. (b) ................................ 4,100 69,700
Biogen, Inc. (b) ............................................. 2,600 91,000
Biomet, Inc. (b) ............................................. 3,400 81,175
Birmingham Steel Corp. ....................................... 8,100 124,031
BISYS Group, Inc. (b) ........................................ 3,900 124,800
Black Box Corp. (b) .......................................... 2,100 74,813
Blanch (E.W.) Holdings, Inc. ................................. 3,600 124,425
BMC Industries, Inc. ......................................... 3,600 66,825
Bob Evans Farms, Inc. ........................................ 5,600 112,000
Boeing Co. ................................................... 5,600 297,500
Boise Cascade Corp. .......................................... 2,400 80,850
Borders Group, Inc. (b) ...................................... 1,900 54,269
Bowater, Inc. ................................................ 1,800 80,775
Briggs & Stratton Corp., Common Rights Callable Through 1/5/00 3,900 199,387
Bristol-Myers Squibb Co. ..................................... 11,700 1,095,412
Brown-Forman Corp., Class B .................................. 2,900 148,987
Browning Ferris Industries, Inc. ............................. 2,500 89,219
</TABLE>
See Notes to Financial Statements
E-20
<PAGE> 272
Portfolio of Investments (Continued)
November 30, 1997 (Unaudited)
<TABLE>
<CAPTION>
Number
Description of Shares Market Value
- ----------- --------- ------------
<S> <C> <C>
UNITED STATES (CONTINUED)
Burlington Northern Santa Fe Corp. .... 2,800 $256,200
Burlington Resources, Inc. ............ 1,700 75,650
CalEnergy, Inc. (b) ................... 2,600 86,450
Callaway Golf Co. ..................... 3,200 102,000
Cambridge Technology Partners, Inc. (b) 2,400 93,300
Camco International, Inc. ............. 1,600 100,400
Campbell Soup Co. ..................... 3,200 179,200
Capital Re Corp. ...................... 1,600 89,700
Catalina Marketing Corp. (b) .......... 1,300 60,125
Caterpillar, Inc. ..................... 6,400 306,800
Centocor, Inc. (b) .................... 2,200 95,700
Central & South West Corp. ............ 6,800 170,000
Central Fidelity Banks, Inc. .......... 2,600 125,287
Central Louisiana Electric Co. ........ 2,000 58,125
Central Newspapers, Inc., Class A ..... 1,300 89,375
Centura Banks, Inc. ................... 2,100 124,162
Century Telephone Enterprises, Inc. ... 2,200 101,338
Chancellor Media Corp. (b) ............ 1,600 96,100
Charter One Financial, Inc. ........... 1,900 112,575
Chase Manhattan Corp. ................. 6,600 716,925
Chevron Corp. ......................... 7,500 601,406
Chittenden Corp. ...................... 1,600 70,600
Choice Hotels, Inc. (b) ............... 4,300 74,981
Chrysler Corp. ........................ 11,000 377,437
Chubb Corp. ........................... 2,100 148,969
CIGNA Corp. ........................... 2,200 367,950
Cincinnati Milacron, Inc. ............. 7,000 206,937
CIPSCO, Inc. .......................... 2,700 108,169
Circus Circus Enterprises, Inc. (b) ... 4,400 90,750
Cisco Systems, Inc. (b) ............... 2,500 215,625
Citicorp .............................. 6,200 743,612
CKE Restaurants, Inc. ................. 2,200 82,638
Clayton Homes, Inc. ................... 5,500 90,406
</TABLE>
See Notes to Financial Statements
E-21
<PAGE> 273
Portfolio of Investments (Continued)
November 30, 1997 (Unaudited)
<TABLE>
<CAPTION>
Number
Description of Shares Market Value
- ----------- --------- ------------
<S> <C> <C>
UNITED STATES (CONTINUED)
Clorox Co. ............................ 2,100 $ 163,012
CMAC Investment Corp. ................. 1,600 83,100
CNF Transportation, Inc. .............. 1,800 78,300
Coast Savings Financial, Inc. (b) ..... 1,600 96,000
Coastal Corp. ......................... 900 52,706
Coca-Cola Co. ......................... 27,800 1,737,500
Colgate-Palmolive Co. ................. 1,200 80,175
Columbia / HCA Healthcare Corp. ....... 17,800 525,100
Comdisco, Inc. ........................ 2,200 64,350
Comerica, Inc. ........................ 3,600 306,675
Commercial Metals Co. ................. 3,100 102,106
COMNET Cellular, Inc. (b) ............. 3,100 109,469
Compaq Computer Corp. (b) ............. 8,100 505,744
Compass Bancshares, Inc. .............. 2,000 80,000
CompUSA, Inc. (b) ..................... 2,700 98,719
Computer Associates International, Inc. 8,700 452,944
Computer Management Sciences, Inc. (b) 3,300 53,625
ConAgra, Inc. ......................... 2,000 71,875
Concord EFS, Inc. (b) ................. 2,700 68,850
Consolidated Edison Co. ............... 4,300 162,325
Consolidated Natural Gas Co. .......... 800 48,300
Consolidated Papers, Inc. ............. 1,800 96,975
Consolidated Stores Corp. (b) ......... 2,600 126,425
Continental Airlines, Inc., Class B (b) 1,900 86,569
Cooper Cameron Corp. (b) .............. 1,400 85,313
Cooper Industries, Inc. ............... 2,500 129,063
Cooper Tire & Rubber Co. .............. 7,100 158,862
Coors (Adolph) Co. .................... 1,800 64,800
CoreStates Financial Corp. ............ 1,700 131,431
Corporate Express, Inc. (b) ........... 3,300 51,563
Countrywide Credit Industries, Inc. ... 3,500 143,281
Covance, Inc. (b) ..................... 3,800 68,875
CPC International, Inc. ............... 4,100 423,837
</TABLE>
See Notes to Financial Statements
E-22
<PAGE> 274
Portfolio of Investments (Continued)
November 30, 1997 (Unaudited)
<TABLE>
<CAPTION>
Number
Description of Shares Market Value
- ----------- --------- ------------
<S> <C> <C>
UNITED STATES (CONTINUED)
Crescendo Pharmaceuticals Corp., Class A (b) ....... 100 $ 1,144
Crompton & Knowles Corp. ........................... 3,800 100,700
Crown Cork & Seal Co., Inc. ........................ 100 4,881
CSX Corp. .......................................... 4,700 245,869
Cyprus Amax Minerals Co. ........................... 2,900 53,106
Cytec Industries, Inc. (b) ......................... 2,100 96,075
Dallas Semiconductor Corp. ......................... 2,500 122,187
Dana Corp. ......................................... 800 37,400
Danaher Corp. ...................................... 2,600 152,750
Darden Restaurants, Inc. ........................... 8,600 102,125
Dayton Hudson Corp. ................................ 4,300 285,681
Dean Foods Co. ..................................... 2,600 138,125
Deere & Co. ........................................ 4,700 257,619
Dell Computer Corp. (b) ............................ 2,200 185,212
Delta Air Lines, Inc. .............................. 2,600 289,737
Deluxe Corp., Common Rights Callable Through 2/22/98 7,300 257,781
Deposit Guaranty Corp. ............................. 2,200 106,150
Digital Equipment Corp. (b) ........................ 3,000 147,750
Dime Bancorp, Inc. ................................. 4,500 109,125
Donnelley (R.R.) & Sons Co. ........................ 1,800 63,450
Doubletree Corp. (b) ............................... 1,900 83,481
Dow Chemical Co. ................................... 2,500 246,875
Dress Barn (b) ..................................... 3,100 79,825
Dresser Industries, Inc. ........................... 2,200 82,225
DTE Energy Co. ..................................... 600 19,688
Du Pont (E. I.) de Nemours & Co. ................... 15,300 926,606
Dun & Bradstreet Corp. ............................. 11,100 310,800
Dura Pharmaceuticals, Inc. (b) ..................... 1,800 78,975
Eastern Enterprises ................................ 6,500 261,625
Eastman Chemical Co. ............................... 1,500 90,563
Eastman Kodak Co. .................................. 5,100 309,188
Echlin, Inc. ....................................... 2,600 82,388
Ecolab, Inc. ....................................... 2,500 127,500
</TABLE>
See Notes to Financial Statements
E-23
<PAGE> 275
Portfolio of Investments (Continued)
November 30, 1997 (Unaudited)
<TABLE>
<CAPTION>
Number
Description of Shares Market Value
- ----------- --------- ------------
<S> <C> <C>
UNITED STATES (CONTINUED)
Edison International ............................................ 900 $ 24,131
EG & G, Inc. .................................................... 5,500 107,937
Electronic Arts (b) ............................................. 2,300 77,050
Eletronics for Imaging, Inc. (b) ................................ 2,100 101,325
EMC Corp. (b) ................................................... 4,100 124,281
Emerson Electric Co. ............................................ 2,900 159,500
Enova Corp. ..................................................... 6,200 161,200
Enron Corp. ..................................................... 2,500 96,875
Entergy Corp. ................................................... 29,100 756,600
Etec Systems, Inc. (b) .......................................... 1,300 59,475
Exxon Corp. ..................................................... 20,700 1,262,700
Falcon Drilling, Inc. (b) ....................................... 2,200 70,950
Family Dollar Stores, Inc. ...................................... 3,000 83,063
Fastenal Co. .................................................... 1,800 95,400
Federal Express Corp. (b) ....................................... 800 53,650
Federal Home Loan Mortgage Corp. ................................ 2,800 115,500
Federal National Mortgage Association ........................... 11,400 602,062
Federal Signal Corp. ............................................ 2,700 58,725
FINOVA Group, Inc. .............................................. 2,300 108,387
First American Corp-Tennessee ................................... 2,700 133,650
First Chicago NBD Corp. ......................................... 4,600 359,950
First Commerce Corp. ............................................ 1,600 102,600
First Commercial Corp., Common Rights Callable Through 9/28/00 .. 3,000 153,375
First Hawaiian, Inc. ............................................ 2,000 76,000
First Midwest Bancorp, Inc. (b) ................................. 2,700 106,312
First Security Corp. ............................................ 2,900 98,238
First Union Corp. ............................................... 11,000 536,250
First Virginia Banks, Inc., Common Rights Callable Through 8/8/98 3,500 167,344
FirstMerit Corp. ................................................ 1,400 37,100
Fiserv, Inc. (b) ................................................ 2,700 130,950
Fleet Financial Group, Inc. ..................................... 4,100 270,856
Fleetwood Enterprises, Inc. ..................................... 100 3,569
Fleming Cos., Inc. .............................................. 3,900 64,838
</TABLE>
See Notes to Financial Statements
E-24
<PAGE> 276
Portfolio of Investments (Continued)
November 30, 1997 (Unaudited)
<TABLE>
<CAPTION>
Number
Description of Shares Market Value
- ----------- --------- ------------
<S> <C> <C>
UNITED STATES (CONTINUED)
Fluor Corp. ........................... 2,500 $ 89,844
FMC Corp. (b) ......................... 1,400 102,287
Ford Motor Co. ........................ 18,200 782,600
Forest Labs, Inc. (b) ................. 2,500 111,875
Fort James Corp. ...................... 100 3,913
Fortune Brands, Inc. .................. 3,600 130,275
Freeport-McMoran Copper & Gold, Class B 1,700 35,594
Fruit of the Loom, Inc. (b) ........... 3,600 83,925
Gannett, Inc. ......................... 2,500 145,156
Gap, Inc. ............................. 2,200 118,113
Gaylord Entertainment Co. ............. 900 27,506
General Dynamics Corp. ................ 400 34,650
General Electric Co. .................. 34,800 2,566,500
General Mills, Inc. ................... 2,200 162,800
General Motors Corp. .................. 9,900 603,900
General Reinsurance Corp. (b) ......... 800 158,800
General Signal Corp. .................. 3,000 122,437
Genesis Health Ventures, Inc. (b) ..... 1,300 31,525
Genzyme Corp. ......................... 2,600 69,713
Giant Foods, Inc., Class A ............ 3,600 121,500
Goodrich (B.F.) Co. ................... 4,100 182,450
Goodyear Tire & Rubber Co. ............ 1,600 97,100
GPU, Inc. ............................. 1,300 51,350
Great Atlantic & Pacific Tea, Inc. .... 6,700 206,862
Green Tree Financial Corp. ............ 4,100 125,563
GTE Corp. ............................. 12,500 632,031
GTECH Holdings Corp. (b) .............. 1,500 48,281
Gulfstream Aerospace Corp. (b) ........ 3,900 114,562
H & R Block, Inc. ..................... 1,600 65,600
Halliburton Co. ....................... 1,200 64,725
Hanna (M.A.) Co. ...................... 3,400 83,938
Hannaford Brothers Co. ................ 2,900 116,544
Harland (John H.) Co. ................. 4,700 97,231
</TABLE>
See Notes to Financial Statements
E-25
<PAGE> 277
Portfolio of Investments (Continued)
November 30, 1997 (Unaudited)
<TABLE>
<CAPTION>
Number
Description of Shares Market Value
- ----------- --------- ------------
<S> <C> <C>
UNITED STATES (CONTINUED)
Harleysville Group, Inc. ................ 4,900 $ 113,312
Harman International Industries, Inc. ... 1,800 91,125
Harnischfeger Industries, Inc. .......... 1,800 68,738
Harrahs Entertainment, Inc. (b) ......... 3,600 72,225
Harris Corp. ............................ 9,100 431,681
Harsco Corp. ............................ 3,900 154,537
Harte-Hanks Communications .............. 2,600 89,700
Hartford Financial Services Group, Inc. . 5,300 443,875
Heinz (H. J.) & Co. ..................... 3,000 150,188
Hercules, Inc. .......................... 6,700 325,369
Hershey Foods Corp. ..................... 2,100 128,887
Hewlett-Packard Co. ..................... 16,400 1,001,425
Hibernia Corp., Class A ................. 7,200 130,500
Hilton Hotels Corp. ..................... 2,500 77,813
Home Depot, Inc. ........................ 9,600 537,000
Honeywell, Inc. ......................... 1,700 111,350
Hong Kong Land Hld Usd .................. 12,596 27,710
Houston Industries, Inc. ................ 2,500 59,219
Huntington Bancshares, Inc. ............. 1,800 61,200
Illinois Central Corp. .................. 1,900 68,519
IMCO Recycling, Inc. .................... 3,000 47,250
Imperial Credit Mortgage Holdings, Inc. . 6,750 119,391
Ingersoll-Rand Co. ...................... 2,600 106,275
INMC Mortgage Holdings, Inc. ............ 3,400 77,138
Integrated Health Services, Inc. ........ 2,200 66,963
Intel Corp. ............................. 19,900 1,544,737
Interim Services, Inc. (b) .............. 3,700 104,756
International Business Machines Corp. ... 12,900 1,413,356
International Flavours & Fragrances, Inc. 3,000 144,562
International Game Technology ........... 3,400 85,000
International Rectifier Corp. (b) ....... 3,700 52,263
Interpublic Group of Cos., Inc. ......... 800 38,350
Interstate Bakeries Corp. ............... 2,900 100,231
</TABLE>
See Notes to Financial Statements
E-26
<PAGE> 278
Portfolio of Investments (Continued)
November 30, 1997 (Unaudited)
<TABLE>
<CAPTION>
Number
Description of Shares Market Value
- ----------- --------- ------------
<S> <C> <C>
UNITED STATES (CONTINUED)
Invacare Corp. ...................................... 3,000 $ 69,375
Iomega Corp. (b) .................................... 3,100 101,912
Ionics, Inc. (b) .................................... 2,400 88,500
ITT Industries, Inc. ................................ 6,300 200,025
Jacobs Engineering Group, Inc. (b) .................. 1,900 50,231
Jefferson-Pilot Corp. ............................... 700 53,419
Johns Manville Corp. ................................ 4,300 47,031
Johnson & Johnson, Inc. ............................. 15,100 950,356
Johnson Controls, Inc. .............................. 5,300 242,806
Jones Apparel Group, Inc. (b) ....................... 1,600 78,000
Jostens, Inc., Common Rights Callable Through 8/19/98 3,800 91,200
JP Morgan & Co., Inc. ............................... 1,600 182,700
KN Energy, Inc. ..................................... 2,500 116,875
Kansas City Southern Industries, Inc. ............... 4,500 138,937
Kemet Corp. (b) ..................................... 2,500 59,063
Kennametal, Inc. .................................... 2,100 110,644
Kent Electronics Corp. (b) .......................... 2,400 80,400
Kerr-McGee Corp. .................................... 300 19,894
Keycorp ............................................. 5,200 350,675
Keyspan Energy Corp. ................................ 1,400 46,638
Kimball International, Inc., Class B ................ 2,300 92,144
Kimberly-Clark Corp. ................................ 6,700 348,819
King World Productions, Inc. ........................ 2,500 135,937
KLA-Tencor Corp. (b) ................................ 2,700 104,625
Knight-Ridder, Inc. ................................. 500 25,063
Komag, Inc. (b) ..................................... 3,000 60,188
Latin American Discovery Fund, Inc. (c) ............. 249,100 3,938,894
LCI International, Inc. (b) ......................... 2,200 60,638
Lear Corp. (b) ...................................... 2,100 98,306
Lexmark International Group, Inc., Class A (b) ...... 2,700 86,063
LG & E Energy Corp. ................................. 4,000 89,500
Liberty Financial Cos., Inc. ........................ 1,600 86,700
Lilly (Eli) & Co. (b) ............................... 6,800 428,825
</TABLE>
See Notes to Financial Statements
E-27
<PAGE> 279
Portfolio of Investments (Continued)
November 30, 1997 (Unaudited)
<TABLE>
<CAPTION>
Number
Description of Shares Market Value
- ----------- --------- ------------
<S> <C> <C>
UNITED STATES (CONTINUED)
Limited, Inc. ..................... 3,600 $ 86,625
Lincoln National Corp. ............ 2,900 206,987
Littelfuse, Inc. (b) .............. 2,200 60,775
Lockheed Martin Corp. ............. 4,100 400,006
Loews Corp. ....................... 4,500 477,562
Long Island Lighting Co. .......... 2,900 78,300
Longs Drug Stores Corp. ........... 800 23,400
Louisiana-Pacific Corp. ........... 2,400 48,450
Lowe's Cos., Inc. ................. 5,900 271,031
Lubrizol Corp. .................... 2,400 93,600
Lucent Technologies, Inc. ......... 2,000 160,250
MacFrugals Bargains Close Outs (b) 2,500 107,187
Magna Group, Inc. ................. 3,100 124,000
Mallinckrodt, Inc. ................ 5,800 214,600
Manor Care, Inc. .................. 14,500 511,125
Markel Corp. (b) .................. 700 107,800
Marriot International, Inc. ....... 700 50,706
Martin Marietta Materials, Inc. ... 2,400 83,100
May Department Stores Co. ......... 4,600 247,250
Maytag Corp. ...................... 2,600 84,013
MBIA, Inc. ........................ 2,200 138,325
MBNA Corp. ........................ 3,900 103,594
McClatchy Newspapers, Inc., Class A 3,600 103,500
McCormick & Co., Inc. ............. 4,200 111,300
McDonalds Corp. ................... 8,400 407,400
McGraw Hill, Inc. ................. 500 34,219
MCN Corp. ......................... 3,500 133,656
Medical Assurance, Inc. (b) ....... 3,600 102,375
Medtronic, Inc. ................... 2,500 119,375
Mellon Bank Corp. ................. 3,000 170,062
Mercantile Stores, Inc. ........... 900 58,163
Merck & Co., Inc. ................. 13,300 1,257,681
Meredith Corp. .................... 2,300 80,213
</TABLE>
See Notes to Financial Statements
E-28
<PAGE> 280
Portfolio of Investments (Continued)
November 30, 1997 (Unaudited)
<TABLE>
<CAPTION>
Number
Description of Shares Market Value
- ----------- --------- ------------
<S> <C> <C>
UNITED STATES (CONTINUED)
Meritor Automotive, Inc. ................. 1 $ 21
Merrill Lynch & Co., Inc. ................ 7,400 519,387
Meyer (Fred), Inc. (b) ................... 2,700 91,463
Microchip Technology, Inc. (b) ........... 2,300 80,500
Microsoft Corp. (b) ...................... 12,900 1,825,350
Millennium Chemicals, Inc. ............... 4,100 94,300
Miller (Herman), Inc. .................... 1,800 91,350
Millipore Corp. .......................... 2,400 93,000
Minerals Technologies, Inc. .............. 1,600 70,000
Minnesota Mining & Manufacturing Co. ..... 2,800 272,825
Mobil Corp. .............................. 10,900 784,119
Molex, Inc. .............................. 2,700 102,769
Monsanto Co. ............................. 2,800 122,325
Montana Power Co. ........................ 3,400 93,075
Morgan Stanley Asia Pacific Fund, Inc. (c) 124,800 928,200
Morton International, Inc. ............... 2,900 98,781
Motorola, Inc. ........................... 7,400 465,275
MSC Industrial Direct, Inc., Class A (b) . 1,600 62,200
Murphy Oil Corp. ......................... 2,300 126,500
Mylan Laboratories, Inc. ................. 4,000 88,750
Nabors Industries, Inc. (b) .............. 4,300 150,769
Nalco Chemical Co. ....................... 3,200 124,200
National City Corp. ...................... 1,500 100,125
National Commerce Bancorp ................ 4,000 118,000
National Fuel Gas Co. .................... 2,200 102,712
National Service Industries, Inc. ........ 1,900 88,944
NationsBank Corp. ........................ 8,900 534,556
NCS Healthcare, Inc., Class A (b) ........ 3,400 90,525
New Century Energies, Inc. ............... 5,500 243,375
New England Electric System .............. 3,100 127,875
New Jersey Resources Corp. ............... 2,900 100,956
New York St Electric & Gas Corp. ......... 4,600 141,450
New York Times Co. ....................... 700 41,563
</TABLE>
See Notes to Financial Statements
E-29
<PAGE> 281
Portfolio of Investments (Continued)
November 30, 1997 (Unaudited)
<TABLE>
<CAPTION>
Number
Description of Shares Market Value
- ----------- --------- ------------
<S> <C> <C>
UNITED STATES (CONTINUED)
Newell Co. .................................. 1,300 $ 53,056
NICOR, Inc. ................................. 200 8,050
Nine West Group, Inc. (b) ................... 2,300 62,531
Noble Affiliates, Inc. ...................... 1,600 59,400
Noble Drilling Corp. (b) .................... 3,100 93,194
Nordson Corp., Common Rights
Callable Through 9/9/98 ................... 1,900 99,750
Norfolk Southern Corp. ...................... 600 19,088
Norrell Corp. ............................... 2,700 65,813
Northern Telecom ............................ 1,300 116,756
Northrop Grumman Corp. ...................... 600 67,650
Norwest Corp. ............................... 8,400 314,475
Novacare, Inc. (b) .......................... 3,300 40,838
Novell, Inc. (b) ............................ 4,500 134,125
Novellus Systems, Inc. (b) .................. 1,800 67,725
O' Reilly Automotive, Inc. (b) .............. 2,900 68,513
Occidental Petroleum Corp. .................. 3,800 112,812
Office Depot, Inc. (b) ...................... 7,000 165,375
Office Max, Inc. (b) ........................ 6,500 91,406
Ohio Casualty Corp. ......................... 2,200 100,375
Old Kent Financial Corp. .................... 2,500 169,062
Olsten Corp. ................................ 6,100 90,738
OM Group, Inc. .............................. 1,900 72,913
Omnicare, Inc. .............................. 3,600 103,950
One Valley Bancorp, Inc. .................... 3,700 139,906
Oracle Systems Corp. (b) .................... 2,500 83,281
Oregon Steel Mills, Inc. .................... 2,900 56,913
Orion Capital Corp. ......................... 2,500 112,656
Oryx Energy Co. (b) ......................... 3,700 99,900
PP&L Resources, Inc. ........................ 5,000 117,500
Pacific Century Financial Corp. ............. 2,100 107,100
Pacific Enterprises, Common Rights
Callable Through 3/6/99 ................... 5,100 180,412
Pall Corp. .................................. 2,700 57,038
Parker Hannifin Corp. ....................... 800 35,600
</TABLE>
See Notes to Financial Statements
E-30
<PAGE> 282
Portfolio of Investments (Continued)
November 30, 1997 (Unaudited)
<TABLE>
<CAPTION>
Number
Description of Shares Market Value
- ----------- --------- ------------
<S> <C> <C>
UNITED STATES (CONTINUED)
Patterson Dental Co. (b) .................... 1,800 $ 73,913
Payless Shoesource, Inc. (b) ................ 1,600 101,600
PECO Energy Co. ............................. 3,800 92,388
Penney (J.C.), Inc. ......................... 3,700 237,725
Pennzoil Co. ................................ 500 33,313
Peoples Energy Corp. ........................ 900 32,963
Pep Boys .................................... 2,900 72,863
Perkin-Elmer Corp.,
Common Rights Callable Through 4/30/99 .. 1,200 83,475
Personnel Group of America, Inc. (b) ....... 2,000 73,125
Pfizer, Inc. ............................... 13,700 996,675
Pharmacia & Upjohn, Inc. ................... 4,300 145,125
Phelps Dodge Corp. ......................... 8,400 556,500
Philip Morris Cos., Inc. ................... 34,400 1,496,400
Phillips Petroleum Co. ..................... 8,300 402,031
Phillips-Van Heusen Corp. .................. 4,300 59,125
Photronics, Inc. (b) ....................... 1,600 76,400
PhyCor, Inc. (b) ........................... 2,700 66,488
Pier 1 Imports, Inc. ....................... 3,600 80,550
Pinnacle West Capital Corp. ................ 3,100 119,544
Pioneer Natural Resources Co. (b) .......... 2,000 63,875
PMI Group, Inc. ............................ 1,400 91,000
PNC Bank Corp. ............................. 3,300 177,581
Pogo Producing Co. ......................... 1,900 59,613
Polaroid Corp. ............................. 2,100 89,250
Policy Management Systems Corp. (b) ........ 1,900 122,787
Potomac Electric Power Co. ................. 4,900 121,275
PPG Industries, Inc. ....................... 1,500 86,906
Precision Castparts Corp. .................. 1,800 106,875
Price (T. Rowe) & Associates, Inc. ......... 1,900 123,500
Procter & Gamble Co. ....................... 16,100 1,228,631
Proffitt's, Inc. (b) ....................... 2,600 79,463
Promus Hotel Corp. (b) ..................... 1,800 74,700
Protective Life Corp. ...................... 1,800 101,025
</TABLE>
See Notes to Financial Statements
E-31
<PAGE> 283
Portfolio of Investments (Continued)
November 30, 1997 (Unaudited)
<TABLE>
<CAPTION>
Number
Description of Shares Market Value
- ----------- --------- ------------
<S> <C> <C>
UNITED STATES (CONTINUED)
Provident Bankshares Corp. .................. 1,800 $ 106,650
Provident Cos., Inc. ........................ 2,200 72,188
Public Service Enterprise Group ............. 18,900 551,644
Puget Sound Energy, Inc.,
Common Rights Callable Through 1/25/01 ... 3,800 104,975
Quanex Corp. ................................ 1,400 41,650
Quantum Corp. (b) ........................... 4,100 109,162
Queens County Bancorp ....................... 2,700 94,500
Quintiles Transnational Corp. (b) ........... 1,300 101,563
RPM, Inc. ................................... 5,600 112,000
Ralston-Ralston Purina Group ................ 2,000 186,000
Raychem Corp. ............................... 3,200 302,600
Rayonier, Inc. .............................. 1,800 87,975
Raytheon Co., Class B ....................... 6,300 352,406
Readers Digest Association, Inc.,
Class A Non Voting ....................... 3,700 88,569
Reading & Bates Corp. (b) ................... 2,100 80,588
Reebok International Ltd. (b) ............... 2,900 114,006
Reliastar Financial Corp. ................... 2,400 88,800
Renal Care Group, Inc. (b) .................. 2,200 69,850
Rite Aid Corp. .............................. 700 46,025
RLI Corp. ................................... 3,200 139,800
Robert Half International, Inc. ............. 3,500 136,719
Rochester Gas & Electric Corp. .............. 3,400 93,500
Rockwell International Corp. ................ 4,500 219,375
Rohm & Haas Co. ............................. 1,200 110,325
Rowan Cos., Inc. (b) ........................ 2,500 85,000
Royal Dutch Petroleum Co. ................... 21,000 1,106,437
Russell Corp. ............................... 500 15,281
Ryder Systems, Inc. ......................... 2,200 79,888
SAFECO Corp. ................................ 700 34,213
Safeguard Scientifics, Inc. (b) ............. 3,900 123,094
Sanmina Corp. (b) ........................... 900 61,200
Sara Lee Corp. .............................. 9,200 486,450
SBC Communications, Inc. .................... 8,400 611,625
</TABLE>
See Notes to Financial Statements
E-32
<PAGE> 284
Portfolio of Investments (Continued)
November 30, 1997 (Unaudited)
<TABLE>
<CAPTION>
Number
Description of Shares Market Value
- ----------- --------- ------------
<S> <C> <C>
UNITED STATES (CONTINUED)
SCANA Corp. ................................. 3,700 $ 102,212
Scherer (R.P.) Corp. (b) .................... 1,800 110,362
Schering-Plough Corp. ....................... 1,200 75,225
Scholastic Corp. (b) ........................ 1,800 68,738
SCI Systems, Inc. (b) ....................... 2,700 123,694
Scientific-Atlanta, Inc. .................... 5,800 116,000
Sealed Air Corp. (b) ........................ 2,100 119,437
Sears Roebuck & Co. ......................... 11,300 517,681
Service Corp. International ................. 7,200 263,250
Shared Medical Systems ...................... 300 19,200
Shaw Industries, Inc. ....................... 4,300 47,300
Sierra Health Services, Inc. (b) ............ 2,200 80,025
Signet Banking Corp. ........................ 1,400 75,513
Smith International, Inc. (b) ............... 1,300 83,200
Snap-On, Inc. ............................... 3,600 158,175
Sonat, Inc. ................................. 700 30,494
Sonoco Products Co. ......................... 3,600 118,125
Springs Industries, Inc. .................... 1,400 70,613
Sprint Corp. ................................ 4,600 269,388
St. John Knits, Inc. ........................ 2,300 87,831
St. Jude Medical, Inc. (b) .................. 3,600 106,650
St. Paul Bancorp, Inc. ...................... 2,900 71,050
St. Paul Cos., Inc. ......................... 1,400 112,000
Starbucks Corp. (b) ......................... 2,600 90,675
Steel Dynamics, Inc. (b) .................... 3,800 70,300
Steris Corp. (b) ............................ 1,600 75,200
Sterling Commerce, Inc. (b) ................. 2,400 83,400
Sterling Software, Inc. (b) ................. 2,900 106,212
Stewart Enterprises, Inc., Class A .......... 2,700 117,281
Storage Technology Corp. (b) ................ 1,800 116,212
Sun Microsystems, Inc. (b) .................. 10,500 378,000
Sun, Inc. ................................... 6,300 254,756
Sunbeam Corp. ............................... 1,800 79,313
</TABLE>
See Notes to Financial Statements
E-33
<PAGE> 285
Portfolio of Investments (Continued)
November 30, 1997 (Unaudited)
<TABLE>
<CAPTION>
Number
Description of Shares Market Value
- ----------- --------- ------------
<S> <C> <C>
UNITED STATES (CONTINUED)
Sunburst Hospitality Corp. (b) .............. 1,400 $ 14,000
SunGard Data Systems, Inc. (b) .............. 2,900 75,038
Sunrise Medical, Inc. (b) ................... 4,500 71,156
Superior Industries International, Inc. ..... 4,200 109,200
SUPERVALU, Inc. ............................. 11,600 456,025
Sybase, Inc. (b) ............................ 4,100 57,400
Sybron International Corp. (b) .............. 2,300 101,200
Symantec Corp. (b) .......................... 6,100 152,500
Symbol Technologies, Inc. ................... 2,100 82,031
Synopsys, Inc. (b) .......................... 2,100 86,363
Sysco Corp. ................................. 400 17,825
360 Communications Co.(b) ................... 4,100 78,925
3Com Corp. (b) .............................. 6,400 232,000
Tandy Corp. ................................. 3,300 141,900
Tech Data Corp. (b) ......................... 1,800 72,675
Tektronix, Inc. ............................. 5,100 213,881
Tele-Communications TCI Ventures
Group, Class A (b) ....................... 5,566 125,931
Telephone & Data Systems, Inc. .............. 2,700 118,631
Texaco, Inc. ................................ 5,300 299,450
Texas Instruments, Inc. ..................... 3,400 167,450
Texas Utilities Co. ......................... 5,100 204,000
Thiokol Corp. ............................... 1,500 123,937
Thomas & Betts Corp. ........................ 3,000 136,125
Tidewater, Inc. ............................. 1,900 106,519
TIG Holdings, Inc. .......................... 1,900 61,156
Times Mirror Co., Series A .................. 1,300 77,188
TJX Cos., Inc. .............................. 3,600 124,200
Torchmark, Inc. ............................. 1,800 73,463
Toro Co. .................................... 1,800 79,425
Transamerica Corp. .......................... 800 86,850
Transatlantic Holdings, Inc. ................ 1,800 128,587
Transport Financial, Inc. . ................ 2,400 82,500
Travelers Group, Inc. . .................... 13,150 664,075
</TABLE>
See Notes to Financial Statements
E-34
<PAGE> 286
Portfolio of Investments (Continued)
November 30, 1997 (Unaudited)
<TABLE>
<CAPTION>
Number
Description of Shares Market Value
- ----------- --------- ------------
<S> <C> <C>
UNITED STATES (CONTINUED)
Triad Guaranty, Inc. (b) .................... 3,200 $ 94,400
Trinity Industries, Inc. .................... 2,100 95,288
TRW, Inc. ................................... 2,700 153,225
Tupperware Corp. ............................ 2,700 64,463
Tyco International Ltd. ..................... 5,300 208,025
U.S. Airways Group, Inc. (b) ................ 2,100 115,762
U.S. Bancorp ................................ 1,400 150,587
U.S. Surgical Corp. ......................... 4,300 113,412
U.S. West Media Group (b) ................... 6,100 275,644
UCAR International, Inc. (b) ................ 1,600 63,900
Ultramar Diamond Shamrock Corp. ............. 3,100 94,356
Unicom Corp. ................................ 15,600 454,350
Unifi, Inc. ................................. 2,700 102,600
Unilever .................................... 6,200 359,988
Union Carbide Corp. ......................... 1,800 79,425
Union Pacific Corp. ......................... 1,300 78,000
Unisys Corp. (b) ............................ 7,300 104,481
United Asset Management Corp. ............... 2,900 75,581
United Cos. Financial Corp. ................. 2,600 56,388
United Illuminating Co. ..................... 2,700 109,856
United States Cellular Corp. (b) ............ 2,400 78,600
United States Filter Corp. (b) .............. 3,500 109,812
United States Industries, Inc. .............. 1,000 46,350
United Technologies Corp. ................... 2,900 217,319
Universal Health Services, Inc., Class B (b) 2,300 100,481
Unocal Corp. ................................ 3,700 147,306
UNUM Corp. .................................. 1,300 61,669
USF&G Corp. ................................. 8,300 167,556
USG Corp. (b) ............................... 2,100 98,438
UST, Inc. ................................... 8,300 256,262
USX-U.S. Steel, Inc. ........................ 18,900 591,806
USX-Marathon Group .......................... 11,400 390,450
Utilicorp United, Inc. ...................... 3,500 119,656
</TABLE>
See Notes to Financial Statements
E-35
<PAGE> 287
Portfolio of Investments (Continued)
November 30, 1997 (Unaudited)
<TABLE>
<CAPTION>
Number
Description of Shares Market Value
- ----------- --------- ------------
<S> <C> <C>
UNITED STATES (CONTINUED)
VF Corp. ..................................... 1,400 $ 64,663
Valero Energy Corp. .......................... 2,900 90,988
Varian Associates, Inc. ...................... 2,600 150,150
Vencor, Inc. (b) ............................. 2,700 65,475
Viking Office Products, Inc. (b) ............. 3,800 88,113
Vintage Petroleum, Inc. ...................... 2,400 46,500
Vishay Intertechnology, Inc. (b) ............. 4,400 93,225
Vulcan Materials Co. ......................... 1,800 183,037
Walgreen Co. ................................. 1,700 54,719
Wallace Computer Services, Inc. .............. 2,600 90,513
Wal-Mart Stores, Inc. ........................ 28,100 1,122,244
Walt Disney Co. .............................. 3,500 332,281
Warner-Lambert Co. ........................... 1,600 223,800
Waste Management, Inc. ....................... 2,300 56,638
Weatherford Enterra, Inc. (b) ................ 2,500 112,656
Webster Financial Corp. ...................... 1,300 81,453
Wendy's International, Inc. .................. 5,100 107,100
Westamerica Bancorp. ......................... 2,200 201,025
Western Digital Corp. (b) .................... 2,500 50,469
Westinghouse Electric Corp. .................. 1,700 51,000
Western National Corp. ....................... 2,300 67,850
Whitman Corp. ................................ 14,500 381,531
WICOR, Inc. .................................. 1,600 73,800
Williams Cos., Inc. .......................... 100 5,344
Wisconsin Central Transportation Corp. (b) ... 2,600 78,325
Witco Corp. .................................. 2,500 107,812
Worthington Industries, Inc. ................. 1,500 27,188
WPS Resources Corp. .......................... 5,100 154,594
Xerox Corp. .................................. 3,600 279,675
York International Corp. ..................... 2,700 125,044
Zions Bancorp. ............................... 2,700 108,338
-----------
116,180,308
-----------
TOTAL COMMON STOCKS ...................... 253,467,563
-----------
</TABLE>
See Notes to Financial Statements
E-36
<PAGE> 288
Portfolio of Investments (Continued)
November 30, 1997 (Unaudited)
<TABLE>
<CAPTION>
Number
Description of Shares Market Value
- ----------- --------- ------------
<S> <C> <C>
PREFERRED STOCKS 0.3%
AUSTRIA 0.1%
Bau Holdings .............................................. 200 $ 9,186
Bk Austria Ag ............................................. 1,466 60,249
Creditanstalt Bank ........................................ 1,100 54,515
EA-Generali ............................................... 100 11,604
Z-Laenderbank Bank Austria ................................ 2,200 91,301
------------
226,855
------------
FRANCE 0.0%
Casino Guichard Perrach ................................... 2,800 155,194
------------
GERMANY 0.2%
RWE, Non Voting ........................................... 6,400 257,851
SAP, Non Voting (ADR) ..................................... 1,150 354,097
------------
611,948
------------
TOTAL PREFERRED STOCKS ................................ 993,997
------------
CORPORATE OBLIGATIONS 0.0%
FRANCE 0.0%
Simco (337,000 par, 3.25% coupon,
01/01/06 maturity, convertible into
650 common shares) ...................................... 29,171
------------
ITALY 0.0%
Mediobanca, SpA (11,200,000 par,
4.50% coupon, 01/00/00 maturity) ........................ 6,373
------------
TOTAL CORPORATE OBLIGATIONS .......................... 35,544
------------
TOTAL LONG-TERM INVESTMENTS 85.2% (COST $234,609,119) .... 254,497,104
------------
SHORT-TERM INVESTMENTS AT AMORTIZED COST 13.4%
COMMERCIAL PAPER 13.4%
State Street Bank & Trust Co. ($39,956,000 par,
yielding 5.00%, maturing 12/01/97)(a) ................... 39,956,000
------------
TOTAL INVESTMENTS 98.6% (COST $274,565,119) .............. 294,453,104
FOREIGN CURRENCY 0.3% (VARIOUS DENOMINATIONS,
COST $829,824) ........................................ 808,893
OTHER ASSETS IN EXCESS OF LIABILITIES 1.1% ............... 3,203,907
------------
NET ASSETS 100.0% ........................................ $298,465,904
============
</TABLE>
(a) Assets segregated as collateral for open futures and forward
transactions.
(b) Non-income producing security as this security currently does not
declare dividends.
(c) Related party transactions. See Footnote 2.
See Notes to Financial Statements
E-37
<PAGE> 289
Statement of Assets and Liabilities
November 30, 1997 (Unaudited)
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Total Investments, at Market Value (Cost $274,565,119)....... $294,453,104
Foreign Currency, at Market Value (Cost $829,824)............ 808,893
Cash......................................................... 976
Receivables:
Variation Margin on Futures................................ 2,057,747
Dividends.................................................. 574,382
Fund Shares Sold........................................... 449,384
Investments Sold........................................... 391,031
Interest................................................... 16,649
Forward Currency Contracts................................... 1,686,056
Other........................................................ 16
------------
Total Assets............................................... 300,438,238
------------
LIABILITIES:
Payables:
Investments Purchased...................................... 697,304
Fund Shares Repurchased.................................... 655,810
Investment Advisory Fee.................................... 247,323
Distributor and Affiliates................................. 244,320
Accrued Expenses............................................. 88,265
Trustee's Deferred Compensation and Retirement Plans......... 39,312
------------
Total Liabilities.......................................... 1,972,334
------------
NET ASSETS $298,465,904
============
NET ASSETS CONSIST OF:
Capital...................................................... $228,629,391
Accumulated Net Realized Gain................................ 51,292,931
Net Unrealized Appreciation.................................. 19,800,963
Accumulated Distributions in Excess
of Net Investment Income................................... (1,257,381)
------------
NET ASSETS $298,465,904
============
MAXIMUM OFFERING PRICE PER SHARE:
Class A Shares:
Net asset value and redemption price
per share (Based on net assets of
$150,967,296 and 9,321,820 shares of
beneficial interest issued and
outstanding)............................................. $ 16.20
Maximum sales charge (5.75%* of offering price)............ .99
------------
Maximum offering price to public........................... $ 17.19
============
Class B Shares:
Net asset value and offering price per share
(Based on net assets of $133,364,977 and
8,546,519 shares of beneficial interest issued
and outstanding)......................................... $ 15.60
============
Class C Shares:
Net asset value and offering price per share
(Based on net assets of $14,133,631
and 897,284 shares of beneficial interest
issued and outstanding).................................. $ 15.75
============
</TABLE>
*On sales of $50,000 or more, the sales charge will be reduced.
See Notes to Financial Statements
E-38
<PAGE> 290
Statement of Operations
For the Six Months Ended November 30, 1997 (Unaudited)
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividends (Net of foreign withholding taxes of $190,057) .............. $ 2,334,418
Interest (Net of foreign withholding taxes of $80) .................... 869,917
------------
Total Income ........................................................ 3,204,335
============
EXPENSES:
Investment Advisory Fee ............................................... 1,494,556
Distribution (12b-1) and Service Fees (Attributed to Classes A, B and C
of $188,240, $671,029 and $70,567, respectively) .................... 929,836
Shareholder Services .................................................. 764,012
Custody ............................................................... 213,860
Legal ................................................................. 10,248
Trustees' Fees and Expenses ........................................... 7,040
Other ................................................................. 162,699
------------
Total Expenses ...................................................... 3,582,251
------------
NET INVESTMENT LOSS ................................................... $ (377,916)
============
REALIZED AND UNREALIZED GAIN/LOSS:
Realized Gain/Loss:
Investments ......................................................... $ 12,027,759
Foreign Currency Transactions ....................................... 445,929
Futures ............................................................. 174,852
------------
Net Realized Gain ..................................................... 12,648,540
------------
Unrealized Appreciation/Depreciation:
Beginning of the Period ............................................. 26,931,817
End of the Period:
Investments ....................................................... 19,887,985
Futures ........................................................... (1,747,188)
Forward Currency Contracts ........................................ 1,686,056
Foreign Currency Translation ...................................... (25,890)
------------
19,800,963
------------
Net Unrealized Depreciation During the Period ......................... (7,130,854)
------------
NET REALIZED AND UNREALIZED GAIN ...................................... $ 5,517,686
============
NET INCREASE IN NET ASSETS FROM OPERATIONS ............................ $ 5,139,770
============
</TABLE>
See Notes to Financial Statements
E-39
<PAGE> 291
Statement of Changes in Net Assets
For the Six Months Ended November 30, 1997 and
the Year ended May 31, 1997 (Unaudited)
<TABLE>
<CAPTION>
Six Months Ended Year Ended
November 30, 1997 May 31, 1997
----------------- -------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Loss .......................................... $ (377,916) $ (1,952,191)
Net Realized Gain ............................................ 12,648,540 42,112,838
Net Unrealized Depreciation During the Period ................ (7,130,854) (810,153)
------------- -------------
Change in Net Assets from Operations ......................... 5,139,770 39,350,494
------------- -------------
Distributions in Excess of Net Investment Income* ............ - 0 - (1,377,948)
Distributions from Net Realized Gain* ........................ - 0 - (6,599,826)
------------- -------------
Total Distributions .......................................... - 0 - (7,977,774)
------------- -------------
NET CHANGE IN NET ASSETS FROM INVESTMENT ACTIVITIES .......... 5,139,770 31,372,720
------------- -------------
FROM CAPITAL TRANSACTIONS:
Proceeds from Shares Sold .................................... 74,038,161 127,851,283
Net Asset Value of Shares Issued Through Dividend Reinvestment - 0 - 7,550,550
Cost of Shares Repurchased ................................... (55,575,934) (101,392,502)
------------- -------------
NET CHANGE IN NET ASSETS FROM CAPITAL TRANSACTIONS ........... 19,262,217 34,000,331
------------- -------------
TOTAL INCREASE IN NET ASSETS ................................. 24,401,987 65,382,051
NET ASSETS:
Beginning of the Period ...................................... 274,063,917 208,681,866
------------- -------------
End of the Period (Including accumulated distributions in
excess of net investment income of $1,257,381 and
$879,465, respectively) .................................... $ 298,465,904 $ 274,063,917
============= =============
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended Year Ended
*Distributions by Class November 30, 1997 May 31, 1997
- ----------------------- ----------------- ------------
Distributions in Excess of Net Investment Income:
<S> <C> <C>
Class A Shares ................................... $ - 0 - $ (1,133,880)
Class B Shares ................................... - 0 - (221,577)
Class C Shares ................................... - 0 - (22,491)
-------- ------------
$ - 0 - $ (1,377,948)
======== ============
Distributions from Net Realized Gain:
Class A Shares ................................... $ - 0 - $ (3,319,275)
Class B Shares ................................... - 0 - (2,976,985)
Class C Shares ................................... - 0 - (303,566)
-------- ------------
$ - 0 - $ (6,599,826)
======== ============
</TABLE>
See Notes to Financial Statements
E-40
<PAGE> 292
Financial Highlights
The following schedule presents financial highlights for one share of the Fund
outstanding throughout the periods indicated. (Unaudited)
<TABLE>
<CAPTION>
Year Ended May 31
Six Months Ended ------------------------------------------------------------------
Class A Shares November 30, 1997 1997 1996(a) 1995(a) 1994
- -------------- ----------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of the Period ......... $ 15.838 $ 13.98 $ 11.79 $ 11.67 $ 10.75
--------- --------- --------- --------- ---------
Net Investment Income/Loss ...... .008 (.064) (.04) (.04) (.06)
Net Realized and Unrealized Gain .349 2.460 2.561 .42 1.0125
--------- --------- --------- --------- ---------
Total from Investment Operations .. .357 2.396 2.521 .38 .9525
--------- --------- --------- --------- ---------
Less:
Distributions in Excess of Net
Investment Income ............. - 0 - .137 - 0 - - 0 - - 0 -
Distributions from and in excess
of Net Realized Gain .......... - 0 - .401 .331 .26 .0425
--------- --------- --------- --------- ---------
Total Distributions ............... - 0 - .538 .331 .26 .0425
--------- --------- --------- --------- ---------
Net Asset Value,
End of the Period ............... $ 16.195 $ 15.838 $ 13.98 $ 11.79 $ 11.67
--------- --------- --------- --------- ---------
Total Return (b) .................. 2.27%* 17.67% 21.85% 3.36% 9.17%
Net Assets at End of the Period
(In millions) ................... $ 151.0 $ 136.9 $ 106.7 $ 60.1 $ 41.8
Ratio of Expenses
to Average Net Assets (c) ....... 2.02% 2.09% 2.22% 2.29% 2.46%
Ratio of Net Investment Income/Loss
to Average Net Assets (c) ....... .13% (.46%) (.30%) (.35%) (.46%)
Portfolio Turnover ................ 50%* 144% 94% 120% 116%
Average Commission Rate per
Equity Share Traded (d) ........... $ .0141 $ .0206 $ .0199 -- --
</TABLE>
* Non-Annualized
(a) Based on average month-end shares outstanding.
(b) Total Return is based upon Net Asset Value which does not include
payment of the maximum sales charge or contingent deferred sales charge.
(c) The impact on the Ratios of Expenses and Net Investment Income/Loss to
Average Net Assets due to VKAC's reimbursement of certain expenses was
less than 0.01%.
(d) Represents the average brokerage commission paid per equity share traded
during the period for trades where commissions were applicable. This
disclosure was not required in fiscal years prior to 1996.
See Notes to Financial Statements
E-41
<PAGE> 293
Financial Highlights (Continued)
The following schedule presents financial highlights for one share of the
Fund outstanding throughout the periods indicated. (Unaudited)
<TABLE>
<CAPTION>
Year Ended May 31
Six Months Ended ------------------------------------------------------------------
Class B Shares November 30, 1997 1997 1996(a) 1995(a) 1994
----------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of the Period $ 15.318 $ 13.53 $ 11.50 $ 11.48 $ 10.67
---------- ---------- ---------- ---------- ----------
Net Investment Loss (.043) (.139) (.14) (.13) (.13)
Net Realized and Unrealized Gain .328 2.358 2.501 .41 .9825
---------- ---------- ---------- ---------- ----------
Total from Investment Operations .286 2.219 2.361 .28 .8525
---------- ---------- ---------- ---------- ----------
Less:
Distributions in Excess
of Net Investment Income - 0 - .030 - 0 - - 0 - - 0 -
Distributions from and in
Excess of Net Realized Gain - 0 - .401 .331 .26 .0425
---------- ---------- ---------- ---------- ----------
Total Distributions - 0 - .431 .331 .26 .0425
---------- ---------- ---------- ---------- ----------
Net Asset Value,
End of the Period $ 15.604 $ 15.318 $ 13.53 $ 11.50 $ 11.48
========== ========== ========== ========== ==========
Total Return (b) 1.83%* 16.83% 20.90% 2.62% 8.21%
Net Assets at End
of the Period (In millions) $ 133.4 $ 124.1 $ 92.8 $ 64.7 $ 48.8
Ratio of Expenses to
Average Net Assets (c) 2.78% 2.86% 2.99% 3.05% 3.21%
Ratio of Net Investment Loss
to Average Net Assets (c) (.63%) (1.22%) (1.11%) (1.11%) (1.19%)
Portfolio Turnover 50%* 144% 94% 120% 116%
Average Commission Rate
per Equity Share Traded (d) $ .0141 $ .0206 $ .0199 -- --
</TABLE>
* Non-Annualized
(a) Based on average month-end shares outstanding.
(b) Total Return is based upon Net Asset Value which does not include
payment of the maximum sales charge or contingent deferred sales charge.
(c) The impact on the Ratios of Expenses and Net Investment Loss to Average
Net Assets due to VKAC's reimbursement of certain expenses was less than
0.01%.
(d) Represents the average brokerage commission paid per equity share traded
during the period for trades where commissions were applicable. This
disclosure was not required in fiscal years prior to 1996.
See Notes to Financial Statements
E-42
<PAGE> 294
Financial Highlights (Continued)
The following schedule presents financial highlights for one share of the
Fund outstanding throughout the periods indicated. (Unaudited)
<TABLE>
<CAPTION>
June 21, 1993
Year Ended May 31, (Commencement
Six Months Ended ------------------------------------------ of Distribution)
Class C Shares November 30, 1997 1997 1996(a) 1995(a) to May 31, 1994(a)
- --------------- ----------------- --------- --------- --------- ------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
the Period ..................... $ 15.464 $ 13.66 $ 11.61 $ 11.59 $ 10.29
--------- --------- --------- --------- ---------
Net Investment Loss ............ (.045) (.137) (.14) (.13) (.13)
Net Realized and
Unrealized Gain ............ .333 2.372 2.621 .41 1.4725
--------- --------- --------- --------- ---------
Total from Investment
Operations ..................... .288 2.235 2.381 .28 1.3425
--------- --------- --------- --------- ---------
Less:
Distributions in Excess of Net
Investment Income .......... -0- .030 -0- -0- -0-
Distributions from and in Excess
of Net Realized Gain ....... -0- .401 .331 .26 .0425
--------- --------- --------- --------- ---------
Total Distributions ............... -0- .431 .331 .26 .0425
Net Asset Value,
End of the Period .............. $ 15.762 $ 15.464 $ 13.66 $ 11.61 $ 11.59
========= ========= ========= ========= =========
Total Return (b) .................. 1.88%* 16.82% 20.87% 2.60% 13.06%*
Net Assets at End of the
Period (In millions) ........... $ 14.1 $ 13.0 $ 9.2 $ 6.6 $ 5.1
Ratio of Expenses to Average
Net Assets (c) ................. 2.79% 2.87% 3.00% 3.05% 3.21%
Ratio of Net Investment Loss
to Average Net Assets (c) ...... (.64%) (1.23%) (1.10%) (1.13%) (1.15%)
Portfolio Turnover ................ 50%* 144% 94% 120% 116%
Average Commission Rate per
Equity Share Traded (d) ........ $ .0141 $ .0206 $ .0199 -- --
</TABLE>
*Non-Annualized
(a) Based on average month-end shares outstanding.
(b) Total Return is based upon Net Asset Value which does not include
payment of the maximum sales charge or contingent deferred sales charge.
(c) The impact on the Ratios of Expenses and Net Investment Loss to Average
Net Assets due to VKAC's reimbursement of certain expenses was less than
0.01%.
(d) Represents the average brokerage commission paid per equity share traded
during the period for trades where commissions were applicable. This
disclosure was not required in fiscal years prior to 1996.
See Notes to Financial Statements
E-43
<PAGE> 295
Notes to Financial Statements
November 30, 1997 (Unaudited)
1. Significant Accounting Policies
Van Kampen American Capital Global Equity Fund (the "Fund") is organized as a
series of Van Kampen American Capital World Portfolio Series Trust, a Delaware
business trust, and is registered as a diversified open-end management
investment company under the Investment Company Act of 1940, as amended. The
Fund's investment objective is to provide long-term growth of capital by
investing in an internationally diversified portfolio of equity securities.
Investments in foreign securities involve certain risks not ordinarily
associated with investments in securities of domestic issuers, including
fluctuations in foreign exchange rates, future political and economic
developments, and the possible imposition of exchange controls or other foreign
governmental laws or restrictions. The Fund commenced investment operations on
August 5, 1991. The distribution of the Fund's Class B and Class C shares
commenced on November 15, 1991 and June 21, 1993, respectively.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
A. SECURITY VALUATION -- Investments in securities listed on a securities
exchange are valued at their sale price as of the close of such securities
exchange. Unlisted securities and listed securities for which the last sales
price is not available are valued at the last bid price. Fixed income
investments are stated at value using market quotations. For those securities
where quotations or prices are not available, valuations are determined in
accordance with procedures established in good faith by the Board of Trustees.
Short-term securities with remaining maturities of 60 days or less are valued at
amortized cost.
B. SECURITY TRANSACTIONS -- Security transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis.
The Fund may invest in repurchase agreements, which are short-term
investments in which the Fund acquires ownership of a debt security and the
seller agrees to repurchase the security at a future time and specified price.
The Fund may invest independently in repurchase agreements, or transfer
uninvested cash balances into a pooled cash account along with other investment
companies advised by Van Kampen American Capital Asset Management, Inc. (the
"Adviser") or its affiliates, the daily aggregate of which is invested in
repurchase agreements. Repurchase agreements are fully collateralized by the
underlying debt security. The Fund will make payment for such secur-
E-44
<PAGE> 296
Notes to Financial Statements (Continued)
November 30, 1997 (Unaudited)
ities only upon physical delivery or evidence of book entry transfer to the
account of the custodian bank. The seller is required to maintain the value of
the underlying security at not less than the repurchase proceeds due the Fund.
C. INVESTMENT INCOME -- Dividend income is recorded on the ex-dividend date and
interest income is recorded on an accrual basis. Original issue discount is
amortized over the life of each applicable security. Premiums on debt securities
are not amortized. Market discounts are recognized at the time of sale as
realized gains for book purposes and ordinary income for tax purposes.
D. CURRENCY TRANSLATION -- Assets and liabilities denominated in foreign
currencies and commitments under forward currency contracts are translated into
U.S. dollars based on quoted exchange rates as of noon Eastern Time. Purchases
and sales of portfolio securities are translated at the rate of exchange
prevailing when such securities were acquired or sold. Income and expenses are
translated at rates prevailing when accrued. Gains and losses on the sale of
securities are not segregated for financial reporting purposes between amounts
arising from changes in exchange rates and amounts arising from changes in the
market prices of securities. Realized gain and loss on foreign currency includes
the net realized amount from the sale of currency and the amount realized
between trade date and settlement date on security transactions.
E. FEDERAL INCOME TAXES -- It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute substantially all of its taxable income to its
shareholders. Therefore, no provision for federal income taxes is required.
At November 30, 1997, for federal income tax purposes, cost of long- and
short-term investments is $275,853,361; the aggregate gross unrealized
appreciation is $30,168,418 and the aggregate gross unrealized depreciation is
$10,820,914, resulting in net unrealized appreciation on investments, futures,
forward currency contracts and foreign currency of $19,347,504.
F. DISTRIBUTION OF INCOME AND GAINS -- The Fund declares and pays dividends
annually from net investment income. Net realized gains, if any, are distributed
annually. Net investment income for federal income tax purposes includes gains
and losses realized on transactions in foreign currencies. These realized gains
and losses are included as net realized gains or losses for financial reporting
purposes.
2. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES
Under the terms of the Fund's Investment Advisory Agreement, the Adviser will
provide investment advice and facilities to the Fund for an annual fee payable
monthly. Investment advisory fees are
E-45
<PAGE> 297
Notes to Financial Statements (Continued)
November 30, 1997 (Unaudited)
calculated monthly, based on the average daily net assets of the Fund at the
annual rate of 1.00%. The Adviser has entered into a subadvisory agreement with
Morgan Stanley Asset Management Inc. (the "Subadviser") who provides advisory
services to the Fund and the Adviser with respect to the Fund's investments. The
Adviser pays 50% of its investment advisory fee to the Subadviser.
For the six months ended November 30, 1997, the Fund recognized expenses of
approximately $10,200 representing legal services provided by Skadden, Arps,
Slate, Meagher & Flom (Illinois), counsel to the Fund, of which a trustee of the
Fund is an affiliated person.
For the six months ended November 30, 1997, the Fund recognized expenses of
approximately $10,800 representing VKAC's cost of providing accounting services
to the Fund. These services are provided by VKAC at cost.
ACCESS Investor Services, Inc. ("ACCESS"), an affiliate of the Adviser,
serves as the shareholder servicing agent for the Fund. For the six months ended
November 30, 1997, the Fund recognized expenses of approximately $582,200,
representing ACCESS' cost of providing transfer agency and shareholder services
plus a profit.
Certain officers and trustees of the Fund are also officers and directors of
VKAC. The Fund does not compensate its officers or trustees who are officers of
VKAC.
The Fund provides deferred compensation and retirement plans for its
trustees who are not officers of VKAC. Under the deferred compensation plan,
trustees may elect to defer all or a portion of their compensation to a later
date. Benefits under the retirement plan are payable for a ten-year period and
are based upon each trustee's years of service to the Fund. The maximum annual
benefit per Trustee under the plan is equal to $2,500.
During the period, the Fund owned the following Morgan Stanley Funds which
were managed by the Subadviser:
<TABLE>
<CAPTION>
Transactions
During the Period
--------------------------
% of Net Assets Cost of Proceeds
At November 30, 1997 Purchases of Sales
-------------------- ---------- ----------
<S> <C> <C> <C>
Latin America Discovery Fund, Inc. ........... 1.32% $1,494,859 $ - 0 -
Morgan Stanley Asia Pacific Fund, Inc......... 0.31% $ - 0 - $1,353,262
Morgan Stanley India Investment Fund ......... 0.00% $ - 0 - $1,547,936
</TABLE>
E-46
<PAGE> 298
Notes to Financial Statements (Continued)
November 30, 1997 (Unaudited)
3. Capital Transactions
The Fund has outstanding three classes of shares of beneficial interest, Classes
A, B and C, each with a par value of $.01 per share. There are an unlimited
number of shares of each class authorized.
At November 30, 1997, capital aggregated $114,356,947, $103,089,702 and
$11,182,742 for Classes A, B and C, respectively. For the six months ended
November 30, 1997, transactions were as follows:
<TABLE>
<CAPTION>
Shares Value
----------- ------------
<S> <C> <C>
Sales:
Class A ....................... 3,192,732 $ 53,170,480
Class B ....................... 1,191,878 19,184,987
Class C ....................... 153,134 2,482,684
----------- ------------
Total Sales ..................... 4,537,744 $ 74,838,151
=========== ============
Dividend Reinvestment:
Class A ....................... - 0 - $ - 0 -
Class B ....................... - 0 - - 0 -
Class C ....................... - 0 - - 0 -
----------- ------------
Total Dividend Reinvestment ..... - 0 - $ - 0 -
=========== ============
Repurchases:
Class A ....................... (2,516,132) $(41,987,054)
Class B ....................... (746,628) (11,973,706)
Class C ....................... (99,227) (1,615,174)
----------- ------------
Total Repurchases ............... (3,361,987) $(55,575,934)
=========== ============
</TABLE>
E-47
<PAGE> 299
Notes to Financial Statements (Continued)
November 30, 1997 (Unaudited)
At May 31, 1997, capital aggregated $103,173,521, $95,878,421 and
$10,315,232 for Classes A, B and C, respectively. For the year ended May 31,
1997, transactions were as follows:
<TABLE>
<CAPTION>
Shares Value
------------- -------------
<S> <C> <C>
Sales:
Class A .......................... 6,134,539 $ 89,228,576
Class B .......................... 2,431,724 34,006,661
Class C .......................... 326,525 4,616,046
------------- -------------
Total Sales ........................ 8,892,788 $ 127,851,283
============= =============
Dividend Reinvestment:
Class A .......................... 304,883 $ 4,257,239
Class B .......................... 221,179 2,997,101
Class C .......................... 21,652 296,210
------------- -------------
Total Dividend Reinvestment ........ 547,714 $ 7,550,550
============= =============
Repurchases:
Class A .......................... (5,426,393) $ (79,299,631)
Class B .......................... (1,408,797) (19,584,581)
Class C .......................... (176,672) (2,508,290)
------------- -------------
Total Repurchases .................. (7,011,862) $(101,392,502)
============= =============
</TABLE>
Class B and C shares are offered without a front-end sales charge, but are
subject to a contingent deferred sales charge (CDSC). The CDSC will be imposed
on most redemptions made within five years of the purchase for Class B and one
year of the purchase for Class C as detailed in the following schedule. The
Class B and C shares bear the expense of their respective deferred sales
arrangements, including higher distribution and service fees and incremental
transfer agency costs.
E-48
<PAGE> 300
Notes to Financial Statements (Continued)
November 30, 1997 (Unaudited)
<TABLE>
<CAPTION>
Contingent Deferred
Sales Charge
--------------------
Year of Redemption Class B Class C
- ------------------ ------- -------
<S> <C> <C>
First .................................. 5.00% 1.00%
Second ................................. 4.00% None
Third .................................. 3.00% None
Fourth ................................. 2.50% None
Fifth .................................. 1.50% None
Sixth and Thereafter ................... None None
</TABLE>
For the six months ended November 30, 1997, VKAC, as Distributor for the
Fund, received commissions on sales of the Fund's Class A shares of
approximately $49,000 and CDSC on the redeemed shares of approximately $87,400.
Sales charges do not represent expenses of the Fund.
4. INVESTMENT TRANSACTIONS
During the period, the cost of purchases and proceeds from sales of investments,
excluding short-term investments, were $128,589,743 and $136,604,808,
respectively.
5. DERIVATIVE FINANCIAL INSTRUMENTS
A derivative financial instrument in very general terms refers to a security
whose value is "derived" from the value of an underlying asset, reference rate
or index.
The Fund has a variety of reasons to use derivative instruments, such as to
attempt to protect the Fund against possible changes in the market value of its
portfolio, manage the portfolio's effective yield, foreign currency exposure, or
generate potential gain. All of the Fund's portfolio holdings, including
derivative instruments, are marked to market each day with the change in value
reflected in unrealized appreciation/depreciation. Upon disposition, a realized
gain or loss is recognized accordingly, except when taking delivery of a
security underlying a futures or forward contract. In this instance, the
recognition of gain or loss is postponed until the disposal of the security
underlying the futures or forward contract.
Summarized below are the specific types of derivative financial instruments
used by the Fund.
A. FUTURES CONTRACTS - A futures contract is an agreement involving the delivery
of a particular asset on a specified future date at an agreed upon price. The
Fund generally invests in stock index futures. These contracts are generally
used to provide the return of an index without purchasing all the securities
underlying the index or to manage the Fund's overall exposure to the equity
markets.
Upon entering into future contracts, the Fund maintains, in a segregated
account with its custodian, securities with a value equal to its obligation
under the futures contracts. During the period
E-49
<PAGE> 301
Notes to Financial Statements (Continued)
November 30, 1997 (Unaudited)
the futures contract is open, payments are received from or made to the broker
based upon changes in the value of the contract (the variation margin).
Transactions in futures contracts for the six months ended November 30,
1997, were as follows:
<TABLE>
<CAPTION>
CONTRACTS
---------
<S> <C>
Outstanding at May 31, 1997 ................................ 25
Futures Opened ............................................. 545
Futures Closed ............................................. (297)
----
Outstanding at November 30, 1997 ........................... 273
====
</TABLE>
The futures contracts outstanding as of November 30, 1997, and the
description and unrealized appreciation/depreciation are as follows:
<TABLE>
<CAPTION>
UNREALIZED
APPRECIATION/
DESCRIPTION CONTRACTS DEPRECIATION
----------- ------------
<S> <C> <C>
LONG CONTRACTS
CAC 40 (France) Index Future, Dec. 1997
(Current Notional Value of $572,600 per contract) .............. 40 $ (191,718)
FTSE 100 (United Kingdom) Index Future, Dec. 1997
(Current Notional Value of $205,455) ........................... 60 (1,298,737)
Milan (Italy) Stock Index Future, Dec. 1997
(Current Notional Value of $134,056) ........................... 10 45,278
SHORT CONTRACTS
Topix (Japan) Future, Dec. 1997
(Current Notional Value of $9,880) ............................. 65 (238,367)
OMX Stock (Sweden) Index Futures, Dec. 1997
(Current Notional Value of $31,645) ............................ 90 (180,516)
DAX (Germany) Index Futures, Dec. 1997
(Current Notional Value of $225,925) ........................... 8 116,872
---- -----------
273 (1,747,188)
==== ===========
</TABLE>
E-50
<PAGE> 302
Notes to Financial Statements (Continued)
November 30, 1997 (Unaudited)
B. Foward Currency Contracts - These instruments are commitments to purchase or
sell a foreign currency at a future date at a negotiated forward rate. The gain
or loss arising from the difference between the original value of the contract
and the closing value of such contract is included as a component of realized
gain/loss on foreign currency.
At November 30, 1997, the Fund has outstanding forward currency contracts as
follows:
<TABLE>
<CAPTION>
Unrealized
CURRENT APPRECIATION/
Description Value Depreciation
- ----------- ----------- ------------
<S> <C> <C>
LONG CONTRACTS
Australian Dollar,
1,300,000 expiring 12/19/97 ..................... $ 888,274 $ (50,066)
French Franc,
42,528,152 expiring 12/15/97-01/21/98 ........... 7,218,026 (81,658)
German Mark,
11,084,635 expiring 01/16/98 .................... 6,304,425 (157,696)
Italian Lira,
13,934,888,400 expiring 01/21/98-02/19/98 ....... 8,063,768 (54,235)
Japanese Yen,
1,362,193,460 expiring 01/26/98-03/16/98 ........ 10,776,995 (487,415)
Netherlands Guilder,
1,241,728 expiring 02/19/98 ..................... 627,915 (16,704)
Spanish Peseta,
235,233,580 expiring 12/18/97-02/12/98 .......... 1,578,866 (32,097)
-----------
$ (879,871)
-----------
SHORT CONTRACTS
Australian Dollar,
1,300,000 expiring 12/19/97 ..................... 888,274 51,236
German Mark,
16,614,418 expiring 01/16/98-03/16/98 ............. 9,453,772 17,228
French Franc,
30,072,747 expiring 12/15/97-03/16/98 ........... 5,105,458 (16,349)
Italian Lira,
13,934,888,400 expiring 01/21/98-02/19/98 ....... 8,063,768 85,107
Japanese Yen,
4,181,480,772 expiring 01/21/98-02/26/98 ........ 33,115,735 2,341,822
</TABLE>
E-51
<PAGE> 303
Notes to Financial Statements (Continued)
November 30, 1997 (Unaudited)
<TABLE>
<CAPTION>
Unrealized
CURRENT APPRECIATION/
Description Value Depreciation
- ----------- ---------- ------------
<S> <C> <C>
SHORT CONTRACTS (CONTINUED)
Netherlands Guilder,
1,241,728 expiring 02/19/98 .................... $ 627,915 $ 12,085
Spanish Peseta,
235,233,580 expiring 12/18/97-02/12/98 ......... 1,578,866 3,063
Swedish Krona,
21,240,565 expiring 02/18/97 ................... 2,758,265 71,735
----------
$2,565,927
==========
</TABLE>
6. Distribution and Service Plans
The Fund and its shareholders have adopted a distribution plan pursuant to Rule
12b-1 under the Investment Company Act of 1940 and a service plan (collectively
the "Plans"). The Plans govern payments for the distribution of the Fund's
shares, ongoing shareholder services and maintenance of shareholder accounts.
Annual fees under the Plans of up to .25% of Class A net assets and 1.00%
each of Class B and Class C net assets are accrued daily. Included in these fees
for the six months ended November 30, 1997, are payments to VKAC of
approximately $585,700.
E-52
<PAGE> 304
APPENDIX F
MORGAN STANLEY GLOBAL EQUITY ALLOCATION FUND
VAN KAMPEN AMERICAN CAPITAL GLOBAL EQUITY FUND
PROFORMA COMBINED PORTFOLIO OF INVESTMENTS
December 31, 1997 (Unaudited)
<PAGE> 305
MS GLOBAL EQUITY ALLOCATION FUND - VKAC GLOBAL EQUITY FUND
PROFORMA CONDENSED STATEMENT OF ASSETS AND LIABILITIES
31-Dec-97
(Unaudited)
<TABLE>
<CAPTION>
MS Global
Equity VKAC
Allocation Global
Fund Equity Fund Adjustments Proforma
<S> <C> <C> <C> <C>
Investments, at Market Value (Cost of $160,750,
$229,294, and $390,044, respectively) $175,720 $253,047 $428,767
Repurchase Agreements 32,681 46,132 78,813
Other Assets Less Liabilities 4,867 5,514 (250) 10,131
--------------------------------------------------------
Net Assets $213,268 $304,693 ($250) $517,711
========================================================
Net Assets Consist of:
Capital $199,359 $268,541 $467,900
Accumulated Undistributed Net Investment
Income (915) (1,597) (250) (2,762)
Net Unrealized Appreciation/Depreciation
on Investments 16,219 26,347 42,566
Accumulated Net Realized Gain/Loss
on Investments (1,395) 11,402 10,007
--------------------------------------------------------
Net Assets $213,268 $304,693 ($250) $517,711
========================================================
Class A Shares:
Net Assets $ 74,593 $154,939 ($125) $229,407
Shares Outstanding 5,202 10,796 15,998
------------------------ --------
Net Asset Value per Share $14.34 $14.35 $14.34
======================== ========
Class B Shares:
Net Assets $ 58,639 $135,321 (113) $193,847
Shares Outstanding 4,209 9,832 13,915
------------------------ --------
Net Asset Value per Share $13.93 $13.76 $13.93
======================== ========
Class C Shares:
Net Assets $ 80,036 $ 14,433 (12) $ 94,457
Shares Outstanding 5,688 1,037 6,713
------------------------ --------
Net Asset Value per Share $14.07 $13.91 $14.07
======================== ========
</TABLE>
(1) The pro forma statements are presented as if the Reorganization was
effective December 31, 1997. The pro forma statements give effect to the
proposed exchange of stock for assets and liabilities with the MS Global Equity
Allocation Fund being the surviving entity. The proposed transaction will be
accounted for in accordance with generally accepted accounting principles as a
tax-free reorganization. The historical cost basis of the investments is
carried over to the surviving entity.
(2) The pro forma statements presumes the issuance by the MS Global Equity
Allocation Fund of approximately 10,796,000 class A shares, 9,706,000 class B
shares and 1,025,000 class C shares in exchange for the assets and liabilities
of the VKAC Global Equity Fund.
(3) In connection with this transaction, the VKAC Global Equity Fund will incur
a non-recurring cost associated with the transaction of approximately $250,000,
or $0.012 per share.
<PAGE> 306
MS GLOBAL EQUITY ALLOCATION FUND - VKAC GLOBAL EQUITY FUND
PROFORMA CONDENSED STATEMENT OF OPERATIONS
For the Year Ended December 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
MS Global VKAC
Equity Global
Allocation Equity
Fund Fund Adjustments Proforma
<S> <C> <C> <C> <C>
Investment Income:
Dividends $3,919 $4,461 $8,380
Interest 736 1,226 1,962
Security Lending 194 0 194
Foreign Taxes Withheld (260) (349) (609)
-----------------------------------------------------
Total Income 4,589 5,338 0 9,927
-----------------------------------------------------
Expenses:
Investment Advisory Fees 1,860 2,748 4,608
Fees Waived (3) (238) (1) (270) (509)
Distribution (12b-1) and Service Fees 1,329 1,710 3,039
Administrative Fee (1) 516 0 636 1,152
All Other Expenses (1) (2) 586 2,190 (1,346) 1,430
-----------------------------------------------------
Total Expenses 4,053 6,647 (980) 9,720
-----------------------------------------------------
-----------------------------------------------------
Net Investment Income $536 ($1,309) $980 $207
=====================================================
Realized and Unrealized Gain/Loss on Investments:
Realized Gain/Loss on Investments $22,616 $50,430 $73,046
Net Change in Unrealized Appreciation/
Depreciation During the Period 1,513 (18,898) (17,385)
-----------------------------------------------------
Net Realized and Unrealized Gain/Loss
on Investments $24,129 $31,532 $0 $55,661
=====================================================
Net Increase/Decrease in Net Assets -----------------------------------------------------
from Operations $24,665 $30,223 $980 $55,868
=====================================================
</TABLE>
(1) The MS Global Equity Allocation Fund's expense structure includes an
Administrative Fee which provides for transfer agency, accounting, tax and
administration services to the Fund. These fees are included as a
component of All Other Expenses for the VKAC Global Equity Fund.
(2) Reflects the reduction of other operating expenses as a result of the
elimination of certain duplicative expenses and the results of operating a
larger, more efficient fund rather than two smaller funds.
(3) The Adviser has agreed to cap expenses after the transaction at 1.70%,
2.45% and 2.45% for classes A, B and C, respectively. The adjustment
reflects the amount of additional fee waiver which would have been
necessary to reduce expenses to this cap.
<PAGE> 307
MS GLOBAL EQUITY ALLOCATION FUND - VKAC GLOBAL EQUITY FUND
PROFORMA COMBINED PORTFOLIO OF INVESTMENTS
December 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares Value (000)
<S> <C>
Common Stocks (80.8%)
Australia (0.0%)
1,699 Broken Hill Proprietary Ltd. $ 16
3,814 Coles Myer Ltd. 18
615 Gio Australia Holdings Ltd. 2
641 MIM Holdings Ltd. -
(a)755 Westfield Trust (New) 1
-------------
37
-------------
Austria (0.7%)
600 Austria Mikro Systems International AG 30
(a)2,900 Austrian Airlines Osterreichische Luftverkehrs AG 62
(a)8,600 Bank Austria AG 436
(a)4,528 Bank Austria AG 224
800 Bau Holdings AG 50
2,100 Boehler-Udderholm AG 123
300 BWT AG 47
2,000 Creditanstalt Bank 128
4,600 Flughafen Wein AG 183
1,000 Generali AG 263
(a)700 Lenzing AG 42
2,300 Mayr-Melnhof Karton AG 124
(a)1,100 Oesterreichische Brau-Beteiligungs AG 55
5,600 Oesterreichische Elektrizitaetswirtschafts, 'A' AG 594
4,300 OMV AG 596
2,600 Radex-Heraklith Industriebet AG 89
1,900 Steyr-Daimler-Puch AG 51
2,300 VA Technologies AG 349
1,600 Wienerberger Baustoffindustrie AG 307
-------------
3,753
-------------
Canada (2.9%)
9,800 Abitibi-Consolidated, Inc. 137
8,000 Agrium, Inc. 97
(a)8,100 Air Canada 84
11,900 Alcan Aluminum Ltd. 328
3,700 Avenor, Inc. 53
14,300 Bank of Montreal 634
13,000 Bank of Nova Scotia 613
22,900 Barrick Gold Corp. 427
34,000 BCE, Inc. 1,134
7,100 Bombardier, Inc., 'A' 146
10,400 Bombardier, Inc., 'B' 214
7,400 CAE, Inc. 58
3,100 Cameco Corp. 101
22,400 Canadian Imperial Bank of Commerce 699
(a)5,600 Canadian Natural Resources Ltd. 120
8,600 Canadian Occidental Petroleum Ltd. 195
</TABLE>
<PAGE> 308
MS GLOBAL EQUITY ALLOCATION FUND - VKAC GLOBAL EQUITY FUND
PROFORMA COMBINED PORTFOLIO OF INVESTMENTS (Continued)
December 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares Value (000)
<S> <C>
Canada (Continued) 18,800 Canadian Pacific Ltd. $ 506
5,000 Canadian Tire Corp., 'A' 107
4,500 Cominco Ltd. 69
(a)4,000 Corel Corp. 6
3,200 Cott Corp. 27
5,500 Dofasco, Inc. 89
8,800 Domtar, Inc. 61
(a)8,600 Echo Bay Mines Ltd. 22
2,500 George Weston Ltd. 213
(a)13,400 Gulf Canada Resources Ltd. 94
11,600 Imasco Ltd. 410
9,100 Imperial Oil Ltd. 586
8,600 Inco Ltd. 146
3,200 IPL Energy, Inc. 146
15,800 Laidlaw, Inc. 'B' 216
3,800 Loewen Group, Inc. 98
8,500 MacMillan Bloedel Ltd. 88
3,900 Magna International, Inc., 'A' 245
(a)9,500 Methanex Corp. 75
4,400 Molson Companies Ltd., 'A' 79
6,100 Moore Corp. Ltd. 92
(a)8,200 Newbridge Networks Corp. 287
13,300 Noranda, Inc. 229
16,500 Norcen Energy Resources Ltd. 189
12,800 Northern Telecom Ltd. 1,139
29,700 Nova Corp. 283
16,000 Petro 253
11,600 Placer Dome, Inc. 146
3,000 Potash Corp. of Saskatchewan, Inc. 250
7,100 Power Corp. of Canada 254
(a)7,200 Provigo, Inc. 44
7,400 Ranger Oil Ltd. 50
(a)7,100 Renaissance Energy Ltd. 147
(a)4,100 Repap Enterprises, Inc. 1
(a)9,600 Rogers Communication, Inc., 'B' 46
16,900 Royal Bank of Canada 894
19,300 Seagram, Ltd 625
4,400 Suncor, Inc. 151
(a)7,200 Talisman Energy, Inc. 220
4,700 Teck Corp., 'B' 71
5,800 TELUS Corp. 129
31,500 Thomson Corp. 865
13,100 Transcanada Pipelines Ltd. 292
6,700 Westcoast Energy, Inc. 155
-------------
15,135
-------------
France (4.3%)
1,943 Accor S.A. 361
</TABLE>
<PAGE> 309
MS GLOBAL EQUITY ALLOCATION FUND - VKAC GLOBAL EQUITY FUND
PROFORMA COMBINED PORTFOLIO OF INVESTMENTS (Continued)
December 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares Value (000)
<S> <C>
France (Continued) 7,350 Alcatel Alsthom $ 934
15,564 AXA S.A. 1,204
10,366 Banque Nationale de Paris RFD 551
6,727 Banque Paribas 585
3,300 BIC 241
1,377 Bouygues 156
1,652 Canal Plus 307
1,910 Carrefour S.A. 996
4,400 Casino Guichard Perrachon 245
500 Cie Bancaire S.A. 81
4,289 Cie de Saint-Gobain 609
6,236 Cie Generale des Eaux 870
12,700 Elf Aquitaine 1,477
1,500 Eridania Beghin-Say S.A. 234
550 Essilor International 164
49,500 France Telecom S.A. 1,795
3,818 Groupe Danone RFD 682
3,650 Havas S.A. 263
800 Imetal, S.A. 99
4,107 L'Air Liquide 643
3,292 L'Oreal 1,288
4,693 Lafarge Coppee S.A. 308
5,400 Lagardere S.C.A. 179
1,535 Legrand S.A. 306
4,255 LVMH Moet Hennessy Louis Vuitton 706
6,033 Lyonnaise des Eaux S.A. 668
6,039 Michelin (C.G.D.E.) 'B' 304
425 Pathe S.A. 82
3,325 Pernod-Ricard 196
380 Pinault S.A. 203
675 Pin Printemps Redo 360
940 Promodes 390
2,555 PSA Peugeot Citroen S.A. 322
16,581 Rhone-Poulenc S.A. 'A' 743
235 Sagem 105
5,336 Sanofi S.A. 594
6,497 Schneider S.A. 353
1,184 Simco S.A. 80
190 Societe Eurafrance S.A. 77
4,832 Societe Generale 658
(a)38 Sodexho S.A. (New) 20
350 Sodexho S.A. 187
5,958 Thomson CSF S.A. 188
11,755 Total S.A. 'B' 1,279
12,340 Usinor Sacilor 178
3,250 Valeo S.A. 220
-------------
22,491
-------------
</TABLE>
<PAGE> 310
MS GLOBAL EQUITY ALLOCATION FUND - VKAC GLOBAL EQUITY FUND
PROFORMA COMBINED PORTFOLIO OF INVESTMENTS (Continued)
December 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares Value (000)
<S> <C>
Germany (4.9%)
2,300 adidas AG $ 302
(a)2,200 Agiv AG 42
11,000 Allianz AG 2,849
1,500 AMB Aachener & Muenchener Beteiligungs AG 164
27,200 BASF AG 964
34,600 Bayer AG 1,292
11,600 Bayerische Hypotheken Bank AG 566
12,150 Bayerische Vereinsbank AG 795
4,050 Beiersdorf AG 176
2,300 Bilfinger & Berger Bau AG 71
(a)400 Brau und Brunnen AG 40
1,350 CKAG Colonia Konzern AG 129
4,550 Continental AG 100
23,500 Daimler-Benz AG 1,649
4,500 Degussa AG 225
23,350 Deutsche Bank AG 1,648
98,770 Deutsche Telekom AG 1,859
1,800 Deutz AG 13
20,500 Dresdner Bank AG 946
2,420 Heidelberger Zement AG 172
4,250 Hochtief AG 168
500 Karstadt AG 171
(a)1,150 Kloeckner-Humboldt-Deutz AG 9
500 Linde AG 305
17,750 Lufthansa AG 340
650 MAN AG 188
1,700 Mannesmann AG 859
7,473 Merck KGAA 243
11,424 METRO AG 410
3,530 Muenchener Rueckversicherungs (Registered) 1,330
800 Preussag AG 244
15,500 RWE AG 831
2,810 SAP AG 854
3,400 Schering AG 328
26,300 Siemens AG 1,557
(a)150 Starbag AG 10
1,850 Thyssen AG 396
23,050 VEBA AG 1,570
1,478 Viag AG 796
1,350 Volkswagen AG 759
-------------
25,370
-------------
Italy (3.1%)
65,672 Assicurazioni Generali S.p.A. 1,613
104,300 Banca Commerciale Italiana 363
40,900 Banco Ambrosiano Veneto 157
13,380 Benetton Group S.p.A. 219
</TABLE>
<PAGE> 311
MS GLOBAL EQUITY ALLOCATION FUND - VKAC GLOBAL EQUITY FUND
PROFORMA COMBINED PORTFOLIO OF INVESTMENTS (Continued)
December 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares Value (000)
<S> <C>
Italy (Continued) 11,700 Cartiere Burgo S.p.A. $ 70
178,500 Credito Italiano S.p.A. 550
48,000 Edison S.p.A. 290
568,000 Ente Nazionale Idrocarburi S.p.A. 3,220
9,500 Falck 43
239,630 Fiat S.p.A. 697
52,970 Fiat S.p.A. Di Risp NCS 88
26,000 Impreglio S.p.A. 20
62,600 Istituto Bancario San Paolo di Torina S.p.A. 598
45,450 Istituto Mobiliare Italiano S.p.A. 540
300,020 Istituto Nazionale delle Assicurazioni (INA) 608
17,300 Italcementi S.p.A. 121
11,650 Italcementi S.p.A. NCS 35
49,400 Italgas 204
(a)16,878 La Rinascente S.p.A. 126
36,500 Magneti Marelli S.p.A. 62
86,000 Mediaset S.p.A 422
36,050 Mediobanca S.p.A. 283
208,108 Montedison S.p.A. 187
68,900 Montedison S.p.A. Di Risp NCS 45
(a)252,880 Olivetti Group 153
114,640 Parmalat Finanziaria S.p.A. 164
115,000 Pirelli S.p.A. 307
22,269 R.A.S. 218
462 R.A.S. Di Risp 3
10,100 S.A.I. 112
12,000 Sasib S.p.A. 35
22,000 Sirti S.p.A. 133
51,000 Snia BPD S.p.A. 52
110,000 Telecom Italia Mobile Di Risp S.p.A. 313
470,300 Telecom Italia Mobile S.p.A 2,171
68,663 Telecom Italia Mobile S.p.A. 303
255,386 Telecom Italia S.p.A. 1,631
-------------
16,156
-------------
Japan (7.9%)
3,300 Advantest Corp. 187
43,800 Ajinomoto Co., Inc. 426
(a)25,800 Aoki Corp. 8
3,500 Aoyama Trading Co., Ltd. 62
500 Asahi Bank Ltd. 2
25,800 Asahi Breweries Ltd. 375
77,400 Asahi Chemical Industry Co., Ltd. 262
73,600 Asahi Glass Co. 349
89,600 Bank of Tokyo-Mitsubishi 1,235
500 Bank of Yokohama 1
25,800 Bridgestone Corp. 559
31,800 Canon, Inc. 740
</TABLE>
<PAGE> 312
MS GLOBAL EQUITY ALLOCATION FUND - VKAC GLOBAL EQUITY FUND
PROFORMA COMBINED PORTFOLIO OF INVESTMENTS (Continued)
December 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares Value (000)
<S> <C>
Japan (Continued) 15,000 Casio Computer Co., Ltd. $ 108
37,800 Chiba Bank Ltd. 24
25,800 Chugai Pharmaceutical Ltd. 132
29,800 Dai Nippon Printing Co., Ltd. 559
27,800 Daiei, Inc. 115
25,800 Daikin Industries Ltd. 97
25,800 Daiwa House Industry 136
17,000 Denso Corp. 306
151 East Japan Railway Co. 681
16,800 Ebara Corp. 178
11,000 Fanuc Co. 416
15,000 Fuji Photo Film Co. 574
66,600 Fujitsu Ltd. 714
18,800 Furukawa Electric 80
34,800 Hankyu Corp. 163
25,800 Hazama-Gumi 13
128,000 Hitachi Ltd. 912
33,000 Honda Motor Co. 1,211
400 Industrial Bank of Japan 3
16,000 Ito-Yokado Co., Ltd. 815
79,000 Japan Airlines Co. 215
64,600 Japan Energy Corp. 61
800 Joyo Bank 3
12,800 Jusco Co. 180
45,800 KAO Corp. 659
51,600 Kajima Corp. 130
34,300 Kansai Electric Power Co. 581
40,600 Kawasaki Steel Corp. 55
61,600 Kinki Nippon Railway 329
51,600 Kirin Brewery Co., Ltd. 375
51,600 Komatsu Ltd. 259
77,400 Kubota Corp. 204
51,600 Kumagai Gumi Co., Ltd. 28
7,800 Kyocera Corp. 354
25,800 Kyowa Hakko Kogyo 112
66,000 Long-Term Credit Bank of Japan Ltd. 106
77,200 Marubeni Corp. 135
5,800 Marui Co. 90
77,400 Matsushita Electric Industrial Ltd. 1,132
77,400 Mitsubishi Chemical Corp. 111
72,000 Mitsubishi Corp. 568
90,400 Mitsubishi Electric Corp. 231
140,000 Mitsubishi Heavy Industries Ltd. 583
51,600 Mitsubishi Materials Corp. 83
25,000 Mitsubishi Trust and Banking Corp. 251
77,200 Mitsui & Co. 456
(a)51,600 Mitsui Engineering & Shipbuilding Co., Ltd. 33
400 Mitsui Trust & Banking Corp. 1
</TABLE>
<PAGE> 313
MS GLOBAL EQUITY ALLOCATION FUND - VKAC GLOBAL EQUITY FUND
PROFORMA COMBINED PORTFOLIO OF INVESTMENTS (Continued)
December 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares Value (000)
<S> <C>
Japan (Continued) 27,800 Mitsukoshi $ 74
9,000 Murata Manufacturing Co., Inc. 226
16,800 Mycal Corp. 140
44,600 NEC Corp. 475
25,800 NGK Insulators Ltd. 229
14,600 Nippon Denko Co., Ltd. 263
20,000 Nippon Express Co., Ltd. 100
25,800 Nippon Fire & Marine Insurance Co. 97
24,800 Nippon Light Metal Co. 36
25,800 Nippon Meat Packers, Inc. 352
73,600 Nippon Oil Co. 190
286,000 Nippon Steel Corp. 423
386 Nippon Telegraph & Telephone ADR 3,311
77,400 Nippon Yusen Kabushiki Kaisha 212
97,400 Nissan Motor Co., Ltd. 403
150,000 NKK Corp. 119
29,800 Odakyu Electric Railway Co. 129
51,600 OJI Paper Co., Ltd. 205
114,200 Osaka Gas Co. 261
25,800 Penta-Ocean Construction 36
7,000 Pioneer Electronic Corp. 108
2,000 Rohm Co. 204
65,200 Sakura Bank Ltd. 186
19,800 Sankyo Co., Ltd. 447
88,000 Sanwa Bank, Ltd. 890
77,400 Sanyo Electric Co., Ltd. 202
5,800 Secom Co. 370
5,000 Sega Enterprises Ltd. 90
25,800 Sekisui House Ltd. 166
51,600 Sharp Corp. 355
7,000 Shimano, Inc. 129
11,000 Shin-Etsu Chemical Co. 210
36,800 Shinizu Corp. 85
11,000 Shiseido Co., Ltd. 150
800 Shizuoka Bank 9
51,600 Showa Denko K.K. 45
700 Softbank Corp. 18
11,900 Sony Corp. 1,057
103,200 Sumitomo Chemical Co. 237
51,400 Sumitomo Corp. 287
34,800 Sumitomo Electric Industries 474
11,000 Sumitomo Forestry 54
92,400 Sumitomo Metal Industries 118
24,000 Sumitomo Metal Mining Co. 79
25,800 Sumitomo Osaka Cement Co., Ltd. 32
61,600 Taisei Corp., Ltd. 85
(a)15,000 Taisho Pharmaceutical Co. 383
31,800 Takeda Chemical Industries 906
</TABLE>
<PAGE> 314
MS GLOBAL EQUITY ALLOCATION FUND - VKAC GLOBAL EQUITY FUND
PROFORMA COMBINED PORTFOLIO OF INVESTMENTS (Continued)
December 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares Value (000)
<S> <C>
Japan (Continued) 51,600 Teijin Ltd. $ 108
34,800 Tobu Railway Co. 109
18,500 Tohoku Electric Power 281
600 Tokai Bank 3
77,400 Tokio Marine & Fire Insurance Co. 877
47,800 Tokyo Electric Power Co. 871
4,000 Tokyo Electron Ltd. 128
103,200 Tokyo Gas Co. 234
42,800 Tokyu Corp. 165
34,800 Toppan Printing Co., Ltd. 453
77,500 Toray Industries, Inc. 347
25,800 Toto Ltd. 165
51,600 Toyobo Ltd. 62
112,200 Toyota Motor Corp. 3,214
51,600 Ube Industries Ltd. 66
300 Yamaichi Securities -
-------------
40,508
-------------
Netherlands (1.6%)
31,207 ABN-Amro Holding N.V. 608
1,800 Akzo Nobel N.V. 310
15,700 Elsevier N.V. 254
1,200 Getronics NV 38
1,050 Heineken N.V. 183
18,402 ING Groep N.V. 775
68 ING Groep N.V. ADR 3
2,139 KLM Royal Dutch Airlines N.V. 79
10,974 Koninklijke Ahold N.V. 286
287 Koninklijke Hoogovens 12
2,400 Koninklijke KNP BT 55
16,247 Koninklijke PTT Nederland N.V. 678
600 Nedlloyd Groep N.V. 14
303 OCE NV 33
7,700 Phillips Electronics N.V. 462
48,000 Royal Dutch Petroleum N.V. 2,636
18,300 Royal Dutch Petroleum N.V. - New York Shares 992
796 Stork N.V. 27
14,400 Unilever N.V. 888
1,656 Wolters Kluwer N.V. 214
-------------
8,547
-------------
Norway (0.5%)
5,400 AKER S.A. 'A' 97
4,700 Bergesen dy ASA, 'A' 111
2,000 Bergesen dy ASA, 'B' 47
45,600 Christiania Bank OG Kreditkasse 184
2,500 Dyno Industrier ASA 48
4,400 Elkem ASA 58
</TABLE>
<PAGE> 315
MS GLOBAL EQUITY ALLOCATION FUND - VKAC GLOBAL EQUITY FUND
PROFORMA COMBINED PORTFOLIO OF INVESTMENTS (Continued)
December 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares Value (000)
<S> <C>
Noway (Continued) 4,800 Hafslund ASA 'A' $ 29
3,300 Hafslund ASA 'B' 16
1,700 Helikopter Services Group ASA 21
3,400 Kvaerner ASA 173
2,700 Leif Hoegh & Co., ASA 55
(a)11,833 NCL Holdings ASA 42
19,100 Norsk Hydro ASA 930
2,500 Norske Skogindustrier AGA 72
3,900 Orkla ASA 335
(a)2,700 Petroleum Geo-Services ASA 170
(a)23,600 Storebrand ASA 166
1,700 Unitor ASA 21
-------------
2,575
-------------
Portugal (1.1%)
25,500 Banco Comercial Portugues, S.A. (Registered) 521
13,400 Banco Espirito Santo e Comercial de Lisboa, S.A. 399
9,700 Banco Totta & Acores 'B' (Registered) 190
12,900 BPI-SGPS S.A. 314
1,300 Cia de Seguros Tranquilidade (Registered) 31
700 CIN, S.A. 44
13,500 Cimpor-Cimentos de Portugal, SGPS, S.A. 354
3,100 Corticeira Amorim, S.A. 37
59,500 EDP-Eletricidade de Portugal, S.A. 1,127
1,000 Engil-SGPS 10
3,100 INAPA Investimentos Participacoes e Gestao, S.A. 36
17,300 Jeronimo Martins, SGPS, S.A. 549
2,007 Jeronimo Martins - Provisional Certificates 11
14,600 Portucel Industrial-Empresa Produtora de Celulose, S.A. 89
30,500 Portugal Telecom S.A. 1,416
(a)2,000 Sociedade de Construcoes Soares da Costa, S.A. 14
6,700 Sonae Investimentos-Sociedade Gestora de Participacoes Sociais, B.A. 271
1,900 UNICER-Uniao Cervejeira, S.A. 26
-------------
5,439
-------------
Spain (2.3%)
840 Acerinox S.A. 124
(a)264 ACS S.A. 6
(a)1,720 Aguas de Barcelona 71
9,920 Argentaria S.A. 604
16,821 Autopistas Concesionaria Espanola S.A. 226
51,300 Banco Bilbao Vizcaya, S.A. (Registered) 1,660
25,400 Banco Central Hispanoamericano S.A. 619
41,400 Banco Santander S.A. 1,383
1,000 Corporacion Financiera Alba S.A. 105
3,898 Corporacion Mapfre S.A. 103
3,850 Dragados y Construcciones S.A. 82
3,300 Ebro Agricolas, Compania de Alimentacion S.A. 56
</TABLE>
<PAGE> 316
MS GLOBAL EQUITY ALLOCATION FUND - VKAC GLOBAL EQUITY FUND
PROFORMA COMBINED PORTFOLIO OF INVESTMENTS (Continued)
December 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares Value (000)
<S> <C>
Spain (Continued) 1,450 Empresa Nacional de Cellulosas S.A. $ 20
81,600 Endesa S.A. 1,450
317 Energia y Industrias Aragonesas 2
(a)11,600 Ercros S.A. 11
4,000 Fomento de Construcciones y Contratas S.A. 152
11,200 Gas Natural SDG 'E' 581
1,635 General de Aguas De Barcelona S.A. 67
73,000 Iberdrola S.A. 961
1,601 Inmobiliaria Metropolitana Vasco Central S.A. 72
500 Portland Vaderrivas S.A. 45
23,800 Repsol S.A. 1,016
2,500 Tabacalera S.A. 'A' 203
72,600 Telefonica de Espana 2,074
19,900 Union Electrica Fenosa S.A. 191
4,500 Uralita S.A. 51
3,076 Vallehermoso S.A. 94
1,550 Viscofan Industria Navarra de Envolturas Celulosicas, S.A. 39
748 Zardoya-Otis S.A. 87
-------------
12,155
-------------
Sweden (2.0%)
53,100 ABB AB 'A' 629
(a)3,500 ABB AB 'B' 41
2,700 AGA AB 'A' 37
10,600 AGA AB 'B' 140
(a)100,166 Astra AB 'A' 1,735
9,100 Astra AB 'B' 153
12,050 Atlas Copco AB 'A' 360
5,400 Electrolux AB 'B' 375
2,700 Esselte AB 'B' 51
(a)2,300 Granges AB 36
1,100 Hennes & Mauritz AB 'A' 49
13,000 Hennes & Mauritz AB 'B' 573
5,700 SCA AB 'B' 128
6,200 Securitas AB 'B' 187
7,800 Skandia Group Forsakrings AB 368
37,700 Skandinaviska Enskilda Banken 'A' 477
8,700 Skanska AB 'B' 357
7,200 SKF AB 'B' 153
22,250 Stora Kopparbergs Bergslags Aktiebolag 280
7,500 Svenska Cellulosa #B# 169
15,000 Svenska Handelsbanken 'A' 519
36,000 Swedish Match AB 120
64,400 Telefonaktiebolaget LM Ericsson 2,421
9,900 Trelleborg AB 'B' 125
26,900 Volvo AB 'B' 722
-------------
10,205
-------------
</TABLE>
<PAGE> 317
MS GLOBAL EQUITY ALLOCATION FUND - VKAC GLOBAL EQUITY FUND
PROFORMA COMBINED PORTFOLIO OF INVESTMENTS (Continued)
December 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares Value (000)
<S> <C>
Switzerland (3.6%)
415 ABB AG (Bearer) $ 521
770 Adia S.A. (Bearer) 223
240 Alusuisse-Lonza Holding AG (Registered) 230
9,850 CS Holding AG (Registered) 1,523
45 Georg Fischer AG (Bearer) 62
285 Holderbank Financiere Glarus AG 'B' (Bearer) 232
275 Merkur Holding AG (Registered) 58
1,655 Nestle S.A. (Registered) 2,479
2,696 Novartis AG (Registered) 4,373
69 Roche Holding AG (Bearer) 1,062
292 Roche Holding AG-Genusshein 2,899
610 Schweizerische Rueckversicherungs-Gesellchaft (Registered) 1,141
215 SMH AG (Bearer) 119
80 Societe Generale de Surveillance Holding S.A. (Bearer) 153
170 Sulzer AG (Registered) 108
3,190 Swiss Bank Corp. (Registered) 991
155 SwissAir AG (Registered) 212
865 Union Bank of Switzerland (Bearer) 1,250
970 Union Bank of Switzerland (Registered) 279
2,005 Zuerich Versicherungs-Gesellschaft (Registered) 955
-------------
18,870
-------------
United Kingdom (8.5%)
52,400 Abbey National plc 943
33,640 Argyll Group plc 190
26,150 Arjo Wiggins Appleton plc 70
18,725 Associated British Foods plc 163
64,089 Barclays plc 1,706
41,125 Bass plc 640
115,891 B.A.T Industries plc 1,057
145,190 BG plc 'A' 653
107,350 BG plc 'B' 51
26,177 BICC plc 74
48,581 Blue Circle Industries plc 273
26,105 BOC Group plc 429
41,125 Boots Co. plc 592
26,150 BPB Industries plc 146
18,693 British Aerospace plc 533
44,903 British Airways plc 413
216,278 British Petroleum Co. plc 2,855
59,825 British Sky Broadcasting Group plc 448
74,800 British Steel plc 161
216,950 British Telecommunications plc 1,709
157,106 BTR plc 475
11,156 Burmah Castrol plc 195
93,487 Cable & Wireless plc 822
41,160 Cadbury Schweppes plc 415
28,530 Caradon plc 83
</TABLE>
<PAGE> 318
MS GLOBAL EQUITY ALLOCATION FUND - VKAC GLOBAL EQUITY FUND
PROFORMA COMBINED PORTFOLIO OF INVESTMENTS (Continued)
December 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares Value (000)
<S> <C>
United Kingdom (a)164,550 Centrica plc $ 242
(Continued) 33,646 Coats Viyella plc 50
26,106 Commercial Union plc 364
18,725 Courtaulds plc 91
3,722 De La Rue plc 24
89,500 Diageo plc 819
(a) 24,590 EMI Group plc 205
108,475 General Electric plc 703
22,367 GKN plc 458
119,675 Glaxo Wellcome plc 2,845
26,140 Granada Group plc 399
44,875 Great Universal Stores plc 565
29,894 Guardian Royal Exchange plc 162
57,172 Guinness plc 526
82,270 HSBC Holdings plc 2,030
22,443 Hanson plc 100
48,625 Harrisons & Crosfield plc 113
33,675 Imperial Chemical Industries plc 526
44,888 Ladbroke Group plc 195
29,925 Land Securities plc 477
29,925 Lasmo plc 133
44,875 Legal & General Group plc 392
205,675 Lloyds TSB Group plc 2,676
29,943 Lonrho plc 46
130,875 Marks & Spencer plc 1,289
22,475 MEPC plc 188
52,400 National Power plc 516
26,148 North West Water plc 335
30,282 Peninsular & Oriental Steam Navigation Co. 344
56,053 Pilkington plc 117
74,809 Prudential Corp. plc 911
33,675 Rank Group plc 188
22,426 Redland plc 126
51,925 Reed International plc 495
63,600 Reuters Holdings plc 695
22,475 Rexam plc 110
11,200 RMC Group plc 159
52,412 Royal & Sun Alliance Insurance Group plc 528
18,679 Royal Bank of Scotland plc 238
45,035 RTZ Corp. plc (Registered) 555
59,797 Sainsbury (J) plc 504
7,450 Schroders plc 234
37,418 Scottish Power plc 331
74,800 Sears plc 65
22,726 Sedgwick Group plc 53
18,725 Slough Estates plc 105
192,871 SmithKline Beecham plc 1,983
18,701 Southern Electric plc 156
</TABLE>
<PAGE> 319
MS GLOBAL EQUITY ALLOCATION FUND - VKAC GLOBAL EQUITY FUND
PROFORMA COMBINED PORTFOLIO OF INVESTMENTS (Continued)
December 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares Value (000)
<S> <C>
United Kingdom 52,385 Tarmac plc $ 98
(Continued) 29,879 Taylor Woodrow plc 87
71,067 Tesco plc 586
26,194 Thames Water plc 390
(a)17,463 Thorn plc 45
6,500 Thorn EMI plc 'B' 2
18,691 TI Group plc 144
107,150 Unilever plc 922
123,417 Vodafone Group plc 892
33,675 Zeneca Group plc 1,185
-------------
43,813
-------------
United States (37.4%)
12,300 Abbott Laboratories 806
(a)2,200 AccuStaff, Inc. 51
7,100 Adobe Systems, Inc. 293
(a)1,800 Advanced Fibre Communications, Inc. 52
2,200 AGCO Corp. 64
2,200 A.H. Belo Corp., 'A' 123
2,000 Air Express International Corp. 61
2,100 Air Products & Chemicals, Inc. 173
1,200 Airborne Freight Corp. 75
1,500 Albank Financial Corp. 77
7,800 Albertson's, Inc. 370
2,600 Allegheny Teledyne, Inc. 67
(a)1,400 Allen Telecom, Inc. 26
3,600 Allergan, Inc. 121
(a)2,900 Allied Waste Industries, Inc. 68
12,100 Allstate Corp. 1,100
9,200 Alltel Corp. 378
2,100 Aluminum Co. of America 148
2,500 Alza Corp., 'A' 80
2,200 AMBAC Finacial Group, Inc. 101
1,700 American Bankers Insurance Group, Inc. 78
13,300 American Express Co. 1,187
2,400 American General Corp. 130
19,500 American Greeting Corp., 'A' 793
20,400 American Home Products Corp. 1,561
13,000 American International Group, Inc. 1,414
(a)1,700 American Power Conversion Corp. 40
2,300 American Stores Co. 47
36,500 American Telephone & Telegraph Co. 2,236
10,900 Ameritech Corp. 877
11,900 Amoco Corp. 1,013
6,400 AMP, Inc. 269
(a)1,400 AMR Corp. 180
(a)1,500 Amresco, Inc. 45
(a)3,000 Andrew Corp. 72
</TABLE>
<PAGE> 320
MS GLOBAL EQUITY ALLOCATION FUND - VKAC GLOBAL EQUITY FUND
PROFORMA COMBINED PORTFOLIO OF INVESTMENTS (Continued)
December 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares Value (000)
<S> <C>
United States 15,900 Anheuser-Busch Cos., Inc., 'A' $ 700
(Continued) (a)2,700 Apple Computer, Inc. 35
(a)23,400 Applied Material, Inc. 705
1,500 Aptar Group, Inc. 83
4,500 Armstrong World Industries, Inc., 'B' 336
1,900 Arvin Industries, Inc. 63
5,200 Asarco, Inc. 117
9,500 Ashland, Inc. 510
1,500 Associated Banc-Corp. 83
1,900 Astoria Financial Corp. 106
3,600 Atlantic Richfield Co. 288
(a)3,100 Atmel Corp. 58
6,900 Automatic Data Processing, Inc. 423
2,700 Avnet, Inc. 178
2,000 AVX Corp. 37
5,200 Baker Hughes, Inc. 227
4,000 Baldor Electric Co. 87
2,500 Ballard Medical Products 61
12,300 Banc One Corp. 668
12,600 Bank of New York Co., Inc. 728
21,600 BankAmerica Corp. 1,577
7,600 BankBoston Corp. 714
2,400 Bankers Trust New York Corp. 270
(a)3,200 Barnes & Noble, Inc. 107
6,900 Bausch & Lomb, Inc. 273
8,500 Baxter International, Inc. 429
21,800 Becton & Dickinson & Co. 1,090
1,800 Belden, Inc. 63
16,400 Bell Atlantic Corp. 1,492
22,500 BellSouth Corp. 1,267
1,400 Beneficial Corp. 116
1,500 Bergen Brunswig Corp., 'A' 63
1,500 Betz Laboratories, Inc. 92
(a)7,000 Beverly Enterprises, Inc. 91
8,600 BFGoodrich Co. 356
(a)2,200 Biogen, Inc. 80
2,900 Biomet, Inc. 74
6,900 Birmingham Steel Corp. 109
(a)3,200 BISYS Group, Inc. 106
(a)1,700 Black Box Corp. 60
3,000 BMC Industries, Inc. 48
4,700 Bob Evans Farms, Inc. 104
11,600 Boeing Co. 568
2,000 Boise Cascade Corp. 61
(a)1,500 Borders Group, Inc. 47
1,500 Bowater, Inc. 67
8,000 Briggs & Stratton Corp. 389
24,900 Bristol-Myers Squibb Co. 2,356
</TABLE>
<PAGE> 321
MS GLOBAL EQUITY ALLOCATION FUND - VKAC GLOBAL EQUITY FUND
PROFORMA COMBINED PORTFOLIO OF INVESTMENTS (Continued)
December 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares Value (000)
<S> <C>
United States 6,200 Brown-Forman Corp., 'B' $ 343
(Continued) 6,100 Browning-Ferris Industries, Inc. 226
5,700 Burlington Northern Railroad Co. 530
3,167 Burlington Resources, Inc. 142
(a)2,200 California Energy Company, Inc. 63
2,700 Callaway Golf Co. 77
(a)2,000 Cambridge Tech Partner, Inc. 83
1,300 Camco International, Inc. 83
6,900 Campbell Soup Co. 401
1,300 Capital RE Corp. 81
(a)1,000 Catalina Marketing Corp. 46
14,400 Caterpillar, Inc. 699
2,890 CBS, Inc. 85
(a)1,800 Centocor, Inc. 60
7,300 Central & South West Corp. 198
1,700 Central Louisiana Electric Co. 55
1,000 Central Newspapers, Inc., 'A' 74
1,700 Centura Banks, Inc. 117
1,800 Century Telephone Enterprises, Inc. 90
(a)1,300 Chancellor Media Corp., 'A' 97
1,555 Charter One Financial Inc. 98
13,800 Chase Manhattan Corp. 1,511
20,100 Chevron Corp. 1,548
1,625 Chittenden Corp. 57
(a) 3,600 Choice Hotels International, Inc. 58
22,700 Chrysler Corp. 799
4,300 Chubb Corp. 325
4,500 CIGNA Corp. 779
9,500 Cincinatti Milacron, Inc. 246
2,200 CIPSCO, Inc. 97
(a)3,700 Circus Circus Enterprises, Inc. 76
(a)9,300 Cisco Systems, Inc. 518
12,800 Citicorp 1,618
1,800 CKE Restaurants, Inc. 76
4,600 Clayton Homes, Inc. 83
4,500 Clorox Co. 356
1,300 CMAC Investment Corp. 78
1,500 CNF Transportation, Inc. 58
(a)1,300 Coast Savings Financial, Inc. 89
3,600 Coastal Corp. 223
60,900 Coca-Cola Co. 4,057
2,100 Colgate Palmolive Co. 154
36,200 Columbia HCA/Healthcare Corp. 1,072
1,800 Comdisco, Inc. 60
8,100 Comerica, Inc. 731
2,500 Commercial Metals Co. 79
(a)3,700 Commnet Cellular, Inc. 132
20,600 Compaq Computer Corp. 1,163
</TABLE>
<PAGE> 322
MS GLOBAL EQUITY ALLOCATION FUND - VKAC GLOBAL EQUITY FUND
PROFORMA COMBINED PORTFOLIO OF INVESTMENTS (Continued)
December 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares Value (000)
<S> <C>
United States 1,700 Compass Bancshares, Inc. $ 74
(Continued) (a)2,200 CompUSA, Inc. 68
15,600 Computer Associates International, Inc. 825
(a)2,700 Computer Management Sciences 52
4,000 Conagra, Inc. 131
(a)2,200 Concord EFS, Inc. 55
4,300 Conseco, Inc. 195
8,700 Consolidated Edison Co. of New York, Inc. 357
1,500 Consolidated Papers, Inc. 80
(a)2,200 Consolidated Stores Corp. 97
(a)1,500 Continental Airlines, 'B' 72
(a)1,200 Cooper Cameron Corp. 73
5,200 Cooper Industries, Inc. 255
4,800 Cooper Tire & Rubber Co. 117
3,800 Coors (Adolph) 'B' 126
3,600 Corestates Financial Corp. 288
(a)2,700 Corporate Express, Inc. 35
2,900 Countrywide Credit Industries, Inc. 124
(a)3,200 Covance, Inc. 64
8,500 CPC International, Inc. 915
8,300 C.R. Bard, Inc. 260
3,200 Crompton & Knowles Corp. 85
200 Crown Cork & Seal, Inc. 10
11,100 CSX Corp. 599
300 Cummins Engine 18
6,100 Cyprus Amaz Minerals Co. 94
(a)1,700 Cytec Industries, Inc. 80
2,000 Dallas Semiconductor Corp. 82
2,400 Dana Corp. 114
2,200 Danaher Corp. 139
14,600 Darden Restaurants, Inc. 183
15,200 Dayton Hudson Corp. 1,026
2,200 Dean Foods Co. 131
16,100 Deere & Co. 939
(a)3,800 Dell Computer Corp. 319
5,500 Delta Airlines Inc. 654
12,100 Deluxe Corp. 417
1,800 Deposit Guaranty Corp. 102
3,800 Dime Bancorp, Inc. 115
1,400 Dow Chemical Co. 142
(a)2,500 Dress Barn, Inc. 71
17,000 Dresser Industries, Inc. 713
1,400 DTE Energy Co. 49
31,700 Du Pont (EI) de Nemours Co. 1,904
25,100 Dun & Bradstreet Corp. 777
(a)1,500 Dura Pharmaceuticals, Inc. 69
10,400 Eastern Entreprises 468
3,100 Eastman Chemical Co. 185
</TABLE>
<PAGE> 323
MS GLOBAL EQUITY ALLOCATION FUND - VKAC GLOBAL EQUITY FUND
PROFORMA COMBINED PORTFOLIO OF INVESTMENTS (Continued)
December 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares Value (000)
<S> <C>
United States 10,000 Eastman Kodak Co. $ 608
(Continued) 2,200 Echlin, Inc. 80
2,000 Ecolab, Inc. 111
4,600 EG&G, Inc. 96
(a)1,900 Electronic Arts, Inc. 72
(a)1,700 Electronics for Imaging, Inc. 28
15,400 Eli Lilly & Co. 1,072
(a)7,100 EMC Corp. 195
6,900 Emerson Electric Co. 389
5,200 Enova Corp. 141
5,400 Enron Corp. 224
35,500 Entergy Corp. 1,063
(a)1,000 Etec Systems, Inc. 46
3,000 E.W. Blanch Holdings, Inc. 103
36,200 Exxon Corp. 2,215
1,800 Falcon Drilling Co., Inc. 63
21,100 Fannie Mae 1,204
2,500 Family Dollar Stores, Inc. 73
1,500 Fastenal Co. 57
(a)1,700 Federal Express Corp. 104
2,200 Federal Signal Corp. 48
1,900 FINOVA Group, Inc. 94
2,200 First American Corp., Tennessee 109
8,300 First Chicago Corp. 693
1,300 First Commerce Corp. 87
2,625 First Commercial Corp. 154
1,700 First Hawaiian, Inc. 68
2,200 First Midwest Bancorp, Inc. 96
2,400 First Security Corp. 101
24,240 First Union Corp. (N.C.) 1,242
2,900 First Virginia Banks, Inc. 150
100 Firstenergy Corp. 3
1,200 Firstmerit Corp. 34
(a)2,200 FISERV, Inc. 108
12,800 Fleet Financial Group, Inc. 959
10,400 Fleming Cos., Inc. 140
6,600 Fluor Corp. 247
(a)1,200 FMC Corp. 81
38,100 Ford Motor Co. 1,855
(a)2,000 Forest Laboratories, Inc. 'A' 99
1,400 Fort James Corp. 54
7,600 Fortune Brands, Inc. 282
(a)2,200 Fred Meyer, Inc. 80
1,600 Freddie Mac 67
11,100 Freeport McMoran Copper Corp., 'B' 175
(a)3,000 Fruit of the Loom 77
5,000 Gannett Co., Inc. 309
4,950 Gap, Inc. 175
</TABLE>
<PAGE> 324
MS GLOBAL EQUITY ALLOCATION FUND - VKAC GLOBAL EQUITY FUND
PROFORMA COMBINED PORTFOLIO OF INVESTMENTS (Continued)
December 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares Value (000)
<S> <C>
United States 700 Gaylord Entertainment Co. $ 22
(Continued) 1,000 General Dynamics Corp. 86
72,200 General Electric Co. 5,298
3,800 General Mills, Inc. 272
20,600 General Motors Corp. 1,249
2,200 General RE Corp. 466
3,600 General Signal Corp. 152
(a)1,000 Genesis Health Ventures, Inc. 26
2,200 Genzyme Corp. 61
3,000 Giant Food, Inc. 'A' 101
3,300 Goodyear Tire & Rubber Co. 210
2,600 GPU, Inc. 110
9,000 Great Atlantic & Pacific Tea Co. 267
5,700 Great Lakes Chemical Corp. 256
19,800 Green Tree Financial Corp. 519
27,200 GTE Corp. 1,421
(a)1,200 GTECH Holdings Corp. 38
(a)3,200 Gulfstream Aerospace Corp. 94
2,800 Halliburton Co. 145
2,400 Hannaford Brothers Co. 104
4,100 Harleysville Group, Inc. 98
1,500 Harman International Industries, Inc. 64
1,500 Harnischfeger Industries, Inc. 53
(a)3,000 Harrah's Entertainment, Inc. 57
17,000 Harris Corp. 780
3,200 Harsco Corp. 138
2,200 Harte-Hanks Communications, Inc. 82
11,100 Hartford Financial Services Group 1,039
200 HBO & Co. 10
13,000 Hercules, Inc. 651
1,500 Herman Miller, Inc. 82
1,900 Hershey Foods Corp. 118
31,700 Hewlett-Packard Co. 1,981
6,100 Hibernia Corp., 'A' 115
5,900 Hilton Hotels Corp. 176
6,400 H.J. Heinz Co. 325
25,100 Home Depot, Inc. 1,478
3,300 Honeywell, Inc. 226
5,400 Houston Industries, Inc. 144
200 H&R Block, Inc. 9
1,570 Huntington Bancshares, Inc. 57
1,500 Illinois Central Corp. 51
2,500 IMCO Recycling, Inc. 40
5,650 Imperial Credit Mortgage Holdings 101
5,200 Ingersoll-Rand Co. 211
2,900 INMC Mortgage Holdings, Inc. 68
1,800 Integrated Health Services, Inc. 56
41,000 Intel Corp. 2,881
</TABLE>
<PAGE> 325
MS GLOBAL EQUITY ALLOCATION FUND - VKAC GLOBAL EQUITY FUND
PROFORMA COMBINED PORTFOLIO OF INVESTMENTS (Continued)
December 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares Value (000)
<S> <C>
United States (a)3,100 Interim Services, Inc. $ 80
(Continued) 26,800 International Business Machines Corp. 2,803
7,300 International Flavors & Fragrances, Inc. 376
2,900 International Game Technology 73
(a)3,100 International Rectifier Corp. 37
4,000 Interpublic Group of Cos., Inc. 199
2,400 Interstate Bakeries Corp. 90
2,500 Invacare Corp. 54
(a)5,000 Iomega Corp. 62
(a)3,200 Ionics, Inc. 125
13,000 ITT Industries, Inc. 408
(a)1,500 Jacobs Engineering Group, Inc. 38
7,100 J.C. Penney Co., Inc. 428
1,400 Jefferson-Pilot Corp. 109
5,300 John H. Harland Co. 111
3,600 Johns Manville Corp. 36
32,900 Johnson & Johnson 2,168
14,000 Johnson Controls, Inc. 669
(a)1,300 Jones Apparel Group, Inc. 56
17,200 Jostens, Inc. 397
3,800 Kansas City Southern Industries, Inc. 121
(a)2,100 Kemet Corp. 41
1,700 Kennametal, Inc. 88
(a)2,000 Kent Electronics Corp. 50
500 Kerr-McGee Corp. 32
11,800 KeyCorp. 836
1,200 Keyspan Energy Corp. 44
5,800 Kimball International, Inc., 'B' 107
13,700 Kimberly-Clark Corp. 676
2,000 King World Productions, Inc. 116
(a)2,200 KLA-Tencor Corp. 85
2,000 KN Energy, Inc. 108
1,200 Knight Ridder, Inc. 62
(a)2,500 Komag, Inc. 37
(a)1,800 LCI International, Inc. 55
(a)1,700 Lear Corp. 81
(a)2,200 Lexmark International Group, Inc. 84
3,400 LG&E Energy Corp. 84
1,950 Liberty Financial Cos., Inc. 74
5,900 Lincoln National Corp. 461
(a)1,800 Littlefuse, Inc. 45
9,000 Lockheed Martin Corp. 887
8,100 Loews Corp. 860
2,400 Long Island Lighting Co. 72
1,900 Longs Drug Stores, Inc. 61
2,000 Louisiana-Pacific Corp. 38
10,900 Lowe's Cos., Inc. 520
2,000 Lubrizol Corp. 74
</TABLE>
<PAGE> 326
MS GLOBAL EQUITY ALLOCATION FUND - VKAC GLOBAL EQUITY FUND
PROFORMA COMBINED PORTFOLIO OF INVESTMENTS (Continued)
December 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares Value (000)
<S> <C>
United States 4,500 Lucent Technologies, Inc. $ 359
(Continued) (a)2,000 Mac Frugals Bargains Close-Outs, Inc. 82
2,500 Magna Group, Inc. 114
2,900 M.A. Hanna Co. 73
6,600 Mallinckrodt, Inc. 251
22,600 Manor Care, Inc. 791
(a)500 Markel Corp. 78
500 Marriott International, Inc. 35
2,000 Martin Marietta Corp. 73
6,600 May Department Stores Co. 348
2,200 Maytag Corp. 82
7,100 MBIA, Inc. 474
7,100 MBNA Corp. 194
3,000 McClatchy Newspapers, Inc. 82
3,600 McCormick & Co., Inc. 101
25,300 McDonald's Corp. 1,209
1,200 McGraw-Hill Cos., Inc. 89
2,900 MCN Corp. 117
3,000 Medical Assurance, Inc. 84
3,800 Medtronic, Inc. 199
9,000 Mellon Bank Corp. 546
1,200 Mercantile Stores Co., Inc. 73
27,300 Merck & Co., Inc. 2,902
4,200 Meredith Corp. 150
2,367 Meritor Automotive, Inc. 50
17,800 Merrill Lynch & Co., Inc. 1,299
(a)1,900 Microchip Technology, Inc. 57
(a)25,800 Microsoft Corp. 3,335
3,400 Millenium Chemicals, Inc. 80
2,100 Millipore Corp. 71
1,300 Minerals Technologies, Inc. 59
5,500 Minnesota Mining & Manufacturing Co. 451
23,000 Mobil Corp. 1,660
2,850 Molex, Inc. 92
6,400 Monsanto 269
2,900 Montana Power Co. 92
2,400 Morgan (J.P.) & Co., Inc. 271
5,900 Morton International, Inc. 203
13,700 Motorola, Inc. 782
(a)1,300 MSC Industrial Direct Co., Inc. 'A' 55
1,900 Murphy Oil Corp. 103
3,400 Mylan Laboratories, Inc. 71
(a)3,600 Nabors Industries, Inc. 113
4,200 Nalco Chemical Co. 166
3,100 National City Corp. 204
3,400 National Commerce Bancorp. 120
1,800 National Fuel Gas Co. 88
1,500 National Service Industries, Inc. 74
</TABLE>
<PAGE> 327
MS GLOBAL EQUITY ALLOCATION FUND - VKAC GLOBAL EQUITY FUND
PROFORMA COMBINED PORTFOLIO OF INVESTMENTS (Continued)
December 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares Value (000)
<S> <C>
United States 15,500 NationsBank Corp. $ 944
(Continued) (a)2,900 NCS HealthCare, Inc. 76
4,600 New Century Energies, Inc. 221
2,500 New England Electric System 107
2,400 New Jersey Resources Corp. 96
3,900 New York State Electric & Gas Corp. 138
1,200 New York Times Co., 'A' 79
1,400 Newell Co. 60
500 Nicor, Inc. 21
(a)1,900 Nine West Group, Inc. 49
1,300 Noble Affiliates, Inc. 46
(a)2,500 Noble Drilling Corp. 77
1,500 Nordson Corp. 69
1,600 Norfolk Southern Corp. 49
2,200 Norrell Corp. 44
2,900 Northern Telecom Ltd. 258
1,200 Northrop Grumman Corp. 138
9,400 Norwest Corp. 363
(a)2,700 Novacare Corp. 35
(a)12,300 Novell, Inc. 92
(a)1,500 Novellus Systems, Inc. 48
(a)5,900 Office Depot, Inc. 141
(a)5,500 OfficeMax, Inc. 78
1,800 Ohio Casualty Corp. 80
4,000 Old Kent Financial Corp. 159
5,100 Olsten Corp. 77
1,500 OM Group, Inc. 55
3,000 Omnicare, Inc. 93
3,100 One Valley Bancorp., Inc. 120
(a)9,900 Oracle System Corp. 221
(a)2,400 O'Reilly Automotive, Inc. 63
2,400 Oregon Steel Mills, Inc. 51
2,000 Orion Capital Corp. 93
(a)3,100 Oryx Energy Co. 79
3,400 Pacific Century Financial Corp. 84
11,100 Pacific Enterprises 418
5,900 Pall Corp. 122
1,700 Parker-Hannifin Corp. 78
(a)1,500 Patterson Dental Co. 68
(a)1,300 Payless ShoeSource, Inc. 87
7,800 Peco Energy Co. 189
1,700 Pennziol Co. 114
2,300 Peoples Energy Corp. 91
3,500 Pep Boys Manny, Moe & Jack 84
16,600 PepsiCo, Inc. 606
2,100 Perkin-Elmer Corp. 149
(a)1,700 Personnel Group of America, Inc. 56
29,600 Pfizer, Inc. 2,208
</TABLE>
<PAGE> 328
MS GLOBAL EQUITY ALLOCATION FUND - VKAC GLOBAL EQUITY FUND
PROFORMA COMBINED PORTFOLIO OF INVESTMENTS (Continued)
December 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares Value (000)
<S> <C>
United States 2,600 PG&E Corp. $ 79
(Continued) (a)5,876 PharMerica, Inc. 215
5,204 Pharmacia & Upjohn, Inc. 54
19,900 Phelps Dodge Corp. 1,240
76,200 Philip Morris Cos., Inc. 3,454
17,300 Phillips Petroleum Co. 841
3,600 Phillips-Van Heusen Corp. 51
(a)2,700 Photronics, Inc. 65
(a)2,200 PhyCor, Inc. 59
3,000 Pier 1 Imports, Inc. 68
2,500 Pinnacle West Capital Corp. 106
1,700 Pioneer Natural Resources Co. 49
1,200 PMI Group, Inc. 87
5,900 PNC Bank Corp. 337
2,100 PPG Industries, Inc. 120
1,500 Pogo Producing Co. 44
1,700 Polaroid Corp. 83
(a)1,500 Policy Management Systems Corp. 104
4,100 Potomac Electric Power Co. 106
16,500 PP&L Resources, Inc. 395
1,500 Precision Castparts Corp. 90
37,000 Procter & Gamble Co. 2,954
(a)2,200 Profitt's Inc. 63
(a)6,065 Promus Company, Inc. 255
1,500 Protective Life Corp. 90
1,500 Provident Bankshares Corp. 96
1,800 Provident Companies, Inc. 70
40,200 Public Service Enterprise Group, Inc. 1,274
3,200 Puget Sound Energy, Inc. 97
1,200 Quanex Corp. 34
(a)3,400 Quantum Corp. 68
2,200 Queens County Bancorp, Inc. 89
(a)2,200 Quintiles Transnational Corp. 84
12,800 Raychem Corp. 551
1,500 Rayonier, Inc. WI 64
1,312 Raytheon Co., 'A' 65
13,300 Raytheon Co., 'B' 672
3,100 Readers Digest Association, Inc., 'A' 73
(a)1,526 R & B FALCON CORP 53
1,000 Reading & Bates Corp. 41
(a)2,400 Reebok International, Ltd. 69
2,000 Reliastar Financial Corp. 82
(a)1,800 Renal Care Group, Inc. 58
3,300 Republic New York Corp. 377
1,400 Rite Aid Corp. 82
2,700 RLI Corp. 134
(a)2,900 Robert Half International, Inc. 116
2,900 Rochester Gas & Electric Corp. 99
</TABLE>
<PAGE> 329
MS GLOBAL EQUITY ALLOCATION FUND - VKAC GLOBAL EQUITY FUND
PROFORMA COMBINED PORTFOLIO OF INVESTMENTS (Continued)
December 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares Value (000)
<S> <C>
United States 9,500 Rockwell International Corp. $ 496
(Continued) 2,400 Rohm & Haas Co. 230
(a)2,000 Rowan Cos., Inc. 61
8,275 RPM, Inc. 126
(a)1,500 R.P. Scherer Corp. 92
2,300 R.R. Donnelly & Sons Co. 86
25,000 Royal Dutch Petroleum ADR (Netherlands) 1,355
1,100 Russell Corp. 29
1,800 Ryder Systems, Inc. 59
1,200 SAFECO Corp. 59
(a)3,200 Safeguard Scientifics, Inc. 100
(a) 700 Samina Corp. 47
26,300 Sara Lee Corp. 1,481
17,499 SBC Communications, Inc. 1,282
3,100 SCANA Corp. 93
2,800 Schering-Plough Corp. 174
(a)1,500 Scholastic Corp. 56
10,600 Scientific-Atlanta, Inc. 178
(a)2,200 SCI Systems, Inc. 96
(a)1,700 Sealed Air Corp. 105
21,500 Sears, Roebuck & Co. 973
6,800 Service Corp. International 251
500 Shared Medical Systems Corp. 33
3,600 Shaw Industries, Inc. 42
(a)1,800 Sierra Health Services, Inc. 61
(a)1,000 Smith International, Inc. 61
3,000 Snap-On, Inc. 131
1,600 Sonat, Inc. 73
3,000 Sonoco Products Co. 104
8,900 Southern Co. 230
7,800 Sprint Corp. 457
2,900 St Paul Cos., Inc. 238
1,900 St. John Knits, Inc. 76
(a)3,000 St. Jude Medical, Inc. 92
2,400 St. Paul Bancorp, Inc. 63
(a)2,200 Starbucks Corp. 84
(a)3,200 Steel Dynamics, Inc. 51
(a)1,300 Steris Corp. 63
(a)2,000 Sterling Commerce, Inc. 77
(a)2,400 Sterling Software, Inc. 98
2,200 Stewart Enterprises, Inc. 'A' 103
1,500 Storage Technology Corp. 93
15,500 Sun Co., Inc. 653
(a)19,900 Sun Microsystems, Inc. 795
1,500 Sunbeam Corp. 63
1,233 Sunburst Hospitality, Corp. 12
(a)2,400 SunGuard Data Systems, Inc. 74
(a)3,800 Sunrise Medical, Inc. 59
</TABLE>
<PAGE> 330
MS GLOBAL EQUITY ALLOCATION FUND - VKAC GLOBAL EQUITY FUND
PROFORMA COMBINED PORTFOLIO OF INVESTMENTS (Continued)
December 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares Value (000)
<S> <C>
United States 3,600 Superior Industries International $ 97
(Continued) 23,800 SUPERVALU Inc. 998
(a)3,400 Sybase, Inc. 45
(a)1,900 Sybron International Corp. 89
(a)5,100 Symantec Corp. 112
1,700 Symbol Technologies, Inc. 64
(a)1,700 Synopsys, Inc. 61
900 Sysco Corp. 41
6,600 Tandy Corp. 255
(a)1,500 Tech Data Corp. 58
8,300 Tektronix, Inc. 329
5,566 TCI Ventures Group 'A' 158
2,200 Telephone & Data Systems, Inc. 102
11,100 Texaco, Inc. 605
7,600 Texas Instruments, Inc. 342
11,100 Texas Utilities Co. 461
3,700 The Limited, Inc. 94
1,200 Thiokol Corp. 98
2,800 Thomas & Betts Corp. 132
(a)9,700 3Com Corp. 339
(a)3,400 360 Communications Co. 69
1,500 Tidewater, Inc. 83
1,500 TIG Holdings, Inc. 50
13,200 TJX Companies, Inc. 454
3,800 Torchmark Corp. 160
1,500 Toro Co. 64
1,500 T. Rowe Price Associates, Inc. 94
2,000 Trans Financial, Inc. 78
1,900 Transamerica Corp. 202
1,500 Transatlantic Holdings, Inc. 107
26,800 Travelers, Inc. 1,445
(a)2,700 Triad Guaranty, Inc. 78
1,700 Trinity Industries, Inc. 76
5,000 TRW, Inc. 267
7,500 Tupperware Corp. 209
14,000 Tyco International, Ltd. 632
(a)1,300 Ucar International, Inc. 52
2,500 Ultramar Diamond Shamrock Corp. 80
24,100 Unicom Corp. 742
2,200 Unifi, Inc. 90
4,000 Union Carbide Corp. 172
1,400 Union Pacific Corp. 87
(a)6,200 Unisys Corp. 86
2,400 United Asset Management Co. 59
2,200 United Cos. Financial Corp. 34
2,200 United Illuminating Co. 101
7,100 United Technologies Corp. 518
(a)1,900 Universal Health Services, Inc. 96
</TABLE>
<PAGE> 331
MS GLOBAL EQUITY ALLOCATION FUND - VKAC GLOBAL EQUITY FUND
PROFORMA COMBINED PORTFOLIO OF INVESTMENTS (Continued)
December 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares Value (000)
<S> <C>
United States (a)1,700 U.S. Airways Group, Inc. $ 106
(Continued) 1,900 U.S. Bancorp. 213
(a)2,000 U.S. Cellular Corp. 62
(a)2,900 U.S. Filter Corp. 87
1,500 U.S. Industries, Inc. 45
9,200 U.S. Surgical Corp. 270
12,500 U.S. West Communications Group 565
12,600 USF&G Corp. 278
(a)1,700 USG Corp. 83
17,300 UST, Inc. 640
23,400 USX-Marathon Group 791
47,800 USX-U.S. Steel Group, Inc. 1,495
2,900 UtliCorp. United, Inc. 113
2,400 Valero Energy Corp. 75
2,200 Varian Associates, Inc. 111
(a)2,200 Vencor, Inc. 54
2,800 VF Corp. 129
(a)3,200 Viking Office Products, Inc. 70
2,000 Vintage Petroleum, Inc. 38
3,700 Vishay Intertechnology, Inc. 87
1,500 Vulcan Materials Co. 153
1,386 Wachovia Corp. 112
58,000 Wal-Mart Stores, Inc. 2,288
3,800 Walgreen Co. 119
2,200 Wallace Computer Services, Inc. 86
7,800 Walt Disney Co. 774
3,300 Warner-Lambert Co. 410
400 Waste Management, Inc. 11
(a)2,000 Weatherford Enterra, Inc. 88
1,000 Webster Financial Corp. 67
9,900 Wendy's International, Inc. 238
1,800 Westamerica Bancorp. 184
(a)2,100 Western Digital Corp. 34
1,900 Western National Corp. 56
27,300 Whitman Corp. 712
1,300 Wicor, Inc. 60
400 Williams Cos., Inc. 11
(a)2,200 Wisconsin Central Transportation Corp. 51
2,000 Witco Corp. 82
(a)200 Wordcom, Inc. 6
3,500 Worthington Industries, Inc. 58
4,200 WPS Resources Corp. 142
2,200 W.R. Berkley Corp. 97
7,800 Xerox Corp. 576
2,200 York International Corp. 87
2,200 Zions Bancorp. 100
--------------
193,010
--------------
</TABLE>
<PAGE> 332
MS GLOBAL EQUITY ALLOCATION FUND - VKAC GLOBAL EQUITY FUND
PROFORMA COMBINED PORTFOLIO OF INVESTMENTS (Continued)
December 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares Value (000)
<S> <C>
--------------
Total Common Stocks $ 418,064
--------------
Preferred Stocks (0.3%)
Austria (0.1%)
3,000 Bank Austria AG 143
2,528 Bank Austria AG 112
300 Bau Holding AG 14
1,100 Creditanstalt Bank 62
200 EA-Generali AG 22
--------------
353
--------------
Germany (0.2%)
10,550 RWE AG 446
1,926 SAP AG 630
--------------
1,076
--------------
Italy (0.0%)
81,550 Fiat S.p.A. 124
--------------
Total Preferred Stocks 1,553
--------------
Investment Companies (1.7%)
United States (1.7%)
(b)405,900 Latin American Discovery Fund, Inc. 7,281
(b)70,000 Morgan Stanley Africa Investment Fund, Inc. 805
(b)124,800 Morgan Stanley Asia Pacific Fund, Inc. 928
--------------
Total Investment Companies 9,014
--------------
Rights (0.0%)
Spain (0.0%)
(a)264 ACS S.A., expiring 1/11/98 -
--------------
Total Rights -
--------------
Warrants (0.0%)
France (0.0%)
(a)320 Casino Guichard Perrachon, expiring 12/31/99 7
(a)5,623 Cie Generale des Eaux, expiring 5/2/01 4
(a)5 Sodexho S.A., expiring 6/7/04 1
--------------
12
--------------
Hong Kong (0.0%)
(a)585 Peregine Investment Holdings Ltd., expiring 5/15/98 -
Italy (0.0%)
(a)2,313 La Rinascente S.p.A., expiring 12/31/99 1
(a)2,891 La Rinascente S.p.A., expiring 12/31/99 3
--------------
4
--------------
Switzerland (0.0%)
(a)45 Roche Holdings, expiring 5/5/98 5
</TABLE>
<PAGE> 333
MS GLOBAL EQUITY ALLOCATION FUND - VKAC GLOBAL EQUITY FUND
PROFORMA COMBINED PORTFOLIO OF INVESTMENTS (Continued)
December 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares Value (000)
<S> <C>
--------------
Total Warrants $ 21
--------------
Covertible 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
53 Simco S.A. 3.25%, 1/1/06 46
1 Sodexho S.A. 6.00%, 6/7/04 4
--------------
103
--------------
Italy (0.0%)
ITL 18,504 Mediobanca S.p.A. 4.50%, 1/1/00 10
2,125 Mediobanca S.p.A. 6.00%, 12/31/02 2
--------------
12
--------------
--------------
Total Covertible Debentures 115
--------------
Total Foreign & U.S. Securities (82.8%) (Cost $390,044) 428,767
--------------
Repurchase Agreements (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, 5.250%, due
1/31/01 32,681
46,132 State Street Bank and Trust, 5.00%, dated 12/31/97 due
1/2/98, to be repurchased at $46,145, collateralized
by $46,710 U.S. Treasury Notes, 5.625%, due
10/31/99 46,132
--------------
Total Repurchase Agreements 78,813
--------------
Foreign Currency (0.1%)
AUD 28 Australian Dollar 18
ATS 5 Austrian Schilling -
GBP 6 British Pound 9
CAD 77 Canadian Dollar 54
DKK 5 Danish Krone -
DEM 90 German Mark 50
HUF 1,078 Hungarian Forint 5
IDR 99,571 Indonesian Rupiah 18
ITL 348,263 Italian Lira 197
JPY 11,260 Japanese Yen 86
MYR 12 Malasian Ringit 3
NLG 31 Netherlands Guilder 15
PTE 1,397 Portuguese Escudo 8
SGD 49 Singapore Dollar 29
ESP 6,353 Spanish Peseta 42
SEK 209 Swedish Krona 26
THB 1,717 Thailand Baht 36
--------------
Total Foreign Currency 596
--------------
</TABLE>
<PAGE> 334
MS GLOBAL EQUITY ALLOCATION FUND - VKAC GLOBAL EQUITY FUND
PROFORMA COMBINED PORTFOLIO OF INVESTMENTS (Continued)
December 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares Value (000)
<S> <C>
Other Assets in Excess of Liabilities (1.8%) $ 9,535
--------------
Net Assets (100%) $ 517,711
==============
</TABLE>
(a)- Non-income producing security.
(b)- The fund is advised by an affiliate.
ADR - American Depositary Receipt.
NCS - Non Convertible Shares.
<PAGE> 335
PART C
MORGAN STANLEY FUND, INC.
OTHER INFORMATION
ITEM 15. INDEMNIFICATION
Reference is made to Article SEVEN of the Registrant's Articles of
Incorporation. Insofar as indemnification for liability arising under the
Securities Act of 1933, as amended (the "1933 Act"), may be permitted to
directors, officers and controlling persons of the Registrant pursuant to the
foregoing provisions, or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission (the "SEC") such
indemnification is against public policy as expressed in the 1933 Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the 1933 Act and will be governed by the final
adjudication of such issue.
ITEM 16. EXHIBITS
<TABLE>
<S> <C> <C>
1 (a) Articles of Amendment and Restatement. (1)
(b) Articles Supplementary (adding Registrant's High Yield, U.S.
Real Estate and Japanese Equity Funds) to the Amended and
Restated Articles of Incorporation.(2)
(c) Articles Supplementary (adding Registrant's Government
Obligations Money Market and Tax-Free Money Market Funds) to
the Amended and Restated Articles of Incorporation.(2)
(d) Articles Supplementary (adding Registrant's Global Equity,
Emerging Market Debt, Mid Cap Growth, Equity Growth and
Value Funds) to the Amended and Restated Articles of
Incorporation.(3)
2 Amended and Restated By-Laws.(1)
3 Not applicable.
4 Form of Agreement and Plan of Reorganization for Van Kampen
American Capital Global Equity Fund and Morgan Stanley
Global Equity Allocation Fund.+
5 Form of Specimen Securities for shares of the Money Market
Fund ("Money Market Specimen"). The Specimen Securities for
the remaining Funds have been omitted because they are
substantially identical to the Money Market Specimen and
differ from the Money Market Specimen only in references to
the Fund and amount of authorized shares to which the
Specimen relates.(5)
6 (a) Form of Investment Advisory Agreement between Registrant and
Van Kampen American Capital Investment Advisory Corp.(5)
(b) Form of Investment Sub-Advisory Agreement between Van Kampen
American Capital Investment Advisory Corp. and Morgan
Stanley Asset Management Inc.(5)
(c) Form of Investment Sub-Advisory Agreement between Van Kampen
American Capital Investment Advisory Corp. and Miller
Anderson & Sherrerd, LLP.(5)
7 Distribution Agreement between Registrant and Van Kampen
American Capital Distributors, Inc.(3)
8 Not applicable.
9 (a) Registrant's Mutual Fund Custody Agreement with the Chase
Manhattan Bank, N.A.(4)
(b) Registrant's Global Custody Agreement with Morgan Stanley
Trust Company.(4)
</TABLE>
C-1
<PAGE> 336
<TABLE>
(c) Registrant's Custody Agreement with PNC Bank, N.A. (with respect to the Money Market
Funds).(2)
<S> <C> <C>
10 (a) Amended and Restated Plan of Distribution Pursuant to Rule 12b-1 for shares of the
Money Market Fund ("Money Market Plan"). The following Rule 12b-1 distribution plan
has been omitted because it is substantially identical to the Money Market Plan and
differs from the Money Market Plan only in references to the Fund to which the plan
relates: Government Obligations Money Market Fund.(3)
(b) Form of Plan of Distribution Pursuant to Rule 12b-1 for shares of the Tax-Free Money
Market Fund.(3)
(c) Form of Plan of Distribution Pursuant to Rule 12b-1 for Class A shares (the "Class A
Plan") of the Global Fixed Income Fund. The following plans have been omitted
because they are substantially identical to the Class A Plan and differ from the
Class A Plan only in references to the Fund to which the plan relates: Asian Growth,
Small Cap Value Equity (currently the American Value Fund), Worldwide High Income,
Emerging Markets, Latin American, Global Equity Allocation, High Yield, U.S. Real
Estate, International Magnum and Aggressive Equity Funds.(3)
(d) Form of Plan of Distribution Pursuant to Rule 12b-1 for Class A shares (the "Class A
Plan") of the Japanese Equity Fund. The following plans have been omitted because
they are substantially identical to the Class A Plan and differ from the Class A
Plan only in references to the Fund to which the plan relates: European Equity,
Growth and Income, Global Equity, Emerging Markets Debt, Mid Cap Growth, Equity
Growth and Value Funds.(3)
(e) Amended and Restated Plan of Distribution Pursuant to Rule 12b-1 for Class B and
Class C shares (the "Class B and Class C Plan") of the Global Fixed Income, Asian
Growth, Small Cap Value Equity (currently the American Value Fund), Worldwide High
Income, Emerging Markets, Latin American, Global Equity Allocation, High Yield, U.S.
Real Estate, International Magnum, Aggressive Equity, Global Equity, Emerging
Markets Debt, Mid Cap Growth, Equity Growth and Value Funds.(3)
(f) Form of Plan of Distribution Pursuant to Rule 12b-1 for Class B and Class C shares
(the "Class B and Class C Plan") relating to the Japanese Equity, European Equity
and Growth and Income Funds.(3)
(g) Registrant's Rule 18f-3 Multiple Class Plan.(3)
11 Opinion of Counsel.+
12 Tax Opinion of Counsel.+
13 (a) Administration Agreement between Registrant and Morgan Stanley Asset Management
Inc.(4) and as amended by Addendum to such Agreement. (1)
(b) Form of Assignment and Assumption Agreement (Administration Agreement) between Van
Kampen American Capital Investment Advisory Corp. and Morgan Stanley Asset
Management Inc.(5)
(c) Administration Agreement between Registrant and Miller Anderson & Sherrerd, LLP.(3)
(d) Form of Assignment and Assumption Agreement (Administration Agreement) between Van
Kampen American Capital Investment Advisory Corp. and Miller Anderson & Sherrerd,
LLP.(5)
(e) Sub-Administration Agreement between Morgan Stanley Asset Management Inc. and The
Chase Manhattan Bank.(3)
(f) Form of Assignment and Assumption Agreement (Sub-Administration Agreement) between
Van Kampen American Capital Investment Advisory Corp. and Morgan Stanley Asset
Management Inc.(5)
(g) Sub-Administration Agreement between Miller Anderson & Sherrerd, LLP and The Chase
Manhattan Bank.(3)
</TABLE>
C-2
<PAGE> 337
<TABLE>
(h) Form of Assignment and Assumption Agreement (Sub-Administration Agreement) between Van
Kampen American Capital Investment Advisory Corp. and Miller Anderson & Sherrerd,
LLP.(5)
<S> <C> <C>
(i) Amended Schedule A and Amended Administration Agreement between Registrant and Morgan
Stanley Asset Management Inc. with respect to the Asian Growth Fund and Small Cap
Value Equity Fund (currently the American Value Fund).(4)
(j) Form of Sub-Transfer Agency Agreement between Van Kampen American Capital Investment
Advisory Corp. and PFPC, Inc.(5)
(k) Sub-Transfer Agency Agreement between Morgan Stanley Asset Management Inc. and ACCESS
Investor Services, Inc.(3)
(l) Form of Assignment and Assumption Agreement (Sub-Transfer Agency Agreement) between
Van Kampen American Capital Investment Advisory Corp. and Morgan Stanley Asset
Management Inc.(5)
(m) Sub-Transfer Agency Agreement between Miller Anderson & Sherrerd, LLP and ACCESS
Investor Services, Inc.(3)
(n) Form of Assignment and Assumption Agreement (Sub-Transfer Agency Agreement) between
Van Kampen American Capital Investment Advisory Corp. and Miller Anderson & Sherrerd,
LLP.(5)
14 Consent of Price Waterhouse LLP+
15 Not Applicable.
16 Powers of Attorney.(5)
17 (a) Form of Proxy Card.*
17 (b) Prospectus of Van Kampen American Capital Global Equity Fund.+
</TABLE>
- -------------------------
(1) Incorporated herein by reference to Post-Effective Amendment No. 10 to
Registrant's Registration Statement on Form N-1A (File Nos. 33-51294 and
811-7140), as filed with the SEC via EDGAR on October 4, 1995.
(2) Incorporated herein by reference to Post-Effective Amendment No. 16 to
Registrant's Registration Statement on Form N-1A (File Nos. 33-51294 and
811-7140), as filed with the SEC via EDGAR on October 18, 1996.
(3) Incorporated herein by reference to Post-Effective Amendment No. 18 to
Registrant's Registration Statement on Form N-1A (File Nos. 33-51294 and
811-7140), as filed with the SEC via EDGAR on December 31, 1996.
(4) Incorporated herein by reference to Post-Effective Amendment No. 11 to
Registrant's Registration Statement on Form N-1A (File Nos. 33-51294 and
811-7140), as filed with the SEC via EDGAR on October 30, 1995.
(5) Incorporated herein by reference to Post-Effective Amendment No. 20 to
Registrant's Registration statement on Form N-1A (File Nos. 33-51294 and
811-7140), as filed with the SEC via EDGAR on August 29, 1997.
* Filed herewith.
+ To be filed by amendment.
ITEM 17. UNDERTAKINGS
(1) The undersigned registrant agrees that prior to any public reoffering
of the securities registered through the use of a prospectus which is a part of
this registration statement by any person or party who is deemed to be an
underwriter within the meaning of Rule 145(c) of the Securities Act, the
reoffering
C-3
<PAGE> 338
prospectus will contain the information called for by the applicable
registration form for reofferings by persons who may be deemed underwriters, in
addition to the information called for by the other items of the applicable
form.
(2) The undersigned registrant agrees that every prospectus that is filed
under paragraph (1) above will be filed as a part of an amendment to the
registration statement and will not be used until the amendment is effective,
and that, in determining any liability under the 1933 Act, each post-effective
amendment shall be deemed to be a new registration statement for the securities
offered therein, and the offering of the securities at that time shall be deemed
to be the initial bona fide offering of them.
C-4
<PAGE> 339
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Oakbrook
Terrace and State of Illinois, on February 23, 1998.
MORGAN STANLEY FUND, INC.
By: /s/ RONALD A. NYBERG
------------------------------------
Ronald A. Nyberg
Vice President and Secretary
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment to the Registration Statement has been signed below by the
following persons in the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ WAYNE W. WHALEN* Director (Chairman)
- --------------------------------------------
Wayne W. Whalen
/s/ J. MILES BRANAGAN* Director
- --------------------------------------------
J. Miles Branagan
/s/ RICHARD M. DEMARTINI* Director
- --------------------------------------------
Richard M. DeMartini
/s/ LINDA HUTTON HEAGY* Director
- --------------------------------------------
Linda Hutton Heagy
/s/ R. CRAIG KENNEDY* Director
- --------------------------------------------
R. Craig Kennedy
/s/ JACK E. NELSON* Director
- --------------------------------------------
Jack E. Nelson
/s/ DON G. POWELL* Director
- --------------------------------------------
Don G. Powell
/s/ PHILLIP ROONEY* Director
- --------------------------------------------
Phillip Rooney
</TABLE>
C-5
<PAGE> 340
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ FERNANDO SISTO* Director
- --------------------------------------------
Fernando Sisto
/s/ EDWARD C. WOOD, III* Chief Financial Officer and Vice President
- --------------------------------------------
Edward C. Wood, III
/s/ DENNIS J. MCDONNELL* Principal Executive Officer and President
- --------------------------------------------
Dennis J. McDonnell
</TABLE>
- ------------------------------------
*Signed by Ronald A. Nyberg pursuant
to a power of attorney.
By: /s/ RONALD A. NYBERG February 23, 1998
- ------------------------------------
Ronald A. Nyberg
Attorney-In-Fact
C-6
<PAGE> 341
SCHEDULE OF EXHIBITS TO FORM N-14
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<C> <S>
17(a) Form of Proxy Card
</TABLE>
<PAGE> 1
EXHIBIT (17)(a)
PROXY
VAN KAMPEN AMERICAN CAPITAL GLOBAL EQUITY FUND
SPECIAL MEETING OF SHAREHOLDERS
PROXY SOLICITED ON BEHALF OF THE BOARD OF TRUSTEES
The undersigned holder of shares of beneficial interest, par value $.01
per share ( the "Shares") of the VAN KAMPEN AMERICAN CAPITAL GLOBAL EQUITY FUND,
a series of Van Kampen American Capital World Portfolio Series Trust, a Delaware
business trust (the "Global Equity Fund"), hereby appoints Don G. Powell, Dennis
J. McDonnell and Ronald A. Nyberg, and each of them, with full power of
substitution and revocation, as proxies to represent the undersigned at the
Special Meeting of Shareholders to be held at the offices of Van Kampen
American Capital, Inc., One Parkview Plaza, Oakbrook Terrace, Illinois 60181, on
May , 1998 at 2:00 p.m., and any and all adjournments thereof (the "Special
Meeting"), and thereat to vote all Shares which the undersigned would be
entitled to vote, with all powers the undersigned would possess if personally
present, in accordance with the following instructions.
If more than one of the proxies, or their substitutes, are present at
the Special Meeting or any adjournment thereof, they jointly (or, if only one is
present and voting then that one) shall have authority and may exercise all
powers granted hereby. This Proxy, when properly executed, will be voted in
accordance with the instructions marked hereon by the undersigned. IF NO
SPECIFICATION IS MADE, THIS PROXY WILL BE VOTED "FOR" EACH OF THE PROPOSALS
DESCRIBED HEREIN AND IN THE DISCRETION OF THE PROXIES UPON SUCH OTHER BUSINESS
AS MAY PROPERLY COME BEFORE THE MEETING.
Account No. No. of Shares Class of Shares Proxy No.
<TABLE>
<S> <C> <C> <C> <C> <C>
1. FOR AGAINST ABSTAIN
--- ------- ------- The proposal to approve the Agreement and Plan of
Reorganization pursuant to which the Global Equity Fund
--- ------- ------- would (i) transfer all of its assets to the Morgan
Stanely Global Equity Allocation Fund (the "MS Global Equity Allocation
Fund") in exchange solely for Class A, B, and C shares of
beneficial interest of the MS Global Equity
Allocation Fund and the MS Global Equity
Allocation Fund's assumption of the liabilities of the Global
Equity Fund, (ii) distribute such shares of the MS
Global Equity Allocation Fund to the holders of shares of the MS
Global Equity Fund and (iii) be dissolved, all as more fully
described in the Prospectus/Proxy Statement.
2. FOR AGAINST ABSTAIN
--- ------- ------- To act upon any and all other business which may come
before the Special Meeting or any adjournment thereof.
</TABLE>
The undersigned hereby acknowledges receipt of the accompanying Notice
of Special Meeting and Proxy Statement for the Special Meeting to be held on
May __, 1998 at 2:00 p.m.
Please sign this Proxy exactly as your name or names appear on the books
of the Global Equity Fund. When signing as attorney, trustee, executor,
administrator, custodian, guardian or corporate officer, please give full title.
If shares are held jointly, each holder should sign.
<TABLE>
<S> <C>
- ------------------------------------ ----------------------------------------
Shareholder signature 1997
Date
- ------------------------------------ ----------------------------------------
Co-owner signature (if applicable) 1997
Date
</TABLE>
