<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 13, 1998
1933 ACT REGISTRATION NO. 333-46839
================================================================================
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. 1 [X]
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: (630) 684-6000
---------------------
<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
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
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
- APRIL 1998 -
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 & Co. 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 MSGLOBAL 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 & Co. 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 MSGLOBAL 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. 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
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> 7
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"
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
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
1. FOR [ ] AGAINST [ ] ABSTAIN [ ] THE PROPOSAL TO APPROVE THE AGREEMENT
AND PLAN OF REORGANIZATION XXXXXXXXX.
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
<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
April 14, 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 APRIL 13, 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 March 27, 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 April 14, 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 April 14, 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 April 14, 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 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 all of 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 22, 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 & Co. 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 Fund 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 also lead to certain economies affecting the total
operating expenses of the MS Global Equity Allocation 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.
issuers 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 respective Fund's 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
7
<PAGE> 16
specified region. The combined market capitalization of companies in these
indices 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 engage in forward foreign currency exchange contracts, options,
futures and options on futures. Each fund may enter into repurchase agreements.
For temporary defensive purposes, each fund may invest a portion or all of its
assets 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 VKAC Global
Equity 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. 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.
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 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
8
<PAGE> 17
company with more than two million retail investor accounts, extensive
capabilities for managing institutional portfolios, and more than $60 billion
under management or supervision. Van Kampen American Capital's more than 50
open-end and 38 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 & Co. ("MSDW").
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 MSDW. 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.
MSDW 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 such fund (after
application of any fee 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
9
<PAGE> 18
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 such fund (after
application of any fee waivers in effect) for such monthly period would have
been had such 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 such 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) 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 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
EXPENSE COMPARISON TABLE
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.
<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%(5) 1.00%(5) 1.00%(5)
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(6)
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(6)
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%(5) 1.00%(5) 1.00%(5)
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(6)
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(6)
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)
11
<PAGE> 20
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 fee waiver. In the absence of fee waiver, "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) Individual long-term shareholders may pay more than the economic equivalent
of the maximum front-end sales charges permitted as a fund-level expense by
NASD Rules.
(6) 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.
THE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESSER THAN THOSE SHOWN.
12
<PAGE> 21
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 conversation schedule 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
advised by Advisory Corp. or Asset Management and distributed by VKAC
Distributors 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
13
<PAGE> 22
VKAC Global Equity Fund, see the sections of the VKAC Fund Prospectus entitled
"Purchase of Shares" and "Shareholder Services--Exchange Privilege".
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, usually a period
of up to 15 days.
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."
14
<PAGE> 23
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(1)
---------------- ----------- ------------
<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>
- ---------------
(1) The pro forma net assets and net asset value per share reflect the payment
of the reorganization expenses of approximately $250,000 by the VKAC Global
Equity Fund. The pro forma shares outstanding reflect the issuance of
approximately 10,796,000 Class A shares, 9,706,000 Class B shares and
1,025,000 Class C shares by the MS Global Equity Allocation Fund in exchange
for the assets and liabilities of the VKAC Global Equity Fund.
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
15
<PAGE> 24
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 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 fee waivers or 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.
16
<PAGE> 25
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 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
17
<PAGE> 26
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.
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. 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 the Funds invests in securities of foreign issuers. Investment in
securities of foreign issuers, especially in securities of issuers in emerging
countries, involves somewhat
18
<PAGE> 27
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 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.
DIFFERENCES IN RISKS
The MS Global Equity Allocation Fund and the VKAC Global Equity Fund engage in
some dissimilar investment practices. To the extent that the investment
19
<PAGE> 28
practices differ, the risks associated with an investment in the MS Global
Equity Allocation Fund are different from the risks associated with an
investment in the VKAC Global Equity Fund. For a complete description of the
respective fund's investment practices and associated risks, 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, delayed 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 the MS Global Equity Allocation Fund and the VKAC
Global Equity Fund may mutually agree.
20
<PAGE> 29
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.
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
21
<PAGE> 30
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).
22
<PAGE> 31
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
23
<PAGE> 32
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 on behalf of the VKAC Global Equity Fund 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
24
<PAGE> 33
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 addition, if the
Reorganization is completed VKAC will reimburse the VKAC Global Equity Fund for
the cost of terminating its trustee retirement plan estimated to be
approximately $35,000. 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.
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.
25
<PAGE> 34
RATIFICATION OF INVESTMENT OBJECTIVE, INVESTMENT POLICIES AND INVESTMENT
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
investment 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 April 7, 1998, there were 5,189,824 Class A
shares, 4,483,389 Class B shares and 5,544,418 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.
At the close of business on March 27, 1998, the record date with respect to
the Special Meeting, there were 10,673,953 Class A shares, 9,664,151 Class B
shares and 1,059,498 Class C shares, respectively, of the VKAC Global Equity
Fund. As
26
<PAGE> 35
of 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.
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 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.
27
<PAGE> 36
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 $75,000, plus reasonable
expenses.
April 14, 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.
28
<PAGE> 37
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> 38
<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> 39
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> 40
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> 41
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> 42
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> 43
(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> 44
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> 45
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> 46
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> 47
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> 48
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> 49
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> 50
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>
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
A-14
<PAGE> 51
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 to be generously valued, in
part because of extreme optimism over the future growth
A-15
<PAGE> 52
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>
A-16
<PAGE> 53
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
VAN KAMPEN AMERICAN CAPITAL
INVESTMENT ADVISORY CORP.
One Parkview Plaza
Oakbrook Terrace, IL 60181
Investment Subadviser
MORGAN STANLEY ASSET
MANAGEMENT, INC.
1221 Avenue of the Americas
New York, New York 10020
Distributor
VAN KAMPEN AMERICAN CAPITAL
DISTRIBUTORS, INC.
One Parkview Plaza
Oakbrook Terrace, IL 60181
Transfer Agent
ACCESS INVESTOR SERVICES, INC.
P.O. Box 418256
Kansas City, MO 64141-9256
Administrator and Domestic Custodian
Chase Global Funds Services Company
73 Tremont Street
Boston, MA 02108-3913
Foreign Custodian
Morgan Stanley Trust Company
Brooklyn, NY
Legal Counsel
SKADDEN, ARPS, SLATE,
MEAGHER & FLOM (ILLINOIS)
333 West Wacker Drive
Chicago, IL 60606
Independent Auditors
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, NY 10036
<PAGE> 54
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
APRIL 14, 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................................................ 18
Similarity of Risks....................................... 18
Differences in Risks...................................... 19
C. THE PROPOSED REORGANIZATION................................. 20
Terms of the Agreement.................................... 20
Description of Securities to be Issued.................... 22
Continuation of Shareholder Accounts and Plans; Share
Certificates.............................................. 23
Federal Income Tax Consequences........................... 23
Expenses.................................................. 25
Ratification of Investment Objective, Investment Policies
and Investment Restrictions of the MS Global Equity
Allocation Fund......................................... 26
Legal Matters............................................. 26
D. RECOMMENDATION OF THE BOARD................................. 26
OTHER INFORMATION................................................... 26
A. SHAREHOLDERS OF THE MS GLOBAL EQUITY ALLOCATION FUND AND THE
VKAC GLOBAL EQUITY FUND................................... 26
B. SHAREHOLDER PROPOSALS....................................... 27
VOTING INFORMATION AND REQUIREMENTS................................. 27
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> 55
Supplement dated March 9, 1998
to the Prospectus dated October 28, 1997,
as previously supplemented on January 2, 1998
Morgan Stanley Asian Growth Fund
Morgan Stanley Emerging Markets Fund
Morgan Stanley Global Equity Fund
Morgan Stanley Global Equity Allocation Fund
Morgan Stanley International Magnum Fund
Morgan Stanley Japanese Equity Fund
Morgan Stanley Latin American Fund
Morgan Stanley Emerging Markets Debt Fund
Morgan Stanley Global Fixed Income Fund
Morgan Stanley High Yield Fund
Morgan Stanley Worldwide High Income Fund
Morgan Stanley Aggressive Equity Fund
Morgan Stanley American Value Fund
Morgan Stanley Equity Growth Fund
Morgan Stanley Mid Cap Growth Fund
Morgan Stanley U.S. Real Estate Fund
Morgan Stanley Value Fund
Morgan Stanley Growth and Income Fund
Morgan Stanley European Equity Fund
Portfolios of the
Morgan Stanley Fund, Inc. (the "Company")
P.O. Box 418256
Kansas City, Missouri
64141
--------------
The section of the Prospectus captioned "SHAREHOLDER SERVICES" hereby is
supplemented by adding the following:
INTERNET TRANSACTIONS. In addition to performing transactions on your
account through written instruction or by telephone, you may also perform
certain transactions through the Internet. Please refer to our web site @
www.vkac.com for further instruction. Van Kampen American Capital and its
subsidiaries, including ACCESS (collectively, "VKAC"), and the Fund employ
procedures considered by them to be reasonable to confirm that
instructions communicated through the Internet are genuine. Such
procedures include requiring use of a personal identification number
prior to acting upon Internet instructions and
<PAGE> 56
providing written confirmation of instructions communicated through the
Internet. If reasonable procedures are employed, neither VKAC nor the Fund will
be liable for following instructions through the Internet which it reasonably
believes to be genuine. If an account has multiple owners, ACCESS may rely on
the instructions of any one owner.
FOR THE MORGAN STANLEY ASIAN GROWTH FUND ONLY
The section of the Prospectus entitled "MANAGEMENT OF THE COMPANY -
PORTFOLIO MANAGERS" is hereby amended and supplemented to reflect a change in
the portfolio management of the Asian Growth Fund. Vinod Sethi now shares
primary responsibility for managing the assets of the Asian Growth Fund with
Ean Wah Chin. The paragraph is replaced with the following:
ASIAN GROWTH FUND - ASIAN EQUITY PORTFOLIO - Ean Wah Chin and Vinod
Sethi. Ean Wah Chin is a Managing Director of Morgan Stanley and the
Sub-Adviser. She has been primarily responsible for managing the Portfolio's
assets since its inception. Prior to joining Morgan Stanley in 1986, Ms. Chin
spent eight years with the Monetary Authority of Singapore and the Government
of Singapore Investment Corporation, where she was a portfolio manager of one
of the largest portfolios in Asia. Vinod Sethi joined the Sub-Adviser in 1989
and since then, has been actively involved in the Sub-Adviser's emerging
markets group. Mr. Sethi is a Managing Director of Morgan Stanley and the
Sub-Adviser and is the Sub-Adviser's Chief Investment Officer for the Asian
region. He received his undergraduate degree in Chemical Engineering from
I.I.T. (Bombay) and his M.B.A. from New York University School of Business.
FOR THE MORGAN STANLEY U.S. REAL ESTATE FUND ONLY
The Trustees of the Fund have approved an Agreement and Plan of
Reorganization between the Fund and Van Kampen American Real Estate Securities
Fund (the "Real Estate Securities Fund"), advised by Van Kampen American
Capital Asset Management, Inc., providing for the transfer of assets and
liabilities of the Fund to the Real Estate Securities Fund in exchange for
shares of beneficial interest of the Real Estate Securities Fund at its net
asset value per share (the "Reorganization").
The Reorganization is subject to approval by the shareholders of the
Fund. Further details of the proposed Reorganization will be contained in the
proxy statement/prospectus expected to be mailed to shareholders in 1998.
The Real Estate Securities Fund's net assets as of December 31, 1997
were approximately $141 million. Its investment objective is to seek to provide
shareholders with long-term growth of capital, and a secondary objective is to
seek current income. The Fund and the Real Estate Securities Fund have similar
investment objectives, policies and practices, and are managed by the same
portfolio management team.
The Fund will continue its normal operations prior to the
Reorganization.
FOR THE MORGAN STANLEY GLOBAL FIXED INCOME FUND ONLY
The Trustees of the Fund have approved an Agreement and Plan of
Reorganization between the Fund and Van Kampen American Global Government
Securities Fund (the "Global Government Securities Fund"), a series of Van
Kampen American Capital World Portfolio Series Trust advised by Van Kampen
American Capital Asset Management, Inc., providing for the transfer of assets
and liabilities of the Fund to the Global Government Securities Fund in
exchange for shares of beneficial interest of the Global Government Securities
Fund at its net asset value per share (the "Reorganization").
<PAGE> 57
The Reorganization is subject to approval by the shareholders of the
Fund. Further details of the proposed Reorganization will be contained in the
proxy statement/prospectus expected to be mailed to shareholders in 1998.
The Global Government Securities Fund's net assets as of December 31,
1997 were approximately $72 million. Its investment objective is to seek to
provide a high level of current income and secondary objectives are to seek to
provide capital appreciation and protection of principal. The Fund and the
Global Government Securities Fund have similar investment objectives, policies
and practices, and are managed by the same portfolio management team.
The Fund will continue its normal operations prior to the
Reorganization.
---------------
PLEASE RETAIN THIS SUPPLEMENT FOR FUTURE REFERENCE
<PAGE> 58
Supplement dated January 2, 1998
to the Prospectus dated October 28, 1997
Morgan Stanley Asian Growth Fund
Morgan Stanley Emerging Markets Fund
Morgan Stanley Global Equity Fund
Morgan Stanley Global Equity Allocation Fund
Morgan Stanley International Magnum Fund
Morgan Stanley Japanese Equity Fund
Morgan Stanley Latin American Fund
Morgan Stanley Emerging Markets Debt Fund
Morgan Stanley Global Fixed Income Fund
Morgan Stanley High Yield Fund
Morgan Stanley Worldwide High Income Fund
Morgan Stanley Aggressive Equity Fund
Morgan Stanley American Value Fund
Morgan Stanley Equity Growth Fund
Morgan Stanley Mid Cap Growth Fund
Morgan Stanley U.S. Real Estate Fund
Morgan Stanley Value Fund
Morgan Stanley Growth and Income Fund
Morgan Stanley European Equity Fund
Portfolios of the
Morgan Stanley Fund, Inc. (the "Company")
P.O. Box 418256
Kansas City, Missouri
64141
--------------
The section of the Prospectus entitled "PURCHASE OF SHARES - GENERAL" is
hereby amended with the following:
The Distributor is sponsoring a sales incentive program for A.G. Edwards &
Sons, Inc, ("A.G. Edwards"). The Distributor will reallow its portion of the
Fund's sales concession to A.G. Edwards on sales of Class A shares of the Fund
relating to the "rollover" of any savings into an Individual Retirement Acount
("IRA"), the transfer of assets into an IRA and contributions to an IRA,
commencing on January 1, 1998 and terminating on April 15, 1998.
Pursuant to the Fund's Prospectus, the Fund's Class A shares may be
purchased at net asset value under certain defined circumstances by certain
classes or group of investors. Certain net asset value
<PAGE> 59
categories described in the section "NAV PURCHASE OPTIONS" UNDER "PURCHASE OF
SHARES--CLASS A SHARES -- OTHER PURCHASE PROGRAMS" have been amended as follows:
(2) Current or retired directors, officers and employees of Morgan
Stanley Group Inc. and any of its subsidiaries, employees of an investment
subadviser to any fund described in (1) above or an affiliate of such
subadviser, and such persons' families and their beneficial accounts.
(3) Directors, officers, employees and registered representatives of
financial institutions that have a selling group agreement with the
Distributor and their spouses and children under 21 years of age when
purchasing for any accounts they beneficially own, or, in the case of any
such financial institution, when purchasing for retirement plans for such
institutions employees; provided that such purchases are otherwise
permitted by such institutions.
(4) Registered investment advisers who charge a fee for their services,
trust companies and bank trust departments investing on their own behalf
or on behalf of their clients. The Distributor may pay Participating
Dealers through which purchases are made an amount up to 0.50% of the
amount invested, over a 12-month period.
(5) Trustees and other fiduciaries purchasing shares for retirement
plans which invest in multiple fund families through national wirehouse
alliance programs subject to certain minimum size and operational
requirements. Trustees and other fiduciaries should refer to the Statement
of Additional Information for further detail with respect to such alliance
programs.
An additional net asset value category, as described below, has been
added as item number 6 and the remaining items shall be renumbered accordingly.
(6) Beneficial owners of shares of Participating Funds held by a
retirement plan or held in a tax-advantaged retirement account who
purchase shares of the Fund with proceeds from distributions from such a
plan or retirement account other than distributions taken to correct an
excess contribution.
As stated in the Fund's Prospectus, the Fund reserves the right to amend
or terminate the terms of offering shares of the Fund at net asset value at
any time.
The section of the Prospectus captioned "PURCHASE OF SHARES--PURCHASE OF
CLASS C SHARES" is hereby supplemented as follows:
Class C shares of the Funds may be purchased at the net asset value per
share and such shares are subject to a CDSC at the rate of 1.00% of the lesser
of the current market value of the shares redeemed or the total cost of such
shares for shares that are redeemed within one year of purchase. The
Distributor will generally make payments to the Participating Dealers that
handle the purchases of such shares at the rate of up to 1.00% of the purchase
price of such shares at the time of purchase and expects to pay to
Participating Dealers most of its distribution fee, with respect to such
shares, under the Rule 12b-1 Plan for such class of shares, as described under
"Management of the Company -- Distributor" above. In determining whether a CDSC
is payable, and, if so, the amount of the fee or charge, it is assumed that
shares not subject to such fee or charge are the first redeemed.
The paragraph of the Prospectus captioned "PURCHASE OF SHARES--WAIVER OF
CDSC" is hereby supplemented as follows:
The CDSC will be waived on the redemption of Class B or Class C shares
(i) following the death or initial determination of disability (as defined in
the Code) of a shareholder; (ii) certain distributions from an
<PAGE> 60
IRA or other retirement plan; (iii) to the extent that shares redeemed have
been withdrawn from a Systematic Withdrawal Plan, up to a maximum amount of 12%
per year from a shareholder account based on the value of the account at the
time the Withdrawal Plan is established; (iv) in circumstances under which no
commission or transaction fee is paid to authorized dealers at the time of
purchase of such shares; and (v) effected pursuant to the right of the Company
to liquidate a shareholder's account as described herein under "Redemption of
Shares." A shareholder, or their representative, must notify the Company's
Transfer Agent prior to the time of redemption if such circumstances exist and
the shareholder is eligible for this waiver. The shareholder is responsible for
providing sufficient documentation to the Transfer Agent to verify the existence
of such circumstances. For information on the imposition and waiver of the
CDSC, contact Investor Services at 1-800-282-4404.
The section of the Prospectus entitled "MANAGEMENT OF THE COMPANY --
PORTFOLIO MANAGERS" is hereby amended and restated with the following:
ASIAN GROWTH FUND - Ean Wah Chin. Ean Wah Chin is a Managing Director
of the Sub-Adviser and Morgan Stanley & Co. Incorporated ("Morgan Stanley") and
is responsible for the sub-adviser's regional Asia ex-Japan operations based in
Singapore. She has shared primary management responsibility for the Fund since
it commenced operations. Ms. Chin was an ASEAN scholar educated at the
University of Singapore.
GLOBAL EQUITY ALLOCATION FUND - Barton M. Biggs and Ann D. Thivierge.
Barton Biggs has been Chairman and a director of the Sub-Adviser since 1980 and
a Managing Director of Morgan Stanley since 1975. He is also a director of
Morgan Stanley Group Inc. and a director and chairman of various registered
investment companies to which the Sub-Adviser and certain of its affiliates
provide investment advisory services. Mr. Biggs holds a B.A. from Yale
University and an M.B.A. from New York University. Ann Thivierge is a Principal
of the Sub-Adviser. She is a member of the sub-Adviser's asset allocation
committee, primarily representing the Total Fund Management team since its
inception in 1991. Prior to joining the Sub-Adviser in 1986, she spent two
years at Edgewood Management Company, a privately held investment management
firm. Ms. Thivierge holds a B.A. in International Relations from James Madison
College. Michigan State University, and an M.B.A. in Finance from New York
University. Mr. Biggs and Ms. Thivierge have had primary responsibility for
managing the Fund since it commenced operations.
-----------------
PLEASE RETAIN THIS SUPPLEMENT FOR FUTURE REFERENCE
<PAGE> 61
- --------------------------------------------------------------------------------
P R O S P E C T U S
- --------------------------------------------------------------------------------
MORGAN STANLEY ASIAN GROWTH FUND
MORGAN STANLEY EMERGING MARKETS FUND
MORGAN STANLEY GLOBAL EQUITY FUND
MORGAN STANLEY GLOBAL EQUITY ALLOCATION FUND
MORGAN STANLEY INTERNATIONAL MAGNUM FUND
MORGAN STANLEY JAPANESE EQUITY FUND
MORGAN STANLEY LATIN AMERICAN FUND
PORTFOLIOS OF THE
MORGAN STANLEY FUND, INC.
P.O. BOX 418256, KANSAS CITY, MISSOURI 64141
FOR INFORMATION CALL 1-800-282-4404
------------------
Morgan Stanley Fund, Inc. (the "Company") is an open-end management
investment company, or mutual fund, which consists of twenty-two investment
portfolios. This prospectus (the "Prospectus") describes the Class A, Class B
and Class C shares of the seven portfolios listed above (each a "Fund" and
together, the "Funds"). The Funds are designed to make available to retail
investors the expertise of Van Kampen American Capital Investment Advisory
Corp., the adviser (the "Adviser") and administrator (the "Administrator"), and
its affiliate, Morgan Stanley Asset Management Inc., the sub-adviser (the
"Sub-Adviser"), to the Funds. Shares are available through Van Kampen American
Capital Distributors, Inc. (the "Distributor") and through investment dealers,
banks and financial services firms that provide distribution, administrative or
shareholder services ("Participating Dealers"). As of the date of this
Prospectus, the Morgan Stanley Japanese Equity Fund is not offering shares.
This Prospectus is designed to set forth concisely the information about the
Funds that a prospective investor should know before investing and it should be
retained for future reference. Additional information about the Company is
contained in a "Statement of Additional Information," dated October 28, 1997,
which is incorporated herein by reference. The Company offers other portfolios
which are described in other prospectuses. The Statement of Additional
Information and the prospectuses pertaining to the other portfolios of the
Company are available upon request and without charge by writing or calling the
Company at the address and telephone number set forth above. The Statement of
Additional Information and other materials regarding the Company have been filed
with the Securities and Exchange Commission and are available at the
Commission's internet web site (http://www.sec.gov).
THE COMPANY'S SHARES ARE NOT OBLIGATIONS, DEPOSITS OR ACCOUNTS OF, OR
ENDORSED OR GUARANTEED BY, ANY BANK OR DEPOSITORY INSTITUTION, OR ANY AFFILIATES
OR CORRESPONDENTS THEREOF. THE COMPANY'S SHARES ARE NOT FEDERALLY INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER
AGENCY. SHARES OF THE COMPANY INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS OCTOBER 28, 1997.
<PAGE> 62
PROSPECTUS SUMMARY
THE COMPANY
The Company currently consists of twenty-two portfolios which are designed
to offer investors a range of investment choices with Van Kampen American
Capital Investment Advisory Corp. (the "Adviser") providing services as adviser
and administrator and its affiliate, Morgan Stanley Asset Management Inc.
("MSAM" or the "Sub-Adviser"), providing services as the sub-adviser. Van Kampen
American Capital Distributors, Inc. (the "Distributor") provides services as
distributor to the Funds. For ease of reference, the words "Morgan Stanley,"
which begin the name of each portfolio, are not used throughout this Prospectus.
The investment objective of each Fund is as follows:
- The ASIAN GROWTH FUND seeks long-term capital appreciation through
investment primarily in equity securities of Asian issuers, excluding
Japan.
- The EMERGING MARKETS FUND seeks long-term capital appreciation by
investing primarily in equity securities of emerging country issuers.
- The GLOBAL EQUITY FUND seeks long-term capital appreciation by investing
primarily in equity securities of issuers throughout the world, including
U.S. issuers.
- The GLOBAL EQUITY ALLOCATION FUND seeks 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 INTERNATIONAL MAGNUM FUND seeks long-term capital appreciation by
investing primarily in equity securities of non-U.S. issuers in accordance
with EAFE country weightings determined by the Sub-Adviser.
- The JAPANESE EQUITY FUND seeks long-term capital appreciation by investing
primarily in equity securities of Japanese issuers. As of the date of this
Prospectus, the Japanese Equity Fund is not offering shares.
- The LATIN AMERICAN FUND seeks long-term capital appreciation by investing
primarily in equity securities of Latin American issuers and investing in
debt securities issued or guaranteed by Latin American governments or
governmental entities.
RISK FACTORS
The investment policies of each Fund entail certain risks and considerations
of which an investor should be aware. The Funds described herein will invest in
securities of foreign issuers. Securities of foreign issuers are subject to
certain risks not typically associated with domestic securities. See "Additional
Investment Information -- Foreign Investment" for more information. The Asian
Growth, Emerging Markets, Latin American and International Magnum Funds invest
in securities of issuers located in developing or emerging market countries,
which may impose greater liquidity risks and other risks not typically
associated with investing in the more established markets of developed
countries. Investments in such emerging markets may be in small- to medium-sized
companies, which are more vulnerable to risks than larger corporations,
including a higher degree of liquidity, financial, price volatility and other
risks than investments in the securities of larger corporations. The Emerging
Markets and Latin American Funds may invest in lower rated and unrated debt
securities (including
2
<PAGE> 63
in the case of the Latin American Fund, sovereign debt) which are considered
speculative in nature and involve a high degree of risk. The Emerging Markets
Fund may invest in equity securities of Russian companies. The registration,
clearing and settlement of securities transactions in Russia are subject to
significant risks not normally associated with securities transactions in the
United States and other more developed markets. See "Additional Investment
Information -- Russian Securities Transactions."
The Funds may invest in forward foreign currency exchange contracts, and in
foreign currency exchange futures and options. The Emerging Markets and Latin
American Funds may engage in short selling. The Latin American Fund may borrow
money for leverage purposes. In addition, each Fund may invest in repurchase
agreements, borrow money, lend its portfolio securities, and purchase securities
on a when-issued or delayed delivery basis. Each Fund may invest in derivative
instruments including options and futures. Each Fund may invest in securities
that are neither listed on a stock exchange nor traded over-the-counter,
including private placement securities. Such securities may be less liquid than
publicly traded securities. There are also risks associated with the
non-diversified status of the Emerging Markets, International Magnum and Latin
American Funds. Each of these investment strategies involves specific risks
which are described under "Investment Objectives and Policies" and "Additional
Investment Information" herein and under "Investment Objectives and Policies" in
the Statement of Additional Information.
HOW TO INVEST
The Class A, Class B and Class C shares of the Funds are designed to provide
investors a choice of three ways to pay distribution costs. Class A shares of
the Funds are offered at net asset value plus a maximum initial sales charge of
5.75% which initial sales charge may be reduced on certain large purchases or
when combining purchases with the investor's aggregate investments in the
Participating Funds. Class B and Class C shares of the Funds are offered at net
asset value. Class B shares are subject to a contingent deferred sales charge
("CDSC") for redemptions within five years of purchase and are subject to higher
annual distribution-related expenses than the Class A shares. Class C shares are
subject to a CDSC for redemptions within one year of purchase and are subject to
higher annual distribution-related expenses than the Class A shares. See
"Purchase of Shares" for a discussion of reduction or waiver of sales charges,
which are available for certain investors. Share purchases may be made through
the Distributor, through Participating Dealers or by sending payments directly
to the Company. The minimum initial investment is $500 for each class of the
Fund, except that the minimum initial investment amount is reduced for certain
categories of investors. The minimum for subsequent investments is $25, except
that there is no minimum for automatic reinvestment of dividends and
distributions. See "Purchase of Shares."
HOW TO REDEEM
Shares of each Fund may be redeemed at any time at the net asset value per
share (less any applicable CDSC) of the Fund next determined after receipt of
the redemption request. The redemption price may be more or less than the
purchase price. See "Redemption of Shares."
3
<PAGE> 64
FUND EXPENSES
The following table illustrates all expenses and fees that a shareholder of
a Fund may incur:
<TABLE>
<CAPTION>
GLOBAL
ASIAN EMERGING GLOBAL EQUITY JAPANESE LATIN
GROWTH MARKETS EQUITY ALLOCATION INTERNATIONAL EQUITY AMERICAN
SHAREHOLDER TRANSACTION EXPENSES FUND FUND FUND FUND MAGNUM FUND FUND FUND
- ----------------------------------- ---------- ---------- ---------- ---------- ------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Maximum Sales Load Imposed on
Purchases (as a percentage of
offering price)
Class A........................ 5.75%(1) 5.75%(1) 5.75%(1) 5.75%(1) 5.75%(1) 5.75%(1) 5.75%(1)
Class B........................ None None None None None None None
Class C........................ None None None None None None None
Maximum Deferred Sales Load (as a
percentage of the lesser of
initial purchase price or current
market value)
Class A
For Purchases up to
$999,999................... None None None None None None None
For Purchases of $1,000,000
or more.................... 1.00%(2) 1.00%(2) 1.00%(2) 1.00%(2) 1.00%(2) 1.00%(2) 1.00%(2)
Class B........................ 5.00%(3) 5.00%(3) 5.00%(3) 5.00%(3) 5.00%(3) 5.00%(3) 5.00%(3)
Class C........................ 1.00%(4) 1.00%(4) 1.00%(4) 1.00%(4) 1.00%(4) 1.00%(4) 1.00%(4)
Maximum Sales Load Imposed on
Reinvested Dividends
Class A........................ None None None None None None None
Class B........................ None None None None None None None
Class C........................ None None None None None None None
Redemption Fees
Class A........................ None None None None None None None
Class B........................ None None None None None None None
Class C........................ None None None None None None None
Exchange Fees
Class A........................ None None None None None None None
Class B........................ None None None None None None None
Class C........................ None None None None None None None
</TABLE>
- ------------------
(1) Percentage shown is the maximum sales load. Certain large purchases may be
subject to a reduced sales load.
(2) Purchases of Class A shares of the Funds which, when combined with the net
asset value of the purchaser's existing investments in Class A shares of the
Participating Funds (as defined under "Purchase of Shares -- Quantity
Discounts"), aggregate to $1 million or more are not subject to an initial
sales load (an "initial sales charge"). A contingent deferred sales charge
("CDSC") of 1.00% will be imposed, however, on shares from any such purchase
that are redeemed within one year following such purchase. Certain other
purchases are not subject to an initial sales charge. See "Purchase of
Shares."
(3) Percentage shown is the maximum CDSC. Purchases of Class B shares of the
Funds are subject to a maximum CDSC of 5.00% which decreases in steps to
0.00% after five years. See "Purchase of Shares."
(4) Purchases of Class C shares of the Funds are subject to a CDSC of 1.00% for
redemptions made within one year of purchase. See "Purchase of Shares."
4
<PAGE> 65
<TABLE>
<CAPTION>
GLOBAL
ANNUAL FUND OPERATING EXPENSES ASIAN EMERGING GLOBAL EQUITY INTERNATIONAL JAPANESE LATIN
(AS A PERCENTAGE OF AVERAGE GROWTH MARKETS EQUITY ALLOCATION MAGNUM EQUITY AMERICAN
DAILY NET ASSETS) FUND FUND FUND FUND FUND FUND FUND
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Investment Advisory Fee (after
expense reimbursement and/or
fee waiver) (5)
Class A..................... 1.00% 0.99% 1.00% 0.80% 0.00% 0.80% 0.58%
Class B..................... 1.00% 0.99% 1.00% 0.80% 0.00% 0.80% 0.58%
Class C..................... 1.00% 0.99% 1.00% 0.80% 0.00% 0.80% 0.58%
12b-1 Distribution and Service
Fees
Class A (6)................. 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25%
Class B (6)................. 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00%
Class C (6)................. 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00%
Other Expenses (after expense
reimbursement and/or fee
waiver) (5)
Class A..................... 0.59% 0.91% 0.55% 0.65% 1.40% 0.65% 1.27%
Class B..................... 0.59% 0.91% 0.55% 0.65% 1.40% 0.65% 1.27%
Class C..................... 0.59% 0.91% 0.55% 0.65% 1.40% 0.65% 1.27%
Total Operating Expenses (after
expense reimbursement and/or
fee waiver) (5)
Class A..................... 1.84% 2.15% 1.80% 1.70% 1.65% 1.70% 2.10%
Class B..................... 2.59% 2.90% 2.55% 2.45% 2.40% 2.45% 2.85%
Class C..................... 2.59% 2.90% 2.55% 2.45% 2.40% 2.45% 2.85%
</TABLE>
- ------------------
(5) The Adviser has agreed to waive a portion of its advisory fees and/or to
reimburse a portion of expenses of the Funds, if necessary, if such fees
would cause the total annual operating expenses of the Funds, as a
percentage of average daily net assets, to exceed the percentages set forth
in the table above. The following table sets forth for each Fund investment
advisory fees and expected total operating expenses absent fee waivers
and/or expense reimbursements. The Adviser in its discretion may terminate
voluntary fee waivers and/or reimbursements at any time. Absent the waiver
of fees or reimbursement of expenses, the amounts in the examples below
would be greater.
<TABLE>
<CAPTION>
INVESTMENT TOTAL
ADVISORY FEES OPERATING EXPENSES
----------------- ----------------------------------------
(ALL CLASSES) CLASS A CLASS B CLASS C
----------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Asian Growth Fund.................. 1.00% 1.84% 2.59% 2.59%
Emerging Markets Fund.............. 1.25% 2.41% 3.17% 3.17%
Global Equity Fund................. 1.00% 1.80% 2.55% 2.55%
Global Equity Allocation Fund...... 1.00% 1.90% 2.65% 2.65%
International Magnum Fund.......... 0.80% 2.50% 3.34% 3.45%
Japanese Equity Fund............... 1.00% 1.90% 2.65% 2.65%
Latin American Fund................ 1.25% 2.77% 3.55% 3.56%
</TABLE>
For further information on Company expenses, see "Management of the Company."
(6) Of the 12b-1 distribution and service fees for the Class A shares, 0.25%
represents a shareholder services fee, and for the Class B shares and the
Class C shares, 0.75% represents a distribution fee and 0.25% represents a
shareholder services fee. See "Management of the Company--Distributor."
Long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales charges permitted as a Fund-level expense by the
Conduct Rules of the National Association of Securities Dealers, Inc.
("NASD").
The purpose of the above table is to assist the investor in understanding
the various expenses that an investor in a Fund will bear directly or
indirectly. The expenses and fees for the Asian Growth, Emerging Markets, Global
Equity Allocation, International Magnum and Latin American Funds are based on
actual figures for the fiscal year ended June 30, 1997. The expenses and fees
for the Global Equity and Japanese Equity Funds are based on the advisory
agreements, the 12b-1 plans and estimates of other expenses because the Funds
had not commenced investment operations as of June 30, 1997.
5
<PAGE> 66
The following examples illustrate the expenses that you would pay on a
$1,000 investment, assuming a 5% annual rate of return and redemption at the end
of each time period as indicated, in (i) Class A shares of each Fund, including
the maximum 5.75% initial sales charge, (ii) Class B shares of each Fund, which
have a CDSC, but no initial sales charge and (iii) Class C shares of each Fund,
which have a CDSC, but no initial sales charge.
<TABLE>
<CAPTION>
GLOBAL
ASIAN EMERGING GLOBAL EQUITY JAPANESE LATIN
GROWTH MARKETS EQUITY ALLOCATION INTERNATIONAL EQUITY AMERICAN
SHAREHOLDER TRANSACTION EXPENSES FUND FUND FUND FUND MAGNUM FUND FUND FUND
- -------------------------------- ---------- ---------- ---------- ---------- ------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Class A shares
1 Year...................... $ 75(1) $ 78(1) $ 75(1) $ 74(1) $ 73(1) $ 74(1) $ 78(1)
3 Years..................... 112 121 111 108 107 108 120
5 Years..................... 151 166 * 144 142 * 164
10 Years.................... 261 291 * 247 242 * 287
Class B shares
(Assuming complete redemption
at end of period)
1 Year...................... 76 79 76 75 74 75 79
3 Years..................... 111 120 109 106 105 106 118
5 Years..................... 153 168 * 146 143 * 165
10 Years (2)................ 274 304 * 260 255 * 299
(Assuming no redemption)
1 Year...................... 26 29 26 25 24 25 29
3 Years..................... 81 90 79 76 75 76 88
5 Years..................... 138 153 * 131 128 * 150
10 Years (2)................ 274 304 * 260 255 * 299
Class C shares
(Assuming complete redemption
immediately prior to the end of
period)
1 Year...................... 36 39 36 35 34 35 39
3 Years..................... 81 90 79 76 75 76 88
5 Years..................... 138 153 * 131 128 * 150
10 Years.................... 292 322 * 279 274 * 318
Class C shares
(Assuming no redemption)
1 Year...................... 27 29 26 25 24 25 29
3 Years..................... 81 90 79 76 75 76 88
5 Years..................... 138 153 * 131 128 * 150
10 Years.................... 292 322 * 279 274 * 318
</TABLE>
- ------------------
* Because the Global Equity and Japanese Equity Funds were either not
operational or had recently become operational as of the date of this
Prospectus, the Funds have not projected expenses beyond the three-year
period shown.
(1) The example reflects Class A shares sold at the maximum 5.75% initial sales
charge. Certain large purchases may be subject to a reduced initial sales
charge. Purchases of Class A shares of the Funds which, when combined with
the net asset value of the purchaser's existing investments in Class A
shares of the Participating Funds, aggregate to $1 million or more are not
subject to an initial sales charge but a CDSC of 1.00% will be imposed on
such shares that are redeemed within one year following such purchase.
(2) The expenses shown reflect that Class B shares automatically convert to
Class A shares after eight years.
THE FOREGOING EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN.
6
<PAGE> 67
FINANCIAL HIGHLIGHTS
The following tables provide financial highlights for the Class A, Class B
and Class C shares of the Asian Growth, Emerging Markets, Global Equity
Allocation, International Magnum and Latin American Funds for each of the
periods presented. The financial highlights are part of the Company's financial
statements, which appear in the Company's June 30, 1997 Annual Report to
Shareholders. The financial statements are incorporated into the Company's
Statement of Additional Information. The foregoing Funds' financial highlights
for the periods presented have been audited by Price Waterhouse LLP, whose
report thereon (which was unqualified) is incorporated into the Statement of
Additional Information. Additional performance information about the Company is
contained in the Company's Annual Report. The Annual Report and the Statement of
Additional Information are available at no cost from the Company at the address
and telephone number noted on the cover page of this Prospectus. The following
information should be read in conjunction with the financial statements and
notes thereto. Financial highlights are not presented for the Global Equity and
Japanese Equity Funds because they had not commenced investment operations as of
June 30, 1997.
7
<PAGE> 68
FINANCIAL HIGHLIGHTS
ASIAN GROWTH FUND
<TABLE>
<CAPTION>
CLASS A CLASS B
-------------------------------------------------------------- -----------------------
JUNE 23, AUGUST 1,
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED 1993* YEAR ENDED 1995+ TO
JUNE 30, JUNE 30, JUNE 30, JUNE 30, TO JUNE JUNE 30, JUNE 30,
SELECTED PER SHARE DATA AND RATIOS 1997 1996 1995 1994 30, 1993 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $ 17.15 $ 16.42 $ 15.50 $ 12.00 $ 12.00 $ 16.81 $ 16.51
---------- ---------- ---------- ---------- ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Loss (0.06) (0.04) -- (0.03) -- (0.16) (0.03)
Net Realized and Unrealized Gain
(Loss) (0.14) 0.77 1.43 3.53 -- (0.15) 0.33
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total From Investment Operations (0.20) 0.73 1.43 3.50 -- (0.31) 0.30
---------- ---------- ---------- ---------- ---------- ---------- ----------
DISTRIBUTIONS
Net Realized Gain -- -- (0.49) -- -- -- --
In Excess of Net Realized Gain (0.33) -- (0.02) -- -- (0.33) --
---------- ---------- ---------- ---------- ---------- ---------- ----------
(0.33) -- (0.51) -- -- (0.33) --
---------- ---------- ---------- ---------- ---------- ---------- ----------
NET ASSET VALUE, END OF PERIOD $ 16.62 $ 17.15 $ 16.42 $ 15.50 $ 12.00 $ 16.17 $ 16.81
========== ========== ========== ========== ========== ========== ==========
TOTAL RETURN (1) (1.10)% 4.45% 9.50% 29.17% 0.00% (1.79)% 1.82%
========== ========== ========== ========== ========== ========== ==========
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 175,440 $ 248,009 $ 178,667 $ 138,212 $ 11,770 $ 62,786 $ 52,853
Ratio of Expenses to Average Net
Assets 1.84% 1.88% 1.90% 1.90% 1.90%** 2.59% 2.61%**
Ratio of Net Investment Income
(Loss) to
Average Net Assets (0.31)% (0.16)% 0.04% (0.24)% (0.81)%** (1.04)% (0.52)%**
Portfolio Turnover Rate 74% 38% 34% 34% 0% 74% 38%
Average Commission Rate #
Per Share $ 0.0110 N/A N/A N/A N/A $ 0.0110 N/A
As a Percentage of Trade Amount 0.51% N/A N/A N/A N/A 0.51% 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)%** -- --
- -----------------------------------------------------------------------------------------------------------------------------
</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.
8
<PAGE> 69
FINANCIAL HIGHLIGHTS CONTINUED
ASIAN GROWTH FUND
<TABLE>
<CAPTION>
CLASS C
-------------------------------------------------------------------------
JUNE 23,
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED 1993*
JUNE 30, JUNE 30, JUNE 30, JUNE 30, TO JUNE 30,
SELECTED PER SHARE DATA AND RATIOS 1997 1996 1995 1994 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.
9
<PAGE> 70
FINANCIAL HIGHLIGHTS CONTINUED
EMERGING MARKETS FUND
<TABLE>
<CAPTION>
CLASS A CLASS B
--------------------------------------------- ----------------------------
JULY 6, AUGUST 1,
YEAR ENDED YEAR ENDED 1994* YEAR ENDED 1995+ TO
JUNE 30, JUNE 30, JUNE 30, JUNE 30, JUNE 30,
SELECTED PER SHARE DATA AND RATIOS 1997 1996 1995 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.06 $ 10.61 $ 12.00 $ 11.94 $ 10.91
----------- ----------- ----------- ----------- -----------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) 0.01 0.05 0.05 (0.03) 0.01
Net Realized and Unrealized Gain
(Loss) 1.57 1.44 (1.44) 1.50 1.02
----------- ----------- ----------- ----------- -----------
Total From Investment Operations 1.58 1.49 (1.39) 1.47 1.03
----------- ----------- ----------- ----------- -----------
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 $ 11.94
=========== =========== =========== =========== ===========
TOTAL RETURN (1) 13.54% 14.16% (11.58)% 12.67% 9.45%
=========== =========== =========== =========== ===========
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 119,022 $ 114,850 $ 26,091 $ 35,966 $ 10,416
Ratio of Expenses to Average Net Assets 2.21% 2.16% 2.33%** 2.96% 2.91%**
Ratio of Net Investment Income (Loss) to
Average Net Assets (0.06)% 0.93% 0.81%** (0.64)% 0.30%**
Portfolio Turnover Rate 82% 42% 32% 82% 42%
Average Commission Rate #
Per Share $ 0.0007 N/A N/A $ 0.0007 N/A
As a Percentage of Trade Amount 0.39% N/A N/A 0.39% N/A
- -------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense Limitation
During the Period
Per Share Benefit to Net Investment
Income $ 0.03 $ 0.02 $ 0.04 $ 0.01 $ 0.02
Ratios Before Expense Limitation:
Expenses to Average Net Assets 2.41% 2.56% 3.10%** 3.17% 3.31%**
Net Investment Income (Loss) to
Average Net Assets (0.27)% 0.53% 0.04%** (0.87)% (0.10)%**
Ratio of Expenses to Average Net Assets
excluding country tax expense 2.15% 2.15% 2.15%** 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.
10
<PAGE> 71
FINANCIAL HIGHLIGHTS CONTINUED
EMERGING MARKETS FUND
<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 Investment 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 if paid for trades on which
commissions were charged.
11
<PAGE> 72
FINANCIAL HIGHLIGHTS CONTINUED
GLOBAL EQUITY ALLOCATION FUND
<TABLE>
<CAPTION>
CLASS A CLASS B
-------------------------------------------------------------- -----------------------
JANUARY 4, AUGUST 1,
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED 1993* YEAR ENDED 1995+
JUNE 30, JUNE 30, JUNE 30, JUNE 30, TO JUNE JUNE 30, TO JUNE
SELECTED PER SHARE DATA AND RATIOS 1997 1996 1995 1994 30, 1993 1997 30, 1996
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.75 $ 12.60 $ 11.99 $ 11.09 $ 10.00 $ 14.46 $ 13.01
---------- ---------- ---------- ---------- ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) 0.10 0.19 0.12 0.10 0.04 (0.05) 0.30
Net Realized and Unrealized Gain
(Loss) 2.76 2.82 0.67 0.90 1.05 2.73 1.98
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total From Investment Operations 2.86 3.01 0.79 1.00 1.09 2.68 2.28
---------- ---------- ---------- ---------- ---------- ---------- ----------
DISTRIBUTIONS
Net Investment Income (0.55) (0.39) -- (0.03) -- (0.50) (0.35)
In Excess of Net Investment Income -- -- (0.05) -- -- -- --
Net Realized Gain (0.49) (0.47) (0.13) (0.07) -- (0.49) (0.48)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total Distributions (1.04) (0.86) (0.18) (0.10) -- (0.99) (0.83)
---------- ---------- ---------- ---------- ---------- ---------- ----------
NET ASSET VALUE, END OF PERIOD $ 16.57 $ 14.75 $ 12.60 $ 11.99 $ 11.09 $ 16.15 $ 14.46
========== ========== ========== ========== ========== ========== ==========
TOTAL RETURN (1) 20.61% 24.62% 6.69% 9.02% 10.90% 19.64% 18.08%
========== ========== ========== ========== ========== ========== ==========
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 72,704 $ 63,706 $ 42,586 $ 33,425 $ 10,434 $ 38,962 $ 14,786
Ratio of Expenses to Average Net Assets 1.70% 1.70% 1.70% 1.70% 1.70%** 2.45% 2.45%**
Ratio of Net Investment Income to
Average Net Assets 0.59% 0.71% 1.01% 0.98% 1.04%** (0.11)% 0.45%**
Portfolio Turnover Rate 45% 44% 39% 30% 14% 45% 44%
Average Commission Rate #
Per Share $0.0021 N/A N/A N/A N/A $0.0021 N/A
As a Percentage of Trade Amount 0.83% N/A N/A N/A N/A 0.83% 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 $ 0.08 $ 0.09 $ 0.22
Ratios Before Expense Limitation:
Expenses to Average Net Assets 1.90% 2.06% 2.03% 2.58% 3.65%** 2.65% 2.81%**
Net Investment Income (Loss) to
Average Net Assets 0.40% 0.35% 0.68% 0.10% (0.91)%** (0.30)% 0.09%**
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Commencement of operations
** Annualized
+ The Fund began offering Class B shares on August 1, 1995.
(1) Total return to 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 if paid for trades on which
commissions were charged.
12
<PAGE> 73
FINANCIAL HIGHLIGHTS CONTINUED
GLOBAL EQUITY ALLOCATION FUND
<TABLE>
<CAPTION>
CLASS C
--------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED JANUARY 4, 1993*
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1995 JUNE 30, 1994 TO JUNE 3, 1993
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.49 $ 12.43 $ 11.90 $ 11.05 $10.00
------- ------- ------- ------- ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) (0.03) 0.12 0.04 0.06 0.01
Net Realized and Unrealized Gain (Loss) 2.73 2.75 0.65 0.86 1.04
------- ------- ------- ------- ------
Total From Investment Operations 2.70 2.87 0.69 0.92 1.05
------- ------- ------- ------- ------
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 $11.05
======= ======= ======= ======= ======
TOTAL RETURN (1) 19.69% 23.65% 5.84% 8.34% 10.50%
======= ======= ======= ======= ======
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $78,199 $63,025 $40,460 $29,892 $6,995
Ratio of Expenses to Average Net Assets 2.45% 2.45% 2.45% 2.45% 2.45%**
Ratio of Net Investment Income to Average Net
Assets (0.16)% (0.04)% 0.25% 0.23% 0.29%**
Portfolio Turnover Rate 45% 44% 39% 30% 14%
Average Commission Rate #
Per Share $0.0021 N/A N/A N/A N/A
As a Percentage of Trade Amount 0.83% N/A N/A N/A N/A
- -------------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense Limitation During
the Period
Per Share Benefit to Net Investment Income $ 0.03 $ 1.16 $ 0.05 $ 0.12 $ 0.07
Ratios Before Expense Limitation:
Expenses to Average Net Assets 2.65% 2.81% 2.78% 3.34% 4.40%**
Net Investment Income (Loss) to Average Net
Assets (0.34)% (0.40)% (0.08)% (0.66)% (1.66)%**
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Commencement of operations
** Annualized
+ The Fund began offering Class B shares on August 1, 1995.
(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.
13
<PAGE> 74
FINANCIAL HIGHLIGHTS CONTINUED
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.
14
<PAGE> 75
FINANCIAL HIGHLIGHTS CONTINUED
LATIN AMERICAN FUND
<TABLE>
<CAPTION>
CLASS A CLASS B
--------------------------------------------- ----------------------------------
YEAR ENDED YEAR ENDED JULY 6, 1994* YEAR ENDED AUGUST 1, 1995+ TO
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1995 JUNE 30, 1997 JUNE 30, 1996
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.63 $ 9.08 $ 12.00 $ 12.45 $ 9.58
-------- ------- ------- ------- ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.02 0.10 (0.02) (0.03) 0.03
Net Realized and Unrealized Gain (Loss) 6.46 3.47 (2.70) 6.28 2.84
-------- ------- ------- ------- ------
Total From Investment Operations 6.48 3.57 (2.72) 6.25 2.87
-------- ------- ------- ------- ------
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 $12.45
======== ======= ======= ======= ======
TOTAL RETURN (1) 57.32% 39.35% (23.07)% 56.17% 29.26%
======== ======= ======= ======= ======
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 84,401 $18,701 $ 7,658 $14,314 $2,041
Ratio of Expenses to Average Net Assets 2.24% 2.11% 2.46%** 2.99% 2.87%**
Ratio of Net Investment Income (Loss) to
Average Net Assets (0.08)% 1.18% (0.44)%** (0.78)% 0.88%**
Portfolio Turnover Rate 241% 131% 107% 241% 131%
Average Commission Rate #
Per Share $ 0.0006 N/A N/A $0.0006 N/A
As a Percentage of Trade Amount 0.31% N/A N/A 0.31% N/A
- ---------------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense Limitation During
the Period
Per Share Benefit to Net Investment Income $ 0.10 $ 0.09 $ 0.13 $ 0.02 $ 0.04
Ratios Before Expense Limitation:
Expenses to Average Net Assets 2.77% 3.28% 4.30%** 3.55% 3.89%**
Net Investment Income (Loss) to Average Net
Assets (0.61)% 0.01% (2.26)%** (1.34)% (0.14)%**
Ratio of Expenses to Average Net Assets
excluding country tax expense 2.10% 2.10% 2.10%** 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.
15
<PAGE> 76
FINANCIAL HIGHLIGHTS CONTINUED
LATIN AMERICAN FUND
<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.
16
<PAGE> 77
INVESTMENT OBJECTIVES AND POLICIES
The investment objective of each Fund is described below, together with the
policies the Fund employs in its efforts to achieve its objective. Each Fund's
investment objective is a fundamental policy which may not be changed by the
Fund without the approval of a majority of the Fund's outstanding voting
securities. There is no assurance that a Fund will attain its objective. The
investment policies described below are not fundamental policies and may be
changed without shareholder approval. For each of the Funds, other than the
Japanese Equity and Latin American Funds, equity securities include common and
preferred stocks, convertible securities, and rights and warrants to purchase
common stocks. For more information about certain investment practices of the
Funds, see "Additional Investment Information" below and "Investment Objectives
and Policies" in the Statement of Additional Information.
THE ASIAN GROWTH FUND
The investment objective of the Asian Growth Fund is long-term capital
appreciation through investment primarily in equity securities of Asian issuers,
excluding Japan. The production of any current income is incidental to this
objective. The Fund seeks to achieve its objective by investing, under normal
market conditions, at least 65% of the value of its total assets in equity
securities which are traded on recognized stock exchanges of the countries in
Asia described below and in equity securities of companies organized under the
laws of an Asian country whose business is conducted principally in Asia. The
Fund does not intend to invest in securities which are primarily traded in
markets in Japan or in companies organized under the laws of Japan. The Fund may
also invest in sponsored or unsponsored depositary receipts, including American
Depositary Receipts ("ADRs") of Asian issuers that are traded on stock exchanges
in the United States.
The Asian Growth Fund will invest in countries having more established
markets in the Asian region. The Asian countries to be represented in the Fund
will consist of three or more of the following countries: Hong Kong (China),
Singapore, Malaysia, Thailand, the Philippines and Indonesia. The Fund may also
invest in common stocks traded on markets in mainland China, Taiwan, South
Korea, India, Pakistan, Sri Lanka and other developing markets that are open to
foreign investment. There is no requirement that the Fund, at any given time,
invest in any one particular country or in all of the countries listed above or
in any other Asian countries. Allocation of investments among the various
countries will depend on the relative attractiveness of the stocks of issuers in
the respective countries. Government regulation and restrictions in many of the
countries of interest may limit the amount, mode and extent of investment in
companies in such countries.
The Sub-Adviser's approach in selecting investments for the Asian Growth
Fund is oriented to individual stock selection and is value driven. In selecting
stocks for the Fund, the Sub-Adviser initially identifies those stocks which it
believes to be undervalued in relation to the issuer's assets, cash flow,
earnings and revenues, and then evaluates the future value of such stocks by
running the results of an in-depth study of the issuer through a dividend
discount model. The Sub-Adviser utilizes the research of a number of sources,
including its affiliate in Geneva, Switzerland, Morgan Stanley Capital
International ("MSCI"), in identifying attractive securities, and applies a
number of proprietary screening criteria to identify those securities it
believes to be undervalued. Fund holdings are regularly reviewed and subjected
to fundamental analysis to determine whether they continue to conform to the
Sub-Adviser's value criteria. Those which no longer conform are sold. In
selecting industries and particular issuers, the Sub-Adviser will evaluate costs
of labor and raw materials, access to technology, export of products and
government regulation, as well as the assets, revenues and earnings of issuers.
Although the Fund seeks to invest in larger companies, it may invest in small-
and medium-sized
17
<PAGE> 78
companies that, in the Sub-Adviser's view, have potential for growth. The Fund
may invest in equity securities of smaller capitalized companies, which may
involve a higher degree of risk and price volatility than investment in
securities of larger companies. The Fund's investments will include securities
of issuers located in developing countries and traded in emerging markets. These
securities pose greater liquidity risks and other risks than securities of
companies located in developed countries and traded in more established markets.
Although the Asian Growth Fund intends to invest primarily in securities
listed on stock exchanges, it may also invest in securities traded in
over-the-counter markets and, to a limited extent, in non-publicly traded
securities. Securities traded in over-the-counter markets and non-publicly
traded securities pose liquidity risks.
Under normal circumstances, at least 65% of the total assets of the Asian
Growth Fund will be invested in equity securities of issuers in Asian countries,
excluding Japan. Any remaining assets of the Fund will be kept in any
combination of debt instruments, bills and bonds of governmental entities in
Asia and the United States, in notes, debentures, and bonds of companies in Asia
and in money market instruments in the United States. Debt securities
convertible into common stocks will be investment grade (rated in one of the
four highest rating categories by an internationally recognized statistical
rating organization) or, if unrated, will be of comparable quality as determined
by the Sub-Adviser under the supervision of the Board of Directors. Pending
investment or settlement, and for liquidity purposes, the Fund may invest in
domestic, Eurodollar and foreign short-term money market instruments. For
temporary defensive purposes, the Fund may invest in money market instruments
and short- and medium-term debt securities that the Sub-Adviser believes to be
of high quality or hold cash. The Fund may enter into forward foreign currency
exchange contracts and invest in derivative instruments. Because of the lack of
hedging facilities in the currency markets of Asia, no active currency hedging
strategy is anticipated currently. Instead, each investment will be considered
on a total currency adjusted basis with the U.S. Dollar as a base currency.
For further information about the foregoing and certain additional
investment practices of the Asian Growth Fund, see "Additional Investment
Information" below.
THE EMERGING MARKETS FUND
The investment objective of the Emerging Markets Fund is to provide
long-term capital appreciation by investing primarily in equity securities of
emerging country issuers. Under normal conditions, at least 65% of the Fund's
total assets will be invested in emerging country equity securities. As used in
this Prospectus, the term "emerging markets" applies to any country which, in
the opinion of the Sub-Adviser, is generally considered to be an emerging or
developing country by the international financial community, including the
International Bank for Reconstruction and Development (more commonly known as
The World Bank) and the International Finance Corporation. There are currently
over 130 countries which, in the opinion of the Sub-Adviser, are generally
considered to be emerging or developing countries by the international financial
community, approximately 40 of which currently have stock markets. These
countries generally include every nation in the world except the United States,
Canada, Japan, Australia, New Zealand and most nations located in Western
Europe. Currently, investing in many emerging markets is not feasible or may
involve unacceptable political risks. The Fund will focus its investments on
those emerging market countries in which it believes the economics are
18
<PAGE> 79
developing strongly and in which the markets are becoming more sophisticated.
The Fund intends to invest primarily in some or all of the following countries:
<TABLE>
<S> <C> <C> <C>
Argentina Hungary Morocco South Korea
Botswana India Nigeria Sri Lanka
Brazil Indonesia Pakistan Taiwan
Chile Israel Peru Thailand
China (mainland and Jamaica Philippines Turkey
Hong Kong) Jordan Poland Venezuela
Colombia Kenya Portugal Zimbabwe
Ghana Malaysia Russia
Greece Mexico South Africa
</TABLE>
As markets in other countries develop, the Emerging Markets Fund expects to
expand and further diversify the emerging markets countries in which it invests.
An emerging markets security is one issued by a company that, in the opinion of
the Sub-Adviser, has one or more of the following characteristics: (i) its
principal securities trading market is in an emerging markets country; (ii)
alone or on a consolidated basis it derives 50% or more of its annual revenue
from either goods produced, sales made or services performed in emerging markets
countries; or (iii) it is organized under the laws of, and has a principal
office in, an emerging markets country. The Sub-Adviser will base determinations
as to eligibility on publicly available information and inquiries made to the
companies.
To the extent that the Emerging Markets Fund's assets are not invested in
emerging country equity securities, the remainder of the assets may be invested
in (i) debt securities denominated in the currency of an emerging country or
issued or guaranteed by an emerging country company or the government of an
emerging country; (ii) equity or debt securities of corporate or governmental
issuers located in industrialized countries; and (iii) short-term and
medium-term debt securities of the type described below under "Additional
Investment Information -- Temporary Investments." The Fund's assets may be
invested in debt securities when the Fund believes that, based upon factors such
as relative interest rate levels and foreign exchange rates, such debt
securities offer opportunities for long-term capital appreciation. It is likely
that many of the debt securities in which the Fund will invest will be unrated,
and whether or not rated, such securities may have speculative characteristics.
When deemed appropriate by the Sub-Adviser, the Fund may invest up to 10% of its
total assets (measured at the time of the investment) in lower quality debt
securities. Lower quality debt securities, also known as "junk bonds," are often
considered to be speculative and involve greater risk of default or price
changes due to changes in the issuer's creditworthiness. The market prices of
these securities may fluctuate more than those of higher quality securities and
may decline significantly in periods of general economic difficulty, which may
follow periods of rising interest rates. Securities in the lowest quality
category may present the risk of default, or may be in default.
The Emerging Markets Fund may invest indirectly in securities of emerging
country issuers through sponsored or unsponsored depositary receipts, including
ADRs. The Fund may also invest in non-publicly traded securities, private
placements and restricted securities. The Fund may enter into short sales,
forward foreign currency exchange contracts and instruments. For temporary
defensive purposes, the Fund may invest in money market instruments and short-
and medium-term debt securities that the Sub-Adviser believes to be of high
quality, or hold cash.
19
<PAGE> 80
For further information about the foregoing and certain additional
investment practices of the Emerging Markets Fund, including the particular
risks associated with Russian Securities, see "Additional Investment
Information" below.
THE GLOBAL EQUITY FUND
The Global Equity Fund seeks long-term capital appreciation by investing
primarily in equity securities of issuers throughout the world, including U.S.
issuers. The Fund may invest in American, global or other types of depositary
receipts. The Fund also may invest in equity-linked securities. The Sub-Adviser
expects that, under normal circumstances, at least 20% of the Fund's total
assets will be invested in the common stocks of U.S. issuers. The remainder of
the Fund will be invested in issuers located throughout the world, including
those located in emerging markets. At least 65% of the total assets of the Fund
will be invested in equity securities under normal circumstances. Securities in
emerging markets may not be as liquid as those in developed markets and pose
certain additional risks. See "The Emerging Markets Fund," above for a
discussion of emerging markets. Although the Fund intends to invest primarily in
securities listed on stock exchanges, it will also invest in securities traded
in over-the-counter markets. The Fund may invest in forward foreign currency
exchange contracts, reverse repurchase agreements, derivatives, when-issued and
delayed delivery securities and non-publicly traded securities, including
private placements and restricted securities. For temporary defensive purposes,
the Fund invests in money market instruments and short-term and medium-term debt
securities as described below under "Additional Investment Information --
Temporary Investments."
The Sub-Adviser's approach in selecting investments for the Fund is oriented
to individual stock selection, and is value driven. The Sub-Adviser initially
identifies those stocks which it believes to be undervalued in relation to the
issuer's cash flow, earnings and dividends. The Sub-Adviser utilizes the
research from a number of sources, including MSCI, in identifying attractive
securities, and applies a number of proprietary screening criteria to identify
those securities it believes to be undervalued. Fund holdings are regularly
reviewed and subjected to fundamental analysis to determine whether they
continue to conform to the Sub-Adviser's value criteria. Securities which no
longer conform to such value criteria are sold.
For further information about the foregoing and certain additional
investment practices of the Fund, see "Additional Investment Information" below.
THE GLOBAL EQUITY ALLOCATION FUND
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 Fund will, under normal market conditions, invest at
least 65% of the value of its total assets in equity securities of issuers in at
least three different countries. The Sub-Adviser utilizes a "top-down" approach
in selecting investments for the Fund that emphasizes country selection and
weighting rather than individual stock selection. This approach reflects the
Sub-Adviser's philosophy for this Fund that a diversified selection of
securities representing exposure to world markets based upon the economic
outlook and current valuation levels for each country is an effective way to
maximize the return and minimize the risk associated with global investment.
The Sub-Adviser determines country allocations for the Global Equity
Allocation 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 other industrialized countries throughout the world that
comprise the MSCI World Index. As
20
<PAGE> 81
of the date of this Prospectus, countries comprising the MSCI World Index
included: Australia, Austria, Belgium, Canada, Denmark, Finland, France,
Germany, Hong Kong (China), Ireland, Italy, Japan, Malaysia, the Netherlands,
New Zealand, Norway, Singapore, Spain, Sweden, Switzerland, the United Kingdom
and the United States. In addition, the Fund may invest a portion of its assets
in emerging country equity securities, which are described in detail in the
discussion of the Emerging Markets Fund, above. The Sub-Adviser intends to use
the same criteria as used for the Emerging Markets Fund in selecting emerging
market securities for investment. As of the date of this Prospectus, the Fund
intends to invest in some or all of the following emerging markets: 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
Sub-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 Sub-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 Sub-Adviser, provide an expected
return for each stock market. The expected return is adjusted by currency return
expectations derived from the Sub-Adviser's purchasing-power parity exchange
rate model to arrive at an expected total return in U.S. Dollars. The final
country allocation decision 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
common stocks which, in the aggregate, replicate a broad market index, which in
most cases will be the MSCI Index for the particular country. The MSCI Indices
measure the performance of stock markets worldwide. 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 Sub-Adviser may overweight or underweight an industry segment of a
particular index if it concludes this would be advantageous to the Fund. Debt
securities convertible into common stocks will be investment grade (rated in one
of the four highest rating categories by a nationally recognized statistical
rating organization (an "NRSRO")) or, if unrated, will be of comparable quality
as determined by the Adviser under the supervision of the Board of Directors.
Indexation of the Fund's stock selection reduces stock-specific risk through
diversification and minimizes transaction costs, which can be substantial in
foreign markets.
The Global Equity Allocation Fund will normally purchase common stocks
listed on a major stock exchange in the subject country. The Global Equity
Allocation Fund may invest in non-publicly traded securities, private
placements, restricted securities and derivative instruments. For temporary
defensive purposes, the Fund may invest in money market instruments and short-
and medium-term debt securities as described below under "Additional Investment
Information -- Temporary Investments."
For further information about the foregoing and certain additional
investment practices of the Fund, see "Additional Investment Information" below.
THE INTERNATIONAL MAGNUM FUND
The investment objective of the International Magnum Fund is to provide
long-term capital appreciation. The production of any current income is
incidental to this objective. The Fund seeks to achieve its objective by
investing primarily in equity securities of non-U.S. issuers in accordance with
the EAFE country (defined
21
<PAGE> 82
below) weightings determined by the Sub-Adviser. The equity securities in which
the Fund may invest may be denominated in any currency.
The countries in which the International Magnum Fund will invest are those
comprising the MSCI EAFE Index (the "Index"), which currently includes
Australia, Japan, New Zealand, most nations located in Western Europe and
certain developed countries in Asia, such as Hong Kong (China) and Singapore
(each an "EAFE country," and collectively the "EAFE countries"). At least 65% of
the total assets of the Fund will be invested in equity securities of issuers in
at least three different EAFE countries under normal circumstances. In addition,
the Fund may invest in a foreign country when it has been announced publicly
that it will be added to the Index.
By analyzing a variety of macroeconomic and political factors, the
Sub-Adviser develops fundamental projections on comparative interest rates,
currencies, corporate profits and economic growth among the various regions
represented in the Index. These projections will be used to establish regional
allocation strategies. Within these regional allocations, the Sub-Adviser then
selects equity securities among issuers of a region.
The Sub-Adviser's approach in selecting among equity securities within a
region comprised of EAFE countries is oriented to individual stock selection and
is value driven. The Sub-Adviser identifies those equity securities which it
believes to be undervalued in relation to the issuer's assets, cash flow,
earnings and revenues. In selecting investments, the Sub-Adviser utilizes the
research of a number of sources, including MSCI. Fund holdings are regularly
reviewed and subjected to fundamental analysis to determine whether they
continue to conform to the Sub-Adviser's investment criteria. Equity securities
which no longer conform to such investment criteria will be sold.
Although the International Magnum Fund intends to invest primarily in equity
securities listed on a stock exchange in an EAFE country, the Fund may invest in
equity securities that are traded over the counter or that are not admitted to
listing on a stock exchange or dealt in on a regulated market. As a result of
the absence of a public trading market, such securities may pose liquidity
risks. The Fund may also invest in private placements or initial public
offerings in the form of oversubscriptions. Such investments generally entail
short-term liquidity risks.
The International Magnum Fund may invest up to 10% of its total assets in
(i) investment funds with investment objectives similar to that of the Fund and
(ii) for temporary purposes, money market funds and pooled investment vehicles.
If the Fund invests in other investment funds, stockholders will bear not only
their proportionate share of the expenses of the Fund (including operating
expenses and fees of the Adviser), but also will indirectly bear similar
expenses of the underlying investment fund. The Fund may invest in forward
foreign currency contracts, derivatives, when-issued and delayed delivery
securities and non-publicly traded securities including private placements and
restricted securities.
Although the International Magnum Fund anticipates being fully invested in
equity securities of EAFE countries, the Fund may invest, under normal
circumstances for cash management purposes, up to 35% of its total assets in
certain short-term (less than twelve months to maturity) and medium-term (not
greater than five years to maturity) debt securities or hold cash. For temporary
defensive purposes, the Fund may invest in money market instruments and short
and medium-term debt securities described below under "Additional Investment
Information -- Temporary Investments."
For further information about the foregoing and certain additional
investment practices of the International Magnum Fund, see "Additional
Investment Information" below.
22
<PAGE> 83
THE JAPANESE EQUITY FUND
The investment objective of the Japanese Equity Fund is to provide long-term
capital appreciation. The Fund seeks to achieve this objective by investing
primarily in equity securities of Japanese issuers. With respect to the Fund,
equity securities include common and preferred stocks, convertible securities,
and rights and warrants to purchase common stocks and depositary receipts.
Under normal conditions, the Japanese Equity Fund will invest at least 80%
of its total assets in securities issued by entities that are organized under
the laws of Japan, entities for which the principal securities trading market is
in Japan, and entities not organized under the laws of Japan but deriving 50% or
more of their revenues or profits from goods produced or sold, investments made,
or services performed in Japan or which have at least 50% of their assets
situated in Japan. These securities may include debt securities (issued by the
Japanese government or by Japanese companies) when the Sub-Adviser believes that
the potential for capital appreciation from investment in debt securities equals
or exceeds that available from investment in equity securities. In making
investment decisions, the Sub-Adviser will consider, among other factors, the
size of the company, its financial condition, its marketing and technical
strengths and its competitiveness in its industry. All debt securities in which
the Fund may invest will be rated no lower than BBB by Standard & Poor's Ratings
Group ("S&P"), Baa by Moody's Investors Services, Inc. ("Moody's") or BBB by
Mikuni Inc. ("Mikuni") (a Japanese rating agency) or, if unrated, of comparable
quality as determined by the Sub-Adviser. Securities rated BBB by S&P, Baa by
Moody's or BBB by Mikuni have speculative characteristics and changes in
economic conditions or other circumstances are more likely to lead to a weakened
capacity to make principal and interest payments on such securities than would
be the case with higher rated securities. The convertible securities in which
the Fund may invest include bonds, notes, debentures, preferred stocks and other
securities convertible into common stocks and may be fixed-income or zero coupon
debt securities. Prior to their conversion, convertible securities may have
characteristics similar to nonconvertible debt securities.
The Japanese Equity Fund currently intends to focus its investments in
Japanese companies that have an active market for their shares and that the
Sub-Adviser believes show a potential for better than average growth. The Fund
anticipates that most equity securities of Japanese companies in which it
invests, either directly or indirectly by means of ADRs or convertible
debentures, will be listed on securities exchanges in Japan. The Fund may also
invest in equity securities of Japanese companies that are traded in an
over-the-counter market.
The Japanese Equity Fund may also invest up to 20% of its total assets in
cash or short-term government or other short-term prime obligations or
repurchase agreements so that funds may be readily available for general
corporate purposes, including the payment of dividends, redemptions and
operating expenses, for investment in securities through exercise of rights or
otherwise. The Fund may invest in forward foreign currency contracts,
derivatives, when-issued and delayed delivery securities and non-publicly traded
securities including private placements and restricted securities. For temporary
defensive purposes, the Fund may invest in money market instruments and
medium-term debt securities as described below under "Additional Investment
Information -- Temporary Investments" below.
For further information about the foregoing and certain additional
investment practices of the Japanese Equity Fund, see "Additional Investment
Information" below.
Investors should consider the following factors inherent in investment in
Japan.
TRADE ISSUES. Because of the concentration of Japanese exports in highly
visible products such as automobiles, machine tools and semiconductors, and the
large trade surpluses ensuing therefrom, Japan is in a difficult
23
<PAGE> 84
phase in its relation with its trading partners, particularly the U.S., where
the trade imbalance is the greatest. Retaliatory action taken by such trading
partners could affect the ability of Japanese companies to export goods to these
countries, which could negatively impact the value of securities in the Fund.
CURRENCY FACTORS. Over a long period of years, the yen has generally
appreciated in relation to the dollar. The yen's appreciation would add to the
returns of dollars invested through the Fund in Japan. A decline in the value of
the yen would have the opposite effect, adversely affecting the value of the
Fund in dollar terms.
THE JAPANESE STOCK MARKET. Like other stock markets, the Japanese stock
market can be volatile. A decline in the market may have an adverse effect on
the availability of credit and on the value of the substantial stock holdings of
Japanese companies in particular, Japanese banks, insurance companies and other
financial institutions. A decline in the market may contribute to weakness in
Japan's economy. The common stocks of many Japanese companies continue to trade
at high price-earnings ratios. Differences in accounting methods make it
difficult to compare the earnings of Japanese companies with those of companies
in other countries, especially the United States. In general, however, reported
net income in Japan is understated relative to U.S. accounting standards. In
addition, Japanese companies have tended historically to have higher growth
rates than U.S. companies, and Japanese interest rates have generally been lower
than in the U.S., both of which factors tend to result in lower discount rates
and higher price-earnings ratios in Japan than in the United States.
THE LATIN AMERICAN FUND
The investment objective of the Latin American Fund is long-term capital
appreciation. The Fund seeks to achieve this objective by investing primarily in
equity securities (i) of companies organized in or for which the principal
securities trading market is in Latin America, (ii) denominated in a Latin
American currency issued by companies to finance operations in Latin America, or
(iii) of companies that alone or on a consolidated basis derive 50% or more of
their annual revenues from either goods produced, sales made or services
performed in Latin America (collectively, "Latin American issuers") and by
investing, from time to time, in debt securities issued or guaranteed by a Latin
American government or governmental entity ("Sovereign Debt"). With respect to
the Fund, unless otherwise indicated, Latin America consists of Argentina,
Bolivia, Brazil, Chile, Colombia, Costa Rica, Cuba, the Dominican Republic,
Ecuador, El Salvador, Guatemala, Honduras, Mexico, Nicaragua, Panama, Paraguay,
Peru, Uruguay and Venezuela. Income is not an investment objective or a
consideration in selecting investments.
Under normal conditions, substantially all, but not less than 80%, of the
Latin American Fund's total assets are invested in equity securities of Latin
American issuers and in Sovereign Debt. With respect to the Fund, equity
securities include common or preferred stocks (including convertible preferred
stock), bonds, notes or debentures convertible into common or preferred stock,
stock purchase warrants or rights, equity interests in trusts or partnerships or
American, global or other types of depositary receipts. Securities in which the
Latin American Fund may invest include those that are neither listed on a stock
exchange nor traded over-the-counter. As a result of the absence of a public
trading market for these securities, they may be less liquid than publicly
traded securities.
The Latin American Fund focuses its investments in listed equity securities
in Argentina, Brazil, Chile and Mexico, the most developed capital markets in
Latin America. The Fund expects, under normal market conditions, to have at
least 55% of its total assets invested in listed equity securities of issuers in
these four countries. In addition, the Fund actively invests in markets in other
Latin American countries such as Colombia, Peru and Venezuela. The Fund is not
limited in the extent to which it may invest in any Latin American country
24
<PAGE> 85
and intends to invest opportunistically as markets develop. The portion of the
Fund's holdings in any Latin American country will vary from time to time,
although the portion of the Fund's assets invested in Chile may tend to vary
less than the portions invested in other Latin American countries because, with
limited exceptions, capital invested in Chile currently cannot be repatriated
for one year.
The securities markets of Latin American countries are substantially
smaller, less liquid and more volatile than the major securities markets in the
United States. A high proportion of the shares of many Latin American issuers
may be held by a limited number of persons, which may limit the number of shares
available for investment by the Fund. A limited number of issuers in most, if
not all, Latin American securities markets may represent a disproportionately
large percentage of market capitalization and trading value. The limited
liquidity of Latin American securities markets may also affect the Fund's
ability to acquire or dispose of securities at the price and time it wishes to
do so. In addition, certain Latin American securities markets, including those
of Argentina, Brazil, Chile and Mexico, are susceptible to being influenced by
large investors trading significant blocks of securities or by large
dispositions of securities resulting from the failure to meet margin calls when
due.
In addition to their smaller size, lesser liquidity and greater volatility,
Latin American securities markets are less developed than U.S. securities
markets. Disclosure and regulatory standards are in many respects less stringent
than U.S. standards. Furthermore, there is a lower level of monitoring and
regulation of the markets and the activities of investors in such markets, and
enforcement of existing regulations has been extremely limited. Consequently,
the prices at which the Fund may acquire investments may be affected by other
market participants' anticipation of the Fund's investing, by trading by persons
with material non-public information and by securities transactions by brokers
in anticipation of transactions by the Fund in particular securities.
Commissions and other transaction costs on most, if not all, Latin American
securities exchanges are generally higher than in the United States, although
the Fund will endeavor to achieve the most favorable net results on its
portfolio transactions.
To the extent that the Latin American Fund's assets are not invested in
equity securities of Latin American issuers or in Sovereign Debt, the remainder
of the assets may be invested in (i) debt securities of Latin American corporate
issuers, (ii) equity or debt securities of corporate or governmental issuers
located in countries outside Latin America, and (iii) short-term and medium-term
debt securities of the type described below under "Temporary Investments." The
Fund's assets may be invested in debt securities when the Fund believes that,
based upon factors such as relative interest rate levels and foreign exchange
rates, such debt securities offer opportunities for long-term capital
appreciation. It is likely that many of the debt securities in which the Fund
will invest will be unrated. The Fund may invest up to 20% of its total assets
in securities that are determined by the Sub-Adviser to be comparable to
securities rated below investment grade by S&P or Moody's. Such lower-quality
securities are regarded as being predominantly speculative and involve
significant risks.
The Latin American Fund's holdings of lower-quality debt securities will
consist predominantly of Sovereign Debt, much of which trades at substantial
discounts from face value and which may include Sovereign Debt comparable to
securities rated as low as D by S&P or C by Moody's. The Fund may invest in
Sovereign Debt to hold and trade in appropriate circumstances, as well as to use
to participate in debt for equity conversion programs. The Fund will invest in
Sovereign Debt only when the Fund believes such investments offer opportunities
for long-term capital appreciation. Investment in Sovereign Debt involves a high
degree of risk and such securities are generally considered to be speculative in
nature.
25
<PAGE> 86
For temporary defensive purposes, the Latin American Fund may invest less
than 80% of its total assets in Latin American equity securities and Sovereign
Debt, in which case the Fund may invest in other equity or debt securities or
may invest in certain short-term (less than twelve months to maturity) and
medium-term (not greater than five years to maturity) debt securities or hold
cash. The Fund may enter into forward foreign currency exchange contracts and
foreign currency futures contracts, may purchase and write (sell) put and call
options on securities, foreign currency and on foreign currency futures
contracts, and may enter into stock index and interest rate futures contracts
and options thereon. There currently are limited options and futures markets for
Latin American currencies, securities and indexes, and the nature of the
strategies adopted by the Sub-Adviser and the extent to which those strategies
are used depends on the development of those markets. The Fund may also from
time to time lend securities (but not in excess of 20% of its total assets) from
its portfolio to brokers, dealers and financial institutions.
The Board of Directors has determined that, in light of the increased
presence of telecommunications companies in the Latin American markets, the
Fund's ability to achieve its investment objective would be materially adversely
affected if it were not permitted to invest more than 25% of its assets in
securities of companies in the telecommunications industries of the Latin
American countries in which the Fund invests. In accordance with the Fund's
investment restrictions and as a result of the Board's action, the Fund is
required to invest at least 25% of its total assets in securities of Latin
American issuers engaged in the telecommunications industry. The Fund will
remain so invested until the Board determines that the Fund should invest less
than 25% of its assets in that industry. Because the Fund will have a more
concentrated position in the securities of a single sector within the Latin
American securities markets, the Fund will be subject to certain risks with
respect to these portfolio securities. Market price movements affecting
telecommunications companies and their securities will have a greater impact on
the Fund's performance because of the more concentrated position in such
securities. Telecommunications may be subject to greater government regulation
than many other industries. Changes in government policies and the need to
obtain regulatory approvals may have a material effect on products and services
offered by telecommunications companies. Technological and structural
developments may adversely affect the profitability of telecommunications
companies. To better control the Fund's exposure to such risks, the Board has
limited investments in telecommunications securities to not more than 40% of the
Fund's assets.
The Latin American Fund is authorized to borrow up to 33 1/3% of its total
assets (including the amount borrowed), less all liabilities and indebtedness
other than the borrowing, for investment purposes to increase the opportunity
for greater return and for payment of dividends. Such borrowings would
constitute leverage, which is a speculative characteristic. See "Additional
Investment Information -- Borrowing and Other Forms of Leverage."
The Latin American Fund may also enter into forward foreign currency
contracts, derivatives, reverse repurchase agreements, short sales, when-issued
and delayed delivery contracts and non-publicly traded securities, including
private placements and restricted securities.
For further information about the foregoing and certain additional
investment practices of the Latin American Fund, see "Additional Investment
Information" below.
26
<PAGE> 87
ADDITIONAL INVESTMENT INFORMATION
BORROWING AND OTHER FORMS OF LEVERAGE
The Global Equity Allocation, Asian Growth, Emerging Markets, International
Magnum, and Japanese Equity Funds may borrow up to 10% of their total assets as
a temporary measure for extraordinary or emergency purposes. These funds may not
purchase additional securities when borrowings exceed 5% of total assets. The
Latin American Fund may enter into reverse repurchase agreements in accordance
with its investment objective and policies and borrow amounts up to 33 1/3% of
its total assets (including the amount borrowed), less all liabilities and
indebtedness other than the borrowing. The Global Equity Fund may borrow money
(i) as a temporary measure for extraordinary or emergency purposes, and (ii) in
connection with reverse repurchase agreements, provided that (i) and (ii) in
combination do not exceed 33 1/3% of the Fund's total assets (including the
amount borrowed) less liabilities (exclusive of borrowings) and, further, that
the Fund may not purchase additional securities when borrowings exceed 5% of its
total assets.
Borrowings by the Latin American Fund may result in leveraging. Leveraging
magnifies declines as well as increases in the net asset value of the Fund's
shares and in the yield on a Fund's investments. Although a Fund is authorized
to borrow, it will do so only when the Sub-Adviser believes that borrowing will
benefit the Fund after taking into account considerations such as the costs of
borrowing and the likely investment returns on securities purchased with
borrowed monies. Borrowing by the Funds may create the opportunity for increased
net income but, at the same time, would involve special risk considerations.
Each Fund expects that any borrowing, other than for temporary purposes,
will be made on a secured basis. The Funds' custodian will either segregate the
assets securing the borrowing for the benefit of the lenders or arrangements
will be made with a suitable sub-custodian. If assets used to secure the
borrowing decrease in value, the Funds may be required to pledge additional
collateral to the lender in the form of cash or securities to avoid liquidation
of those assets.
CONVERTIBLE SECURITIES, WARRANTS AND EQUITY-LINKED SECURITIES
Each Fund may invest in convertible securities, preferred stock, warrants or
other securities exchangeable under certain circumstances for shares of common
stock. Warrants are instruments giving holders the right, but not the
obligation, to buy shares of a company at a given price during a specified
period.
The Global Equity Fund may invest in equity-linked securities 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. Trading prices of the underlying
common stock will be influenced by the issuer's operational results, by complex,
interrelated political, economic, financial or other factors affecting the
capital markets, the stock exchanges on which the underlying common stock is
traded and the market segment of which the issuer is a part. In addition, it is
not possible to predict how equity-linked securities will trade in the secondary
market which is fairly developed and liquid. The market for such securities may
be shallow, however, and high volume trades may be possible only with
discounting. In addition to the foregoing risks, the return on such securities
depends on the creditworthiness of the issuer of the securities, which may be
the issuer of the underlying securities or a third party investment banker or
other lender. The creditworthiness of such third party issuer of equity-linked
securities may, and often does, exceed the creditworthiness of the issuer of the
underlying securities. The advantage of using equity-linked securities over
traditional equity and debt securities
27
<PAGE> 88
is that the former are income producing vehicles that may provide a higher
income than the dividend income on the underlying equity securities while
allowing some participation in the capital appreciation of the underlying equity
securities. Another advantage of using equity-linked securities is that they may
be used for hedging to reduce the risk of investing in the generally more
volatile underlying equity securities.
DEPOSITARY RECEIPTS
The Asian Growth, Emerging Markets, Global Equity, Japanese Equity and Latin
American Funds may invest in depositary receipts, including ADRs, Global
Depositary Receipts ("GDRs"), European Depositary Receipts ("EDRs") and other
depositary receipts, to the extent that such depositary receipts become
available. ADRs are securities, typically issued by a U.S. financial institution
(a "depositary"), that evidence ownership interests in a security or a pool of
securities issued by a foreign issuer (the "underlying issuer") and deposited
with the depositary. ADRs include American Depositary Shares and New York Shares
and may be "sponsored" or "unsponsored." Sponsored ADRs are established jointly
by a depositary and the underlying issuer, whereas unsponsored ADRs may be
established by a depositary without participation by the underlying issuer.
GDRs, EDRs and other types of depositary receipts are typically issued by
foreign depositaries, although they may also be issued by U.S. depositaries, and
evidence ownership interests in a security or pool of securities issued by
either a foreign or a U.S. corporation.
Holders of unsponsored depositary receipts generally bear all the costs
associated with establishing the unsponsored depositary receipt. The depositary
of an unsponsored depositary receipt is under no obligation to distribute
shareholder communications received from the underlying issuer or to pass
through to the holders of the unsponsored depositary receipt voting rights with
respect to the deposited securities or pool of securities. Depositary receipts
are not necessarily denominated in the same currency as the underlying
securities to which they may be connected. Generally, depositary receipts in
registered form are designed for use in the U.S. securities market and
depositary receipts in bearer form are designed for use in securities markets
outside the United States. The Funds may invest in sponsored and unsponsored
depositary receipts. For purposes of the Funds' investment policies, a Fund's
investments in depositary receipts will be deemed to be investments in the
underlying securities.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
Each of the Funds may enter into forward foreign currency exchange contracts
("forward contracts"). Forward contracts provide for the purchase or sale of an
amount of a specified foreign currency at a future date. Purposes for which such
contracts may be used include protecting against a decline in a foreign currency
against the U.S. Dollar between the trade date and settlement date when a Fund
purchases or sells securities, locking in the U.S. Dollar value of dividends
declared on securities held by the Fund and generally protecting the U.S. Dollar
value of securities held by the Fund against exchange rate fluctuations. While
such forward contracts may limit losses to a Fund as a result of exchange rate
fluctuations, they will also limit any exchange rate gains that might otherwise
have been realized.
FOREIGN INVESTMENT
Each of 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
28
<PAGE> 89
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 economic developments, the possibility that a foreign jurisdiction might
impose or change withholding taxes on 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.
Investments in securities of foreign issuers are frequently denominated in
foreign currencies, and a Fund may temporarily hold uninvested reserves in bank
deposits in foreign currencies. Therefore, the value of a Fund's assets measured
in U.S. Dollars may be affected favorably or unfavorably by changes in currency
exchange rates and exchange control regulations. Each Fund will also incur
certain costs in connection with conversions between various currencies.
INVESTMENT COMPANY SECURITIES
Each Fund may invest in securities of another open-end or closed-end
investment company by purchase in the open market involving only customary
brokers' commissions or in connection with mergers, acquisitions of assets or
consolidations and as may otherwise be permitted by the Investment Company Act
of 1940, as amended (the "1940 Act").
Some emerging market countries have laws and regulations that currently
preclude direct foreign investment in the securities of their companies.
However, indirect foreign investment in the securities of companies listed and
traded on the stock exchanges in these countries is permitted by certain
emerging market countries through investment funds which have been specifically
authorized. Certain of the Funds may invest in these investment funds, including
those advised by MSAM, as well as other investment companies, subject to
applicable provisions of the 1940 Act and other applicable laws. If a Fund
invests in such investment companies, the Fund's shareholders will bear not only
their proportionate share of the expenses of the Fund (including operating
expenses and the fees of the Adviser), but also will indirectly bear similar
expenses of the underlying investment funds.
LOANS OF PORTFOLIO SECURITIES
Each Fund may lend its portfolio securities to brokers, dealers, domestic
and foreign banks or other financial institutions for the purpose of increasing
its net investment income. These loans must be secured continuously by cash or
equivalent collateral or by a letter of credit at least equal to the market
value of the securities loaned plus accrued interest. The Funds will not enter
into securities loan transactions exceeding in the aggregate 33 1/3% of the
market value of a Fund's total assets (exceeding in the aggregate 20% of such
value
29
<PAGE> 90
with respect to the Latin American Fund). As with other extensions of credit,
there are risks of delay in recovery or even loss of rights in collateral should
the borrower of the portfolio securities fail financially.
LOWER RATED AND UNRATED DEBT SECURITIES
The Emerging Markets and Latin American Funds may invest in lower rated or
unrated debt securities, commonly referred to as "junk bonds." In addition, the
emerging country debt securities in which such Funds may invest are subject to
risk and will not be required to meet a minimum rating standard and may not be
rated. Fixed income securities are subject to the risk of an issuer's inability
to meet principal and interest payments on the obligations (credit risk) and may
also be subject to price volatility due to such factors as interest rate
sensitivity, market perception of the creditworthiness of the issuer and general
market liquidity (market risk). Lower rated or unrated securities are more
likely to react to developments affecting market and credit risk than are more
highly rated securities, which react primarily to movements in the general level
of interest rates. The market values of fixed-income securities tend to vary
inversely with the level of interest rates. Yields and market values of lower
rated and unrated debt securities will fluctuate over time, reflecting not only
changing interest rates but the market's perception of credit quality and the
outlook for economic growth. When economic conditions appear to be
deteriorating, medium to lower rated securities may decline in value due to
heightened concern over credit quality, regardless of prevailing interest rates.
Fluctuations in the value of a Fund's investments will be reflected in the
Fund's net asset value per share. The Sub-Adviser considers both credit risk and
market risk in making investment decisions for a Fund. Investors should
carefully consider the relative risks of investing in lower rated and unrated
debt securities and understand that such securities are not generally meant for
short-term investing.
Adverse economic developments may disrupt the market for U.S. corporate
lower rated and unrated debt securities and for international and emerging
country debt securities. Such disruptions may severely affect the ability of
issuers, especially highly leveraged issuers, to service their debt obligations
or to repay their obligations upon maturity. In addition, the secondary market
for lower rated and unrated debt securities, which is concentrated in relatively
few market makers, may not be as liquid as the secondary market for more highly
rated securities. As a result, the Sub-Adviser could find it more difficult to
sell these securities or may be able to sell the securities only at prices lower
than if such securities were widely traded. In addition, there may be limited
trading markets for debt securities of issuers located in emerging countries.
Prices realized upon the sale of such lower rated or unrated securities, under
these circumstances, may be less than the prices used in calculating a Fund's
net asset value.
Prices for lower rated and unrated debt securities may be affected by
legislative and regulatory developments. These laws could adversely affect a
Fund's net asset value and investment practices, the secondary market for lower
rated and unrated debt securities, the financial condition of issuers of such
securities and the value of outstanding lower rated and unrated debt securities.
For example, U.S. federal legislation requiring the divestiture by federally
insured savings and loan associations of their investments in lower rated and
unrated debt securities and limiting the deductibility of interest by certain
corporate issuers of lower rated and unrated debt securities adversely affected
the market in recent years.
Lower rated or unrated debt obligations also present risks based on payment
expectations. If an issuer calls the obligations for redemption, a Fund may have
to replace the security with a lower yielding security, resulting in a decreased
return for investors. If a Fund experiences unexpected net redemptions, it may
be forced to sell
30
<PAGE> 91
its higher rated securities, resulting in a decline in the overall credit
quality of the Fund's investment portfolio and increasing the exposure of the
Fund to the risks of lower rated and unrated debt securities.
MONEY MARKET INSTRUMENTS
Each Fund is permitted to invest in money market instruments pending other
investment, prior to settlement of portfolio transactions, for liquidity and for
temporary defensive purposes, although the Funds intend to stay invested in
securities satisfying their primary investment objective to the extent
practical. The money market investments permitted for the Funds include
obligations of the U.S. Government, its agencies and instrumentalities,
obligations of foreign sovereignties and other debt securities, including
high-grade commercial paper, repurchase agreements and bank obligations, such as
bankers' acceptances and certificates of deposit (including Eurodollar
certificates of deposit).
NON-PUBLICLY TRADED SECURITIES, PRIVATE PLACEMENTS AND RESTRICTED SECURITIES
Each Fund, except the Japanese Equity Fund, may invest in securities that
are neither listed on a stock exchange nor traded over the counter. Such
unlisted securities may involve a higher degree of business and financial risk
that can result in substantial losses. As a result of the absence of a public
trading market for these securities, they may be less liquid than publicly
traded securities. Although these securities may be resold in privately
negotiated transactions, the prices realized from these sales could be less than
what may be considered the fair value of such securities. Furthermore, companies
whose securities are not publicly traded may not be subject to the disclosure
and other investor protection requirements which might be applicable if their
securities were publicly traded. If such securities are required to be
registered under the securities laws of one or more jurisdictions before being
resold, a Fund may be required to bear the expenses of registration. No Fund may
invest more than 15% of its net assets in illiquid securities and, with the
exception of the Global Equity Fund, no fund may invest more than 10% of its
total assets in securities subject to legal or contractual restrictions on
resale. Securities that are restricted from sale to the public without
registration ("Restricted Securities") under the Securities Act of 1933, as
amended (the "1933 Act"), which can be offered and sold to qualified
institutional buyers under Rule 144A under the 1933 Act ("Rule 144A Securities")
may be determined to be liquid under guidelines adopted by, and subject to the
supervision of, the Board of Directors and therefore not subject to the
limitation on illiquid securities. Rule 144A securities may become illiquid if
qualified institutional buyers are not interested in acquiring the securities.
REPURCHASE AGREEMENTS
Each Fund may enter into repurchase agreements with investment dealers or
financial institutions that meet the credit guidelines of the Company's Board of
Directors. In a repurchase agreement, a Fund buys a security from a seller that
has agreed to repurchase it at a mutually agreed upon date and price, reflecting
the interest rate effective for the term of the agreement. The term of these
agreements is usually from overnight to one week and never exceeds one year. A
repurchase agreement may be viewed as a fully collateralized loan of money by a
Fund to the seller. The Funds always receive securities as collateral with a
market value at least equal to the purchase price, including accrued interest,
and this value is maintained during the term of the agreement. If the seller
defaults and the collateral value declines, a Fund might incur a loss. If
bankruptcy proceedings are commenced with respect to the seller, the Fund's
realization upon the collateral may be delayed or limited. Repurchase agreements
with durations (or maturities) over seven days in length are considered to be
illiquid securities.
31
<PAGE> 92
REVERSE REPURCHASE AGREEMENTS
The Latin American and Global Equity Funds may enter into reverse repurchase
agreements with brokers, dealers, banks or other financial institutions that
meet credit guidelines of the Company's Board of Directors. In a reverse
repurchase agreement, a Fund sells a security and agrees to repurchase it at a
mutually agreed upon date and price, reflecting the interest rate effective for
the term of the agreement. It may also be viewed as the borrowing of money by
the Fund. A Fund's investment of the proceeds of a reverse repurchase agreement
is the speculative factor known as leverage. The Funds will enter into a reverse
repurchase agreement only if the interest income from investment of the proceeds
is expected to be greater than the interest expense of the transaction and the
proceeds are invested for a period no longer than the term of the agreement. The
Funds will maintain with the appropriate custodian a separate account with a
segregated portfolio of cash or liquid assets in an amount at least equal to its
purchase obligations under these agreements (including accrued interest). If
interest rates rise during a reverse repurchase agreement, it may adversely
affect a Fund's net asset value. In the event that the buyer of securities under
a reverse repurchase agreement files for bankruptcy or becomes insolvent, the
buyer or its trustee or receiver may receive an extension of time to determine
whether to enforce the Fund's repurchase obligation, and the Fund's use of
proceeds of the agreement may effectively be restricted pending such decision.
RUSSIAN SECURITIES TRANSACTIONS
The Emerging Markets Fund may invest in equity securities of Russian
companies. The registration, clearing and settlement of securities transactions
in Russia are subject to significant risks not normally associated with
securities transactions in the United States and other more developed markets.
Ownership of shares in Russian companies is evidenced by entries in a company's
share register (except where shares are held through depositories that meet the
requirements of the 1940 Act) and the issuance of extracts from the register or,
in certain limited cases, by formal share certificates. However, Russian share
registers are frequently unreliable and the Fund could possibly lose its
registration through oversight, negligence or fraud. Moreover, Russia lacks a
centralized registry to record securities transactions and registrars located
throughout Russia or the companies themselves maintain share registers.
Registrars are under no obligation to provide extracts to potential purchasers
in a timely manner or at all and are not necessarily subject to effective state
supervision. In addition, while registrars are liable under law for losses
resulting from their errors, it may be difficult for the Fund to enforce any
rights it may have against the registrar or issuer of the securities in the
event of loss of share registration. Although Russian companies with more than
1,000 shareholders are required by law to employ an independent company to
maintain share registers, in practice, such companies have not always followed
this law. Because of this lack of independence of registrars, management of a
Russian company may be able to exert considerable influence over who can
purchase and sell the company's shares by illegally instructing the registrar to
refuse to record transactions on the share register. Furthermore, these
practices may prevent the Fund from investing in the securities of certain
Russian companies deemed suitable by the Sub-Adviser and could cause a delay in
the sale of Russian securities by the Fund if the company deems a purchaser
unsuitable, which may expose the Fund to potential loss on its investment.
In light of the risks described above, the Board of Directors has approved
certain procedures concerning the Fund's investments in Russian securities.
Among these procedures is a requirement that the Fund will not invest in the
securities of a Russian company unless that issuer's registrar has entered into
a contract with the
32
<PAGE> 93
Fund's sub-custodian containing certain protective conditions, including, among
other things, the sub-custodian's right to conduct regular share confirmations
on behalf of the Fund. This requirement will likely have the effect of
precluding investments in certain Russian companies that the Fund would
otherwise make.
SHORT SALES
The Emerging Markets and Latin American Funds may from time to time sell
securities short without limitation, although neither of such Funds intends to
sell securities short on a regular basis. A short sale is a transaction in which
a Fund sells securities it either owns or has the right to acquire at no added
cost (i.e., "against the box") or it does not own (but has borrowed) in
anticipation of a decline in the market price of the securities. When a Fund
makes a short sale of borrowed securities, the proceeds it receives from the
sale will be held on behalf of a broker until the Fund replaces the borrowed
securities. To deliver the securities to the buyer, a Fund will need to arrange
through a broker to borrow the securities and, in so doing, the Fund will become
obligated to replace the securities borrowed at their market price at the time
of replacement, whatever that price may be. A Fund may have to pay a premium to
borrow the securities and must pay any dividends or interest payable on the
securities until they are replaced.
A Fund's obligation to replace the securities borrowed in connection with a
short sale will be secured by collateral deposited with the broker that consists
of cash or liquid assets. In addition, the Fund will place in a segregated
account with the appropriate custodian an amount of cash or liquid assets equal
to the difference, if any, between (1) the market value of the securities sold,
and (2) any cash or liquid securities deposited as collateral with the broker in
connection with the short sale (not including the proceeds of the short sale).
Possible losses from short sales differ from losses that could be incurred from
a purchase of a security, because losses from short sales may be unlimited,
whereas losses from purchases can equal only the total amount invested.
TEMPORARY INVESTMENTS
For temporary defensive purposes, when the Sub-Adviser determines that
market conditions warrant, each Fund may invest a portion or all of its assets
in money market instruments, short- and medium-term debt securities that the
Sub-Adviser believes to be of high quality, or hold cash.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
Each Fund may purchase securities on a when-issued or delayed delivery
basis. In such transactions, instruments are bought with payment and delivery
taking place in the future in order to secure what is considered to be an
advantageous yield or price at the time of the transaction. The payment
obligation and the interest rates that will be received are each fixed at the
time a Fund enters into the commitment, and no interest accrues to the Fund
until settlement. Thus, it is possible that the market value at the time of
settlement could be higher or lower than the purchase price if the general level
of interest rates has changed. It is a current policy of each of the Funds,
other than the Global Equity Fund, not to enter into when-issued commitments or
delayed delivery securities exceeding, in the aggregate, 15% of a Fund's net
assets other than the obligations created by these commitments.
33
<PAGE> 94
ZERO COUPONS; PAY-IN-KIND; DEFERRED PAYMENT SECURITIES
The Funds may invest in zero coupon securities, which are securities that
are sold at a discount to par value and on which interest payments are not made
during the life of the security. Upon maturity, the holder is entitled to
receive the par value of the security. While interest payments are not made on
such securities, holders of such securities are deemed to have received annually
"phantom income." Because a Fund will distribute its "phantom income" to
shareholders, to the extent that shareholders elect to receive dividends in cash
rather than reinvesting such dividends in additional shares, the Fund will have
fewer assets with which to purchase income producing securities. A Fund accrues
income with respect to these securities prior to the receipt of cash payments.
Pay-in-kind securities are securities that have interest payable by delivery of
additional securities. Upon maturity, the holder is entitled to receive the
aggregate par value of the securities. Deferred payment securities are
securities that remain zero coupon securities until a predetermined date, at
which time the stated coupon rate becomes effective and interest becomes payable
at regular intervals. Zero coupon, pay-in-kind and deferred payment securities
may be subject to greater fluctuation in value and lesser liquidity in the event
of adverse market conditions than comparably rated securities paying cash
interest at regular interest payment periods.
DERIVATIVE INSTRUMENTS
The Funds are permitted to invest in various derivative instruments for both
hedging and non-hedging purposes. Derivative instruments include options,
futures and options on futures, structured notes, caps, floors, collars and
swaps. Additionally, the Funds may invest in other derivative instruments that
are developed over time if their use would be consistent with the objectives of
the Funds. Each Fund, other than the Global Equity Fund (as described below),
will limit its use of the foregoing derivative instruments for non-hedging
purposes to 33 1/3% of its total assets measured by the aggregate notional
amount of outstanding derivative instruments. In addition, no Fund, other than
the Global Equity Fund, 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% of its total
assets. The Global Equity Fund will limit its use of the foregoing derivative
instruments to 50% of its total assets measured by the aggregate notional amount
of outstanding derivative instruments, provided that no more than 33 1/3% of its
total assets are invested, for non-hedging purposes, in derivatives other than
futures and options on futures. The Funds' investments in forward foreign
currency contracts and derivatives used for hedging purposes are not subject to
the limits described above.
The Funds may use derivative instruments under a number of different
circumstances to further their investment objectives. The Funds may use
derivatives when doing so provides more liquidity than the direct purchase of
the securities underlying such derivatives. For example, a Fund may purchase
derivatives to quickly gain exposure to a market in response to changes in the
Fund's investment policy or upon the inflow of investable cash or when the
derivative provides greater liquidity than the underlying securities market. A
Fund may also use derivatives when it is restricted from directly owning the
underlying securities due to foreign investment restrictions or other reasons or
when doing so provides a price advantage over purchasing the underlying
securities directly, either because of a pricing differential between the
derivatives and securities markets or because of lower transaction costs
associated with the derivatives transaction. Derivatives may also be used by a
Fund for hedging purposes and in other circumstances when a Fund's portfolio
managers believe it advantageous to do so consistent with the Fund's investment
objective. The Funds will not, however, use
34
<PAGE> 95
derivatives in a manner that creates leverage, except to the extent that the use
of leverage is expressly permitted by a particular Fund's investment policies,
and then only in a manner consistent with such policies.
Some of the derivative instruments in which the Funds may invest and the
risks related thereto are described in more detail below.
CAPS, FLOORS AND COLLARS
The Funds may invest in caps, floors and collars, which are instruments
analogous to options. In particular, a cap is the right to receive the excess of
a reference rate over a given rate and is analogous to a put option. A floor is
the right to receive the excess of a given rate over a reference rate and is
analogous to a call option. Finally, a collar is an instrument that combines a
cap and a floor. That is, the buyer of a collar buys a cap and writes a floor,
and the writer of a collar writes a cap and buys a floor. The risks associated
with caps, floors and collars are similar to those associated with options. In
addition, caps, floors and collars are subject to risk of default by the
counterparty because they are privately negotiated instruments.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
The Funds may purchase and sell futures contracts and options on futures
contracts, including but not limited to securities index futures, foreign
currency exchange futures, interest rate futures and other financial futures.
Futures contracts provide for the sale by one party and purchase by another
party of a specified amount of a specific security, instrument or basket
thereof, at a specific future date and at a specified price. An option on a
futures contract is a legal contract that gives the holder the right to buy or
sell a specified amount of futures contracts at a fixed or determinable price
upon the exercise of the option.
The Funds may sell securities index futures contracts and/or options thereon
in anticipation of or during a market decline to attempt to offset the decrease
in market value of investments in its portfolio, or purchase securities index
futures in order to gain market exposure. Subject to applicable laws, the Funds
may engage in transactions in securities index futures contracts (and options
thereon) which are traded on a recognized securities or futures exchange, or may
purchase or sell such instruments in the over-the-counter market. There
currently are limited securities index futures and options on such futures in
many countries, particularly emerging countries. The nature of the strategies
adopted by the Sub-Adviser, and the extent to which those strategies are used,
may depend on the development of such markets.
The Funds may engage in transactions involving foreign currency exchange
futures contracts. Such contracts involve an obligation to purchase or sell a
specific currency at a specified future date and at a specified price. The Funds
may engage in such transactions to hedge their respective holdings and
commitments against changes in the level of future currency rates or to adjust
their exposure to a particular currency.
The Funds may engage in transactions in interest rate futures transactions.
Interest rate futures contracts involve an obligation to purchase or sell a
specific debt security, instrument or basket thereof at a specified future date
at a specified price. The value of the contract rises and falls inversely with
changes in interest rates. The Funds may engage in such transactions to hedge
their holdings of debt instruments against future changes in interest rates.
Financial futures are futures contracts relating to financial instruments,
such as U.S. Government securities, foreign currencies and certificates of
deposit. Such contracts involve an obligation to purchase or sell a specific
security, instrument or basket thereof at a specified future date at a specified
price. Like interest rate futures
35
<PAGE> 96
contracts, the value of financial futures contracts rises and falls inversely
with changes in interest rates. The Funds may engage in financial futures
contracts for hedging and non-hedging purposes.
Under rules adopted by the Commodity Futures Trading Commission, each Fund
may enter into futures contracts and options thereon for both hedging and
non-hedging purposes, provided that not more than 5% of such Fund's total assets
at the time of entering the transaction are required as margin and option
premiums to secure obligations under such contracts relating to non-hedging
activities.
Gains and losses on futures contracts and options thereon depend on the
Sub-Adviser's ability to predict correctly the direction of securities prices,
interest rates and other economic factors. Other risks associated with the use
of futures and options are (i) imperfect correlation between the change in
market value of investments held by a Fund and the prices of futures and options
relating to investments purchased or sold by the Fund, and (ii) possible lack of
a liquid secondary market for a futures contract and the resulting inability to
close a futures position. The risk that a Fund will be unable to close out a
futures position or options contract will be minimized by only entering into
futures contracts or options transactions for which there appears to be a liquid
exchange or secondary market. The risk of loss in trading on 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.
OPTIONS TRANSACTIONS
The Funds may seek to increase their returns or may hedge their portfolio
investments through options transactions with respect to (i) securities,
instruments, indices or baskets thereof in which such Funds may invest and (ii)
foreign currencies. Purchasing a put option gives a Fund the right to sell a
specified security, currency or basket of securities or currencies at the
exercise price until the expiration of the option. Purchasing a call option
gives a Fund the right to purchase a specified security, currency or basket of
securities or currencies at the exercise price until the expiration of the
option.
Each Fund also may write (i.e., sell) put and call options on investments
held in its portfolio, as well as with respect to a foreign currency. A Fund
that has written an option receives a premium, which increases the Fund's return
on the underlying security or instrument in the event the option expires
unexercised or is closed out at a profit. However, by writing a call option, a
Fund will limit its opportunity to profit from an increase in the market value
of the underlying security or instrument above the exercise price of the option
for as long as the Fund's obligation as writer of the option continues. The
Funds may only write options that are "covered." A covered call option means
that so long as the Fund is obligated as the writer of the option, it will
earmark or segregate sufficient liquid assets to cover its obligations under the
option or own (i) the underlying security or instrument subject to the option,
(ii) securities or instruments convertible or exchangeable without the payment
of any consideration into the security or instrument subject to the option, or
(iii) a call option on the same underlying security with a strike price no
higher than the price at which the underlying instrument was sold pursuant to a
short option position.
By writing (or selling) a put option, a Fund incurs an obligation to buy the
security or instrument underlying the option from the purchaser of the put at
the option's exercise price at any time during the option period, at the
purchaser's election. The Funds may also write options that may be exercisable
by the purchaser only on a specific date. A Fund that has written a put option
will earmark or segregate sufficient liquid assets to cover its obligations
under the option or will own a put option on the same underlying security with
an equal or higher strike price.
36
<PAGE> 97
The Funds may engage in transactions in options which are traded on
recognized exchanges or over-the-counter. There currently are limited options
markets in many countries, particularly emerging countries such as Latin
American countries, and the nature of the strategies adopted by the Sub-Adviser
and the extent to which those strategies are used will depend on the development
of such option markets. The primary risks associated with the use of options are
(i) imperfect correlation between the change in market value of investments
held, purchased or sold by a Fund and the prices of options relating to such
investments; and (ii) possible lack of a liquid secondary market for an option.
STRUCTURED NOTES
Structured Notes are derivatives on which the amount of principal repayment
and/or interest payments is based upon the movement of one or more factors.
These factors include, but are not limited to, currency exchange rates, interest
rates (such as the prime lending rate and LIBOR) and stock indices such as the
S&P 500 Index. In some cases, the impact of the movements of these factors may
increase or decrease through the use of multipliers or deflators. The Funds may
use structured notes to tailor their investments to the specific risks and
returns the Sub-Adviser wishes to accept while avoiding or reducing certain
other risks.
SWAPS -- SWAP CONTRACTS
Swaps and Swap Contracts are derivatives in the form of a contract or other
similar instrument in which two parties agree to exchange the returns generated
by a security, instrument, basket thereof or index for the returns generated by
another security, instrument, basket thereof or index. The payment streams are
calculated by reference to a specific security, instrument, basket thereof or
index and an agreed upon notional amount. The relevant indices include but are
not limited to, currencies, fixed interest rates, prices and 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 the return generated by a second fixed income index. The currency swaps in
which the Funds 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.
A Fund will usually enter into swaps on a net basis, i.e., the two return
streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with a Fund receiving or paying, as the case may
be, only the net amount of the two returns. A Fund's obligations under a swap
agreement will be accrued daily (offset against any amounts owing to the Fund)
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. A Fund will not enter into any swap agreement unless the
counterparty meets the rating requirements set forth in guidelines established
by the Company's Board of Directors.
Interest rate and total rate of return swaps do not involve the delivery of
securities, other underlying assets, or principal. Accordingly, the risk of loss
with respect to interest rate and total rate of return swaps is limited to the
net amount of payments that a Fund is contractually obligated to make. If the
other party to an interest rate or total rate of return swap defaults, a Fund's
risk of loss consists of the net amount of payments that the Fund is
contractually entitled to receive. In contrast, currency swaps may 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 may be subject to the risk that the other party to the swap will
default on its contractual
37
<PAGE> 98
delivery obligations. If there is a default by the counterparty, a Fund may have
contractual remedies pursuant to the agreements related to the transaction. The
swaps 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 swaps market has
become relatively liquid. Swaps that include 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 "traditional" swaps.
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 Funds would be less favorable than it would have been if this
investment technique were not used.
INVESTMENT LIMITATIONS
Each Fund, except the Emerging Markets, Latin American and International
Magnum Funds, is a diversified investment company under the 1940 Act, and is
subject to the following limitations as to 75% of its total assets: (a) the Fund
may not invest more than 5% of its total assets in the securities of any one
issuer, except obligations of the U.S. Government, and its agencies and
instrumentalities, and (b) the Fund may not own more than 10% of the outstanding
voting securities of any one issuer. The Emerging Markets, Latin American and
International Magnum Funds are non-diversified investment companies under the
1940 Act, which means that each of such Funds is not limited by the 1940 Act in
the proportion of its total assets that may be invested in the obligations of a
single issuer. Thus, each of such Funds may invest a greater proportion of its
total assets in the securities of a smaller number of issuers and, as a result,
will be subject to greater risk resulting from such concentration of its
portfolio securities. Each of such Funds, however, intends to comply with the
diversification requirements imposed by the Internal Revenue Code of 1986, as
amended (the "Code"), for qualification as a regulated investment company.
MANAGEMENT OF THE COMPANY
INVESTMENT ADVISER. Van Kampen American Capital Investment Advisory Corp.
(the "Adviser") is the investment adviser and administrator of the Funds. The
Adviser provides investment advice and portfolio management services pursuant to
an advisory agreement (the "Advisory Agreement") and subject to the supervision
of the Company's Board of Directors, makes the Funds' investment decisions,
arranges for the execution of portfolio transactions and generally manages the
Funds' investments. The Advisory Agreement also provides that the Adviser may
appoint sub-advisers to perform these portfolio management responsibilities. See
"Investment Sub-Adviser" below. The Adviser is entitled to receive an aggregate
advisory fee computed daily and paid monthly at the following annual rates for
each Fund:
<TABLE>
<S> <C>
Asian Growth Fund.................................................... 1.00%
Emerging Markets Fund................................................ 1.25%
Global Equity Fund................................................... 1.00%
Global Equity Allocation Fund........................................ 1.00%
International Magnum Fund............................................ 0.80%
Japanese Equity Fund................................................. 1.00%
Latin American Fund.................................................. 1.25%
</TABLE>
38
<PAGE> 99
The Adviser reserves the right in its sole discretion from time to time to
waive all or a portion of its management fee to reimburse the Funds for all or a
portion of other expenses.
The Adviser is a wholly-owned subsidiary of Van Kampen American Capital,
Inc. ("Van Kampen American Capital"). Van Kampen American Capital is a
diversified asset management company with more than two million retail investor
accounts, extensive capabilities for managing institutional portfolios, and more
than $60 billion under management or supervision. Van Kampen American Capital's
more than 50 open-end and 37 closed-end funds and more than 2,500 unit
investment trust are professionally distributed by leading financial advisers
nationwide. The Distributor of the Company and the sponsor of the funds
mentioned above is also a wholly-owned subsidiary of Van Kampen American
Capital. The Adviser's principal office is located at One Parkview Plaza,
Oakbrook Terrace, Illinois 60181.
Van Kampen American Capital is an indirect wholly-owned subsidiary of Morgan
Stanley, Dean Witter, Discover & Co. Morgan Stanley, Dean Witter, Discover & Co.
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; trading of futures, options, foreign exchange
commodities and swaps (including foreign exchange, commodities, indices and
interest rates); real estate advice, financing and investing; and global
custody, securities clearance services and securities lending; and credit
services.
INVESTMENT SUB-ADVISER. Morgan Stanley Asset Management Inc. ("MSAM," or
the "Sub-Adviser") is the investment sub-adviser of the Funds. The Sub-Adviser
provides investment advice and portfolio management services pursuant to an
investment sub-advisory agreement and, subject to the supervision of the Adviser
and the Company's Board of Directors, makes the Funds' investment decisions,
arranges for the execution of portfolio transactions and generally manages the
Funds' investments.
The Sub-Adviser is entitled to receive sub-advisory fees computed daily and
paid monthly. If the average daily net assets of a Fund during the monthly
period are less than or equal to $500 million, the Adviser shall pay MSAM
one-half of the total investment advisory fee payable to the Adviser by the Fund
(after application of any fee waivers in effect) for such monthly period. If a
Fund's average daily net assets for the monthly period are greater than $500
million, the Adviser 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 the
Adviser 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 the Adviser by the Fund (after application of
any fee waivers in effect) for such monthly period.
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. At August 31, 1997, MSAM had approximately $80.9 billion in assets under
management as an investment adviser or as a named fiduciary or fiduciary
adviser.
39
<PAGE> 100
PORTFOLIO MANAGERS -- The following individuals have primary portfolio
management responsibility for the Funds noted below:
ASIAN GROWTH FUND -- EAN WAH CHIN AND SEAH KIAT SENG. Ean Wah Chin is a
Managing Director of the Sub-Adviser and Morgan Stanley & Co. Incorporated
("Morgan Stanley") and is responsible for the Sub-Adviser's regional Asia
ex-Japan operations based in Singapore. She has shared primary management
responsibility for the Fund since it commenced operations. Ms. Chin was an ASEAN
scholar educated at the University of Singapore. Seah Kiat Seng joined the
Sub-Adviser's Singapore office in 1990 as a portfolio manager/analyst
specializing in the Southeast Asian markets. He is currently a Vice President,
responsible for investments in Thailand. He has shared primary management
responsibility for the Fund since it commenced operations. Kiat Seng is a
Chartered Financial Analyst and a qualified real estate valuer who has worked
for the Singapore Ministry of Finance. He was a Colombo Plan Scholar educated in
New Zealand.
EMERGING MARKETS FUND -- MADHAV DHAR AND ROBERT C. MEYER. Madhav Dhar is a
Managing Director of the Sub-Adviser and Morgan Stanley. He joined the
Sub-Adviser in 1984. He is a member of the Sub-Adviser's executive committee,
head of the Sub-Adviser's emerging markets group and chief investment officer of
the Sub-Adviser's global emerging market equity portfolios. He holds a B.S.
(honors) from St. Stephens College, Delhi University (India), and an M.B.A. from
Carnegie - Mellon University. Mr. Dhar has been primarily responsibe for
managing the Fund's assets since it commenced operations. Robert Meyer joined
the Sub-Adviser in 1989. He is a Managing Director of the Sub-Adviser and Morgan
Stanley and co-manager of the Adviser's emerging markets group and head of the
Adviser's Latin American team. He was born in Argentina and graduated from Yale
University with a B.A. in Economics and Political Science. He received a J.D.
from Harvard Law School. In addition, he is also a Chartered Financial Analyst.
Mr. Meyer has worked with Mr. Dhar in managing the Fund's assets since its
inception.
GLOBAL EQUITY FUND -- FRANCES CAMPION. Frances Campion joined the
Sub-Adviser in January 1990 as a Global Equity Fund Manager and is now a
Principal of Morgan Stanley. Her responsibilities include day-to-day management
of the Global Equity product. Ms. Campion has ten years global investment
experience. She is a graduate of University College, Dublin.
GLOBAL EQUITY ALLOCATION FUND -- BARTON M. BIGGS, MADHAV DHAR, FRANCINE J.
BOVICH AND ANN D. THIVIERGE. Barton Biggs has been Chairman and a director of
the Sub-Adviser since 1980 and a Managing Director of Morgan Stanley since 1975.
He is also a director of Morgan Stanley Group Inc. and a director and chairman
of various registered investment companies to which the Sub-Adviser and certain
of its affiliates provide investment advisory services. Mr. Biggs holds a B.A.
from Yale University and an M.B.A. from New York University. Information about
Madhav Dhar is included under the Emerging Markets Fund above. Francine Bovich
joined the Sub-Adviser as a Principal in 1993. She is responsible for portfolio
management and communication of the Sub-Adviser's asset allocation strategy to
institutional investor clients. She holds a B.A. in Economics from Connecticut
College and an M.B.A. in Finance from New York University. Ann Thivierge is a
Principal of the Sub-Adviser. She is a member of the Sub-Adviser's asset
allocation committee, primarily representing the Total Fund Management team
since its inception in 1991. Prior to joining the Sub-Adviser in 1986, she spent
two years at Edgewood Management Company, a privately held investment management
firm. Ms. Thivierge holds a B.A. in International Relations from James Madison
College, Michigan State University, and an M.B.A. in Finance from New York
University. Mr. Biggs, Mr. Dhar, Ms. Bovich and Ms. Thivierge have had primary
responsibility for managing the Fund since it commenced operations.
40
<PAGE> 101
INTERNATIONAL MAGNUM FUND -- FRANCINE J. BOVICH. Information about Francine
Bovich is included under the Global Equity Allocation Fund above. Ms. Bovich has
had primary responsibility for managing the Fund since it commenced operations.
JAPANESE EQUITY FUND -- DOMINIC CALDECOTT AND KUNIHIKO SUGIO. Mr. Caldecott
is responsible for research and stock selection in the Pacific Basin and will
share primary responsibility for managing the Fund's assets upon commencement of
operations. He has ten years professional experience, primarily in Tokyo, Hong
Kong and Seoul. He became a Vice President of the Sub-Adviser and Morgan Stanley
in 1987, a principal in 1989, and a Managing Director in 1991. He is responsible
for a number of Pacific Basin investment programs for clients of Morgan Stanley.
Mr. Caldecott is a graduate of New College, Oxford, England. Kunihiko Sugio
joined the Sub-Adviser in December 1993 as a Vice President and manages
dedicated Japanese equity portfolios. He will share primary responsibility for
managing the Fund's assets upon commencement of operations. He graduated from
Wakayama Kokuritsu University.
LATIN AMERICAN FUND -- ROBERT L. MEYER AND ANDY SKOV. Robert Meyer and Andy
Skov share primary responsibility for managing the Fund's assets. Information
about Robert Meyer is included under the Emerging Markets Fund above. Andy Skov
joined the Sub-Adviser in 1994 as a Portfolio Manager. Currently, he is a Vice
President of the Sub-Adviser. He graduated from the University of California at
Berkeley with a B.A. (Phi Beta Kappa) in Political Science and Economics
Development.
ADMINISTRATOR. The Administrator provides the Company with administrative
services pursuant to an administration agreement (the "Administration
Agreement"). The services provided under the Administration Agreement are
subject to the supervision of the officers and Board of Directors of the Company
and include day-to-day administration of matters related to the corporate
existence of the Company, maintenance of its records, preparation of reports,
supervision of the Company's arrangements with its custodian and assistance in
the preparation of the Company's registration statements under federal and state
laws. The Administration Agreement also provides that the Administrator through
its agents will provide the Company dividend disbursing and transfer agent
services. For its services under the Administration Agreement, the Company pays
the Administrator a monthly fee which on an annual basis equals 0.25% of the
average daily net assets of the Funds.
Under a sub-administration agreement between the Administrator and The Chase
Manhattan Bank ("Chase"), Chase Global Funds Services Company ("CGFSC"), a
corporate affiliate of Chase, provides certain administrative services to the
Company. The Administrator supervises and monitors such administrative services
provided by CGFSC. The services provided under the sub-administration agreement
are subject to the supervision of the Board of Directors of the Company. The
Board of Directors of the Company has approved the provision of services
described above pursuant to the sub-administration agreement as being in the
best interests of the Company. CGFSC's business address is 73 Tremont Street,
Boston, Massachusetts 02108-3913. For additional information on the
Administration Agreement, see "Management of the Company" in the Statement of
Additional Information.
LOCAL ADMINISTRATORS FOR THE LATIN AMERICAN FUND. The Fund has, as required
by local law, entered into administration agreements with local administrators
in Brazil, Chile, and Colombia. A local administrator provides certain services
for the Fund with respect to the Fund's investments in that country, including
services relating to foreign exchange, local taxes, remittance of income and
capital gains, and repatriation of investments. The Fund's local administrator
in Brazil, Unibanco-Uniao, a Brazilian corporation, is paid by the Company an
41
<PAGE> 102
annual fee of 0.125% of the Fund's average weekly net assets invested in Brazil.
The Fund's local administrator in Chile, Bice Chileconsult Agente de Valores
S.A., a Chilean corporation, is paid by the Company an annual fee of 0.125% of
the Fund's average weekly net assets invested in Chile. The Fund's local
administrator in Colombia, CitiTrust S.A., a Colombian trust company, is paid by
the Company an annual fee of $1,000 plus 0.20% per transaction in Colombia.
DIRECTORS AND OFFICERS. Pursuant to the Company's Articles of
Incorporation, the Board of Directors decides upon matters of general policy and
reviews the actions of the Adviser, Sub-Adviser, Administrator and Distributor.
The Officers of the Company conduct and supervise its daily business operations.
DISTRIBUTOR. Van Kampen American Capital Distributors, Inc. (the
"Distributor") serves as the distributor of the shares of the Company. Under its
distribution agreement (the "Distribution Agreement") with the Company, the
Distributor sells shares of the Company upon the terms and at the current
offering price described in this Prospectus. The Distributor is not obligated to
sell any specific number of shares of the Company.
The Company currently offers Class A shares, Class B shares and Class C
shares of the Funds. The Company may in the future offer one or more classes of
shares for the Funds that may have sales charges or other distribution charges
or a combination thereof different from those of the classes currently offered.
The Board of Directors of the Company has approved and adopted the
Distribution Agreement for the Company and a Plan for each class of the Funds
pursuant to Rule 12b-1 under the 1940 Act (each a "Plan" and together, the
"Plans"). Under each Plan, the Distributor is entitled to receive from each Fund
a distribution fee, which is accrued daily and paid quarterly, at a maximum rate
of 0.75% of the Class B shares and Class C shares of the Fund, on an annualized
basis of the average daily net assets of such classes. The actual amount of such
compensation is agreed upon by the Company's Board of Directors and by the
Distributor. With respect to Class B shares, the Distributor expects to utilize
substantially all of its fee to reimburse itself for commissions paid to
investment dealers, banks or financial services firms that provide distribution
services (each, a "Participating Dealer"). With respect to the Class C shares,
the Distributor expects to reallocate substantially all of its fee to such
Participating Dealers. 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. Class A shares, Class B shares and Class C shares are subject to a
service fee at an annual rate of 0.25% on an annualized basis of the average
daily net assets of such class of shares of the Funds as compensation the
Distributor for shareholder services. In addition to such payments, the Adviser
may use its advisory fees or other resources to pay expenses associated with
activities which might be construed to be financing the sale of the Fund's
shares, including payments to third parties that provide assistance in the
distribution effort (in addition to selling shares and providing shareholder
services).
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.
42
<PAGE> 103
Each Plan for a class of Company shares, under the terms of Rule 12b-1, will
remain in effect only if approved at least annually 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 ("12b-1 Directors"). Each Plan may be terminated at any time by
a vote of a majority of the 12b-1 Directors or by a vote of a majority of the
outstanding voting securities of the applicable class of the Funds. The fee set
forth above will be paid by the appropriate class to the Distributor unless and
until a Plan is terminated or not renewed. The Company intends to operate each
Plan in accordance with its terms and the NASD Conduct Rules concerning sales
charges.
PAYMENTS TO FINANCIAL INSTITUTIONS. The Adviser or its affiliates may
compensate certain financial institutions for the continued investment of their
customers' assets in the Funds pursuant to the advice of such financial
institutions. These payments will be made directly by the Adviser or its
affiliates from their assets, and will not be made from the assets of the
Company or by the assessment of a sales charge on shares. Such financial
institutions may also perform certain shareholder or recordkeeping services that
would otherwise be performed by ACCESS. The Adviser may elect to enter into a
contract to pay the financial institutions for such services.
EXPENSES. Each Fund is responsible for payment of certain other fees and
expenses (including professional fees, custodial fees and printing and mailing
costs) specified in the Administration and Distribution Agreements.
PURCHASE OF SHARES
GENERAL
The Company offers three classes of shares to the public on a continuous
basis through the Distributor as principal underwriter, which is located at One
Parkview Plaza, Oakbrook Terrace, Illinois 60181. Shares are also offered
through members of the NASD who are acting as securities dealers ("dealers") and
NASD members or eligible non-NASD members who are acting as brokers or agents
for investors ("brokers"). The term "dealers" and "brokers" are sometimes
referred to herein as "Participating Dealers."
Initial investments must be at least $500 for each class of shares, and
subsequent investments must be at least $25 for each class of shares. The $500
minimums may be waived by the Distributor for plans involving periodic
investments. Shares of the Company may be sold in foreign countries where
permissible. The Company and the Distributor reserve the right to refuse any
order for the purchase of shares. The Company also reserves the right to suspend
the sale of the Company's shares in response to conditions in the securities
markets or for other reasons.
Shares of the Company may be purchased on any business day through
Participating Dealers. Shares may also be purchased by completing the
application accompanying this Prospectus and forwarding the application, through
the Participating Dealer, to the shareholder service agent, ACCESS Investor
Services, Inc. ("ACCESS"), a wholly-owned subsidiary of Van Kampen American
Capital, Inc. When purchasing shares of the Company, investors must specify
whether the purchase is for Class A shares, Class B shares or Class C shares.
Shares are offered at the next determined net asset value per share, plus an
initial or contingent deferred sales charge depending on the class of shares
chosen by the investor, as shown in the tables herein. See "Valuation of Shares"
for a further description of net asset value computations.
43
<PAGE> 104
Generally, the net asset values per share of the Class A shares, Class B
shares and Class C shares are expected to be substantially the same. Under
certain circumstances, however, the per share net asset values of the classes of
shares may differ from one another, reflecting the daily expense accruals of the
higher distribution fees applicable with respect to the Class B shares and Class
C shares and the differential in the dividends paid on the classes of shares.
The price paid for shares purchased is based on the next calculation of net
asset value (plus sales charges, where applicable) after an order is received by
a Participating Dealer provided such order is transmitted to the Distributor
prior to the Distributor's close of business on such day. Orders received by
Participating Dealers after the close of the New York Stock Exchange (the
"NYSE") are priced based on the net asset value calculated after the next day's
close provided they are received by the Distributor prior to the Distributor's
close of business on such day. It is the responsibility of Participating Dealers
to transmit orders received by them to the Distributor so they will be received
prior to such time.
Each class of shares represents an interest in the same portfolio of
investments, has the same rights and is identical in all respects, except that
(i) Class B shares and Class C shares bear the expenses of the deferred sales
arrangement and any expenses (including higher distribution fees) resulting from
such sales arrangement, (ii) generally, each class has exclusive voting rights
with respect to approvals of the Rule 12b-1 distribution plan to which its
distribution fee or service fee is paid, (iii) certain shares are subject to a
conversion feature, (iv) each class has different exchange privileges and (v)
each class has different shareholder service options available. The net income
attributable to Class B shares and Class C shares and the dividends payable on
Class B shares and Class C shares will be reduced by the amount of the higher
distribution fees associated with such class of shares. Sales personnel of
Participating Dealers distributing the Company's shares and other persons
entitled to receive compensation for selling such shares may receive differing
compensation for selling Class A shares, Class B shares or Class C shares.
In deciding which class of shares to purchase, investors should take into
consideration their investment goals, present and anticipated purchase amounts,
time horizons and temperments. Investors should consider whether, during the
anticipated life of their investment in a Fund, the accumulated distribution
fees and contingent deferred sales charges on Class B shares prior to conversion
or Class C shares would be less than the initial sales charge on Class A shares
purchased at the same time, and to what extent such differential would be offset
by the higher dividends per share on Class A shares. To assist investors in
making this determination, the table under the caption "Fund Expenses" sets
forth examples of the charges applicable to each class of shares. In this
regard, Class A shares may be more beneficial to the investor who qualifies for
reduced initial sales charges or purchases shares at net asset value, as
described herein under "Purchase of Shares -- Class A Shares." For these
reasons, it is presently the policy of the Distributor not to accept any order
of $500,000 or more for Class B shares or any order of $1 million or more for
Class C shares as it ordinarily would be more beneficial for such investor to
purchase Class A shares.
Class A shares are not subject to an ongoing distribution fee and,
accordingly, receive correspondingly higher dividends per share. However,
because initial sales charges are deducted at the time of purchase for most
accounts under $1 million, investors in Class A shares do not have all their
funds invested initially and, therefore, initially own fewer shares. Other
investors might determine that it is more advantageous to purchase either Class
B shares or Class C shares and have all their funds invested initially, although
remaining subject to a contingent deferred sales charge. Ongoing distribution
fees on Class B shares and Class C shares will be offset to the extent of the
additional funds originally invested and any return realized on those funds.
However, there can
44
<PAGE> 105
be no assurance as to the return, if any, which will be realized on such
additional funds. For investments held for ten years or more, the relative value
upon liquidation of the three classes tends to favor Class A or Class B shares,
rather than Class C shares.
Class A shares may be appropriate for investors who prefer to pay the sales
charge up front, want to take advantage of the reduced sales charges available
on larger investments, wish to maximize their current income from the start,
prefer not to pay redemption charges and/or have a longer-term investment
horizon. Class B shares may be appropriate for investors who wish to avoid a
front-end sales charge, put 100% of their investment dollars to work
immediately, and/or have a longer-term investment horizon. Class C shares may be
appropriate for investors who wish to avoid a front-end sales charge, put 100%
of their investment dollars to work immediately, have a shorter-term investment
horizon and/or desire a short contingent deferred sales charge schedule.
The distribution expenses incurred by the Distributor in connection with the
sale of the shares will be reimbursed, in the case of Class A shares, from the
proceeds of the initial sales charge and, in the case of Class B shares and
Class C shares, from the proceeds of the ongoing distribution fee and any CDSC
incurred upon redemption within five years or one year, respectively, of
purchase. Investors should understand that the purpose and function of the CDSC
and ongoing distribution fee with respect to Class B shares and Class C shares
are the same as those of the initial sales charge with respect to Class A
shares. See "Distribution Plans."
The Distributor may from time to time implement programs under which a
Participating Dealer's sales force may be eligible to win nominal awards for
certain sales efforts or under which the Distributor will reallow to any
Participating Dealer that sponsors sales contests or recognition programs
conforming to criteria established by the Distributor, or participates in sales
programs sponsored by the Distributor, an amount not exceeding the total
applicable sales charges on the sales generated by the Participating Dealer at
the public offering price during such programs. Other programs provide, among
other things and subject to certain conditions, for certain favorable
distribution arrangements for shares of the Company. Also, the Distributor in
its discretion may from time to time, pursuant to objective criteria established
by the Distributor, pay fees to, and sponsor business seminars for, qualifying
authorized dealers for certain services or activities which are primarily
intended to result in sales of shares of the Company. Fees may include payment
for travel expenses, including lodging, incurred in connection with trips taken
by invited registered representatives and members of their families to locations
within or outside of the United States for meetings or seminars of a business
nature. In some instances, additional compensation or promotional incentives may
be offered to Participating Dealers that have sold or may sell significant
amounts of shares during specified periods of time. Such fees paid for such
services and activities with respect to a Fund will not exceed in the aggregate
1.25% of the average total daily net assets of the Fund on an annual basis. All
of the foregoing payments are made by the Distributor out of its own assets.
These programs will not change the price an investor will pay for shares or the
amount that a Fund will receive from such sale.
CLASS A SHARES
The public offering price of Class A shares is the next determined net asset
value plus a sales charge, as set forth herein.
45
<PAGE> 106
SALES CHARGE TABLE
<TABLE>
<CAPTION>
REALLOWED TO DEALERS
AS % OF AS % OF NET AMOUNT (AS % OF OFFERING
SIZE OF INVESTMENT OFFERING PRICE INVESTED PRICE)
- --------------------------------------------------------- --------------- ------------------- -----------------------
<S> <C> <C> <C>
Less than $50,000........................................ 5.75 6.10 5.00
$50,000 but less than $100,000........................... 4.75 4.99 4.00
$100,000 but less than $250,000.......................... 3.75 3.90 3.00
$250,000 but less than $500,000.......................... 2.75 2.83 2.25
$500,000 but less than $1,000,000........................ 2.00 2.04 1.75
$1,000,000 or more*...................................... * * *
</TABLE>
- ------------------
* No initial sales charge is payable at the time of purchase on investments of
$1 million or more, although for such investments the Fund imposes a
contingent deferred sales charge of 1.00% in the event of certain redemptions
within one year of the purchase. A commission will be paid to brokers, dealers
or financial intermediaries who initiate and are responsible for purchases of
$1 million or more as follows: 1.00 % on sales to $2 million, plus 0.80% on
the next $1 million, plus 0.50% on the excess over $3 million. See "Purchase
of Shares -- Purchase of Class B Shares" and "-- Purchase of Class C Shares"
for additional information with respect to contingent deferred sales charges.
In addition to the reallowances from the applicable public offering price
described herein, the Distributor may, from time to time, pay or allow
additional reallowances or promotional incentives, in the form of cash or other
compensation, to Participating Dealers that sell shares of the Company.
Participating Dealers which are reallowed all or substantially all of the sales
charges may be deemed to be underwriters for purposes of the 1933 Act.
The Distributor may also pay financial institutions (which may include
banks) and other industry professionals that provide services to facilitate
transactions in shares of the Company for their clients a transaction fee up to
the level of the reallowance allowable to Participating Dealers described
herein. Such financial institutions, other industry professionals and
Participating Dealers are hereinafter referred to as "Service Organizations."
Banks are currently prohibited under the Glass-Steagall Act from providing
certain underwriting or distribution services. If banking firms were prohibited
from acting in any capacity or providing any of the described services, the
Distributor would consider what action, if any, would be appropriate. The
Distributor does not believe that termination of a relationship with a bank
would result in any material adverse consequences to the Company. State
securities laws regarding registration of banks and other financial institutions
may differ from the interpretations of federal law expressed herein and banks
and other financial institutions may be required to register as dealers pursuant
to certain state laws.
QUANTITY DISCOUNTS
Investors purchasing Class A shares may, under certain circumstances, be
entitled to pay reduced sales charges. The circumstances under which such
investors may pay reduced sales charges are described below.
Investors or their Participating Dealers must notify the Company whenever a
quantity discount is applicable to purchases. Upon such notification, an
investor will receive the lowest applicable sales charge. Quantity discounts may
be modified or terminated at any time. For more information about quantity
discounts, investors should contact their Participating Dealer or the
Distributor.
A person eligible for a reduced sales charge includes an individual, their
spouse and children under 21 years of age, and any corporation, partnership or
sole proprietorship which is 100% owned, either alone or in
46
<PAGE> 107
combination, by any of the foregoing; a trustee or other fiduciary purchasing
for a single trust estate or single fiduciary account, or a "company" as defined
in Section 2(a)(8) of the 1940 Act.
The phrase "Participating Funds," as used herein, refers to certain open-end
investment companies advised by the Adviser or Van Kampen American Capital Asset
Management Inc. and distributed by the Distributor as determined from time to
time by the Company's Board of Directors.
VOLUME DISCOUNTS. The size of investment shown in the preceding sales
charge tables applies to the total dollar amount being invested by any person in
shares of a Fund or in any combination of shares of the Fund and shares of other
Participating Funds, although other Participating Funds may have different sales
charges.
CUMULATIVE PURCHASE DISCOUNT. The size of investment shown in the preceding
sales charge tables may also be determined by combining the amount being
invested in shares of the Participating Funds plus the current offering price of
all shares of the Participating Funds which have been previously purchased and
are still owned.
LETTER OF INTENT. A Letter of Intent provides an opportunity for an
investor to obtain a reduced sales charge by aggregating investments over a
13-month period to determine the sales charge as outlined in the preceding
table. The size of investment shown in the preceding tables also includes
purchases of shares of the Participating Funds over a 13-month period based on
the total amount of intended purchases plus the value of all shares of the
Participating Funds previously purchased and still owned. An investor may elect
to compute the 13-month period starting up to 90 days before the date of
execution of a Letter of Intent. Each investment made during the period receives
the reduced sales charge applicable to the total amount of the investment goal.
If the goal is not achieved within the period, the investor must pay the
difference between the sales charges applicable to the purchases made and the
sales charges previously paid. The initial purchase must be for an amount equal
to at least 5% of the minimum total purchased amount of the level selected. If
trades not initially made under a Letter of Intent subsequently qualify for a
lower sales charge through the 90-day back-dating provisions, an adjustment will
be made at the expiration of the Letter of Intent to give effect to the lower
charge. Such adjustments in sales charge will be used to purchase additional
shares for the shareholder at the applicable discount category. Additional
information is contained in the application form accompanying this Prospectus.
OTHER PURCHASE PROGRAMS
Purchasers of Class A shares may be entitled to reduced initial sales
charges in connection with unit investment trust reinvestment programs and
purchases by registered representatives of selling firms or purchases by persons
affiliated with the Company or the Distributor. The Company reserves the right
to modify or terminate these arrangements at any time.
UNIT INVESTMENT TRUST REINVESTMENT PROGRAMS. The Company permits
unitholders of unit investment trusts to reinvest distributions from such trusts
in Class A shares of the Company at net asset value with no minimum initial or
subsequent investment requirement if the administrator of an investor's unit
investment trust program meets certain uniform criteria relating to cost savings
by the Company and the Distributor. The total sales charge for all other
investments made from unit trust distributions will be 1.00% of the offering
price (1.01% of net asset value). Of this amount, the Distributor will pay to
the Participating Dealer, if any, through which such participation in the
qualifying program was initiated 0.50% of the offering price as a dealer
concession or agency commission. Persons desiring more information with respect
to this program, including the applicable terms and conditions thereof, should
contact their Participating Dealer or the Distributor.
47
<PAGE> 108
The administrator of such a unit investment trust must have an agreement
with the Distributor pursuant to which the administrator will (1) submit a
single bulk order and make payment with a single remittance for all investments
in a Fund during each distribution period by all investors who choose to invest
in the Fund through the program and (2) provide ACCESS with appropriate backup
data for each participating investor in a computerized format fully compatible
with ACCESS' processing system.
As further requirements for obtaining these special benefits, the Company
also requires that all dividends and other distributions by a Fund be reinvested
in additional shares without any systematic withdrawal program. There will be no
minimum for reinvestments from unit investment trusts. The Company will send
account activity statements to such participants on a monthly basis only, even
if their investments are made more frequently. The Company reserves the right to
modify or terminate this program at any time.
NAV PURCHASE OPTIONS. Class A shares of a Fund may be purchased without an
initial sales charge, at net asset value, upon written assurance that the
purchase is made for investment purposes and that the shares will not be resold
except through redemption by the Fund, by:
(1) Current or retired trustees/directors of funds advised by the
Adviser or Van Kampen American Capital Asset Management, Inc. and such
persons' families and their beneficial accounts.
(2) Current or retired directors, officers and employees of Morgan
Stanley Group Inc. and any of its subsidiaries, employees of an investment
subadviser to any fund described in (1) above or an affiliate of such
subadviser, and such persons' families and their beneficial accounts.
(3) Directors, officers, employees and registered representatives of
financial institutions that have a selling group agreement with the
Distributor and their spouses and children under 21 years of age when
purchasing for any accounts they beneficially own, or, in the case of any
such financial institution, when purchasing for retirement plans for such
institution's employees.
(4) Registered investments advisers, trust companies and bank trust
departments investing on their own behalf or on behalf of their clients
provided that the aggregate amount invested in a Fund alone, or in any
combination of shares of the Fund and shares of other Participating Funds as
described herein under "Purchase of Shares -- Class A Shares -- Volume
Discounts," during the 13-month period commencing with the first investment
pursuant hereto equals at least $1 million. The Distributor may pay
Participating Dealers through which purchases are made an amount up to 0.50%
of the amount invested, over a 12-month period following such transaction.
(5) Trustees and other fiduciaries purchasing shares for retirement
plans of organizations with retirement plan assets of $3 million or more and
which invest in multiple fund families through national wirehouse alliance
programs. The Distributor may pay commissions of up to 1.00% for such
purchases.
(6) Accounts as to which a broker, dealer or financial intermediary
charges an account management fee ("wrap accounts"), provided the broker,
dealer or financial intermediary has a separate agreement with the
Distributor.
(7) Trusts created under pension, profit sharing or other employee
benefit plans qualified under Section 401(a) of the Code, or custodial
accounts held by a bank created pursuant to Section 403(b) of the Code and
sponsored by non-profit organizations defined under Section 501(c)(3) of the
Code and assets
48
<PAGE> 109
held by an employer or trustee in connection with an eligible deferred
compensation plan under Section 457 of the Code. Such plans will qualify for
purchases at net asset value provided that (1) the initial amount invested
in the Participating Funds is at least $500,000 or (2) such shares are
purchased by an employer sponsored plan with more than 100 eligible
employees. Section 403(b) and similar accounts for which Van Kampen American
Capital Trust Company ("VKAC Trust") serves as custodian will not be
eligible for net asset value purchases based on the aggregate investment
made by the plan or the number of eligible employee, except under certain
uniform criteria established by the Distributor from time to time. A
commission will be paid to dealers who initiate and are responsible for such
purchases within a rolling twelve month period as follows: 1.00% on sales up
to $2 million, plus 0.80% on the next $1 million, plus 0.50% on the next $47
million, plus 0.25% on the excess over $50 million.
(8) Individuals who are members of a "qualified group." For this
purpose, a qualified group is one which (i) has been in existence for more
than six months, (ii) has a purpose other than to acquire shares of the
Funds or similar investments, (iii) has given and continues to give its
endorsement or authorization, on behalf of the group, for purchase of shares
of the Funds and other Participating Funds, (iv) has a membership that the
authorized dealer can certify as to the group's members and (v) satisfies
other uniform criteria established by the Distributor for the purpose of
realizing economies of scale in distributing such shares. A qualified group
does not include one whose sole organizational nexus, for example, is that
its participants are credit card holders of the same institution, policy
holders of an insurance company, customers of a bank or broker-dealer,
clients of an investment adviser or other similar groups. Shares purchased
in each group's participant's account in connection with this privilege will
be subject to a contingent deferred sales charge of one percent in the event
of redemption within one year of purchase, and a commission will be paid to
authorized dealers who initiate and are responsible for such sales to each
individual as follows: 1.00% on sales to $2 million, plus 0.80% on the next
$1 million and 0.50% on the excess over $3 million.
The term "families" includes a person's spouse, children and grandchildren
under 21 years of age, parents, and a person's spouse's parents.
Purchase orders made pursuant to clause (4) may be placed either through
authorized dealers as described above or directly with ACCESS by the investment
adviser, trust company or bank trust department, provided that ACCESS receives
federal funds for the purchase by the close of business on the next business day
following acceptance of the order. An authorized dealer may charge a transaction
fee for placing an order to purchase shares pursuant to this provision or for
placing a redemption order with respect to such shares. Authorized dealers will
be paid a service fee as described herein under "Distribution Plans" on
purchases made as described in (3) through (8) above.
The Company may terminate, or amend the terms of, offering shares of the
Funds at net asset value to the foregoing groups at any time.
PURCHASE OF CLASS B SHARES
Class B shares of the Funds may be purchased at net asset value without an
initial sales charge. However, a CDSC will be imposed on certain Class B shares
redeemed within five years of purchase. The charge is assessed on an amount
equal to the lesser of the then-current market value of the Class B shares
redeemed or the total cost of such shares. Accordingly, the CDSC will not be
applied to dollar amounts representing an increase in the
49
<PAGE> 110
net asset values above the initial purchase price of the shares being redeemed.
In addition, no charge is assessed on redemptions of Class B shares derived from
reinvestment of dividends or capital gains distributions.
In determining whether the CDSC is applicable to a redemption, the
calculation is made in the manner that results in the lowest possible rate.
Therefore, it is assumed that the redemption is first of any Class B shares in
the shareholder's account that represent reinvested dividends and/or
distributions, and/or of Class B shares held longer than five years after
purchase, and next of Class B shares held the longest during the initial
five-year period after purchase. The amount of the CDSC, if any, will vary
depending on the number of years from the time of purchase of Class B shares
until the redemption of such shares (the "holding period"). The following table
sets forth the rates of the CDSC.
CONTINGENT DEFERRED SALES CHARGE
<TABLE>
<CAPTION>
SALES CHARGE AS PERCENTAGE
YEAR SINCE PURCHASE OF THE DOLLAR AMOUNT
PAYMENT WAS MADE SUBJECT TO CHARGE
- ------------------------------------------------------------------- ---------------------------
<S> <C>
First.............................................................. 5.00%
Second............................................................. 4.00%
Third.............................................................. 3.00%
Fourth............................................................. 2.50%
Fifth.............................................................. 1.50%
Thereafter......................................................... None*
</TABLE>
- ------------------
* As described more fully below, Class B shares automatically convert to Class A
shares after the eighth year following purchase.
Proceeds from any CDSC are paid to the Distributor and are used by the
Distributor to defray its expenses related to providing distribution-related
services to the Company in connection with the sale of the Class B shares. The
Distributor will make payments to the Participating Dealers that handle the
purchases of such shares at a rate not in excess of 4.00% of the purchase price
of such shares at the time of purchase and expects to pay to Participating
Dealers a portion of its distribution fee under the Rule 12b-1 Plan, as
described under "Management of the Company -- Distributor" above. Additionally,
the Distributor may pay additional promotional incentives, in the form of cash
or other compensation, to authorized dealers that sell Class B shares of the
Funds. The combination of the CDSC and the distribution fee facilitates the
ability of the Company to sell the Class B shares without a sales charge being
deducted at the time of purchase.
AUTOMATIC CONVERSION TO CLASS A SHARES. After the eighth year following
purchase, Class B shares will automatically convert to Class A shares and will
no longer be subject to the higher distribution fees. Such conversion will be on
the basis of the relative net asset values of the two classes, without the
imposition of any sales load, fee or other charge. Under current tax law, the
conversion is not a taxable event to the shareholder.
PURCHASE OF CLASS C SHARES
Class C shares of the Funds may be purchased at the net asset value per
share and such shares are subject to a CDSC at the rate of 1.00% of the lesser
of the current market value of the shares redeemed or the total cost of such
shares for shares that are redeemed within one year of purchase. The Distributor
will make payments to the Participating Dealers that handle the purchases of
such shares at the rate of 1.00% of the purchase price of such shares at the
time of purchase and expects to pay to Participating Dealers most of its
distribution fee, with
50
<PAGE> 111
respect to such shares, under the Rule 12b-1 Plan for such class of shares, as
described under "Management of the Company -- Distributor" above. In determining
whether a CDSC is payable, and, if so, the amount of the fee or charge, it is
assumed that shares not subject to such fee or charge are the first redeemed.
WAIVER OF CDSC
The CDSC will be waived on the redemption of Class B or Class C shares (i)
following the death or initial determination of disability (as defined in the
Code) of a shareholder; (ii) certain distributions from an IRA or other
retirement plan; (iii) to the extent that shares redeemed have been withdrawn
from a Systematic Withdrawal Plan, up to a maximum of 12% per year from a
shareholder account based on the value of the account at the time the Withdrawal
Plan is established; or (iv) effected pursuant to the right of the Company to
liquidate a shareholder's account as described herein under "Redemption of
Shares." A shareholder, or their representative, must notify the Transfer Agent
prior to the time of redemption if such circumstances exist and the shareholder
is eligible for this waiver. The shareholder is responsible for providing
sufficient documentation to the Transfer Agent to verify the existence of such
circumstances. For information on the imposition and waiver of the CDSC, contact
Investor Services at 1-800-282-4404.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND DISTRIBUTIONS
No initial sales charge or CDSC will be payable on the shares of the Funds
or classes thereof purchased through the automatic reinvestment of dividends and
distributions on shares of the Funds.
REINSTATEMENT PRIVILEGE OF EACH CLASS
A shareholder who has redeemed Class A shares of a Participating Fund may
reinvest up to the full amount received at net asset value at the time of the
reinvestment in Class A shares of the Funds without payment of a sales charge. A
shareholder who has redeemed Class B shares of a Participating Fund and paid a
CDSC upon such redemption may reinvest up to the full amount received upon
redemption in Class A shares of a Fund at net asset value with no initial sales
charge. A Class C shareholder who has redeemed shares of a Participating Fund
may reinstate any portion or all of the net proceeds of such redemption in Class
C shares of a Fund with credit given for any CDSC paid upon such redemption. The
reinstatement privilege as to any specific Class A, Class B or Class C shares
must be exercised within 180 days of the redemption. The Transfer Agent must
receive from the shareholder or the shareholder's Participating Dealer both a
written request for reinstatement and a check or wire which does not exceed the
redemption proceeds. The written request must state that the reinstatement is
made pursuant to this reinstatement privilege. If a loss is realized on the
redemption of Class A shares, the reinstatement may be subject to the "wash
sale" rules if made within 30 days of the redemption, resulting in a
postponement of the recognition of such loss for federal income tax purposes.
The reinstatement privilege may be terminated or modified at any time.
Reinstatement at net asset value is also offered to participants in those
eligible retirement plans held or administered by VKAC Trust for repayment of
principal (and interest) on their borrowings. See the Statement of Additional
Information for further discussion of waiver provisions.
SHAREHOLDER SERVICES
The Company offers a number of shareholder services designed to facilitate
investment in its shares at little or no extra cost to the investor. Below is a
description of such services. Unless otherwise described below, each of these
services may be modified or terminated by the Company at any time.
51
<PAGE> 112
INVESTMENT ACCOUNT. Each shareholder has an investment account under which
shares are held by ACCESS. ACCESS acts as transfer agent for the Company and
performs bookkeeping, data processing and administration services related to the
maintenance of shareholder accounts. Except as described herein, after each
share transaction in an account, the shareholder receives a statement showing
the activity in the account. Each shareholder will receive statements at least
quarterly from ACCESS showing any reinvestments of dividends and capital gains
distributions and any other activity in the account since the preceding
statement. Such shareholders also will receive separate confirmations for each
purchase or sale transaction other than reinvestment of dividends and capital
gains distributions and systematic purchases or redemptions. Additions to an
investment account may be made at any time by purchasing shares through
authorized brokers, dealers or financial intermediaries or by mailing a check
directly to ACCESS.
SHARE CERTIFICATES. Generally, the Company will not issue share
certificates. However, upon written or telephone request to the Company, a share
certificate will be issued, representing shares (with the exception of
fractional shares) of the Company. A shareholder will be required to surrender
such certificates upon redemption or transfer thereof. In addition, if such
certificates are lost the shareholder must write to Morgan Stanley Fund, Inc.
c/o ACCESS, P.O. Box 418256, Kansas City, MO 64141-9256, requesting an
"affidavit of loss" and to obtain a Surety Bond in a form acceptable to ACCESS.
On the date the letter is received, ACCESS will calculate a fee for replacing
the lost certificate equal to no more than 2.00% of the net asset value of the
issued shares and bill the party to whom the replacement certificate was mailed.
REINVESTMENT PLAN. A convenient way for investors to accumulate additional
shares is by accepting dividends and capital gains distributions in shares of
the applicable Fund. Such shares are acquired at net asset value (without sales
charge) on the record date of such dividend or distribution. Unless the
shareholder instructs otherwise, the reinvestment plan is automatic. This
instruction may be made by telephone by calling (800) 282-4404 or (800) 772-8889
for the hearing impaired, or in writing to ACCESS. The investor may, on the
initial application or prior to any declaration, instruct that dividends be paid
in cash and capital gains distributions be reinvested at net asset value, or
that both dividends and capital gains distributions be paid in cash. For further
information, see "Dividends and Distributions."
AUTOMATIC INVESTMENT PLAN. An automatic investment plan is available under
which a shareholder can authorize ACCESS to charge a bank account on a regular
basis to invest pre-determined amounts in the Funds. Additional information is
available from the Distributor or authorized brokers, dealers or financial
intermediaries.
DIVIDEND DIVERSIFICATION. A shareholder may, upon written request or by
completing the appropriate section of the application form accompanied by this
Prospectus or by calling (800) 282-4404 or (800) 772-8889 for the hearing
impaired, elect to have all dividends and other distributions paid on a class of
shares of the Company invested into shares of the same class of any
Participating Fund so long as a pre-existing account for such class of shares
exists for such shareholder. Both accounts must also be of the same type, either
non-retirement or retirement. Any two non-retirement accounts can be used. If
the accounts are retirement accounts, they must both be for the same class and
of the same type of retirement plan (e.g. IRA, 403(b)(7), 401(k), Keogh) and for
the benefit of the same individual.
52
<PAGE> 113
If the qualified pre-existing account does not exist, the shareholder must
establish a new account subject to minimum investment and other requirements of
the portfolio into which distributions would be invested. Distributions are
invested into the selected portfolio at its net asset value as of the payable
date of the distribution only if shares of such selected portfolio have been
registered for sale in the investor's state and are currently available for
sale.
RETIREMENT PLANS. Eligible investors may establish IRAs; SEP; and pension
and profit sharing plans; 401(k) plans; or Section 403(b)(7) plans in the case
of employees of public school systems and certain non-profit organizations.
Documents and forms containing detailed information regarding these plans are
available from the Distributor. VKAC Trust serves as custodian under the IRA,
403(b)(7) and Keogh plans. Details regarding fees, as well as full plan
administration for profit sharing, pension and 401(k) plans, are available from
the Distributor.
EXCHANGE PRIVILEGE. Shares of the Funds or any Participating Fund may be
exchanged with shares of the same class of another Participating Fund based on
the net asset value of each fund on the date of exchange, subject to certain
limitations. Before effecting an exchange, shareholders in the Company should
obtain and read a current prospectus of the Participating Funds into which the
exchange is to be made. SHAREHOLDERS MAY ONLY EXCHANGE INTO SUCH OTHER
PARTICIPATING FUNDS AS ARE LEGALLY AVAILABLE FOR SALE IN THEIR STATE AND ARE
CURRENTLY AVAILABLE FOR SALE.
To be eligible for exchange, shares of a Fund generally must have been
registered in the shareholder's name for at least 30 days prior to an exchange.
Shares of a Fund registered in a shareholder's name for less than 30 days may
only be exchanged upon receipt of prior approval of the Adviser. Under normal
circumstances, it is the policy of the Adviser not to approve such requests.
Class A shares of a Participating Fund that generally impose an initial
sales charge are not subject to any sales charge upon exchange into another
Participating Fund. Class A shares of Participating Funds that do not impose an
initial sales charge will be subject to the applicable sales charge of the
Participating Fund being obtained in the exchange.
No sales charge is imposed upon the exchange of a Class B share or a Class C
share. The CDSC schedule, conversion schedule and holding period applicable to a
Class B share or a Class C share acquired through the exchange privilege is
determined by reference to the Participating Fund from which such share
originally was purchased.
Exchanges of shares are sales and may result in a gain or loss for federal
income tax purposes. If the shares exchanged have been held for less than 91
days, the sales charge paid on such shares is not included in the tax basis of
the exchanged shares, but is carried over and included in the tax basis of the
shares acquired.
A shareholder wishing to make an exchange may do so by sending a written
request to ACCESS or by contacting the telephone transaction line at (800)
421-5684. A shareholder automatically has telephone exchange privileges unless
otherwise designated in the application form accompanied by this Prospectus. See
"Redemption of Shares--Telephone Transaction Procedures" for more information.
The exchange will take place at the relative net asset values of the shares next
determined after receipt of such request with adjustment for any additional
sales charge. Any shares exchanged begin earning dividends on the next business
day after the exchange is affected. If the exchanging shareholder does not have
an account in the portfolio whose shares are
53
<PAGE> 114
being acquired, a new account will be established with the same registration,
dividend and capital gains options (except dividend diversification options) and
broker, dealer or financial intermediary of record as the account from which
shares are exchanged, unless otherwise specified by the shareholder. In order to
establish a systematic withdrawal plan for the new account or dividend
diversification options for the new account, an exchanging shareholder must file
a specific written request. The Company reserves the right to reject any order
to acquire its shares through exchange. In addition, the Company may restrict or
terminate the exchange privilege at any time on 60 days' notice to its
shareholders of any termination or material amendment. If an account has
multiple owners, ACCESS may rely on the instructions of any one owner.
SYSTEMATIC WITHDRAWAL PLAN. Any investor whose shares in a single account
total $5,000 or more at the offering prices next completed after receipt of
instructions may establish a quarterly, semi-annual or annual withdrawal plan.
Investors whose shares in a single account total $10,000 or more at the offering
prices next completed after receipt of instruction may establish a monthly,
quarterly, semi-annual, or annual withdrawal plan. This plan provides for the
orderly use of the entire account, not only the income but also the principal,
if necessary. Each withdrawal constitutes a redemption of shares on which
taxable gain or loss will be recognized. The plan holder may arrange for
monthly, quarterly, semi-annual, or annual checks in any amount not less than
$25.
The CDSC on Class B and Class C shares is waived for withdrawals under the
Systematic Withdrawal Plan of a maximum 1% per month, 3% per quarter, 6%
semiannually or 12% annually, of the initial value of a shareholder's account.
Under this CDSC waiver policy, amounts withdrawn each period will be paid by
redeeming first shares not subject to a CDSC because the shares were purchased
by the reinvestment of dividends or capital gains distributions, the CDSC period
has elapsed or some other waiver of the CDSC applies. If shares subject to a
CDSC must be redeemed, shares held for the longest period of time will be
redeemed first and continuing with shares held the next longest period of time
until shares held the shortest period of time are redeemed.
Under the plan, sufficient shares of the Company are redeemed to provide the
amount of the periodic withdrawal payment. Dividends and capital gains
distributions on shares held under the plan are reinvested in additional shares
at the next determined net asset value. If periodic withdrawals continuously
exceed reinvested dividends and capital gains distributions, the shareholder's
original investment will be correspondingly reduced and ultimately exhausted.
Withdrawals made concurrently with purchases of additional shares ordinarily
will be disadvantageous to the shareholder because of the duplication of sales
charges. The Company reserves the right to amend or terminate the systematic
withdrawal program on 30 days' notice to its shareholders.
AUTOMATED CLEARING HOUSE ("ACH") DEPOSITS. Holders of Class A shares can
use ACH to have redemption proceeds deposited electronically into their bank
accounts. Redemptions transferred to a bank account via the ACH plan are
available to be credited to the account on the second business day following
normal payment. In order to utilize this option, the shareholder's bank must be
a member of ACH. In addition, the shareholder must fill out the appropriate
section of the account application. The shareholder must also include a voided
check or deposit slip from the bank account into which redemptions are to be
deposited together with the completed application. Once ACCESS has received the
application and the voided check or deposit slip, such shareholder's designated
bank account, following any redemption, will be credited with the proceeds of
such redemption. Once enrolled in the ACH plan, a shareholder may terminate
participation at any time by writing to ACCESS or by calling 1-800-282-4404. A
shareholder's bank may charge a fee for ACH transfers.
54
<PAGE> 115
TRANSFER OF REGISTRATION. You may transfer the registration of any of your
Company shares to another person by writing to the Company c/o ACCESS, P.O. Box
418256, Kansas City, Missouri 64141-9256. As in the case of redemptions, the
written request must be received in "good order" before any transfer can be
made. Shares held in broker street name may be transferred only by contacting
your Participating Dealer.
REDEMPTION OF SHARES
Shareholders may redeem for cash some or all of their shares without charge
by the Company (other than, any applicable CDSC) at any time by sending a
written request in proper form directly to the Company c/o ACCESS, P.O. Box
418256, Kansas City, Missouri 64141-9256, by placing the redemption request
through a Participating Dealer or by calling the Company. See "Purchase of
Shares" for a discussion of applicable CDSC levels.
WRITTEN REDEMPTION REQUESTS. In the case of redemption requests sent
directly to ACCESS, the redemption request should indicate the number of shares
or dollars to be redeemed, the class designation of such shares, the account
number and be signed exactly as the shares are registered. Signatures must
conform exactly to the account registration. If the proceeds of the redemption
would exceed $50,000, or if the proceeds are not to be paid to the record owner
at the record address, or if the record address has changed within the previous
30 days, signature(s) must be guaranteed by one of the following: a bank or
trust company; a broker-dealer; a credit union; a national securities exchange,
registered securities association or clearing agency; a savings and loan
association; or a federal savings bank. If certificates are held for the shares
being redeemed, such certificates must be endorsed for transfer or accompanied
by an endorsed stock power and sent with the redemption request. In the event
the redemption is requested by a corporation, partnership, trust, fiduciary,
executor or administrator, additional documents may be necessary. The redemption
price is the net asset value per share next determined after the request is
received by ACCESS in proper form. Payment for shares redeemed will ordinarily
be made by check mailed within seven business days after acceptance by ACCESS of
the request and any other necessary documents in proper order.
DEALER REDEMPTION REQUESTS. Shareholders may redeem shares through their
securities dealer, who will submit the request to the Distributor. Orders
received from dealers must be at least $500 unless transmitted via the FUNDSERV
network. The redemption price for such shares is the net asset value next
calculated after an order is received, less any applicable CDSC, by a dealer
provided such order is transmitted to the Distributor prior to the Distributor's
close of business on such day. It is the responsibility of dealers to transmit
redemption requests received by them to the Distributor so they will be received
prior to such time. Any change in the redemption price due to failure of the
Distributor to receive a redemption request prior to such time must be settled
between the shareholder and dealer. Shareholders must submit a written
redemption request in proper form (as described above under "Written Redemption
Requests") to the dealer within three business days after calling the dealer
with the redemption request. Payment for shares redeemed will ordinarily be made
by check mailed within three business days to the dealer.
TELEPHONE REDEMPTION REQUESTS. The Company permits redemption of shares by
telephone and for redemption proceeds to be sent to the address of record for
the account or to the bank account of record as described below. To establish
such privilege, a shareholder must complete the appropriate section of the
application accompanying this Prospectus or call the Company at (800) 287-4404
or (800) 772-8889 for the hearing impaired, to request that a copy of the
Telephone Redemption Authorization form be sent to them for
55
<PAGE> 116
completion. To redeem shares, contact the telephone transaction line at (800)
421-5684. See "Telephone Transaction Procedures" for more information. Telephone
redemptions may not be available if the shareholder cannot reach ACCESS by
telephone, whether because all telephone lines are busy or for any other reason;
in such case, a shareholder would have to use the Company's other redemption
procedures previously described. Requests received by ACCESS prior to 4:00 p.m.,
Eastern Time, on a regular business day will be processed at the net asset value
per share determined that day. These privileges are available for all accounts
other than retirement accounts. The telephone redemption privilege is not
available for shares represented by certificates. If an account has multiple
owners, ACCESS may rely on the instructions of any one owner.
For redemptions authorized by telephone, amounts of $50,000 or less may be
redeemed daily if the proceeds are to be paid by check sent to the shareholders'
address of record and amounts of at least $1,000 and up to $1 million may be
redeemed daily if the proceeds are to be paid by wire sent to the shareholder's
bank account of record. The proceeds must be payable to the shareholder(s) of
record. Proceeds from redemptions to be paid by check will ordinarily be mailed
within three business days to the shareholder's address of record. Proceeds from
redemptions to be paid by wire will ordinarily be wired on the next business day
to the shareholder's bank account of record. This privilege is not available if
the address or bank account of record has been changed within 30 days prior to a
telephone redemption request. The Company reserves the right at any time to
terminate, limit or otherwise modify this telephone redemption privilege.
REDEMPTION UPON DISABILITY. The Company will waive the CDSC on redemptions
following the disability of holders of Class B shares and Class C shares. 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 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 disability before it determines to waive the
contingent deferred sales charge on Class B shares and Class C shares.
In cases of disability, the CDSCs on Class B shares and Class C shares will
be waived where the 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 initial determination of disability. This waiver of the
CDSC on Class B shares and Class C shares applies to a total or partial
redemption, but only to redemptions of shares held at the time of the initial
determination of disability.
GENERAL REDEMPTION INFORMATION. If the shares to be redeemed have been
recently purchased by check, ACCESS may delay mailing a redemption check or
wiring redemption proceeds until it confirms that the purchase check has
cleared, usually a period of up to 15 days. In addition, the redemption payment
may be delayed or the right of redemption suspended by the Fund pursuant to
rules of the SEC.
The Company may redeem any shareholder account with a net asset value on the
date of the notice of redemption less than the minimum investment as specified
by the Directors. At least 60 days' advance written notice of any such
involuntary redemption is required and the shareholder is given an opportunity
to purchase the required value of additional shares at the next determined net
asset value without sales charge. Any
56
<PAGE> 117
involuntary redemption may only occur if the shareholder account is less than
the minimum investment due to shareholder redemptions.
A custodian of a retirement plan account may charge fees based on the
custodian's fee schedule. IRA redemption requests should be sent to the IRA
custodian to be forwarded to ACCESS. Where VKAC Trust serves as IRA custodian,
special IRA, 403(b)(7), or Keogh redemption forms must be obtained from and be
forwarded to Van Kampen American Capital Trust Company, P.O. Box 944, Houston,
Texas 77001-0944. Contact the custodian for information. Reinstatement
privileges (as otherwise described under "Purchase of Shares-- Reinstatement
Privilege of Each Class" above) also extend to participants in eligible
retirement plans held or administered by VKAC Trust who repay the principal and
interest on their borrowings from such plans.
FOR SHARES HELD IN BROKER STREET NAME, YOU CANNOT REQUEST REDEMPTION BY
TELEPHONE OR BY MAIL; SUCH SHARES MAY BE REDEEMED ONLY BY CONTACTING YOUR
PARTICIPATING DEALER.
TELEPHONE TRANSACTION PROCEDURES. Van Kampen American Capital, Inc. and its
subsidiaries, including ACCESS (collectively, "VKAC") and the Company 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, a
shareholder agrees that neither VKAC nor the Company will be liable for
following instructions which it reasonably believes to be genuine. VKAC and the
Company may be liable for any losses due to unauthorized or fraudulent
instructions if reasonable procedures are not followed.
VALUATION OF SHARES
Net asset value is calculated separately for each class of a Fund. The net
asset value per share of each class of shares of a Fund is determined by
dividing the total fair market value of the investments and other assets
attributable to such class of shares, less all liabilities attributable to such
class of shares, by the total number of outstanding shares of such class of
shares. Net asset value per share of a Fund is determined as of the regular
close of the NYSE (currently 4:00 p.m. Eastern Time) on each day that the NYSE
is open for business. Securities listed on a securities exchange for which
market quotations are available are valued at their closing price. If no closing
price is available, such securities will be valued at the last quoted sale price
on the day the valuation is made. Price information on listed securities is
taken from the exchange where the security is primarily traded. 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 are valued according to the broadest
and most representative market, which will ordinarily be the over-the-counter
market. Net asset value includes interest on fixed income securities, which is
accrued daily. In addition, bonds and other fixed income securities may be
valued on the basis of prices provided by a pricing service when such prices are
believed to reflect the fair market value of such securities. The prices
provided by a pricing service are determined without regard to bid or last sale
prices but take into account institutional size trading in similar groups of
securities and any developments related to the specific securities. Securities
not priced in this manner are valued at the most recent quoted bid price, or,
when stock exchange valuations are used, at the closing price, or if that is
unavailable, the latest quoted sale price on
57
<PAGE> 118
the day of valuation. If there is no such reported sale, the latest quoted bid
price will be used. Debt securities purchased with remaining maturities of 60
days or less are valued at amortized cost, if it approximates market value. In
the event that amortized cost does not approximate market value, market prices
as determined above will be used. The "amortized cost" method of valuation does
not take into account unrealized gains or losses. This method involves valuing
an instrument at its cost and thereafter assuming a constant amortization to
maturity of any discount or premium, regardless of the impact of fluctuating
interest rates on the market value of the instrument. While this method provides
certainty in valuation, it may result in periods during which value, as
determined by amortized cost, is higher or lower than the price each Fund would
receive if it sold the instrument.
The value of other assets and securities for which no quotations are readily
available (including illiquid and unlisted foreign securities) and those
securities for which it is inappropriate to determine prices in accordance with
the above procedures are determined in good faith at fair value using methods
determined by the Board of Directors. For purposes of calculating net asset
value per share, all assets and liabilities initially expressed in foreign
currencies will be converted into U.S. Dollars at the mean of the bid price and
asked price of such currencies against the U.S. Dollar as quoted by a major
bank.
PORTFOLIO TRANSACTIONS
The Adviser and the Sub-Adviser select the brokers or dealers that will
execute the purchases and sales of investment securities for the Funds. The
Adviser and the Sub-Adviser may, consistent with NASD rules, place portfolio
orders with qualified broker-dealers who recommend the Funds to their clients or
who act as agents in the purchase of shares of the Funds for their clients.
Subject to the overriding objective of obtaining the best execution of
orders, the Adviser and the Sub-Adviser may allocate a portion of the Company's
portfolio brokerage transactions to Morgan Stanley & Co. Incorporated ("Morgan
Stanley"), an affiliate of the Adviser and the Sub-Adviser, or broker affiliates
of Morgan Stanley under procedures adopted by the Board of Directors. For such
portfolio transactions, the commissions, fees or other remuneration received by
Morgan Stanley or such affiliates must be reasonable and fair compared to the
commissions, fees or other remuneration paid to other brokers for comparable
transactions involving similar securities being purchased or sold during a
comparable period of time.
Although the objective of each Fund is not to invest for short-term trading,
a Fund will seek to take advantage of trading opportunities as they arise to the
extent they are consistent with the Fund's objectives. Accordingly, investment
securities may be sold from time to time without regard to the length of time
they have been held. Each Fund, other than the Latin American Fund, anticipates
that its annual portfolio turnover rate will not exceed 100% under normal
circumstances but market conditions could result in portfolio activity at a
greater or lesser rate than anticipated. High portfolio turnover involves
correspondingly greater transaction costs which will be borne directly by a
Fund. In addition, high portfolio turnover may result in more capital gains
which would be taxable to the shareholders of the particular Fund. See
"Financial Highlights" above for the Funds' historical portfolio turnover rates.
58
<PAGE> 119
PERFORMANCE INFORMATION
The Company may from time to time advertise total return of the Funds. THESE
FIGURES WILL BE BASED ON HISTORICAL EARNINGS AND ARE NOT INTENDED TO INDICATE
FUTURE PERFORMANCE. The "total return" shows what an investment in a Fund would
have earned over a specified period of time (such as one, three, five or ten
years) assuming that all distributions and dividends by the Fund were reinvested
on the reinvestment dates during the period. Total return does not take into
account any federal or state income taxes consequences to shareholders subject
to tax. The Company may also include comparative performance information in
advertising or marketing the Funds' shares. Such performance information may
include data from Lipper Analytical Services, Inc. and Morgan Stanley Capital
International.
PERFORMANCE OF INVESTMENT SUB-ADVISER
The Sub-Adviser manages a portfolio of Morgan Stanley Institutional Fund,
Inc. ("MSIF") which served as the model for the Global Equity Fund. The
portfolio of MSIF (the "MSIF Portfolio") has substantially the same investment
objective, policies and strategies as the Global Equity Fund. In addition, the
Adviser and Sub-Adviser intends the Global Equity Fund and the corresponding
MSIF Portfolio to be managed by the same personnel and to continue to have
closely similar investment strategies, techniques and characteristics. Past
investment performance of the MSIF Portfolio, as shown in the table below, may
be relevant to your consideration of investment in the Global Equity Fund. The
investment performance of the MSIF Portfolio is not necessarily indicative of
future performance of the Global Equity Fund. Also, the operating expenses of
the Global Equity Fund will be different from, and may be higher than, the
operating expenses of the MSIF Portfolio. The investment performance of the MSIF
Portfolio is provided merely to indicate the experience of the Sub-Adviser in
managing similar investment portfolios.
The data set forth below under the heading "Return With Sales Charge" is
adjusted to reflect the Fund's projected operating expenses and (i) with respect
to the Class A shares to take into account a maximum 5.75% initial sales charge
applicable to purchases of Class A shares of the Global Equity Fund; (ii) with
respect to Class B shares to take into account the applicable CDSC that is
imposed if Class B shares of the Global Equity Fund are redeemed within the year
of their purchase indicated; and (iii) with respect to the Class C shares to
take into account a 1.00% CDSC that is imposed if Class C shares of the Global
Equity Fund are redeemed within one year of their purchase. The data set forth
below under the heading "Return Without Sales Charge" is adjusted to reflect the
Fund's projected operating expenses and not adjusted to take into account such
sales charges.
59
<PAGE> 120
TOTAL RETURN FOR THE MSIF GLOBAL EQUITY PORTFOLIO'S CLASS A SHARES
(A SEPARATE MUTUAL FUND FROM THE GLOBAL EQUITY FUND)
FOR THE PERIOD ENDED JULY 31, 1997
(ADJUSTED TO REFLECT PROJECTED OPERATING EXPENSES AND, WHERE INDICATED, THE
SALES CHARGES OF THE GLOBAL EQUITY FUND)
<TABLE>
<CAPTION>
RETURN WITH SALES CHARGE 1 YEAR 3 YEARS 5 YEARS SINCE INCEPTION(1)
- ------------------------ ---------- ---------- ---------- -------------------
<S> <C> <C> <C> <C>
Class A......................................................... 30.23% 17.48% 20.57% 19.73%
Class B......................................................... 32.43% 18.58% 21.52% 20.77%
Class C......................................................... 36.43% 19.29% 21.65% 20.77%
<CAPTION>
RETURN WITHOUT SALES CHARGE
- ---------------------------
<S> <C> <C> <C> <C>
Class A......................................................... 38.18% 19.83% 22.01% 21.14%
Class B......................................................... 37.43% 19.29% 21.65% 20.77%
Class C......................................................... 37.43% 19.29% 21.65% 20.77%
</TABLE>
- ------------------
(1) Commenced Operations on July 15, 1992.
The past performance of the MSIF Global Equity Portfolio is no guarantee of
the future performance of the Global Equity Fund.
DIVIDENDS AND DISTRIBUTIONS
Shareholders will automatically be credited with all dividends and
distributions in additional shares at net asset value, without payment of any
sales charge of the Funds, except that, upon written notice to the Company or by
checking off the appropriate box in the account application form, a shareholder
may elect to receive dividends and/or distributions in cash.
Each Fund expects to distribute substantially all of its net investment
income in the form of annual dividends. Each Fund expects to distribute net
realized gains, if any, annually. Confirmations of the purchase of shares of a
Fund through the automatic reinvestment of income dividends and capital gains
distributions will be provided, pursuant to Rule 10b-10(b) under the Securities
Exchange Act of 1934, as amended, on the next quarterly client statement
following such purchase of shares. Consequently, confirmations of such purchases
will not be provided at the time of completion of such purchases, as might
otherwise be required by Rule 10b-10.
Any undistributed net investment income and undistributed realized gains
increase a Fund's net assets for the purpose of calculating net asset value per
share. Therefore, on the "ex-dividend" or "ex-distribution" date, the net asset
value per share excludes the dividend or distribution (i.e., is reduced by the
per share amount of the dividend or distribution). Dividends and distributions
paid shortly after the purchase of shares by an investor, although in effect a
return of capital, are taxable to shareholders subject to tax.
Expenses of the Company allocated to a particular class of shares of the
Fund will be borne on a pro rata basis by each outstanding share of that class.
60
<PAGE> 121
TAXES
TAX STATUS OF THE FUNDS
The following summary of certain federal income tax consequences is based on
current tax laws and regulations, which may be changed by legislative, judicial
or administrative action, possibly with retroactive effect. See also the tax
sections in the Statement of Additional Information.
No attempt has been made to present a detailed explanation of the federal,
state or local income tax treatment of the Funds or their shareholders.
Accordingly, shareholders are urged to consult their tax advisors regarding
specific questions as to federal, state and local income taxes.
Each of the Funds is generally treated as a separate entity 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. Net long-term, mid-term and short-term
capital gains, net income and operating expenses therefore will be determined
separately for each Fund.
Each Fund intends to qualify for the special tax treatment afforded
"regulated investment companies" ("RICs") under Subchapter M of the Code so that
it will be relieved of federal income tax on that part of its net investment
income and net capital gain (the excess of net long-term capital gain over net
short-term capital loss less any available capital loss carryforward) which is
distributed to its shareholders.
TAX STATUS OF DISTRIBUTIONS AND DISPOSITIONS
Each Fund distributes substantially all of its net investment income
(including, for this purpose, net short-term capital gain), to its shareholders.
Dividends paid by a Fund from its net investment income will be taxable to the
shareholders of the Fund as ordinary income, whether received in cash or in
additional shares, if the shareholder is subject to tax. Dividends paid by a
Fund attributable to dividends received from shares of domestic corporations may
qualify for the dividends-received deduction for corporations.
Distributions of net capital gains ("capital gain dividends") are taxable to
shareholders subject to tax as long-term capital gains, regardless of how long
the shareholder has held a Fund's shares. Capital gain dividends are not
eligible for the corporate dividends-received deduction. The Funds will make
annual reports to shareholders of the federal income tax status of all
distributions. For a summary of the tax rates applicable to capital gains
(including capital gain dividends), see the discussion below regarding the
Taxpayer Relief Act of 1997.
Each Fund intends to make sufficient distributions or deemed distributions
of its ordinary income and net capital gains prior to the end of each calendar
year to qualify as an RIC under the Code and to avoid liability for federal
income and excise taxes.
Dividends and other distributions declared in October, November and December
by a Fund payable as of a record date in such month and paid at any time during
January of the following year are treated as having been paid by the Fund and
received by the shareholders on December 31 of the year declared.
The sale, exchange or redemption of shares may result in taxable gain or
loss to the selling, exchanging or redeeming shareholder, depending upon whether
the fair market value of the redemption proceeds exceeds or is less than the
shareholder's adjusted basis in the redeemed, exchanged or sold shares. If
capital gain dividends have been made with respect to shares that are sold at a
loss after being held for six months or less, then the loss
61
<PAGE> 122
is treated as a long-term capital loss to the extent of the capital gain
dividends. Shareholders may also be subject to state and local taxes on
distributions from the Funds.
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 particualr circumstances.
THE TAX DISCUSSION SET FORTH ABOVE IS INCLUDED HEREIN FOR GENERAL
INFORMATION ONLY. PROSPECTIVE INVESTORS AND SHAREHOLDERS SHOULD CONSULT THEIR
OWN TAX ADVISERS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF AN INVESTMENT
IN THE FUNDS.
GENERAL INFORMATION
DESCRIPTION OF COMMON STOCK
The Company was organized as a Maryland corporation on August 14, 1992. The
Amended Articles of Incorporation currently permit the Company to issue 27.375
billion shares of common stock, par value $.001 per share. Pursuant to the
Company's By-Laws, the Board of Directors may increase the number of shares the
Company is authorized to issue without the approval of the shareholders of the
Company. The Board of Directors has the power to designate one or more classes
of shares of common stock and to classify and reclassify any unissued shares
with respect to such classes.
The shares of the Funds, when issued, will be fully paid, nonassessable,
fully transferable and redeemable at the option of the holder. Except as
described herein, the shares have no preference as to conversion, exchange,
dividends, retirement or other features and have no preemptive rights. The
shares of the Funds 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. Under Maryland law, the
Company is not required to hold an annual meeting of its shareholders unless
required to do so under the 1940 Act. Any person or organization owning 25% or
more of the outstanding shares of a Fund may be presumed to "control" (as that
term is defined in the 1940 Act) such Fund. As of October 16, 1997, no person or
organization owned 25% or more of the outstanding voting shares of any of the
Funds.
REPORTS TO SHAREHOLDERS
The Company will send to its shareholders annual and semi-annual reports;
the financial statements appearing in annual reports are audited by independent
accountants.
62
<PAGE> 123
In addition, the Company or ACCESS will send to each shareholder having an
account directly with the Company a quarterly statement showing transactions in
the account, the total number of shares owned, and any dividends or
distributions paid. In addition, when a transaction occurs in a shareholder's
account, the Company or ACCESS will send the shareholder a confirmation
statement showing the same information.
CUSTODIAN
Domestic securities and cash are held by Chase, which is not an affiliate of
the Adviser, the Sub-Adviser or the Distributor. Morgan Stanley Trust Company,
Brooklyn, New York ("Morgan Stanley Trust"), 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 regulations of the
SEC for the purpose of providing custodial services for such assets. Morgan
Stanley Trust may also hold certain domestic assets for the Company. Morgan
Stanley Trust is an affiliate of the Adviser, the Sub-Adviser and the
Distributor. For more information on the custodians, see "General Information --
Custody Arrangements" in the Statement of Additional Information.
DIVIDEND DISBURSING AND TRANSFER AGENT
ACCESS, P.O. Box 418256, Kansas City, Missouri 64141-9256, acts as dividend
disbursing and transfer agent for the Company.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP, 1177 Avenue of the Americas, New York, NY 10036,
serves as independent accountants for the Company and audits its annual
financial statements.
63
<PAGE> 124
APPENDIX A
DESCRIPTION OF CORPORATE BOND RATINGS
MOODY'S INVESTORS SERVICE, INC. -- CORPORATE 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-edge." 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 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.
A-1
<PAGE> 125
STANDARD & POOR'S RATINGS GROUP -- CORPORATE 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.
A-2
<PAGE> 126
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS, IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE DISTRIBUTOR. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER BY THE COMPANY OR THE DISTRIBUTOR TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY
JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION IN SUCH JURISDICTION.
--------------------------
TABLE OF CONTENTS
PAGE
-----
Prospectus Summary.......................................... 2
Fund Expenses............................................... 4
Financial Highlights........................................ 7
Investment Objectives and Policies.......................... 17
Additional Investment Information........................... 27
Investment Limitations...................................... 38
Management of the Company................................... 38
Purchase of Shares.......................................... 43
Shareholder Services........................................ 51
Redemption of Shares........................................ 55
Valuation of Shares......................................... 57
Portfolio Transactions...................................... 58
Performance Information..................................... 59
Dividends and Distributions................................. 60
Taxes....................................................... 61
General Information......................................... 62
Appendix A -- Description of Corporate Bond Ratings......... A-1
MORGAN STANLEY
----------------------
ASIAN GROWTH FUND
EMERGING MARKETS FUND
GLOBAL EQUITY FUND
GLOBAL EQUITY ALLOCATION FUND
INTERNATIONAL MAGNUM FUND
JAPANESE EQUITY FUND
LATIN AMERICAN FUND
PORTFOLIOS OF
MORGAN STANLEY
FUND, INC.
---------------
PROSPECTUS
---------------
INVESTMENT ADVISER
VAN KAMPEN
AMERICAN CAPITAL
INVESTMENT ADVISORY CORP.
INVESTMENT SUB-ADVISER
MORGAN STANLEY
ASSET MANAGEMENT INC.
DISTRIBUTOR
VAN KAMPEN AMERICAN
CAPITAL DISTRIBUTORS, INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 127
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 APRIL 13, 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 APRIL 14, 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 April 14, 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> 128
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, 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,
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> 129
APPENDIX A
AGREEMENT AND PLAN OF REORGANIZATION
<PAGE> 130
AGREEMENT AND PLAN OF REORGANIZATION
This Agreement and Plan of Reorganization (the "Agreement") is made as of
October 28, 1997, by and between Morgan Stanley Global Equity Allocation Fund
(the "MS Global Equity Allocation Fund"), a series of the Morgan Stanley Fund,
Inc. a Maryland corporation formed under the laws of the State of Maryland (the
"Morgan Stanley Fund"), and Van Kampen American Capital Global Equity Fund (the
"VKAC Global Equity Fund"), a series of Van Kampen American Capital World
Portfolio Series Trust, a Delaware business trust formed under the laws of the
State of Delaware (the "Trust").
WITNESSETH:
WHEREAS, the Board of Trustees of the Trust on behalf of the MS Global Equity
Allocation Fund and VKAC Global Equity Fund have determined that entering into
this Agreement for the MS Global Equity Allocation Fund to acquire the assets
and liabilities of the VKAC Global Equity Fund is in the best interests of the
shareholders of each respective fund; and
WHEREAS, the parties intend that this transaction qualify as a reorganization
within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as
amended (the "Code");
NOW, THEREFORE, in consideration of the mutual promises contained herein, and
intending to be legally bound hereby, the parties hereto agree as follows:
1. PLAN OF TRANSACTION.
A. TRANSFER OF ASSETS. Upon satisfaction of the conditions precedent
set forth in Sections 7 and 8 hereof, the VKAC Global Equity Fund will convey,
transfer and deliver to the MS Global Equity Allocation Fund at the closing,
provided for in Section 2 hereof, all of the existing assets of the VKAC Global
Equity Fund (including accrued interest to the Closing Date) acceptable to the
MS Global Equity Allocation Fund as more fully set forth on Schedule 1 hereto,
and as amended from time to time prior to the Closing Date (as defined below),
free and clear of all liens, encumbrances and claims whatsoever (the assets so
transferred collectively being referred to as the "Assets").
B. CONSIDERATION. In consideration thereof, the MS Global Equity
Allocation Fund agrees that on the Closing Date the MS Global Equity Allocation
Fund will (i) deliver to the VKAC Global Equity Fund, full and fractional Class
A, Class B and Class C Shares of beneficial interest of the MS Global Equity
Allocation Fund having net asset values per share in an amount equal to the
aggregate dollar value of the Assets net of any liabilities of the VKAC Global
Equity Fund described in Section 3E hereof (the
1
<PAGE> 131
"Liabilities") determined pursuant to Section 3A of this Agreement
(collectively, the "MS Global Equity Allocation Fund Shares") and (ii) assume
all of the VKAC Global Equity Fund's Liabilities. The calculation of full and
fractional Class A, Class B and Class C Shares of beneficial interest of the MS
Global Equity Allocation Fund to be exchanged shall be carried out to no less
than two (2) decimal places. All MS Global Equity Allocation Fund Shares
delivered to the VKAC Global Equity Fund in exchange for such Assets shall be
delivered at net asset value without sales load, commission or other
transactional fee being imposed.
2. CLOSING OF THE TRANSACTION.
CLOSING DATE. The closing shall occur within fifteen (15) business days
after the later of receipt of all necessary regulatory approvals and the final
adjournment of the meeting of shareholders of the VKAC Global Equity Fund at
which this Agreement will be considered and approved or such later date as soon
as practicable thereafter, as the parties may mutually agree (the "Closing
Date"). On the Closing Date, the MS Global Equity Allocation Fund shall deliver
to the VKAC Global Equity Fund the MS Global Equity Allocation Fund Shares in
the amount determined pursuant to Section 1B hereof and the VKAC Global Equity
Fund thereafter shall, in order to effect the distribution of such shares to the
VKAC Global Equity Fund stockholders, instruct the MS Global Equity Allocation
Fund to register the pro rata interest in the MS Global Equity Allocation Fund
Shares (in full and fractional shares) of each of the holders of record of
shares of the VKAC Global Equity Fund in accordance with their holdings of
either Class A, Class B or Class C shares and shall provide as part of such
instruction a complete and updated list of such holders (including addresses and
taxpayer identification numbers), and the MS Global Equity Allocation Fund
agrees promptly to comply with said instruction. The MS Global Equity Allocation
Fund shall have no obligation to inquire as to the validity, propriety or
correctness of such instruction, but shall assume that such instruction is
valid, proper and correct.
3. PROCEDURE FOR REORGANIZATION.
A. VALUATION. The value of the Assets and Liabilities of the VKAC
Global Equity Fund to be transferred and assumed, respectively, by the MS Global
Equity Allocation Fund shall be computed as of the Closing Date, in the manner
set forth in the most recent Prospectus and Statement of Additional Information
of the MS Global Equity Allocation Fund (collectively, the "MS Global Equity
Allocation Fund Prospectus"), copies of which have been delivered to the VKAC
Global Equity Fund.
B. DELIVERY OF FUND ASSETS. The Assets shall be delivered to State
Street Bank and Trust Company, 225 Franklin Street, Post Office Box 1713,
Boston, Massachusetts 02105-1713, as custodian for the MS Global Equity
Allocation Fund (the "Custodian") for the benefit of the MS Global Equity
2
<PAGE> 132
Allocation Fund, duly endorsed in proper form for transfer in such condition as
to constitute a good delivery thereof, free and clear of all liens, encumbrances
and claims whatsoever, in accordance with the custom of brokers, and shall be
accompanied by all necessary state stock transfer stamps, the cost of which
shall be borne by the Van Kampen American Capital Investment Advisory Corp. (the
"VKAC Global Equity Adviser").
C. FAILURE TO DELIVER SECURITIES. If the VKAC Global Equity Fund is
unable to make delivery pursuant to Section 3B hereof to the Custodian of any of
the VKAC Global Equity Fund's securities for the reason that any of such
securities purchased by the MS Global Equity Allocation Fund have not yet been
delivered to it by the VKAC Global Equity Fund's broker or brokers, then, in
lieu of such delivery, the VKAC Global Equity Fund shall deliver to the
Custodian, with respect to said securities, executed copies of an agreement of
assignment and due bills executed on behalf of said broker or brokers, together
with such other documents as may be required by the MS Global Equity Allocation
Fund or Custodian, including brokers' confirmation slips.
D. SHAREHOLDER ACCOUNTS. The MS Global Equity Allocation Fund, in order
to assist the VKAC Global Equity Fund in the distribution of the MS Global
Equity Allocation Fund Shares to the VKAC Global Equity Fund shareholders after
delivery of the MS Global Equity Allocation Fund Shares to the VKAC Global
Equity Fund, will establish pursuant to the request of the VKAC Global Equity
Fund an open account with the MS Global Equity Allocation Fund for each
shareholder of the VKAC Global Equity Fund and, upon request by the VKAC Global
Equity Fund, shall transfer to such account the exact number of full and
fractional Class A, Class B and Class C shares of the MS Global Equity
Allocation Fund then held by the VKAC Global Equity Fund specified in the
instruction provided pursuant to Section 2 hereof. The MS Global Equity
Allocation Fund is not required to issue certificates representing MS Global
Equity Allocation Fund Shares unless requested to do so by a shareholder. Upon
liquidation or dissolution of the VKAC Global Equity Fund, certificates
representing shares of beneficial interest stock of the VKAC Global Equity Fund
shall become null and void.
E. LIABILITIES. The Liabilities shall include all of VKAC Global Equity
Fund's liabilities, debts, obligations, and duties of whatever kind or nature,
whether absolute, accrued, contingent, or otherwise, whether or not arising in
the ordinary course of business, whether or not determinable at the Closing
Date, and whether or not specifically referred to in this Agreement.
F. EXPENSES. In the event that the transactions contemplated herein are
consummated, the VKAC Global Equity Adviser agrees to pay (i) for the reasonable
outside expenses for the transactions contemplated herein; including, but not by
way of limitation, the preparation of the MS Global Equity Allocation Fund's
Registration Statement on Form N-14 (the "Registration Statement") and the
solicitation
3
<PAGE> 133
of the VKAC Global Equity Fund shareholder proxies; (ii) the VKAC Global Equity
Fund counsel's reasonable attorney's fees, which fees shall be payable pursuant
to receipt of an itemized statement; and (iii) the cost of rendering the tax
opinion, more fully referenced in Section 7F below. In the event that the
transactions contemplated herein are not consummated for any reason, then all
reasonable outside expenses incurred to the date of termination of this
Agreement shall be borne by the VKAC Global Equity Adviser.
G. DISSOLUTION. As soon as practicable after the Closing Date but in no
event later than one year after the Closing Date, the VKAC Global Equity Fund
shall voluntarily dissolve and completely liquidate by taking, in accordance
with the Delaware Business Trust Law and Federal securities laws, all steps as
shall be necessary and proper to effect a complete liquidation and dissolution
of the VKAC Global Equity Fund. Immediately after the Closing Date, the stock
transfer books relating to the VKAC Global Equity Fund shall be closed and no
transfer of shares shall thereafter be made on such books.
4. VKAC GLOBAL EQUITY FUND'S REPRESENTATIONS AND WARRANTIES.
The VKAC Global Equity Fund hereby represents and warrants to the MS Global
Equity Allocation Fund, which representations and warranties are true and
correct on the date hereof, and agrees with the MS Global Equity Allocation Fund
that:
A. ORGANIZATION. The Trust is a Delaware Business Trust duly formed and
in good standing under the laws of the State of Delaware and is duly authorized
to transact business in the State of Delaware. The VKAC Global Equity Fund is a
separate series of the Tax Free Trust duly designated in accordance with the
applicable provisions of the Tax Free Trust's Declaration of Trust. The VKAC
Global Equity Fund is qualified to do business in all jurisdictions in which it
is required to be so qualified, except jurisdictions in which the failure to so
qualify would not have a material adverse effect on the VKAC Global Equity Fund.
The VKAC Global Equity Fund has all material federal, state and local
authorizations necessary to own all of the properties and assets and to carry on
its business as now being conducted, except authorizations which the failure to
so obtain would not have a material adverse effect on the VKAC Global Equity
Fund.
4
<PAGE> 134
B. REGISTRATION. The VKAC Global Equity Fund is registered under the
Investment Company Act of l940, as amended (the "l940 Act") as an open-end,
diversified management company and such registration has not been revoked or
rescinded. The VKAC Global Equity Fund is in compliance in all material respects
with the 1940 Act and the rules and regulations thereunder with respect to its
activities. All of the outstanding shares of beneficial interest of the VKAC
Global Equity Fund have been duly authorized and are validly issued, fully paid
and nonassessable and not subject to pre-emptive or dissenters' rights.
C. AUDITED FINANCIAL STATEMENTS. The statement of assets and
liabilities and the portfolio of investments and the related statements of
operations and changes in net assets of the VKAC Global Equity Fund audited as
of and for the year ended May 31, 1997, true and complete copies of which have
been heretofore furnished to the MS Global Equity Allocation Fund, fairly
represent the financial condition and the results of operations of the VKAC
Global Equity Fund as of and for their respective dates and periods in
conformity with generally accepted accounting principles applied on a consistent
basis during the periods involved.
D. FINANCIAL STATEMENTS. The VKAC Global Equity Fund shall furnish to
the MS Global Equity Allocation Fund (i) an unaudited statement of assets and
liabilities and the portfolio of investments and the related statements of
operations and changes in net assets of the VKAC Global Equity Fund for the
period ended December 31, 1997; and (ii) within five (5) business days after the
Closing Date, an unaudited statement of assets and liabilities and the portfolio
of investments and the related statements of operations and changes in net
assets as of and for the interim period ending on the Closing Date; such
financial statements will represent fairly the financial position and portfolio
of investments and the results of the VKAC Global Equity Fund's operations as
of, and for the period ending on, the dates of such statements in conformity
with generally accepted accounting principles applied on a consistent basis
during the periods involved and the results of its operations and changes in
financial position for the period then ended; and such financial statements
shall be certified by the Treasurer of the VKAC Global Equity Fund as complying
with the requirements hereof.
E. CONTINGENT LIABILITIES. There are, and as of the Closing Date will
be, no contingent Liabilities of the VKAC Global Equity Fund not disclosed in
the financial statements delivered pursuant to Sections 4C and 4D which would
materially affect the VKAC Global Equity Fund's financial condition, and there
are no legal, administrative, or other proceedings pending or, to its knowledge,
threatened against the VKAC Global Equity Fund which would, if adversely
determined, materially affect the VKAC Global Equity Fund's financial condition.
All Liabilities were incurred by the VKAC Global Equity Fund in the ordinary
course of its business.
5
<PAGE> 135
F. MATERIAL AGREEMENTS. The VKAC Global Equity Fund is in compliance
with all material agreements, rules, laws, statutes, regulations and
administrative orders affecting its operations or its assets; and except as
referred to in the VKAC Global Equity Fund's Prospectus and Statement of
Additional Information, there are no material agreements outstanding relating to
the VKAC Global Equity Fund to which the VKAC Global Equity Fund is a party.
G. STATEMENT OF EARNINGS. As promptly as practicable, but in any case
no later than 30 calendar days after the Closing Date, KPMG Peat Marwick LLP,
auditors for the VKAC Global Equity Fund, shall furnish the MS Global Equity
Allocation Fund with a statement of the earnings and profits of the VKAC Global
Equity Fund within the meaning of the Code as of the Closing Date.
H. RESTRICTED SECURITIES. None of the securities comprising the assets
of the VKAC Global Equity Fund at the date hereof are, or on the Closing Date or
any subsequent delivery date will be, "restricted securities" under the
Securities Act of 1933, (the "Securities Act") or the rules and regulations of
the Securities and Exchange Commission (the "SEC") thereunder, or will be
securities for which market quotations are not readily available for purposes of
Section 2(a)(41) under the 1940 Act.
I. TAX RETURNS. At the date hereof and on the Closing Date, all Federal
and other material tax returns and reports of the VKAC Global Equity Fund
required by law to have been filed by such dates shall have been filed, and all
Federal and other taxes shown thereon shall have been paid so far as due, or
provision shall have been made for the payment thereof, and to the best of the
VKAC Global Equity Fund's knowledge no such return is currently under audit and
no assessment has been asserted with respect to any such return.
J. CORPORATE AUTHORITY. The VKAC Global Equity Fund has the necessary
power to enter into this Agreement and to consummate the transactions
contemplated herein. The execution, delivery and performance of this Agreement
and the consummation of the transactions contemplated herein have been duly
authorized by the VKAC Global Equity Fund's Board of Trustees, and except for
obtaining approval of the holders of the shares of the VKAC Global Equity Fund,
no other corporate acts or proceedings by the VKAC Global Equity Fund are
necessary to authorize this Agreement and the transactions contemplated herein.
This Agreement has been duly executed and delivered by the VKAC Global Equity
Fund and constitutes the legal, valid and binding obligation of VKAC Global
Equity Fund enforceable in accordance with its terms, except as such
enforceability may be limited by bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium or similar law affecting creditors' rights generally,
or by general principals of equity (regardless of whether enforcement is sought
in a proceeding at equity or law).
6
<PAGE> 136
K. NO VIOLATION; CONSENTS AND APPROVALS. The execution, delivery and
performance of this Agreement by the VKAC Global Equity Fund does not and will
not (i) violate any provision of the Trust's Declaration of Trust or the
Designation of Series of the VKAC Global Equity Fund, (ii) violate any statute,
law, judgment, writ, decree, order, regulation or rule of any court or
governmental authority applicable to the VKAC Global Equity Fund, (iii) result
in a violation or breach of, or constitute a default under any material
contract, indenture, mortgage, loan agreement, note, lease or other instrument
or obligation to which the VKAC Global Equity Fund is subject, or (iv) result in
the creation or imposition or any lien, charge or encumbrance upon any property
or assets of the VKAC Global Equity Fund. Except as set forth in Schedule 2 to
this Agreement, (i) no consent, approval, authorization, order or filing with or
notice to any court or governmental authority or agency is required for the
consummation by the VKAC Global Equity Fund of the transactions contemplated by
this Agreement and (ii) no consent of or notice to any third party or entity is
required for the consummation by the VKAC Global Equity Fund of the transactions
contemplated by this Agreement.
L. ABSENCE OF CHANGES. From the date of this Agreement through the
Closing Date, there shall not have been:
(1) any change in the business, results of operations, assets, or
financial condition or the manner of conducting the business of the VKAC Global
Equity Fund, other than changes in the ordinary course of its business, or any
pending or threatened litigation, which has had or may have a material adverse
effect on such business, results of operations, assets or financial condition;
(2) issued any option to purchase or other right to acquire shares of
the VKAC Global Equity Fund granted by the VKAC Global Equity Fund to any person
other than subscriptions to purchase shares at net asset value in accordance
with terms in the Prospectus for the VKAC Global Equity Fund;
(3) any entering into, amendment or termination of any contract or
agreement by VKAC Global Equity Fund, except as otherwise contemplated by this
Agreement;
(4) any indebtedness incurred, other than in the ordinary course of
business, by the VKAC Global Equity Fund for borrowed money or any commitment to
borrow money entered into by the VKAC Global Equity Fund;
(5) any amendment of the Trust's Declaration of Trust or Designation of
Series of the VKAC Global Equity Fund ; or
7
<PAGE> 137
(6) any grant or imposition of any lien, claim, charge or encumbrance
(other than encumbrances arising in the ordinary course of business with respect
to covered options) upon any asset of the VKAC Global Equity Fund other than a
lien for taxes not yet due and payable.
M. TITLE. On the Closing Date, the VKAC Global Equity Fund will have
good and marketable title to the Assets, free and clear of all liens, mortgages,
pledges, encumbrances, charges, claims and equities whatsoever, other than a
lien for taxes not yet due and payable, and full right, power and authority to
sell, assign, transfer and deliver such Assets; upon delivery of such Assets,
the MS Global Equity Allocation Fund will receive good and marketable title to
such Assets, free and clear of all liens, mortgages, pledges, encumbrances,
charges, claims and equities other than a lien for taxes not yet due and
payable.
N. PROSPECTUS/PROXY STATEMENT. The Registration Statement and the
Prospectus/Proxy Statement contained therein as of the effective date of the
Registration Statement, and at all times subsequent thereto up to and including
the Closing Date, as amended or as supplemented if it shall have been amended or
supplemented, conform and will conform as it relates to the VKAC Global Equity
Fund, in all material respects, to the applicable requirements of the applicable
Federal and state securities laws and the rules and regulations of the SEC
thereunder, and do not and will not include any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, except that no representations or
warranties in this Section 4N apply to statements or omissions made in reliance
upon and in conformity with written information concerning the MS Global Equity
Allocation Fund furnished to the VKAC Global Equity Fund by the MS Global Equity
Allocation Fund.
O. TAX QUALIFICATION. The VKAC Global Equity Fund has qualified as a
regulated investment company within the meaning of Section 851 of the Code for
each of its taxable years; and has satisfied the distribution requirements
imposed by Section 852 of the Code for each of its taxable years.
P. FAIR MARKET VALUE. The fair market value on a going concern basis of
the Assets will equal or exceed the Liabilities to be assumed by the MS Global
Equity Allocation Fund and those to which the Assets are subject.
Q. VKAC GLOBAL EQUITY FUND LIABILITIES. Except as otherwise provided
for herein, the VKAC Global Equity Fund shall use reasonable efforts, consistent
with its ordinary operating procedures, to repay in full any indebtedness for
borrowed money and have discharged or reserved against all of the VKAC Global
Equity Fund's known debts, liabilities and obligations including expenses, costs
and charges whether absolute or contingent, accrued or unaccrued.
8
<PAGE> 138
5. THE MS GLOBAL EQUITY ALLOCATION FUND'S REPRESENTATIONS AND WARRANTIES.
The MS Global Equity Allocation Fund hereby represents and warrants to the VKAC
Global Equity Fund, which representations and warranties are true and correct on
the date hereof, and agrees with the VKAC Global Equity Fund that:
A. ORGANIZATION. The Morgan Stanley Fund is a Maryland corporation duly
formed and in good standing under the laws of the State of Maryland and is duly
authorized to transact business in the State of Maryland. The MS Global Equity
Allocation Fund is a separate series of the Morgan Stanley Fund duly designated
in accordance with the applicable provisions of the Fund's Articles of
Incorporation. The Morgan Stanley Fund and MS Global Equity Allocation Fund is
qualified to do business in all jurisdictions in which they are required to be
so qualified, except jurisdictions in which the failure to so qualify would not
have a material adverse effect on the MS Global Equity Allocation Fund. The MS
Global Equity Allocation Fund has all material federal, state and local
authorizations necessary to own all of the properties and assets and to carry on
its business and the business thereof as now being conducted, except
authorizations which the failure to so obtain would not have a material adverse
effect on the MS Global Equity Allocation Fund.
B. REGISTRATION. The MS Global Equity Allocation Fund is registered
under the 1940 Act as an open-end, diversified management company and such
registration has not been revoked or rescinded. The MS Global Equity Allocation
Fund is in compliance in all material respects with the 1940 Act and the rules
and regulations thereunder. All of the outstanding shares of beneficial interest
of the MS Global Equity Allocation Fund have been duly authorized and are
validly issued, fully paid and non-assessable and not subject to pre-emptive
dissenters rights.
C. AUDITED FINANCIAL STATEMENTS. The statement of assets and
liabilities and the portfolio of investments and the related statements of
operations and changes in net assets of the MS Global Equity Allocation Fund
audited as of and for the year ended June 30, 1997, true and complete copies of
which have been heretofore furnished to the VKAC Global Equity Fund fairly
represent the financial condition and the results of operations of the MS Global
Equity Allocation Fund as of and for their respective dates and periods in
conformity with generally accepted accounting principles applied on a consistent
basis during the periods involved.
D. FINANCIAL STATEMENTS. The MS Global Equity Allocation Fund shall
furnish to the VKAC Global Equity Fund (i) an unaudited statement of assets and
liabilities and the portfolio of investments and the related statements of
operations and changes in net assets of the MS Global Equity Allocation Fund for
the period ended December 31, 1997, and (ii) within five (5) business days after
the Closing
9
<PAGE> 139
Date, an unaudited statement of assets and liabilities and the portfolio of
investments and the related statements of operations and changes in net assets
as of and for the interim period ending on the Closing Date; such financial
statements will represent fairly the financial position and portfolio of
investments and the results of its operations as of, and for the period ending
on, the dates of such statements in conformity with generally accepted
accounting principles applied on a consistent basis during the period involved
and the results of its operations and changes in financial position for the
periods then ended; and such financial statements shall be certified by the
Treasurer of the MS Global Equity Allocation Fund as complying with the
requirements hereof.
E. CONTINGENT LIABILITIES. There are no contingent liabilities of the
MS Global Equity Allocation Fund not disclosed in the financial statements
delivered pursuant to Sections 5C and 5D which would materially affect the MS
Global Equity Allocation Fund's financial condition, and there are no legal,
administrative, or other proceedings pending or, to its knowledge, threatened
against the MS Global Equity Allocation Fund which would, if adversely
determined, materially affect the MS Global Equity Allocation Fund's financial
condition.
F. MATERIAL AGREEMENTS. The MS Global Equity Allocation Fund is in
compliance with all material agreements, rules, laws, statutes, regulations and
administrative orders affecting its operations or its assets; and except as
referred to in the MS Global Equity Allocation Fund Prospectus and Statement of
Additional Information there are no material agreements outstanding to which the
MS Global Equity Allocation Fund is a party.
G. TAX RETURNS. At the date hereof and on the Closing Date, all Federal
and other material tax returns and reports of the MS Global Equity Allocation
Fund required by law to have been filed by such dates shall have been filed, and
all Federal and other taxes shall have been paid so far as due, or provision
shall have been made for the payment thereof, and to the best of the MS Global
Equity Allocation Fund's knowledge no such return is currently under audit and
no assessment has been asserted with respect to any such return.
H. CORPORATE AUTHORITY. The MS Global Equity Allocation Fund has the
necessary power to enter into this Agreement and to consummate the transactions
contemplated herein. The execution, delivery and performance of this Agreement
and the consummation of the transactions contemplated herein have been duly
authorized by the MS Global Equity Allocation Fund's Board of Trustees, no other
corporate acts or proceedings by the MS Global Equity Allocation Fund are
necessary to authorize this Agreement and the transactions contemplated herein.
This Agreement has been duly executed and delivered by the MS Global Equity
Allocation Fund and constitutes a valid and binding obligation of the MS Global
Equity Allocation Fund enforceable in accordance with its terms, except as such
enforceability
10
<PAGE> 140
may be limited by bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium or similar law affecting creditors' rights generally, or by general
principals of equity (regardless of whether enforcement is sought in a
proceeding at equity or law).
I. NO VIOLATION; CONSENTS AND APPROVALS. The execution, delivery and
performance of this Agreement by the MS Global Equity Allocation Fund does not
and will not (i) result in a material violation of any provision of the
Declaration of Trust of the MS Global Equity Allocation Fund, (ii) violate any
statute, law, judgment, writ, decree, order, regulation or rule of any court or
governmental authority applicable to the MS Global Equity Allocation Fund or
(iii) result in a material violation or breach of, or constitute a default
under, any material contract, indenture, mortgage, loan agreement, note, lease
or other instrument or obligation to which the MS Global Equity Allocation Fund
is subject, or (iv)result in the creation or imposition or any lien, charge or
encumbrance upon any property or assets of the MS Global Equity Allocation Fund.
Except as set forth in Schedule 3 to this Agreement, (i) no consent, approval,
authorization, order or filing with notice to any court or governmental
authority or agency is required for the consummation by the MS Global Equity
Allocation Fund of the transactions contemplated by this Agreement and (ii) no
consent of or notice to any third party or entity is required for the
consummation by the MS Global Equity Allocation Fund of the transactions
contemplated by this Agreement.
J. ABSENCE OF PROCEEDINGS. There are no legal, administrative or other
proceedings pending or, to its knowledge, threatened against the MS Global
Equity Allocation Fund which would materially affect its financial condition.
K. SHARES OF THE MS GLOBAL EQUITY ALLOCATION FUND: REGISTRATION. The MS
Global Equity Allocation Fund Shares to be issued pursuant to Section 1 hereof
will be duly registered under the Securities Act and all applicable state
securities laws.
L. SHARES OF THE MS GLOBAL EQUITY ALLOCATION FUND: AUTHORIZATION.
Subject to the matters set forth in the Statement of Additional Information of
the MS Global Equity Allocation Fund, under the heading "The Fund and the
Trust", a copy of which has been furnished to the VKAC Global Equity Fund, the
shares of beneficial interest of the MS Global Equity Allocation Fund to be
issued pursuant to Section 1 hereof have been duly authorized and, when issued
in accordance with this Agreement, will be validly issued and fully paid and
non-assessable by the Trust and conform in all material respects to the
description thereof contained in the MS Global Equity Allocation Fund's
Prospectus furnished to the VKAC Global Equity Fund.
11
<PAGE> 141
M. ABSENCE OF CHANGES. From the date hereof through the Closing Date,
there shall not have been any change in the business, results of operations,
assets or financial condition or the manner of conducting the business of the MS
Global Equity Allocation Fund, other than changes in the ordinary course of its
business, which has had a material adverse effect on such business, results of
operations, assets or financial condition.
N. REGISTRATION STATEMENT. The Registration Statement and the
Prospectus/Proxy Statement contained therein as of the effective date of the
Registration Statement, and at all times subsequent thereto up to and including
the Closing Date, as amended or as supplemented if they shall have been amended
or supplemented, conforms and will conform, as it relates to the MS Global
Equity Allocation Fund, in all material respects, to the applicable requirements
of the applicable Federal securities laws and the rules and regulations of the
SEC thereunder, and do not and will not include any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, except that no representations or
warranties in this Section 5N apply to statements or omissions made in reliance
upon and in conformity with written information concerning the Tax Free Trust or
the VKAC Global Equity Fund furnished to the MS Global Equity Allocation Fund by
the VKAC Global Equity Fund.
O. TAX QUALIFICATION. The MS Global Equity Allocation Fund has
qualified as a regulated investment company within the meaning of Section 851 of
the Code for each of its taxable years; and has satisfied the distribution
requirements imposed by Section 852 of the Code for each of its taxable years.
6. COVENANTS.
During the period from the date of this Agreement and continuing until the
Closing Date the VKAC Global Equity Fund and MS Global Equity Allocation Fund
each agrees that (except as expressly contemplated or permitted by this
Agreement):
A. OTHER ACTIONS. The VKAC Global Equity Fund and MS Global Equity
Allocation Fund shall operate only in the ordinary course of business consistent
with prior practice. No party shall take any action that would, or reasonably
would be expected to, result in any of its representations and warranties set
forth in this Agreement being or becoming untrue in any material respect.
B. GOVERNMENT FILINGS; CONSENTS. The VKAC Global Equity Fund and MS
Global Equity Allocation Fund shall file all reports required to be filed by the
VKAC Global Equity Fund and MS Global Equity Allocation Fund with the SEC
between the date of this Agreement and the Closing Date and shall deliver to the
other party copies of all such reports promptly after the same are filed. Except
where
12
<PAGE> 142
prohibited by applicable statutes and regulations, each party shall promptly
provide the other (or its counsel) with copies of all other filings made by such
party with any state, local or federal government agency or entity in connection
with this Agreement or the transactions contemplated hereby. Each of the VKAC
Global Equity Fund and the MS Global Equity Allocation Fund shall use all
reasonable efforts to obtain all consents, approvals and authorizations required
in connection with the consummation of the transactions contemplated by this
Agreement and to make all necessary filings with the Secretary of State of the
State of Delaware.
C. PREPARATION OF THE REGISTRATION STATEMENT AND THE PROSPECTUS/PROXY
STATEMENT. In connection with the Registration Statement and the
Prospectus/Proxy Statement, each party hereto will cooperate with the other and
furnish to the other the information relating to the VKAC Global Equity Fund or
MS Global Equity Allocation Fund, as the case may be, required by the Securities
Act or the Exchange Act and the rules and regulations thereunder, as the case
may be, to be set forth in the Registration Statement or the Prospectus/Proxy
Statement, as the case may be. The VKAC Global Equity Fund shall promptly
prepare and file with the SEC the Prospectus/Proxy Statement and the MS Global
Equity Allocation Fund and the MS Global Equity Allocation Fund shall promptly
prepare and file with the SEC the Registration Statement, in which the
Prospectus/Proxy Statement will be included as a prospectus. In connection with
the Registration Statement, insofar as it relates to the VKAC Global Equity Fund
and its affiliated persons, the MS Global Equity Allocation Fund shall only
include such information as is approved by the VKAC Global Equity Fund for use
in the Registration Statement. The MS Global Equity Allocation Fund shall not
amend or supplement any such information regarding the MS Global Equity
Allocation Fund and such affiliates without the prior written consent of the
VKAC Global Equity Fund which consent shall not unreasonably withheld or
delayed. The MS Global Equity Allocation Fund shall promptly notify and provide
the VKAC Global Equity Fund with copies of all amendments or supplements filed
with respect to the Registration Statement. The MS Global Equity Allocation Fund
shall use all reasonable efforts to have the Registration Statement declared
effective under the Securities Act as promptly as practicable after such filing.
The MS Global Equity Allocation Fund shall also take any action (other than
qualifying to do business in any jurisdiction in which it is now not so
qualified) required to be taken under any applicable state securities laws in
connection with the issuance of the MS Global Equity Allocation Fund's shares of
beneficial interest in the transactions contemplated by this Agreement, and the
VKAC Global Equity Fund shall furnish all information concerning the VKAC Global
Equity Fund and the holders of the VKAC Global Equity Fund's shares of
beneficial interest as may be reasonably requested in connection with any such
action.
13
<PAGE> 143
D. ACCESS TO INFORMATION. During the period prior to the Closing Date,
the VKAC Global Equity Fund shall make available to the MS Global Equity
Allocation Fund a copy of each report, schedule, registration statement and
other document (the "Documents") filed or received by it during such period
pursuant to the requirements of Federal or state securities laws or Federal or
state banking laws (other than Documents which such party is not permitted to
disclose under applicable law or which are not relevant to the VKAC Global
Equity Fund). During the period prior to the Closing Date, the MS Global Equity
Allocation Fund shall make available to the VKAC Global Equity Fund each
Document pertaining to the transactions contemplated hereby filed or received by
it during such period pursuant to Federal or state securities laws or Federal or
state banking laws (other than Documents which such party is not permitted to
disclose under applicable law).
E. SHAREHOLDERS MEETING. The VKAC Global Equity Fund shall call a
meeting of the VKAC Global Equity Fund shareholders to be held as promptly as
practicable for the purpose of voting upon the approval of this Agreement and
the transactions contemplated herein, and shall furnish a copy of the
Prospectus/Proxy Statement and form of proxy to each shareholder of the VKAC
Global Equity Fund as of the record date for such meeting of shareholders. The
Board shall recommend to the VKAC Global Equity Fund shareholders approval of
this Agreement and the transactions contemplated herein, subject to fiduciary
obligations under applicable law.
F. COORDINATION OF PORTFOLIOS. The VKAC Global Equity Fund and MS
Global Equity Allocation Fund covenant and agree to coordinate the respective
portfolios of the VKAC Global Equity Fund and MS Global Equity Allocation Fund
from the date of the Agreement up to and including the Closing Date in order
that at Closing, when the Assets are added to the MS Global Equity Allocation
Fund's portfolio, the resulting portfolio will meet the MS Global Equity
Allocation Fund's investment objective, policies and restrictions, as set forth
in the MS Global Equity Allocation Fund's Prospectus, a copy of which has been
delivered to the VKAC Global Equity Fund.
G. DISTRIBUTION OF THE SHARES. At Closing the VKAC Global Equity Fund
covenants that it shall cause to be distributed the MS Global Equity Allocation
Fund Shares in the proper pro rata amount for the benefit of VKAC Global Equity
Fund's shareholders and such that the VKAC Global Equity Fund shall not continue
to hold amounts of said shares so as to cause a violation of Section 12(d)(1) of
the 1940 Act. The VKAC Global Equity Fund covenants further that, pursuant to
Section 3G, it shall liquidate and dissolve as promptly as practicable after the
Closing Date. The VKAC Global Equity Fund covenants to use all reasonable
efforts to cooperate with the MS Global Equity Allocation Fund and the MS Global
Equity Allocation Fund's transfer agent in the distribution of said shares.
14
<PAGE> 144
H. BROKERS OR FINDERS. Except as disclosed in writing to the other
party prior to the date hereof, each of the VKAC Global Equity Fund and the MS
Global Equity Allocation Fund represents that no agent, broker, investment
banker, financial advisor or other firm or person is or will be entitled to any
broker's or finder's fee or any other commission or similar fee in connection
with any of the transactions contemplated by this Agreement, and each party
shall hold the other harmless from and against any and all claims, liabilities
or obligations with respect to any such fees, commissions or expenses asserted
by any person to be due or payable in connection with any of the transactions
contemplated by this Agreement on the basis of any act or statement alleged to
have been made by such first party or its affiliate.
L. ADDITIONAL AGREEMENT. In case at any time after the Closing Date any
further action is necessary or desirable in order to carry out the purposes of
this Agreement the proper officers and trustees of each party to this Agreement
shall take all such necessary action.
J. PUBLIC ANNOUNCEMENTS. For a period of time from the date of this
Agreement to the Closing Date, the VKAC Global Equity Fund and the MS Global
Equity Allocation Fund will consult with each other before issuing any press
releases or otherwise making any public statements with respect to this
Agreement or the transactions contemplated herein and shall not issue any press
release or make any public statement prior to such consultation, except as may
be required by law or the rules of any national securities exchange on which
such party's securities are traded.
K. TAX STATUS OF REORGANIZATION. The intention of the parties is that
the transaction will qualify as a reorganization within the meaning of Section
368(a) of the Code. Neither the MS Global Equity Allocation Fund nor the VKAC
Global Equity Fund shall take any action, or cause any action to be taken
(including, without limitation, the filing of any tax return) that is
inconsistent with such treatment or results in the failure of the transaction to
qualify as a reorganization within meaning of Section 368(a) of the Code. At or
prior to the Closing Date, the MS Global Equity Allocation Fund and the VKAC
Global Equity Fund will take such action, or cause such action to be taken, as
is reasonably necessary to enable Skadden, Arps, Slate, Meagher & Flom
(Illinois), counsel to the VKAC Global Equity Fund, to render the tax opinion
required herein.
L. DECLARATION OF DIVIDEND. At or immediately prior to the Closing
Date, the VKAC Global Equity Fund shall declare and pay to its stockholders a
dividend or other distribution in an amount large enough so that it will have
distributed substantially all (and in any event not less than 98%) of its
investment company taxable income (computed without regard to any deduction for
dividends paid) and realized net capital gain, if any, for the current taxable
year through the Closing Date.
15
<PAGE> 145
7. CONDITIONS TO OBLIGATIONS OF THE VKAC GLOBAL EQUITY FUND.
The obligations of the VKAC Global Equity Fund hereunder with respect to the
consummation of the Reorganization are subject to the satisfaction, or written
waiver by the VKAC Global Equity Fund, of the following conditions:
A. SHAREHOLDER APPROVAL. This Agreement and the transactions
contemplated herein shall have been approved by the affirmative vote of the
holders of a majority of the outstanding shares of beneficial interest the VKAC
Global Equity Fund.
B. REPRESENTATIONS, WARRANTIES AND AGREEMENTS. Each of the
representations and warranties of the MS Global Equity Allocation Fund contained
herein shall be true in all material respects as of the Closing Date, and as of
the Closing Date there shall have been no material adverse change in the
financial condition, results of operations, business properties or assets of the
MS Global Equity Allocation Fund, and the VKAC Global Equity Fund shall have
received a certificate of the President or Vice President of the MS Global
Equity Allocation Fund satisfactory in form and substance to the VKAC Global
Equity Fund so stating. The MS Global Equity Allocation Fund shall have
performed and complied in all material respects with all agreements, obligations
and covenants required by this Agreement to be so performed or complied with by
it on or prior to the Closing Date.
C. REGISTRATION STATEMENT EFFECTIVE. The Registration Statement shall
have become effective and no stop orders under the Securities Act pertaining
thereto shall have been issued.
D. REGULATORY APPROVAL. All necessary approvals, registrations, and
exemptions under federal and state securities laws shall have been obtained.
E. NO INJUNCTIONS OR RESTRAINTS; ILLEGALITY. No temporary restraining
order, preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal restraint or prohibition (an "Injunction")
preventing the consummation of the transactions contemplated by this Agreement
shall be in effect, nor shall any proceeding by any state, local or federal
government agency or entity asking any of the foregoing be pending. There shall
not have been any action taken or any statute, rule, regulation or order
enacted, entered, enforced or deemed applicable to the transactions contemplated
by this Agreement, which makes the consummation of the transactions contemplated
by this Agreement illegal or which has a material adverse effect on business
operations of the MS Global Equity Allocation Fund.
16
<PAGE> 146
F. TAX OPINION. The VKAC Global Equity Fund shall have obtained an
opinion from Skadden, Arps, Slate, Meagher & Flom (Illinois), counsel for the
VKAC Global Equity Fund, dated as of the Closing Date, addressed to the VKAC
Global Equity Fund, that the consummation of the transactions set forth in this
Agreement comply with the requirements of a reorganization as described in
Section 368(a) of the Code, substantially in the form attached as Annex A.
G. OPINION OF COUNSEL. The VKAC Global Equity Fund shall have received
the opinion of Skadden, Arps, Slate, Meagher & Flom (Illinois), counsel for the
Morgan Stanley Fund and MS Global Equity Allocation Fund, dated as of the
Closing Date, addressed to the VKAC Global Equity Fund substantially in the form
and to the effect that: (i) the Morgan Stanley Fund is duly formed and in good
standing as a corporation under the laws of the State of Maryland; (ii) the
Board of Directors of the Fund has duly designated the MS Global Equity
Allocation Fund as a series of the Morgan Stanley Fund pursuant to the terms of
the Articles of Incorporation; (iii) the MS Global Equity Allocation Fund is
registered as an open-end, diversified management company under the 1940 Act;
(iv) this Agreement and the reorganization provided for herein and the execution
of this Agreement have been duly authorized and approved by all requisite action
of Trust and this Agreement has been duly executed and delivered by the Morgan
Stanely Fund on behalf of the MS Global Equity Allocation Fund and (assuming the
Agreement is a valid and binding obligation of the other parties thereto) is a
valid and binding obligation of the MS Global Equity Allocation Fund; (v)
neither the execution or delivery by the Morgan Stanley Fund on behalf of the MS
Global Equity Allocation Fund of this Agreement nor the consummation by the
Morgan Stanley Fund or MS Global Equity Allocation Fund of the transactions
contemplated thereby contravene the Morgan Stanley's Articles of Incorporation,
or, to the best of their knowledge, violate any provision of any statute or any
published regulation or any judgment or order disclosed to it by the Morgan
Stanley Fund as being applicable to the Morgan Stanley Fund or the MS Global
Equity Allocation Fund; (v) to the best of their knowledge based solely on the
certificate of an appropriate officer of the MS Global Equity Allocation Fund
attached hereto, there is no pending or threatened litigation which would have
the effect of prohibiting any material business practice or the acquisition of
any material property or the conduct of any material business of the MS Global
Equity Allocation Fund or might have a material adverse effect on the value of
any assets of the MS Global Equity Allocation Fund; (vii) the MS Global Equity
Allocation Fund's Shares have been duly authorized and upon issuance thereof in
accordance with this Agreement will, subject to certain matters regarding the
liability of a shareholder of a Delaware trust, be validly issued, fully paid
and nonassessable; (viii) except as to financial statements and schedules and
other financial and statistical data included or incorporated by reference
therein and subject to usual and customary qualifications with respect to Rule
10b-5 type opinions, as of the effective date of the Registration Statement
filed pursuant to the Agreement, the portions thereof pertaining to the MS
Global Equity Allocation Fund comply as to form in all material respects with
the requirements of the Securities Act, the Securities Exchange Act and the 1940
Act and the rules and regulations of the SEC
17
<PAGE> 147
thereunder and no facts have come to counsel's attention which would cause them
to believe that as of the effectiveness of the portions of the Registration
Statement applicable to MS Global Equity Allocation Fund, the Registration
Statement contained any untrue statement of a material fact or omitted to state
any material fact required to be stated therein or necessary to make the
statements therein not misleading, and (ix) to the best of their knowledge and
information and subject to the qualifications set forth below, the execution and
delivery by the Morgan Stanley Fund on behalf of the MS Global Equity Allocation
Fund of the Agreement and the consummation of the transactions therein
contemplated do not require, under the laws of the States of Maryland or
Illinois or the federal laws of the United States, the consent, approval,
authorization, registration, qualification or order of, or filing with, any
court or governmental agency or body (except such as have been obtained).
Counsel need express no opinion, however, as to any such consent, approval,
authorization, registration, qualification, order or filing (a) which may be
required as a result of the involvement of other parties to the Agreement in the
transactions contemplated by the Agreement because of their legal or regulatory
status or because of any other facts specifically pertaining to them; (b) the
absence of which does not deprive the VKAC Global Equity Fund of any material
benefit under the Agreement; or (c) which can be readily obtained without
significant delay or expense to the VKAC Global Equity Fund, without loss to the
VKAC Global Equity Fund of any material benefit under the Agreement and without
any material adverse effect on the VKAC Global Equity Fund during the period
such consent, approval, authorization, registration, qualification or order was
obtained. The foregoing opinion relates only to consents, approvals,
authorizations, registrations, qualifications, orders or filings under (a) laws
which are specifically referred to in this opinion, (b) laws of the States of
Delaware and Illinois and the federal laws of the United States which, in
counsel's experience, are normally applicable to transactions of the type
provided for in the Agreement and (c) court orders and judgments disclosed to us
by the MS Global Equity Allocation Fund in connection with the opinion. In
addition, although counsel need not specifically considered the possible
applicability to the MS Global Equity Allocation Fund of any other laws, orders
or judgments, nothing has come to their attention in connection with their
representation of the MS Global Equity Allocation Fund in this transaction that
has caused them to conclude that any other consent, approval, authorization,
registration, qualification, order or filing is required.
H. OFFICER CERTIFICATES. The VKAC Global Equity Fund shall have
received a certificate of an authorized officer of the MS Global Equity
Allocation Fund, dated as of the Closing Date, certifying that the
representations and warranties set forth in Section 5 are true and correct on
the Closing Date, together with certified copies of the resolutions adopted by
the Board of Trustees shall be furnished to the VKAC Global Equity Fund.
18
<PAGE> 148
8. CONDITIONS TO OBLIGATIONS OF MS GLOBAL EQUITY ALLOCATION FUND.
The obligations of the MS Global Equity Allocation Fund hereunder with respect
to the consummation of the Reorganization are subject to the satisfaction, or
written waiver by the MS Global Equity Allocation Fund of the following
conditions:
A. SHAREHOLDER APPROVAL. This Agreement and the transactions
contemplated herein shall have been approved by the affirmative vote of the
holders of a majority of the outstanding shares of beneficial interest of the
VKAC Global Equity Fund.
B. REPRESENTATIONS, WARRANTIES AND AGREEMENTS. Each of the
representations and warranties of the VKAC Global Equity Fund contained herein
shall be true in all material respects as of the Closing Date, and as of the
Closing Date there shall have been no material adverse change in the financial
condition, results of operations, business, properties or assets of the VKAC
Global Equity Fund and the MS Global Equity Allocation Fund shall have received
a certificate of an authorized officer of the VKAC Global Equity Fund
satisfactory in form and substance to the MS Global Equity Allocation Fund so
stating. The VKAC Global Equity Fund shall have performed and complied in all
material respects with all agreements, obligations and covenants required by
this Agreement to be so performed or complied with by them on or prior to the
Closing Date.
C. REGISTRATION STATEMENT EFFECTIVE. The Registration Statement shall
have become effective and no stop orders under the Securities Act pertaining
thereto shall have been issued.
D. REGULATORY APPROVAL. All necessary approvals, registrations, and
exemptions under federal and state securities laws shall have been obtained.
E. NO INJUNCTIONS OR RESTRAINTS: ILLEGALITY. No injunction preventing
the consummation of the transactions contemplated by this Agreement shall be in
effect, nor shall any proceeding by any state, local or federal government
agency or entity seeking any of the foregoing be pending. There shall not be any
action taken, or any statute, rule, regulation or order enacted, entered,
enforced or deemed applicable to the transactions contemplated by this
Agreement, which makes the consummation of the transactions contemplated by this
Agreement illegal.
19
<PAGE> 149
F. TAX OPINION. The MS Global Equity Allocation Fund shall have
obtained an opinion from Skadden, Arps, Slate, Meagher & Flom (Illinois),
counsel for the VKAC Global Equity Fund, dated as of the Closing Date, addressed
to the MS Global Equity Allocation Fund, that the consummation of the
transactions set forth in this Agreement comply with the requirements of a
reorganization as described in Section 368(a) of the Code substantially in the
form attached as Annex A.
G. OPINION OF COUNSEL. The MS Global Equity Allocation Fund shall have
received the opinion of Skadden, Arps, Slate, Meagher & Flom (Illinois), counsel
for the Trust and the VKAC Global Equity Fund, dated as of the Closing Date,
addressed to the MS Global Equity Allocation Fund, substantially in the form and
to the effect that: (i) the Trust is duly formed and existing as a trust under
the laws of the State of Delaware; (ii) the Board of Trustees of the has duly
designated the VKAC Global Equity Fund as a series of the Trust pursuant to the
terms of the Declaration of Trust of the Trust; (iii) the VKAC Global Equity
Fund is registered as an open-end, non-diversified management company under the
1940 Act; (iv) this Agreement and the reorganization provided for herein and the
execution of this Agreement have been duly authorized by all requisite action of
the Trust and this Agreement has been duly executed and delivered by the Trust
on behalf of the VKAC Global Equity Fund and (assuming the Agreement is a valid
and binding obligation of the other parties thereto) is a valid and binding
obligation of the VKAC Global Equity Fund; (v) neither the execution or delivery
by the Trust on behalf of the VKAC Global Equity Fund of this Agreement nor the
consummation by the Trust or VKAC Global Equity Fund of the transactions
contemplated thereby contravene the Trust's Declaration of Trust or, to their
knowledge, violate any provision of any statute, or any published regulation or
any judgment or order disclosed to them by the Trust as being applicable to the
Trust or VKAC Global Equity Fund; (vi) to their knowledge based solely on the
certificate of an appropriate officer of the VKAC Global Equity Fund attached
thereto, there is no pending, or threatened litigation involving the VKAC Global
Equity Fund except as disclosed therein; (vii) except as to financial statements
and schedules and other financial and statistical data included or incorporated
by reference therein and subject to usual and customary qualifications with
respect to Rule 10b-5 type opinions as of the effective date of the Registration
Statement filed pursuant to the Agreement, the portions thereof pertaining to
the VKAC Global Equity Fund comply as to form in all material respects with
their requirements of the Securities Act, the Securities Exchange Act and the
1940 Act and the rules and regulations of the SEC thereunder and no facts have
come to counsel's attention which cause them to believe that as of the
effectiveness of the portions of the Registration Statement applicable to the
VKAC Global Equity Fund, the Registration Statement contained any untrue
statement of a material fact or omitted to state any material fact required to
be stated therein or necessary to make the statements therein not misleading,
and (viii) to their knowledge and subject to the qualifications set forth below,
the execution and delivery by the Trust on behalf of the VKAC Global Equity Fund
of the Agreement and the consummation of the transactions therein contemplated
do not require, under the laws of the States of Delaware or Illinois, or the
federal laws of the United States, the consent, approval,
20
<PAGE> 150
authorization, registration, qualification or order of, or filing with, any
court or governmental agency or body (except such as have been obtained under
the Securities Act, the 1940 Act or the rules and regulations thereunder.)
Counsel need express no opinion, however, as to any such consent, approval,
authorization, registration, qualification, order or filing; (a) which may be
required as a result of the involvement of other parties to the Agreement in the
transactions contemplated by the Agreement because of their legal or regulatory
status or because of any other facts specifically pertaining to them; (b) the
absence of which does not deprive the MS Global Equity Allocation Fund of any
material benefit under such agreements; or (c) which can be readily obtained
without significant delay or expense to the MS Global Equity Allocation Fund,
without loss to the MS Global Equity Allocation Fund of any material benefit
under the Agreement and without any material adverse effect on them during the
period such consent, approval, authorization, registration, qualification or
order was obtained. The foregoing opinion relates only to consents, approvals,
authorizations, registrations, qualifications, orders or filings under (a) laws
which are specifically referred to in the opinion, (b) laws of the States of
Delaware and Illinois and the federal laws of the United States which, in our
experience, are normally applicable to transactions of the type provided for in
the Agreement and (c) court orders and judgments disclosed to them by the VKAC
Global Equity Fund in connection with the opinion. In addition, although counsel
need not specifically considered the possible applicability to the VKAC Global
Equity Fund of any other laws, orders or judgments, nothing has come to their
attention in connection with their representation of the VKAC Global Equity Fund
in this transaction that has caused them to conclude that any other consent,
approval, authorization, registration, qualification, order or filing is
required.
H. THE ASSETS. The Assets, as set forth in Schedule 1, as amended,
shall consist solely of nondefaulted, liquid tax-exempt MS Global Equity
Allocation Fund's securities, at least 80% of which shall be rated investment
grade by S&P or Moody's, cash and other marketable securities which are in
conformity with the MS Global Equity Allocation Fund's investment objectives,
policies and restrictions as set forth in the MS Global Equity Allocation Fund's
Prospectus, a copy of which has been delivered to the VKAC Global Equity Fund.
I. SHAREHOLDER LIST. The VKAC Global Equity Fund shall have delivered
to the MS Global Equity Allocation Fund an updated list of all shareholders of
the VKAC Global Equity Fund, as reported by the VKAC Global Equity Fund's
transfer agent, as of one (1) business day prior to the Closing Date with each
shareholder's respective holdings in the VKAC Global Equity Fund, taxpayer
identification numbers, Form W9 and last known address.
21
<PAGE> 151
J. OFFICER CERTIFICATES. The MS Global Equity Allocation Fund shall
have received a certificate of an authorized officer of the VKAC Global Equity
Fund, dated as of the Closing Date, certifying that the representations and
warranties set forth in Section 4 are true and correct on the Closing Date,
together with certified copies of the resolutions adopted by the Board of
Trustees and shareholders.
9. AMENDMENT, WAIVER AND TERMINATION.
(A) The parties hereto may, by agreement in writing authorized by the
Board, amend this Agreement at any time before or after approval thereof by the
shareholders of the VKAC Global Equity Fund; provided, however, that after
receipt of VKAC Global Equity Fund shareholder approval, no amendment shall be
made by the parties hereto which substantially changes the terms of Sections 1,
2 and 3 hereof without obtaining VKAC Global Equity Fund's shareholder approval
thereof.
(B) At any time prior to the Closing Date, either of the parties may by
written instrument signed by it (i) waive any inaccuracies in the
representations and warranties made to it contained herein and (ii) waive
compliance with any of the covenants or conditions made for its benefit
contained herein. No delay on the part of either party in exercising any right,
power or privilege hereunder shall operate as a waiver thereof, nor shall any
waiver on the part of any party of any such right, power or privilege, or any
single or partial exercise of any such right, power or privilege, preclude any
further exercise thereof or the exercise of any other such right, power or
privilege.
(C) This Agreement may be terminated, and the transactions contemplated
herein may be abandoned at any time prior to the Closing Date:
(i) by the mutual consents of the Board of Trustees of the VKAC Global
Equity Fund and the MS Global Equity Allocation Fund;
(ii) by the VKAC Global Equity Fund, if the MS Global Equity Allocation
Fund breaches in any material respect any of its representations, warranties,
covenants or agreements contained in this Agreement;
(iii) by the MS Global Equity Allocation Fund, if the VKAC Global
Equity Fund breaches in any material respect any of its representations,
warranties, covenants or agreements contained in this Agreement;
22
<PAGE> 152
(iv) by either the VKAC Global Equity Fund or MS Global Equity
Allocation Fund, if the Closing has not occurred on or prior to December 31,
1997 (provided that the rights to terminate this Agreement pursuant to this
subsection (C)(iv) shall not be available to any party whose failure to fulfill
any of its obligations under this Agreement has been the cause of or resulted in
the failure of the Closing to occur on or before such date);
(v) by the MS Global Equity Allocation Fund in the event that: (a) all
the conditions precedent to the VKAC Global Equity Fund's obligation to close,
as set forth in Section 7 of this Agreement, have been fully satisfied (or can
be fully satisfied at the Closing); (b) the MS Global Equity Allocation Fund
gives the VKAC Global Equity Fund written assurance of its intent to close
irrespective of the satisfaction or nonsatisfaction of all conditions precedent
to the MS Global Equity Allocation Fund's obligation to close, as set forth in
Section 8 of this Agreement; and (c) the VKAC Global Equity Fund then fails or
refuses to close within the earlier of five (5) business days or May 31, 1998;
or
(vi) by the VKAC Global Equity Fund in the event that: (a) all the
conditions precedent to the MS Global Equity Allocation Fund's obligation to
close, as set forth in Section 8 of this Agreement, have been fully satisfied
(or can be fully satisfied at the Closing); (b) the VKAC Global Equity Fund
gives the MS Global Equity Allocation Fund written assurance of its intent to
close irrespective of the satisfaction or nonsatisfaction of all the conditions
precedent to the VKAC Global Equity Fund's obligation to close, as set forth in
Section 7 of this Agreement; and (c) the MS Global Equity Allocation Fund then
fails or refuses to close within the earlier of five (5) business days or May
31, 1998.
10. REMEDIES.
In the event of termination of this Agreement by either or both of the VKAC
Global Equity Fund and MS Global Equity Allocation Fund pursuant to Section
9(C), written notice thereof shall forthwith be given by the terminating party
to the other party hereto, and this Agreement shall therefore terminate and
become void and have no effect, and the transactions contemplated herein and
thereby shall be abandoned, without further action by the parties hereto.
11. SURVIVAL OF WARRANTIES AND INDEMNIFICATION.
A. SURVIVAL. The representations and warranties included or provided
for herein, or in the Schedules or other instruments delivered or to be
delivered pursuant hereto, shall survive the Closing Date for a three year
period except that any representation or warranty with respect to taxes shall
survive for the expiration of the statutory period of limitations for
assessments of tax deficiencies as the same may be extended from time to time by
the taxpayer. The covenants and agreements included or provided
23
<PAGE> 153
for herein shall survive and be continuing obligations in accordance with their
terms. The period for which a representation, warranty, covenant or agreement
survives shall be referred to hereinafter as the "Survival Period."
Notwithstanding anything set forth in the immediately preceding sentence, the MS
Global Equity Allocation Fund's and the VKAC Global Equity Fund's right to seek
indemnity pursuant to this Agreement shall survive for a period of ninety (90)
days beyond the expiration of the Survival Period of the representation,
warranty, covenant or agreement upon which indemnity is sought. In no event
shall the MS Global Equity Allocation Fund or the VKAC Global Equity Fund be
obligated to indemnify the other if indemnity is not sought within ninety (90)
days of the expiration of the applicable Survival Period.
B. INDEMNIFICATION. Each party (an "Indemnitor") shall indemnify and
hold the other and its officers, directors, agents and persons controlled by or
controlling any of them (each an "Indemnified Party") harmless from and against
any and all losses, damages, liabilities, claims, demands, judgments,
settlements, deficiencies, taxes, assessments, charges, costs and expenses of
any nature whatsoever (including reasonable attorneys' fees) including amounts
paid in satisfaction of judgments, in compromise or as fines and penalties, and
counsel fees reasonably incurred by such Indemnified Party in connection with
the defense or disposition of any claim, action, suit or other proceeding,
whether civil or criminal, before any court or administrative or investigative
body in which such Indemnified Party may be or may have been involved as a party
or otherwise or with which such Indemnified Party may be or may have been
threatened, (collectively, the "Losses"): arising out of or related to any claim
of a breach of any representation, warranty or covenant made herein by the
Indemnitor, provided, however, that no Indemnified Party shall be indemnified
hereunder against any Losses arising directly from such Indemnified Party's (i)
willful misfeasance, (ii) bad faith, (iii) gross negligence or (iv) reckless
disregard of the duties involved in the conduct of such Indemnified Party's
position.
C. INDEMNIFICATION PROCEDURE. The Indemnified Party shall use its best
efforts to minimize any liabilities, damages, deficiencies, claims, judgments,
assessments, costs and expenses in respect of which indemnity may be sought
hereunder. The Indemnified Party shall give written notice to Indemnitor within
the earlier of ten (10) days of receipt of written notice to Indemnified Party
or thirty (30) days from discovery by Indemnified Party of any matters which may
give rise to a claim for indemnification or reimbursement under this Agreement.
The failure to give such notice shall not affect the right of Indemnified Party
to indemnity hereunder unless such failure has materially and adversely affected
the rights of the Indemnitor; provided that in any event such notice shall have
been given prior to the expiration of the Survival Period. At any time after ten
(10) days from the giving of such notice, Indemnified Party may, at its option,
resist, settle or otherwise compromise, or pay such claim unless it shall have
received notice from Indemnitor that Indemnitor intends, at Indemnitor's sole
cost and expense, to assume the defense of any such matter, in which case
Indemnified Party shall have the right, at no cost or expense to Indemnitor, to
participate in such defense. If Indemnitor does not assume the
24
<PAGE> 154
defense of such matter, and in any event until Indemnitor states in writing that
it will assume the defense, Indemnitor shall pay all costs of Indemnified Party
arising out of the defense until the defense is assumed; provided, however, that
Indemnified Party shall consult with Indemnitor and obtain Indemnitor's prior
written consent to any payment or settlement of any such claim. Indemnitor shall
keep Indemnified Party fully apprised at all times as to the status of the
defense. If Indemnitor does not assume the defense, Indemnified Party shall keep
Indemnitor apprised at all times as to the status of the defense. Following
indemnification as provided for hereunder, Indemnitor shall be subrogated to all
rights of Indemnified Party with respect to all third parties, firms or
corporations relating to the matter for which indemnification has been made.
12. SURVIVAL.
The provisions set forth in Sections 10, 11 and 16 hereof shall survive the
termination of this Agreement for any cause whatsoever.
13. NOTICES.
All notices hereunder shall be sufficiently given for all purposes hereunder if
in writing and delivered personally or sent by registered mail or certified
mail, postage prepaid. Notice to the VKAC Global Equity Fund shall be addressed
to the VKAC Global Equity Fund c/o Van Kampen American Capital Investment
Advisory Corp., One Parkview Plaza, Oakbrook Terrace, Illinois 60181, Attention:
General Counsel, or at such other address as the VKAC Global Equity Fund may
designate by written notice to the MS Global Equity Allocation Fund. Notice to
the MS Global Equity Allocation Fund shall be addressed to the MS Global Equity
Allocation Income Fund c/o Van Kampen American Capital Investment Advisory
Corp., One Parkview Plaza, Oakbrook Terrace, Illinois 60181, Attention: General
Counsel, or at such other address and to the attention of such other person as
the MS Global Equity Allocation Fund may designate by written notice to the VKAC
Global Equity Fund. Any notice shall be deemed to have been served or given as
of the date such notice is delivered personally or mailed.
14. SUCCESSORS AND ASSIGNS.
This Agreement shall be binding upon and inure to the benefit of the parties
hereto and their successors and assigns. This Agreement shall not be assigned by
any party without the prior written consent of the other party hereto.
25
<PAGE> 155
15. BOOKS AND RECORDS.
The VKAC Global Equity Fund and the MS Global Equity Allocation Fund agree that
copies of the books and records of the VKAC Global Equity Fund relating to the
Assets including, but not limited to all files, records, written materials;
e.g., closing transcripts, surveillance files and credit reports shall be
delivered by the VKAC Global Equity Fund to the MS Global Equity Allocation Fund
at the Closing Date. In addition to, and without limiting the foregoing, the
VKAC Global Equity Fund and the MS Global Equity Allocation Fund agree to take
such action as may be necessary in order that the MS Global Equity Allocation
Fund shall have reasonable access to such other books and records as may be
reasonably requested, all for three years after the Closing Date for the three
tax years ending December 31, 1995, December 31, 1996 and December 31, 1997;
namely, general ledger, journal entries, voucher registers; distribution
journal; payroll register, monthly balance owing report; income tax returns; tax
depreciation schedules; and investment tax credit basis schedules.
16. GENERAL.
This Agreement supersedes all prior agreements between the parties (written or
oral), is intended as a complete and exclusive statement of the terms of the
Agreement between the parties and may not be amended, modified or changed or
terminated orally. This Agreement may be executed in one or more counterparts,
all of which shall be considered one and the same agreement, and shall become
effective when one or more counterparts have been executed by the VKAC Global
Equity Fund and MS Global Equity Allocation Fund and delivered to each of the
parties hereto. The headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement. This Agreement is for the sole benefit of the parties thereto,
and nothing in this Agreement, expressed or implied, is intended to confer upon
any other person any rights or remedies under or by reason of this Agreement.
This Agreement shall be governed by and construed in accordance with the laws of
the State of Illinois without regard to principles of conflicts or choice of
law.
17. LIMITATION OF LIABILITY.
Consistent with the Morgan Stanley's Article of Incorporation, notice is hereby
given and the parties hereto acknowledge and agree that this instrument is
executed on behalf of the Directors of the Fund on behalf of the MS Global
equity Allocation Fund and the VKAC Global Equity Fund, respectively, as
Trustees and not individually and that the obligations of this instrument are
not binding upon any of the Trustees or shareholders of the Trust, MS Global
Equity Allocation Fund or VKAC Global Equity Fund individually but binding only
upon the assets and property of the MS Global Equity Allocation Fund or the VKAC
Global Equity Fund the case may be.
26
<PAGE> 156
IN WITNESS WHEREOF, the parties have hereunto caused this Agreement to be
executed and delivered by their duly authorized officers as of the day and year
first written above.
MORGAN STANLEY FUND, INC., a Maryland
corporation on behalf of MORGAN STANLEY GLOBAL
EQUITY ALLOCATION FUND
---------------------------------
Dennis J. McDonnell
President
Attest:
------------------------------
Nicholas Dalmaso
Assistant Secretary
VAN KAMPEN AMERICAN CAPITAL
WORLD PORTFOLIO SERIES TRUST,
a Delaware business trust on behalf of
VAN KAMPEN AMERICAN CAPITAL
VKAC GLOBAL EQUITY FUND
---------------------------------
Dennis J. McDonnell
President
Attest:
------------------------------
Nicholas Dalmaso
Assistant Secretary
27
<PAGE> 157
APPENDIX B
STATEMENT OF ADDITIONAL INFORMATION
OF
MORGAN STANLEY FUND, INC.
DATED OCTOBER 28, 1997
<PAGE> 158
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> 159
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> 160
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> 161
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> 162
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> 163
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> 164
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> 165
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> 166
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> 167
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> 168
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> 169
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> 170
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> 171
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> 172
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> 173
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> 174
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> 175
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> 176
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> 177
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> 178
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> 179
(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> 180
(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> 181
(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> 182
(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> 183
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> 184
<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> 185
<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> 186
<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> 187
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> 188
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> 189
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> 190
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> 191
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> 192
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> 193
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> 194
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> 195
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> 196
<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> 197
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> 198
(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> 199
(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> 200
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> 201
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> 202
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> 203
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> 204
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> 205
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> 206
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> 207
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> 208
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> 209
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> 210
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> 211
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> 212
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> 213
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> 214
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> 215
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> 216
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> 217
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> 218
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> 219
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> 220
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> 221
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> 222
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> 223
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> 224
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> 225
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> 226
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> 227
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> 228
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> 229
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> 230
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> 231
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> 232
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> 233
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> 234
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> 235
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> 236
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> 237
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> 238
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> 239
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> 240
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> 241
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> 242
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> 243
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> 244
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> 245
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> 246
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> 247
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> 248
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> 249
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> 250
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> 251
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> 252
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> 253
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> 254
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> 255
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> 256
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> 257
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> 258
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> 259
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> 260
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> 261
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> 262
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> 263
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> 264
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> 265
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> 266
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> 267
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> 268
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> 269
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> 270
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> 271
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> 272
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> 273
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> 274
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> 275
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> 276
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> 277
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> 278
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> 279
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> 280
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> 281
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> 282
APPENDIX C
STATEMENT OF ADDITIONAL INFORMATION
OF
VAN KAMPEN AMERICAN CAPITAL
GLOBAL EQUITY FUND
September 28, 1997
<PAGE> 283
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> 284
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> 285
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> 286
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> 287
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> 288
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> 289
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> 290
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> 291
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> 292
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> 293
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> 294
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> 295
<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> 296
<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> 297
<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> 298
<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> 299
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> 300
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> 301
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> 302
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> 303
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> 304
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> 305
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> 306
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> 307
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> 308
(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> 309
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> 310
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> 311
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> 312
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> 313
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
---------
11,157,183
---------
Czech Republic 0.0%
Prazske Pivovary............................................ 24,000 144,260
---------
</TABLE>
B-31 See Notes to Financial Statements
<PAGE> 314
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> 315
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> 316
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> 317
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> 318
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> 319
\
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> 320
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> 321
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> 322
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> 323
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> 324
- --------------------------------------------------------------------------------
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> 325
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> 326
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> 327
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> 328
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> 329
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> 330
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> 331
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> 332
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> 333
- --------------------------------------------------------------------------------
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> 334
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> 335
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> 336
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> 337
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> 338
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> 339
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> 340
- --------------------------------------------------------------------------------
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> 341
- --------------------------------------------------------------------------------
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> 342
- --------------------------------------------------------------------------------
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> 343
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> 344
- --------------------------------------------------------------------------------
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> 345
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> 346
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> 347
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> 348
APPENDIX D
SEMI-ANNUAL REPORT
FOR
MORGAN STANLEY FUNDS
DATED DECEMBER 31, 1997 (UNAUDITED)
<PAGE> 349
MORGAN STANLEY FUNDS
- --------------------------------------------------------------------------------
DISTRIBUTED BY VAN KAMPEN AMERICAN CAPITAL DISTRIBUTORS, INC.
- ------------------------------------------------------------------------------
MORGAN STANLEY GLOBAL EQUITY ALLOCATION FUND
- ------------------------------------------------------------------------------
MORGAN STANLEY GLOBAL EQUITY FUND
- ------------------------------------------------------------------------------
MORGAN STANLEY GLOBAL FIXED INCOME FUND
- ------------------------------------------------------------------------------
MORGAN STANLEY ASIAN GROWTH FUND
- ------------------------------------------------------------------------------
MORGAN STANLEY AMERICAN VALUE FUND
- ------------------------------------------------------------------------------
MORGAN STANLEY VALUE FUND
- ------------------------------------------------------------------------------
MORGAN STANLEY WORLDWIDE HIGH INCOME FUND
- ------------------------------------------------------------------------------
MORGAN STANLEY LATIN AMERICAN FUND
- ------------------------------------------------------------------------------
MORGAN STANLEY EMERGING MARKETS FUND
- ------------------------------------------------------------------------------
MORGAN STANLEY AGGRESSIVE EQUITY FUND
- ------------------------------------------------------------------------------
MORGAN STANLEY U.S. REAL ESTATE FUND
- ------------------------------------------------------------------------------
MORGAN STANLEY HIGH YIELD FUND
- ------------------------------------------------------------------------------
MORGAN STANLEY INTERNATIONAL MAGNUM FUND
- ------------------------------------------------------------------------------
MORGAN STANLEY GOVERNMENT OBLIGATIONS
MONEY MARKET FUND
- ------------------------------------------------------------------------------
MORGAN STANLEY MONEY MARKET FUND
- ------------------------------------------------------------------------------
SEMI-ANNUAL REPORT
DECEMBER 31, 1997
<PAGE> 350
MORGAN STANLEY FUNDS
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Overview and Portfolio of Investments by Fund:
Letter to Shareholders.............................................. 1
Performance Summary................................................. 3
Global Equity Allocation Fund....................................... 4
Global Equity Fund.................................................. 20
Global Fixed Income Fund............................................ 25
Asian Growth Fund................................................... 29
American Value Fund................................................. 34
Value Fund.......................................................... 39
Worldwide High Income Fund.......................................... 43
Latin American Fund................................................. 49
Emerging Markets Fund............................................... 54
Aggressive Equity Fund.............................................. 61
U.S. Real Estate Fund............................................... 65
High Yield Fund..................................................... 71
International Magnum Fund........................................... 75
Government Obligations Money Market Fund............................ 82
Money Market Fund................................................... 85
Statement of Assets and Liabilities................................... 89
Statement of Operations............................................... 93
Statement of Changes in Net Assets.................................... 95
Financial Highlights ................................................. 110
Notes to Financial Statements......................................... 125
</TABLE>
<PAGE> 351
LETTER TO SHAREHOLDERS
- --------------------------------------------------------------------------------
Dear Shareholder,
The new year ushers in what promises to be an exciting and challenging time for
investors. The Taxpayer Relief Act of 1997, passed by President Clinton in
August, creates many new opportunities for you and your family to take a more
active role in achieving your long-term financial goals.
Most Americans will benefit from the bill's $95 billion in tax cuts over five
years. The so-called Kiddie Credit gives parents $400 in immediate tax relief
for every child under age 17, and families will find it easier to save for their
children's college expenses through the new Education IRA. The bill also cuts
capital gains tax rates for the first time in over a decade, and loosens
restrictions on tax-deductible IRA contributions. Perhaps the most exciting
feature of all is the new Roth IRA, which allows investment earnings to grow tax
free, not just tax deferred.
This year more than ever, it could be important for you to talk with your
financial adviser about how to make the tax code work to your advantage. At Van
Kampen American Capital, we have prepared a variety of publications to help you
understand your choices under the new tax legislation. And with the help of your
adviser, we'll help you locate the many benefits hidden among the changing tax
landscape.
ECONOMIC OVERVIEW
After years of breakneck growth and rapid expansion of credit, Asia experienced
a severe economic setback during the reporting period. The region's problems
first became evident in July, when Thailand responded to a growing trade deficit
by allowing its currency to float freely in international markets. The Thai
government's move set in motion a chain reaction of devaluations which
ultimately severed much of the region's traditional currency link to the U.S.
dollar. At the height of the crisis in October, the Hong Kong dollar, pegged to
the American dollar since 1983, also came under attack from speculators.
While Chinese officials defended the currency and retained the U.S. dollar peg,
Asia's turmoil was far from finished. The crisis next spread to South Korea,
where that country's ailing financial sector required a massive infusion of
liquidity from the International Monetary Fund to stave off widespread
bankruptcies.
Compared to Asia, economic conditions in Europe and the United States were
healthy and tranquil. Europe continues to enjoy solid economic growth with low
inflation. The relatively tight fiscal policies required to accomplish a move to
a single currency, however, have left Europe's unemployment rate in double
digits.
In the United States, economic growth remains strong, unemployment is low,
consumers are optimistic, the budget is headed for surplus this year, and our
nation's currency is rising around the world. Despite the strength in the U.S.
economy, there was no indication of troublesome inflation. In fact, the producer
price index fell by 1.2 percent during the year, the largest annual decline in
wholesale prices since 1986. Inflation at the consumer level was also virtually
nonexistent, with the consumer price index rising by only 1.7 percent during
1997. A strong dollar and significant productivity gains helped offset the
inflationary pressures caused by rising wages.
MARKET REVIEW
After gliding through a strong and mostly uneventful first half of 1997, global
equity markets experienced a sharp increase in volatility during the later
stages of the year. In particular, the currency crisis that roiled most
Southeast Asian economies spilled over into the region's equity markets,
creating an avalanche of selling that unnerved markets in Europe, Latin America,
and the United States as well.
Despite the shifting global economic conditions, U.S. stocks continued to post
solid returns. For the year, the Wilshire 5000 Index, which measures the
performance of all publicly traded U.S. companies, gained 29.17 percent. But
while the general upward trend in U.S. stocks continued, volatility also picked
up. Between early August and late October, the Dow Jones Industrial Average fell
by 16 percent before rebounding sharply to close the reporting period near
record-high territory.
In Europe, falling interest rates, low inflation, and improving corporate
profitability provided a strong underpinning to the region's equity markets. In
local currency terms, every European market gained at least 13 percent, led by
the 79 percent gain in Portugal and the nearly 51 percent rise in Switzerland.
However, the strong U.S. dollar offset a significant portion of those gains for
American investors.
In Asia, falling currencies exacerbated the impact of tumbling stock prices. For
the year, the Dow Jones Asia/Pacific Index fell 29.13 percent in dollar terms.
Equity markets in Indonesia, Malaysia, South Korea, and Thailand each finished
1997 with losses of more than 60 percent. The negative impact of the Asian
crisis on prospects for world economic growth created a positive environment for
global bonds. For the 12 months ended December 31, the Salomon Brothers World
Government Bond Index gained 8.97 percent in local currency terms. However, the
strong dollar undermined the results for U.S. investors, and the Index gained
0.23 percent in U.S. dollar terms during the same period.
1
<PAGE> 352
LETTER TO SHAREHOLDERS
- --------------------------------------------------------------------------------
Bond markets were especially strong in European nations that are not
participating in the planned European Monetary Union, as interest rates in
non-EMU countries such as Sweden and the United Kingdom fell toward those in
Germany and France. In the U.S., the yield on the Treasury's benchmark 30-year
bond began the year at 6.64 percent and climbed to 7.17 percent in April amid
fears of increasing inflation. When subsequent data showed the economy to be
slowing, bond yields drifted gradually lower. By the end of the reporting
period, the long-term Treasury bond yield had fallen to 5.92 percent, its lowest
level in more than four years, and bond prices, which move in the opposite
direction of bond yields, rose significantly.
OUTLOOK
We expect that the recent upheavals in Southeast Asia will have a mixed impact
on the U.S. economy and financial markets. Sales of American goods overseas are
likely to decline in coming months, and competition from relatively inexpensive
imports could pinch profit margins. Overall, we believe that lower currency
values in Asia will likely result in less inflation in the U.S. and a greater
likelihood of stable or falling interest rates. We also anticipate that stock
selection will play a larger role in generating investment performance due to
the uneven impact of the Asian crisis on individual companies and the
broad-based nature of the advance in equity prices in recent years.
Within Asia itself, we believe that the turbulence has yet to run its course. It
is likely that Pacific Rim markets will continue to search for a bottom until
investors arrive at meaningful projections for economic growth rates and
corporate profits. As the reporting period ended, a clear vision of the new
economic order in Asia remained elusive. We believe that European markets
generally have the least amount to lose by the Asian shock. European exports to
Asia are relatively modest, and the region continues to enjoy solid growth,
declining budget deficits, and benign inflation.
As we noted earlier, the Taxpayer Relief Act of 1997 provides attractive new
vehicles through which investors can save for a variety of goals, including
higher education and retirement. We encourage you to work with your financial
adviser to consider how the tax changes can work to your benefit.
Additional details about your Funds, including investment overviews from your
portfolio management team, are provided in this report. As always, we are
pleased to have the opportunity to serve you and your family through our diverse
menu of quality investments.
Sincerely,
Don G. Powell Dennis J. McDonnell
Chairman President
Van Kampen American Capital Van Kampen American Capital
Investment Advisory Corp. Investment Advisory Corp.
February 9, 1998
2
<PAGE> 353
MORGAN STANLEY FUNDS, INC.
PERFORMANCE SUMMARY (UNAUDITED)
- --------------------------------------------------------------------------------
DECEMBER 31, 1997
<TABLE>
<CAPTION>
SIX MONTHS TOTAL RETURNS
---------------------------------
NET NET ASSET WITH WITHOUT
INCEPTION ASSETS VALUE PER SALES SALES COMPARABLE
FUNDS DATES (000) SHARE CHARGE CHARGE INDEXES
- ------------------------------ ---------- -------- --------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
GLOBAL EQUITY ALLOCATION
Class A..................... 1/4/93 $74,593 $ 14.34 (5.81)% (0.07)% 0.33%(1)
Class B..................... 8/1/95 58,639 13.93 (4.83) (0.52) 0.33(1)
Class C..................... 1/4/93 80,036 14.07 (1.28) (0.42) 0.33(1)
GLOBAL EQUITY
Class A..................... 10/29/97 55,372 9.91 N/A N/A N/A
Class B..................... 10/29/97 467,465 9.91 N/A N/A N/A
Class C..................... 10/29/97 45,801 9.91 N/A N/A N/A
GLOBAL FIXED INCOME
Class A..................... 1/4/93 5,851 9.93 (2.51) 2.39 2.52(2)
Class B..................... 8/1/95 1,539 9.88 (2.00) 1.99 2.52(2)
Class C..................... 1/4/93 2,103 9.87 0.99 1.99 2.52(2)
ASIAN GROWTH
Class A..................... 6/23/93 63,990 8.30 (52.82) (49.96) (45.59)(3)
Class B..................... 8/1/95 27,558 8.04 (52.66) (50.17) (45.59)(3)
Class C..................... 6/23/93 37,979 8.03 (50.64) (50.14) (45.59)(3)
AMERICAN VALUE
Class A..................... 10/18/93 106,826 19.41 9.98 16.66 11.78(4)
Class B..................... 8/1/95 107,301 19.36 11.25 16.25 11.78(4)
Class C..................... 10/18/93 73,222 19.36 15.24 16.24 11.78(4)
VALUE
Class A..................... 7/7/97 102,701 10.10 N/A N/A N/A
Class B..................... 7/7/97 88,112 10.09 N/A N/A N/A
Class C..................... 7/7/97 19,466 10.08 N/A N/A N/A
WORLDWIDE HIGH INCOME
Class A..................... 4/21/94 82,139 12.99 (1.54) 3.36 4.59(6)
Class B..................... 8/1/95 103,847 12.92 (0.68) 2.96 4.59(6)
Class C..................... 4/21/94 50,102 12.93 1.97 2.88 4.59(6)
LATIN AMERICAN
Class A..................... 7/6/94 66,929 13.48 (8.06) (2.46) (6.29)(7)
Class B..................... 8/1/95 29,554 13.06 (6.53) (2.66) (6.29)(7)
Class C..................... 7/6/94 22,730 13.07 (3.52) (2.75) (6.29)(7)
EMERGING MARKETS
Class A..................... 7/6/94 95,359 9.44 (26.66) (22.19) (26.93)(8)
Class B..................... 8/1/95 43,549 9.23 (25.98) (22.50) (26.93)(8)
Class C..................... 7/6/94 39,235 9.24 (23.18) (22.48) (26.93)(8)
AGGRESSIVE EQUITY
Class A..................... 1/2/96 35,689 17.82 9.92 16.66 8.81(9)
Class B..................... 1/2/96 58,739 17.58 11.26 16.26 8.81(9)
Class C..................... 1/2/96 11,837 17.57 15.21 16.21 8.81(9)
U.S. REAL ESTATE
Class A..................... 5/1/96 20,768 16.79 7.28 13.83 13.77(10)
Class B..................... 5/1/96 12,764 16.73 8.40 13.40 13.77(10)
Class C..................... 5/1/96 3,910 16.73 12.36 13.36 13.77(10)
HIGH YIELD
Class A..................... 5/1/96 5,644 12.59 1.20 6.24 6.40(11)
Class B..................... 5/1/96 9,931 12.56 1.76 5.67 6.40(11)
Class C..................... 5/1/96 2,864 12.56 4.69 5.66 6.40(11)
INTERNATIONAL MAGNUM
Class A..................... 7/1/96 36,918 12.67 (12.85) (7.52) (8.48)(12)
Class B..................... 7/1/96 33,824 12.61 (12.43) (7.87) (8.48)(12)
Class C..................... 7/1/96 9,147 12.66 (8.79) (7.88) (8.48)(12)
GOVERNMENT OBLIGATIONS MONEY
MARKET...................... 3/12/92 52,997 1.00 N/A 2.37 N/A
MONEY MARKET.................. 8/4/89 362,813 1.00 N/A 2.42 N/A
<CAPTION>
ONE YEAR TOTAL RETURNS AVERAGE ANNUAL SINCE INCEPTION
--------------------------------- ---------------------------------
WITH WITHOUT WITH WITHOUT
SALES SALES COMPARABLE SALES SALES COMPARABLE
FUNDS CHARGE CHARGE INDEXES CHARGE CHARGE INDEXES
- ------------------------------ -------- -------- ----------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
GLOBAL EQUITY ALLOCATION
Class A..................... 9.73% 16.44% 15.76%(1) 12.83% 14.17% 15.34%(1)
Class B..................... 10.49 15.49 15.76(1) 14.11 15.13 14.39(1)
Class C..................... 14.60 15.60 15.76(1) 13.33 13.33 15.34(1)
GLOBAL EQUITY
Class A..................... (6.44)* (0.74)* 2.43*(1) N/A N/A N/A
Class B..................... (5.81)* (0.86)* 2.43*(1) N/A N/A N/A
Class C..................... (5.81)* (0.86)* 2.43*(1) N/A N/A N/A
GLOBAL FIXED INCOME
Class A..................... (3.97) 0.77 1.40(2) 5.28 6.31 7.51(2)
Class B..................... (3.77) 0.07 1.40(2) 2.64 3.83 3.54(2)
Class C..................... (0.89) 0.07 1.40(2) 5.47 5.47 7.51(2)
ASIAN GROWTH
Class A..................... (52.14) (49.22) (45.48)(3) (7.89) (6.68) (3.67)(3)
Class B..................... (52.15) (49.64) (45.48)(3) (25.93) (25.01) (19.84)(3)
Class C..................... (50.11) (49.61) (45.48)(3) (7.34) (7.34) (3.67)(3)
AMERICAN VALUE
Class A..................... 28.56 36.39 24.35(4) 16.74 18.39 17.23(4)
Class B..................... 30.41 35.41 24.35(4) 23.39 24.30 20.63(4)
Class C..................... 34.48 35.48 24.35(4) 17.47 17.47 17.23(4)
VALUE
Class A..................... (4.02)* 1.84* 7.27*(5) N/A N/A N/A
Class B..................... (3.49)* 1.51* 7.27*(5) N/A N/A N/A
Class C..................... 0.43* 1.43* 7.27*(5) N/A N/A N/A
WORLDWIDE HIGH INCOME
Class A..................... 10.14 15.62 12.56(6) 15.15 16.67 15.34(6)
Class B..................... 10.82 14.72 12.56(6) 19.10 20.07 17.26(6)
Class C..................... 13.64 14.62 12.56(6) 15.76 15.76 15.34(6)
LATIN AMERICAN
Class A..................... 31.59 39.61 31.66(7) 13.39 15.33 10.34(7)
Class B..................... 33.89 38.89 31.66(7) 31.67 32.50 19.89(7)
Class C..................... 37.74 38.74 31.66(7) 14.40 14.40 10.34(7)
EMERGING MARKETS
Class A..................... (7.58) (1.96) (14.42)(8) (4.86) (3.23) (3.85)(8)
Class B..................... (7.04) (2.66) (14.42)(8) (2.91) (1.82) (5.77)(8)
Class C..................... (3.63) (2.75) (14.42)(8) (3.97) (3.97) (3.85)(8)
AGGRESSIVE EQUITY
Class A..................... 24.11 31.70 19.86(9) 30.72 34.64 17.38(9)
Class B..................... 25.87 30.87 19.86(9) 32.24 33.74 17.38(9)
Class C..................... 29.82 30.82 19.86(9) 33.67 33.67 17.38(9)
U.S. REAL ESTATE
Class A..................... 17.33 24.48 20.29(10) 28.70 33.33 31.61(10)
Class B..................... 18.40 23.40 20.29(10) 30.28 32.27 31.61(10)
Class C..................... 22.43 23.43 20.29(10) 32.28 32.28 31.61(10)
HIGH YIELD
Class A..................... 8.41 13.80 12.65(11) 11.41 14.71 13.33(11)
Class B..................... 8.76 12.76 12.65(11) 11.54 13.75 13.33(11)
Class C..................... 11.76 12.76 12.65(11) 13.75 13.75 13.33(11)
INTERNATIONAL MAGNUM
Class A..................... (0.05) 6.05 1.78(12) 1.50 5.57 2.16(12)
Class B..................... 0.20 5.20 1.78(12) 2.15 4.77 2.16(12)
Class C..................... 4.20 5.20 1.78(12) 4.74 4.74 2.16(12)
GOVERNMENT OBLIGATIONS MONEY
MARKET...................... N/A -- N/A N/A -- N/A
MONEY MARKET.................. N/A -- N/A N/A -- N/A
</TABLE>
- --------------------------------------------------------------------------------
* Cumulative (unannualized) total return since inception of the Portfolio.
<TABLE>
<CAPTION>
INDEXES:
<C> <S>
(1) MSCI World Index
(2) J.P. Morgan Traded Global Bond Index
(3) MSCI Combined Far East Free ex-Japan Index
(4) Russell 2500 Small Company Index
(5) S&P 500 Index
(6) Worldwide High Income Blended Index
(7) MSCI Latin America Global Index
(8) IFC Global Total Return Composite Index
(9) Lipper Capital Appreciation Index
(10) NAREIT Equity Index
(11) CS First Boston High Yield Index
(12) MSCI EAFE Index
(13) IBC's Money Fund Report Averages/Government
(14) IBC's Money Fund Report Averages/All Taxable
</TABLE>
<TABLE>
<CAPTION>
YIELD INFORMATION AS OF DECEMBER 31, 1997
- --------------------------------------------------------------------------------------------------------------------------------
30 DAY 7 DAY 7 DAY 30 DAY 30 DAY
CURRENT CURRENT EFFECTIVE CURRENT COMPARABLE
YIELD++ YIELD+ YIELD+ YIELD++ YIELD
------------ ------------ ------------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
GLOBAL FIXED INCOME MONEY MARKET PORTFOLIOS:
Class A................ 3.70% Government Obligations
Class B................ 3.14 Money Market.............. 5.01% 5.14% 4.87% 5.19% (13)
Class C................ 3.13 Money Market.............. 5.06 5.19 5.02 5.10% (14)
WORLDWIDE HIGH INCOME
Class A................ 8.65%
Class B................ 8.30
Class C................ 8.29
HIGH YIELD
Class A................ 7.46%
Class B................ 7.10
Class C................ 7.10
</TABLE>
- --------------------------------------------------------------------------------
+ The current 7 day yield reflects the net investment income generated by the
Fund over the specified 7 day period expressed as an annual percentage.
Expenses accrued for the 7 day period include any fees charged to all
shareholders. Yields will fluctuate as market conditions change and are not
necessarily indicative of future performance.
++ The current 30 day yield reflects the net investment income generated by the
Fund over a specified 30-day period expressed as an annual percentage.
Expenses accrued for the 30-day period include any fees charged to all
shareholders. Yields will fluctuate as market conditions change and are not
necessarily indicative of future performance.
PAST PERFORMANCE SHOULD NOT BE CONSTRUED AS A GUARANTEE OF FUTURE PERFORMANCE.
INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT INVESTOR'S SHARES,
WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. INVESTMENTS
IN THE GOVERNMENT OBLIGATIONS MONEY MARKET FUND AND MONEY MARKET FUND ARE
NEITHER INSURED OR GUARANTEED BY THE U.S. GOVERNMENT. THERE IS NO ASSURANCE THAT
THE GOVERNMENT OBLIGATIONS MONEY MARKET FUND AND THE MONEY MARKET FUND WILL BE
ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE. PLEASE READ THE
FUND'S PROSPECTUSES CAREFULLY BEFORE YOU INVEST OR SEND MONEY.
3
<PAGE> 354
MORGAN STANLEY
GLOBAL EQUITY ALLOCATION FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW
(UNAUDITED)
THE COUNTRY SPECIFIC PERFORMANCE RESULTS PROVIDED IN THIS OVERVIEW ARE AS
MEASURED BY THE MSCI WORLD INDEX AND ARE FOR INFORMATIONAL PURPOSES ONLY AND
SHOULD NOT BE CONSTRUED AS A GUARANTEE OF THE FUND'S FUTURE PERFORMANCE.
INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S
SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
PLEASE SEE THE PROSPECTUS FOR A DESCRIPTION OF CERTAIN RISK CONSIDERATIONS
ASSOCIATED WITH INTERNATIONAL INVESTING.
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1997)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Canada 2.9%
France 3.8%
Germany 4.9%
Italy 2.9%
Japan 8.7%
Spain 2.7%
Sweden 2.1%
Switzerland 3.7%
United Kingdom 7.2%
United States 39.5%
Short-Term Investments 15.3%
Other 6.3%
</TABLE>
<TABLE>
<CAPTION>
TOTAL RETURNS**
-------------------------------------------------------------
AVERAGE ANNUAL
SIX MONTHS ONE YEAR SINCE INCEPTION
----------------- ----------------- -----------------
WITH WITHOUT WITH WITHOUT WITH WITHOUT
SALES SALES SALES SALES SALES SALES
CHARGE* CHARGE CHARGE* CHARGE CHARGE* CHARGE
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class A Shares -5.81% -0.07% 9.73% 16.44% 12.83% 14.17%
- ---------------------------------------------------------------------------------------
Class B+ Shares -4.83% -0.52% 10.49% 15.49% 14.11% 15.13%
- ---------------------------------------------------------------------------------------
Class C Shares -1.28% -0.42% 14.60% 15.60% 13.33% 13.33%
- ---------------------------------------------------------------------------------------
MSCI World Index:
Class A & C Shares N/A 0.33% N/A 15.76% N/A 15.34%
Class B Shares N/A 0.33% N/A 15.76% N/A 14.39%
- ---------------------------------------------------------------------------------------
</TABLE>
* The returns above are calculated using the applicable sales charge for Class
A shares and the applicable deferred sales charge for Class B and Class C
shares.
** Total returns for the Fund reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waivers and reimbursements, total
returns would be lower.
+ Class B shares have been offered since August 1, 1995.
The Morgan Stanley Capital International (MSCI) World Index is an unmanaged
index which includes securities listed on the stock exchanges of the U.S.,
Europe, Canada, Australia, New Zealand and the Far East and assumes dividends
are reinvested net of withholding tax.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
<TABLE>
<CAPTION>
TOP FIVE HOLDINGS
PERCENT OF
ISSUER COUNTRY NET ASSETS
- ---------------------------------------- ------------- ----------
<S> <C> <C>
Latin American Discovery Fund, Inc. United States 1.3%
General Electric Co. United States 1.2%
Royal Dutch Petroleum, N.V. Netherlands 0.9%
Novartis AG (Registered) Switzerland 0.9%
Coca-Cola Co. United States 0.8%
</TABLE>
<TABLE>
<CAPTION>
TOP FIVE SECTORS
VALUE PERCENT OF
SECTOR (000) NET ASSETS
- -------------------- --------- -------------
<S> <C> <C>
Consumer Goods $ 42,382 19.9%
Finance 35,867 16.8%
Capital Equipment 29,493 13.8%
Services 29,110 13.6%
Energy 18,990 8.9%
</TABLE>
The Global Equity Allocation Fund seeks long-term capital appreciation by
investing primarily in equity securities of U.S. and non-U.S. issuers in
accordance with country weightings determined by the subadviser and with stock
selection within each country designed to replicate a broad market index. As
such, emphasis is placed upon country rather than stock selection. This approach
reflects our investment philosophy that a diversified selection of securities
representing exposure to each country that we find attractive is an effective
way to maximize the return and reduce the risk associated with global investing.
For the six months ended December 31, 1997, the Fund generated a total return of
- -0.07 percent for the Class A shares at net asset value, as compared to a total
return of 0.33 percent for the Morgan Stanley Capital International (MSCI) World
Index.
The Asian crisis created a steady flow of negative surprises. The question now
is whether the markets have correctly assessed its potential implications to
economic growth and earnings downgrades in the face of large amounts of
anecdotal evidence and a shortage of hard facts.
During the reporting period, the Japanese economy moved from a potentially
robust recovery to the brink of recession, Europe's vision of a single currency
went from a dream to a near-certainty, and what began as pressure on the Thai
baht turned into an ever-widening Asian currency and asset-price debacle.
Although the United States continues to perform well and its economy seems to
run along effortlessly, we remain cautious. We believe that the U.S. equity
market is "priced for perfection." Economic growth is slackening, inflation is
lower, and minimal pricing power should undermine earnings. The strong U.S.
dollar certainly does not help the profit picture for U.S. multinationals.
Current valuation levels demand double-digit earnings growth to look reasonable,
and we are unconvinced of that likelihood.
Of the developed international regions, Europe has the most investment promise
for 1998. Though valuations are high by historic measures, earnings expectations
remain strong (though falling), and there is substantial potential for corporate
restructuring and government deregulation. Much downsizing and balance sheet
recovery has already taken place in the manufacturing and industrial sectors,
but restructuring has just begun in the financial and service industries. With
regard to
4
<PAGE> 355
MORGAN STANLEY
GLOBAL EQUITY ALLOCATION FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
(UNAUDITED)
deregulation, European telecommunication markets officially opened to
cross-border competition on January 1, and more is to follow. In countries such
as Germany, France, and Italy, where domestic politics are too rigid or
splintered to push through necessary pension and labor market reforms, many
corporations are showing dynamism and entrepreneurship on their own.
One of the major themes for the European markets this year will be the run-up to
the introduction of the euro in January 1999. By the close of 1998, short-term
interest rates in countries participating in the single currency will have to be
identical, as there will be one short rate for the whole new currency area. Our
economists and currency strategists expect short rates to converge at around
4.00 percent by late 1998. This implies an easing of monetary conditions in the
peripheral countries of Italy, Spain, Portugal, and Ireland (where rates are
currently between 5 and 6 percent), and a tightening of short rates in Germany,
France, Benelux, Austria, and Finland (where rates are currently 3.7 percent).
This divergence of monetary policy, in combination with high German and French
export exposure to Asia, should lead to a slight easing of growth in core
European countries and an acceleration of growth in the periphery. We have
recently increased our portfolio overweights to Italy and Spain and have moved
back to neutral in France and Germany.
German orders for foreign manufactured goods were down 3 percent in November,
consumer confidence remains anemic, and business confidence has recently turned
down. A French slowdown in capital goods exports may be offset by strengthening
domestic demand, but a slowdown in Germany is never good news for France. In
addition, the recent insurance worker strikes remind us of France's high
political and social risks. Meanwhile, Italian economic growth and business
sentiment picked up nicely in the third quarter. Italy's economy, like that of
Spain, is among the least exposed to Asia and is very interest rate sensitive.
Sharply lower short-term rates, combined with the boost to sentiment from
first-round entry into European Monetary Union, should bring strong relative
growth to Italy and Spain in 1998.
The reporting period was a difficult period for Japan, and the outlook for 1998
is not very different. Restrictive Japanese fiscal policy in April brought the
long-faltering recovery to a standstill and renewed pressure on Japanese banks.
The banks, profligate lenders for years, have become extremely risk averse in
the face of bankruptcies and tougher government regulations. Though tighter
lending standards are necessary for the financial system in the long run, small-
and medium-sized companies are facing a severe credit squeeze, and consumer and
business confidence has plummeted. Export growth potential has been dampened by
the fallout from Asia and U.S. trade pressures, while the government's
anti-deficit stance implies no major fiscal stimulus or personal/ corporate tax
relief.
The silver lining is that the strain of a tumbling stock market and a
depreciating yen increases the odds for a more aggressive policy response. To be
effective, policy will need to both stimulate the economy and reform the
financial sector. Unfortunately, economic stimulus in recent years has
emphasized deregulation and structural reform rather than direct pump-priming.
Bank reform has focused on guaranteeing depositors and recapitalizing the banks.
The Japanese government officials we met with in mid-December assured us that
the old bank convoy system of "good banks" bailing out "bad banks" was over, but
they had no RTC-type proposals to clear bank balance sheets and no plans to
close down insolvent institutions.
We have moved to a neutral position in Japan from underweight relative to our
benchmark. More importantly, valuations are relatively attractive. Japan
currently sells at 1.6 times book value, the fourth-cheapest and in the first
quartile of EAFE markets. On any kind of dividend discount model, Japanese
equities look attractive compared to 10-year bonds, which yield about 1.5
percent. The price-to-sales ratio, at 0.6 percent, is the cheapest in the world.
As we write this letter, many Asian markets have recovered from their lows, but
their currencies remain under pressure and the markets are fragile and illiquid.
Companies that are bankrupt remain open due to a lack of bankruptcy laws and
creditor rights. Meanwhile, healthy companies cannot get credit or cash to
operate. Under these circumstances, it will take time for Asian growth to
recover.
5
<PAGE> 356
MORGAN STANLEY
GLOBAL EQUITY ALLOCATION FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
(UNAUDITED)
Malaysia is an interesting example. While we concur with the Malaysian Central
Bank's position that an austere International Monetary Fund type of program of
high interest rates and severe fiscal belt-tightening would not necessarily
stabilize the currency and may serve only to kill off the economy, we do not
believe the Central Bank should be suppressing interest rates and printing money
to keep banks and companies afloat. Unfortunately, as the crisis deepens,
Malaysia and Singapore--countries that initially hoped to grow their way out of
the price deflation--are now looking at negative-to-flat economic growth.
We remain very underweight in Asia-ex Japan. We have positions of 1 percent in
Singapore, 0.4 percent in Malaysia and 1.5 percent in Australia. The Singapore
dollar and Malaysian ringgit positions are completely hedged.
In sum, we are ringing in the new year with less mirth and good cheer than we
would like. There is a chance that the U.S. market and economy will grind upward
and pull the world along, but U.S. valuations leave little room for
disappointment. Until we see more positive policy responses in Asia and some
indication that the eye of the storm has passed, we remain cautious.
Barton M. Biggs Madhav Dhar
PORTFOLIO MANAGER PORTFOLIO MANAGER
Francine J. Bovich Ann D. Thivierge
PORTFOLIO MANAGER PORTFOLIO MANAGER
6
<PAGE> 357
MORGAN STANLEY
GLOBAL EQUITY ALLOCATION FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<S> <C>
COMMON STOCKS (80.4%)
AUSTRALIA (0.0%)
718 Broken Hill Proprietary Ltd...................... $ 7
227 Coles Myer Ltd................................... 1
334 Gio Australia Holdings Ltd....................... 1
271 MIM Holdings Ltd................................. --
(a)755 Westfield Trust (New)............................ 1
--------
10
--------
AUSTRIA (0.4%)
200 Austria Mikro Systems International AG........... 10
(a)700 Austrian Airlines Osterreichische Luftverkehrs
AG............................................. 15
(a)2,100 Bank Austria AG.................................. 106
(a)1,864 Bank Austria AG.................................. 92
200 Bau Holdings AG.................................. 13
600 Boehler-Udderholm AG............................. 35
100 BWT AG........................................... 16
1,300 Flughafen Wein AG................................ 52
300 Generali AG...................................... 79
(a)200 Lenzing AG....................................... 12
600 Mayr-Melnhof Karton AG........................... 32
(a)300 Oesterreichische Brau-Beteiligungs AG............ 15
1,500 Oesterreichische Elektrizitaetswirtschafts, 'A'
AG............................................. 159
1,100 OMV AG........................................... 152
700 Radex-Heraklith Industriebet AG.................. 24
500 Steyr-Daimler-Puch AG............................ 13
600 VA Technologies AG............................... 91
400 Wienerberger Baustoffindustrie AG................ 77
--------
993
--------
CANADA (2.9%)
4,000 Abitibi-Consolidated, Inc........................ 56
3,300 Agrium, Inc...................................... 40
(a)3,300 Air Canada....................................... 34
4,800 Alcan Aluminum Ltd............................... 132
1,500 Avenor, Inc...................................... 21
5,800 Bank of Montreal................................. 257
5,300 Bank of Nova Scotia.............................. 250
9,300 Barrick Gold Corp................................ 173
13,800 BCE, Inc......................................... 460
7,100 Bombardier, Inc., 'A'............................ 146
3,000 CAE, Inc......................................... 24
1,300 Cameco Corp...................................... 42
9,100 Canadian Imperial Bank of Commerce............... 284
(a)2,300 Canadian Natural Resources Ltd................... 49
3,500 Canadian Occidental Petroleum Ltd................ 79
7,600 Canadian Pacific Ltd............................. 205
2,000 Canadian Tire Corp., 'A'......................... 43
1,800 Cominco Ltd...................................... 28
(a)1,600 Corel Corp....................................... 3
1,300 Cott Corp........................................ 11
2,200 Dofasco, Inc..................................... 35
3,600 Domtar, Inc...................................... 25
(a)3,500 Echo Bay Mines Ltd............................... 9
1,000 George Weston Ltd................................ 85
(a)5,400 Gulf Canada Resources Ltd........................ 38
4,700 Imasco Ltd....................................... 166
3,700 Imperial Oil Ltd................................. 238
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<S> <C>
3,500 Inco Ltd......................................... $ 59
1,300 IPL Energy, Inc.................................. 60
6,400 Laidlaw, Inc. 'B'................................ 87
1,500 Loewen Group, Inc................................ 39
3,500 MacMillan Bloedel Ltd............................ 36
1,600 Magna International, Inc., 'A'................... 100
(a)3,900 Methanex Corp.................................... 31
1,800 Molson Companies Ltd., 'A'....................... 32
2,500 Moore Corp. Ltd.................................. 38
(a)3,300 Newbridge Networks Corp.......................... 116
5,400 Noranda, Inc..................................... 93
6,800 Norcen Energy Resources Ltd...................... 78
5,200 Northern Telecom Ltd............................. 463
12,100 Nova Corp........................................ 115
6,500 Petro............................................ 118
4,700 Placer Dome, Inc................................. 59
1,200 Potash Corp. of Saskatchewan, Inc................ 100
2,900 Power Corp. of Canada............................ 104
(a)2,900 Provigo, Inc..................................... 18
3,000 Ranger Oil Ltd................................... 20
(a)2,900 Renaissance Energy Ltd........................... 60
(a)4,100 Repap Enterprises, Inc........................... 1
(a)3,900 Rogers Communication, Inc., 'B'.................. 19
6,900 Royal Bank of Canada............................. 365
1,800 Suncor, Inc...................................... 62
(a)2,900 Talisman Energy, Inc............................. 89
1,900 Teck Corp., 'B'.................................. 29
2,300 TELUS Corp....................................... 51
7,800 The Seagram Co., Ltd............................. 252
12,800 Thomson Corp..................................... 351
5,300 Transcanada Pipelines Ltd........................ 118
2,700 Westcoast Energy, Inc............................ 62
--------
6,158
--------
FRANCE (3.8%)
693 Accor S.A........................................ 129
2,650 Alcatel Alsthom.................................. 337
5,564 AXA S.A.......................................... 431
3,700 Banque Nationale de Paris RFD.................... 197
1,877 Banque Paribas................................... 163
1,200 BIC.............................................. 88
478 Bouygues......................................... 54
582 Canal Plus....................................... 108
660 Carrefour S.A.................................... 344
1,600 Casino Guichard Perrachon........................ 89
500 Cie Bancaire S.A................................. 81
1,510 Cie de Saint-Gobain.............................. 215
2,209 Cie Generale des Eaux............................ 308
4,550 Elf Aquitaine.................................... 529
550 Eridania Beghin-Say S.A.......................... 86
200 Essilor International............................ 60
18,700 France Telecom S.A............................... 678
1,368 Groupe Danone RFD................................ 244
1,289 Havas S.A........................................ 93
300 Imetal, S.A...................................... 37
1,757 L'Air Liquide.................................... 275
1,192 L'Oreal.......................................... 466
1,643 Lafarge Coppee S.A............................... 108
1,900 Lagardere S.C.A.................................. 63
</TABLE>
7
The accompanying notes are an integral part of the financial statements.
<PAGE> 358
MORGAN STANLEY
GLOBAL EQUITY ALLOCATION FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<S> <C>
FRANCE (CONT.)
535 Legrand S.A...................................... $ 107
1,505 LVMH Moet Hennessy Louis Vuitton................. 250
2,177 Lyonnaise des Eaux S.A........................... 241
2,123 Michelin (C.G.D.E.) 'B'.......................... 107
150 Pathe S.A........................................ 29
1,175 Pernod-Ricard.................................... 69
380 Pinault S.A...................................... 203
340 Promodes......................................... 141
905 PSA Peugeot Citroen S.A.......................... 114
5,902 Rhone-Poulenc S.A. 'A'........................... 264
85 Sagem............................................ 38
1,936 Sanofi S.A....................................... 216
2,297 Schneider S.A.................................... 125
409 Simco S.A........................................ 27
65 Societe Eurafrance S.A........................... 26
1,738 Societe Generale................................. 237
125 Sodexho S.A...................................... 67
(a)13 Sodexho S.A. (New)............................... 7
2,108 Thomson CSF S.A.................................. 66
4,205 Total S.A. 'B'................................... 458
4,390 Usinor Sacilor................................... 63
1,150 Valeo S.A........................................ 78
--------
8,116
--------
GERMANY (4.7%)
900 adidas AG........................................ 119
(a)850 Agiv AG.......................................... 17
4,500 Allianz AG....................................... 1,161
500 AMB Aachener & Muenchener
Beteiligungs AG................................ 55
10,700 BASF AG.......................................... 382
13,600 Bayer AG......................................... 505
4,550 Bayerische Hypotheken Bank AG.................... 221
4,750 Bayerische Vereinsbank AG........................ 306
1,600 Beiersdorf AG.................................... 68
900 Bilfinger & Berger Bau AG........................ 28
(a)150 Brau und Brunnen AG.............................. 15
550 CKAG Colonia Konzern AG.......................... 53
1,750 Continental AG................................... 39
9,200 Daimler-Benz AG.................................. 649
2,000 Degussa AG....................................... 100
9,200 Deutsche Bank AG................................. 643
38,770 Deutsche Telekom AG.............................. 718
8,050 Dresdner Bank AG................................. 366
935 Heidelberger Zement AG........................... 66
1,650 Hochtief AG...................................... 68
200 Karstadt AG...................................... 69
(a)1,150 Kloeckner-Humboldt-Deutz AG...................... 9
200 Linde AG......................................... 121
6,950 Lufthansa AG..................................... 131
250 MAN AG........................................... 72
650 Mannesmann AG.................................... 326
2,923 Merck KGAA....................................... 98
4,464 METRO AG......................................... 158
1,530 Muenchener Rueckversicherungs (Registered)....... 582
300 Preussag AG...................................... 92
6,100 RWE AG........................................... 327
1,110 SAP AG........................................... 337
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<S> <C>
1,350 Schering AG...................................... $ 130
10,300 Siemens AG....................................... 621
(a)50 Starbag AG....................................... 4
750 Thyssen AG....................................... 160
9,050 VEBA AG.......................................... 616
678 Viag AG.......................................... 371
550 Volkswagen AG.................................... 307
--------
10,110
--------
ITALY (2.9%)
25,422 Assicurazioni Generali S.p.A..................... 624
40,300 Banca Commerciale Italiana....................... 140
15,900 Banco Ambrosiano Veneto.......................... 61
5,160 Benetton Group S.p.A............................. 84
4,700 Cartiere Burgo S.p.A............................. 28
68,500 Credito Italiano S.p.A........................... 211
19,000 Edison S.p.A..................................... 115
220,000 Ente Nazionale Idrocarburi S.p.A................. 1,247
4,500 Falck............................................ 21
92,930 Fiat S.p.A....................................... 270
20,570 Fiat S.p.A. Di Risp NCS.......................... 34
11,000 Impreglio S.p.A.................................. 8
24,100 Istituto Bancario San Paolo di Torina S.p.A...... 230
17,700 Istituto Mobiliare Italiano S.p.A................ 210
116,020 Istituto Nazionale delle Assicurazioni (INA)..... 235
6,800 Italcementi S.p.A................................ 47
4,650 Italcementi S.p.A. NCS........................... 14
19,400 Italgas.......................................... 80
(a)6,478 La Rinascente S.p.A.............................. 48
14,000 Magneti Marelli S.p.A............................ 24
33,500 Mediaset S.p.A................................... 165
14,050 Mediobanca S.p.A................................. 110
83,108 Montedison S.p.A................................. 75
28,900 Montedison S.p.A. Di Risp NCS.................... 19
(a)96,880 Olivetti Group................................... 59
44,640 Parmalat Finanziaria S.p.A....................... 64
45,000 Pirelli S.p.A.................................... 120
9,269 R.A.S............................................ 91
462 R.A.S. Di Risp................................... 3
4,100 S.A.I............................................ 46
5,000 Sasib S.p.A...................................... 15
8,500 Sirti S.p.A...................................... 52
21,000 Snia BPD S.p.A................................... 22
42,500 Telecom Italia Mobile Di Risp S.p.A.............. 121
182,800 Telecom Italia Mobile S.p.A...................... 844
24,884 Telecom Italia Mobile S.p.A...................... 110
95,666 Telecom Italia S.p.A............................. 611
--------
6,258
--------
JAPAN (8.7%)
1,500 Advantest Corp................................... 85
19,800 Ajinomoto Co., Inc............................... 193
(a)11,800 Aoki Corp........................................ 4
1,600 Aoyama Trading Co., Ltd.......................... 29
500 Asahi Bank Ltd................................... 2
11,800 Asahi Breweries Ltd.............................. 172
35,400 Asahi Chemical Industry Co., Ltd................. 120
33,600 Asahi Glass Co................................... 160
35,000 Bank of Tokyo-Mitsubishi......................... 483
</TABLE>
8
The accompanying notes are an integral part of the financial statements.
<PAGE> 359
MORGAN STANLEY
GLOBAL EQUITY ALLOCATION FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<S> <C>
JAPAN (CONT.)
500 Bank of Yokohama................................. $ 1
11,800 Bridgestone Corp................................. 256
14,800 Canon, Inc....................................... 345
7,000 Casio Computer Co., Ltd.......................... 50
3,800 Chiba Bank Ltd................................... 12
11,800 Chugai Pharmaceutical Ltd........................ 61
13,800 Dai Nippon Printing Co., Ltd..................... 259
12,800 Daiei, Inc....................................... 53
11,800 Daikin Industries Ltd............................ 44
11,800 Daiwa House Industry............................. 62
69 East Japan Railway Co............................ 311
7,800 Ebara Corp....................................... 82
5,100 Fanuc Co......................................... 193
7,000 Fuji Photo Film Co............................... 268
30,600 Fujitsu Ltd...................................... 328
8,800 Furukawa Electric................................ 38
15,800 Hankyu Corp...................................... 74
11,800 Hazama-Gumi...................................... 6
59,000 Hitachi Ltd...................................... 421
15,000 Honda Motor Co................................... 551
400 Industrial Bank of Japan......................... 3
7,000 Ito-Yokado Co., Ltd.............................. 357
36,000 Japan Airlines Co................................ 98
29,600 Japan Energy Corp................................ 28
800 Joyo Bank........................................ 3
5,800 Jusco Co......................................... 82
23,600 Kajima Corp...................................... 60
15,700 Kansai Electric Power Co......................... 266
20,800 KAO Corp......................................... 300
18,600 Kawasaki Steel Corp.............................. 25
28,600 Kinki Nippon Railway............................. 153
23,600 Kirin Brewery Co., Ltd........................... 172
23,600 Komatsu Ltd...................................... 118
35,400 Kubota Corp...................................... 93
23,600 Kumagai Gumi Co., Ltd............................ 13
3,600 Kyocera Corp..................................... 163
11,800 Kyowa Hakko Kogyo................................ 51
31,000 Long-Term Credit Bank of Japan Ltd............... 50
35,200 Marubeni Corp.................................... 62
2,800 Marui Co......................................... 44
35,400 Matsushita Electric Industrial Ltd............... 518
35,400 Mitsubishi Chemical Corp......................... 51
33,000 Mitsubishi Corp.................................. 260
41,400 Mitsubishi Electric Corp......................... 106
64,000 Mitsubishi Heavy Industries Ltd.................. 267
23,600 Mitsubishi Materials Corp........................ 38
10,000 Mitsubishi Trust and Banking Corp................ 100
35,200 Mitsui & Co...................................... 208
(a)23,600 Mitsui Engineering & Shipbuilding Co., Ltd....... 15
400 Mitsui Trust & Banking Corp...................... 1
12,800 Mitsukoshi....................................... 34
4,000 Murata Manufacturing Co., Inc.................... 101
7,800 Mycal Corp....................................... 65
20,600 NEC Corp......................................... 219
11,800 NGK Insulators Ltd............................... 105
14,600 Nippon Denko Co., Ltd............................ 263
9,000 Nippon Express Co., Ltd.......................... 45
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<S> <C>
11,800 Nippon Fire & Marine Insurance Co................ $ 44
11,800 Nippon Light Metal Co............................ 17
11,800 Nippon Meat Packers, Inc......................... 161
33,600 Nippon Oil Co.................................... 87
131,000 Nippon Steel Corp................................ 194
177 Nippon Telegraph & Telephone ADR................. 1,519
35,400 Nippon Yusen Kabushiki Kaisha.................... 97
44,400 Nissan Motor Co., Ltd............................ 184
69,000 NKK Corp......................................... 55
13,800 Odakyu Electric Railway Co....................... 60
23,600 OJI Paper Co., Ltd............................... 94
52,200 Osaka Gas Co..................................... 119
11,800 Penta-Ocean Construction......................... 16
3,000 Pioneer Electronic Corp.......................... 46
1,000 Rohm Co.......................................... 102
25,200 Sakura Bank Ltd.................................. 72
8,800 Sankyo Co., Ltd.................................. 199
42,000 Sanwa Bank, Ltd.................................. 425
35,400 Sanyo Electric Co., Ltd.......................... 92
2,800 Secom Co......................................... 179
2,300 Sega Enterprises Ltd............................. 42
11,800 Sekisui House Ltd................................ 76
23,600 Sharp Corp....................................... 162
3,000 Shimano, Inc..................................... 55
5,000 Shin-Etsu Chemical Co............................ 95
16,800 Shinizu Corp..................................... 39
5,000 Shiseido Co., Ltd................................ 68
800 Shizuoka Bank.................................... 9
23,600 Showa Denko K.K.................................. 21
5,500 Sony Corp........................................ 489
47,200 Sumitomo Chemical Co............................. 108
23,400 Sumitomo Corp.................................... 131
15,800 Sumitomo Electric Industries..................... 216
5,000 Sumitomo Forestry................................ 24
42,400 Sumitomo Metal Industries........................ 54
11,000 Sumitomo Metal Mining Co......................... 36
11,800 Sumitomo Osaka Cement Co., Ltd................... 15
23,600 Taisei Corp., Ltd................................ 39
(a)7,000 Taisho Pharmaceutical Co......................... 179
14,800 Takeda Chemical Industries....................... 422
23,600 Teijin Ltd....................................... 49
15,800 Tobu Railway Co.................................. 49
8,500 Tohoku Electric Power............................ 129
600 Tokai Bank....................................... 3
35,400 Tokio Marine & Fire Insurance Co................. 402
21,900 Tokyo Electric Power Co.......................... 399
2,000 Tokyo Electron Ltd............................... 64
47,200 Tokyo Gas Co..................................... 107
19,800 Tokyu Corp....................................... 76
15,800 Toppan Printing Co., Ltd......................... 206
35,500 Toray Industries, Inc............................ 159
11,800 Toto Ltd......................................... 75
23,600 Toyobo Ltd....................................... 29
51,200 Toyota Motor Corp................................ 1,468
23,600 Ube Industries Ltd............................... 30
300 Yamaichi Securities.............................. --
--------
18,487
--------
</TABLE>
9
The accompanying notes are an integral part of the financial statements.
<PAGE> 360
MORGAN STANLEY
GLOBAL EQUITY ALLOCATION FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<S> <C>
NETHERLANDS (1.9%)
11,845 ABN-Amro Holding N.V............................. $ 231
700 Akzo Nobel N.V................................... 121
5,800 Elsevier N.V..................................... 94
350 Heineken N.V..................................... 61
7,195 ING Groep N.V.................................... 303
68 ING Groep N.V. ADR............................... 3
823 KLM Royal Dutch Airlines N.V..................... 30
3,866 Koninklijke Ahold N.V............................ 101
287 Koninklijke Hoogovens............................ 12
900 Koninklijke KNP BT............................... 21
9,587 Koninklijke PTT Nederland N.V.................... 400
200 Nedlloyd Groep N.V............................... 4
2,900 Phillips Electronics N.V......................... 174
18,800 Royal Dutch Petroleum N.V........................ 1,032
18,300 Royal Dutch Petroleum N.V. - New York Shares..... 992
296 Stork N.V........................................ 10
5,600 Unilever N.V..................................... 345
646 Wolters Kluwer N.V............................... 83
--------
4,017
--------
NORWAY (0.5%)
2,200 AKER S.A. 'A'.................................... 40
1,900 Bergesen dy ASA, 'A'............................. 45
800 Bergesen dy ASA, 'B'............................. 19
18,600 Christiania Bank OG Kreditkasse.................. 75
1,000 Dyno Industrier ASA.............................. 19
1,800 Elkem ASA........................................ 24
3,300 Hafslund ASA 'B'................................. 16
700 Helikopter Services Group ASA.................... 8
1,400 Kvaerner ASA..................................... 71
1,100 Leif Hoegh & Co., ASA............................ 22
(a)4,500 NCL Holdings ASA................................. 16
7,800 Norsk Hydro ASA.................................. 380
1,000 Norske Skogindustrier AGA........................ 29
1,600 Orkla ASA........................................ 137
(a)1,100 Petroleum Geo-Services ASA....................... 69
(a)9,600 Storebrand ASA................................... 68
700 Unitor ASA....................................... 9
--------
1,047
--------
PORTUGAL (1.1%)
10,500 Banco Comercial Portugues, S.A. (Registered)..... 215
5,500 Banco Espirito Santo e Comercial de Lisboa,
S.A............................................ 164
4,000 Banco Totta & Acores 'B' (Registered)............ 78
5,300 BPI-SGPS S.A..................................... 129
500 Cia de Seguros Tranquilidade (Registered)........ 12
5,600 Cimpor-Cimentos de Portugal, SGPS, S.A........... 147
300 CIN, S.A......................................... 19
1,300 Corticeira Amorim, S.A........................... 15
24,500 EDP-Eletricidade de Portugal, S.A................ 464
400 Engil-SGPS....................................... 4
1,100 INAPA Investimentos Participacoes e Gestao,
S.A............................................ 13
7,600 Jeronimo Martins, SGPS, S.A...................... 241
6,000 Portucel Industrial-Empresa Produtora de
Celulose, S.A.................................. 37
12,600 Portugal Telecom S.A............................. 585
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<S> <C>
(a)800 Sociedade de Construcoes Soares da Costa, S.A.... $ 5
2,800 Sonae Investimentos-Sociedade Gestora de
Participacoes Sociais, S.A..................... 113
800 UNICER-Uniao Cervejeira, S.A..................... 11
--------
2,252
--------
SPAIN (2.7%)
340 Acerinox S.A..................................... 50
(a)264 ACS S.A.......................................... 6
(a)20 Aguas de Barcelona............................... --
4,800 Argentaria S.A................................... 292
8,211 Autopistas Concesionaria Espanola S.A............ 110
24,000 Banco Bilbao Vizcaya, S.A. (Registered).......... 777
12,200 Banco Central Hispanoamericano S.A............... 297
21,900 Banco Santander S.A.............................. 732
400 Corporacion Financiera Alba S.A.................. 42
1,698 Corporacion Mapfre S.A........................... 45
1,550 Dragados y Construcciones S.A.................... 33
1,300 Ebro Agricolas, Compania de Alimentacion S.A..... 23
550 Empresa Nacional de Cellulosas S.A............... 7
40,000 Endesa S.A....................................... 710
317 Energia y Industrias Aragonesas.................. 2
(a)4,700 Ercros S.A....................................... 5
1,600 Fomento de Construcciones y Contratas S.A........ 61
5,200 Gas Natural SDG 'E'.............................. 270
1,635 General de Aguas De Barcelona S.A................ 67
35,300 Iberdrola S.A.................................... 465
656 Inmobiliaria Metropolitana Vasco Central S.A..... 30
200 Portland Vaderrivas S.A.......................... 18
11,600 Repsol S.A....................................... 495
1,000 Tabacalera S.A. 'A'.............................. 81
34,600 Telefonica de Espana............................. 988
8,100 Union Electrica Fenosa S.A....................... 78
2,400 Uralita S.A...................................... 27
1,376 Vallehermoso S.A................................. 42
650 Viscofan Industria Navarra de Envolturas
Celulosicas S.A................................ 16
348 Zardoya-Otis S.A................................. 41
--------
5,810
--------
SWEDEN (2.1%)
21,100 ABB AB 'A'....................................... 250
(a)3,500 ABB AB 'B'....................................... 41
5,900 AGA AB 'B'....................................... 78
(a)40,166 Astra AB 'A'..................................... 696
9,100 Astra AB 'B'..................................... 153
4,650 Atlas Copco AB 'A'............................... 139
2,500 Electrolux AB 'B'................................ 173
1,200 Esselte AB 'B'................................... 24
(a)850 Granges AB....................................... 13
1,100 Hennes & Mauritz AB 'A'.......................... 49
5,000 Hennes & Mauritz AB 'B'.......................... 220
5,700 SCA AB 'B'....................................... 128
2,600 Securitas AB 'B'................................. 79
3,200 Skandia Group Forsakrings AB..................... 151
16,600 Skandinaviska Enskilda Banken 'A'................ 210
3,800 Skanska AB 'B'................................... 156
2,400 SKF AB 'B'....................................... 51
10,050 Stora Kopparbergs Bergslags Aktiebolag........... 127
</TABLE>
10
The accompanying notes are an integral part of the financial statements.
<PAGE> 361
MORGAN STANLEY
GLOBAL EQUITY ALLOCATION FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<S> <C>
SWEDEN (CONT.)
6,800 Svenska Handelsbanken 'A'........................ $ 235
17,200 Swedish Match AB................................. 57
27,600 Telefonaktiebolaget LM Ericsson.................. 1,038
4,600 Trelleborg AB 'B'................................ 58
11,300 Volvo AB 'B'..................................... 303
--------
4,429
--------
SWITZERLAND (3.7%)
165 ABB AG (Bearer).................................. 207
320 Adia S.A. (Bearer)............................... 93
100 Alusuisse-Lonza Holding AG (Registered).......... 96
3,850 CS Holding AG (Registered)....................... 596
15 Georg Fischer AG (Bearer)........................ 21
115 Holderbank Financiere Glarus AG 'B' (Bearer)..... 94
105 Merkur Holding AG (Registered)................... 22
685 Nestle S.A. (Registered)......................... 1,027
1,130 Novartis AG (Registered)......................... 1,834
29 Roche Holding AG (Bearer)........................ 447
121 Roche Holding AG-Genusshein...................... 1,202
260 Schweizerische Rueckversicherungs-Gesellchaft
(Registered)................................... 486
85 SMH AG (Bearer).................................. 47
35 Societe Generale de Surveillance Holding S.A.
(Bearer)....................................... 67
70 Sulzer AG (Registered)........................... 44
1,330 Swiss Bank Corp. (Registered).................... 413
65 SwissAir AG (Registered)......................... 89
355 Union Bank of Switzerland (Bearer)............... 513
400 Union Bank of Switzerland (Registered)........... 115
835 Zuerich Versicherungs-Gesellschaft (Registered).. 398
--------
7,811
--------
UNITED KINGDOM (7.2%)
18,200 Abbey National plc............................... 326
11,665 Argyll Group plc................................. 66
9,100 Arjo Wiggins Appleton plc........................ 24
6,500 Associated British Foods plc..................... 57
22,589 Barclays plc..................................... 601
14,300 Bass plc......................................... 222
40,266 B.A.T Industries plc............................. 367
50,470 BG plc........................................... 227
9,127 BICC plc......................................... 26
16,856 Blue Circle Industries plc....................... 95
9,055 BOC Group plc.................................... 149
14,300 Boots Co. plc.................................... 206
9,100 BPB Industries plc............................... 51
6,468 British Aerospace plc............................ 184
15,628 British Airways plc.............................. 144
76,115 British Petroleum Co. plc........................ 1,001
20,800 British Sky Broadcasting Group plc............... 156
26,000 British Steel plc................................ 56
75,400 British Telecommunications plc................... 593
54,606 BTR plc.......................................... 165
3,856 Burmah Castrol plc............................... 67
32,462 Cable & Wireless plc............................. 285
14,335 Cadbury Schweppes plc............................ 145
9,360 Caradon plc...................................... 27
(a)57,200 Centrica plc..................................... 84
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<S> <C>
11,671 Coats Viyella plc................................ $ 17
9,056 Commercial Union plc............................. 126
6,500 Courtaulds plc................................... 32
1,272 De La Rue plc.................................... 8
(a)11,730 EMI Group plc.................................... 98
37,700 General Electric plc............................. 244
7,767 GKN plc.......................................... 159
41,600 Glaxo Wellcome plc............................... 984
9,090 Granada Group plc................................ 139
15,600 Great Universal Stores plc....................... 197
10,369 Guardian Royal Exchange plc...................... 56
57,172 Guinness plc..................................... 526
28,570 HSBC Holdings plc................................ 705
7,768 Hanson plc....................................... 35
16,900 Harrisons & Crosfield plc........................ 39
11,700 Imperial Chemical Industries plc................. 183
15,613 Ladbroke Group plc............................... 68
10,400 Land Securities plc.............................. 166
10,400 Lasmo plc........................................ 47
15,600 Legal & General Group plc........................ 136
71,500 Lloyds TSB Group plc............................. 925
10,418 Lonrho plc....................................... 16
45,500 Marks & Spencer plc.............................. 448
7,800 MEPC plc......................................... 65
18,200 National Power plc............................... 180
9,098 North West Water plc............................. 117
10,757 Peninsular & Oriental Steam Navigation Co........ 122
19,478 Pilkington plc................................... 41
26,009 Prudential Corp. plc............................. 314
11,700 Rank Group plc................................... 65
7,751 Redland plc...................................... 44
18,200 Reed International plc........................... 182
22,100 Reuters Holdings plc............................. 242
7,800 Rexam plc........................................ 38
3,900 RMC Group plc.................................... 54
18,212 Royal & Sun Alliance Insurance Group plc......... 183
6,454 Royal Bank of Scotland plc....................... 82
15,760 RTZ Corp. plc (Registered)....................... 194
20,772 Sainsbury (J) plc................................ 174
2,600 Schroders plc.................................... 82
12,993 Scottish Power plc............................... 115
26,000 Sears plc........................................ 23
8,051 Sedgwick Group plc............................... 19
6,500 Slough Estates plc............................... 37
64,896 SmithKline Beecham plc........................... 664
6,476 Southern Electric plc............................ 54
18,185 Tarmac plc....................................... 34
10,354 Taylor Woodrow plc............................... 30
24,742 Tesco plc........................................ 201
9,144 Thames Water plc................................. 136
(a)5,571 Thorn plc........................................ 14
6,500 Thorn EMI plc 'B'................................ 2
6,466 TI Group plc..................................... 49
36,400 Unilever plc..................................... 312
42,892 Vodafone Group plc............................... 309
11,700 Zeneca Group plc................................. 411
--------
15,267
--------
</TABLE>
11
The accompanying notes are an integral part of the financial statements.
<PAGE> 362
MORGAN STANLEY
GLOBAL EQUITY ALLOCATION FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<S> <C>
UNITED STATES (37.8%)
5,200 Abbott Laboratories.............................. $ 341
(a)900 AccuStaff, Inc................................... 21
3,000 Adobe Systems, Inc............................... 124
(a)700 Advanced Fibre Communications, Inc............... 20
900 AGCO Corp........................................ 26
900 A.H. Belo Corp., 'A'............................. 51
800 Air Express International Corp................... 24
900 Air Products & Chemicals, Inc.................... 74
500 Airborne Freight Corp............................ 31
600 Albank Financial Corp............................ 31
3,300 Albertson's, Inc................................. 156
1,100 Allegheny Teledyne, Inc.......................... 28
(a)600 Allen Telecom, Inc............................... 11
1,500 Allergan, Inc.................................... 50
(a)1,200 Allied Waste Industries, Inc..................... 28
5,100 Allstate Corp.................................... 463
3,900 Alltel Corp...................................... 160
900 Aluminum Co. of America.......................... 63
1,000 Alza Corp., 'A'.................................. 32
900 AMBAC Finacial Group, Inc........................ 41
700 American Bankers Insurance Group, Inc............ 32
5,600 American Express Co.............................. 500
1,000 American General Corp............................ 54
8,200 American Greeting Corp., 'A'..................... 321
8,600 American Home Products Corp...................... 658
5,500 American International Group, Inc................ 598
(a)700 American Power Conversion Corp................... 16
1,000 American Stores Co............................... 20
15,400 American Telephone & Telegraph Co................ 943
4,600 Ameritech Corp................................... 370
5,000 Amoco Corp....................................... 426
2,700 AMP, Inc......................................... 113
(a)600 AMR Corp......................................... 77
(a)600 Amresco, Inc..................................... 18
(a)1,200 Andrew Corp...................................... 29
6,700 Anheuser-Busch Cos., Inc., 'A'................... 295
(a)1,100 Apple Computer, Inc.............................. 14
(a)9,900 Applied Material, Inc............................ 298
600 Aptar Group, Inc................................. 33
1,900 Armstrong World Industries, Inc., 'B'............ 142
800 Arvin Industries, Inc............................ 27
2,200 Asarco, Inc...................................... 49
4,000 Ashland, Inc..................................... 215
600 Associated Banc-Corp............................. 33
800 Astoria Financial Corp........................... 45
1,500 Atlantic Richfield Co............................ 120
(a)1,300 Atmel Corp....................................... 24
2,900 Automatic Data Processing, Inc................... 178
1,100 Avnet, Inc....................................... 73
800 AVX Corp......................................... 15
2,200 Baker Hughes, Inc................................ 96
1,600 Baldor Electric Co............................... 35
1,000 Ballard Medical Products......................... 24
5,200 Banc One Corp.................................... 282
5,300 Bank of New York Co., Inc........................ 306
9,100 BankAmerica Corp................................. 664
3,200 BankBoston Corp.................................. 301
1,000 Bankers Trust New York Corp...................... 112
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<S> <C>
(a)1,300 Barnes & Noble, Inc.............................. $ 43
2,900 Bausch & Lomb, Inc............................... 115
3,600 Baxter International, Inc........................ 182
9,600 Becton & Dickinson & Co.......................... 480
700 Belden, Inc...................................... 25
6,900 Bell Atlantic Corp............................... 628
9,500 BellSouth Corp................................... 535
600 Beneficial Corp.................................. 50
600 Bergen Brunswig Corp., 'A'....................... 25
600 Betz Laboratories, Inc........................... 37
(a)2,900 Beverly Enterprises, Inc......................... 38
3,600 BFGoodrich Co.................................... 149
(a)900 Biogen, Inc...................................... 33
1,200 Biomet, Inc...................................... 31
2,900 Birmingham Steel Corp............................ 46
(a)1,300 BISYS Group, Inc................................. 43
(a)700 Black Box Corp................................... 25
1,200 BMC Industries, Inc.............................. 19
1,900 Bob Evans Farms, Inc............................. 42
4,900 Boeing Co........................................ 240
800 Boise Cascade Corp............................... 24
(a)600 Borders Group, Inc............................... 19
600 Bowater, Inc..................................... 27
3,400 Briggs & Stratton Corp........................... 165
10,500 Bristol-Myers Squibb Co.......................... 993
2,600 Brown-Forman Corp., 'B'.......................... 144
2,600 Browning-Ferris Industries, Inc.................. 96
2,400 Burlington Northern Railroad Co.................. 223
1,367 Burlington Resources, Inc........................ 61
(a)900 California Energy Company, Inc................... 26
1,100 Callaway Golf Co................................. 31
(a)800 Cambridge Tech Partner, Inc...................... 33
500 Camco International, Inc......................... 32
2,900 Campbell Soup Co................................. 169
500 Capital RE Corp.................................. 31
(a)400 Catalina Marketing Corp.......................... 18
6,100 Caterpillar, Inc................................. 296
1,190 CBS, Inc......................................... 35
(a)700 Centocor, Inc.................................... 23
3,100 Central & South West Corp........................ 84
700 Central Louisiana Electric Co.................... 23
400 Central Newspapers, Inc., 'A'.................... 30
700 Centura Banks, Inc............................... 48
700 Century Telephone Enterprises, Inc............... 35
(a)500 Chancellor Media Corp., 'A'...................... 37
655 Charter One Financial Inc........................ 41
5,800 Chase Manhattan Corp............................. 635
8,500 Chevron Corp..................................... 654
625 Chittenden Corp.................................. 22
(a)1,500 Choice Hotels International, Inc................. 24
9,600 Chrysler Corp.................................... 338
1,800 Chubb Corp....................................... 136
1,900 CIGNA Corp....................................... 329
4,000 Cincinatti Milacron, Inc......................... 104
900 CIPSCO, Inc...................................... 40
(a)1,500 Circus Circus Enterprises, Inc................... 31
(a)3,900 Cisco Systems, Inc............................... 217
5,400 Citicorp......................................... 683
700 CKE Restaurants, Inc............................. 29
</TABLE>
12
The accompanying notes are an integral part of the financial statements.
<PAGE> 363
MORGAN STANLEY
GLOBAL EQUITY ALLOCATION FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<S> <C>
UNITED STATES (CONT.)
1,900 Clayton Homes, Inc............................... $ 34
1,900 Clorox Co........................................ 150
500 CMAC Investment Corp............................. 30
600 CNF Transportation, Inc.......................... 23
(a)500 Coast Savings Financial, Inc..................... 34
1,500 Coastal Corp..................................... 93
25,700 Coca-Cola Co..................................... 1,712
900 Colgate Palmolive Co............................. 66
15,300 Columbia HCA/Healthcare Corp..................... 453
700 Comdisco, Inc.................................... 23
3,800 Comerica, Inc.................................... 343
1,000 Commercial Metals Co............................. 32
(a)2,200 Commnet Cellular, Inc............................ 78
8,700 Compaq Computer Corp............................. 491
700 Compass Bancshares, Inc.......................... 31
(a)900 CompUSA, Inc..................................... 28
6,600 Computer Associates International, Inc........... 349
(a)1,100 Computer Management Sciences..................... 21
1,700 Conagra, Inc..................................... 56
(a)900 Concord EFS, Inc................................. 22
1,800 Conseco, Inc..................................... 82
3,700 Consolidated Edison Co. of New York, Inc......... 152
600 Consolidated Papers, Inc......................... 32
(a)900 Consolidated Stores Corp......................... 40
(a)600 Continental Airlines, 'B'........................ 29
(a)500 Cooper Cameron Corp.............................. 31
2,200 Cooper Industries, Inc........................... 108
2,000 Cooper Tire & Rubber Co.......................... 49
1,600 Coors (Adolph) 'B'............................... 53
1,500 Corestates Financial Corp........................ 120
(a)1,100 Corporate Express, Inc........................... 14
1,200 Countrywide Credit Industries, Inc............... 51
(a)1,300 Covance, Inc..................................... 26
3,600 CPC International, Inc........................... 389
3,500 C.R. Bard, Inc................................... 110
1,300 Crompton & Knowles Corp.......................... 34
100 Crown Cork & Seal, Inc........................... 5
4,700 CSX Corp......................................... 254
300 Cummins Engine................................... 18
2,600 Cyprus Amaz Minerals Co.......................... 40
(a)700 Cytec Industries, Inc............................ 33
800 Dallas Semiconductor Corp........................ 33
1,000 Dana Corp........................................ 47
900 Danaher Corp..................................... 57
6,200 Darden Restaurants, Inc.......................... 78
6,400 Dayton Hudson Corp............................... 432
900 Dean Foods Co.................................... 54
6,800 Deere & Co....................................... 397
(a)1,600 Dell Computer Corp............................... 134
2,300 Delta Airlines Inc............................... 274
5,100 Deluxe Corp...................................... 176
700 Deposit Guaranty Corp............................ 40
1,600 Dime Bancorp, Inc................................ 48
600 Dow Chemical Co.................................. 61
(a)1,000 Dress Barn, Inc.................................. 28
7,200 Dresser Industries, Inc.......................... 302
600 DTE Energy Co.................................... 21
13,400 Du Pont (EI) de Nemours Co....................... 805
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<S> <C>
10,600 Dun & Bradstreet Corp............................ $ 328
(a)600 Dura Pharmaceuticals, Inc........................ 28
4,400 Eastern Entreprises.............................. 198
1,300 Eastman Chemical Co.............................. 77
4,200 Eastman Kodak Co................................. 255
900 Echlin, Inc...................................... 33
800 Ecolab, Inc...................................... 44
1,900 EG&G, Inc........................................ 40
(a)800 Electronic Arts, Inc............................. 30
(a)700 Electronics for Imaging, Inc..................... 12
6,500 Eli Lilly & Co................................... 453
(a)3,000 EMC Corp......................................... 82
2,900 Emerson Electric Co.............................. 164
2,100 Enova Corp....................................... 57
2,300 Enron Corp....................................... 96
15,000 Entergy Corp..................................... 449
(a)400 Etec Systems, Inc................................ 19
1,200 E.W. Blanch Holdings, Inc........................ 41
15,300 Exxon Corp....................................... 936
8,900 Fannie Mae....................................... 508
1,000 Family Dollar Stores, Inc........................ 29
600 Fastenal Co...................................... 23
(a)700 Federal Express Corp............................. 43
900 Federal Signal Corp.............................. 19
800 FINOVA Group, Inc................................ 40
900 First American Corp., Tennessee.................. 45
3,500 First Chicago Corp............................... 292
500 First Commerce Corp.............................. 34
1,050 First Commercial Corp............................ 62
700 First Hawaiian, Inc.............................. 28
900 First Midwest Bancorp, Inc....................... 39
1,000 First Security Corp.............................. 42
10,200 First Union Corp. (N.C.)......................... 523
1,200 First Virginia Banks, Inc........................ 62
100 Firstenergy Corp................................. 3
500 Firstmerit Corp.................................. 14
(a)900 FISERV, Inc...................................... 44
5,400 Fleet Financial Group, Inc....................... 405
4,400 Fleming Cos., Inc................................ 59
2,800 Fluor Corp....................................... 105
(a)500 FMC Corp......................................... 34
16,100 Ford Motor Co.................................... 784
(a)800 Forest Laboratories, Inc. 'A'.................... 39
600 Fort James Corp.................................. 23
3,200 Fortune Brands, Inc.............................. 119
(a)900 Fred Meyer, Inc.................................. 33
700 Freddie Mac...................................... 29
4,700 Freeport McMoran Copper Corp., 'B'............... 74
(a)1,200 Fruit of the Loom................................ 31
2,100 Gannett Co., Inc................................. 130
2,100 Gap, Inc......................................... 74
300 Gaylord Entertainment Co......................... 10
400 General Dynamics Corp............................ 35
30,500 General Electric Co.............................. 2,238
1,600 General Mills, Inc............................... 115
8,700 General Motors Corp.............................. 527
900 General RE Corp.................................. 191
1,500 General Signal Corp.............................. 63
(a)400 Genesis Health Ventures, Inc..................... 11
</TABLE>
13
The accompanying notes are an integral part of the financial statements.
<PAGE> 364
MORGAN STANLEY
GLOBAL EQUITY ALLOCATION FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<S> <C>
UNITED STATES (CONT.)
900 Genzyme Corp..................................... $ 25
1,200 Giant Food, Inc. 'A'............................. 40
1,400 Goodyear Tire & Rubber Co........................ 89
1,100 GPU, Inc......................................... 46
3,800 Great Atlantic & Pacific Tea Co.................. 113
2,400 Great Lakes Chemical Corp........................ 108
8,400 Green Tree Financial Corp........................ 220
11,500 GTE Corp......................................... 601
(a)500 GTECH Holdings Corp.............................. 16
(a)1,300 Gulfstream Aerospace Corp........................ 38
1,200 Halliburton Co................................... 62
1,000 Hannaford Brothers Co............................ 43
1,700 Harleysville Group, Inc.......................... 41
600 Harman International Industries, Inc............. 25
600 Harnischfeger Industries, Inc.................... 21
(a)1,200 Harrah's Entertainment, Inc...................... 23
7,200 Harris Corp...................................... 330
1,300 Harsco Corp...................................... 56
900 Harte-Hanks Communications, Inc.................. 33
4,700 Hartford Financial Services Group................ 440
100 HBO & Co......................................... 5
5,500 Hercules, Inc.................................... 275
600 Herman Miller, Inc............................... 33
800 Hershey Foods Corp............................... 50
13,400 Hewlett-Packard Co............................... 838
2,500 Hibernia Corp., 'A'.............................. 47
2,500 Hilton Hotels Corp............................... 74
2,700 H.J. Heinz Co.................................... 137
10,600 Home Depot, Inc.................................. 624
1,400 Honeywell, Inc................................... 96
2,300 Houston Industries, Inc.......................... 61
100 H&R Block, Inc................................... 4
670 Huntington Bancshares, Inc....................... 24
600 Illinois Central Corp............................ 20
1,000 IMCO Recycling, Inc.............................. 16
2,300 Imperial Credit Mortgage Holdings................ 41
2,200 Ingersoll-Rand Co................................ 89
1,200 INMC Mortgage Holdings, Inc...................... 28
700 Integrated Health Services, Inc.................. 22
17,300 Intel Corp....................................... 1,215
(a)1,300 Interim Services, Inc............................ 34
11,300 International Business Machines Corp............. 1,182
3,100 International Flavors & Fragrances, Inc.......... 160
1,200 International Game Technology.................... 30
(a)1,300 International Rectifier Corp..................... 15
1,700 Interpublic Group of Cos., Inc................... 85
1,000 Interstate Bakeries Corp......................... 37
1,000 Invacare Corp.................................... 22
(a)2,000 Iomega Corp...................................... 25
(a)2,000 Ionics, Inc...................................... 78
5,500 ITT Industries, Inc.............................. 173
(a)600 Jacobs Engineering Group, Inc.................... 15
3,000 J.C. Penney Co., Inc............................. 181
600 Jefferson-Pilot Corp............................. 47
2,200 John H. Harland Co............................... 46
1,500 Johns Manville Corp.............................. 15
13,900 Johnson & Johnson................................ 916
5,900 Johnson Controls, Inc............................ 282
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<S> <C>
(a)500 Jones Apparel Group, Inc......................... $ 22
7,300 Jostens, Inc..................................... 168
1,600 Kansas City Southern Industries, Inc............. 51
(a)900 Kemet Corp....................................... 17
700 Kennametal, Inc.................................. 36
(a)800 Kent Electronics Corp............................ 20
200 Kerr-McGee Corp.................................. 13
5,400 KeyCorp.......................................... 382
500 Keyspan Energy Corp.............................. 18
2,400 Kimball International, Inc., 'B'................. 44
5,800 Kimberly-Clark Corp.............................. 286
800 King World Productions, Inc...................... 46
(a)900 KLA-Tencor Corp.................................. 35
800 KN Energy, Inc................................... 43
500 Knight Ridder, Inc............................... 26
(a)1,000 Komag, Inc....................................... 15
(a)700 LCI International, Inc........................... 22
(a)700 Lear Corp........................................ 33
(a)900 Lexmark International Group, Inc................. 34
1,400 LG&E Energy Corp................................. 35
750 Liberty Financial Cos., Inc...................... 28
2,500 Lincoln National Corp............................ 195
(a)700 Littlefuse, Inc.................................. 17
3,800 Lockheed Martin Corp............................. 374
3,400 Loews Corp....................................... 361
1,000 Long Island Lighting Co.......................... 30
800 Longs Drug Stores, Inc........................... 26
800 Louisiana-Pacific Corp........................... 15
4,600 Lowe's Cos., Inc................................. 219
800 Lubrizol Corp.................................... 30
1,900 Lucent Technologies, Inc......................... 152
(a)800 Mac Frugals Bargains Close-Outs, Inc............. 33
1,000 Magna Group, Inc................................. 46
1,200 M.A. Hanna Co.................................... 30
2,800 Mallinckrodt, Inc................................ 106
9,500 Manor Care, Inc.................................. 333
(a)200 Markel Corp...................................... 31
200 Marriott International, Inc...................... 14
800 Martin Marietta Corp............................. 29
2,800 May Department Stores Co......................... 148
900 Maytag Corp...................................... 34
3,000 MBIA, Inc........................................ 200
3,000 MBNA Corp........................................ 82
1,200 McClatchy Newspapers, Inc........................ 33
1,500 McCormick & Co., Inc............................. 42
10,700 McDonald's Corp.................................. 511
500 McGraw-Hill Cos., Inc............................ 37
1,200 MCN Corp......................................... 48
1,200 Medical Assurance, Inc........................... 35
1,600 Medtronic, Inc................................... 84
3,800 Mellon Bank Corp................................. 230
500 Mercantile Stores Co., Inc....................... 30
11,500 Merck & Co., Inc................................. 1,222
1,800 Meredith Corp.................................... 64
2,366 Meritor Automotive, Inc.......................... 50
7,500 Merrill Lynch & Co., Inc......................... 547
(a)800 Microchip Technology, Inc........................ 24
(a)10,900 Microsoft Corp................................... 1,409
1,400 Millenium Chemicals, Inc......................... 33
</TABLE>
14
The accompanying notes are an integral part of the financial statements.
<PAGE> 365
MORGAN STANLEY
GLOBAL EQUITY ALLOCATION FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<S> <C>
UNITED STATES (CONT.)
900 Millipore Corp................................... $ 31
500 Minerals Technologies, Inc....................... 23
2,300 Minnesota Mining & Manufacturing Co.............. 189
9,700 Mobil Corp....................................... 700
1,175 Molex, Inc....................................... 38
2,700 Monsanto......................................... 113
1,200 Montana Power Co................................. 38
1,000 Morgan (J.P.) & Co., Inc......................... 113
2,500 Morton International, Inc........................ 86
5,800 Motorola, Inc.................................... 331
(a)500 MSC Industrial Direct Co., Inc. 'A'.............. 21
800 Murphy Oil Corp.................................. 43
1,400 Mylan Laboratories, Inc.......................... 29
(a)1,500 Nabors Industries, Inc........................... 47
1,800 Nalco Chemical Co................................ 71
1,300 National City Corp............................... 85
1,400 National Commerce Bancorp........................ 49
700 National Fuel Gas Co............................. 34
600 National Service Industries, Inc................. 30
6,600 NationsBank Corp................................. 401
(a)1,200 NCS HealthCare, Inc.............................. 32
1,900 New Century Energies, Inc........................ 91
1,000 New England Electric System...................... 43
1,000 New Jersey Resources Corp........................ 40
1,600 New York State Electric & Gas Corp............... 57
500 New York Times Co., 'A'.......................... 33
600 Newell Co........................................ 26
200 Nicor, Inc....................................... 8
(a)800 Nine West Group, Inc............................. 21
500 Noble Affiliates, Inc............................ 18
(a)1,000 Noble Drilling Corp.............................. 31
600 Nordson Corp..................................... 28
700 Norfolk Southern Corp............................ 22
900 Norrell Corp..................................... 18
1,200 Northern Telecom Ltd............................. 107
500 Northrop Grumman Corp............................ 58
4,000 Norwest Corp..................................... 155
(a)1,100 Novacare Corp.................................... 14
(a)5,100 Novell, Inc...................................... 38
(a)600 Novellus Systems, Inc............................ 19
(a)2,400 Office Depot, Inc................................ 57
(a)2,300 OfficeMax, Inc................................... 33
700 Ohio Casualty Corp............................... 31
1,600 Old Kent Financial Corp.......................... 63
2,100 Olsten Corp...................................... 32
600 OM Group, Inc.................................... 22
1,200 Omnicare, Inc.................................... 37
1,300 One Valley Bancorp., Inc......................... 50
(a)4,200 Oracle System Corp............................... 94
(a)1,000 O'Reilly Automotive, Inc......................... 26
1,000 Oregon Steel Mills, Inc.......................... 21
800 Orion Capital Corp............................... 37
(a)1,300 Oryx Energy Co................................... 33
1,400 Pacific Century Financial Corp................... 35
4,700 Pacific Enterprises.............................. 177
2,500 Pall Corp........................................ 52
700 Parker-Hannifin Corp............................. 32
(a)600 Patterson Dental Co.............................. 27
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<S> <C>
(a)500 Payless ShoeSource, Inc.......................... $ 34
3,300 Peco Energy Co................................... 80
700 Pennziol Co...................................... 47
1,000 Peoples Energy Corp.............................. 39
1,500 Pep Boys Manny, Moe & Jack....................... 36
7,000 PepsiCo, Inc..................................... 255
900 Perkin-Elmer Corp................................ 64
(a)700 Personnel Group of America, Inc.................. 23
12,500 Pfizer, Inc...................................... 932
1,100 PG&E Corp........................................ 33
(a)1,276 PharMerica, Inc.................................. 13
3,400 Pharmacia & Upjohn, Inc.......................... 125
8,400 Phelps Dodge Corp................................ 523
32,200 Philip Morris Cos., Inc.......................... 1,459
7,300 Phillips Petroleum Co............................ 355
1,500 Phillips-Van Heusen Corp......................... 21
(a)1,100 Photronics, Inc.................................. 27
(a)900 PhyCor, Inc...................................... 24
1,200 Pier 1 Imports, Inc.............................. 27
1,000 Pinnacle West Capital Corp....................... 42
700 Pioneer Natural Resources Co..................... 20
500 PMI Group, Inc................................... 36
2,500 PNC Bank Corp.................................... 143
900 PPG Industries, Inc.............................. 51
600 Pogo Producing Co................................ 18
700 Polaroid Corp.................................... 34
(a)600 Policy Management Systems Corp................... 42
1,700 Potomac Electric Power Co........................ 44
7,000 PP&L Resources, Inc.............................. 168
600 Precision Castparts Corp......................... 36
15,600 Procter & Gamble Co.............................. 1,245
(a)900 Profitt's Inc.................................... 26
(a)2,500 Promus Company, Inc.............................. 105
600 Protective Life Corp............................. 36
600 Provident Bankshares Corp........................ 38
700 Provident Companies, Inc......................... 27
17,000 Public Service Enterprise Group, Inc............. 539
1,300 Puget Sound Energy, Inc.......................... 39
500 Quanex Corp...................................... 14
(a)1,400 Quantum Corp..................................... 28
900 Queens County Bancorp, Inc....................... 36
(a)900 Quintiles Transnational Corp..................... 34
(a)1,526 R & B Falcon Corp................................ 53
5,400 Raychem Corp..................................... 233
600 Rayonier, Inc., WI............................... 26
554 Raytheon Co., 'A'................................ 27
5,600 Raytheon Co., 'B'................................ 283
1,300 Readers Digest Association, Inc., 'A'............ 31
(a)1,000 Reebok International, Ltd........................ 29
800 Reliastar Financial Corp......................... 33
(a)700 Renal Care Group, Inc............................ 22
1,400 Republic New York Corp........................... 160
600 Rite Aid Corp.................................... 35
1,100 RLI Corp......................................... 55
(a)1,200 Robert Half International, Inc................... 48
1,200 Rochester Gas & Electric Corp.................... 41
4,000 Rockwell International Corp...................... 209
1,000 Rohm & Haas Co................................... 96
(a)800 Rowan Cos., Inc.................................. 24
</TABLE>
15
The accompanying notes are an integral part of the financial statements.
<PAGE> 366
MORGAN STANLEY
GLOBAL EQUITY ALLOCATION FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<S> <C>
UNITED STATES (CONT.)
4,075 RPM, Inc......................................... $ 62
(a)600 R.P. Scherer Corp................................ 37
1,000 R.R. Donnelly & Sons Co.......................... 37
500 Russell Corp..................................... 13
700 Ryder Systems, Inc............................... 23
500 SAFECO Corp...................................... 24
(a)1,300 Safeguard Scientifics, Inc....................... 41
(a)300 Samina Corp...................................... 20
11,500 Sara Lee Corp.................................... 648
7,399 SBC Communications, Inc.......................... 542
1,300 SCANA Corp....................................... 39
1,200 Schering-Plough Corp............................. 75
(a)600 Scholastic Corp.................................. 23
(a)900 SCI Systems, Inc................................. 39
4,500 Scientific-Atlanta, Inc.......................... 75
(a)700 Sealed Air Corp.................................. 43
9,100 Sears, Roebuck & Co.............................. 412
2,900 Service Corp. International...................... 107
200 Shared Medical Systems Corp...................... 13
1,500 Shaw Industries, Inc............................. 17
(a)700 Sierra Health Services, Inc...................... 24
(a)400 Smith International, Inc......................... 25
1,200 Snap-On, Inc..................................... 52
700 Sonat, Inc....................................... 32
1,200 Sonoco Products Co............................... 42
3,800 Southern Co...................................... 98
3,300 Sprint Corp...................................... 193
1,200 St. Paul Cos., Inc............................... 98
800 St. John Knits, Inc.............................. 32
(a)1,200 St. Jude Medical, Inc............................ 37
1,000 St. Paul Bancorp, Inc............................ 26
(a)900 Starbucks Corp................................... 35
(a)1,300 Steel Dynamics, Inc.............................. 21
(a)500 Steris Corp...................................... 24
(a)800 Sterling Commerce, Inc........................... 31
(a)1,000 Sterling Software, Inc........................... 41
900 Stewart Enterprises, Inc. 'A'.................... 42
600 Storage Technology Corp.......................... 37
6,500 Sun Co., Inc..................................... 273
(a)8,400 Sun Microsystems, Inc............................ 335
600 Sunbeam Corp..................................... 25
533 Sunburst Hospitality, Corp....................... 5
(a)1,000 SunGuard Data Systems, Inc....................... 31
(a)1,600 Sunrise Medical, Inc............................. 25
1,500 Superior Industries International................ 40
10,700 SUPERVALU Inc.................................... 448
(a)1,400 Sybase, Inc...................................... 19
(a)800 Sybron International Corp........................ 38
(a)2,100 Symantec Corp.................................... 46
700 Symbol Technologies, Inc......................... 26
(a)700 Synopsys, Inc.................................... 25
400 Sysco Corp....................................... 18
2,800 Tandy Corp....................................... 108
(a)600 Tech Data Corp................................... 23
3,500 Tektronix, Inc................................... 139
900 Telephone & Data Systems, Inc.................... 42
4,700 Texaco, Inc...................................... 256
3,200 Texas Instruments, Inc........................... 144
4,700 Texas Utilities Co............................... 195
1,600 The Limited, Inc................................. 41
500 Thiokol Corp..................................... 41
1,200 Thomas & Betts Corp.............................. 57
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<S> <C>
(a)4,100 3Com Corp........................................ $ 143
(a)1,400 360 Communications Co............................ 28
600 Tidewater, Inc................................... 33
600 TIG Holdings, Inc................................ 20
5,600 TJX Companies, Inc............................... 193
1,600 Torchmark Corp................................... 67
600 Toro Co.......................................... 26
600 T. Rowe Price Associates, Inc.................... 38
800 Trans Financial, Inc............................. 31
800 Transamerica Corp................................ 85
600 Transatlantic Holdings, Inc...................... 43
11,300 Travelers, Inc................................... 609
(a)1,100 Triad Guaranty, Inc.............................. 32
700 Trinity Industries, Inc.......................... 31
2,100 TRW, Inc......................................... 112
3,200 Tupperware Corp.................................. 89
5,900 Tyco International, Ltd.......................... 266
(a)500 Ucar International, Inc.......................... 20
1,000 Ultramar Diamond Shamrock Corp................... 32
10,200 Unicom Corp...................................... 314
900 Unifi, Inc....................................... 37
1,700 Union Carbide Corp............................... 73
600 Union Pacific Corp............................... 37
(a)2,600 Unisys Corp...................................... 36
1,000 United Asset Management Co....................... 24
900 United Cos. Financial Corp....................... 14
900 United Illuminating Co........................... 41
3,000 United Technologies Corp......................... 218
(a)800 Universal Health Services, Inc................... 40
(a)700 U.S. Airways Group, Inc.......................... 44
800 U.S. Bancorp..................................... 90
(a)800 U.S. Cellular Corp............................... 25
(a)1,200 U.S. Filter Corp................................. 36
600 U.S. Industries, Inc............................. 18
3,900 U.S. Surgical Corp............................... 114
5,300 U.S. West Communications Group................... 239
5,300 USF&G Corp....................................... 117
(a)700 USG Corp......................................... 34
7,300 UST, Inc......................................... 270
9,900 USX-Marathon Group............................... 334
20,200 USX-U.S. Steel Group, Inc........................ 631
1,200 UtliCorp. United, Inc............................ 47
1,000 Valero Energy Corp............................... 31
900 Varian Associates, Inc........................... 46
(a)900 Vencor, Inc...................................... 22
1,200 VF Corp.......................................... 55
(a)1,300 Viking Office Products, Inc...................... 28
800 Vintage Petroleum, Inc........................... 15
1,500 Vishay Intertechnology, Inc...................... 35
600 Vulcan Materials Co.............................. 61
567 Wachovia Corp.................................... 46
24,500 Wal-Mart Stores, Inc............................. 966
1,600 Walgreen Co...................................... 50
900 Wallace Computer Services, Inc................... 35
3,300 Walt Disney Co................................... 327
1,400 Warner-Lambert Co................................ 174
200 Waste Management, Inc............................ 6
(a)800 Weatherford Enterra, Inc......................... 35
400 Webster Financial Corp........................... 27
4,200 Wendy's International, Inc....................... 101
700 Westamerica Bancorp.............................. 72
(a)900 Western Digital Corp............................. 14
800 Western National Corp............................ 24
</TABLE>
16
The accompanying notes are an integral part of the financial statements.
<PAGE> 367
MORGAN STANLEY
GLOBAL EQUITY ALLOCATION FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<S> <C>
UNITED STATES (CONT.)
11,500 Whitman Corp..................................... $ 300
500 Wicor, Inc....................................... 23
200 Williams Cos., Inc............................... 6
(a)900 Wisconsin Central Transportation Corp............ 21
800 Witco Corp....................................... 33
(a)100 Wordcom, Inc..................................... 3
1,500 Worthington Industries, Inc...................... 25
1,700 WPS Resources Corp............................... 57
900 W.R. Berkley Corp................................ 39
3,300 Xerox Corp....................................... 244
900 York International Corp.......................... 36
900 Zions Bancorp.................................... 41
--------
80,662
--------
TOTAL COMMON STOCKS (COST $157,172)............................. 171,427
--------
PREFERRED STOCKS (0.3%)
AUSTRIA (0.1%)
800 Bank Austria AG.................................. 38
1,064 Bank Austria AG.................................. 47
100 Bau Holding AG................................... 5
100 EA-Generali AG................................... 11
--------
101
--------
GERMANY (0.2%)
4,150 RWE AG........................................... 178
776 SAP AG........................................... 252
--------
430
--------
ITALY (0.0%)
31,850 Fiat S.p.A....................................... 49
--------
TOTAL PREFERRED STOCKS (COST $391).............................. 580
--------
INVESTMENT COMPANIES (1.7%)
UNITED STATES (1.7%)
(g)156,800 Latin American Discovery Fund, Inc............... 2,813
(g)70,000 Morgan Stanley Africa Investment Fund, Inc....... 805
--------
TOTAL INVESTMENT COMPANIES (COST $3,144)........................ 3,618
--------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
RIGHTS
- ------------
<S> <C>
RIGHTS (0.0%)
PORTUGAL (0.0%)
(a)1,600 Jeronimo Martins................................. --
--------
SPAIN (0.0%)
(a)264 ACS S.A.......................................... --
--------
TOTAL RIGHTS (COST $0).......................................... --
--------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
WARRANTS
- ------------
<S> <C>
WARRANTS (0.0%)
FRANCE (0.0%)
(a)320 Casino Guichard Perrachon, expiring 12/31/99..... 7
(a)2,073 Cie Generale des Eaux, expiring 5/2/01........... 1
(a)5 Sodexho S.A., expiring 6/7/04.................... 1
--------
9
--------
HONG KONG (0.0%)
(a)585 Peregine Investment Holdings Ltd., expiring
5/15/98........................................ --
--------
<CAPTION>
NO. OF VALUE
WARRANTS (000)
- --------------------------------------------------------------------------
<S> <C>
ITALY (0.0%)
(a)913 La Rinascente S.p.A., expiring 12/31/99.......... $ --
(a)1,491 La Rinascente S.p.A., expiring 12/31/99.......... 2
--------
2
--------
SWITZERLAND (0.0%)
(a)45 Roche Holdings, expiring 5/5/98.................. 5
--------
TOTAL WARRANTS (COST $1)........................................ 16
--------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
- ------------
<S> <C>
CONVERTIBLE DEBENTURES (0.0%)
FRANCE (0.0%)
FRF 32 Casino Guichard Perrachon 4.50%, 7/12/01......... 18
29 Sanofi S.A. 4.00%, 1/1/00........................ 35
19 Simco S.A. 8.25%, 1/1/06......................... 16
1 Sodexho S.A.6.00%, 6/7/04........................ 4
--------
73
--------
ITALY (0.0%)
ITL 7,304 Mediobanca S.p.A. 4.50%, 1/1/00.................. 4
2,125 Mediobanca S.p.A. 6.00%, 12/31/02................ 2
--------
6
--------
TOTAL CONVERTIBLE DEBENTURES (COST $42)......................... 79
--------
TOTAL FOREIGN & U.S. SECURITIES (82.4%) (COST $160,750)......... 175,720
--------
SHORT-TERM INVESTMENT (15.3%)
REPURCHASE AGREEMENT (15.3%)
$ 32,681 Chase Securities, Inc., 5.95%, dated 12/31/97 due
1/2/98, to be repurchased at $32,692,
collateralized by $33,050 U.S. Treasury Bonds,
5.25%, due 1/31/01, valued at $33,383 (COST
$32,681)....................................... 32,681
--------
TOTAL INVESTMENT IN SECURITIES (97.7%) (COST $193,431).......... 208,401
--------
FOREIGN CURRENCY (0.1%)
AUD 2 Australian Dollar................................ 1
ATS 5 Austrian Schilling............................... --
GBP 6 British Pound.................................... 9
CAD 77 Canadian Dollar.................................. 54
DEM 33 German Mark...................................... 18
FRF 9 French Franc..................................... 2
IDR 99,571 Indonesian Rupiah................................ 18
ITL 146,403 Italian Lira..................................... 83
JPY 701 Japanese Yen..................................... 5
PTE 1,397 Portuguese Escudo................................ 8
SGD 2 Singapore Dollar................................. 1
ESP 3,759 Spanish Peseta................................... 25
SEK 2 Swedish Krona.................................... --
--------
TOTAL FOREIGN CURRENCY (COST $249).............................. 224
--------
TOTAL INVESTMENTS (97.8%) (COST $193,680)....................... 208,625
OTHER ASSETS IN EXCESS OF LIABILITIES (2.2%).................... 4,643
--------
NET ASSETS (100%)............................................... $213,268
--------
--------
</TABLE>
- ---------------
(a) -- Non-income producing security
(g) -- The fund is advised by an affiliate.
(ADR) -- American Depositary Receipt
(NCS) -- Non Convertible Shares
(RFD) -- Ranked for Dividend
17
The accompanying notes are an integral part of the financial statements.
<PAGE> 368
MORGAN STANLEY
GLOBAL EQUITY ALLOCATION FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
DECEMBER 31, 1997
(UNAUDITED)
- --------------------------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE INFORMATION:
Under the terms of foreign currency contracts open at December 31, 1997, the
Portfolio is obligated to deliver or is to receive foreign currency in exchange
for U.S. dollars as indicated below:
<TABLE>
<CAPTION>
CURRENCY IN EXCHANGE
TO DELIVER VALUE SETTLEMENT FOR VALUE NET UNREALIZED
(000) (000) DATE (000) (000) GAIN (LOSS) (000)
- ------------- --------- ----------- ------------- --------- -----------------
<S> <C> <C> <C> <C> <C>
ESP 3,706 $ 24 1/2/98 $ 24 $ 24 $ --
IDR 99,571 18 1/2/98 $ 18 18 --
$ 132 132 1/16/98 DEM 229 128 (4)
$ 930 930 1/16/98 DEM 1,596 888 (42)
$ 632 632 1/16/98 DEM 1,080 601 (31)
DEM 8,921 4,964 1/16/98 $ 5,084 5,084 120
$ 1,894 1,894 1/21/98 FRF 11,000 1,830 (64)
$ 1,015 1,015 1/21/98 FRF 5,825 969 (46)
FRF 6,351 1,056 1/21/98 $ 1,089 1,089 33
$ 1,622 1,622 1/21/98 ITL 2,761,232 1,561 (61)
$ 945 945 1/21/98 ITL 1,648,883 932 (13)
ITL 641,978 363 1/21/98 $ 375 375 12
ITL 5,212,918 2,946 1/21/98 $ 3,044 3,044 98
JPY 821,696 6,326 1/29/98 $ 6,841 6,841 515
JPY 123,140 948 1/29/98 $ 1,020 1,020 72
$ 3,830 3,830 2/5/98 JPY 455,272 3,507 (323)
JPY 1,217,549 9,380 2/5/98 $ 10,260 10,260 880
$ 322 322 2/12/98 ESP 46,749 307 (15)
ESP 46,749 307 2/12/98 $ 320 320 13
$ 12,078 12,078 2/19/98 GBP 7,159 11,737 (341)
$ 2,357 2,357 2/19/98 ITL 3,985,066 2,252 (105)
ITL 810,604 458 2/19/98 $ 476 476 18
ITL 1,332 -- 2/19/98 $ -- -- --
$ 280 280 2/19/98 NLG 540 267 (13)
$ 123 123 2/19/98 NLG 236 117 (6)
NLG 776 384 2/19/98 $ 400 400 16
SEK 15,084 1,902 2/19/98 $ 2,000 2,000 98
$ 2,800 2,800 2/26/98 DEM 4,785 2,669 (131)
$ 89 89 2/26/98 JPY 11,140 86 (3)
$ 7,300 7,300 2/26/98 JPY 922,380 7,128 (172)
JPY 363,023 2,805 2/26/98 $ 2,970 2,970 165
JPY 682,557 5,275 2/26/98 $ 5,434 5,434 159
$ 1,006 1,006 3/16/98 FRF 5,896 983 (23)
DEM 1,632 912 3/16/98 $ 933 933 21
FRF 5,531 923 3/16/98 $ 944 944 21
$ 21 21 3/16/98 JPY 2,575 20 (1)
CAN 1,408 989 3/23/98 $ 985 985 (4)
JPY 125,215 976 4/20/98 $ 1,000 1,000 24
--------- --------- ---------
$ 78,332 $ 79,199 $ 867
========= ========= =========
</TABLE>
18
The accompanying notes are an integral part of the financial statements.
<PAGE> 369
MORGAN STANLEY
GLOBAL EQUITY ALLOCATION FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
DECEMBER 31, 1997
(UNAUDITED)
- --------------------------------------------------------------------------------
FUTURES CONTRACTS: At December 31, 1997, the Portfolio had futures contracts
open:
<TABLE>
<CAPTION>
UNREALIZED
AGGREGATE APPRECIATION
NUMBER OF FACE VALUE EXPIRATION (DEPRECIATION)
CONTRACTS (000) DATE (000)
--------------- ----------- ---------- ---------------
<S> <C> <C> <C> <C>
PURCHASES:
FTSE 100 Index 59 GBP 12,652 Mar-98 $ 232
MIB 30 Index 9 ITL 1,310 Jan-98 78
Toronto 35 Index 8 CAD 1,013 Mar-98 24
SALES:
CAC 40 Index 30 FRF 3,041 Jan-98 (160)
DAX Index 3 DEM 726 Mar-98 (38)
OMX Index 65 SEK 2,017 Jan-98 (52)
TOPIX Index 85 JPY 7,810 Mar-98 395
---------
$ 479
=========
</TABLE>
- ---------------
GBP -- British Pound
CAD -- Canadian Dollar
FRF -- French Franc
DEM -- German Mark
IDR -- Indonesian Rupiah
ITL -- Italian Lira
JPY -- Japanese Yen
NLG -- Netherlands Guilder
ESP -- Spanish Peseta
SEK -- Swedish Krona
- --------------------------------------------------------------------------------
SUMMARY OF FOREIGN & U.S. SECURITIES BY INDUSTRY CLASSIFICATION
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
- --------------------------------------------------------------------------------- --------- -------------
<S> <C> <C>
Consumer Goods................................................................... $ 42,382 19.9%
Finance.......................................................................... 35,867 16.8
Capital Equipment................................................................ 29,493 13.8
Services......................................................................... 29,110 13.6
Energy........................................................................... 18,990 8.9
Materials........................................................................ 13,184 6.2
Investment Companies............................................................. 3,618 1.7
Multi-Industry................................................................... 2,570 1.3
Gold Mines....................................................................... 506 0.2
--------- ----
$ 175,720 82.4%
========= ====
</TABLE>
19
The accompanying notes are an integral part of the financial statements.
<PAGE> 370
MORGAN STANLEY
GLOBAL EQUITY FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW
(UNAUDITED)
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1997)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Canada 3.4%
France 5.3%
Germany 5.5%
Ireland 3.2%
Italy 2.4%
Japan 7.9%
Netherlands 2.6%
Switzerland 5.6%
United Kingdom 11.1%
United States 40.8%
Short-Term Investments 9.4%
Other 2.8%
</TABLE>
<TABLE>
<CAPTION>
TOTAL RETURNS
SINCE INCEPTION
(10/29/97)**
---------------------
WITH WITHOUT
SALES SALES
CHARGE* CHARGE
- ---------------------------------------------
<S> <C> <C>
Class A Shares -6.44% -0.74%
- ---------------------------------------------
Class B Shares -5.81% -0.86%
- ---------------------------------------------
Class C Shares -5.81% -0.86%
- ---------------------------------------------
MSCI World Index N/A 2.43%
- ---------------------------------------------
</TABLE>
* The returns above are calculated using the applicable sales charge for Class
A shares and the deferred sales charge for Class B and Class C shares.
** Total returns for the Fund reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waivers and reimbursements, total
returns would be lower.
The Morgan Stanley Capital International (MSCI) World Index is an unmanaged
index which includes securities listed on the stock exchanges of the U.S.,
Europe, Canada, Australia, New Zealand and the Far East and assumes dividends
are reinvested net of withholding tax.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
<TABLE>
<CAPTION>
TOP FIVE HOLDINGS
PERCENT OF
ISSUER COUNTRY NET ASSETS
- ---------------------------------------- --------------- ----------
<S> <C> <C>
Philip Morris Cos., Inc. United States 3.1%
Reckitt & Coleman plc United Kingdom 2.5%
GenRad, Inc. United States 2.4%
Albertson's, Inc. United States 2.3%
Pharmacia & Upjohn, Inc. United States 2.1%
</TABLE>
<TABLE>
<CAPTION>
TOP FIVE SECTORS
VALUE PERCENT OF
SECTOR (000) NET ASSETS
- ------------------- --------- -------------
<S> <C> <C>
Finance $ 107,480 18.9%
Consumer--Staples 84,164 14.8%
Consumer--Cyclical 51,750 9.1%
Capital Equipment 48,338 8.5%
Technology 44,926 7.9%
</TABLE>
The investment objective of the Global Equity Fund is to seek long-term capital
appreciation by investing primarily in equity securities of issuers throughout
the world, including issuers in the United States and emerging market countries.
For the period from inception of the portfolio on October 29, 1997 through
December 31, 1997, the Fund generated a total return of -0.74 percent for Class
A shares at net asset value, as compared to a total return of 2.43 percent for
the Morgan Stanley Capital International (MSCI) World Index during the same
period.
The Fund's underperformance during this initial period can be attributed to the
negative effect of the relatively high cash position as the Portfolio became
fully invested. The initial funding is largely complete and the chart shown
above illustrates the country weightings within the Portfolio as of the end of
December.
A significant feature of our strategy during the final quarter of 1997 was our
underweight positions in Japan and Southeast Asia. However, many of the Fund's
Japanese stocks--notably large exporters such as Fuji--have continued to benefit
from the yen's weakness. Another positive factor was stock selection in the
financial sectors of such European markets as Ireland, France, Sweden, and the
United Kingdom. Partially offsetting these favorable holdings was stock
selection in the United States, Switzerland, and the Netherlands.
Some of our recent stock picks included Valmet, ABB, and American Stores. Based
in Finland, Valmet is the world's leading paper machine manufacturer. In recent
years, the group has expanded from its strong European base and is now well
established in North America and the rapidly growing markets of Asia. Also,
Valmet has reduced its cyclicality by increasing its use of subcontractors and
expanding its service and maintenance businesses. Valmet has a strong financial
position, and its stock price is cheap relative to earnings and cash flow.
The Swiss power engineering conglomerate ABB is a market leader in large-scale
power projects and will be a major beneficiary of long-term projections for
world power demand. The market's overreaction to ABB's Southeast Asian exposure
provides a unique opportunity to buy into a group with a clear global franchise
and a reputation for nimble management. A recovery in the group's Industrial and
Building Systems business is also being overlooked.
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.
20
<PAGE> 371
MORGAN STANLEY
GLOBAL EQUITY FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
(UNAUDITED)
American Stores operates the second-largest food store chain as well as large
drugstore chains in the United States. The company is currently tackling its
enormous transition from a decentralized holding company into an integrated
operating company. Over time, the benefits of this re-engineering program should
outweigh the implementation costs. The company should also benefit from a
stabilization of its capital expenditures, which have grown substantially in
recent years.
Given a projected slowdown in global growth as a result of the deepening Asian
crisis the Federal Reserve Board's next move may well be to ease rather than
raise interest rates. This would be positive for most interest-rate sensitive
sectors such as utilities, banks, tobacco, and telecommunications. Furthermore,
if mid-single digit earnings growth can be maintained, and inflation remains
quiescent, then the U.S. market is arguably fairly valued with long-term bond
yields at current levels. While equity mutual fund inflows should slow, merger
activity, in the absence of any pricing power, is expected to continue at record
levels. We remain slightly underweight in the U.S. market relative to the
benchmark, finding better relative value in Europe, particularly Ireland and the
U.K. We recently raised our position to overweight in the U.K., having found a
number of strong business franchises with management dedicated to shareholder
value. Despite continued underperformance, we still struggle to find value in
Japan, other than in selected sectors such as exporters and pharmaceuticals.
Consequently, we expect to remain underweight in the foreseeable future. We also
remain cautious about Asia as a whole and, despite the exceptionally steep
sell-off, we are unlikely to revise our weighting there in a material sense, any
time soon.
Frances Campion Richard Boon Paul Boyne
PORTFOLIO MANAGER PORTFOLIO MANAGER PORTFOLIO MANAGER
21
<PAGE> 372
MORGAN STANLEY
GLOBAL EQUITY FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<S> <C>
COMMON STOCKS (96.1%)
AUSTRALIA (0.3%)
(a)893,600 Telstra Corp., Ltd............................... $ 1,886
--------
CANADA (3.4%)
94,600 Potash Corp. of Saskatchewan, Inc................ 7,878
(a)130,000 Renaissance Energy, Ltd.......................... 2,683
385,500 TELUS Corp....................................... 8,549
--------
19,110
--------
FINLAND (0.5%)
210,000 Valmet Oyj....................................... 2,897
--------
FRANCE (5.3%)
62,300 Elf Aquitaine.................................... 7,246
(a)149,900 France Telecom S.A............................... 5,437
33,600 Groupe Danone RFD................................ 6,002
166,000 Scor............................................. 7,938
(a)55,600 SGS-Thomson Microelectronics N.V................. 3,441
--------
30,064
--------
GERMANY (5.5%)
223,400 BASF AG.......................................... 7,973
215,000 Bayer AG......................................... 7,977
133,400 Veba AG.......................................... 9,084
11,000 Viag AG.......................................... 6,023
--------
31,057
--------
HONG KONG (0.8%)
2,330,000 Hysan Development Co............................. 4,646
--------
IRELAND (3.1%)
604,400 Bank of Ireland.................................. 9,304
470,000 Green Property plc............................... 2,675
978,500 Irish Life plc................................... 5,611
--------
17,590
--------
ITALY (2.4%)
1,700,000 Mediaset S.p.A................................... 8,351
(a)1,273,000 Telecom Italia S.p.A............................. 5,613
--------
13,964
--------
JAPAN (7.9%)
939,000 Daicel Chemical Industries, Ltd.................. 1,223
142,000 Fuji Photo Film Co............................... 5,442
911,000 Fujisawa Pharmaceutical Co., Ltd................. 7,960
335,000 Hitachi, Ltd..................................... 2,388
600 Japan Tobacco, Inc............................... 4,258
460,000 Matsushita Electric Industrial Co., Ltd.......... 6,734
2,783,000 NKK Corp......................................... 2,218
1,069,000 Shionogi & Co.................................... 4,900
773,000 Sumitomo Marine & Fire Insurance Co.............. 4,088
77,000 TDK Corp......................................... 5,807
--------
45,018
--------
NETHERLANDS (2.6%)
(a)148,400 Benckiser N.V. `B'............................... 6,140
200,000 ING Groep N.V.................................... 8,424
--------
14,564
--------
NEW ZEALAND (1.1%)
2,928,900 Lion Nathan, Ltd................................. 6,565
--------
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<S> <C>
PORTUGAL (0.9%)
203,500 Cimpor-Cimentos de Portugal S.A.................. $ 5,334
--------
SINGAPORE (0.7%)
1,608,000 Jardine Strategic Holdings, Ltd.................. 4,245
--------
SPAIN (2.4%)
610,400 Iberdrola S.A.................................... 8,033
188,600 Telefonica de Espana............................. 5,385
--------
13,418
--------
SWEDEN (1.7%)
(a)1,722,700 Nordbanken Holding AB............................ 9,742
--------
SWITZERLAND (5.6%)
6,000 ABB AG (Bearer).................................. 7,538
(a)1,800 Ascom Holding AG (Bearer)........................ 2,317
13,100 Forbo Holding AG (Registered).................... 5,355
9,900 Holderbank Financiere Glarus AG `B' (Bearer)..... 8,080
5,600 Nestle S.A. (Registered)......................... 8,393
--------
31,683
--------
UNITED KINGDOM (11.1%)
589,700 BG plc........................................... 2,655
304,800 Burmah Castrol plc............................... 5,309
1,255,900 English China Clays plc.......................... 5,531
838,300 Imperial Tobacco Group plc....................... 5,276
722,500 Peninsular & Oriental Steam Navigation Co........ 8,222
811,800 Premier Farnell plc.............................. 5,843
695,100 Racal Electronic plc............................. 3,050
915,500 Reckitt & Colman plc............................. 14,368
628,800 Royal & Sun Alliance Insurance Group plc......... 6,334
1,402,700 WPP Group plc.................................... 6,247
--------
62,835
--------
UNITED STATES (40.8%)
279,400 Albertson's, Inc................................. 13,237
100,600 Aluminum Co. of America.......................... 7,080
275,100 American Stores Co............................... 5,657
286,200 Boise Cascade Corp............................... 8,658
180,400 Borg-Warner Automotive, Inc...................... 9,381
81,900 Chase Manhattan Corp............................. 8,968
337,900 COMSAT Corp...................................... 8,194
365,000 Danka Business Systems plc....................... 5,817
(a)623,300 Data General Corp................................ 10,869
(a)535,300 Egghead, Inc..................................... 3,479
37,100 Enhance Financial Services Group, Inc............ 2,207
117,300 FINOVA Group, Inc................................ 5,828
128,400 General Signal Corp.............................. 5,417
(a)456,900 GenRad, Inc...................................... 13,793
121,500 Georgia-Pacific Corp............................. 7,381
(a)121,500 Georgia-Pacific Corp. (Timber Group)............. 2,757
217,700 Houghton Mifflin Co.............................. 8,354
200,000 IBP, Inc......................................... 4,187
129,300 MBIA, Inc........................................ 8,639
(a)255,000 NCR Corp......................................... 7,092
(a)174,900 Noble Drilling Corp.............................. 5,356
158,500 Penncorp Financial Group, Inc.................... 5,656
324,500 Pharmacia & Upjohn, Inc.......................... 11,885
390,100 Philip Morris Cos., Inc.......................... 17,676
99,300 Tecumseh Products Co. `A'........................ 4,841
</TABLE>
22
The accompanying notes are an integral part of the financial statements.
<PAGE> 373
MORGAN STANLEY
GLOBAL EQUITY FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<S> <C>
UNITED STATES (CONT.)
178,600 Tenneco, Inc..................................... $ 7,055
199,100 Terra Nova (Bermuda) Holdings Ltd., `A'.......... 5,226
166,100 The B.F. Goodrich Co............................. 6,883
205,600 Tupperware Corp.................................. 5,731
197,200 United Dominion Industries....................... 4,992
(a)151,800 United Meridian Corp............................. 4,269
199,100 UST Corp......................................... 5,525
--------
232,090
--------
TOTAL COMMON STOCKS (COST $551,567)............................. 546,708
--------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
- ------------
<S> <C>
SHORT-TERM INVESTMENTS (9.4%)
U. S. TREASURY SECURITY (4.9%)
$ 28,000 U.S. Treasury Bill 1/2/98........................ 28,000
--------
REPURCHASE AGREEMENT (4.5%)
25,400 Chase Securities, Inc., 5.95%, dated 12/31/97,
due 1/2/98, to be repurchased at $25,408,
collateralized by $20,225 U.S. Treasury Bonds,
8.125%, due 8/15/19, valued at $25,951......... 25,400
--------
TOTAL SHORT-TERM INVESTMENTS (COST $53,400)..................... 53,400
--------
TOTAL INVESTMENT IN SECURITIES (105.5%) (COST $604,967)......... 600,108
--------
FOREIGN CURRENCY (0.3%)
AUD 1,787 Australian Dollar................................ 1,164
IEP 283 Irish Punt....................................... 403
NZD 154 New Zealand Dollar............................... 89
--------
TOTAL FOREIGN CURRENCY (COST $1,727)............................ 1,656
--------
TOTAL INVESTMENTS (105.8%) (COST $606,694)...................... 601,764
LIABILITIES IN EXCESS OF OTHER ASSETS (-5.8%)................... (33,126)
--------
NET ASSETS (100%)............................................... $568,638
--------
--------
</TABLE>
- ---------------
(a) -- Non-income producing security
RFD -- Ranked for Dividend
23
The accompanying notes are an integral part of the financial statements.
<PAGE> 374
MORGAN STANLEY
GLOBAL EQUITY FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
DECEMBER 31, 1997
(UNAUDITED)
- --------------------------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE INFORMATION:
Under the terms of foreign currency contracts open at December 31, 1997, the
Portfolio is obligated to deliver or is to receive foreign currency in exchange
for U.S. dollars as indicated below:
<TABLE>
<CAPTION>
CURRENCY IN EXCHANGE
TO DELIVER VALUE SETTLEMENT FOR VALUE NET UNREALIZED
(000) (000) DATE (000) (000) GAIN (LOSS) (000)
- ----------- --------- ----------- ----------- --------- -----------------
<S> <C> <C> <C> <C> <C>
$ 2,894 $ 2,894 1/2/98 FIM 15,685 $ 2,878 $ (16)
$ 3,350 3,350 1/5/98 GBP 2,025 3,327 (23)
--------- --------- ---
$ 6,244 $ 6,205 $ (39)
========= =========
</TABLE>
- ---------------
FIM -- Finnish Markka
GBP -- British Pound
- --------------------------------------------------------------------------------
SUMMARY OF FOREIGN & U.S. SECURITIES BY INDUSTRY CLASSIFICATION
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
- --------------------------------------------------------------------------------- --------- -------------
<S> <C> <C>
Finance.......................................................................... $ 107,480 18.9%
Consumer Staples................................................................. 84,164 14.8
Consumer Cyclical................................................................ 51,750 9.1
Capital Equipment................................................................ 48,338 8.5
Technology....................................................................... 44,926 7.9
Basic Industry................................................................... 43,220 7.6
Retail........................................................................... 37,533 6.6
Telecommunications............................................................... 36,395 6.4
Services......................................................................... 26,728 4.7
Utilities (Electric & Gas)....................................................... 25,591 4.5
Healthcare....................................................................... 14,217 2.5
Consumer Durable................................................................. 9,875 1.7
Energy........................................................................... 9,667 1.7
Transportation................................................................... 6,824 1.2
--------- ----
$ 546,708 96.1%
========= ====
</TABLE>
24
The accompanying notes are an integral part of the financial statements.
<PAGE> 375
MORGAN STANLEY
GLOBAL FIXED INCOME FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW
(UNAUDITED)
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1997)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Australia 4.2%
Canada 4.0%
Denmark 2.6%
Germany 12.7%
Italy 5.7%
Japan 7.9%
Spain 5.0%
Sweden 5.5%
United Kingdom 8.4%
United States 32.4%
Short-Term Investments 6.8%
Other 4.8%
</TABLE>
<TABLE>
<CAPTION>
TOTAL RETURNS**
---------------------------------------------------------------------
AVERAGE ANNUAL
SIX MONTHS ONE YEAR SINCE INCEPTION
--------------------- --------------------- ---------------------
WITH WITHOUT WITH WITHOUT WITH WITHOUT
SALES SALES SALES SALES SALES SALES
CHARGE* CHARGE CHARGE* CHARGE CHARGE* CHARGE
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class A Shares -2.51% 2.39% -3.97% 0.77% 5.28% 6.31%
- ---------------------------------------------------------------------------------------------
Class B+ Shares -2.00% 1.99% -3.77% 0.07% 2.64% 3.83%
- ---------------------------------------------------------------------------------------------
Class C Shares 0.99% 1.99% -0.89% 0.07% 5.47% 5.47%
- ---------------------------------------------------------------------------------------------
J.P. Morgan Traded
Global Bond Index:
Class A & C Shares N/A 2.52% N/A 1.40% N/A 7.51%
Class B Shares N/A 2.52% N/A 1.40% N/A 3.54%
- ---------------------------------------------------------------------------------------------
</TABLE>
* The returns above are calculated using the applicable sales charge for Class
A shares and the applicable deferred sales charge for Class B and Class C
shares.
** Total returns for the Fund reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waivers and reimbursements, total
returns would be lower.
+ Class B shares have been offered since August 1, 1995.
The J.P. Morgan Traded Global Bond Index is an unmanaged index of government
bond issues that includes Australia, Belgium, Canada, Denmark, France, Germany,
Italy, Japan, the Netherlands, Spain, Sweden, the United Kingdom and the United
States excluding withholding tax.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
<TABLE>
<CAPTION>
TOP FIVE HOLDINGS
PERCENT OF
SECURITY CURRENCY NET ASSETS
- -------- ------------ ----------
<S> <C> <C>
U.S. Treasury Note 7.25%, 5/15/04 U.S. Dollar 14.1%
U.S. Treasury Bond 8.125%, 8/15/19 U.S. Dollar 8.8%
United Kingdom 9.50%, 4/18/05 British 6.1%
Pound
Swedish Government 6.00%, 2/9/05 Swedish 5.5%
Krona
U.S. Treasury Note 5.125%, 11/30/98 U.S. Dollar 4.9%
</TABLE>
<TABLE>
<CAPTION>
TOP FIVE CURRENCY DENOMINATIONS
VALUE PERCENT OF
CURRENCY (000) NET ASSETS
- -------- ----------- -------------
<S> <C> <C>
U.S. Dollar $ 3,724 32.4%
German Mark 1,209 12.7%
British Pound 799 8.4%
Japanese Yen 747 7.9%
Italian Lira 543 5.7%
</TABLE>
The Global Fixed Income Fund seeks to produce an attractive real rate of return
while preserving capital by investing in fixed-income securities of U.S. and
foreign issuers denominated in U.S. dollars and in other currencies. For the six
months ended December 31, 1997, the Fund achieved a total return of 2.39 percent
(Class A shares at net asset value). By comparison, the J.P. Morgan Traded
Global Bond Index returned 2.52 percent during the same period.
Global fixed-income markets in every country rallied during the second half of
1997. After a solid third quarter, the market began to focus on the likely
impact of the Asian economic crisis. A consensus view emerged that the region's
problems would reduce world economic growth and that the devaluation of Asian
currencies would increase competitive pressures globally, thereby keeping
inflation in check. Both developments are positive for bond markets.
In Japan, where the Asian impact is expected to be greatest, 10-year bond yields
fell 82 basis points despite concerns about the financial sector, particularly
the high-profile collapse of Yamaichi Securities in November. U.S. Treasury
bonds also benefited from their "safe haven" status, benign inflation data, and
the belief that any tightening in monetary policy by the Federal Reserve Board
was now on hold despite evidence of strong economic activity. As a result, the
yield on 10-year Treasuries fell 83 basis points, taking the long bond close to
5.90 percent. Bonds in Australia also performed well as a result of the ongoing
Asian crisis, and 10-year yields fell 106 basis points.
Although European bond markets benefited from developments in Asia, the
continued political move towards monetary union was the dominant theme, as
reflected in the further yield convergence of higher-yielding markets towards
Germany. Italian and Spanish bonds rallied strongly, and their 10-year yields
fell 115 and 81 basis points, respectively. Both markets responded positively to
interest-rate cuts in December, and Italy received a further boost from the
final approval of its 1998 budget. Attention also shifted to those countries
that may be part of the second stage of European Monetary Union, with yields in
the U.K. and Sweden contracting dramatically towards Germany. Bonds in core
European markets were the poorest performers, although 10-year
THE PERFORMANCE RESULTS PROVIDED IN THIS OVERVIEW ARE FOR INFORMATIONAL PURPOSES
ONLY AND SHOULD NOT BE CONSTRUED AS A GUARANTEE OF THE FUND'S FUTURE
PERFORMANCE. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN
INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL
COST. PLEASE SEE THE PROSPECTUS FOR A DESCRIPTION OF CERTAIN RISK CONSIDERATIONS
ASSOCIATED WITH INTERNATIONAL INVESTING. YIELDS WILL FLUCTUATE AS MARKET
CONDITIONS CHANGE.
25
<PAGE> 376
MORGAN STANLEY
GLOBAL FIXED INCOME FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
(UNAUDITED)
yields still declined by 25 to 37 basis points. However, the drop in rates in
core European markets was part of an overall flattening of the curve, as yields
at the short-end rose in response to monetary tightening early in the fourth
quarter.
In a continuation of the trend in place during the first half of the year, bond
market returns in U.S. dollar terms were significantly reduced as the dollar
gained on its "safe haven" status. During the reporting period, the dollar rose
3.1 percent versus the Deutsche mark and 12.4 percent against the Japanese yen.
The Australian and New Zealand dollars fared particularly poorly, falling 13.4
percent and 14.8 percent against the American dollar, respectively.
These developments resulted in a 2.5 percent return in the second half of 1997
for the J.P. Morgan Global Government Bond Index. During the period, the Fund
benefited from its overweighting to higher-yielding European, Australian, Irish,
and U.K. bonds. On the currency side, the Fund benefited from its overweighting
to the U.S. dollar at the expense of the Japanese yen. The duration of the Fund
at the end of December was 4.8 years. This slightly short duration was mainly a
result of our Japanese position and was a negative factor.
Strategy changes included a reduction in exposure to Japanese bonds, with
proceeds being placed in the Australian market. A position in the 5-year U.S.
Treasury inflation-protected security was also purchased to take advantage of
its relative cheapness. On the currency front, there was a 2 percent reduction
in our underweighting of the Japanese yen in favor of the U.S. dollar. Other
moves included small increases in exposure to the Spanish peseta and Swedish
krona.
Although the Asian crisis will hinder economic growth, expansions in Europe and
North America are expected to continue. In the United States, the Asian crisis
should help lower economic growth to a more sustainable pace. This reduction,
combined with the likely downward pressure on the prices of goods resulting from
the increased competitiveness of Asian exporters, will act to prevent any
near-term tightening on the part of the Federal Reserve. U.S. labor markets are
very tight, however, and the prospect remains for increases in both U.S. wages
and service-sector prices. Within Europe, inflation remains low. Competitive
exchange rates to the dollar and low interest rates continue to promote a
broadening of the recovery. The impact from Asia will also be less pronounced in
Europe than in the United States. We therefore remain cautious about increasing
interest-rate exposure in North America or Europe at the current time. In Japan,
we retain the view that the exceptionally low levels of Japanese yields offer
minimal value despite the dire state of its economy.
IMPORTANT FUND UPDATE
On October 23, 1997, the Trustees of the Fund approved its reorganization into
the Van Kampen American Capital Global Government Securities Fund. Upon
shareholder approval, the reorganization of the Fund is expected to take place
prior to June 30, 1998. More information about the reorganization will be
forwarded to you in a proxy statement in the near future.
Your Fund and the Van Kampen American Capital Global Government Securities Fund
have similar investment objectives and similar investment policies and
practices, and are managed by the same portfolio management team, with the
addition of Richard B. Worley. Both funds seek a high level of current income
while preserving capital, and both funds invest primarily in the debt securities
of issuers located in at least three different countries in attempting to
achieve their investment objectives.
J. David Germany Michael B. Kushma
PORTFOLIO MANAGER PORTFOLIO MANAGER
Paul F. O'Brien Richard B. Worley
PORTFOLIO MANAGER PORTFOLIO MANAGER
26
<PAGE> 377
MORGAN STANLEY
GLOBAL FIXED INCOME FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- -----------------------------------------------------------------------
<S> <C>
FIXED INCOME SECURITIES (91.0%)
AUSTRALIAN DOLLAR (4.2%)
GOVERNMENT BONDS
AUD 250 Government of Australia 9.00%, 9/15/04........... $ 191
100 Government of Australia 7.50%, 9/15/09........... 72
------
263
------
U.S. GOVERNMENT & AGENCY OBLIGATIONS-GLOBAL
200 Federal National Mortgage Association 6.50%,
7/10/02........................................ 133
------
TOTAL AUSTRALIAN DOLLAR...................................... 396
------
BRITISH POUND (8.4%)
GOVERNMENT BONDS
GBP 300 United Kingdom 9.50%, 4/18/05.................... 579
110 United Kingdom 8.00%, 6/7/21..................... 220
------
TOTAL BRITISH POUND.......................................... 799
------
CANADIAN DOLLAR (4.0%)
GOVERNMENT BONDS
CAD 300 Government of Canada 7.50%, 3/1/01............... 223
180 Government of Canada 8.75%, 12/1/05.............. 151
------
TOTAL CANADIAN DOLLAR........................................ 374
------
DANISH KRONE (2.6%)
GOVERNMENT BOND
DKK 1,500 Kingdom of Denmark 8.00%, 5/15/03................ 247
------
GERMAN MARK (12.7%)
CORPORATE BONDS
DEM 150 KFW International Finace, Inc. 7.50%, 1/24/00.... 88
200 Landeskreditbank Baden-Wuerttemberg Financial
6.63%, 8/20/03................................. 119
------
207
------
GOVERNMENT BONDS
200 Deutschland Republic 6.25%, 1/4/24............... 117
450 German Unity Fund 8.00%, 1/21/02................. 280
450 Treuhandanstalt 7.00%, 11/25/99.................. 265
540 Treuhandanstalt 7.50%, 9/9/04.................... 340
------
1,002
------
TOTAL GERMAN MARK............................................ 1,209
------
IRISH PUNT (2.6%)
GOVERNMENT BOND
IEP 150 Government of Ireland 8.00%, 8/18/06............. 249
------
ITALIAN LIRA (5.7%)
GOVERNMENT BONDS
ITL 400,000 Buoni Poliennali Del Tes 10.00%, 8/1/03.......... 276
150,000 Buoni Poliennali Del Tes 9.50%, 1/1/05........... 104
230,000 Buoni Poliennali Del Tes 9.50%, 2/1/06........... 163
------
TOTAL ITALIAN LIRA........................................... 543
------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- -----------------------------------------------------------------------
<S> <C>
JAPANESE YEN (7.9%)
EUROBONDS
JPY 25,000 Export Import Bank of Japan 4.38%, 10/1/03....... $ 222
27,000 Japan Development Bank 6.50%, 9/20/01............ 248
30,000 World Bank 4.75%, 12/20/04....................... 277
------
TOTAL JAPANESE YEN........................................... 747
------
SPANISH PESETA (5.0%)
GOVERNMENT BONDS
ESP 50,000 Spanish Government 8.30%, 12/15/98............... 339
20,000 Spanish Government 7.40%, 7/30/99................ 137
------
TOTAL SPANISH PESETA......................................... 476
------
SWEDISH KRONA (5.5%)
GOVERNMENT BOND
SEK 4,100 Swedish Government 6.00%, 2/9/05................. 520
------
UNITED STATES DOLLAR (32.4%)
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (32.4%)
U.S. TREASURY BONDS
$ 665 8.125%, 8/15/19.................................. 832
40 7.625%, 2/15/25.................................. 49
------
881
------
U.S. TREASURY NOTES
465 5.125%, 11/30/98................................. 463
200 6.25%, 10/31/01.................................. 204
192 3.625%, 7/15/02 (Inflation Indexed).............. 191
1,238 7.25%, 5/15/04................................... 1,336
------
2,194
------
TOTAL UNITED STATES DOLLAR................................... 3,075
------
TOTAL FIXED INCOME SECURITIES (COST $8,661).................... 8,635
------
SHORT-TERM INVESTMENT (6.8%)
REPURCHASE AGREEMENT (6.8%)
UNITED STATES DOLLAR
649 Chase Securities, Inc., 5.95%, dated 12/31/97,
due 1/2/98, to be repurchased at $649,
collateralized by $660 U.S. Treasury Notes,
5.625%, due 2/15/06, valued at $667 (COST
$649).......................................... 649
------
FOREIGN CURRENCY (0.0%)
JPY 713 Japanese Yen (COST $6)........................... 6
------
TOTAL INVESTMENTS (97.8%) (COST $9,316)........................ 9,290
OTHER ASSETS IN EXCESS OF LIABILITIES (2.2%)................... 203
------
NET ASSETS (100%).............................................. $9,493
======
</TABLE>
- ---------------
Inflation Indexed Security -- Security includes principal adjustment feature in
which par amount adjusts with the Consumer Price Index to insulate bonds from
the effects of inflation. The face amount shown is that in effect on December
31, 1997.
27
The accompanying notes are an integral part of the financial statements.
<PAGE> 378
MORGAN STANLEY
GLOBAL FIXED INCOME FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
DECEMBER 31, 1997
(UNAUDITED)
- --------------------------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE INFORMATION:
Under the terms of foreign currency contracts open at December 31, 1997, the
Portfolio is obligated to deliver or is to receive foreign currency in exchange
for U.S. dollars as indicated below:
<TABLE>
<CAPTION>
CURRENCY IN EXCHANGE
TO DELIVER VALUE SETTLEMENT FOR VALUE NET UNREALIZED
(000) (000) DATE (000) (000) GAIN (LOSS) (000)
- ------------- --------- ----------- ------------- --------- -----------------
<S> <C> <C> <C> <C> <C>
ITL 26 $ -- 1/2/98 $ -- $ -- $ --
ESP 10,000 65 1/9/98 $ 68 68 3
$ 29 29 1/9/98 ESP 4,345 28 (1)
AUD 500 326 1/16/98 $ 338 338 12
IEP 170 242 1/16/98 $ 250 250 8
SEK 540 68 1/16/98 $ 69 69 1
GBP 52 85 1/16/98 $ 87 87 2
$ 39 39 1/16/98 CAD 55 39 --
$ 176 176 1/16/98 DEM 311 173 (3)
--------- --------- ---------
$ 1,030 $ 1,052 $ 22
========= ========= =========
</TABLE>
- ---------------
AUD -- Australian Dollar
GBP -- British Pound
CAD -- Canadian Dollar
DEM -- German Mark
IEP -- Irish Punt
ITL -- Italian Lira
ESP -- Spanish Peseta
SEK -- Swedish Krona
28
The accompanying notes are an integral part of the financial statements.
<PAGE> 379
MORGAN STANLEY
ASIAN GROWTH FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW
(UNAUDITED)
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1997)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
China 2.8%
Hong Kong 38.9%
India 6.4%
Indonesia 3.0%
Korea 3.1%
Malaysia 4.5%
Philippines 5.4%
Singapore 15.1%
Taiwan 15.3%
Thailand 1.6%
Other 3.9%
</TABLE>
<TABLE>
<CAPTION>
TOTAL RETURNS**
---------------------------------------------------------------------
AVERAGE ANNUAL
SIX MONTHS ONE YEAR SINCE INCEPTION
--------------------- --------------------- ---------------------
WITH WITHOUT WITH WITHOUT WITH WITHOUT
SALES SALES SALES SALES SALES SALES
CHARGE* CHARGE CHARGE* CHARGE CHARGE* CHARGE
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class A Shares -52.82% -49.96% -52.14% -49.22% -7.89% -6.68%
- -----------------------------------------------------------------------------------------------------
Class B+ Shares -52.66% -50.17% -52.15% -49.64% -25.93% -25.01%
- -----------------------------------------------------------------------------------------------------
Class C Shares -50.64% -50.14% -50.11% -49.61% -7.34% -7.34%
- -----------------------------------------------------------------------------------------------------
MSCI CFEF ex-Japan
Index:
Class A & C Shares N/A -45.59% N/A -45.48% N/A -3.67%
Class B Shares N/A -45.59% N/A -45.48% N/A -19.84%
- -----------------------------------------------------------------------------------------------------
</TABLE>
* The returns above are calculated using the applicable sales charge for Class
A shares and the applicable deferred sales charge for Class B and Class C
shares.
** Total returns for the Fund reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waivers and reimbursements, total
returns would be lower.
+ Class B shares have been offered since August 1, 1995.
The Morgan Stanley Capital International (MSCI) Combined Far East Free (CFEF)
ex-Japan Index is an unmanaged index of common stocks and includes Indonesia,
Hong Kong, Malaysia, the Philippines, Korea, Taiwan and Thailand and assumes
dividends are reinvested.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
<TABLE>
<CAPTION>
TOP FIVE HOLDINGS
PERCENT OF
ISSUER COUNTRY NET ASSETS
- ------ --------- --------------
<S> <C> <C>
Cheung Kong Holdings Ltd. Hong Kong 10.6%
HSBC Holdings plc Hong Kong 5.5%
Hutchinson Whampoa Ltd. Hong Kong 5.4%
China Light & Power Co., Ltd. Hong Kong 5.3%
Asustek Computer, Inc. Taiwan 4.1%
</TABLE>
<TABLE>
<CAPTION>
TOP FIVE SECTORS
VALUE PERCENT OF
SECTOR (000) NET ASSETS
- ------ --------- -------------
<S> <C> <C>
Finance $ 48,957 37.8%
Capital Equipment 19,358 14.9%
Energy 14,948 11.5%
Consumer Goods 14,199 11.0%
Services 12,207 9.4%
</TABLE>
The investment objective of the Asian Growth Fund is long-term capital
appreciation through investments primarily in equity securities of Asian issues,
excluding Japan.
For the six months ended December 31, 1997, the Fund generated a total
return of -49.96 percent for the Class A shares at net asset value, as compared
to a total return of -45.59 percent for the Morgan Stanley Capital International
(MSCI) Combined Far East Free ex-Japan Index.
Asian markets continued to witness steep losses in the second half of 1997, with
the MSCI Combined Far East Free ex-Japan Index recording a decline of 45.6
percent. None of the Asian equity markets posted a positive return during the
reporting period. In relative terms, the region's "best" performers were Taiwan
(-26.5 percent) and Hong Kong (-31.4 percent). Five of the nine countries
encompassing the Index suffered declines of more than 50 percent, including
Indonesia (-75.9 percent), Korea (-70.2 percent), Malaysia (-64.2 percent),
Thailand (-60.3 percent), and the Philippines (-57.8 percent).
The Asian crisis is the result of excessive credit creation throughout the
region. However, the trigger for the collapse was the de-pegging of the Thai
baht on July 2, a move that forced regional currencies and equity markets into
vicious downward spirals. In Thailand, the devaluation in the baht was
exacerbated by the country's large current-account deficit and the substantial
amount of unhedged U.S.-dollar corporate loans. Despite a change of government
and a bailout package led by the International Monetary Fund (IMF), the Thai
stock market was down nearly 90 percent from its peak two years ago. While the
IMF has been successful in closing shaky financial institutions, an absence of
confidence in the Thai currency and illiquidity in most stocks led many
international investors to desert Thailand's equity market.
The currency depreciation in Thailand quickly spread to other Southeast Asian
countries. Most severely impacted was Indonesia. Despite significant
improvements on the country's macro-economic front in recent years, the rapid
erosion of domestic and foreign confidence in the economy and the rupiah brought
the currency down 56 percent by year end. Indonesian corporations and banks with
large exposure to U.S. dollar-denominated debt deepened the currency crisis.
Meanwhile, skyrocketing domestic interest rates hastened the pace of corporate
bankruptcies. The ensuing economic downturn, as well as concerns about the
health of Indonesia's ailing patriarch President Suharto, dampened market
sentiment as the reporting period ended.
THE COUNTRY-SPECIFIC PERFORMANCE RESULTS PROVIDED IN THIS OVERVIEW ARE AS
MEASURED BY THE MSCI COMBINED FAR EAST FREE EX-JAPAN INDEX AND ARE FOR
INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED AS A GUARANTEE OF THE
FUND'S FUTURE PERFORMANCE. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE
SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN
THEIR ORIGINAL COST. PLEASE SEE THE PROSPECTUS FOR A DESCRIPTION OF CERTAIN RISK
CONSIDERATIONS ASSOCIATED WITH INTERNATIONAL INVESTING.
29
<PAGE> 380
MORGAN STANLEY
ASIAN GROWTH FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
(UNAUDITED)
The contagion effect that lashed Southeast Asia subsequently transmitted to
Northeast Asia, with the Korean won depreciating by 47 percent. In the fourth
quarter, the Korean stock market declined sharply amid concerns about the credit
quality of the country's financial sector and the ability of Korean corporations
to repay foreign short-term obligations. Korea's economic downturn was a result
of excessive expansion and over-leverage by Korean chaebols (business
conglomerates), which comprise over 70 percent of the country's gross domestic
product. Several large chaebols, including Sammi, Hanbo, Kia, and Jinro, entered
into court receivership with debt-to-equity ratios well above 500 percent. In
the latter part of the year, the IMF stepped in and Korea was forced to
undertake quick liberalization and reform measures, including the opening of its
capital markets.
Even Hong Kong did not escape unscathed from the regional turmoil. Although its
currency board system meant that the Hong Kong dollar remain pegged to the U.S.
dollar, the cost was levied through a sharp rise in interest rates. The equity
market, dominated by interest-sensitive stocks in the property and banking
sectors, reversed the 20 percent return it had posted through September and
plummeted to a final -25 percent performance for the year. Hong Kong property
prices, among the most expensive in the world, fell 30 percent in four months as
asset deflation replaced currency depreciation.
As the initial equity-market victims in ASEAN (a trade group of eight Southeast
Asian nations) remain nearly 70 percent below their peaks, focus has now shifted
to Northeast Asia. The imminent demise of the Korean economy (the 11th largest
in the world) has awakened global investors to the risks of a worldwide
contagion and begun to elicit concerted responses from the United States and the
international community.
As other Asian currencies and markets fall, however, remaining markets such as
Hong Kong, Singapore, and Taiwan look relatively more expensive and vulnerable.
In particular, Hong Kong's currency peg to the U.S. dollar is exacting a heavy
toll on its economy. There also remains a risk that an economic slowdown in
China may compound the already-difficult economic conditions in Hong Kong.
Should China falter, Taiwan would be seriously impacted. Already, Taiwan is
experiencing weakness in its technology and electronics sectors. Any fallout in
the electronics area will also cause problems for Singapore, which already is
contending with the devastation of its ASEAN trading partners.
As a result of these risks, we would look to reduce our exposure to Hong Kong
and China. We also seek to hedge our currency exposure to the Hong Kong dollar,
the New Taiwan dollar, and the Singapore dollar. Concurrently, we would be
seeking to put money to work in selected stocks in the more devastated markets
that are beginning to offer compelling values for the patient investor.
We anticipate 1998 to be a very difficult year for the region. The effect of the
fallout on the regional markets is just beginning to filter through to the real
economy, and the year likely will be marked by corporate collapses and massive
layoffs. In turn, many Asian nations could experience economic recession as well
as political and social unrest.
Although there are no signs of stabilization for equity prices or currency
values, and despite the ongoing crisis of confidence, the speed at which some of
the regional currencies and markets are sliding would indicate a climatic
condition. Under these circumstances, it is our view that now is not the time
for serious investors to exit these markets. Indeed, investors with the luxury
of a longer-term horizon may stand to reap massive long-term gains by
capitalizing on this monumental meltdown in the Asian markets. Our strategy will
be to concentrate on identifying and acquiring those companies that represent
irreplaceable franchises and that are currently available at bargain-basement
prices.
Vinod Sethi Ean Wan Chin
PORTFOLIO MANAGER PORTFOLIO MANAGER
30
<PAGE> 381
MORGAN STANLEY
ASIAN GROWTH FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- -----------------------------------------------------------------------------
<S> <C>
COMMON STOCKS (95.8%)
CHINA (2.8%)
3,179,000 Qingling Motors Co., `H'......................... $ 1,559
65,340 Shenzhen Fangda Co., Ltd. `B'.................... 75
(a)5,792,000 Zhejiang Expressway Co., Ltd. `H'................ 1,173
(a)2,416,000 Zhejiang Southeast Electric Power Co., Ltd.
`B'............................................ 778
--------
3,585
--------
HONG KONG (38.9%)
2,102,000 Cheung Kong Holdings Ltd......................... 13,767
1,235,000 China Light & Power Co., Ltd..................... 6,853
806,000 Dao Heng Bank Group Ltd.......................... 2,013
1,461,800 Hong Kong Telecommunications Ltd................. 3,009
290,400 HSBC Holdings plc................................ 7,158
1,107,600 Hutchison Whampoa Ltd............................ 6,947
2,528,700 Ng Fung Hong Ltd................................. 2,659
115,000 Shanghai Industrial Holdings Ltd................. 427
569,900 Sun Hung Kai Properties Ltd...................... 3,971
518,000 Swire Pacific Ltd. `A'........................... 2,841
47,000 Television Broadcasting Ltd...................... 134
1,629,000 Zhenhai Refining & Chemical Co................... 678
--------
50,457
--------
INDIA (6.4%)
133,700 Bharat Heavy Electricals Ltd..................... 1,207
40,000 Castrol Ltd...................................... 760
30,000 Container Corp. of India Ltd..................... 322
(a)25,000 Hoechst Marion Roussel Ltd....................... 215
42,000 Housing Development Finance Corp., Ltd........... 3,297
12,800 SmithKline Beecham Consumer Healthcare Ltd....... 107
211,450 State Bank of India.............................. 1,311
135,000 Tata Engineering & Locomotive Co., Ltd........... 1,020
--------
8,239
--------
INDONESIA (3.0%)
68,000 Bat Indonesia (Foreign).......................... 321
227,000 Gudang Garam (Foreign)........................... 346
(a)57,500 Gulf Indonesia Resources Ltd. (Foreign).......... 1,265
(a)6,445,000 Makindo Tbk (Foreign)............................ 1,143
1,123,500 Telekomunikasi (Foreign)......................... 597
34,000 Unilever Indonesia (Foreign)..................... 186
--------
3,858
--------
KOREA (2.8%)
(e)17,082 Housing & Commercial Bank GDR (Foreign).......... 90
(d)200 Korea Mobile Telecommunications Corp............. 60
19,537 LG Information & Communication (Foreign)......... 547
(d)27,462 Pohang Iron & Steel Ltd. (Foreign)............... 766
80,909 Samsung Electronics Co. (Foreign)................ 1,833
(a)24,095 Samsung Electronics Co. GDR (New)................ 342
--------
3,638
--------
MALAYSIA (4.5%)
154,000 Dialog Group Bhd................................. 265
414,400 Genting Bhd...................................... 1,039
53,000 Kuala Lumpur Kepong Bhd.......................... 114
276,000 Telekom Malaysia Bhd............................. 816
<CAPTION>
VALUE
SHARES (000)
- -----------------------------------------------------------------------------
<S> <C>
1,612,000 Tenaga Nasional Bhd.............................. $ 3,440
149,000 United Engineers Bhd............................. 124
--------
5,798
--------
PHILIPPINES (5.4%)
3,663,496 Ayala Land, Inc. `B'............................. 1,447
(a)2,775,000 Fil-Estate Land, Inc............................. 81
411,965 Manila Electric `B'.............................. 1,363
(a)5,610,000 Music Corp....................................... 2,009
786,000 San Miguel Corp. `B'............................. 960
8,158,180 SM Prime Holdings, Inc........................... 1,209
--------
7,069
--------
SINGAPORE (15.1%)
(a)93,600 Creative Technology Ltd.......................... 2,059
223,500 Development Bank of Singapore (Foreign).......... 1,914
269,000 Electronic Resources Ltd......................... 274
(a)589,000 NatSteel Ltd..................................... 757
865,238 Oversea-Chinese Banking Corp. (Foreign).......... 5,043
584,000 Parkway Holdings Ltd............................. 1,320
207,400 Singapore Press Holdings (Foreign)............... 2,602
902,000 United Overseas Bank Ltd. (Foreign).............. 5,016
155,000 Venture Manufacturing Ltd........................ 433
(a)12,000 Want Want Holdings............................... 16
93,000 Wing Tai Holdings Ltd............................ 109
--------
19,543
--------
TAIWAN (15.3%)
(a)319,000 Asustek Computer, Inc............................ 5,055
(a)16,600 Asustek Computer, Inc., GDR...................... 265
322,000 Cathay Construction Corp......................... 367
(a)218,950 China Development Corp........................... 624
(a)951,383 Compal Electronics, Inc.......................... 2,770
(a)106,000 Delpha Construction Co., Ltd..................... 159
97,000 Delta Electronics, Inc........................... 387
2,714,287 Far Eastern Textile, Ltd......................... 2,945
(a)680,000 Hon Hai Precision Industry....................... 3,439
(a)312,500 Kuoyang Construction............................. 589
(a)338,000 Pou Chen Corp.................................... 1,388
788,000 Siliconware Precision Industries Co.............. 1,860
--------
19,848
--------
THAILAND (1.6%)
15,000 Advanced Info Service Public Co., Ltd.
(Foreign)...................................... 72
(a,d)115,000 Bangkok Expressway Public Co., Ltd. (Foreign).... 64
(d)29,000 BEC World Public Co., Ltd. (Foreign)............. 116
(d)200,900 CVD Entertainment Public Co., Ltd. (Foreign)..... 105
947,700 Eastern Water Resources Development Public Co.,
Ltd............................................ 984
(d)68,700 Nation Multimedia Group Public Co., Ltd.
(Foreign)...................................... 18
(d)983,000 National Petrochemical Public Co., Ltd........... 521
(d)35,000 Thai Storage Battery Public Co., Ltd.
(Foreign)...................................... 29
(d)174,900 Thai Theparos Food Product Public Co., Ltd.
(Foreign)...................................... 169
--------
2,078
--------
TOTAL COMMON STOCKS (COST $158,053)................................ 124,113
--------
</TABLE>
31
The accompanying notes are an integral part of the financial statements.
<PAGE> 382
MORGAN STANLEY
ASIAN GROWTH FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- -----------------------------------------------------------------------------
<S> <C>
INVESTMENT COMPANY (0.3%)
KOREA (0.3%)
(a)58,000 Korea Fund, Inc. (COST $592)..................... $ 384
--------
TOTAL FOREIGN SECURITIES (96.1%) (COST $158,645)................... 124,497
--------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
- ---------------
<S> <C>
FOREIGN CURRENCY (1.7%)
HKD 5 Hong Kong Dollar................................. 1
INR 4,694 Indian Rupee..................................... 120
MYR 34 Malaysian Ringgit................................ 9
SGD 3,448 Singapore Dollar................................. 2,050
TWD 571 Taiwan Dollar.................................... 17
--------
TOTAL FOREIGN CURRENCY (COST $2,206)............................... 2,197
--------
TOTAL INVESTMENTS (97.8%) (COST $160,851).......................... 126,694
OTHER ASSETS IN EXCESS OF LIABILITIES (2.2%)....................... 2,833
--------
NET ASSETS (100%).................................................. $129,527
========
</TABLE>
- ---------------
(a) -- Non-income producing security
(d) -- Security valued at fair value -- see note A-1 to financial statements.
(e) -- 144A Security -- certain conditions for public sale may exist.
GDR -- Global Depositary Receipt
32
The accompanying notes are an integral part of the financial statements.
<PAGE> 383
MORGAN STANLEY
ASIAN GROWTH FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
DECEMBER 31, 1997
(UNAUDITED)
- --------------------------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE INFORMATION:
Under the terms of foreign currency contracts open at December 31, 1997, the
Portfolio is obligated to deliver or is to receive foreign currency in exchange
for U.S. dollars as indicated below:
<TABLE>
<CAPTION>
CURRENCY IN EXCHANGE
TO DELIVER VALUE SETTLEMENT FOR VALUE NET UNREALIZED
(000) (000) DATE (000) (000) GAIN (LOSS) (000)
- -------------- --------- ----------- ------------ --------- -----------------
<S> <C> <C> <C> <C> <C>
HKD 4,634 $ 598 1/2/98 $ 598 $ 598 $ --
MYR 4,437 1,141 1/2/98 $ 1,135 1,135 (6)
PHP 9,505 235 1/2/98 $ 234 234 (1)
SGD 3,623 2,155 1/2/98 $ 2,163 2,163 8
HKD 7,279 939 1/5/98 $ 939 939 --
MYR 702 180 1/5/98 $ 180 180 --
PHP 1,501 37 1/5/98 $ 37 37 --
SGD 192 115 1/5/98 $ 115 115 --
THB 166 3 1/5/98 $ 3 3 --
MYR 3,718 956 1/6/98 $ 953 953 (3)
PHP 3,535 87 1/6/98 $ 87 87 --
SGD 444 264 1/6/98 $ 263 263 (1)
THB 4,583 95 1/6/98 $ 95 95 --
KRW 1,861,500 1,093 2/25/98 $ 1,700 1,700 607
SGD 22,204 13,105 3/18/98 $ 12,985 12,985 (120)
--------- --------- -----
$ 21,003 $ 21,487 $ 484
========= ========= =====
</TABLE>
- ---------------
HKD -- Hong Kong Dollar
KRW -- South Korean Won
MYR -- Malaysian Ringgit
PHP -- Philippine Peso
SGD -- Singapore Dollar
THB -- Thai Baht
- --------------------------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
<TABLE>
<CAPTION>
PERCENT
OF
VALUE NET
INDUSTRY (000) ASSETS
- -------- -------- --------
<S> <C> <C>
Finance................................. $ 48,957 37.8%
Capital Equipment....................... 19,358 14.9
Energy.................................. 14,948 11.5
Consumer Goods.......................... 14,199 11.0
Services................................ 12,207 9.4
Multi-Industry.......................... 12,028 9.3
Materials............................... 2,800 2.2
-------- ----
$124,497 96.1%
======== ====
</TABLE>
33
The accompanying notes are an integral part of the financial statements.
<PAGE> 384
MORGAN STANLEY
AMERICAN VALUE FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW
(UNAUDITED)
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1997)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Banking 7.1%
Building 5.4%
Computers 4.6%
Consumer--Retail 6.0%
Consumer--Staples 7.7%
Energy 7.0%
Financial--Diversified 10.8%
Health Care 4.9%
Insurance 5.0%
Technology 6.6%
Short-Term Investments 8.0%
Other 26.9%
</TABLE>
<TABLE>
<CAPTION>
TOTAL RETURNS**
---------------------------------------------------------------------
AVERAGE ANNUAL
SIX MONTHS ONE YEAR SINCE INCEPTION
--------------------- --------------------- ---------------------
WITH WITHOUT WITH WITHOUT WITH WITHOUT
SALES SALES SALES SALES SALES SALES
CHARGE* CHARGE CHARGE* CHARGE CHARGE* CHARGE
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class A Shares 9.98% 16.66% 28.56% 36.39% 16.74% 18.39%
- -----------------------------------------------------------------------------------------------------
Class B+ Shares 11.25% 16.25% 30.41% 35.41% 23.39% 24.30%
- -----------------------------------------------------------------------------------------------------
Class C Shares 15.24% 16.24% 34.48% 35.48% 17.47% 17.47%
- -----------------------------------------------------------------------------------------------------
Russell 2500 Small Company
Index:
Class A & C Shares N/A 11.78% N/A 24.35% N/A 17.23%
Class B Shares N/A 11.78% N/A 24.35% N/A 20.63%
- -----------------------------------------------------------------------------------------------------
S&P 500 Index:
Class A & C Shares N/A 10.58% N/A 33.36% N/A 22.01%
Class B Shares N/A 10.58% N/A 33.36% N/A 28.00%
- -----------------------------------------------------------------------------------------------------
</TABLE>
* The returns above are calculated using the applicable sales charge for Class
A shares and the applicable deferred sales charge for Class B and Class C
shares.
** Total returns for the Fund reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waivers and reimbursements, total
returns would be lower.
+ Class B shares have been offered since August 1, 1995.
The Russell 2500 Small Company
Index and S&P 500 Index are
unmanaged indices of common
stocks. The S&P 500 Index assumes
dividends are reinvested.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
<TABLE>
<CAPTION>
TOP FIVE HOLDINGS
PERCENT OF
ISSUER SECTOR NET ASSETS
- ------ -------------------- ----------
<S> <C> <C>
NBTY, Inc. Consumer--Staples 1.8%
Valassis Communications, Inc. Communications 1.6%
Universal Corp. Consumer--Staples 1.5%
DIMON, Inc. Consumer--Staples 1.4%
Storage Technology Corp. Computers 1.3%
</TABLE>
<TABLE>
<CAPTION>
TOP FIVE SECTORS
VALUE PERCENT OF
SECTOR (000) NET ASSETS
- ------ ------- ----------
<S> <C> <C>
Financial--Diversified $30,913 10.8%
Consumer--Staples 22,234 7.7%
Banking 20,386 7.1%
Energy 20,243 7.0%
Technology 19,077 6.6%
</TABLE>
The American Value Fund invests in domestic small- to- medium-sized companies
that our research indicates are undervalued, of high quality, and will have the
potential to reward the shareholder through high current dividend income. The
Fund's disciplined value approach seeks to outperform the Russell 2500 Small
Company Index in the longer term. We believe our emphasis on high-quality
companies and high-yielding securities will help the Fund perform particularly
well in difficult markets.
Our stock selection process favors companies that offer the best value when
looking at the trade-off between the price/earnings ratio and the earnings
growth rate. Among the companies offering attractive value, we generally favor
those with improving near-term business prospects relative to investor
expectations. As a way of helping to control risk, the Fund is diversified
across the major economic sectors.
For the six months ended December 31, 1997, the Fund generated a total return of
16.66 percent for Class A shares at net asset value, as compared to a total
return of 11.78 percent for the Russell 2500 Small Company Index and 10.58
percent for the Standard & Poor's 500-Stock Index.
The Fund's relative performance during the reporting period benefited from stock
selection in the finance sector. In particular, North Fork Bancorporation, First
of America Bank, and Nationwide Financial Services posted strong returns. Also,
the Fund's overweight in energy service stocks (a position that we reduced after
the first half of the reporting period) contributed positively to relative
performance. Stocks from the food and tobacco sector, including NBTY (vitamins)
and Universal (tobacco leaf processing), also produced solid returns. The Fund's
underweight in the electric utility sector, as well as mediocre performance from
some of our health-care service stocks, had a negative effect on relative
returns.
We reduced our bank and thrift holdings toward the end of the reporting period
as valuations in the group became expensive. Within the finance sector, we
reinvested the bank and thrift proceeds into real estate investment trusts
(REITs). Among cyclical stocks, we increased the Fund's presence in housing and
furniture-related holdings, while maintaining our underweight in the basic
resources sector.
THE PERFORMANCE RESULTS PROVIDED IN THIS OVERVIEW ARE FOR INFORMATIONAL PURPOSES
ONLY AND SHOULD NOT BE CONSTRUED AS A GUARANTEE OF THE FUND'S FUTURE
PERFORMANCE. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN
INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL
COST.
34
<PAGE> 385
MORGAN STANLEY
AMERICAN VALUE FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
(UNAUDITED)
Looking to the future, we believe that returns may fall short of the very strong
performance the stock market has delivered during the past three years. While
corporate earnings should continue to increase, we believe that the growth rate
for corporate profits may decelerate. In this environment, careful attention to
earnings risk will become increasingly important. Be assured that this is an
area that we monitor closely. But while overall corporate earnings growth may be
slowing, we continue to find undervalued stocks that have favorable earnings
prospects. Given the availability of such investments, we remain optimistic
about the Fund's long-term future. We also recognize, however, that volatility
may increase in the near term.
Chris Leavy William B. Gerlach Gary G. Schlarbaum
PORTFOLIO MANAGER PORTFOLIO MANAGER PORTFOLIO MANAGER
35
<PAGE> 386
MORGAN STANLEY
AMERICAN VALUE FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------------------
<S> <C>
COMMON STOCKS (92.7%)
AEROSPACE (1.3%)
(a)29,800 Alliant Techsystems, Inc......................... $ 1,661
(a)20,600 Coltec Industries, Inc........................... 478
5,300 Doncasters plc ADR............................... 112
(a)36,300 Hexcel Corp...................................... 905
10,100 Precision Castparts Corp......................... 609
(a)2,700 Triumph Group, Inc............................... 90
--------
3,855
--------
BANKING (7.1%)
21,500 Affiliated Community Bancorp, Inc................ 812
5,500 AmSouth Bancorp.................................. 299
9,868 Associated Banc-Corp............................. 544
(a)21,700 Cadillac Fairview Corp........................... 510
16,800 City National Corp............................... 621
61,500 Colonial BancGroup, Inc.......................... 2,118
15,200 Comerica, Inc.................................... 1,372
17,000 Community First Bankshares, Inc.................. 905
28,500 Compass Bancshares, Inc.......................... 1,247
51,400 Dime Bancorp, Inc................................ 1,555
40,000 First Savings Bank of Washington Bancorp, Inc.... 1,100
12,400 Franchise Mortgage Acceptance Co., L.L.C......... 228
16,200 Long Island Bancorp, Inc......................... 804
18,100 MAF Bancorp, Inc................................. 640
53,000 North Fork Bancorp, Inc.......................... 1,779
7,919 Peoples Heritage Financial Group, Inc............ 364
3,400 Prime Bancshares, Inc............................ 71
60,900 Trans Financial, Inc............................. 2,368
34,800 Webster Financial Corp........................... 2,314
10,000 Western Bancorp.................................. 330
6,500 Wilmington Trust Corp............................ 405
--------
20,386
--------
BUILDING (5.4%)
(a)119,300 AFC Cable Systems, Inc........................... 3,549
74,600 Essex International, Inc......................... 2,219
43,400 General Cable Corp............................... 1,571
57,000 Lone Star Industries, Inc........................ 3,028
34,100 Southdown, Inc................................... 2,012
(a)53,000 Superior TeleCom, Inc............................ 1,832
(a)28,100 USG Corp......................................... 1,377
--------
15,588
--------
CAPITAL GOODS (2.5%)
115,400 AGCO Corp........................................ 3,375
15,900 Case Corp........................................ 961
48,300 Flowserve Corp................................... 1,349
11,400 IRI International Corp........................... 160
12,500 Stoneridge, Inc.................................. 200
7,900 Tecumseh Products 'A'............................ 385
18,500 Trinity Industries, Inc.......................... 826
--------
7,256
--------
CHEMICALS (1.6%)
108,300 Crompton & Knowles Corp.......................... 2,870
34,200 Lubrizol Corp. (The)............................. 1,261
(a)17,400 Quaker Chemical Corp............................. 329
--------
4,460
--------
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------------------
<S> <C>
COMMUNICATIONS (2.6%)
(a)6,100 Hirsch International Corp. 'A'................... $ 134
68,400 Journal Register Co.............................. 1,436
21,200 McClatchy Newspapers, Inc........................ 576
(a)39,200 Nextel Communications Inc., 'A'.................. 1,019
(a)121,600 Valassis Communications, Inc..................... 4,499
--------
7,664
--------
COMPUTERS (4.6%)
(a)71,400 Apex PC Solutions, Inc........................... 1,580
(a)7,700 Box Hill Systems Corp............................ 80
(a)51,300 CHS Electronics, Inc............................. 879
17,300 Elbit Systems Ltd................................ 238
(a)38,500 InaCom Corp...................................... 1,080
23,200 Quantum Corp..................................... 465
(a)26,800 SCI Systems, Inc................................. 1,168
(a)29,000 SMART Modular Technologies, Inc.................. 667
61,300 Storage Technology Corp.......................... 3,797
(a)55,600 Stratus Computer, Inc............................ 2,102
(a)14,400 Tech Data Corp................................... 560
(a)38,600 Western Digital Corp............................. 620
--------
13,236
--------
CONSUMER--DURABLES (4.1%)
30,300 Arvin Industries, Inc............................ 1,009
42,700 Dan River, Inc. 'A'.............................. 702
9,300 Dana Corp........................................ 442
(a)22,300 Datascope Corp................................... 577
(a)153,400 Furniture Brands Internatioanl, Inc.............. 3,145
48,200 I.C. Isaacs & Co., Inc........................... 488
13,200 Interface, Inc................................... 383
(a)27,100 Lear Corp........................................ 1,287
101,800 MascoTech, Inc................................... 1,871
48,700 Windmere-Durable Holdings, Inc................... 1,099
(a)25,900 VWR Scientific Products Corp..................... 732
--------
11,735
--------
CONSUMER--RETAIL (6.0%)
(a)13,900 Brylane, Inc..................................... 685
26,500 Claire's Stores, Inc............................. 515
(a)1,600 Day Runner, Inc.................................. 65
(a)8,200 Fred Meyer, Inc.................................. 298
(a)80,800 Goody's Family Clothing, Inc..................... 2,197
27,900 Hughes Supply, Inc............................... 975
(a)22,000 Neiman Marcus Group, Inc. (The).................. 666
5,300 Novel Denim Holdings, Ltd........................ 106
(a)140,700 Office Depot, Inc................................ 3,368
(a)17,100 Polo Ralph Lauren Corp........................... 416
93,500 Ross Stores, Inc................................. 3,401
52,200 Russ Berrie & Co., Inc........................... 1,370
(a)20,700 Stage Stores, Inc................................ 774
34,700 TJX Companies, Inc............................... 1,193
16,200 VF Corp.......................................... 744
(a)21,000 Zale Corp........................................ 483
--------
17,256
--------
CONSUMER--SERVICE & GROWTH (1.2%)
4,800 Hertz Corp. 'A'.................................. 193
(a)105,200 Prime Hospitality Corp........................... 2,143
</TABLE>
36
The accompanying notes are an integral part of the financial statements.
<PAGE> 387
MORGAN STANLEY
AMERICAN VALUE FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------------------
<S> <C>
CONSUMER--SERVICE & GROWTH (CONT.)
(a)23,300 Renters Choice, Inc.............................. $ 478
41,200 Select Appointments Holdings Public Ltd., Co.
ADR............................................ 752
--------
3,566
--------
CONSUMER--STAPLES (7.7%)
(a)5,300 Beringer Wine Estates Holdings, Inc. 'B'......... 201
(a)82,500 Blyth Industries, Inc............................ 2,470
(a)38,000 Consolidated Cigar Holdings, Inc................. 1,047
(a)19,600 CTB International Corp........................... 279
15,000 Dean Foods Co.................................... 893
157,200 DIMON, Inc....................................... 4,127
50,800 Fresh Del Monte Produce Inc...................... 743
23,100 General Cigar Holdings, Inc...................... 492
40,400 Interstate Bakeries Corp......................... 1,510
(a)154,600 NBTY, Inc........................................ 5,160
13,600 Richfood Holdings, Inc........................... 384
8,700 Schweitzer-Mauduit International, Inc............ 324
16,000 Standard Commercial Corp......................... 265
105,500 Universal Corp................................... 4,339
--------
22,234
--------
ENERGY (7.0%)
22,900 Apache Corp...................................... 803
(a)8,500 BJ Services Co................................... 611
1,800 Black Hills Corp................................. 63
(a)27,700 Cooper Cameron Corp.............................. 1,690
39,100 Diamond Offshore Drilling, Inc................... 1,882
(a)8,500 EVI, Inc......................................... 440
(a)86,300 Global Industries, Ltd........................... 1,467
(a)27,400 Marine Drilling Cos, Inc......................... 569
16,200 National Fuel Gas Co............................. 789
14,700 Nicor, Inc....................................... 620
(a)7,500 Noble Affiliates, Inc............................ 264
84,800 Noble Drilling Corp.............................. 2,597
(a)8,200 NS Group, Inc.................................... 140
(a)20,600 Ocean Energy, Inc................................ 1,016
(a)28,900 Precision Drilling Corp.......................... 704
6,300 Stolt Comex Seaway, S.A.......................... 315
21,300 Sun Co., Inc..................................... 896
35,200 Transocean Offshore, Inc......................... 1,696
8,900 Ultramar Diamond Shamrock Corp................... 284
(a)11,600 United Meridian Corp............................. 326
(a)36,100 Varco International, Inc......................... 774
44,700 Vintage Petroleum, Inc........................... 849
14,000 Washington Gas Light Co.......................... 433
(a)23,200 Weatherford Enterra, Inc......................... 1,015
--------
20,243
--------
ENTERTAINMENT (0.1%)
(a)9,300 Imax Corp........................................ 205
--------
FINANCIAL--DIVERSIFIED (10.8%)
18,600 A.G. Edwards, Inc................................ 739
(a)25,300 AmeriCredit Corp................................. 700
27,600 Bear Stearns Companies, Inc...................... 1,311
49,500 CIT Group, Inc. (The) 'A'........................ 1,596
10,000 CMAC Investment Corp............................. 604
43,400 Cousins Properties, Inc. REIT.................... 1,272
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------------------
<S> <C>
32,900 Crescent Real Estate Equities Co. REIT........... $ 1,295
(a)34,300 Delta Financial Corp............................. 459
34,600 Developers Diversified Realty Corp............... 1,323
54,300 Duke Realty Investment, Inc. REIT................ 1,317
13,125 Equity Residential Properties Trust.............. 664
45,100 Felcor Suite Hotels, Inc. REIT................... 1,601
(a)27,200 First Alliance Corp.............................. 500
35,000 First Washinton Realty Trust, Inc................ 963
15,600 Franklin Resources, Inc.......................... 1,356
26,500 Glenborough Realty Trust, Inc.................... 785
6,800 Hartford Life, Inc. 'A'.......................... 308
12,900 Irvine Apartment Communities, Inc. REIT.......... 410
38,000 JDN Realty Corp.................................. 1,230
46,900 Kilroy Realty Corp. REIT......................... 1,348
37,200 Kimco Realty Corp................................ 1,311
8,900 Lehman Brothers Holdings, Inc.................... 454
(a)79,100 Lexington Corporate Properties, Inc.............. 1,221
48,600 Liberty Property Trust, REIT..................... 1,388
30,000 Mack-Cali Realty Corp............................ 1,230
58,500 Manufactured Home Communities, Inc. REIT......... 1,580
32,000 Money Store, Inc. (The).......................... 672
16,300 Nationwide Health Properties, Inc................ 416
3,400 Post Properties, Inc............................. 138
19,400 Security Capital Group Inc. 'B'.................. 631
9,600 Security Capital Industrial Trust................ 239
12,400 SL Green Realty Corp............................. 322
30,600 Spieker Properties, Inc. REIT.................... 1,312
(a)8,200 T&W Financial Corp............................... 136
5,250 Wellsford Realty Properties Inc.................. 82
--------
30,913
--------
HEALTH CARE (4.9%)
17,500 Bergen Brunswig Corp., 'A'....................... 737
(a)25,800 Del Global Technologies Corp..................... 258
(a)4,000 Dental Care Alliance, Inc........................ 42
(a)32,200 ESC Medical Systems Ltd.......................... 1,248
(a)81,200 FPA Medical Management, Inc...................... 1,512
(a)108,500 Healthdyne Technologies, Inc..................... 2,211
(a)27,300 Hologic, Inc..................................... 565
26,800 ICN Pharmaceuticals, Inc......................... 1,308
(a)9,200 Laser Industries, Ltd............................ 252
39,300 Mylan Laboratories, Inc.......................... 823
(a)40,800 Physician Sale & Service, Inc.................... 877
(a)13,600 Universal Health Services, Inc................... 685
(a)128,000 VIVUS, Inc....................................... 1,360
(a)10,600 Watson Pharmaceuticals, Inc...................... 344
(a)45,800 Wellpoint Health Networks, Inc................... 1,935
--------
14,157
--------
INDUSTRIAL (1.3%)
13,200 Ameron, Inc...................................... 835
19,500 Barnes Group, Inc................................ 444
(a)160,600 Philip Services Corp............................. 2,309
--------
3,588
--------
INSURANCE (5.0%)
58,258 AmerUs Life Holdings, Inc. 'A'................... 2,148
(a)79,000 Bethlehem Steel Corp............................. 681
(a)56,400 ESG Re Ltd....................................... 1,325
</TABLE>
37
The accompanying notes are an integral part of the financial statements.
<PAGE> 388
MORGAN STANLEY
AMERICAN VALUE FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------------------
<S> <C>
INSURANCE (CONT.)
56,100 Everest Reinsurance Holdings, Inc................ $ 2,314
39,400 EXEL Ltd......................................... 2,497
54,900 Nationwide Financial Services, Inc., 'A'......... 1,983
19,200 Old Republic International Corp.................. 714
16,600 Reliance Group Holdings, Inc..................... 234
(a)78,600 Stirling Cooke Browm Holdings Ltd................ 1,926
10,200 Torchmark Corp................................... 429
--------
14,251
--------
METALS (1.7%)
88,300 AK Steel Holding Corp............................ 1,562
76,200 Barrick Gold Corp................................ 1,419
72,600 Homestake Mining Co.............................. 644
(a)46,900 NatSteel Corp. 'B'............................... 542
22,700 USX-U.S. Steel Group, Inc........................ 709
--------
4,876
--------
MISCELLANEOUS (0.9%)
39,800 S & P Mid Cap 400 Depositary Receipts............ 2,550
--------
PAPER & PACKAGING (0.4%)
(a)7,500 Owens-Illinois, Inc.............................. 284
27,500 P.H. Glatfelter Co............................... 512
10,900 Potlatch Corp.................................... 469
--------
1,265
--------
RESTAURANTS (0.7%)
53,700 Applebee's International, Inc.................... 970
80,000 Friendly Ice Cream Corp.......................... 930
--------
1,900
--------
SERVICES (3.1%)
(a)18,000 AccuStaff, Inc................................... 414
20,300 Bowne & Co....................................... 810
(a)49,600 CDI Corp......................................... 2,269
38,000 Danka Business Systems plc....................... 606
(a)5,300 Data Processing Resources Corp................... 135
(a)14,900 Fiserv, Inc...................................... 732
27,000 Herman Miller, Inc............................... 1,473
26,800 Ogden Corp....................................... 755
1,000 True North Communications, Inc................... 25
(a)8,100 USA Waste Services, Inc.......................... 318
(a)67,700 U.S. Office Products Co.......................... 1,329
--------
8,866
--------
TECHNOLOGY (6.6%)
(a)1,600 Aspen Technologies, Inc.......................... 55
(a)69,400 Avid Technology, Inc............................. 1,856
(a)60,600 Boston Technology, Inc........................... 1,522
(a)113,000 Cidco, Inc....................................... 2,204
(a)41,700 Comverse Technology, Inc......................... 1,626
(a)3,400 Electro Scientific Industries, Inc............... 129
(a)12,000 Electronics for Imaging, Inc..................... 200
(a)48,600 Etec Systems, Inc................................ 2,260
(a)93,700 HMT Technology Corp.............................. 1,218
(a)13,300 KLA-Tencor Corp.................................. 514
(a)13,800 Lattice Semiconductor Corp....................... 654
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------------------
<S> <C>
(a)38,700 MicroAge, Inc.................................... $ 583
(a)62,500 Procom Technology, Inc........................... 988
16,000 Park Electrochemical Corp........................ 454
(a)10,400 Semitool, Inc.................................... 136
(a)108,900 Symantec Corp.................................... 2,389
27,750 Tektronix, Inc................................... 1,101
(a)34,900 Teradyne, Inc.................................... 1,117
(a)1,800 Veritas DGC, Inc................................. 71
--------
19,077
--------
TRANSPORTATION (3.0%)
38,800 Air Express International Corp................... 1,183
36,400 Arnold Industries, Inc........................... 628
(a)92,200 Atlas Air, Inc................................... 2,213
5,700 C.H. Robinson Worldwide, Inc..................... 128
66,900 CNF Transportation, Inc.......................... 2,567
(a)15,000 Jevic Transportation, Inc........................ 242
(a)8,900 Midway Airlines, Corp............................ 135
43,000 USFreightways Corp............................... 1,398
--------
8,494
--------
UTILITIES (3.1%)
(a)22,900 CalEnergy Co., Inc............................... 658
18,000 Cinergy Corp..................................... 690
10,500 Eastern Entreprises.............................. 472
26,200 Illinova Corp.................................... 706
16,800 Minnesota Power & Light Co....................... 732
28,400 New Century Energies, Inc........................ 1,361
21,200 New York State Electric & Gas Corp............... 753
16,300 ONEOK, Inc....................................... 658
22,200 Pinnacle West Capital Corp....................... 941
45,200 Public Service Co. of New Mexico................. 1,071
5,300 SJW Corp......................................... 321
19,600 Washington Water Power Co........................ 476
--------
8,839
--------
TOTAL COMMON STOCKS (COST $251,360)........................... 266,460
--------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
- ----------
<S> <C>
SHORT-TERM INVESTMENT (8.0%)
REPURCHASE AGREEMENT (8.0%)
$ 22,945 Chase Securities, Inc., 5.95%, dated 12/31/97,
due 1/2/98, to be repurchased at $22,953,
collateralized by $23,205 U.S. Treasury Notes,
5.25%, due 1/31/01, valued at $23,432 (COST
$22,945)....................................... 22,945
--------
TOTAL INVESTMENTS (100.7%) (COST $274,305).................... 289,405
LIABILITIES IN EXCESS OF OTHER ASSETS (-0.7%)................. (2,156)
--------
NET ASSET (100%).............................................. $287,249
========
</TABLE>
- ---------------
(a) -- Non-income producing security
ADR -- American Depositary Receipt
REIT -- Real Estate Investment Trust
38
The accompanying notes are an integral part of the financial statements.
<PAGE> 389
MORGAN STANLEY
VALUE FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW
(UNAUDITED)
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1997)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Capital Equipment 25.0%
Consumer Products--Miscellaneous 25.8%
Energy 7.5%
Finance 18.0%
Materials 4.7%
Services 4.8%
Short-Term Investments 14.2%
</TABLE>
<TABLE>
<CAPTION>
TOTAL RETURNS
SINCE INCEPTION
(7/7/97)**
-----------------
WITH WITHOUT
SALES SALES
CHARGE* CHARGE
- -------------------------------------------
<S> <C> <C>
Class A Shares -4.02% 1.84%
- -------------------------------------------
Class B Shares -3.49% 1.51%
- -------------------------------------------
Class C Shares 0.43% 1.43%
- -------------------------------------------
S&P 500 Index: N/A 7.27%
- -------------------------------------------
</TABLE>
* The returns above with sales charge are calculated using the applicable sales
charge for Class A shares and applicable deferred sales charge for Class B
and Class C shares.
** Total returns for the Fund reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waivers and reimbursements, total
returns would be lower.
The S&P 500 Index is an unmanaged index of common stocks. The S&P 500 Index
assumes dividends are reinvested.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
<TABLE>
<CAPTION>
TOP FIVE HOLDINGS
PERCENT OF
ISSUER SECTOR NET ASSETS
- ------ -------------------- ----------
<S> <C> <C>
Ford Motor Co. Consumer Products-- 3.2%
Miscellaneous
International Business Consumer Products--
Machines Corp. Miscellaneous 2.7%
Aeroquip-Vickers, Inc. Capital Equipment 2.2%
Philip Morris Cos., Inc. Consumer Products-- 2.1%
Miscellaneous
Goodyear Tire & Rubber Co. Capital Equipment 2.0%
</TABLE>
<TABLE>
<CAPTION>
TOP FIVE SECTORS
VALUE PERCENT OF
SECTOR (000) NET ASSETS
- ------ ------- ----------
<S> <C> <C>
Consumer Products-
Miscellaneous $54,328 25.8%
Capital Equipment 52,475 25.0%
Finance 37,821 18.0%
Energy 15,723 7.5%
Services 10,178 4.8%
</TABLE>
The Value Fund seeks to achieve above-average total return over a market cycle
of three to five years, consistent with reasonable risk, by investing in a
diversified portfolio of common stocks and other equity securities that we
believe to be relatively undervalued based on various risk measures such as
price/earnings ratios and price/book ratios. We try to buy companies with
average or better-than-average profitability and revenue growth, but
below-average valuations.
For the period from inception of the portfolio on July 7, 1997 through December
31, 1997, the Fund generated a total return of 1.84 percent for Class A shares
at net asset value, as compared to a total return of 7.27 percent for the S&P
500 Index.
Both sector allocation and stock selection contributed to a performance
shortfall, particularly during the later stages of the reporting period. Our
significant underweightings in such traditionally defensive sectors of the
market--such as health care, beverages, personal care products, and telephone
and consumer services--penalized relative returns. Fears of a global economic
slowdown caused by the crisis in Asia generated strong interest in defensive
stocks and created a strong aversion to economically sensitive sectors of the
market. Poor stock selection in the financial services, heavy industry, health
care, and retail sectors also negatively impacted our performance.
Most active managers struggled in 1997, with about 90 percent of all equity
mutual funds falling behind the S&P 500. The past year represented the third
consecutive year (and the only consecutive three-year period since 1958) in
which the market-weighted S&P 500 significantly outperformed an equal-weighted
version of the same Index. Also, because of valuation considerations, our
portfolio remains somewhat smaller and more economically sensitive than the
Index. Nearly 46 percent of our portfolio holdings are invested in companies
with market-capitalizations of less than $5 billion, versus only about 8 percent
for the S&P 500.
Our current portfolio characteristics reflect our commitment to investing in
stocks with low price/ earnings ratios. Our portfolio's projected P/E ratio for
the next 12 months is 12.5, versus 18.1 for the
THE PERFORMANCE RESULTS PROVIDED IN THIS OVERVIEW ARE FOR INFORMATIONAL PURPOSES
ONLY AND SHOULD NOT BE CONSTRUED AS A GUARANTEE OF THE FUND'S FUTURE
PERFORMANCE. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN
INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL
COST.
39
<PAGE> 390
MORGAN STANLEY
VALUE FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
(UNAUDITED)
S&P 500. Our price/sales ratio, another important valuation parameter in our
investment process, is 76 percent, compared to 151 percent for the Index. The
Fund's price/cash flow and price/book value ratios also are at significant
discounts to the market.
Typically, our portfolio maintains growth and profitability characteristics that
approach the Index. Unfortunately, growth is now generally too expensive for us
to own while still adhering to our valuation restrictions. And because of the
current global economic uncertainty, growth and defensive stocks have become
richly priced as well. Our portfolio maintains a projected secular (long-term)
growth rate of 11 percent, versus 13.4 percent for the Index, and a current
return on equity of 17.4 percent against 22.4 percent for the benchmark.
We remain cautious about the outlook for U.S. stocks during the coming year. The
cumulative return of the S&P 500 during the three-year period from 1995 to 1997
is 125 percent. Since 1945, stocks have climbed by that amount in any
consecutive three-year period on only two previous occasions, and each of those
rallies began from considerably lower valuation levels. However, there are
fundamental reasons supporting the current bull run, including
lower-than-expected inflation, exceptional cash flows into equities, healthy
merger and acquisition activity, reasonable profit growth, and a strong bond
market.
Many of these factors may persist through 1998. But because we enter the new
year with very high P/E ratios and unprecedented price/sales, price/book value
and price/dividend ratios, much if not all of these fundamental improvements
appear to be priced into current market levels. Should these ideal conditions
change for the worse, equity prices would almost certainly come under some
pressure.
Our fundamental, top-down outlook is for continued low inflation and interest
rates through 1998. Our concerns revolve around corporate profitability and
asset allocation issues. With demand moderating, labor costs rising, and the
dollar climbing, many large multinational companies (which dominate the S&P 500)
may find it difficult to increase their already historically high levels of
profitability. Revenue growth for the average company has slowed to around 5
percent, and appears to be decelerating as we head into the new year.
Expectations of 10 to 12 percent long-term profit growth are built into current
valuations, and 1998 could be the first year in some time that profitability is
disappointing.
Regarding asset allocation, both household and institutional equity ownership as
a percentage of financial assets is approaching historically peak levels. In
this new era, investors might continue to buy during each dip in the market,
believing that every correction represents a new opportunity to increase equity
exposure and, therefore, historical asset allocation guidelines are obsolete.
But if not, stock market valuations cannot well tolerate significant
liquidations from retail or institutional investors. If something happens to
"break the spell," it is a long way down to average valuations from today's
market levels.
While the equity market in general appears quite expensive to us, valuations in
our low P/E universe of stocks look reasonable. The Fund's 12.5 P/E ratio
includes many high-quality industrial franchise companies selling for less than
10 times 1998 estimated earnings. On either a relative or absolute basis, these
valuations are very cheap, and valuation divergences between many economically
sensitive companies and the broad market have never been wider. We do not know
what type of economy 1998 will deliver, and we can't predict with certainty what
kind of scenario will generate interest in economically sensitive stocks.
However, we do know that on a fundamental basis, many of our companies have
never been better positioned to profit, grow, and create shareholder value. The
stock market may continue to ignore the type of businesses that dominate our
portfolio for a while longer, but over time we believe our patience and
commitment to value will be handsomely rewarded.
Richard Behler Nicholas Kovich Robert Marcin
PORTFOLIO MANAGER PORTFOLIO MANAGER PORTFOLIO MANAGER
40
<PAGE> 391
MORGAN STANLEY
VALUE FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------------------------
<S> <C>
COMMON STOCKS (85.8%)
CAPITAL EQUIPMENT (25.0%)
AEROSPACE & MILITARY TECHNOLOGY (1.1%)
(a)18,140 AMR Corp......................................... $ 2,331
--------
CHEMICALS--DIVERSIFIED (2.8%)
20,600 Dow Chemical Co.................................. 2,091
28,210 Du Pont (EI) de Nemours Co....................... 1,694
22,060 Rohm & Haas Co................................... 2,112
--------
5,897
--------
CONSTRUCTION & HOUSING (0.9%)
52,820 Owens Corning.................................... 1,802
--------
ELECTRICAL & ELECTRONICS (1.4%)
37,990 Entergy Corp..................................... 1,137
3,712 Raytheon Co., 'A'................................ 183
35,770 Tecumseh Products Co. 'A'........................ 1,744
--------
3,064
--------
ELECTRONIC COMPONENTS--MISCELLANEOUS (2.3%)
(a)53,060 Arrow Electronics, Inc........................... 1,721
37,180 DTE Energy Co.................................... 1,290
47,410 Tektronix, Inc................................... 1,882
--------
4,893
--------
ENERGY EQUIPMENT & SERVICES (1.7%)
59,200 Cummins Engine................................... 3,497
--------
INDUSTRIAL COMPONENTS (4.4%)
96,090 Aeroquip-Vickers, Inc............................ 4,714
57,730 Beckman Instruments, Inc......................... 2,309
50,425 Parker-Hannifin Corp............................. 2,313
--------
9,336
--------
MACHINERY & ENGINEERING (5.4%)
69,300 Case Corp........................................ 4,188
26,300 Caterpillar, Inc................................. 1,277
9,460 Deere & Co....................................... 552
80,060 Harnischfeger Industries, Inc.................... 2,827
47,350 Kennametal, Inc.................................. 2,453
--------
11,297
--------
MANUFACTURING (3.7%)
22,800 Eaton Corp....................................... 2,035
(a)22,010 FMC Corp......................................... 1,482
66,400 Goodyear Tire & Rubber Co........................ 4,225
--------
7,742
--------
OFFICE EQUIPMENT (0.4%)
22,870 Standard Register Co............................. 795
--------
PROFESSIONAL SERVICES (0.9%)
121,370 Olsten Corp...................................... 1,821
--------
TOTAL CAPITAL EQUIPMENT........................................... 52,475
--------
CONSUMER PRODUCTS--MISCELLANEOUS (25.8%)
AUTOMOBILES (6.6%)
39,390 Dana Corp........................................ 1,871
137,530 Ford Motor Co.................................... 6,696
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------------------------
<S> <C>
59,080 General Motors Corp.............................. $ 3,582
34,260 TRW, Inc......................................... 1,828
--------
13,977
--------
COMPUTERS/SOFTWARE (4.5%)
53,400 International Business Machines Corp............. 5,584
(a)53,030 Seagate Technology, Inc.......................... 1,021
(a)73,600 Stratus Computer, Inc............................ 2,783
--------
9,388
--------
CONSUMER PRODUCTS--MISCELLANEOUS (1.0%)
48,700 Quantum Corp..................................... 977
41,510 Tupperware Corp.................................. 1,157
--------
2,134
--------
HEALTHCARE SUPPLIES & SERVICES (2.8%)
13,180 Bergen Brunswig Corp., 'A'....................... 555
77,670 Columbia HCA/Healthcare Corp..................... 2,301
46,610 Mallinckrodt, Inc................................ 1,771
(a)41,910 Maxicare Health Plans, Inc....................... 456
(a)34,100 Vencor, Inc...................................... 833
--------
5,916
--------
RECREATION, OTHER CONSUMER GOODS (0.5%)
(a)23,100 Wellpoint Health Networks, Inc................... 976
--------
RETAIL--MAJOR DEPARTMENT STORES (3.9%)
41,520 Dillards Inc. 'A'................................ 1,464
(a)50,410 Federated Department Stores...................... 2,171
60,100 Sears, Roebuck & Co.............................. 2,720
(a)58,440 Toys 'R' Us, Inc................................. 1,837
--------
8,192
--------
TEXTILES & APPAREL (2.7%)
43,830 Russell Corp..................................... 1,164
33,620 Springs Industries, Inc. 'A'..................... 1,748
58,740 VF Corp.......................................... 2,698
--------
5,610
--------
TOBACCO (3.8%)
99,040 Philip Morris Cos., Inc.......................... 4,488
94,840 RJR Nabisco Holdings Corp........................ 3,557
--------
8,045
--------
TOTAL CONSUMER PRODUCTS--MISCELLANEOUS............................ 54,238
--------
ENERGY (7.5%)
ELECTRIC--INTEGRATED (1.6%)
22,870 Cinergy Corp..................................... 876
19,100 Duke Power Co.................................... 1,058
32,240 GPU, Inc......................................... 1,358
--------
3,292
--------
OIL & GAS (5.9%)
24,080 Amoco Corp....................................... 2,050
28,110 Atlantic Richfield Co............................ 2,252
47,960 Phillips Petroleum Co............................ 2,332
43,630 Repsol S.A. ADR.................................. 1,857
</TABLE>
41
The accompanying notes are an integral part of the financial statements.
<PAGE> 392
MORGAN STANLEY
VALUE FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------------------------
<S> <C>
OIL & GAS (CONT.)
51,870 Ultramar Diamond Shamrock Corp................... $ 1,653
66,900 YPF ADR.......................................... 2,287
--------
12,431
--------
TOTAL ENERGY...................................................... 15,723
--------
FINANCE (18.0%)
BANKING (4.2%)
21,210 Bank of New York Co., Inc........................ 1,226
32,520 Chase Manhattan Corp............................. 3,561
17,030 Citicorp......................................... 2,153
16,320 Republic New York Corp........................... 1,864
--------
8,804
--------
FINANCIAL SERVICES (3.3%)
32,040 American General Corp............................ 1,732
16,200 CIGNA Corp....................................... 2,803
19,650 Crestar Financial Corp........................... 1,120
23,040 Fannie Mae....................................... 1,315
--------
6,970
--------
INSURANCE (5.5%)
31,540 Allstate Corp.................................... 2,866
19,340 Chubb Corp....................................... 1,463
24,420 Hartford Financial Services Group................ 2,285
49,370 Old Republic International Corp.................. 1,836
46,060 TIG Holdings, Inc................................ 1,528
22,865 Transatlantic Holdings, Inc...................... 1,635
--------
11,613
--------
LIFE/HEALTH INSURANCE (1.0%)
49,780 Reliastar Financial Corp......................... 2,050
--------
REINSURANCE (1.1%)
54,510 Everest Reinsurance Holdings, Inc................ 2,249
--------
SUPER-REGIONAL BANKS--U.S. (2.9%)
77,989 First Union Corp. (N.C.)......................... 3,997
35,260 Mellon Bank Corp................................. 2,138
--------
6,135
--------
TOTAL FINANCE..................................................... 37,821
--------
MATERIALS (4.7%)
CHEMICALS (3.6%)
27,830 British Petroleum ADR............................ 2,218
41,710 Cabot Corp....................................... 1,152
57,330 Great Lakes Chemical Corp........................ 2,573
50,800 IMC Global, Inc.................................. 1,664
--------
7,607
--------
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------------------------
<S> <C>
FOREST PRODUCTS & PAPER (0.4%)
29,120 Westvaco Corp.................................... $ 915
--------
METALS--STEEL (0.7%)
55,600 Inland Steel Industries, Inc..................... 952
(a)45,700 National Steel Corp. 'B'......................... 528
--------
1,480
--------
TOTAL MATERIALS................................................... 10,002
--------
SERVICES (4.8%)
FOOD--MISCELLANEOUS (1.5%)
54,210 IBP, Inc......................................... 1,135
48,060 Universal Foods Corp............................. 2,030
--------
3,165
--------
MEDICAL--NURSING HOMES (0.8%)
79,800 Foundation Health Systems 'A'.................... 1,786
--------
TRANSPORTATION--AIRLINES (1.7%)
30,000 Delta Airlines Inc............................... 3,570
--------
TRANSPORTATION--RAIL (0.8%)
30,680 CSX Corp......................................... 1,657
--------
TOTAL SERVICES.................................................... 10,178
--------
TOTAL COMMON STOCKS (COST $181,979)................................. 180,437
--------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
- ----------------
<S> <C>
SHORT-TERM INVESTMENT (15.0%)
REPURCHASE AGREEMENT (15.0%)
$ 31,553 Chase Securities, Inc., 5.95%, dated 12/31/97,
due 1/2/98, to be repurchased at $31,563,
collateralized by $30,910 U.S. Treasury Notes,
6.875%, due 3/31/00, valued at $32,232 (COST
$31,553)....................................... 31,553
--------
TOTAL INVESTMENTS (100.8%) (COST $213,532).......................... 211,990
LIABILITIES IN EXCESS OF OTHER ASSETS (-0.8%)....................... (1,711)
--------
NET ASSETS (100%)................................................... $210,279
========
</TABLE>
- ---------------
(a) -- Non-income producing security
ADR -- American Depositary Receipt
42
The accompanying notes are an integral part of the financial statements.
<PAGE> 393
MORGAN STANLEY
WORLDWIDE HIGH INCOME FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW
(UNAUDITED)
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1997)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Argentina 9.8%
Brazil 12.0%
Bulgaria 5.9%
Ecuador 4.6%
Jamaica 3.2%
Mexico 6.7%
Russia 9.0%
Turkey 2.9%
United States 26.8%
Venezuela 6.8%
Short-Term Investments 5.7%
Other 6.6%
</TABLE>
<TABLE>
<CAPTION>
TOTAL RETURNS**
---------------------------------------
AVERAGE ANNUAL
SIX MONTHS ONE YEAR SINCE INCEPTION
----------------- ----------------- -----------------
WITH WITHOUT WITH WITHOUT WITH WITHOUT
SALES SALES SALES SALES SALES SALES
CHARGE* CHARGE CHARGE* CHARGE CHARGE* CHARGE
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class A Shares -1.54% 3.36% 10.14% 15.62% 15.15% 16.67%
- -----------------------------------------------------------------------------------------------
Class B+ Shares -0.68% 2.96% 10.82% 14.72% 19.10% 20.07%
- -----------------------------------------------------------------------------------------------
Class C Shares 1.97% 2.88% 13.64% 14.62% 15.76% 15.76%
- -----------------------------------------------------------------------------------------------
Worldwide High Income Blended
Index***
Class A & C Shares N/A 4.59% N/A 12.56% N/A 15.34%
Class B Shares N/A 4.59% N/A 12.56% N/A 17.26%
- -----------------------------------------------------------------------------------------------
Lehman Aggregate Bond Index:
Class A & C Shares N/A 6.36% N/A 9.65% N/A 8.66%
Class B Shares N/A 6.36% N/A 9.65% N/A 8.23%
- -----------------------------------------------------------------------------------------------
</TABLE>
* The returns above are calculated using the applicable sales charge for Class
A shares and the applicable deferred sales charge for Class B and Class C
shares.
** Total returns for the Fund reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waivers and reimbursements, total
returns would be lower.
*** The Worldwide High Income Blended Index is comprised of 50% CS First Boston
High Yield Index, 25% J.P. Morgan Emerging Markets Bond Index Plus, and 25%
J.P. Morgan Latin Eurobond Index.
+ Class B shares have been offered since August 1, 1995.
The Lehman Aggregate Bond Index is an unmanaged index comprised of the
Government/Corporate Index, the Mortgage-Backed Securities Index and the
Asset-Backed Securities Index.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
<TABLE>
<CAPTION>
TOP FIVE HOLDINGS
PERCENT OF
SECURITY COUNTRY NET ASSETS
- -------- ---------- ----------
<S> <C> <C>
Federative Republic of Brazil,
Series C PIK 8.00%, 4/15/04 Brazil 5.8%
Russia Principal Notes 6.719%,
12/15/20 Russia 4.3%
Republic of Venezuela 9.25%,
9/15/27 Venezuela 3.5%
Republic of Venezuela Discount
Bond, Series L, 6.81%,
12/18/07 Venezuela 3.3%
Republic of Bulgaria Front
Loaded Interest Reduction
Bond 2.25%, 7/28/12 Bulgaria 3.3%
</TABLE>
<TABLE>
<CAPTION>
TOP FIVE SECTORS
VALUE PERCENT OF
SECTOR (000) NET ASSETS
- ------ ------ ----------
<S> <C> <C>
Foreign Government & Agency
Obligations $70,103 29.7%
Eurobonds 40,718 17.1%
Multi-Industry 16,535 7.0%
Telecommunications 13,034 5.5%
Finance 12,684 5.4%
</TABLE>
The Worldwide High Income Fund seeks to offer investors high current income
consistent with relative stability of principal and potential for capital
appreciation. To achieve this objective, the Fund will invest primarily in
high-yielding, high-risk fixed-income securities of issuers located throughout
the world.
For the six months ended December 31, 1997, the Fund generated a total return of
3.36 percent for the Class A shares at net asset value, as compared to a total
return of 4.59 percent for the Worldwide High Income Blended Index comprised of
50 percent CS First Boston High Yield Index, 25 percent J.P. Morgan Emerging
Markets Bond Index Plus, and 25 percent J.P. Morgan Latin Eurobond Index. In
addition, the Lehman Aggregate Bond Index returned 6.36 percent for the same
period.***
Relative to the blended benchmark, the Fund had a higher weighting in emerging
debt than in high yield bonds during the reporting period. A steep appreciation
in global bond prices pushed yield spreads (the yield differential between
different quality bonds of similar maturities) to historically tight levels
throughout July, August, and September. This strong performance was driven by
the rally in U.S. bonds, which benefited from the benign inflation and moderate
growth outlooks in the United States. Yield spreads on emerging debt also
benefited from a number of technical factors,
*** The Lehman Aggregate Bond Index was initially selected as a benchmark for
the Fund's performance; however, based upon the Fund's asset composition, we
believe the Worldwide High Income Blended Index provides a more accurate
benchmark for the Fund. Therefore, the Lehman Brothers Aggregate Bond Index
will not be shown beginning with the December 31, 1998 semi-annual report.
THE PERFORMANCE RESULTS PROVIDED IN THIS OVERVIEW ARE FOR INFORMATIONAL PURPOSES
ONLY AND SHOULD NOT BE CONSTRUED AS A GUARANTEE OF THE FUND'S FUTURE
PERFORMANCE. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN
INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL
COST. PLEASE SEE THE PROSPECTUS FOR A DESCRIPTION OF CERTAIN RISK CONSIDERATIONS
ASSOCIATED WITH INTERNATIONAL INVESTING. YIELDS WILL FLUCTUATE AS MARKET
CONDITIONS CHANGE.
43
<PAGE> 394
MORGAN STANLEY
WORLDWIDE HIGH INCOME FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
(UNAUDITED)
including large inflows to mutual funds specializing in high yield and emerging
markets debt, and Brady bond buybacks by most of the larger Latin countries.
Together, these factors caused yield spreads to narrow to an average of 350
basis points (3.5 percent) over U.S. Treasuries.
As the reporting period continued, however, the deepening economic crisis in
Asia caused investors to reconsider how much additional risk they were willing
to take to hold emerging market bonds. Following a robust third quarter, the
almost two-year rally in emerging country debt came to an abrupt halt during the
final three months of 1997. After emerging market debt had reached an all-time
high in terms of price in early September, investors suddenly lost their
appetite for risk, causing prices to fall to a 12-month low by mid-October.
The ripple effect of the Asian problems were felt in all emerging countries and
caused spreads on emerging debt to widen to 800 basis points (8 percent) over
U.S. Treasuries. Once the broad-based panic subsided, however, spreads narrowed,
falling to roughly 500 basis points (5 percent) over Treasuries.
The sell-off occurred even though the majority of emerging market debt was from
Latin American and Eastern European countries. All emerging market bond prices
fell, as any asset with the word "emerging" in its description was penalized.
Prior to the sell-off, bonds from most Asian countries were rated investment
grade and not considered part of the emerging debt universe. However, the Asian
countries have now entered our radar screen.
Within the high yield market, the telecommunications sector was clearly the best
performing group. Fortunately, this was our most heavily weighted sector. Even
within the telecommunications industry, we picked our sectors and issues well.
The "Enhanced Specialized Mobile Radio" area-- through our large position in
Nextel--did extremely well, as did long distance telephone companies and
competitive local exchange carriers. We successfully avoided areas that
experienced trouble, particularly supermarkets and sub-prime lenders.
The continuing strength of the U.S. economy and the attractive growth prospects
of selected companies in the U.S. high-yield market cause us to be relatively
optimistic about prospects for 1998 returns. Due to the age of the economic
cycle and the still historically narrow average yield spreads, we continue to
emphasize somewhat higher-than-average credit quality in the portfolio.
Additionally, we intend to maintain interest-rate sensitivity on the high-yield
portion, which is no longer than that of its benchmark.
The Asian financial crisis will continue to impact all emerging markets into
1998. Severe dislocations in Asia have created several areas of value for our
portfolio, and for the first time since the inception of the Fund we are
gradually building exposure in Asia to what we consider solid sovereign and
corporate issuers with good medium-term prospects. The ripple effects of Asia
will likely keep the overall risk spreads in the broad emerging debt universe
high, as fair value may be deemed to be 400 to 500 basis points of spread,
rather than 300 to 400 basis points.
More yield is available in the global high yield markets today and, importantly,
several non-Asian countries (e.g. Brazil, Mexico, Russia) have been forced by
the Asian crisis to accelerate long overdue structural reform. While the
stabilization and recovery processes in Asia will take many quarters to
materialize, the repricing of the overall debt market in recent months, along
with a renewed commitment to a proper policy mix in many countries, makes the
1998 outlook attractive from a total return standpoint.
Robert Angevine Paul Ghaffari
PORTFOLIO MANAGER PORTFOLIO MANAGER
44
<PAGE> 395
MORGAN STANLEY
WORLDWIDE HIGH INCOME FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ------------------------------------------------------------------------------
<S> <C>
FIXED INCOME SECURITIES (91.9%)
CORPORATE BONDS & NOTES (34.7%)
ARGENTINA (1.5%)
$ 3,500 Impsa S.A. 11.75%, 3/27/98....................... $ 3,518
--------
BRAZIL (1.3%)
250 Banco Nacional De Desen Econo 9.00%, 9/24/07..... 224
3,200 CSN Iron S.A. 9.125%, 6/1/07..................... 2,766
--------
2,990
--------
CANADA (1.2%)
400 Rogers Cablesystems 10.125%, 9/1/12.............. 438
865 Rogers Cablesystems, Series B, 10.00%, 3/15/05... 956
1,080 Rogers Cantel, Inc. 8.30%, 10/1/07............... 1,073
250 Rogers Communications, Inc. 9.125%, 1/15/06...... 254
100 Rogers Communications, Inc. 8.875%, 7/15/07...... 100
--------
2,821
--------
ECUADOR (1.3%)
(e)3,000 Consorcio Ecuadoriano 14.00%, 5/1/02............. 3,000
--------
JAMAICA (0.8%)
2,000 Mechala Group Jamaica Ltd., Series B, 12.75%,
12/30/99....................................... 1,900
--------
MEXICO (2.1%)
(e)3,000 Empresas ICA Sociedad Controladora S.A. 11.875%,
5/30/01........................................ 3,255
(n)2,200 Grupo Televisa S.A. Zero Coupon, 5/15/08......... 1,661
--------
4,916
--------
RUSSIA (1.7%)
4,800 SBS Argo Finance B.V. 10.25%, 7/21/00............ 4,104
--------
TURKEY (1.4%)
ZAR(e)2,500 Pera Financial Services 9.375%, 10/15/02......... 2,350
1,050 Yapi Kredi Finance Co. 10.00%, 8/19/02........... 1,029
--------
3,379
--------
UNITED STATES (23.4%)
1,470 Advanced Micro Devices 11.00%, 8/1/03............ 1,580
(e)600 Ameriserv Food Co. 8.875%, 10/15/06.............. 602
(e)275 Ameriserv Food Co. 10.125%, 7/15/07.............. 286
870 Big Flower Press 8.875%, 7/1/07.................. 879
(e)489 CA FM Lease Trust 8.50%, 7/15/17................. 516
3,655 Cablevision Systems Corp. 9.875%, 5/15/06........ 4,016
705 Comcast Corp. 1.125%, 4/15/07.................... 464
1,345 Comcast Corp. 9.50%, 5/1/07...................... 1,402
(n)1,025 Dial Call Communications, Series B, 0.00%,
12/15/05....................................... 938
825 DR Securitized Lease Trust, Series 1993-K1, Class
A1, 6.66%, 8/15/10............................. 764
997 DR Securitized Lease Trust, Series 1994-K1, Class
A1, 7.60%, 8/15/07............................. 979
250 DR Securitized Lease Trust, Series 1994-K1, Class
A2, 8.38%, 8/15/15............................. 246
150 DR Structured Finance, Series 1994-K2, CMO,
9.35%, 8/15/19................................. 156
(e)300 EES Coke Battery Co., Inc. 9.382%, 4/15/07....... 316
(e)525 Fleming Cos, Inc. 10.50%, 12/1/04................ 549
(e)300 Fleming Cos, Inc. 10.625%, 7/31/07............... 317
(e)310 Fox/Liberty Networks L.L.C. 8.875%, 8/15/07...... 310
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ------------------------------------------------------------------------------
<S> <C>
$ (e,n)510 Fox/Liberty Networks L.L.C. 0.00%, 8/15/07....... $ 326
1,130 Grand Casinos, Inc. 10.125%, 12/1/03............. 1,220
(e)175 Hermes Euro Railtel B.V. 11.50%, 8/15/07......... 193
625 HMC Acquisition Properties 9.00%, 12/15/07....... 652
(e)1,535 Horseshoe Gaming L.L.C. 9.375%, 6/15/07.......... 1,604
950 Host Marriott Travel Plaza, Series B, 9.50%,
5/15/05........................................ 1,007
(e,h)850 Huntsman Corp. 9.09%, 7/1/07..................... 888
1,970 ISP Holdings, Inc., Series B, 9.00%, 10/15/03.... 2,045
800 IXC Communications, Inc. 12.50%, 10/1/05......... 920
(e)2,000 Integrated Health Servies 9.50%, 9/15/07......... 2,052
(n)760 Intermedia Communications, Series B, 0.00%,
7/15/07........................................ 538
(e)300 Jet Equipment Trust, Series C-1, 11.79%,
6/15/13........................................ 404
(e)300 Jet Equipment Trust, Series 1995-D, 11.44%,
11/1/14........................................ 401
265 Kmart Corp. 7.75%, 10/1/12....................... 258
350 Kmart Funding Corp. 8.80%, 7/1/10................ 362
600 Lenfest Communications 8.375%, 11/1/05........... 619
443 Midland Cogeneration Ventures, Series C-94,
10.33%, 7/23/02................................ 474
305 Midland Funding II, Series A, 11.75%, 7/23/05.... 358
200 Navistar Financial Corp., Series B, 9.00%,
6/1/02......................................... 206
(e)220 Newpark Resources, Inc. 8.625%, 12/15/07......... 224
(n)1,915 Nextel Communications 0.00%, 8/15/04............. 1,700
(n)990 Norcal Waste Systems 13.50%, 11/15/05............ 1,151
660 Nuevo Energy Co. 9.50%, 4/15/06.................. 704
2,420 Outdoor Systems, Inc., 8.875%, 6/15/07........... 2,523
2,400 Paramount Communications 8.25%, 8/1/22........... 2,420
320 Qwest Communcations International 10.875%,
4/1/07......................................... 362
(e,n)1,450 RCN Corp. 0.00%, 10/15/07........................ 901
425 Revlon Worldwide, Series B, Zero Coupon,
3/15/01........................................ 293
800 SD Warren Co., Series B, 12.00%, 12/15/04........ 894
(e)1,800 Sinclair Broadcast Group 9.00%, 7/15/07.......... 1,836
1,360 Snyder Oil Corp. 8.75%, 6/15/07.................. 1,384
1,982 Southland Corp. 5.00%, 12/15/03.................. 1,734
825 Station Casinos, Inc. 9.75%, 4/15/07............. 854
(e,n)2,290 TCI Satellite Entertainment 0.00%, 2/15/07....... 1,529
(n)4,325 Teleport Communications 0.00%, 7/1/07............ 3,536
1,280 Tenet Healthcare Corp. 8.625%, 1/15/07........... 1,320
(e,n)350 Transamerica Energy, 0.00%, 6/15/02.............. 276
(e)1,380 Vencor, Inc. 8.625%, 7/15/07..................... 1,382
1,470 Western Financial Bank 8.875%, 8/1/07............ 1,459
--------
55,329
--------
TOTAL CORPORATE BONDS & NOTES (COST $80,127)...................... 81,957
--------
ASSET BACKED SECURITIES (1.0%)
UNITED STATES (1.0%)
(e)499 Aircraft Lease Portfolio Securitization Ltd.,
Series 1996-1, Class D 12.75%, 6/15/06......... 539
(e)934 Commercial Financial Services, Inc., Series
1997-5, Class A1 7.72%, 6/15/05................ 943
(e)847 Long Beach Acceptance Auto Grantor Trust 1997-1,
Class B, 14.22%, 10/26/03...................... 847
--------
TOTAL ASSET BACKED SECURITIES (COST $2,293)....................... 2,329
--------
</TABLE>
45
The accompanying notes are an integral part of the financial statements.
<PAGE> 396
MORGAN STANLEY
WORLDWIDE HIGH INCOME FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ------------------------------------------------------------------------------
<S> <C>
COLLATERALIZED MORTGAGE OBLIGATIONS (1.3%)
UNITED STATES (1.3%)
$ (e,h)1,020 DLJ Mortgage Acceptance Corp., Series 1996-CF2,
Class S, IO, 1.64%, 11/12/21................... $ 88
36,944 DLJ Mortgagae Acceptance Corp., Series 1997-CF2,
Class S, IO, 0.3571%, 10/15/30................. 982
(e)537 First Home Mortgage Acceptance Corp., Series
1996-B, Class C, 7.9289%, 11/1/18.............. 481
1,420 OHA Auto Grantor Trust, 11.00%, 9/15/03.......... 1,423
--------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS (COST $2,923)........... 2,974
--------
EUROBONDS (17.1%)
ARGENTINA (5.5%)
(e,h)2,500 Acindar Industria Agrentina 11.66%, 11/12/98..... 2,513
(e)5,500 Republic of Argentina 11.75%, 2/12/07............ 5,226
650 Republic of Argentina 11.75%, 2/12/07............ 618
1,550 Republic of Argentina 9.75%, 9/19/27............. 1,483
(h)3,360 Republic of Argentina, Series L, 6.69%, 3/31/05.. 3,006
--------
12,846
--------
BRAZIL (6.4%)
(h)1,700 Federative Republic of Brazil 6.75%, 4/15/09..... 1,374
(n)17,503 Federative Republic of Brazil, Series C, PIK
8.00%, 4/15/04................................. 13,762
--------
15,136
--------
BULGARIA (2.6%)
(h)8,500 Republic of Bulgaria Past Due Interest Bond
6.69%, 7/28/11................................. 6,237
--------
RUSSIA (1.1%)
(e)3,000 Mosenergo Finance B.V. 8.375%, 10/9/02........... 2,580
--------
TURKEY (1.5%)
3,750 Export Credit Bank of Turkey 9.00%, 8/18/00...... 3,619
--------
TOTAL EUROBONDS (COST $41,343).................................... 40,418
--------
FOREIGN GOVERNMENT & AGENCY OBLIGATIONS (29.7%)
ARGENTINA (2.8%)
(e)8,000 CIA International Telecom 10.375%, 8/1/04........ 6,481
--------
BRAZIL (1.5%)
3,920 Federative Republic of Brazil 10.125%, 5/15/27... 3,680
--------
BULGARIA (3.3%)
(n)12,700 Republic of Bulgaria Front Loaded Interest
Reduction Bond 2.25%, 7/28/12.................. 7,735
--------
COLOMBIA (1.1%)
(h)2,714 Republic of Colombia 6.84%, 12/15/03............. 2,619
--------
ECUADOR (3.3%)
(h)11,647 Republic of Ecuador Past Due Interest Bond, PIK,
6.69%, 2/27/15................................. 7,643
--------
JAMAICA (2.0%)
4,600 Government of Jamaica 12.00%, 7/19/99............ 4,658
--------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ------------------------------------------------------------------------------
<S> <C>
MEXICO (4.6%)
ZAR 8,000 Nacional Financiera 17.00%, 2/26/99.............. $ 1,641
$ 2,750 United Mexican States 6.25%, 12/31/19............ 2,297
5,750 United Mexican States 11.375%, 9/15/16........... 6,602
200 United Mexican States 11.50%, 5/15/26............ 238
--------
10,778
--------
PANAMA (0.8%)
2,100 Republic of Panama 8.875%, 9/30/27............... 1,976
--------
PERU (1.8%)
(e,n)7,200 Republic of Peru Front Loaded Interest Reduction
Bond 3.25%, 3/7/17............................. 4,284
--------
RUSSIA (1.7%)
60 Ministry of Finance Tranche IV GDR 3.00%,
5/14/03........................................ 40
4 Ministry of Finance Tranche VI GDR 3.00%,
5/14/06........................................ 3
(e)4,600 Unexim International Finance B.V. 9.875%,
8/1/00......................................... 4,071
--------
4,114
--------
VENEZUELA (6.8%)
9,150 Republic of Venezuela 9.25%, 9/15/27............. 8,228
(h)8,810 Republic of Venezuela Discount Bond, Series L,
6.81%, 12/18/07................................ 7,907
--------
16,135
--------
TOTAL FOREIGN GOVERNMENT & AGENCY OBLIGATIONS
(COST $70,172).................................................. 70,103
--------
LOAN AGREEMENTS (7.9%)
GABON (1.5%)
(h)99 Republic of Gabon Syndicated Loan, 6.69%,
4/1/04......................................... 3,515
--------
IVORY COAST (0.2%)
DEM 2,210 Republic of Ivory Coast Syndicated Loan, Zero
Coupon, 12/31/00............................... 485
--------
JAMAICA (0.4%)
$ (h)1,000 Government of Jamaica Syndicated Loan, 6.56%,
12/1/05........................................ 915
--------
MOROCCO (1.5%)
(h)4,100 Kingdom of Morocco Restructuring and
Consolidation Agreement, 6.66%, 1/1/09
(Participation J.P. Morgan).................... 3,558
--------
RUSSIA (4.3%)
(n)16,400 Russia Principal Loans, 6.719%, 12/15/20......... 10,188
--------
TOTAL LOAN AGREEMENTS (COST $19,673).............................. 18,661
--------
NOTES (0.2%)
RUSSIA (0.2%)
(e,h)600 Russian Interest Arrears Note 6.72%, 12/2/15
(COST $395).................................... 426
--------
TOTAL FIXED INCOME SECURITIES (COST $216,926)....................... 216,868
--------
</TABLE>
46
The accompanying notes are an integral part of the financial statements.
<PAGE> 397
MORGAN STANLEY
WORLDWIDE HIGH INCOME FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------------------------
<S> <C>
EQUITY SECURITIES (1.1%)
COMMON STOCKS (0.1%)
UNITED STATES (0.1%)
(a)4,926 Nextel Communications Inc., `A'.................. $ 128
--------
PREFERRED STOCK (1.0%)
UNITED STATES (1.0%)
(a,e)16 IXC Communications, Inc., PIK 9.50%.............. 18
2,134 Time Warner, Inc., `M', PIK 10.25%............... 2,404
--------
2,422
--------
TOTAL EQUITY SECURITIES (COST $2,430)............................... 2,550
--------
<CAPTION>
FACE
AMOUNT
(000)
- ----------------
<S> <C>
STRUCTURED INVESTMENT (2.8%)
BRAZIL (2.8%)
$ (f)8,000 Salomon Bros. Federative Republic of Brazil
Credit Linked Enhanced Access Note 9.00%,
5/4/99 (COST $7,143)........................... 6,695
--------
TOTAL FOREIGN AND U.S. SECURITIES (95.8%) (COST $226,499)........... 226,113
--------
SHORT-TERM INVESTMENTS (5.7%)
PROMISSORY NOTE (0.4%)
INDONESIA (0.4%)
1,000 Polysindo Zero Coupon, 2/24/98................... 850
--------
REPURCHASE AGREEMENT (5.3%)
UNITED STATES (5.3%)
12,585 Chase Securities, Inc., 5.95%, dated 12/31/97,
due 1/2/98, to be repurchased at $12,589,
collateralized by $12,710 U.S. Treasury Notes,
5.625%. due 2/15/06, valued at $12,845......... 12,585
--------
TOTAL SHORT-TERM INVESTMENTS (COST $13,548)......................... 13,435
--------
TOTAL INVESTMENTS (101.5%) (COST $240,047).......................... 239,548
LIABILITIES IN EXCESS OF OTHER ASSETS (-1.5%)....................... (3,460)
--------
NET ASSETS (100%)................................................... $236,088
========
</TABLE>
- ---------------
(a) -- Non-income producing security
(e) -- 144A Security -- certain conditions for public sale may exist.
(f) -- Restricted as to public resale. Total value of restricted securities
at December 31, 1997 was $6,695 or 2.8% of net assets
(h) -- Variable/floating rate security -- rate disclosed is as of December
31, 1997.
(n) -- Step Bond -- coupon rate increases in increments to maturity. Rate
disclosed is as of December 31, 1997. Maturity date disclosed is the
ultimate maturity date.
DEM -- German Mark
GDR -- Global Depositary Receipt
IO -- Interest Only
PIK -- Payment-In-Kind. Income may be received in additional securities or
cash at the discretion of the issuer.
ZAR -- South African Rand
47
The accompanying notes are an integral part of the financial statements.
<PAGE> 398
MORGAN STANLEY
WORLDWIDE HIGH INCOME FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
DECEMBER 31, 1997
(UNAUDITED)
- --------------------------------------------------------------------------------
SUMMARY OF FOREIGN & U.S. SECURITIES
BY INDUSTRY CLASSIFICATION
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
- -------- --------- -------------
<S> <C> <C>
Foreign Government & Agency Obligations............................................... $ 70,103 29.7%
Eurobonds............................................................................. 40,418 17.1
Loan Agreements....................................................................... 18,661 7.9
Multi-Industry........................................................................ 16,535 7.0
Telecommunications.................................................................... 13,034 5.5
Finance............................................................................... 12,684 5.4
Services.............................................................................. 11,006 4.7
Broadcast--Radio & Television......................................................... 10,037 4.3
Materials............................................................................. 9,533 4.0
Structured Investment................................................................. 6,695 2.8
Collateralized Mortgage Obligation & Asset Backed Securities.......................... 5,303 2.3
Capital Equiptment.................................................................... 3,659 1.5
Consumer Goods........................................................................ 2,647 1.1
Energy................................................................................ 2,365 1.0
Technology............................................................................ 1,580 0.7
Utilities............................................................................. 833 0.4
Transportation........................................................................ 594 0.2
Notes................................................................................. 426 0.2
--------- ----
$ 226,113 95.8%
========= ====
</TABLE>
BY ASSET CLASSIFICATION
<TABLE>
<CAPTION>
PERCENT OF
ASSET NET ASSETS
- ----- -------------
<S> <C>
High Yield...................................................................................... 27.8%
Brady Bonds..................................................................................... 23.2
Sovereign Non-Bradys............................................................................ 18.4
Corporate Bonds................................................................................. 12.1
Performance Loans............................................................................... 8.3
Local Intruments................................................................................ 6.2
Short-Term Investments.......................................................................... 3.8
Non-Performance Loans........................................................................... 0.2
-----
100.0%
=====
</TABLE>
48
The accompanying notes are an integral part of the financial statements.
<PAGE> 399
MORGAN STANLEY
LATIN AMERICAN FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW
(UNAUDITED)
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1997)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Argentina 8.5%
Brazil 44.7%
Chile 5.1%
Colombia 1.5%
Mexico 34.7%
Peru 2.2%
Venezuela 1.8%
Short-Term Investments 1.5%
</TABLE>
<TABLE>
<CAPTION>
TOTAL RETURNS**
-------------------------------------------------------------
AVERAGE ANNUAL
SIX MONTHS ONE YEAR SINCE INCEPTION
----------------- ----------------- -----------------
WITH WITHOUT WITH WITHOUT WITH WITHOUT
SALES SALES SALES SALES SALES SALES
CHARGE* CHARGE CHARGE* CHARGE CHARGE* CHARGE
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class A Shares -8.06% -2.46% 31.59% 39.61% 13.39% 15.33%
- -----------------------------------------------------------------------------------------------
Class B+ Shares -6.53% -2.66% 33.89% 38.89% 31.67% 32.50%
- -----------------------------------------------------------------------------------------------
Class C Shares -3.52% -2.75% 37.74% 38.74% 14.40% 14.40%
- -----------------------------------------------------------------------------------------------
MSCI Latin America Global
Index:
Class A & C Shares N/A -6.29% N/A 31.66% N/A 10.34%
Class B Shares N/A -6.29% N/A 31.66% N/A 19.89%
- -----------------------------------------------------------------------------------------------
</TABLE>
* The returns above are calculated using the applicable sales charge for Class
A shares and the applicable deferred sales charge for Class B and Class C
shares.
** Total returns for the Fund reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waivers and reimbursements, total
returns would be lower.
+ Class B shares have been offered since August 1, 1995.
The MSCI Latin America Global Index is a broad-based market cap weighted
composite index covering at least 60% of markets in Mexico, Argentina, Brazil,
Chile, Colombia, Peru and Venezuela and assumes dividends are reinvested.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
<TABLE>
<CAPTION>
TOP FIVE HOLDINGS
PERCENT OF
ISSUER COUNTRY NET ASSETS
- ------ --------- --------------
<S> <C> <C>
Telebras Brazil 12.1%
CRT Brazil 11.3%
Telemex ADR Mexico 7.4%
Unibanco GDR Brazil 5.1%
FEMSA 'B' Mexico 4.9%
</TABLE>
<TABLE>
<CAPTION>
TOP FIVE SECTORS
VALUE PERCENT OF
SECTOR (000) NET ASSETS
- ------ --------- -------------
<S> <C> <C>
Services $ 62,397 52.3%
Energy 12,974 10.9%
Finance 12,283 10.3%
Consumer Goods 11,859 10.0%
Materials 10,564 8.9%
</TABLE>
The investment objective of the Latin American Fund is to provide long-term
capital appreciation by investing primarily in equity securities of Latin
American issuers.
For the six months ended December 31, 1997, the Fund generated a total return of
- -2.46 percent for the Class A shares at net asset value, as compared to a total
return of -6.29 percent for the Morgan Stanley Capital International (MSCI)
Latin America Global Index.
The Asian economic crisis, which began on July 2 with the devaluation of the
Thai baht, undermined performance in nearly all emerging markets, including
those in Latin America. However, the Fund outperformed its benchmark during the
reporting period due to strong country allocation and stock selection. In
particular, the largest contributors to the Fund's outperformance were
overweighting Mexico, underweighting Chile, adding to Brazil in early December,
and making strong stock selections in Mexico, where we are focusing on
consumer-related companies.
The Brazilian stock market fell 18.4 percent during the six months ended
December 31 due to exaggerated currency fears. Investors expected fallout from
the Asian currency crisis to impact Brazil due to its superficial similarities
with many Southeast Asian countries. (Brazil follows a fixed exchange-rate
regime and has large current account and fiscal deficits.) These fears were
exacerbated by profit-taking, given the sharp equity gains prior to the onset of
the Asian crisis.
Our concerns about Brazil's vulnerable macro-economic outlook (current account
deficit, overvalued exchange rate, fiscal deficit, and stubborn Congress) led us
to reduce our exposure to Brazilian equities during the third quarter.
Nevertheless, positive themes such as the ongoing privatization process cause us
to be optimistic about Brazil's prospects for the long term.
During the latter part of the fourth quarter, Brazilian equities were able to
pull away from the effects of investors' recent focus on Asia. A strong U.S.
market and favorable domestic news helped Brazilian stocks begin to recoup
earlier losses. A number of positive moves by political authorities also
supported the equity market, including an aggressive, well-planned response to
the Asian crisis, the doubling of interest rates, and a significant tightening
of fiscal policy.
Even the Brazilian Congress contributed to building confidence in the economy.
Not only was the fiscal package passed quickly and with few amendments, but the
Asian currency crisis provided the spur for action on the reform process. Since
the full-blown eruption of the crisis in late October, the
THE COUNTRY-SPECIFIC PERFORMANCE RESULTS PROVIDED IN THIS OVERVIEW ARE AS
MEASURED BY THE MSCI LATIN AMERICA GLOBAL INDEX AND ARE FOR INFORMATIONAL
PURPOSES ONLY AND SHOULD NOT BE CONSTRUED AS A GUARANTEE OF THE FUND'S FUTURE
PERFORMANCE. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN
INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL
COST. PLEASE SEE THE PROSPECTUS FOR A DESCRIPTION OF CERTAIN RISK CONSIDERATIONS
ASSOCIATED WITH INTERNATIONAL INVESTING.
49
<PAGE> 400
MORGAN STANLEY
LATIN AMERICAN FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
(UNAUDITED)
Brazilian Lower House passed an administrative reform package that allows
government at all levels to fire workers when payroll costs exceed 60 percent of
total costs. Given these positive measures, we increased our exposure to an
overweight position in Brazil at the end of November, a move that proved
favorable for the Fund's performance.
Mexico was the best-performing market in the region during the six-month period,
appreciating 16.8 percent. Most of Mexico's exports are to the U.S., making the
country less vulnerable to an economic slowdown in Asia. The outstanding
performance of Mexican stocks during the reporting period was also due to the
recovery of the Mexican consumer, as evidenced by improving retail and consumer
production sales, and increasing real wages. On the political front, the smooth
transition to a multiparty Congressional leadership after the July 6 mid-term
elections seems to have appeased investors. We increased our exposure to Mexico
during the third quarter in response to consumer-led economic progress and the
country's strong operating earnings growth potential.
Argentina declined 1.4 percent during the last six months of 1997, largely in
sympathy with the broad-based declines throughout the region. However, Argentina
continued a strong economic acceleration that began at the end of last year, led
by infrastructure and mining-related industries. Equities in Argentina performed
well during the third quarter, gaining 7.6 percent amid indications of a
recovery in domestic consumption.
The Chilean market fell 21.3 percent during the six months ended December 31 due
to modest profit-taking during the third quarter and commodity deflation during
the fourth quarter. We lightened our exposure early in the third quarter to fund
purchases in Mexico and because of lackluster Chilean earnings growth relative
to the region. Commodity deflation in copper, pulp, and paper, as a result of
reduced demand from Asia, has pressured the Chilean economy and equity market.
None of the remaining Latin markets were immune to the Asian contagion. Colombia
posted the second-best return for the region, appreciating 3.3 percent during
the second half of 1997. Colombia benefited from improved sentiment as investors
anticipated a bottoming of the economic slowdown from which forward momentum
will begin. Peru fell 14.9 percent during the period in response to political
instability and concerns over the impact of the El Nino weather phenomenon on
the economy, primarily the fishmeal industry.
Despite the impact of Asian turmoil on Latin America, our outlook for the region
is positive. We are encouraged by the many key steps taken across the region to
strengthen and consolidate economic and political reforms. We will continue to
focus on Brazil and Mexico in 1998. The Brazilian equity market should be fueled
by continued privatization successes, further progress in structural reforms, a
gradual decline in interest rates, and the reelection of President Cardoso. The
Mexican market should be driven by another year of strong economic growth and
further strengthening of the consumer.
Robert L. Meyer Andy B. Skov
PORTFOLIO MANAGER PORTFOLIO MANAGER
50
<PAGE> 401
MORGAN STANLEY
LATIN AMERICAN FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------------------------
<S> <C>
COMMON STOCKS (73.2%)
ARGENTINA (8.5%)
(a)274,087 Acindar.......................................... $ 653
172,387 Banco del Suquia................................. 448
90,665 Banco Rio de La Plata ADR........................ 1,269
62,112 Siderar 'A'...................................... 264
(e)8,095 Siderar ADR...................................... 275
34,145 Telecom Argentina ADR............................ 1,221
98,351 Telefonica de Argentina ADR...................... 3,664
67,450 YPF ADR.......................................... 2,306
--------
10,100
--------
BRAZIL (20.1%)
23,569 CEMIG ADR........................................ 1,024
(e)683 CEMIG ADR........................................ 29
28,790 Copel ADR........................................ 394
3,410,000 Coteminas........................................ 1,130
(a,e)23,790 Coteminas ADR.................................... 394
(a)10,908,918 CRT.............................................. 13,440
(a)2,961,000 Encorpar......................................... 2
600,500 Iven............................................. 342
(e)10,410 Lojas Arupua ADR................................. 35
(a,e)233,455 Rossi Residencial GDR............................ 1,138
(a)186,932 Unibanco GDR..................................... 6,017
(a)31,997 Vale Do Rio Doce................................. --
--------
23,945
--------
CHILE (5.1%)
61,685 CCU ADR.......................................... 1,812
77,850 Chilectra ADR.................................... 2,160
119,013 Santa Isabel ADR................................. 2,083
--------
6,055
--------
COLOMBIA (1.3%)
5,519 Banco de Colombia................................ 2
146,317 Bavaria.......................................... 1,501
--------
1,503
--------
MEXICO (34.7%)
(a)564,792 Banacci 'B'...................................... 1,692
(a)166,310 Banacci 'L'...................................... 429
(a)244,830 Bancomer 'B'..................................... 159
(a)28,435 Cemex ADR........................................ 256
(a)25,200 Cemex 'B'........................................ 134
(a)52,234 Cemex 'B' ADR.................................... 555
(a)399,931 Cemex CPO........................................ 1,811
(a)3,155 Cifra ADR........................................ 78
502,575 Cifra 'B'........................................ 1,236
591,070 Cifra 'C'........................................ 1,327
(a)73,300 Corporation Interamericana de Entretenimiento
S.A............................................ 569
(e)23,400 FEMSA ADR........................................ 187
701,595 FEMSA 'B'........................................ 5,641
69,630 Grupo Modelo 'C'................................. 584
1,018,494 Kimberly 'A'..................................... 4,840
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------------------------
<S> <C>
16,201 Panamerican Beverages, Inc....................... $ 529
894,968 Soriana 'B'...................................... 3,964
156,890 Telemex ADR...................................... 8,796
(a)120,635 Televisa CPO ADR................................. 4,667
(a)174,495 TV Azteca ADR.................................... 3,937
--------
41,391
--------
PERU (1.7%)
70,755 Banco Weise ADR.................................. 354
72,120 Tel Peru 'B' ADR................................. 1,681
--------
2,035
--------
VENEZUELA (1.8%)
469,326 C.A. La Electricidad de Caracas.................. 563
28,852 CANTV ADR........................................ 1,201
103,385 Sivensa S.A.C.A. ADR............................. 433
--------
2,197
--------
TOTAL COMMON STOCKS (COST $83,967).................................. 87,226
--------
PREFERRED STOCKS (24.6%)
BRAZIL (NON-VOTING STOCKS) (24.6%)
192,522,000 Banco Bradesco................................... 1,894
(a,d)8,115,000 Banco Nacional................................... --
55,000,200 CEMIG............................................ 2,390
1,827,000 Cimento Portland Itau............................ 352
129,387 CVRD............................................. 2,603
83,035 CVRD ADR......................................... 1,635
79,020,767 Gerdau........................................... 991
8,000 Globex Utilidades................................ 47
19,195,300 Lojas Arapua..................................... 69
24,090,300 Lojas Renner..................................... 755
10,966,800 Petrobras........................................ 2,565
(a,e)64,625 Petrobras ADR.................................... 1,543
81,265,783 Telebras......................................... 9,269
44,621 Telebras ADR..................................... 5,196
--------
TOTAL PREFERRED STOCKS (COST $30,879)............................... 29,309
--------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
RIGHTS
- ----------------
<S> <C>
RIGHTS (0.0%)
BRAZIL (0.0%)
(a,d)195,522,000 Banco Bradesco (COST $0)......................... 17
--------
TOTAL FOREIGN SECURITIES (97.8%) (COST $114,846).................... 116,552
--------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
- ----------------
<S> <C>
SHORT-TERM INVESTMENT (3.2%)
REPURCHASE AGREEMENT (3.2%)
$ 3,861 Chase Securities, Inc., 5.95%, dated 12/31/97,
due 1/2/98, to be repurchased at $3,862,
collateralized by $3,900 U.S. Treasury Bonds,
5.625% due 2/15/06 valued at $3,941 (COST
$3,861)........................................ 3,861
--------
TOTAL INVESTMENT IN SECURITIES (101.0%) (COST $118,707)............. 120,413
--------
</TABLE>
51
The accompanying notes are an integral part of the financial statements.
<PAGE> 402
MORGAN STANLEY
LATIN AMERICAN FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ------------------------------------------------------------------------------
<S> <C>
FOREIGN CURRENCY (0.8%)
ARP 86 Argentine Peso................................... $ 86
BRL 21 Brazilian Real................................... 18
COP 346,124 Colombian Peso................................... 267
MXP 7 Mexican Peso..................................... 1
PSS 1,433 Peruvian Sol..................................... 526
VEB 8,980 Venezuelan Bolivar............................... 18
--------
TOTAL FOREIGN CURRENCY (COST $933).................................. 916
--------
TOTAL INVESTMENTS (101.8%) (COST $119,640).......................... 121,329
LIABILITIES IN EXCESS OF OTHER ASSETS (-1.8%)....................... (2,116)
--------
NET ASSETS (100%)................................................... $119,213
========
</TABLE>
- ---------------
(a) -- Non-income producing security
(d) -- Security valued at fair value -- see note A-1 to financial statements.
(e) -- 144A Security -- certain conditions for public sale may exist.
CPO -- Certificate of Participation
ADR -- American Depositary Receipt
GDR -- Global Depositary Receipt
52
The accompanying notes are an integral part of the financial statements.
<PAGE> 403
MORGAN STANLEY
LATIN AMERICAN FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
DECEMBER 31, 1997
(UNAUDITED)
- --------------------------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE INFORMATION:
Under the terms of foreign currency contracts open at December 31, 1997, the
Portfolio is obligated to deliver or is to receive foreign currency in exchange
for U.S. dollars as indicated below:
<TABLE>
<CAPTION>
CURRENCY IN EXCHANGE NET UNREALIZED
TO DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS)
(000) (000) DATE (000) (000) (000)
- ------------- ----- ----------- ----------- ----- -----------------
<S> <C> <C> <C> <C> <C>
$ 95 $ 95 1/2/98 BRL 106 $ 95 $ --
$ 87 87 1/2/98 MXP 701 87 --
--------- --------- ---------
$ 182 $ 182 $ --
========= ========= =========
</TABLE>
- ---------------
BRL -- Brazilian Real
MXP -- Mexican Peso
- --------------------------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
- -------- --------- -------------
<S> <C> <C>
Services..................................................................... $ 62,397 52.3%
Energy....................................................................... 12,974 10.9
Finance...................................................................... 12,283 10.3
Consumer Goods............................................................... 11,859 10.0
Materials.................................................................... 10,564 8.9
Capital Equipment............................................................ 5,378 4.5
Multi-Industry............................................................... 1,097 0.9
--------- ----
$ 116,552 97.8%
========= ====
</TABLE>
53
The accompanying notes are an integral part of the financial statements.
<PAGE> 404
MORGAN STANLEY
EMERGING MARKETS FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW
(UNAUDITED)
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1997)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Brazil 14.6%
India 7.7%
Korea 3.2%
Malaysia 3.1%
Mexico 11.2%
Pakistan 4.1%
Russia 8.7%
South Africa 6.0%
Taiwan 6.2%
Turkey 5.6%
Other 29.6%
</TABLE>
<TABLE>
<CAPTION>
TOTAL RETURNS**
-------------------------------------------------------------
AVERAGE ANNUAL
SIX MONTHS ONE YEAR SINCE INCEPTION
----------------- ----------------- -----------------
WITH WITHOUT WITH WITHOUT WITH WITHOUT
SALES SALES SALES SALES SALES SALES
CHARGE* CHARGE CHARGE* CHARGE CHARGE* CHARGE
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class A Shares -26.66% -22.19% -7.58% -1.96% -4.86% -3.23%
- -----------------------------------------------------------------------------------------------
Class B+ Shares -25.98% -22.50% -7.04% -2.66% -2.91% -1.82%
- -----------------------------------------------------------------------------------------------
Class C Shares -23.18% -22.48% -3.63% -2.75% -3.97% -3.97%
- -----------------------------------------------------------------------------------------------
IFC Global Total Return
Composite Index:
Class A & C Shares N/A -26.93% N/A -14.42% N/A -3.85%
Class B Shares N/A -26.93% N/A -14.42% N/A -5.77%
- -----------------------------------------------------------------------------------------------
</TABLE>
* The returns above are calculated using the applicable sales charge for Class
A shares and the applicable deferred sales charge for Class B and Class C
shares.
** Total returns for the Fund reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waivers and reimbursements, total
returns would be lower.
+ Class B shares have been offered since August 1, 1995.
The IFC Global Total Return Composite Index is an unmanaged index of common
stocks and includes developing countries in Latin America, East and South Asia,
Europe, the Middle East and Africa and assumes dividends are reinvested.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
<TABLE>
<CAPTION>
TOP FIVE HOLDINGS
PERCENT OF
ISSUER COUNTRY NET ASSETS
- ------ --------- --------------
<S> <C> <C>
Telebras ADR Brazil 4.5%
CRT Brazil 3.1%
FEMSA 'B' Mexico 2.7%
Yapi Ve Kredi Bankasi A.S. Turkey 2.6%
Telemex 'L' ADR Mexico 2.5%
</TABLE>
<TABLE>
<CAPTION>
TOP FIVE SECTORS
VALUE PERCENT OF
SECTOR (000) NET ASSETS
- ------ --------- -------------
<S> <C> <C>
Services $ 40,100 22.5%
Finance 27,959 15.7%
Consumer Goods 27,469 15.4%
Energy 21,369 12.0%
Capital Equipment 17,496 9.8%
</TABLE>
The investment objective of the Emerging Markets Fund is to seek to provide
long-term capital appreciation by investing primarily in equity securities of
emerging country issuers.
For the six months ended December 31, 1997, the Fund had a total return of
- -22.19 percent for Class A shares at net asset value, as compared to a total
return of -26.93 percent for the IFC Global Total Return Composite Index for the
same period.
The contagion effect of the currency crisis in Asia triggered a collapse of
nearly every emerging market during the final months of the reporting period.
The selling panic that ensued across all emerging markets left Asia down 33
percent, Latin America down 11 percent, and Russia down 18 percent. Even the
relatively isolated Indian market was off 12 percent during the fourth quarter.
Performance relative to the Fund's benchmark was primarily driven by country
allocation. Fund results were helped by overweights in Russia, India, Pakistan,
and Turkey, and by underweights in Asia. However, given our view that currency
and stock markets throughout the region dramatically overshot fair-value
benchmarks, we began easing into Asia during the third and fourth quarters.
Asian markets finished the reporting period off between 70 percent and 85
percent from their highs, and we believe that current prices already discount
economic devastation and corporate bankruptcies.
While we also believe that the near-term economic and earnings outlook for most
Asian countries remains grim and that considerable economic pain--with its
commensurate political convulsions-- is ahead, we nonetheless believe that the
worst has been discounted in the prices of stocks and currencies. Asian markets
have been tremendously oversold, and in the face of such negative sentiment, any
marginally positive news could ignite a huge rally in the region.
We believe that after the shake-out in Asia is complete, the region will divide
into groups of winners and losers as the era of "Asian Value" crony-capitalism
comes to an end. As always, country allocation and stock selection are
important, and the Fund has been highly discriminating in its selection of both
markets and stocks. We feel that Korea has the best chance of transforming its
economy and its corporate structure for the benefit of the shareholder.
World-class companies such as Samsung Electronics, LG Information &
Communication Ltd., and Pohang Iron and Steel are at bargain-basement levels.
Our overweight position in Korea is concentrated in those stocks.
Last month's closure of 56 out of 58 finance companies in Thailand signaled the
start of the corporate restructuring that is inevitable in that country. After
an agonizing six months, it appears
THE COUNTRY-SPECIFIC PERFORMANCE RESULTS PROVIDED IN THIS OVERVIEW ARE AS
MEASURED BY THE MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) EMERGING MARKETS
REGIONAL OR COUNTRY INDICES AND ARE FOR INFORMATIONAL PURPOSES ONLY AND SHOULD
NOT BE CONSTRUED AS A GUARANTEE OF THE FUND'S FUTURE PERFORMANCE. INVESTMENT
RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN
REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. PLEASE SEE THE
PROSPECTUS FOR A DESCRIPTION OF CERTAIN RISK CONSIDERATIONS ASSOCIATED WITH
INTERNATIONAL INVESTING.
54
<PAGE> 405
MORGAN STANLEY
EMERGING MARKETS FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
(UNAUDITED)
that the Thai government and corporate sector have recognized the need for
reform. While we feel that positive economic and corporate news will be scarce
during the next year, the market is already discounting much of the potentially
negative developments. Consequently, we are overweight Thailand.
Indonesia has fallen the farthest and the fastest of all Asian markets. Although
the Indonesian equity market currently is capitalized at just 10 percent of its
value in U.S. dollars from a year earlier, we remain hesitant to add to
positions. While Indonesia is cheap, it is deservedly so. The fate of the
country's 200 million residents could rest on the will of one man, President
Suharto. The nexus between politics and business remains intractable, and it
appears that no real progress on economic reform can be made while the current
political regime retains power. President Suharto has made some concessions and
conciliatory gestures under pressure from the IMF and President Clinton.
However, a true embracing of the IMF reform package implies a fundamental
reformation of the political system and abdication of economic largesse by the
Suharto family. Resentment of the First Family, particularly toward the Suharto
children, runs deep and may prove incendiary in coming months. The scenario
developing in Indonesia includes sharply higher inflation, a recession, a
dramatic rise in unemployment, food shortages, and an election. We maintain a
neutral weight in Indonesia given the market's dramatically oversold condition.
Although we expect a significant upward move from these levels, we would expect
to sell into a rally, assuming no change in underlying fundamentals.
Malaysia has earned the dubious distinction of being the "least-worst" Asian
market. The country's banking system is sound, its politics are stable, and its
corporate sector is in reasonable financial shape. Our hesitancy towards
Malaysia has been based on valuations. Given the recent correction, however, we
are in the process of increasing our long underweight position.
We are slightly underweight in Latin America and expect to decrease our exposure
even further. We remain upbeat on the political and corporate leadership
witnessed during the post-Mexico devaluation crisis and the more recent Asian
crisis. In Mexico, the consumer recovery continues, while in Brazil the
privatization program is moving ahead. However, the Brazilian Real is perhaps
one of the more overvalued currencies in the emerging-market universe, and the
high real interest rates required to support it in the aftermath of the Asian
crisis will prove burdensome both for the corporate sector and for equity market
performance.
Mexico has performed spectacularly well over the last 12 months as the country
has benefited from having taken its devaluation "medicine" early, as well as
being geographically situated to capitalize on the phenomenal strength of the
U.S. economy. As a result of the strong gains, however, many of the Fund's
Mexican holdings no longer offer compelling value and will likely be trimmed
back to gain exposure to other investments in Asia.
We continue to view India and South Africa as sources of funds for our increased
exposure in Asia. India is well underpinned by both valuations and corporate
fundamentals; however, we believe that political uncertainty and slightly higher
interest rates will cap some of the upside potential in the Indian market.
In Europe, Russian stocks experienced a substantial correction after a stellar
run. We remain optimistic about the country's long-term prospects, but have
reduced our exposure to Russian equities. Likewise, Turkey experienced
tremendous returns in the last year and remains one of the last markets that has
yet to conquer inflation. Positive news on the inflation front could trigger
another move up in stock prices. Because valuations remain at attractive levels,
we are overweight in the Turkish market. The Fund's cash position is slowly
being redeployed as the entire emerging-market asset class has fallen to levels
significantly below fair value.
Madhav Dhar Robert L. Meyer
PORTFOLIO MANAGER PORTFOLIO MANAGER
55
<PAGE> 406
MORGAN STANLEY
EMERGING MARKETS FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------------------------
<S> <C>
COMMON STOCKS (75.8%)
ARGENTINA (2.3%)
12,975 Nortel Inversora ADR............................. $ 331
8,449 Telecom Argentina ADR............................ 302
71,551 Telefonica de Argentina ADR...................... 2,665
24,156 YPF ADR.......................................... 826
--------
4,124
--------
BRAZIL (2.4%)
42,380 Brahma ADR....................................... 601
(a,e)12,645 Coteminas ADR.................................... 210
(a)295,381 CRT 'A'.......................................... 364
(a)1,256,000 Encorpar......................................... 1
571,000 Lightpar......................................... 171
(e)14,225 Lojas Arupua ADR................................. 51
7,720 Pao de Acucar ADR................................ 150
14,961 Pao de Acucar ADR................................ 291
(a,e)16,025 Rossi Residencial GDR............................ 78
1,508,100 Tecidos Nortre de Minas.......................... 541
5,854,000 Telebras......................................... 595
(a)38,920 Unibanco GDR..................................... 1,253
--------
4,306
--------
CHILE (0.7%)
18,300 CCU ADR.......................................... 538
8,290 Enersis ADR...................................... 240
22,954 Santa Isabel ADR................................. 402
--------
1,180
--------
CHINA (0.2%)
281,000 Qingling Motors Co., 'H'......................... 138
(a)996,000 Zhejiang Expressway Co., Ltd. 'H'................ 202
--------
340
--------
COLOMBIA (0.0%)
68,572 Banco de Colombia................................ 24
--------
EGYPT (1.9%)
7,400 Al-Ahram Beverages Co. S.A.E. GDR................ 205
7,916 Ameriyah Cement Co............................... 185
34,430 Commercial International Bank.................... 695
16,750 Commercial International Bank GDR................ 350
13,720 Eastern Tobacco.................................. 318
5,775 Egyptian Finance & Industrial.................... 348
(a)10,800 General Silo Storage............................. 260
(a)10,475 Helwan Portland Cement Co........................ 211
(a)6,377 Industrial & Engineering......................... 107
(a)3,200 Madinet Housing & Development.................... 207
1,950 North Cairo Flour Mills.......................... 55
500 Paints & Chemical Industries Co. S.A.E........... 16
31,100 Paints & Chemical Industries Co. S.A.E. GDR...... 311
8,575 Tourah Portland Cement Co........................ 197
--------
3,465
--------
HONG KONG (2.0%)
80,000 Cheung Kong Holdings Ltd......................... 524
111,000 China Light & Power Co., Ltd..................... 616
147,000 China Resources Enterprises Ltd.................. 328
24,400 HSBC Holdings plc................................ 601
433,000 Ng Fung Hong Ltd................................. 455
77,000 Shanghai Industrial Holdings Ltd................. 286
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------------------------
<S> <C>
78,000 Sun Hung Kai Properties Ltd...................... $ 544
456,000 Zhenhai Refining & Chemical Co................... 190
--------
3,544
--------
HUNGARY (0.6%)
3,601 BorsodChem Rt. GDR............................... 130
3,200 Gedeon Richter Ltd............................... 336
16,416 MOL Magyar Olaj-es Gazipari Rt. GDR.............. 401
6,200 OPT Bank Rt...................................... 235
--------
1,102
--------
INDIA (7.2%)
100 Automotive Axles Ltd............................. 1
209,700 Bharat Heavy Electricals Ltd..................... 1,893
4,369 Century Textiles & Industries GDR................ 109
105,000 Container Corp. of India Ltd..................... 1,125
(e)150,000 E.I.D. Parry Ltd. GDR............................ 244
56,600 Great Eastern Shipping GDR....................... 304
85,314 Gujarat Narmada Valley Fertilizers Co., Ltd.
GDR............................................ 128
22,500 Hero Honda Motors Ltd............................ 530
504,000 Hindustan Development Corp. Ltd. GDR............. 78
24,400 Hoechst Shering Agrero Ltd....................... 386
32,409 Housing Development Finance Corp., Ltd........... 2,544
(e)108,750 Indo Rama Synthetics Ltd. GDR.................... 218
61,000 Infosys Technologies Ltd......................... 1,918
51,200 ITC Ltd.......................................... 808
184,150 LG Balakrishnan Bros............................. 479
32,300 Mahanagar Telephone Nigam Ltd.................... 213
5,000 MRF Ltd. 'B'..................................... 247
100,000 Philips India Ltd................................ 166
21,150 Rane Madras Ltd.................................. 55
(a)317,000 SIV Industries GDR............................... 127
135,600 State Bank of India.............................. 841
302,600 Tube Investments of India Ltd. GDR............... 287
40,550 United Phosphorus Ltd. GDR....................... 101
--------
12,802
--------
INDONESIA (2.5%)
(d)3,204,563 Astra International (Foreign).................... 830
(d)3,265,138 Bank International Indonesia (Foreign)........... 193
(d)2,059,300 Bank Negara Indonesia (Foreign).................. 197
51,300 Barito Pacific Timber (Foreign).................. 15
359,428 Bimantara Citra (Foreign)........................ 69
166,300 Citra Marga Nusaphala Persada (Foreign).......... 18
50,246 Daya Guna Samudera (Foreign)..................... 38
(d)546,325 Gudang Garam (Foreign)........................... 831
(a)4,700 Gulf Indonesia Resources Ltd. (Foreign).......... 103
(d)287,000 Hanjaya Mandala Sampoerna (Foreign).............. 217
1,472,880 Indah Kiat Pulp & Paper (Foreign)................ 261
743,000 Indofood Sukses Makmur (Foreign)................. 243
37,600 London Sumatra Indonesia (Foreign)............... 21
(d)1,199,000 Mayora Indah (Foreign)........................... 104
(a,d)1,153,200 Putra Surya Multidana (Foreign).................. 110
37,300 Tambang Timah (Foreign).......................... 40
6,400 Telekomunikasi ADR............................... 71
1,997,700 Telekomunikasi (Foreign)......................... 1,062
--------
4,423
--------
ISRAEL (2.9%)
273,200 Bank Hapoalim Ltd................................ 656
1 Elbit Medical Imaging Ltd........................ --
</TABLE>
56
The accompanying notes are an integral part of the financial statements.
<PAGE> 407
MORGAN STANLEY
EMERGING MARKETS FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------------------------
<S> <C>
ISRAEL (CONT.)
37,500 Elbit Systems Ltd................................ $ 495
680 First International Bank of Israel Ltd. '1'...... 93
1,097 First International Bank of Israel Ltd. '5'...... 805
10,890 Koor Industries Ltd.............................. 1,207
16,500 Koor Industries Ltd. ADR......................... 362
530,700 Super Sol Ltd.................................... 1,505
1,030 Super Sol Ltd. ADR............................... 14
--------
5,137
--------
KOREA (3.2%)
(a)25,260 Hansol Paper Co.................................. 111
(a)33,022 Housing & Commercial Bank (Foreign).............. 222
59,593 Housing & Commercial Bank GDR.................... 393
(d)650 Korea Mobile Telecommunications Corp............. 196
46,209 LG Information & Communication Ltd............... 1,295
(d)40,200 Pohang Iron & Steel Co., Ltd..................... 1,121
24,486 Pohang Iron & Steel Co., Ltd. (Foreign).......... 663
56,723 Samsung Electronics Co. (Foreign)................ 1,285
(a)28,184 Samsung Electronics Co. GDR (New)................ 400
--------
5,686
--------
MALAYSIA (3.1%)
69,800 AMMB Holdings Bhd................................ 46
13,000 Berjaya Sports Toto Bhd.......................... 33
20,000 Carlsberg Brewery Malaysia Bhd................... 64
164,000 Commerce Asset Holdings Bhd...................... 78
253,000 DCB Holdings Bhd................................. 122
125,000 Genting Bhd...................................... 313
242,000 Golden Hope Plantations Bhd...................... 280
124,000 IOI Corp., Bhd................................... 40
150,000 Kuala Lumpur Kepong Bhd.......................... 322
166,000 Magnum Corp., Bhd................................ 100
154,800 Malayan Banking Bhd.............................. 450
155,000 Malayan United Industries Bhd.................... 27
59,000 Malaysian International Shipping (Foreign)....... 86
19,000 Malaysian Pacific Industries Bhd................. 46
46,000 Nestle Bhd....................................... 213
31,000 New Straits Times Press Bhd...................... 38
51,000 Perusahaan Otomobil Nasional Bhd................. 50
193,000 Petronas Gas Bhd................................. 439
60,000 Rashid Hussain Bhd............................... 47
58,000 Resorts World Bhd................................ 98
52,000 R.J. Reynolds Bhd................................ 85
62,000 Rothmans of Pall Mall Bhd........................ 482
323,000 Sime Darby Bhd................................... 311
102,000 Technology Resources Industries.................. 60
259,000 Telekom Malaysia Bhd............................. 766
336,000 Tenaga Nasional Bhd.............................. 717
208,000 United Engineers Bhd............................. 173
--------
5,486
--------
MEXICO (11.2%)
44,710 Apasco........................................... 308
(a)79,309 Banacci 'B'...................................... 238
(a)193,888 Banacci 'L'...................................... 500
(a)461,662 Bancomer 'B'..................................... 300
(a,e)21,425 Bancomer 'B' ADR................................. 277
(a)239,635 Cemex CPO........................................ 1,085
(a)34,354 Cemex CPO ADR.................................... 312
15,004 Cifra 'A'........................................ 37
21,930 Cifra 'B'........................................ 54
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------------------------
<S> <C>
36,440 Cifra 'B' ADR.................................... $ 89
141,854 Cifra 'C'........................................ 318
601,835 FEMSA 'B'........................................ 4,839
(a)1 Gruma ADR........................................ --
545,427 Kimberly 'A'..................................... 2,592
80,754 Telemex 'L' ADR.................................. 4,527
(a)87,665 Televisa CPO GDR................................. 3,392
(a)47,255 TV Azteca ADR.................................... 1,066
--------
19,934
--------
PAKISTAN (4.1%)
753,600 Fauji Fertilizer Co., Ltd........................ 1,443
(a)1,080,000 Hub Power Co..................................... 1,406
154,644 Pakistan State Oil Co., Ltd...................... 1,316
3,635,900 Pakistan Telecommunication Co.................... 2,747
(a)771,650 Sui Northern Gas Pipelines....................... 472
--------
7,384
--------
PERU (0.6%)
45,190 Tel Peru 'B' ADR................................. 1,053
--------
PHILIPPINES (1.9%)
1,736,300 Ayala Corp....................................... 675
207,860 Ayala Land, Inc. 'B'............................. 82
348,290 C&P Homes, Inc................................... 20
(a)283,460 Filinvest Land, Inc.............................. 11
199,250 Manila Electric 'B'.............................. 659
185,410 Metro Pacific Corp............................... 5
10,814 Metropolitan Bank & Trust Co..................... 73
254,490 Petron Corp...................................... 21
42,170 Philippine Long Distance Telephone Co............ 916
3,200 Philippine Long Distance Telephone Co. ADR....... 72
(a)8,770 Philippine National Bank 'B'..................... 19
359,720 San Miguel Corp. 'B'............................. 440
2,400,940 SM Prime Holdings, Inc........................... 356
--------
3,349
--------
POLAND (2.2%)
(a)18,860 Agros Holdings S.A. 'C'.......................... 391
(a)4,080 Agros Holdings S.A. 'D'.......................... 84
12,500 Bank Rozwoju Eksportu S.A........................ 259
8,136 Bank Slaski S.A.................................. 450
(a)8,300 Bank of Handlowy W Warszawie S.A................. 106
588,000 BIG Bank Gdanski S.A............................. 575
(a)13,000 BIG Bank Gdanski ell............................. 202
15,750 Debica S.A....................................... 384
77,100 Elektrim S.A..................................... 746
(a)30,500 Exbud S.A........................................ 286
(a)99,597 Polifarb Wroclaw S.A............................. 472
--------
3,955
--------
RUSSIA (8.4%)
6,852,500 Edinaya Energetiches............................. 2,056
1,622,000 Irkutskenergo.................................... 320
73,333 Lukoil Holdings Co............................... 1,694
4,333 Lukoil Holdings Co. ADR.......................... 400
736,667 Moscow Energy (Mosenergo)........................ 935
(a,d)4,570,885 Mustcom.......................................... 3,885
(a)600 Storyfirst Communications........................ 1,716
116,300 Surgutneftegaz ADR............................... 1,189
</TABLE>
57
The accompanying notes are an integral part of the financial statements.
<PAGE> 408
MORGAN STANLEY
EMERGING MARKETS FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------------------------
<S> <C>
RUSSIA (CONT.)
(a,d)2,684,488 Svyaz Finance.................................... $ 2,336
3,400 Tatneft ADR...................................... 483
--------
15,014
--------
SOUTH AFRICA (4.8%)
62,200 Barlow Ltd....................................... 528
21,262 Bidvest Group Ltd................................ 176
8,400 Coronation Holdings Ltd. 'N'..................... 122
127,400 Ellerine Holdings Ltd............................ 822
66,358 Foodcorp Limited................................. 341
94,400 Forbes Group Ltd................................. 175
182,400 Illovo Sugar Ltd................................. 311
249,675 Malbak Ltd....................................... 244
278,800 NBS Boland Group, Ltd............................ 690
893,500 New Africa Investments Ltd. 'N'.................. 854
236,100 Orion Selections Holdings, Ltd................... 606
160,000 Orion Selections Ltd............................. 345
64,779 Persetel Holdings Ltd............................ 355
519,900 Protea Furnishers Ltd............................ 259
122,900 Rembrandt Group Ltd.............................. 897
170,600 Sasol Ltd........................................ 1,784
--------
8,509
--------
TAIWAN (4.3%)
(a)191,500 Asustek Computer, Inc............................ 3,035
359,000 Cathay Construction Corp......................... 409
(a)342,572 Compal Electronics, Inc.......................... 998
1,173,632 Far Eastern Textile, Ltd......................... 1,273
(a)226,000 Hon Hai Precision Industry....................... 1,143
357,000 Siliconware Precision Industries Co.............. 843
--------
7,701
--------
THAILAND (2.8%)
(a)8,100 Advance Agro Public Co., Ltd..................... 7
(a)24,400 Advance Agro Public Co., Ltd. (Foreign).......... 20
137,100 Advanced Info Service Public Co., Ltd.
(Foreign)...................................... 655
38,200 BEC World Public Co., Ltd. (Foreign)............. 152
14,300 Bangkok Bank Public Co., Ltd. (Foreign).......... 36
(a,d)804,600 Bangkok Expressway Public Co., Ltd. (Foreign).... 447
3,200 Bank of Ayudhya Public Co., Ltd. (Foreign)....... 1
(d)88,700 Central Pattana Public Co., Ltd. (Foreign)....... 28
(a,d)54,900 Delta Electronics Public Co., Ltd. (Foreign)..... 451
(a)27,700 Electricity Generating Public Co., Ltd.
(Foreign)...................................... 52
105,300 Exploration & Production Public Co., Ltd.
(Foreign)...................................... 1,212
(d)65,300 Grammy Entertainment Public Co., Ltd.
(Foreign)...................................... 285
385,400 Industrial Finance Corp. of Thailand (Foreign)... 59
(d)22,000 Lanna Lignite Public Co., Ltd. (Foreign)......... 45
278,000 National Finance & Securities Co., Ltd.
(Foreign)...................................... 51
(d)253,400 National Petrochemical Public Co., Ltd.
(Foreign)...................................... 134
113,440 Shinawatra Computer Co., Ltd. (Foreign).......... 377
4,200 Siam City Cement Public Co., Ltd. (Foreign)...... 4
445,866 Siam Commercial Bank Co. Ltd. (Foreign).......... 509
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------------------------
<S> <C>
(a)15,500 TelecomAsia Corp. Public Co. Ltd. (Foreign)...... $ 3
(d)235,000 Thai Airways International Public Co., Ltd.
(Foreign)...................................... 254
(a,d)30,300 Thai Engine Manufacturing Public Co., Ltd.
(Foreign)...................................... 51
41,900 Thai Farmers Bank Public Co., Ltd. (Foreign)..... 76
8,400 Thailand Petrochemical Industry.................. 1
174,700 United Communications Industry Public Co., Ltd.
(Foreign)...................................... 71
--------
4,981
--------
TURKEY (5.6%)
5,669,750 Arcelik A.S...................................... 533
6,495,500 Ege Biracilik Ve Malt Sanayii.................... 588
4,009,000 Erciyas Biracilik Ve Malt Sanayii................ 561
14,583,000 Eregli Demir Ve Celik Fabrikalari A.S............ 2,252
119,000 Migros Turk...................................... 108
12,603,383 Turkiye Garanti Bankasi A.S...................... 623
8,071,000 Vestel Elektronik Sanayii ve Ticaret A.S......... 662
120,265,330 Yapi Ve Kredi Bankasi A.S........................ 4,584
--------
9,911
--------
VENEZUELA (0.4%)
91,003 C.A. La Electricidad de Caracas.................. 109
17,005 CANTV ADR........................................ 708
--------
817
--------
ZIMBABWE (0.5%)
656,950 Delta Corp....................................... 447
374,200 Meikles Africa Ltd............................... 337
(e)597,000 Trans Zambesi Industries Ltd. 'S'................ 190
--------
974
--------
TOTAL COMMON STOCKS (COST $164,281).................................
135,201
--------
PREFERRED STOCKS (12.5%)
BRAZIL (NON-VOTING STOCKS) (12.2%)
67,992,584 Banco Bradesco................................... 670
(a,d)11,156,000 Banco Nacional................................... --
2,963,099 Brahma........................................... 1,991
41,211,110 CEMIG............................................ 1,791
13,945 CEMIG ADR........................................ 606
(a)4,164,300 CRT.............................................. 5,131
30,400 CVRD............................................. 612
23,359 CVRD ADR......................................... 470
1,734,000 Itaubanco........................................ 932
12,437,000 Lojas Arapua..................................... 45
6,448,000 Lojas Renner..................................... 202
4,660,000 Pao de Acucar.................................... 85
(e)6,401,000 Petrobras........................................ 1,497
(a,e)12,430 Petrobras ADR.................................... 295
12,862,390 Telebras......................................... 1,467
51,035 Telebras ADR..................................... 5,942
53,661,000 Telesp........................................... 14
--------
21,750
--------
RUSSIA (0.3%)
200,000 Rostelekom....................................... 466
--------
TOTAL PREFERRED STOCKS (COST $23,258)............................... 22,216
--------
</TABLE>
58
The accompanying notes are an integral part of the financial statements.
<PAGE> 409
MORGAN STANLEY
EMERGING MARKETS FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------------------------
<S> <C>
INVESTMENT COMPANIES (1.0%)
UNITED STATES (1.0%)
(a)71,000 Korea Fund, Inc.................................. $ 470
(g)34,265 Morgan Stanley Africa Investment Fund, Inc....... 394
(a,g)105,434 Morgan Stanley India Investment Fund, Inc........ 883
--------
TOTAL INVESTMENT COMPANIES (COST $2,228)............................ 1,747
--------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
RIGHTS
- ----------------
<S> <C>
RIGHTS (0.0%)
BRAZIL (0.0%)
(a)75,148,584 Banco Bradesco................................... 7
(a,d)53,661 Telecom de Sao Paulo............................. --
--------
7
--------
POLAND (0.0%)
(a)1,694 Polifarb Wroclaw S.A............................. 2
--------
SOUTH AFRICA (0.0%)
(a)2,100 Coronation Holdings Ltd.......................... --
--------
THAILAND (0.0%)
(a,d)278,000 National Finance & Securities Public Co., Ltd.... --
--------
TOTAL RIGHTS (COST $0).............................................. 9
--------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
WARRANTS
- ----------------
<S> <C>
WARRANTS (0.0%)
INDONESIA (0.0%)
(a)126,596 Bank International Indonesia, expiring 1/17/00... 2
(a)80,192 Indah Kiat Pulp & Paper, expiring 7/11/02........ 2
--------
4
--------
MALAYSIA (0.0%)
(a)26,750 Commerce Asset Holdings Bhd., expiring 3/16/02... 4
(a)7,428 Rashid Hussain Bhd. expiring 3/25/02............. 1
--------
5
--------
THAILAND (0.0%)
(a,d)111,466 Siam Commercial Bank Co.......................... --
--------
TOTAL WARRANTS (COST $26)........................................... 9
--------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ------------------------------------------------------------------------------
<S> <C>
CONVERTIBLE DEBENTURE (0.1%)
SOUTH AFRICA (0.1%)
$ (a)14,600 Sasol Ltd. 8.50%, 12/15/2099 (COST $182)......... $ 146
--------
TOTAL FOREIGN SECURITIES (89.4%) (COST $189,975).................... 159,328
--------
FOREIGN CURRENCY (5.6%)
ARP 14 Argentine Peso................................... 14
BRL 84 Brazilian Real................................... 75
COP 7,776 Colombian Peso................................... 6
EGP 170 Egyptian Pound................................... 50
HKD 17,621 Hong Kong Dollar................................. 2,274
HUF 37,262 Hungarian Forint................................. 183
INR 37,214 Indian Rupee..................................... 949
IDR 900,987 Indonesian Rupiah................................ 164
MYR 224 Malaysian Ringgit................................ 58
PKR 4 Pakistani Rupee.................................. --
PLN 1,453 Polish Zloty..................................... 412
ZAR 9,495 South African Rand............................... 1,951
KRW 621,772 South Korean Won................................. 367
TWD 111,558 Taiwan Dollar.................................... 3,419
TRL 205,528 Turkish Lira..................................... 1
VEB 450 Venezuelan Bolivar............................... 1
ZWD 11 Zimbabwe Dollar.................................. 1
--------
TOTAL FOREIGN CURRENCY (COST $10,029)............................... 9,925
--------
TOTAL INVESTMENTS (95.0%) (COST $200,004)........................... 169,253
OTHER ASSETS IN EXCESS OF LIABILITIES (5.0%)........................ 8,890
--------
NET ASSETS (100%)................................................... $178,143
========
</TABLE>
- ---------------
(a) -- Non-income producing security
(d) -- Security valued at fair value -- see note A-1 to financial statements.
(e) -- 144A Security -- certain conditions for public sale may exist.
(g) -- The Fund is advised by an affiliate.
ADR -- American Depositary Receipt
CPO -- Certificate of Participation
GDR -- Global Depositary Receipt
59
The accompanying notes are an integral part of the financial statements.
<PAGE> 410
MORGAN STANLEY
EMERGING MARKETS FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
DECEMBER 31, 1997
(UNAUDITED)
- --------------------------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE INFORMATION:
Under the terms of foreign currency contracts open at December 31, 1997, the
Portfolio is obligated to deliver or is to receive foreign currency in exchange
for U.S. dollars as indicated below:
<TABLE>
<CAPTION>
CURRENCY IN EXCHANGE
TO DELIVER VALUE SETTLEMENT FOR VALUE NET UNREALIZED
(000) (000) DATE (000) (000) GAIN (LOSS) (000)
- ------------ --------- ----------- ------------- --------- -----------------
<S> <C> <C> <C> <C> <C>
HKD 17,622 $ 2,274 1/2/98 $ 2,274 $ 2,274 $ --
IDR 899,539 164 1/2/98 $ 159 159 (5)
MYR 220 57 1/2/98 $ 56 57 --
ZAR 3,019 620 1/2/98 $ 620 620 --
--------- --------- ---------
$ 3,115 $ 3,110 $ (5)
========= ========= =========
</TABLE>
- ---------------
HKD -- Hong Kong Dollar
IDR -- Indonesian Rupiah
MYR -- Malaysian Ringgit
ZAR -- South African Rand
- --------------------------------------------------------------------------------
SWAP AGREEMENT:
The Portfolio had the following Total Return Swap Agreement open at December 31,
1997:
<TABLE>
<CAPTION>
UNEALIZED
NOTIONAL APPRECIATION
AMOUNT (DEPRECIATION)
(000) DESCRIPTION (000)
- --------- ---------------------------------------------------------------------------- -----------------
<C> <S> <C>
$2,000,000 Agreement with Goldman Sachs International terminating November 30, 1998 to
pay 12 month USD-LIBOR minus 4.00% and to receive the SET Index converted
into USD at the mid-market rate on October 30, 1998......................... $ 581
</TABLE>
- ---------------
LIBOR -- London Interbank Offer Rate
USD -- U.S. Dollar
- --------------------------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
- ----------------------------------------------------------------------------- --------- -------------
<S> <C> <C>
Services..................................................................... $ 40,100 22.5%
Finance...................................................................... 27,959 15.7
Consumer Goods............................................................... 27,469 15.4
Energy....................................................................... 21,369 12.0
Capital Equipment............................................................ 17,496 9.8
Materials.................................................................... 13,549 7.6
Mutli-Industry............................................................... 11,365 6.4
Gold Mines................................................................... 21 0.0
--------- ----
$ 159,328 89.4%
========= ====
</TABLE>
60
The accompanying notes are an integral part of the financial statements.
<PAGE> 411
MORGAN STANLEY
AGGRESSIVE EQUITY FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW
(UNAUDITED)
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1997)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Capital Goods 17.2%
Consumer--Cyclical 15.6%
Consumer--Staples 5.7%
Diversified 27.1%
Energy 1.1%
Finance 10.2%
Services 12.1%
Technology 5.2%
Short-Term Investments 3.4%
Other 2.4%
</TABLE>
<TABLE>
<CAPTION>
TOTAL RETURNS**
---------------------------------------
AVERAGE ANNUAL
SIX MONTHS ONE YEAR SINCE INCEPTION
----------------- ----------------- -----------------
WITH WITHOUT WITH WITHOUT WITH WITHOUT
SALES SALES SALES SALES SALES SALES
CHARGE* CHARGE CHARGE* CHARGE CHARGE* CHARGE
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class A Shares 9.92% 16.66% 24.11% 31.70% 30.72% 34.64%
- ---------------------------------------------------------------------------------------
Class B Shares 11.26% 16.26% 25.87% 30.87% 32.24% 33.74%
- ---------------------------------------------------------------------------------------
Class C Shares 15.21% 16.21% 29.82% 30.82% 33.67% 33.67%
- ---------------------------------------------------------------------------------------
Lipper Capital
Appreciation Index N/A 8.81% N/A 19.86% N/A 17.38%
- ---------------------------------------------------------------------------------------
S&P 500 Index N/A 10.58% N/A 33.36% N/A 28.05%
- ---------------------------------------------------------------------------------------
</TABLE>
* The returns above are calculated using the applicable sales charge for Class
A shares and the applicable deferred sales charge for Class B and Class C
shares.
** Total returns for the Fund reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waivers and reimbursements, total
returns would be lower.
The Lipper Capital Appreciation Index is a composite of mutual funds managed for
maximum capital gains. The S&P 500 Index is an unmanaged index of common stocks.
The S&P 500 Index assumes dividends are reinvested.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
<TABLE>
<CAPTION>
TOP FIVE HOLDINGS
PERCENT OF
ISSUER INDUSTRY NET ASSETS
- ------ -------------- ----------
<S> <C> <C>
United Technologies Corp. Diversified 18.6%
Cendant Corp. Services 12.1%
Lockheed Martin Corp. Capital Goods 12.0%
Loews Corp. Diversified 4.0%
Clear Channel Communications,
Inc. Consumer-- 4.0%
Cyclical
</TABLE>
<TABLE>
<CAPTION>
TOP FIVE SECTORS
VALUE PERCENT OF
SECTOR (000) NET ASSETS
- ------ --------- -------------
<S> <C> <C>
Diversified $ 28,745 27.1%
Capital Goods 18,231 17.2%
Consumer--Cyclical 4,485 15.6%
Services 12,873 12.1%
Finance 10,839 10.2%
</TABLE>
The investment objective of the Aggressive Equity Fund is to provide capital
appreciation by investing primarily in a non-diversified portfolio of corporate
equity and equity-linked securities. Equity and equity-linked securities include
common and preferred stock, convertible securities, rights and warrants to
purchase common stock, options, futures, and specialty securities.
For the six-month period ended December 31, 1997, the Fund had a total return of
16.66 percent for the Class A shares at net asset value, as compared to a total
return of 8.81 percent for the Lipper Capital Appreciation Index and 10.58
percent for the Standard & Poor's 500-Stock Index during the same period.
After three heady years for the market, Wall Street futurists are divided firmly
into bull and bear camps. We are foremost bottom-up investors, focusing on
companies rather than markets, and we do not care which way the U.S. market
moves in 1998. But if pushed, we are bullish because the backdrop for financial
assets remains positive: inflation and interest rates are at 30-year lows, the
U.S. budget is balanced, and U.S. companies seem as strong as ever in terms of
global competitiveness. Also, the Federal Reserve has enormous flexibility due
to the strength in the dollar and low inflation; if the economy slows,
short-term rates will come down quickly. Meanwhile, corporate managements are
more focused on creating shareholder value than in prior business cycles. Still,
negative factors such as the strong dollar and disinflationary/deflationary
trends are combining to put pressure on corporate profits. Additionally,
valuations are high on an absolute basis.
In our view, this sets up a classic stock-pickers' market. We prefer such an
environment because we would rather deal with earnings risk than upward pressure
on interest rates. Companies that are able to rise above profit pressures and
achieve significant earnings growth will be richly rewarded. However, the "safe
growth" segment of the U.S. market--stocks like Coca-Cola and General
Electric--look extended and expensive. We don't believe they necessarily need to
go down, but they have gone up much more than their respective earnings in
recent years and should eventually enter a phase where their stock prices lag
profit growth.
We believe there is more money to be made in "unsafe growth," i.e., companies
that have strong fundamentals but where investors still have doubts. We divide
those "unsafe growth" stocks that we find compelling into two categories: stocks
infected with investor fears stemming from the turmoil in
THE PERFORMANCE RESULTS PROVIDED IN THIS OVERVIEW ARE FOR INFORMATIONAL PURPOSES
ONLY AND SHOULD NOT BE CONSTRUED AS A GUARANTEE OF THE FUND'S FUTURE
PERFORMANCE. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN
INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL
COST.
61
<PAGE> 412
MORGAN STANLEY
AGGRESSIVE EQUITY FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
(UNAUDITED)
Asia, and stocks that should be insulated against the negative factors
pressuring U.S. corporate profits. In the first category, we include such
companies as United Technologies, whose earnings are growing at 17 to 18 percent
annually, and Gulfstream Aerospace, the leading producer of executive jets with
a debt-free balance sheet and earnings estimates on the rise.
In the second category we include Cendant, the new company formed by the merger
of HFS and CUC International. We feel Cendant may reap tremendous revenue and
profit-margin gains from the combination of the country's largest franchiser
with the preeminent direct marketing company. Also in this category is Cracker
Barrel Old Country Store, a 300-unit chain of restaurant and gift shops that is
experiencing profit-margin improvement after several sluggish years. A final
example of a stock that should be somewhat insulated from generalized corporate
profit pressure is Lockheed Martin. The company is generating massive free cash
flow and will be the largest defense contractor in the world, pending the
closing of its acquisition of Northrop Grumman.
Kurt A. Feuerman
PORTFOLIO MANAGER
62
<PAGE> 413
MORGAN STANLEY
AGGRESSIVE EQUITY FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------------------------
<S> <C>
COMMON STOCKS (93.6%)
CAPITAL GOODS (17.2%)
AEROSPACE & DEFENSE (17.2%)
21,200 AVTEAM, Inc., `A'................................ $ 188
(a)85,100 Gulfstream Aerospace Corp........................ 2,489
(a)33,800 Litton Industries, Inc........................... 1,943
129,600 Lockheed Martin Corp............................. 12,766
10,400 Thiokol Corp..................................... 845
--------
TOTAL CAPITAL GOODS............................................... 18,231
--------
CONSUMER -- CYCLICAL (15.6%)
AUTOMOTIVE (4.2%)
68,100 Avis Rent A Car, Inc............................. 2,175
19,000 Borg-Warner Automotive, Inc...................... 988
21,800 General Motors Corp.............................. 1,322
--------
4,485
--------
BROADCAST -- RADIO & TELEVISION (6.7%)
(a)10,100 American Radio Systems Corp., `A'................ 538
57,700 CBS, Inc......................................... 1,699
(a)52,900 Clear Channel Communications, Inc................ 4,202
(a)16,200 Viacom, Inc., `B'................................ 671
--------
7,110
--------
FOOD SERVICE & LODGING (2.6%)
(a)39,900 Brinker Intertional, Inc......................... 638
63,700 Cracker Barrel Old Country Store, Inc............ 2,126
--------
2,764
--------
LEISURE RELATED (0.9%)
38,000 International Game Technology.................... 960
--------
PUBLISHING (1.2%)
(a)102,900 PRIMEDIA, Inc.................................... 1,299
--------
TOTAL CONSUMER -- CYCLICAL........................................ 16,618
--------
CONSUMER -- STAPLES (5.7%)
BEVERAGES (0.9%)
28,500 Coca-Cola Enterprises, Inc....................... 1,013
--------
FOOD (1.1%)
12,100 Ralston-Ralston Purina Group..................... 1,125
--------
TOBACCO (3.7%)
(a)19,100 Consolidated Cigar Holdings, Inc................. 526
62,100 Philip Morris Cos., Inc.......................... 2,814
16,600 RJR Nabisco Holdings Corp........................ 623
--------
3,963
--------
TOTAL CONSUMER -- STAPLES......................................... 6,101
--------
DIVERSIFIED (27.1%)
DIVERSIFIED (27.1%)
(a)65 Berkshire Hathaway, Inc.......................... 2,990
57,200 ITT Industries, Inc.............................. 1,795
39,700 Loews Corp....................................... 4,213
271,200 United Technologies Corp......................... 19,747
--------
TOTAL DIVERSIFIED................................................. 28,745
--------
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------------------------
<S> <C>
ENERGY (1.1%)
COAL, GAS, & OIL (1.1%)
23,800 Diamond Offshore Drilling, Inc................... $ 1,145
--------
FINANCE (9.6%)
BANKING (1.4%)
(a)32,600 Friedman, Billings, Ramsey Group, Inc., `A'...... 585
2,733 Wells Fargo Co................................... 927
--------
1,512
--------
FINANCIAL SERVICES (5.6%)
15,600 American Express Co.............................. 1,392
22,900 SLM Holding Corp................................. 3,186
25,550 Travelers, Inc................................... 1,377
--------
5,955
--------
INSURANCE (2.6%)
33,100 American Bankers Insurance Group, Inc............ 1,521
4,000 Cincinnati Financial Corp........................ 563
19,300 Nationwide Financial Services, Inc., 'A'......... 697
--------
2,781
--------
TOTAL FINANCE..................................................... 10,248
--------
SERVICES (12.1%)
PROFESSIONAL SERVICES (12.1%)
(a)374,491 Cendant Corp..................................... 12,873
--------
TECHNOLOGY (5.2%)
COMPUTERS (1.8%)
18,700 International Business Machines Corp............. 1,955
--------
SOFTWARE SERVICES (2.2%)
(a)17,900 Microsoft Corp................................... 2,314
--------
TECHNOLOGY (0.7%)
13,700 Linear Technology Corp........................... 789
--------
TELECOMMUNICATIONS (0.5%)
(a)9,200 Associated Group, Inc., Class A.................. 273
(a)7,900 Associated Group, Inc., Class B.................. 230
--------
503
--------
TOTAL TECHNOLOGY.................................................. 5,561
--------
TOTAL COMMON STOCKS (COST $93,897).................................. 99,522
--------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
RIGHTS
- ----------------
<S> <C>
RIGHTS (0.6%)
FINANCE (0.6%)
FINANCIAL SERVICES (0.6%)
(a)17,700 Newcourt Credit Group, Inc. (COST $577).......... 591
--------
</TABLE>
63
The accompanying notes are an integral part of the financial statements.
<PAGE> 414
MORGAN STANLEY
AGGRESSIVE EQUITY FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ------------------------------------------------------------------------------
<S> <C>
SHORT-TERM INVESTMENT (3.4%)
REPURCHASE AGREEMENT (3.4%)
$ 3,601 Chase Securities, Inc. 5.95%, dated 12/31/97, due
1/2/98, to be repurchased at $3,602,
collateralized by $3,640 U.S. Treasury Notes,
5.625%, due 2/15/06, valued at $3,679 (COST
$3,601)........................................ $ 3,601
--------
TOTAL INVESTMENTS (97.6%) (COST $98,075)............................ 103,714
OTHER ASSETS IN EXCESS OF LIABILITIES (2.4%)........................ 2,551
--------
NET ASSETS (100%)................................................... $106,265
========
</TABLE>
- ---------------
(a) -- Non-income producing security
SECURITIES SOLD SHORT (NOTE A-6)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ---------------- --------
<S> <C>
17,700 Newcourt Credit Group, Inc. Rights (TOTAL
PROCEEDS $605)................................. $ 591
========
</TABLE>
64
The accompanying notes are an integral part of the financial statements.
<PAGE> 415
MORGAN STANLEY
U.S. REAL ESTATE FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW
(UNAUDITED)
THE PERFORMANCE RESULTS PROVIDED IN THIS OVERVIEW ARE FOR INFORMATIONAL PURPOSES
ONLY AND SHOULD NOT BE CONSTRUED AS A GUARANTEE OF THE FUND'S FUTURE
PERFORMANCE. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN
INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL
COST.
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1997)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Apartment 19.5%
Healthcare 6.2%
Land 1.4%
Lodging/Leisure 11.5%
Manufactured Homes 6.6%
Office & Industrial 28.1%
Retail 18.3%
Self Storage 3.2%
Short-Term Investments 5.2%
</TABLE>
<TABLE>
<CAPTION>
TOTAL RETURNS**
-------------------------------------------------------------
AVERAGE ANNUAL
SIX MONTHS ONE YEAR SINCE INCEPTION
----------------- ----------------- -----------------
WITH WITHOUT WITH WITHOUT WITH WITHOUT
SALES SALES SALES SALES SALES SALES
CHARGE* CHARGE CHARGE* CHARGE CHARGE* CHARGE
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class A Shares 7.28% 13.83% 17.33% 24.48% 28.70% 33.33%
- ---------------------------------------------------------------------------------------
Class B Shares 8.40% 13.40% 18.40% 23.40% 30.28% 32.27%
- ---------------------------------------------------------------------------------------
Class C Shares 12.36% 13.36% 22.43% 23.43% 32.28% 32.28%
- ---------------------------------------------------------------------------------------
NAREIT Equity Index N/A 13.77% N/A 20.29% N/A 31.61%
- ---------------------------------------------------------------------------------------
</TABLE>
* The returns above are calculated using the applicable sales charge for Class
A shares and the applicable deferred sales charge for Class B and Class C
shares.
** Total returns for the Fund reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waivers and reimbursements, total
returns would be lower.
The NAREIT Equity Index is an unmanaged market weighted index of tax qualified
REITs listed on the New York Stock Exchange, American Stock Exchange and the
NASDAQ National Market System, including dividends.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
<TABLE>
<CAPTION>
TOP FIVE HOLDINGS
PERCENT OF
ISSUER INDUSTRY NET ASSETS
- ------ ------------------ ----------
<S> <C> <C>
Taubman Centers, Inc. REIT Retail 5.4%
Arden Realty Group, Inc. Office &
Industrial 4.7%
Chateau Communities, Inc. REIT Manufactured Homes 4.6%
Nationwide Health Properties, Inc. Healthcare 4.6%
Bay Apartment Communities, Inc. REIT Apartment 4.0%
</TABLE>
<TABLE>
<CAPTION>
TOP FIVE SECTORS
VALUE PERCENT OF
SECTOR (000) NET ASSETS
- ------ ------ ----------
<S> <C> <C>
Office & Industrial $10,502 28.1%
Apartment 7,301 19.5%
Retail 6,839 18.3%
Lodging/Leisure 4,294 11.5%
Manufactured Homes 2,476 6.6%
</TABLE>
The U.S. Real Estate Fund seeks to provide above-average current income and
long-term capital appreciation by investing primarily in equity securities of
companies in the U.S. real estate industry, including real estate investment
trusts (REITs).
For the six-month period ended December 31, 1997, the Fund achieved a total
return of 13.83 percent for Class A shares at net asset value, as compared to a
total return of 13.77 percent for the National Association of Real Estate
Investment Trusts (NAREIT) Equity Index.
INVESTMENT THEMES
The past six months were very exciting for the REIT industry, as REITs continued
to become much more widely accepted in the investment community. Reasons for
this acceptance include the tremendous growth of the industry, continued strong
performance, and positive attention from the business media.
Total equity capitalization of the REIT industry at the end of the reporting
period reached $145 billion, a 65 percent increase over 1996. New equity
issuance of $23 billion during 1997 was more than the three previous years
combined, and double the previous record of 1993, when the market was dominated
by IPOs. Although the majority of the issuance was for secondary offerings by
existing REITs, there was also a reopening of the window for IPOs, with
approximately $3 billion raised in 12 separate transactions.
Noteworthy IPOs included several regional office companies. Potentially of
greater interest, however, were the IPOs of Equity Office Properties and AMB
Property Corporation, involving essentially the conversion of a pension fund
advisory business to a REIT. It also is noteworthy that the office and
industrial sectors accounted for almost one-half of the total equity issuance.
We expect equity issuance to continue at a high rate, albeit at a slower pace
than in 1997. We believe that given current valuations, we will continue to see
a modest level of IPOs both from regional operators and from pension fund
advisors.
Participants in the REIT industry have speculated on the timing of a merger wave
as the public real estate market matures beyond its initial proliferation of
IPOs. It now appears as if the anticipated wave of mergers has officially
commenced, beginning with the friendly and surprising merger between Equity
Office Properties (the nation's largest office REIT) with Beacon Properties
(Equity
65
<PAGE> 416
MORGAN STANLEY
U.S. REAL ESTATE FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
(UNAUDITED)
Office Properties' largest national rival). Generally, the majority of the other
merger deals involved companies expanding to become super-regional or national
players in their sector, with the multifamily sector producing the most mergers.
However, the greatest excitement was generated by the bidding war between
Starwood Lodging and Hilton Hotels to purchase ITT Corporation, a battle won by
Starwood. The battle over ITT commanded daily articles in THE WALL STREET
JOURNAL and other business publications.
This merger activity set off an interesting debate about whether it is more
favorable to own the consolidators or the targets. Given our approach of
selecting securities that we believe offer the best value relative to their
underlying net property assets, it is not surprising that we often own the
targets. Although we are not opposed to owning the consolidators, owning such
companies in the portfolio would likely be as a result of their underlying
relative valuation, as opposed to a stated goal to be a large participant in a
sector.
Clearly, with healthy investor interest in REITs combined with REITs trading at
significant premiums to asset value, a number of companies are attempting to
position themselves as growth companies. While this objective may be achievable
at this stage of the real estate recovery cycle, it may be far more difficult to
implement this type of approach to real estate investing and strategic direction
in other phases of the real estate cycle. We expect that as the current recovery
in the U.S. real estate market continues toward equilibrium, we will see a
decline in the average premiums to net asset value at which the companies trade.
SECTOR REVIEW
With regard to the property markets, we are seeing evidence of an emerging
recovery in the area of new construction of real estate. Despite the disfavor
that real estate development faced in virtually every property sector in the
early 1990s, we have witnessed the financial community reopening their doors to
finance development. Although the real estate market generally remains in a
favorable part of its cycle, this new supply causes us to raise the following
issues. In our modeling of companies, we have implemented a negative
reversionary value calculation (to reflect our anticipation of declines in
occupancy caused by oversupply) in calculating the net asset value of companies.
This is particularly true in the limited service hotel business, as well as for
companies with a concentration of multifamily properties in the Southeast.
Additionally, we are monitoring a number of industrial markets for oversupply
and potential decline in occupancy. Finally, although we have discussed our
rationale for overweighting the office and upscale full-service hotel markets
since inception of the Fund, we have begun shifting the portfolio to favor those
companies with properties in the most supply-constrained locations, which
include urban markets as well as those in California and the Northeast.
The majority of sell-side analysts predicted that 1997 would be a year for
stock-picking as opposed to sector allocation. At the beginning of the year, we
declared that there was still room for outperformance through sector allocation.
The chart below outlines the total return performance of the various sectors in
the real estate industry for 1996 and 1997.
<TABLE>
<CAPTION>
TOTAL PERFORMANCE
------------------------
SECTOR 1997 1996
- ------ ----------- -----------
<S> <C> <C>
Apartments..................................................... 16.0% 28.4%
Manufactured Homes............................................. 18.1% 34.9%
Strip Centers.................................................. 21.4% 32.8%
Regional Malls................................................. 13.7% 44.6%
Outlet Centers................................................. 0.1% 3.5%
Industrial..................................................... 19.0% 27.0%
Office......................................................... 29.0% 51.8%
Self Storage................................................... 3.4% 42.0%
Triple Net Lease............................................... 17.7% 30.8%
Hotel.......................................................... 30.1% 49.2%
</TABLE>
66
<PAGE> 417
MORGAN STANLEY
U.S. REAL ESTATE FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
(UNAUDITED)
From a market perspective, the office and hotel sectors provided the best
performance for the third consecutive year. However, we believe that the
increasing supply in these markets, combined with the prevailing prices of the
securities in these sectors, may cause overall returns in 1998 to be
substantially less than in previous years.
The self-storage and factory outlet sectors drastically underperformed the
NAREIT Equity Index for two very different reasons. The poor returns in the
factory outlet sector were the result of a continued deterioration of the
sector's fundamentals. Looking forward, we believe this sector will continue to
trail due to continued weakness in occupancies and rents. The self-storage
market, by contrast, is in equilibrium from a supply-and-demand perspective;
however, share prices had run too far in 1996, leaving no room for continued
appreciation last year. In 1998, we expect this sector to be a market performer.
As we discussed last year, we were unable to explain the outperformance of the
regional mall sector, and despite improving occupancies and reduced
bankruptcies, this sector trailed the Index in 1997. The other major sectors in
the Index provided returns similar to the market.
With respect to the performance of the Fund from a top-down perspective, we
created outperformance through our overweighting of the office and hotel
sectors, and through the underweighting of the self-storage and factory outlet
sectors. From a bottom-up perspective, we created significant outperformance
from our stock-picking in the apartment, manufactured home, industrial, and
regional mall sectors.
INVESTMENT STRATEGY
We will continue to pursue a strategy of overweighting those sectors that offer
the best underlying real estate fundamentals. We believe that in 1998 our
overall sector weightings will probably come closer to approximating market
weightings, due to two factors. First, the relative weightings in the NAREIT
Equity Index have changed materially and are now more in line with our Fund. For
example, we have maintained a hotel weighting between 8 and 15 percent during
the last several years. During this reporting period, the Index weighting has
shifted from 4 percent to a likely weighting of 13 to 15 percent in light of
recent merger activity. Second, the underlying valuations have generally
adjusted to reflect the relative attractiveness of each sector. We will continue
to provide basic sector weighting guidelines, but it is important to note that
we focus in great detail on sub-sectors within those sectors. Following is our
outlook for the various sub-sectors in the coming year:
<TABLE>
<CAPTION>
UNDERPERFORM MARKET PERFORM OUTPERFORM
- --------------------------------- --------------------------------- ---------------------------------
<S> <C> <C>
Class A Apartments Class B Apartments CBD Office
Sunbelt Self Storage Upscale Hotels
Economy Lodging Suburban Office Northeast/Pacific Coast
Factory Outlets Industrial
Class B Regional Malls Class A Regional Malls
Midwest
Manufactured Housing
Strip Shopping Centers
</TABLE>
Within this framework, we will, as discussed above, continue to select those
securities that we feel offer the best value relative to our estimate of their
intrinsic asset value.
67
<PAGE> 418
MORGAN STANLEY
U.S. REAL ESTATE FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
(UNAUDITED)
IMPORTANT FUND UPDATE
On October 23, 1997, the Trustees of the Fund approved its reorganization into
the Van Kampen American Capital Real Estate Securities Fund. Upon shareholder
approval, the reorganization of the Fund is expected to take place prior to June
30, 1998. More information about the reorganization will be forwarded to you in
a proxy statement in the near future.
Your Fund and the Van Kampen American Capital Real Estate Securities Fund have
substantially similar investment objectives, policies and practices, and are
managed by the same portfolio management team. The Van Kampen American Capital
Fund's investment objective is to provide shareholders with long-term growth of
capital, with current income as a secondary objective.
Russell Platt Theodore R. Bigman
PORTFOLIO MANAGER PORTFOLIO MANAGER
68
<PAGE> 419
MORGAN STANLEY
U.S. REAL ESTATE FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ----------------------------------------------------------------------
<S> <C>
COMMON STOCKS (93.3%)
APARTMENT (19.5%)
3,400 Amli Residential Properties Trust REIT........... $ 76
30,900 Avalon Properties, Inc. REIT..................... 956
38,600 Bay Apartment Communities, Inc. REIT............. 1,505
41,400 Essex Property Trust, Inc. REIT.................. 1,449
5,800 Irvine Apartment Communities, Inc. REIT.......... 184
34,000 Oasis Residential, Inc. REIT..................... 759
48,032 Security Capital Atlantic, Inc................... 1,015
25,400 Walden Residential Properties, Inc. REIT......... 648
45,351 Wellsford Properties, Inc........................ 709
-------
7,301
-------
HEALTHCARE (6.2%)
66,800 Nationwide Health Properties, Inc................ 1,703
16,500 Omega Healthcare Investors, Inc.................. 637
-------
2,340
-------
LAND (0.9%)
(a)45,424 Atlantic Gulf Communities Corp................... 204
(a)7,600 Catellus Development Corp........................ 152
-------
356
-------
LODGING/LEISURE (11.5%)
17,700 American General Hospitality Corp................ 473
(a)36,800 CapStar Hotel Co................................. 1,263
(a)33,100 Extended Stay of America, Inc.................... 412
(a)76,000 Host Marriott Corp............................... 1,491
(a)400 ITT Corp......................................... 33
(a)31,700 John Q. Hammons Hotels, Inc...................... 285
(a)12,600 Suburban Lodges of America....................... 168
(a)6,500 Vail Resorts, Inc................................ 169
-------
4,294
-------
MANUFACTURED HOMES (6.6%)
54,848 Chateau Communities, Inc. REIT................... 1,728
27,700 Manufactured Home Communities, Inc. REIT......... 748
-------
2,476
-------
OFFICE & INDUSTRIAL (27.6%)
INDUSTRIAL (3.8%)
59,000 Pacific Gulf Properties, Inc. REIT............... 1,401
-------
OFFICE (19.0%)
56,600 Arden Realty Group, Inc.......................... 1,740
51,166 Brandywine Realty Trust REIT..................... 1,286
50,600 Brookfield Properties Corp....................... 844
20,500 Brookfield Properties Corp. Installment
Receipts....................................... 244
39,200 CarrAmerica Realty Corp. REIT.................... 1,242
19,407 Equity Office Properties Trust REIT.............. 613
34,400 Great Lakes REIT, Inc............................ 669
21,016 Trizec Hahn Corp................................. 487
-------
7,125
-------
<CAPTION>
VALUE
SHARES (000)
- ----------------------------------------------------------------------
<S> <C>
OFFICE & INDUSTRIAL (4.8%)
41,400 Bedford Property Investors, Inc. REIT............ $ 906
34,400 Prime Group Realty Trust REIT.................... 697
7,600 Reckson Associates Realty Trust REIT............. 193
-------
1,796
-------
TOTAL OFFICE & INDUSTRIAL.................................. 10,322
-------
RETAIL (17.8%)
REGIONAL MALL (10.4%)
36,200 CBL & Associates Properties, Inc. REIT........... 894
23,900 First Union Real Estate Investments REIT......... 388
156,300 Taubman Center, Inc. REIT........................ 2,032
16,900 Urban Shopping Centers, Inc. REIT................ 589
-------
3,903
-------
SHOPPING CENTER (7.4%)
43,500 Burnham Pacific Property Trust REIT.............. 666
48,200 Federal Realty Investment Trust REIT............. 1,241
17,900 Pan Pacific Retail Properties, Inc. REIT......... 383
9,500 Pennsylvania REIT................................ 233
200 Ramco-Gershenson Properties Trust REIT........... 4
16,400 Western Investment Real Estate Trust REIT........ 225
-------
2,752
-------
TOTAL RETAIL............................................... 6,655
-------
SELF STORAGE (3.2%)
8,800 Public Storage, Inc. REIT........................ 258
32,100 Shurgard Storage Centers, Inc. `A' REIT.......... 931
-------
TOTAL SELF STORAGE......................................... 1,189
-------
TOTAL COMMON STOCKS (COST $31,977)........................... 34,933
-------
PREFERRED STOCKS (0.9%)
LAND (0.4%)
(a)14,036 Atlantic Gulf Communities Corp................... 155
-------
RETAIL (0.5%)
SHOPPING CENTER (0.5%)
5,500 First Washington Realty Trust, Inc. `A'.......... 184
-------
TOTAL PREFERRED STOCKS (COST $294)........................... 339
-------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
- ---------
<S> <C>
CONVERTIBLE BONDS (0.5%)
OFFICE & INDUSTRIAL (0.5%)
$ 224 Brookfield Properties Corp. 6.00%, 2/14/07 (COST
$92)........................................... 180
-------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
WARRANTS
- ---------
<S> <C>
WARRANTS (0.1%)
LAND (0.1%)
(a)9,609 Atlantic Gulf Communities Corp., Class A,
expiring 6/23/04............................... 14
(a)9,609 Atlantic Gulf Communities Corp., Class B,
expiring 6/23/04............................... 14
(a)9,609 Atlantic Gulf Communities Corp., Class C,
expiring 6/23/04............................... 14
-------
TOTAL WARRANTS (COST $0)..................................... 42
-------
</TABLE>
69
The accompanying notes are an integral part of the financial statements.
<PAGE> 420
MORGAN STANLEY
U.S. REAL ESTATE FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ----------------------------------------------------------------------
<S> <C>
SHORT-TERM INVESTMENT (14.7%)
REPURCHASE AGREEMENT (14.7%)
$ 5,507 Chase Securities, Inc. 5.95%, dated 12/31/97, due
1/2/98 to be repurchased at $5,509,
collateralized by $4,985, U.S. Treasury Bonds,
7.875%, due 11/15/04, valued at $5,624
(COST $5,507).................................. $ 5,507
-------
TOTAL INVESTMENTS (109.5%) (COST $37,870).................... 41,001
LIABILITIES IN EXCESS OF OTHER ASSETS (-9.5%)................ (3,559)
-------
NET ASSET (100%)............................................. $37,442
=======
</TABLE>
- ---------------
(a) -- Non-income producing security
REIT -- Real Estate Investment Trust
70
The accompanying notes are an integral part of the financial statements.
<PAGE> 421
MORGAN STANLEY
HIGH YIELD FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW
(UNAUDITED)
THE PERFORMANCE RESULTS PROVIDED IN THIS OVERVIEW ARE FOR INFORMATIONAL PURPOSES
ONLY AND SHOULD NOT BE CONSTRUED AS A GUARANTEE OF THE FUND'S FUTURE
PERFORMANCE. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN
INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL
COST. YIELDS WILL FLUCTUATE AS MARKET CONDITIONS CHANGE.
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1997)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Aerospace & Defense 4.6%
Broadcast--Radio & Television 13.2%
Energy 6.1%
Entertainment 5.2%
Finance 4.9%
Foreign Government Bonds 4.2%
Gaming & Lodging 4.4%
Health Care Supplies &
Services 3.1%
Retail 5.7%
Telecommunications 22.3%
Short-Term Investments 3.2%
Other 23.1%
</TABLE>
<TABLE>
<CAPTION>
TOTAL RETURNS**
-------------------------------------------------------------
AVERAGE ANNUAL
SIX MONTHS ONE YEAR SINCE INCEPTION
----------------- ----------------- -----------------
WITH WITHOUT WITH WITHOUT WITH WITHOUT
SALES SALES SALES SALES SALES SALES
CHARGE* CHARGE CHARGE* CHARGE CHARGE* CHARGE
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class A Shares 1.20% 6.24% 8.41% 13.80% 11.41% 14.71%
- ---------------------------------------------------------------------------------------
Class B Shares 1.76% 5.67% 8.76% 12.76% 11.54% 13.75%
- ---------------------------------------------------------------------------------------
Class C Shares 4.69% 5.66% 11.76% 12.76% 13.75% 13.75%
- ---------------------------------------------------------------------------------------
CS First Boston High
Yield Index N/A 6.40% N/A 12.65% N/A 13.33%
- ---------------------------------------------------------------------------------------
</TABLE>
* The returns above are calculated using the applicable sales charge for Class
A shares and the applicable deferred sales charge for Class B and Class C
shares.
** Total returns for the Fund reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waivers and reimbursements, total
returns would be lower.
The CS First Boston High Yield Index is an unmanaged index of high yield
corporate bonds.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
<TABLE>
<CAPTION>
TOP FIVE HOLDINGS
PERCENT OF
SECURITY SECTOR NET ASSETS
- -------- ------------------- ----------
<S> <C> <C>
Time Warner, Inc., 'M', 10.25% Entertainment 5.2%
Teleport Communications 0.00%,
7/1/07 Telecommunications 3.3%
Nextel Communications 0.00%,
8/15/04 Telecommunications 3.2%
Norcal Waste Systems 'B',
13.50%, 11/15/05 Environmental 2.8%
Controls
Advanced Micro Devices 11.00%,
8/1/03 Computers 2.8%
</TABLE>
<TABLE>
<CAPTION>
TOP FIVE SECTORS
VALUE PERCENT OF
SECTOR (000) NET ASSETS
- ------ --------- -------------
<S> <C> <C>
Telecommunications $ 4,116 22.3%
Broadcast--Radio &
Television 2,438 13.2%
Energy 1,130 6.1%
Retail 1,036 5.7%
Entertainment 955 5.2%
</TABLE>
The investment objective of the High Yield Fund is to seek to maximize total
return by investing in a diversified portfolio of high-yield, high-risk income
securities that offer a yield above what is generally available on debt
securities in the four highest categories of the recognized rating services.
For the six months ended December 31, 1997, the Fund had a total return at net
asset value of 6.24 percent for Class A shares, as compared to a total return of
6.40 percent for the CS First Boston High Yield Index.
High-yield bond yield spreads over U.S. Treasuries continue to be at
historically narrow levels. These levels have been supported by several factors,
including the solid U.S. economy, strong demand among investors for high-yield
bonds, and favorable merger and acquisition activity affecting high-yield
companies. The telecommunications sector has been especially active in the M & A
and IPO fronts.
The third quarter was capped by the proposed acquisition of MCI Communications
and Brooks Fiber by WorldCom. These transactions would follow WorldCom's
acquisition of MFS Communications completed earlier in the year. These and
similar transactions are being consummated through stock swaps, so the combined
companies have not increased debt levels. Credit quality of the acquired
companies has improved as a result of the mergers, favorably impacting prices on
their high-yield bonds. We believe the accelerating demand for
telecommunications services will continue to favorably impact companies that
have sound business strategies and attractive fiber-optic networks. We have been
significantly weighted in the sector and increased our commitment in the second
half of the year. In particular, we feel there will be investment opportunities
in European telecommunications companies that we believe will benefit from the
deregulation underway in the long-distance business in the region.
We have continued to reduce our exposure to the cable television sector.
Following the news in the second quarter that Microsoft planned to make an
investment in Comcast, Tele-Communications Inc., the leader in the industry, has
also begun to improve credit quality by spinning off non-cable
71
<PAGE> 422
MORGAN STANLEY
HIGH YIELD FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
(UNAUDITED)
assets and entering into joint ventures to realize efficiencies in its cable
system. Cable company stock prices soared last year, indirectly helping bond
prices and more directly boosting returns on a TCI convertible-bond investment
we made earlier in the year.
After reducing our exposure to dollar-denominated non-U.S. issues in the second
and third quarters, we reversed course as problems in the Asian economies caused
international bonds to underperform regardless of credit profile or country of
origin. While we do have limited direct exposure to corporate bonds in Asia, the
majority of our investments have been in Latin America and Europe. In our
opinion, the fundamentals in those regions remain strong, and we view the higher
yields as an opportunity. We maintained a 20 percent limit on dollar-denominated
issuers in below-investment grade countries. Recent investments have increased
our commitment closer to that level.
The continuing strength of the U.S. economy and the attractive growth prospects
of selected companies in the domestic high-yield market lead us to be relatively
optimistic about prospects for 1998 returns. Due to the age of the economic
cycle and the still historically narrow average yield spreads, however, we
continue to emphasize somewhat higher-than-average credit quality in the
portfolio. Additionally, we intend to maintain interest-rate sensitivity at no
longer than that of the Fund's benchmark.
Robert Angevine Thomas L. Bennett Stephen F. Esser
PORTFOLIO MANAGER PORTFOLIO MANAGER PORTFOLIO MANAGER
72
<PAGE> 423
MORGAN STANLEY
HIGH YIELD FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- -----------------------------------------------------------------------
<S> <C>
CORPORATE BONDS AND NOTES (75.4%)
AEROSPACE & DEFENSE (3.6%)
$ (e)200 Jet Equipment Trust, Series 1994-C1, 11.79%,
6/15/13........................................ $ 269
(e)300 Jet Equipment Trust, Series 1995-D, 11.44%,
11/1/14........................................ 401
-------
670
-------
BANKING (0.3%)
65 Korea Development Bank 7.375%, 9/17/04........... 52
-------
BROADCAST -- RADIO & TELEVISION (13.2%)
410 Cablevision Systems Corp. 9.875%, 5/15/06........ 451
155 Comcast Corp. 1.125%, 4/15/07.................... 102
(e,n)165 Fox/Liberty Networks L.L.C. 0.00%, 8/15/07....... 106
(e)115 Fox/Liberty Networks L.L.C. 8.875%, 8/15/07...... 115
130 Lenfest Communications 8.375%, 11/1/05........... 134
210 Multicanal S.A. 10.50%, 2/1/07................... 208
350 Paramount Communications 8.25%, 8/1/22........... 353
(e)240 RBS Participacoes S.A. 11.00%, 4/1/07............ 222
60 Rogers Communications, Inc. 9.125%, 1/15/06...... 61
350 Rogers Communications, Inc. 8.875%, 7/15/07...... 350
325 TV Azteca S.A. de CV, 'B', 10.50%, 2/15/07....... 336
-------
2,438
-------
CHEMICALS (1.3%)
(e,h)225 Huntsman Corp. 9.09%, 7/1/07..................... 235
-------
COMPUTERS (2.8%)
480 Advanced Micro Devices 11.00%, 8/1/03............ 516
-------
ELECTRICAL EQUIPMENT (1.3%)
(e)325 Hyundai Semiconductor 8.625%, 5/15/07............ 239
-------
ENERGY (6.1%)
340 Nuevo Energy Co. 9.50%, 4/15/06.................. 363
325 Quezon Power Ltd. 8.86%, 6/15/17................. 278
380 Snyder Oil Corp. 8.75%, 6/15/07.................. 386
(e,n)130 Transamerican Energy 0.00%, 6/15/02.............. 103
-------
1,130
-------
ENVIRONMENTAL CONTROLS (2.8%)
(n)450 Norcal Waste Systems, 'B', 13.50%, 11/15/05...... 523
-------
FINANCE (1.6%)
75 Navistar Financial Corp., 'B', 9.00%, 6/1/02..... 77
225 Western Financial Bank 8.875%, 8/1/07............ 223
-------
300
-------
FOOD (2.0%)
105 Ameriserve Food Co. 10.125%, 7/15/07............. 109
(e)240 Fleming Cos., Inc. 10.50%, 12/1/04............... 251
-------
360
-------
FOOD SERVICE & LODGING (3.1%)
150 HMC Acquisition Properties, 'B', 9.00%,
12/15/07....................................... 157
50 HMH Properties Inc., 'B', 8.875%, 1/15/07........ 53
335 Host Marriott Travel Plaza, 'B', 9.50%,
5/15/05........................................ 355
-------
565
-------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- -----------------------------------------------------------------------
<S> <C>
FOREST PRODUCTS & PAPER (2.8%)
$ 215 Asia Pulp & Paper Co., Ltd. 12.00%, 12/29/49..... $ 181
305 SD Warren Co., 'B', 12.00%, 12/15/04............. 341
-------
522
-------
GAMING & LODGING (4.4%)
445 Grand Casinos, Inc. 10.125%, 12/1/03............. 480
320 Station Casinos, Inc. 10.125%, 3/15/06........... 337
-------
817
-------
HEALTH CARE SUPPLIES & SERVICES (3.1%)
(e)200 Integrated Health Services 9.50%, 9/15/07........ 206
220 Tenet Healthcare Corp. 8.625%, 1/15/07........... 227
145 Vencor, Inc. 8.625%, 7/15/07..................... 145
-------
578
-------
OUTDOOR ADVERTISING (2.0%)
355 Outdoor Systems, Inc., 8.875%, 6/15/07........... 370
-------
RETAIL -- GENERAL (1.8%)
95 Kmart Corp. 7.75%, 10/1/12....................... 92
225 Kmart Funding Corp. 8.80%, 7/1/10................ 233
-------
325
-------
SOAP & TOILETRIES (0.4%)
100 Revlon Worldwide, 'B', Zero Coupon, 3/15/01...... 69
-------
TELECOMMUNICATIONS (22.0%)
260 Comcast Cellular Holdings 'B', 9.50%, 5/1/07..... 271
(n)190 Dial Call Communications, 0.00%, 12/15/05........ 174
210 Globalstar LP/Capital 11.375%, 2/15/04........... 214
(e)150 Globo Communicoes 10.50%, 12/20/06............... 144
(e)50 Hermes Euro Railtel B.V. 11.50%, 8/15/07......... 55
(e)200 Hylsa S.A. de C.V. 9.25%, 9/15/07................ 196
320 IXC Communications, Inc., 'B', 12.50%, 10/1/05... 368
(n)665 Nextel Communications 0.00%, 8/15/04............. 590
(n)400 Occidente Y Caribe 0.00%, 3/15/04................ 300
215 Philippine Long Distance Telephone 7.85%,
3/6/07......................................... 186
(e,n)250 PTC International Finance B.V. 0.00%, 7/1/07..... 161
100 Qwest Communcations International, 'B', 10.88%,
4/1/07......................................... 113
150 Rogers Cantel, Inc. 8.30%, 10/1/07............... 149
(e,n)645 TCI Satellite Entertainment 0.00%, 2/15/07....... 430
(n)745 Teleport Communications 0.00%, 7/1/07............ 609
180 Total Access Communications 2.00%, 5/31/06....... 84
-------
4,044
-------
UTILITIES (0.8%)
125 Midland Funding II, 'A', 11.75%, 7/23/05......... 147
-------
TOTAL CORPORATE BONDS AND NOTES (COST $13,618)................ 13,900
-------
ASSET BACKED SECURITIES (9.6%)
AEROSPACE & DEFENSE (1.0%)
175 Aircraft Lease Portfolio Securitization Ltd.,
Series 1996-1, Class D 12.75%, 6/15/06......... 188
-------
FINANCE (3.3%)
(e)246 Commercial Financial Services, Inc., Series
1997-5, Class A1, 7.715% 6/15/05............... 248
(e,h)316 DLJ Mortgage Acceptance Corp., Series 1996-CF2,
Class S, 1.64%, 11/12/21....................... 27
</TABLE>
73
The accompanying notes are an integral part of the financial statements.
<PAGE> 424
MORGAN STANLEY
HIGH YIELD FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- -----------------------------------------------------------------------
<S> <C>
FINANCE (CONT.)
$ (e)122 First Home Mortgage Acceptance Corp.,
Series 1996-B, Class C, 7.929%, 11/1/18........ $ 110
(e)223 Long Beach Auto Trust 1997-1, Class B, 14.22%,
10/26/03....................................... 223
-------
608
-------
RETAIL (3.9%)
150 DR Securitized Lease Trust, Series 1993-K1, Class
A2, 7.43%, 8/15/18............................. 134
488 DR Securitized Lease Trust, Series 1994-K1, Class
A1, 7.60%, 8/15/07............................. 479
100 DR Securitized Lease Trust, Series 1994-K1, Class
A2, 8.375%, 8/15/15............................ 98
-------
711
-------
SUPERMARKET (1.4%)
(e)245 CA FM Lease Trust 8.50%, 7/15/17................. 258
-------
TOTAL ASSET BACKED SECURITIES (COST $1,665)................... 1,765
-------
FOREIGN GOVERNMENT BONDS (4.2%)
BONDS (4.2%)
425 Republic of Argentina 5.50%, 3/31/23............. 312
(n)90 Republic of Argentina BOCON, Series 2, PIK,
5.375%, 9/1/02................................. 105
150 Republic of Colombia 8.70%, 2/15/16.............. 146
250 United Mexican States Discount Bond, 'B', 6.25%,
12/31/19....................................... 209
-------
TOTAL FOREIGN GOVERNMENT BONDS (COST $690).................... 772
-------
</TABLE>
<TABLE>
<CAPTION>
SHARES
- ----------
<S> <C>
COMMON STOCKS (0.2%)
TELECOMMUNICATIONS (0.2%)
(a)1,494 Nextel Communications Inc., 'A' (COST $24)....... 39
-------
PREFERRED STOCKS (6.5%)
BROADCASTING (1.3%)
2,150 Sinclair Capital 11.625%......................... 237
-------
ENTERTAINMENT (5.2%)
848 Time Warner, Inc., 'M', 10.25%................... 955
-------
<CAPTION>
VALUE
SHARES (000)
- -----------------------------------------------------------------------
<S> <C>
TELECOMMUNICATIONS (0.0%)
(a,e)4 IXC Communications, Inc., 12.50% PIK............. $ 5
-------
TOTAL PREFERRED STOCKS (COST $1,073).......................... 1,197
-------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
WARRANTS
- ----------
<S> <C>
WARRANTS (0.1%)
TELECOMMUNICATIONS (0.1%)
(a,e)260 Globalstar Telecom, expiring 2/15/04............. 28
(a,e)1,600 Occidente Y Caribe, expiring 3/15/04............. --
-------
TOTAL WARRANTS (COST $0)...................................... 28
-------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
- ----------
<S> <C>
SHORT-TERM INVESTMENT (3.2%)
REPURCHASE AGREEMENT (3.2%)
$ 598 Chase Securities Inc. 5.95%, dated 12/31/97, due
1/2/98, to be repurchased at $598
collateralized by $545 U.S. Treasury Bonds,
7.875%, due 11/15/04, valued at $615 (COST
$598).......................................... 598
-------
TOTAL INVESTMENTS (99.2%) (COST $17,668)...................... 18,299
OTHER ASSETS IN EXCESS OF LIABILITIES (0.8%).................. 140
-------
NET ASSETS (100%)............................................. $18,439
=======
</TABLE>
- ---------------
(a) -- Non-income producing security
(e) -- 144A Security -- certain conditions for public sale may exist.
(h) -- Variable/floating rate security -- rate disclosed is as of December
31, 1997.
(n) -- Step Bond -- coupon rate increases in increments to maturity. Rate
disclosed is as of December 31, 1997. Maturity date disclosed is the
ultimate maturity date.
PIK -- Payment-in-Kind. Income may be paid in additional securities or cash
at the discretion of the issuer.
74
The accompanying notes are an integral part of the financial statements.
<PAGE> 425
MORGAN STANLEY
INTERNATIONAL MAGNUM FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW
(UNAUDITED)
THE PERFORMANCE RESULTS PROVIDED IN THIS OVERVIEW ARE FOR INFORMATIONAL PURPOSES
ONLY AND SHOULD NOT BE CONSTRUED AS A GUARANTEE OF THE FUND'S FUTURE
PERFORMANCE. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN
INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL
COST. PLEASE SEE THE PROSPECTUS FOR A DESCRIPTION OF CERTAIN RISK CONSIDERATIONS
ASSOCIATED WITH INTERNATIONAL INVESTING.
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1997)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Finland 3.1%
France 8.1%
Germany 8.7%
Italy 3.6%
Japan 16.6%
Netherlands 5.5%
Spain 3.6%
Sweden 4.0%
Switzerland 6.5%
United Kingdom 15.7%
Short-Term Investments 15.7%
Other 8.9%
</TABLE>
<TABLE>
<CAPTION>
TOTAL RETURNS**
-------------------------------------------------------------
AVERAGE ANNUAL
SIX MONTHS ONE YEAR SINCE INCEPTION
----------------- ----------------- -----------------
WITH WITHOUT WITH WITHOUT WITH WITHOUT
SALES SALES SALES SALES SALES SALES
CHARGE* CHARGE CHARGE* CHARGE CHARGE* CHARGE
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class A Shares -12.85% -7.52% -0.05% 6.05% 1.50% 5.57%
- ---------------------------------------------------------------------------------------
Class B Shares -12.43% -7.87% 0.20% 5.20% 2.15% 4.77%
- ---------------------------------------------------------------------------------------
Class C Shares -8.79% -7.88% 4.20% 5.20% 4.74% 4.74%
- ---------------------------------------------------------------------------------------
MSCI EAFE Index N/A -8.48% N/A 1.78% N/A 2.16%
- ---------------------------------------------------------------------------------------
</TABLE>
* The returns above are calculated using the applicable sales charge for Class
A shares and the applicable deferred sales charge for Class B and Class C
shares.
** Total returns for the Fund reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waivers and reimbursements, total
returns would be lower.
The Morgan Stanley International (MSCI) EAFE Index is an unmanaged index of
common stocks and includes Europe, Australia and the Far East and assumes
dividends are reinvested net of withholding taxes.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
<TABLE>
<CAPTION>
TOP FIVE HOLDINGS
PERCENT OF
ISSUER COUNTRY NET ASSETS
- ------ ------------- --------------
<S> <C> <C>
Telecom Italia S.p.A. Italy 1.7%
Nestle S.A. (Registered) Switzerland 1.5%
Akzo Nobel N.V. Netherlands 1.3%
Nordbanken AB Sweden 1.2%
Reckitt & Coleman plc United 1.2%
Kingdom
</TABLE>
<TABLE>
<CAPTION>
TOP FIVE SECTORS
VALUE PERCENT OF
SECTOR (000) NET ASSETS
- ------ --------- -------------
<S> <C> <C>
Capital Equipment $ 15,410 19.3%
Consumer Goods 15,146 19.0%
Materials 10,632 13.3%
Finance 9,865 12.3%
Services 8,455 10.6%
</TABLE>
The International Magnum Fund seeks long-term capital appreciation by investing
primarily in equity securities of non-U.S. issuers in accordance with the EAFE
country weightings determined by the subadviser. The EAFE countries in which the
Portfolio will invest are those comprising the Morgan Stanley Capital
International (MSCI) EAFE Index, which includes Australia, Japan, New Zealand,
most Western European nations, and certain developed countries.
For the six months ended December 31, 1997, the Fund generated a total return of
- -7.52 percent for the Class A shares at net asset value, as compared to a total
return of -8.48 percent for the Morgan Stanley Capital International (MSCI) EAFE
Index.
The second half of 1997 saw most international markets registering losses in
U.S. dollar terms as the turmoil in Asia continued to rattle investors around
the globe. While the contagion had its greatest impact on the nations in the
Pacific Rim, investors in more distant markets such as the United States and
Europe began to consider the effects of cheap Asian exports, slower global
growth, and lower Asian demand on corporate earnings.
The Asian currency crisis began with the devaluation of the Thai baht on July 2,
and quickly spread throughout the region. Countries that succumbed to the Asian
crisis, including Thailand, Malaysia, the Philippines, Indonesia, and South
Korea, share common traits. Companies in those countries have largely financed
themselves with readily available bank credit, and the borrowed funds were put
to work in unproductive ways that earned a less-than-economic return on
investment. Much of this debt was borrowed in U.S. dollars to take advantage of
lower U.S. interest rates, and as these currencies have devalued, corporate debt
obligations have ballooned, pushing many firms toward bankruptcy.
Because loans were often granted based on relationships and cronyism rather than
sound credit analysis, banks within these countries also have suffered, leading
to a banking crisis as well. Although the International Monetary Fund (IMF) has
stepped in to bolster the financial system and stabilize currencies in the
region, a lack of political will to implement the IMF's austere policies in
several countries has left the region vulnerable and sent investors fleeing--at
least until there are signs of real progress.
Virtually no country in the region escaped the debacle. Although the Hong Kong
dollar's peg to the U.S. dollar has stubbornly held despite speculators'
attacks, it has come at a high cost to the Hong Kong economy. In order to defend
its currency, the Hong Kong Monetary Authority was forced to
75
<PAGE> 426
MORGAN STANLEY
INTERNATIONAL MAGNUM FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
(UNAUDITED)
raise interest rates to painfully high levels in October, thereby putting
pressure on interest-sensitive stocks such as real estate and banking, sectors
that comprise the bulk of the Hong Kong market. As a result, Hong Kong stocks
fell nearly 29 percent during the fourth quarter. Even markets with relatively
healthy fundamentals were not spared; for the fourth quarter, the supposed "safe
haven" Singapore market fell 20.6 percent in U.S. dollar terms (10.0 percent in
local currency) while Australia declined 12.9 percent (3.2 percent in local
currency).
The Japanese market also experienced a difficult fourth quarter as the MSCI
Japan Index fell 19.8 percent in U.S. dollar terms and 13.6 percent in local
currency terms. December was the Japanese market's sixth consecutive month in
the red. Business, consumer, and investor confidence has plummeted, contributing
to the market's downward spiral. Sentiment also worsened as a string of
high-profile bankruptcies in the financial sector, including Sanyo Securities,
Hokkaido-Takushoku Bank and Yamaichi Securities (one of Japan's "big four"
brokerage houses) caught the market and the Japanese government by surprise. The
bankruptcies were caused in part by a credit crunch ahead of stricter capital
requirements for Japanese banks beginning in 1999 (delayed from 1998). Small and
mid-size companies are being especially hard hit by the banks' reticence to
lend. The market also was disappointed by the Japanese government's inaction;
the government thus far has failed to announce a meaningful plan to shore up the
financial sector or pass a fiscal stimulus package able to jump-start the
economy. And if domestic problems were not enough, the uncertainty in Asia and
particularly in Korea--one of Japan's major competitors--helped drive Japan's
equity markets to lows set in 1995.
Relatively speaking, the brightest spot during the reporting period was Europe.
The Swiss market benefited from the $25 billion merger of UBS and Swiss Bank
Corp., and from its heavy weighting in defensive pharmaceutical stocks.
Financial stocks throughout Europe performed well during the past several months
as interest rates have fallen and restructuring has just begun within the
industry. In addition, a "flight to quality" prompted by the Asian crisis saw
investors moving towards the more liquid markets and currencies of Germany,
Switzerland, and France. Exporters and other companies with exposure to Asia
also suffered during the fourth quarter with capital goods, electronics, autos,
metals, and paper all noticeably weak. Among the weakest European markets was
Finland, which suffered as Nokia, the cellular telephone manufacturer that
comprises one-third of the Finnish index, fell more than 10 percent in December
alone. On the positive side, restructuring and merger activity continues at a
robust pace in Europe, with six mergers/acquisitions worth approximately $87
billion announced on a single day in October. Industry consolidation should
continue as European Monetary Union forces companies to reevaluate their
competitive positions and seek partners across borders.
Against this backdrop, the International Magnum Fund outperformed the benchmark
MSCI EAFE Index. Midway through the reporting period, we further reduced our
exposure to both Asia and Japan, preferring to increase cash levels given our
bearish outlook. Our regional allocation, in which we were underweight in Japan
and Asia and neutral in Europe, contributed to outperformance, while stock
selection, particularly in Europe, provided an offset. Specifically, our
underweight in European financials and our exposure to smaller-capitalization
stocks in Germany and Switzerland were negatives for the portfolio.
Small-caps suffered as investors sought safety in the liquidity of large-cap
names. Poor performance from export-oriented companies such as SGS Thompson
Microelectronics, Volkswagen, and Philips Electronics, undermined returns. An
increase in interest rates in Hong Kong also hurt the performance of our
holdings in that market's property stocks. On the positive side, stock selection
in the U.K. and in Australia was strong, with British consumer-products stocks
Tate & Lyle and Unilever contributing to good performance.
Looking ahead, we expect the beginning of 1998 to be volatile, particularly as
the Asian crisis plays itself out. The financial sectors in Asia and Japan are
in fragile condition, and the world will be watching carefully to see how these
difficulties are resolved. The wild card in Asia is whether China and Hong Kong
will allow their currencies to devalue in light of the competitive devaluations
76
<PAGE> 427
MORGAN STANLEY
INTERNATIONAL MAGNUM FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
(UNAUDITED)
sweeping the region. We do not believe such a devaluation is likely in the near
term; nonetheless, the mere possibility makes us cautious about the outlook for
the Hong Kong market and the region overall, because another round of
devaluations would likely ensue. Currently, we are underweight in Asia relative
to the MSCI EAFE Index, with the majority of our Asian holdings in Australia.
In Japan, we believe the government will come under increasing pressure to
implement policies to stimulate the domestic economy and reform the banking
sector. Thus far, however, the government's anti-deficit stance has precluded
any government spending package or meaningful tax cut, and no approach has been
announced to deal with the weakest banks or the huge amount of bad debt on bank
balance sheets. Therefore, despite valuations that have become increasingly
attractive, we will remain wary and underweight the Japanese market until we
begin to see signs of a change. Because of our bearish outlook for Japan and
Hong Kong, we have been holding a higher-than-average amount of cash, a policy
that we view as a temporary and defensive measure.
Of the developed international regions, we believe Europe offers the most
investment potential for the coming year. As a result, Europe currently
represents our largest weighting, with about two-thirds of the portfolio
invested there. Restructuring, consolidation, and deregulation should continue
as EMU approaches, with companies jockeying for better strategic position in the
new pan-European world. Additionally, with the introduction of the new euro
currency scheduled for 1999, interest rates will continue to converge with rates
falling in the peripheral nations and rising in the core countries. Although we
expect growth to slow as exports of European luxury and capital goods moderate
due to lower Asian demand, the overall environment is benign for European
equities. In particular, we are finding new investment opportunities in U.K.
companies offering the attractive combination of strong business franchises with
low capital requirements and managements focused on shareholder value.
Overall, we will continue to monitor conditions around the world, seeking the
best investment opportunities available. We strive to remain agile regarding
stock selection and will put cash to work as soon as we find suitable
opportunities to do so.
Francine J. Bovich
PORTFOLIO MANAGER
77
<PAGE> 428
MORGAN STANLEY
INTERNATIONAL MAGNUM FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- -------------------------------------------------------------------------
<S> <C>
COMMON STOCKS (83.8%)
AUSTRALIA (1.5%)
21,000 Australia & New Zealand Banking Group Ltd........ $ 139
18,600 Commonwealth Bank of Australia................... 213
11,000 Lend Lease Corp., Ltd............................ 215
15,500 National Australia Bank Ltd...................... 216
35,640 News Corp., Ltd.................................. 197
(a)112,500 Telstra Corp., Ltd............................... 237
-------
1,217
-------
AUSTRIA (0.5%)
6,600 Boehler-Udderholm AG............................. 387
-------
BELGIUM (0.7%)
10,830 G.I.B. Holdings Ltd.............................. 526
-------
DENMARK (1.3%)
7,700 BG Bank A/S...................................... 518
7,140 Unidanmark A/S 'A' (Registered).................. 524
-------
1,042
-------
FINLAND (3.1%)
(a)7,150 Amer-Yhtymae Oyj................................. 137
9,900 Huhtamaki Oyj 'I'................................ 409
3,460 Kone Oyj 'B'..................................... 419
80,000 Merita Ltd. 'A'.................................. 437
9,500 Metra Oyj 'B'.................................... 223
66,100 Rautaruukki Oyj.................................. 534
25,750 Valmet Oyj....................................... 355
-------
2,514
-------
FRANCE (8.1%)
2,000 Alcatel Alsthom.................................. 254
1,240 Bongrain S.A..................................... 523
5,442 Cie de Saint-Gobain.............................. 773
7,070 Elf Aquitaine S.A................................ 822
(a)9,200 France Telecom S.A............................... 334
3,900 Groupe Danone RFD................................ 697
9,100 Lafarge S.A...................................... 597
14,488 Legris Industries S.A............................ 503
3,500 Scor............................................. 167
(a)6,400 SGS-Thomson Microelectronics N.V................. 396
8,000 Total S.A. 'B'................................... 871
37,150 Usinor Sacilor................................... 537
-------
6,474
-------
GERMANY (8.7%)
16,800 BASF AG.......................................... 600
13,600 Bayer AG......................................... 505
1,440 Buderus AG....................................... 646
1,420 Dyckerhoff AG.................................... 364
21,610 Gerresheimer Glas AG............................. 303
2,700 Hornbach Holding AG.............................. 186
22,600 Lufthansa AG..................................... 425
8,920 Metro AG......................................... 316
(a)940 Philipp Holzmann AG.............................. 242
2,737 Plettac AG....................................... 377
1,200 Suedzucker AG.................................... 590
11,500 Veba AG.......................................... 783
<CAPTION>
VALUE
SHARES (000)
- -------------------------------------------------------------------------
<S> <C>
1,660 Viag AG.......................................... $ 909
1,270 Volkswagen AG.................................... 709
-------
6,955
-------
HONG KONG (1.3%)
31,000 Cheung Kong Holdings Ltd......................... 203
24,000 China Light & Power Co., Ltd..................... 133
24,000 Dao Heng Bank Group Ltd.......................... 60
43,200 Hong Kong Telecommunications Ltd................. 89
6,800 HSBC Holdings plc................................ 168
23,000 Hutchison Whampoa Ltd............................ 144
38,000 Ng Fung Hong Ltd................................. 40
17,000 Shanghai Industrial Holdings Ltd................. 63
9,000 Sun Hung Kai Properties Ltd...................... 63
8,000 Swire Pacific Ltd. 'A'........................... 44
-------
1,007
-------
IRELAND (0.8%)
41,000 Bank of Ireland.................................. 630
-------
ITALY (3.6%)
22,800 Editoriale L' Expresso S.p.A..................... 110
108,900 Magneti Marelli S.p.A............................ 186
36,200 Marzotto (Gaetano) & Figli S.p.A................. 452
52,400 Mediaset S.p.A................................... 258
191,900 Sogefi S.p.A..................................... 488
(a)307,824 Telecom Italia S.p.A............................. 1,357
-------
2,851
-------
JAPAN (16.6%)
43,000 Amada Co., Ltd................................... 160
31,000 Asahi Tec Corp................................... 49
19,000 Canon, Inc....................................... 443
14,000 Dai Nippon Printing Co. Ltd...................... 263
85,000 Daicel Chemical Industries Ltd................... 111
38,000 Daifuku Co., Ltd................................. 185
45,000 Daikin Industries Ltd............................ 170
4,190 Family Mart...................................... 150
16,000 Fuji Machine Manufacturing Co.................... 386
10,000 Fuji Photo Film Ltd.............................. 383
28,000 Fujitec Co., Ltd................................. 155
44,000 Fujitsu Ltd...................................... 472
68,000 Furukawa Electric................................ 291
12,000 Hitachi Credit Corp.............................. 198
65,000 Hitachi Ltd...................................... 463
13,000 Inabata & Co..................................... 41
50,000 Kaneka Corp...................................... 226
15,000 Kurita Water Industries.......................... 153
5,700 Kyocera Ltd...................................... 259
18,000 Kyudenko Co., Ltd................................ 91
11,000 Lintec Corp...................................... 170
27,000 Matsushita Electric Industrial Co., Ltd.......... 395
80,000 Mitsubishi Chemical Corp......................... 115
21,000 Mitsubishi Estate Co., Ltd....................... 229
68,000 Mitsubishi Heavy Industries Ltd.................. 284
22,000 Mitsumi Electric Co., Ltd........................ 314
5,000 Murata Manufacturing Co., Inc.................... 126
44,000 NEC Corp......................................... 469
23,000 Nifco, Inc....................................... 150
5,000 Nintendo Corp., Ltd.............................. 491
</TABLE>
78
The accompanying notes are an integral part of the financial statements.
<PAGE> 429
MORGAN STANLEY
INTERNATIONAL MAGNUM FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- -------------------------------------------------------------------------
<S> <C>
JAPAN (CONT.)
1,000 Nippon Pillar Packing............................ $ 5
56 Nippon Telegraph & Telephone Corp................ 481
66,000 Nissan Motor Co.................................. 273
17,000 Nissha Printing Co., Ltd......................... 102
34,000 Ricoh Co., Ltd................................... 422
12,000 Rinnai Corp...................................... 181
9,000 Sangetsu Co., Ltd................................ 92
15,000 Sankyo Co., Ltd.................................. 339
27,000 Sanwa Shutter.................................... 136
24,000 Sekisui Chemical Co.............................. 122
22,000 Sekisui House Ltd................................ 141
9,000 Shimamura Co., Ltd............................... 157
38,000 Shin-Etsu Polymer Co., Ltd....................... 125
6,900 Sony Corp........................................ 613
12,000 Sumitomo Marine & Fire Insurance Co.............. 63
28,000 Suzuki Motor Co., Ltd............................ 253
6,000 TDK Corp......................................... 452
7,000 Tokyo Electron Ltd............................... 224
113,000 Toshiba Corp..................................... 470
16,000 Toyota Motor Corp................................ 459
60,000 Tsubakimoto Chain Co............................. 216
14,000 Yamaha Corp...................................... 159
18,000 Yamanuchi Pharmaceutical Co...................... 386
-------
13,263
-------
MALAYSIA (0.2%)
59,000 Tenaga Nasional Bhd.............................. 126
-------
NETHERLANDS (5.5%)
17,100 ABN Amro Holding N.V............................. 333
6,000 Akzo Nobel N.V................................... 1,035
(a)3,350 Benckiser N.V. 'B'............................... 139
19,480 ING Groep N.V.................................... 820
8,500 KLM Royal Dutch Airlines N.V..................... 314
2,400 Koninklijke Bijenkorf Beheer..................... 150
28,500 Koninklijke KNP BT N.V........................... 656
9,500 Koninklijke Van Ommeren N.V...................... 319
10,400 Phillips Electronics N.V......................... 624
-------
4,390
-------
NEW ZEALAND (0.1%)
(a)56,000 AMP NZ Office Trust.............................. 33
1,840 Fletcher Challenge Forest........................ 2
-------
35
-------
NORWAY (1.1%)
48,800 Saga Petroleum ASA 'B'........................... 740
4,850 Sparebanken...................................... 173
-------
913
-------
SINGAPORE (0.9%)
(a)6,200 Creative Technology Ltd.......................... 126
(a)850 Creative Technology Ltd.......................... 19
5,000 Development Bank of Singapore Ltd. (Foreign)..... 43
5,000 Electronic Resources Ltd......................... 5
(a)42,000 NatSteel Ltd..................................... 54
29,600 Oversea-Chinese Banking Corp., Ltd. (Foreign).... 172
10,000 Parkway Holdings Ltd............................. 23
5,000 Singapore Press Holdings (Foreign)............... 63
<CAPTION>
VALUE
SHARES (000)
- -------------------------------------------------------------------------
<S> <C>
58,000 SM Summit Holdings Ltd........................... $ 12
28,000 United Overseas Bank Ltd. (Foreign).............. 156
16,000 Venture Manufacturing Ltd........................ 45
21,000 WBL Corp., Ltd................................... 19
-------
737
-------
SPAIN (3.6%)
23,900 Banco Bilbao Vizcaya S.A......................... 773
58,700 Iberdrola S.A.................................... 773
19,750 Telefonica de Espana S.A......................... 564
70,200 Uralita S.A...................................... 802
-------
2,912
-------
SWEDEN (4.0%)
20,450 Esselte AB 'B'................................... 415
(a)175,600 Nordbanken AB.................................... 993
13,300 Pharmacia & Upjohn, Inc. Depository Shares....... 489
8,100 S.K.F. AB 'B'.................................... 173
11,100 Sparbanken Sverige AB 'A'........................ 252
22,600 Spectra-Physics AB 'A'........................... 428
14,000 Svenska Handelsbanken 'A'........................ 484
-------
3,234
-------
SWITZERLAND (6.5%)
(a)240 Ascom Holding AG (Bearer)........................ 309
290 Bobst AG (Bearer)................................ 427
1,910 Forbo Holding AG (Registered).................... 781
960 Holderbank Financiere Glaris AG 'B' (Bearer)..... 783
2,080 Merkur Holding AG (Registered)................... 439
790 Nestle S.A. (Registered)......................... 1,184
93 Novartis AG (Registered)......................... 151
80 Schindler Holding AG (Participating
Certificates).................................. 83
334 Schindler Holding AG (Registered)................ 359
317 Schweizerische Industrie-Gesellschaft Holding AG
(Registered)................................... 433
366 Sulzer AG (Registered)........................... 232
-------
5,181
-------
UNITED KINGDOM (15.7%)
(a)73,522 Aggreko plc...................................... 189
3,700 Associated British Foods plc..................... 32
31,230 B.A.T. Industries plc............................ 284
65,511 BG plc........................................... 296
37,862 Bank of Scotland................................. 349
18,800 Bass plc......................................... 292
49,200 Booker plc....................................... 259
200 Bowthorpe plc.................................... 1
82,300 British Telecommunications plc................... 647
(a)55,800 Bunzl plc........................................ 217
47,150 Burmah Castrol plc............................... 821
31,300 Charter plc...................................... 385
79,022 Christian Salvesen plc........................... 127
21,175 Commercial Union plc............................. 295
14,200 Danka Business Systems plc....................... 55
49,100 Diageo plc....................................... 452
13,200 Glynwed International plc........................ 56
49,900 Great Universal Stores plc....................... 629
121,100 Imperial Tobacco Group plc....................... 762
38,898 John Mowlem & Co. plc............................ 57
76,200 Kwik Save Group plc.............................. 367
</TABLE>
79
The accompanying notes are an integral part of the financial statements.
<PAGE> 430
MORGAN STANLEY
INTERNATIONAL MAGNUM FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- -------------------------------------------------------------------------
<S> <C>
UNITED KINGDOM (CONT.)
135,000 Medeva plc....................................... $ 359
45,700 Peninsular and Oriental Steam Navigation Co...... 520
45,200 Premier Farnell plc.............................. 325
208,600 Premier Oil plc.................................. 182
72,800 Racal Electronic plc............................. 319
63,268 Reckitt & Colman plc............................. 993
86,682 Royal & Sun Alliance Insurance Group plc......... 873
119,900 Scapa Group plc.................................. 459
50,350 Tate & Lyle plc.................................. 415
57,600 Unilever plc..................................... 493
47,900 Westminster Health Care Holdings plc............. 287
166,800 WPP Group plc.................................... 743
-------
12,540
-------
TOTAL COMMON STOCKS (COST $69,415).............................. 66,934
-------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
- ------------
<S> <C>
CONVERTIBLE DEBENTURE (0.0%)
NEW ZEALAND (0.0%)
$ (a)56 AMP Office Trust 7.50%, 6/30/03 (COST $33)....... 33
-------
TOTAL FOREIGN SECURITIES (83.8%) (COST $69,448)................. 66,967
-------
SHORT-TERM INVESTMENT (15.7%)
REPURCHASE AGREEMENT (15.7%)
12,568 Chase Securities, Inc., 5.95%, dated 12/31/97,
due 1/2/98, to be repurchased at $12,572,
collateralized by $11,370 U.S. Treasury Notes,
7.875%, due 11/15/04, valued at $12,826 (COST
$12,568)....................................... 12,568
-------
TOTAL INVESTMENT IN SECURITIES (99.5%) (COST $82,016)........... 79,535
-------
FOREIGN CURRENCY (0.9%)
GPB 102 British Pound.................................... 168
DEM 727 German Mark...................................... 404
FIM 345 Finnish Marka.................................... 63
ITL 18,517 Italian Lira..................................... 11
JPY 6,019 Japanese Yen..................................... 46
CHF 5 Swiss Franc...................................... 3
-------
TOTAL FOREIGN CURRENCY (COST $705).............................. 695
-------
TOTAL INVESTMENTS (100.4%) (COST $82,721)....................... 80,230
LIABILITIES IN EXCESS OF OTHER ASSETS (-0.4%)................... (341)
-------
NET ASSETS (100%)............................................... $79,889
-------
-------
</TABLE>
- ---------------
(a) -- Non-income producing security
RFD -- Ranked for Dividend
80
The accompanying notes are an integral part of the financial statements.
<PAGE> 431
MORGAN STANLEY
INTERNATIONAL MAGNUM FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
DECEMBER 31, 1997
(UNAUDITED)
- --------------------------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE INFORMATION:
Under the terms of foreign currency contracts open at December 31, 1997, the
Portfolio is obligated to deliver or is to receive foreign currency in exchange
for U.S. dollars as indicated below:
<TABLE>
<CAPTION>
CURRENCY IN EXCHANGE
TO DELIVER VALUE SETTLEMENT FOR VALUE NET UNREALIZED
(000) (000) DATE (000) (000) GAIN (LOSS) (000)
- ----------- --------- ----------- ------------ --------- -----------------
<S> <C> <C> <C> <C> <C>
$ 10 $ 10 1/2/98 DEM 18 $ 10 $ --
$ 180 180 1/2/98 ESP 27,325 179 (1)
$ 20 20 1/2/98 FRF 120 20 --
$ 371 371 1/2/98 GBP 224 368 (3)
$ 205 205 1/2/98 SEK 1,589 200 (5)
JPY 6,019 46 1/5/98 $ 46 46 --
JPY 372,595 2,868 1/29/98 $ 3,090 3,090 222
JPY 189,202 1,456 1/29/98 $ 1,545 1,545 89
JPY 363,508 2,801 2/5/98 $ 3,090 3,090 289
JPY 189,009 1,456 2/5/98 $ 1,545 1,545 89
BEF 1,317 36 2/26/98 $ 37 37 1
FRF 1,819 303 2/26/98 $ 315 315 12
DEM 198 111 2/26/98 $ 115 115 4
NLG 321 159 2/26/98 $ 165 165 6
CHF 484 334 2/26/98 $ 345 345 11
$ 37 37 2/26/98 BEF 1,317 35 (2)
$ 351 351 2/26/98 CHF 484 334 (17)
$ 116 116 2/26/98 DEM 198 110 (6)
$ 319 319 2/26/98 FRF 1,819 304 (15)
$ 167 167 2/26/98 NLG 321 159 (8)
SGD 794 469 3/5/98 $ 491 491 22
$ 494 494 3/5/98 SGD 794 469 (25)
SGD 735 434 3/18/98 $ 430 430 (4)
$ 77 77 3/18/98 SGD 130 77 --
--------- --------- ---------
$ 12,820 $ 13,479 $ 659
========= ========= =========
</TABLE>
- ---------------
BEF -- Belgian Franc
GBP -- British Pound
FRF -- French Franc
DEM -- German Mark
JPY -- Japanese Yen
NLG -- Netherlands Guilder
SGD -- Singapore Dollar
ESP -- Spanish Peseta
SEK -- Swedish Krona
CHF -- Swiss Franc
- --------------------------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
- -------- --------- -------------
<S> <C> <C>
Capital Equipment............................................................. $ 15,410 19.3%
Consumer Goods................................................................ 15,146 19.0
Materials..................................................................... 10,632 13.3
Finance....................................................................... 9,865 12.3
Services...................................................................... 8,455 10.6
Energy........................................................................ 4,721 5.9
Multi-Industry................................................................ 2,738 3.4
--------- ---
$ 66,967 83.8%
========= ====
</TABLE>
81
The accompanying notes are an integral part of the financial statements.
<PAGE> 432
MORGAN STANLEY
GOVERNMENT OBLIGATIONS MONEY MARKET FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW
(UNAUDITED)
INVESTMENTS IN SHARES OF THE FUND ARE NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT, AND THERE IS NO ASSURANCE THAT THE FUND WILL MAINTAIN A STABLE NET
ASSET VALUE OF $1.00 PER SHARE. YIELDS WILL FLUCTUATE AS MARKET CONDITIONS
CHANGE.
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1997)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Agency Obligations 51.4%
Variable Rate
Obligations 48.1%
Other 0.5%
</TABLE>
<TABLE>
<CAPTION>
TOP FIVE HOLDINGS
PERCENT OF
SECURITY INSTRUMENT NET ASSETS
- -------- --------------- --------------
<S> <C> <C>
Federal Home
Loan Mortgage
Corporation
Note 5.75%,
6/22/98 Agency 43.4%
Obligation
Federal National
Mortgage
Association
Discount Note
5.42%, 1/15/98 Agency 13.2%
Obligation
Federal National
Mortgage
Association
8.15%, 5/11/98 Agency 10.1%
Obligation
Federal National
Mortgage
Association
Discount Note
5.47%, 1/21/98 Agency 9.4%
Obligation
Federal National
Mortgage
Association
Discount Note
5.53%, 2/25/98 Agency 9.4%
Obligation
</TABLE>
The Government Obligations Money Market Fund's investment objective is to
provide a high level of current income consistent with maintaining liquidity and
stability of principal. It seeks to achieve this objective by investing in
short-term U.S. Treasury bills, notes, and other obligations issued or
guaranteed by the U.S. government, its agencies or instrumentalities, and
entering into repurchase agreements relating to such obligations.
The annualized seven-day yield and seven-day effective yield (which assumes all
dividends reinvested) for the Government Obligations Money Market Fund as of
December 31, 1997 were 5.01 percent and 5.14 percent, respectively. As with all
money market portfolios, the seven-day yields are not necessarily indicative of
future performance.
During the second half of 1997, the market was obsessed with the relative
strength of the U.S. economy. Investors speculated about how long the U.S. could
continue functioning at full employment without triggering inflation and when
the Federal Reserve might raise interest rates. One-year Treasury bills declined
as much as 20 basis points in the quarter ended September 30, and the money
market yield curve flattened dramatically. By the end of the quarter, the spread
between three-month and one-year Treasury bills compressed to only 34 basis
points.
The market followed a pattern of drifting in either direction within a
relatively tight range in response to conflicting economic data and each
approaching meeting of the Federal Open Market Committee (FOMC). This relative
"calm" in the market came to an abrupt end, however, on October 27 as Hong Kong
and most foreign stock markets tumbled dramatically in response to a region-wide
economic crisis, and U.S. stocks followed suit. As equity markets plummeted,
investors concluded that the Federal Reserve would shift its focus away from
U.S. economic fundamentals and turn its attention instead to world markets. In
light of these developments, the U.S. bond market rallied amid a global "flight
to quality."
The November employment data, released in early December, indicated that
employment remained very strong. But the inflation statistics that followed were
also positive, indicating that inflation remained under control. At this point,
the market began to rethink the Federal Reserve's need to act. The consensus
view emerged that if the Asian crisis had not occurred, the December FOMC
meeting would have resulted in a 25 basis point tightening. Instead, the Fed
left rates unchanged. During this period, market levels remained strong, and the
yield curve continued to flatten. By the end of December, the spread between
three-month and one-year Treasury bills was approximately 15 basis points.
82
<PAGE> 433
MORGAN STANLEY
GOVERNMENT OBLIGATIONS MONEY MARKET FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
(UNAUDITED)
With no protection against possible Federal Reserve tightening built into the
front end of the yield curve, we found little value in the market, particularly
in the one-year area of the money market curve. Finally, anchored by a 5.5
percent funds rate, the entire yield curve has flattened, offering less
opportunity to enhance returns by rolling down the curve.
In managing the Government Obligations Money Market Fund, we work to maximize
the yield but also are conscious of changes in the relative asset size. Within
this context, we sought to maintain a neutral maturity structure that was in
keeping with our market outlook. The portfolio ended the reporting period with a
weighted average maturity of 61 days. The majority of the portfolio has been
invested in a combination of U.S. agency floating rate notes and discount notes.
We are pleased to report that the Fund continues to meet its goals of providing
as high a level of interest income as is consistent with maintaining liquidity
and stability of principal.
Abigail Jones Feder Ellen D. Harvey
PORTFOLIO MANAGER PORTFOLIO MANAGER
Christian G. Roth Scott F. Richard
PORTFOLIO MANAGER PORTFOLIO MANAGER
Daniel M. Nilanel
PORTFOLIO MANAGER
83
<PAGE> 434
MORGAN STANLEY
GOVERNMENT OBLIGATIONS MONEY MARKET FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
- -------------------------------------------------------------------------
<S> <C>
AGENCY OBLIGATIONS (51.4%)
FEDERAL FARM CREDIT BANK (5.7%)
$ 3,000 5.65%, 10/1/98................................... $ 2,997
---------
FEDERAL HOME LOAN BANK (3.8%)
2,000 5.80%, 12/18/98.................................. 2,000
---------
FEDERAL NATIONAL MORTGAGE ASSOCIATION (10.0%)
5,280 8.15%, 5/11/98................................... 5,325
---------
FEDERAL NATIONAL MORTGAGE ASSOCIATION
DISCOUNT NOTES (31.9%)
7,000 5.42%, 1/15/98................................... 6,986
5,000 5.47%, 1/21/98................................... 4,986
5,000 5.53%, 2/25/98................................... 4,958
---------
16,930
---------
TOTAL AGENCY OBLIGATIONS (COST $27,252)....................... 27,252
---------
VARIABLE RATE OBLIGATIONS (48.1%)
FEDERAL HOME LOAN MORTGAGE CORPORATION (48.1%)
(h) 23,000 5.75%, 6/22/98................................... 22,991
(h) 2,500 5.74%, 8/18/98................................... 2,499
---------
TOTAL VARIABLE RATE OBLIGATIONS (COST $25,490)................ 25,490
---------
TOTAL INVESTMENTS (99.5%) (COST $52,742)...................... 52,742
OTHER ASSETS IN EXCESS OF LIABILITIES (0.5%).................. 255
---------
NET ASSETS (100%)............................................. $ 52,997
=========
</TABLE>
- ---------------
(h) -- Variable or floating rate security -- rate disclosed is as of December
31, 1997.
84
The accompanying notes are an integral part of the financial statements.
<PAGE> 435
MORGAN STANLEY
MONEY MARKET FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW
(UNAUDITED)
COMPOSITION OF NET ASSETS
(AT DECEMBER 31, 1997)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Asset Backed Commercial Paper 7.4%
Certificates of Deposit 11.6%
Commercial Paper 40.7%
Corporate Floating Rate Notes 2.5%
U.S. Government & Agency Obligations 27.3%
Other 10.5%
</TABLE>
<TABLE>
<CAPTION>
TOP FIVE HOLDINGS
PERCENT OF NET
SECURITY INSTRUMENT ASSETS
- -------- ---------------- --------------
<S> <C> <C>
Federal National
Mortgage
Association U.S. Government
Discount Note & Agency
5.70%, 1/5/98 Obligations 4.1%
Federal Home Loan
Mortgage
Corporation U.S. Government
Discount Note & Agency
5.70%, 1/9/98 Obligations 4.1%
Federal National
Mortgage
Association U.S. Government
Discount Note & Agency
5.70%, 1/16/98 Obligations 4.1%
Federal Home Loan
Mortgage
Corporation U.S. Government
Discount Note & Agency
5.66%, 2/6/98 Obligations 4.1%
Federal Home Loan
Mortgage
Corporation U.S. Government
Discount Note & Agency
5.66%, 2/12/98 Obligations 4.1%
</TABLE>
The Money Market Fund's investment objective is to provide as high a level of
current interest income as is consistent with maintaining liquidity and
stability of principal. Obligations held by the Money Market Fund will have
remaining maturities of 397 days or less. In pursuing its investment objective,
the Money Market Fund invests in a broad range of U.S. dollar-denominated
instruments, such as government, bank, and commercial obligations.
The annualized seven-day yield and seven-day effective yield (which assumes all
dividends reinvested) for the Money Market Fund as of December 31, 1997 were
5.06 percent and 5.19 percent, respectively. As with all money market
portfolios, the seven-day yields are not necessarily indicative of future
performance.
During the second half of 1997, the market was obsessed with the relative
strength of the U.S. economy. Investors speculated about how long the U.S. could
continue functioning at full employment without triggering inflation and when
the Federal Reserve might raise interest rates. One-year Treasury bills declined
as much as 20 basis points in the quarter ended September 30, and the money
market yield curve flattened dramatically. By the end of the quarter, the spread
between three-month and one-year Treasury bills compressed to only 34 basis
points.
The market followed a pattern of drifting in either direction within a
relatively tight range in response to conflicting economic data and each
approaching meeting of the Federal Open Market Committee (FOMC). This relative
"calm" in the market came to an abrupt end, however, on October 27 as Hong Kong
and most foreign stock markets tumbled dramatically in response to a region-wide
economic crisis, and U.S. stocks followed suit. As equity markets plummeted,
investors concluded that the Federal Reserve would shift its focus away from
U.S. economic fundamentals and turn its attention instead to world markets. In
light of these developments, the U.S. bond market rallied amid a global "flight
to quality."
The November employment data, released in early December, indicated that
employment remained very strong. But the inflation statistics that followed were
also positive, indicating that inflation remained under control. At this point,
the market began to rethink the Federal Reserve's need to act. The consensus
view emerged that if the Asian crisis had not occurred, the December FOMC
meeting would have resulted in a 25 basis point tightening. Instead, the Fed
left rates unchanged. During this period, market levels remained strong, and the
yield curve continued to flatten. By the end of December, the spread between
three-month and one-year Treasury bills was approximately 15 basis points.
85
<PAGE> 436
MORGAN STANLEY
MONEY MARKET FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
(UNAUDITED)
With no protection against possible Federal Reserve tightening built into the
front end of the yield curve, we found little value in the market, particularly
in the one-year area of the money market curve. Finally, anchored by a 5.5
percent funds rate, the entire yield curve has flattened, offering less
opportunity to enhance returns by rolling down the curve.
The weighted average maturity for the Fund remained neutral during the past six
months. As of December 31, the weighted average maturity was 49 days. Throughout
the reporting period, we invested the majority of the portfolio in high-quality
commercial paper, certificates of deposit, and floating-rate notes to maximize
the portfolio's yield. As opportunity presented itself, we selectively extended
a portion of the portfolio to lock in yield.
We are pleased to report that the Fund continues to meet its goal of providing
as high a level of interest income as is consistent with maintaining liquidity
and stability of principal, and that the Fund holds only high-quality securities
with more than 90 percent invested in securities rated A1+/P1 according to
Moody's or Standard & Poor's.
Abigail Jones Feder Ellen D. Harvey
PORTFOLIO MANAGER PORTFOLIO MANAGER
Christian G. Roth Scott F. Richard
PORTFOLIO MANAGER PORTFOLIO MANAGER
Daniel M. Nilanel
PORTFOLIO MANAGER
86
<PAGE> 437
MORGAN STANLEY
MONEY MARKET FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
- ------------------------------------------------------------------------
<S> <C>
U.S. GOVERNMENT & AGENCY OBLIGATIONS (27.3%)
FEDERAL HOME LOAN MORTGAGE CORPORATION
DISCOUNT NOTES (12.4%)
$ 15,000 5.70%, 1/9/98.................................... $ 14,983
15,000 5.66%, 2/6/98.................................... 14,918
15,000 5.66%, 2/12/98................................... 14,903
--------
44,804
--------
FEDERAL NATIONAL MORTGAGE ASSOCIATION
DISCOUNT NOTES (14.9%)
15,000 5.70%, 1/5/98.................................... 14,993
15,000 5.70%, 1/16/98................................... 14,967
9,370 5.71%, 1/26/98................................... 9,334
15,000 5.62%, 3/12/98................................... 14,839
--------
54,133
--------
TOTAL U.S. GOVERNMENT & AGENCY OBLIGATIONS (COST $98,937).... 98,937
--------
CERTIFICATES OF DEPOSIT (11.6%)
BANKS (11.6%)
2,000 Australia & New Zealand Bank, New York 5.68%,
2/27/98........................................ 2,000
3,000 Bank Montreal, Chicago (Yankee) 5.80%, 11/6/98... 2,999
3,000 Barclays Bank 5.94%, 6/19/98..................... 3,001
2,000 Canadian Imperial Bank, New York 5.82%, 2/9/98... 2,000
3,000 Canadian Imperial Bank (Yankee) 5.94%,
10/23/98....................................... 3,002
3,000 Chase Manhattan Corp. 5.65%, 4/6/98.............. 3,000
5,000 Credit Suisse, First Boston 6.25%, 4/8/98........ 5,000
5,000 Deutsche Bank (Yankee) 5.85%, 3/13/98............ 5,000
2,000 National Westminster Bank 5.66%, 3/5/98.......... 1,999
5,000 Rabobank Nederland (Yankee) 6.20%, 4/10/98....... 4,999
3,000 Societe Generale Bank, New York 5.85%,
12/17/98....................................... 2,997
4,000 Swiss Bank, New York 5.83%, 12/16/98............. 3,998
2,000 Westdeutsche Landesbank 5.66%, 3/2/98............ 2,000
--------
TOTAL CERTIFICATES OF DEPOSIT (COST $41,995)................. 41,995
--------
ASSET BACKED COMMERCIAL PAPER (7.4%)
SINGLE PURPOSE CORPORATE (7.4%)
3,000 Asset Securitization Corp. 5.60%, 2/20/98........ 2,977
2,000 Asset Securitization Corp. 5.72%, 3/24/98........ 1,974
3,000 Citation Capital Corp. 5.75%, 1/28/98............ 2,989
3,000 Delaware Funding 5.74%, 1/16/98.................. 2,993
2,000 Delaware Funding 5.78%, 2/12/98.................. 1,987
5,000 Eiger Capital Corp. 5.85%, 1/16/98............... 4,989
2,129 Greenwich Funding 5.85%, 1/8/98.................. 2,127
7,000 Greenwich Funding 5.92%, 1/9/98.................. 6,992
--------
TOTAL ASSET BACKED COMMERCIAL PAPER (COST $27,028)........... 27,028
--------
COMMERCIAL PAPER (40.7%)
AUTOMOBILES (4.4%)
2,000 Associates Corp. 5.75%, 2/8/98................... 1,989
3,000 Associates Corp. 5.69%, 2/17/98.................. 2,978
3,000 Daimler-Benz North America Corp. 5.50%, 2/10/98.. 2,982
2,000 Daimler-Benz North America Corp. 5.75%, 2/18/98.. 1,987
3,000 Toyota Motor Credit Corp. 5.65%, 1/30/98......... 2,987
3,000 Toyota Motor Credit Corp. 5.76%, 3/8/98.......... 2,970
--------
15,893
--------
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
- ------------------------------------------------------------------------
<S> <C>
BANKS (13.6%)
$ 2,000 Bank of America 5.80%, 1/20/98................... $ 1,994
3,000 Bank of America 5.70%, 1/29/98................... 2,987
2,000 Barclays Bank U.S. Funding Corp. 5.75%, 2/2/98... 1,990
5,000 Bayerische Landesbank 5.69%, 3/11/98............. 4,946
5,000 Bayerische Veriensbank 5.82%, 1/8/98............. 4,995
3,000 Commerzbank Finance 5.70%, 1/20/98............... 2,991
5,000 Dresdner U.S. Finance 5.75%, 2/3/98.............. 4,974
2,000 First Chicago Finance Corp. 5.77%, 2/9/98........ 1,988
3,000 First Chicago Finance Corp. 5.56%, 5/8/98........ 2,943
5,000 International Nederlander Finance 5.72%, 3/5/98.. 4,951
4,000 J.P. Morgan & Co. 5.64%, 6/18/98................. 3,895
3,000 Royal Bank of Scotland 5.59%, 1/27/98............ 2,988
2,700 Sun Trust Bank 5.88%, 1/16/98.................... 2,694
5,000 UBS Finance, Inc. 5.95%, 1/12/98................. 4,992
--------
49,328
--------
CONSUMER GOODS (3.6%)
5,000 HJ Heinz Co. 5.78%, 1/21/98...................... 4,985
5,000 Pfizer Inc. 5.92%, 1/22/98....................... 4,984
3,000 Warner Lambert Co. 5.49%, 3/17/98................ 2,966
--------
12,935
--------
ELECTRONICS (3.0%)
5,000 Electronic Data Systems 5.75%, 2/13/98........... 4,966
3,000 Panasonic Finance 5.55%, 3/4/98.................. 2,972
3,000 Siemens Capital Corp. 5.57%, 2/19/98............. 2,978
--------
10,916
--------
FINANCE (5.3%)
3,000 American Express Credit Corp. 5.49%, 2/5/98...... 2,984
5,000 CIT Group Holdings 6.00%, 1/20/98................ 4,985
2,000 Commercial Credit Corp. 5.75%, 2/2/98............ 1,990
3,000 Commercial Credit Corp. 5.55%, 2/9/98............ 2,982
3,300 General Capital Corp 5.80%, 1/22/98.............. 3,289
3,000 Transamerica Financial Corp. 5.65%, 1/23/98...... 2,990
--------
19,220
--------
INSURANCE (3.5%)
2,351 General Reinsurance Corp 5.72%, 4/23/98.......... 2,310
2,000 Prudential Funding 5.72%, 4/2/98................. 1,971
3,000 Metlife Funding Inc. 5.71%, 3/23/98.............. 2,962
3,000 USAA Capital Corp. 5.66%, 1/23/98................ 2,990
2,500 USAA Capital Corp. 5.57%, 2/6/98................. 2,486
--------
12,719
--------
INVESTMENT BANKING (1.1%)
4,000 Merrill Lynch 5.75%, 2/13/98..................... 3,973
--------
TELECOMMUNICATONS (4.9%)
6,000 AT&T Corp. 6.00%, 1/8/98......................... 4,995
5,000 AT&T Capital Corp. 5.73%, 3/9/98................. 4,948
4,000 Bell South Telecommunications 5.70%, 2/11/98..... 3,975
3,950 Southern New England Telephone 5.90%, 1/20/98.... 3,938
--------
17,856
--------
UTILITIES (1.3%)
5,000 National Rural Utilities 5.68%, 4/28/98.......... 4,908
--------
TOTAL COMMERCIAL PAPER (COST $147,748)....................... 147,748
--------
</TABLE>
87
The accompanying notes are an integral part of the financial statements.
<PAGE> 438
MORGAN STANLEY
MONEY MARKET FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
- ------------------------------------------------------------------------
<S> <C>
CORPORATE FLOATING RATE NOTES (2.5%)
BANKS (1.7%)
$(h)3,000 Banc One, Dayton 6.22%, 8/21/98.................. $ 3,000
(h)3,000 Morgan Guaranty Trust, New York 5.63%,
3/25/98........................................ 3,000
--------
6,000
--------
ELECTRONICS (0.8%)
(h)3,000 IBM Credit Corp. 5.66%, 11/20/98................. 3,000
--------
TOTAL CORPORATE FLOATING RATE NOTES (COST $9,000)............ 9,000
--------
REPURCHASE AGREEMENT (10.5%)
37,961 J. P. Morgan Securities, Inc., 6.20%, dated
12/31/97, due 1/2/98, to be repurchased at
$37,974, collateralized by $38,148 U.S.
Treasury Notes 6.75%, due 6/30/99 valued at
$38,770 (COST $37,961)......................... 37,961
--------
TOTAL INVESTMENTS (100.0%) (COST $362,669)................... 362,669
OTHER ASSETS IN EXCESS OF LIABILITIES (0.0%)................. 144
--------
NET ASSETS (100%)............................................ $362,813
========
</TABLE>
- ---------------
(h) -- Variable/floating rate security -- rate disclosed is as of December
31, 1997.
88
The accompanying notes are an integral part of the financial statements.
<PAGE> 439
MORGAN STANLEY FUNDS
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
DECEMBER 31, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
GLOBAL
EQUITY GLOBAL WORLDWIDE
ALLO- GLOBAL FIXED ASIAN AMERICAN HIGH LATIN
CATION EQUITY INCOME GROWTH VALUE VALUE INCOME AMERICAN
FUND FUND FUND FUND FUND FUND FUND FUND
(000) (000) (000) (000) (000) (000) (000) (000)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments in Securities, at Value* (Note 1)
-- See accompanying portfolios $ 208,401 $600,108 $ 9,284 $124,497 $289,405 $211,990 $ 239,548 $120,413
Foreign Currency 224 1,656 6 2,197 -- -- -- 916
Cash -- -- 6 -- -- -- 783 26
Margin Deposit on Futures 2,728 -- -- -- -- -- -- --
Receivable for:
Investments Sold -- -- -- 5,028 6,740 673 2,593 772
Daily Variation on Futures Contracts 557 -- -- -- -- -- -- --
Securities Sold Short -- -- -- -- -- -- -- --
Fund Shares Sold 851 2,078 1 938 4,852 2,514 1,283 1,888
Dividends 570 677 -- 54 208 243 5 138
Interest 6 8 180 -- 4 11 5,108 1
Security Lending Income 23 -- -- -- -- -- -- --
Foreign Withholding Tax Reclaim 59 20 2 27 -- -- -- --
Net Unrealized Gain on Foreign Currency
Exchange Contracts 867 -- 22 484 -- -- -- --
Deferred Organizational Costs -- 1 -- 2 3 38 5 5
Due from Broker -- -- -- -- -- -- -- --
Receivable from Investment Adviser -- -- 44 -- -- -- -- --
Securities, at Value, Held as Collateral for
Securities Loaned 16,567 -- -- -- -- -- -- --
Other 8 -- -- 22 22 1 -- 259
---------- -------- ------- -------- -------- -------- --------- --------
Total Assets 230,861 604,548 9,545 133,249 301,234 215,470 249,325 124,418
---------- -------- ------- -------- -------- -------- --------- --------
LIABILITIES:
Payable for:
Investments Purchased 50 33,811 -- 111 10,378 4,274 6,862 3,068
Securities Sold Short, at Value (Proceeds --
$605) -- -- -- -- -- -- -- --
Fund Shares Redeemed 373 478 4 2,621 2,250 460 378 1,801
Bank Overdraft -- 7 -- 385 763 10 -- --
Dividends Declared 38 -- 7 1 -- -- 5,410 --
Investment Advisory Fees 93 484 -- 120 123 43 150 60
Administrative Fees 47 121 2 31 57 44 50 32
Custody Fees 98 25 10 149 31 64 44 95
Professional Fees 9 17 12 14 5 12 12 10
Distribution Fees 252 848 8 159 298 193 289 106
Shareholder Reporting Expenses 26 18 5 57 23 19 9 16
Transfer Agent Fees 9 24 2 14 11 10 9 8
Directors' Fees and Expenses 6 2 1 16 2 1 6 2
Securities Lending Expense 16 -- -- -- -- -- -- --
Filing and Registration Fees 8 36 -- 1 44 60 12 1
Deferred Country Tax -- -- -- 39 -- -- -- 5
Collateral on Securities Loaned 16,567 -- -- -- -- -- -- --
Net Unrealized Loss on Foreign Currency
Exchange Contracts -- 39 -- -- -- -- -- --
Net Unrealized Loss on Swap Agreement -- -- -- -- -- -- -- --
Other 1 -- 1 4 -- 1 6 1
---------- -------- ------- -------- -------- -------- --------- --------
Total Liabilities 17,593 35,910 52 3,722 13,985 5,191 13,237 5,205
---------- -------- ------- -------- -------- -------- --------- --------
NET ASSETS $ 213,268 $568,638 $ 9,493 $129,527 $287,249 $210,279 $ 236,088 $119,213
========== ======== ======= ======== ======== ======== ========= ========
</TABLE>
- ---------------
* Includes repurchase agreements aggregating $32,681,000, $25,400,000,
$649,000, $22,945,000, $31,553,000, $12,585,000, $3,861,000,
$3,601,000 $5,507,000, $598,000, $12,568,000 and $37,961,000 for
Global Equity Allocation Fund, Global Equity Fund, Global Fixed Income
Fund, American Value Fund, Value Fund, Worldwide High Income Fund,
Latin American Fund, Aggressive Equity Fund, U.S. Real Estate Fund,
High Yield Fund, International Magnum Fund, and Money Market Fund,
respectively.
89
The accompanying notes are an integral part of the financial statements.
<PAGE> 440
MORGAN STANLEY FUNDS
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
DECEMBER 31, 1997 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
GOVERNMENT
U.S. INTER- OBLIGATIONS
EMERGING AGGRESSIVE REAL HIGH NATIONAL MONEY MONEY
MARKETS EQUITY ESTATE YIELD MAGNUM MARKET MARKET
FUND FUND FUND FUND FUND FUND FUND
(000) (000) (000) (000) (000) (000) (000)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments in Securities, at Value* (Note 1)
-- See accompanying portfolios $159,328 $ 103,714 $41,001 $18,299 $79,535 $ 52,742 $362,669
Foreign Currency 9,925 -- -- -- 695 -- --
Cash -- -- 122 1 -- 259 --
Margin Deposit on Futures -- -- -- -- -- -- --
Receivable for:
Investments Sold 6,120 4,766 98 -- 48 -- --
Daily Variation on Futures Contracts -- -- -- -- -- -- --
Securities Sold Short -- 605 -- -- -- -- --
Fund Shares Sold 10,355 2,387 245 243 1,223 -- --
Dividends 429 50 247 -- 173 -- --
Interest 2 1 5 299 2 161 1,133
Security Lending Income -- -- -- -- -- -- --
Foreign Withholding Tax Reclaim -- -- -- -- 49 -- --
Net Unrealized Gain on Foreign Currency
Exchange Contracts -- -- -- -- 659 -- --
Deferred Organizational Costs 4 31 14 16 26 -- --
Due from Broker -- 303 -- -- -- -- --
Receivable from Investment Adviser -- -- 17 32 12 1 --
Securities, at Value, Held as Collateral for
Securities Loaned -- -- -- -- -- -- --
Other 11 39 -- -- 4 -- --
-------- ---------- ------- ------- ------- ---------- --------
Total Assets 186,174 111,896 41,749 18,890 82,426 53,163 363,802
-------- ---------- ------- ------- ------- ---------- --------
LIABILITIES:
Payable for:
Investments Purchased 420 4,542 417 102 1,976 -- --
Securities Sold Short, at Value (Proceeds --
$605) -- 591 -- -- -- -- --
Fund Shares Redeemed 3,239 75 3,785 6 318 -- --
Bank Overdraft 3,095 211 -- -- 45 -- 25
Dividends Declared 36 -- -- 289 -- 78 573
Investment Advisory Fees 62 4 -- -- -- -- 116
Administrative Fees 45 20 8 4 18 10 27
Custody Fees 238 33 44 15 50 8 18
Professional Fees 17 10 8 5 14 10 9
Distribution Fees 205 118 34 25 86 52 169
Shareholder Reporting Expenses 27 14 5 4 11 4 --
Transfer Agent Fees 9 7 2 1 5 -- 1
Directors' Fees and Expenses 6 1 1 -- 1 4 7
Securities Lending Expense -- -- -- -- -- -- --
Filing and Registration Fees 8 5 2 -- 12 -- 44
Deferred Country Tax 22 -- -- -- -- -- --
Collateral on Securities Loaned -- -- -- -- -- -- --
Net Unrealized Loss on Foreign Currency
Exchange Contracts 5 -- -- -- -- -- --
Net Unrealized Loss on Swap Agreements 581 -- -- -- -- -- --
Other 16 -- 1 -- 1 -- --
-------- ---------- ------- ------- ------- ---------- --------
Total Liabilities 8,031 5,631 4,307 451 2,537 166 989
-------- ---------- ------- ------- ------- ---------- --------
NET ASSETS $178,143 $ 106,265 $37,442 $18,439 $79,889 $ 52,997 $362,813
======== ========== ======= ======= ======= ========== ========
</TABLE>
90
The accompanying notes are an integral part of the financial statements.
<PAGE> 441
MORGAN STANLEY FUNDS
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
DECEMBER 31, 1997 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
GLOBAL
EQUITY GLOBAL WORLDWIDE
ALLO- GLOBAL FIXED ASIAN AMERICAN HIGH LATIN
CATION EQUITY INCOME GROWTH VALUE VALUE INCOME AMERICAN
FUND FUND FUND FUND FUND FUND FUND FUND
(000) (000) (000) (000) (000) (000) (000) (000)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSETS CONSIST OF:
Capital Stock at Par $ 15 $ 57 $ 1 $ 16 $ 15 $ 21 $ 18 $ 9
Paid in Capital in Excess of Par 199,344 572,646 9,648 253,790 266,632 212,383 235,378 125,412
Undistributed (Distributions in Excess of) Net
Investment Income (915) 18 (75) (2,683) (638) (7) 747 (804)
Accumulated (Distributions in Excess of) Net
Realized Gain (Loss) (1,395) 640 (74) (87,866) 6,140 (576) 528 (7,086)
Unrealized Appreciation (Depreciation) on
Investments and Foreign Currency
Translations** 16,219 (4,723) (7) (33,730) 15,100 (1,542) (583) 1,682
---------- -------- ------- -------- -------- -------- --------- --------
NET ASSETS $ 213,268 $568,638 $ 9,493 $129,527 $287,249 $210,279 $ 236,088 $119,213
========== ======== ======= ======== ======== ======== ========= ========
CLASS A SHARES:
Net Assets $ 74,593 $ 55,372 $ 5,851 $ 63,990 $106,826 $102,701 $ 82,139 $ 66,929
Shares Issued and Outstanding ($.001 par value)
(Authorized 2,625,000,000) 5,202 5,590 589 7,708 5,502 10,166 6,323 4,964
Net Asset Value and Redemption Price Per Share $ 14.34 $ 9.91 $ 9.93 $ 8.30 $ 19.41 $ 10.10 $ 12.99 $ 13.48
========== ======== ======= ======== ======== ======== ========= ========
Maximum Sales Charge 5.75% 5.75% 4.75% 5.75% 5.75% 5.75% 4.75% 5.75%
Maximum Offering Price Per Share
(Net Asset Value Per Share X 100 / (100 -
maximum sales charge)) $ 15.21 $ 10.51 $ 10.43 $ 8.81 $ 20.59 $ 10.72 $ 13.64 $ 14.30
========== ======== ======= ======== ======== ======== ========= ========
CLASS B SHARES:
Net Assets $ 58,639 $467,465 $ 1,539 $ 27,558 $107,301 $ 88,112 $ 103,847 $ 29,554
Shares Issued and Outstanding ($.001 par value)
(Authorized 2,625,000,000) 4,209 47,188 156 3,427 5,544 8,733 8,036 2,263
Net Asset Value and Offering Price Per Share*** $ 13.93 $ 9.91 $ 9.88 $ 8.04 $ 19.36 $ 10.09 $ 12.92 $ 13.06
========== ======== ======= ======== ======== ======== ========= ========
CLASS C SHARES:
Net Assets $ 80,036 $ 45,801 $ 2,103 $ 37,979 $ 73,122 $ 19,466 $ 50,102 $ 22,730
Shares Issued and Outstanding ($.001 par value)
(Authorized 2,625,000,000) 5,688 4,623 213 4,732 3,777 1,931 3,875 1,739
Net Asset Value and Offering Price Per Share*** $ 14.07 $ 9.91 $ 9.87 $ 8.03 $ 19.36 $ 10.08 $ 12.93 $ 13.07
========== ======== ======= ======== ======== ======== ========= ========
Investments at Cost, Including Foreign Currency $ 193,680 $606,694 $ 9,316 $160,851 $274,305 $213,532 $ 240,047 $119,640
========== ======== ======= ======== ======== ======== ========= ========
</TABLE>
- ---------------
** Net of accrual for country tax of $38,000 for Asian Growth Fund,
$5,000 for Latin American Fund and $125,000 for Emerging Markets Fund.
*** Redemption price may be subject to a contingent deferred sales charge.
91
The accompanying notes are an integral part of the financial statements.
<PAGE> 442
MORGAN STANLEY FUNDS
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
DECEMBER 31, 1997 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
GOVERNMENT
U.S. INTER- OBLIGATIONS
EMERGING AGGRESSIVE REAL HIGH NATIONAL MONEY MONEY
MARKETS EQUITY ESTATE YIELD MAGNUM MARKET MARKET
FUND FUND FUND FUND FUND FUND FUND
(000) (000) (000) (000) (000) (000) (000)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSETS CONSIST OF:
Capital Stock at Par $ 19 $ 6 $ 2 $ 15 $ 6 $ 59 $ 363
Paid in Capital in Excess of Par 218,344 97,368 33,397 17,598 82,264 53,037 362,611
Undistributed (Distributions in Excess of) Net
Investment Income (1,380) (390) 12 41 (97) (7) (68)
Accumulated (Distributions in Excess of) Net
Realized Gain (Loss) (7,671) 3,627 338 154 (478) (92) (93)
Unrealized Appreciation (Depreciation) on
Investments and Foreign Currency
Translations** (31,169) 5,654 3,693 631 (1,806) -- --
-------- ---------- ------- ------- ------- ---------- --------
NET ASSETS $178,143 $ 106,265 $37,442 $18,439 $79,889 $ 52,997 $362,813
======== ========== ======= ======= ======= ========== ========
CLASS A SHARES:
Net Assets $ 95,359 $ 35,689 $20,768 $ 5,644 $36,918 $ 52,997 $362,813
Shares Issued and Outstanding ($.001 par value)
(Authorized 2,625,000,000) 10,106 2,003 1,237 448 2,915 53,096 362,974
Net Asset Value and Redemption Price Per Share $ 9.44 $ 17.82 $ 16.79 $ 12.59 $ 12.67 $ 1.00 $ 1.00
======== ========== ======= ======= ======= ========== ========
Maximum Sales Charge 5.75% 5.75% 5.75% 4.75% 5.75% -- --
Maximum Offering Price Per Share
(Net Asset Value Per Share X 100 / 100 -
maximum sales charge) $ 10.02 $ 18.91 $ 17.81 $ 13.22 $ 13.44 -- --
======== ========== ======= ======= ======= ========== ========
CLASS B SHARES:
Net Assets $ 43,549 $ 58,739 $12,764 $ 9,931 $33,824 -- --
Shares Issued and Outstanding ($.001 par value)
(Authorized 2,625,000,000) 4,716 3,340 763 791 2,682 -- --
Net Asset Value and Offering Price Per Share*** $ 9.23 $ 17.58 $ 16.73 $ 12.56 $ 12.61 -- --
======== ========== ======= ======= ======= ========== ========
CLASS C SHARES:
Net Assets $ 39,235 $ 11,837 $ 3,910 $ 2,864 $ 9,147 -- --
Shares Issued and Outstanding ($.001 par value)
(Authorized 2,625,000,000) 4,246 674 234 228 723 -- --
Net Asset Value and Offering Price Per Share*** $ 9.24 $ 17.57 $ 16.73 $ 12.56 $ 12.66 -- --
======== ========== ======= ======= ======= ========== ========
Investments at Cost, Including Foreign Currency $200,004 $ 98,075 $37,870 $17,668 $82,721 $ 52,742 $362,669
======== ========== ======= ======= ======= ========== ========
</TABLE>
92
The accompanying notes are an integral part of the financial statements.
<PAGE> 443
MORGAN STANLEY FUNDS
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
(UNAUDITED)
<TABLE>
<CAPTION>
GLOBAL
EQUITY
ALLOCATION GLOBAL GLOBAL FIXED AMERICAN
FUND EQUITY FUND INCOME FUND ASIAN GROWTH VALUE FUND VALUE FUND
SIX MONTHS OCTOBER 29, SIX MONTHS FUND SIX SIX MONTHS JULY 7,
ENDED 1997* TO ENDED MONTHS ENDED ENDED 1997* TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1997 1997 1997 1997 1997
(000) (000) (000) (000) (000) (000)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends $ 1,809 $ 1,084 $ -- $ 1,224 $ 959 $ 955
Interest 724 1,527 266 183 374 575
Security Lending 87 -- -- -- -- --
Less Foreign Taxes Withheld (89) (79) (2) (137) -- --
------------ ------------ ------------ ------------ ------------ ------------
Total Income 2,531 2,532 264 1,270 1,333 1,530
------------ ------------ ------------ ------------ ------------ ------------
EXPENSES:
Investment Advisory Fees 1,036 938 37 1,192 776 498
Less: Fees Waived (101) -- (37) -- (69) (193)
------------ ------------ ------------ ------------ ------------ ------------
Net Investment Advisory Fees 935 938 -- 1,192 707 305
Administrative Fees 281 232 14 301 232 157
Custodian Fees 111 25 9 195 23 64
Filing and Registration Fees 8 36 -- -- 44 51
Directors' Fees and Expenses 2 1 -- 3 1 1
Professional Fees 13 20 12 1 11 18
Shareholder Reports 52 41 32 72 46 43
Transfer Agent Fees 55 24 10 115 41 16
Security Lending Fees 15 -- -- -- -- --
Distribution Fees
Class A 94 22 8 147 89 78
Class B 254 776 8 229 290 250
Class C 403 76 11 381 265 52
Amortization of Organizational Costs 6 13 6 2 2 31
Blue Sky Fees 32 16 24 55 41 68
Country Tax Expense -- -- -- 47 -- --
Interest Expense -- -- 2 52 -- --
Other 8 -- 1 8 2 1
Expenses Reimbursed by Adviser -- -- (49) -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Net Expenses 2,269 2,220 88 2,800 1,794 1,135
------------ ------------ ------------ ------------ ------------ ------------
Net Investment Income (Loss) 262 312 176 (1,530) (461) 395
------------ ------------ ------------ ------------ ------------ ------------
NET REALIZED GAIN (LOSS) ON:
Investments 13,773 -- (104) (79,275) 14,491 452
Foreign Currency Transactions 871 640 31 144 -- --
Futures 88
Securities Sold Short -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Net Realized Gain (Loss) 14,732 640 (73) (79,131) 14,491 452
------------ ------------ ------------ ------------ ------------ ------------
CHANGE IN UNREALIZED
APPRECIATION/DEPRECIATION ON:
Investments (16,845) (4,859) 70 (69,450) 2,398 (1,542)
Foreign Currency Translations 498 136 41 591 -- --
Futures and Swaps 479
Securities Sold Short -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Change in Unrealized Appreciation/
Depreciation (15,868) (4,723) 111 (68,859) 2,398 (1,542)
------------ ------------ ------------ ------------ ------------ ------------
Net Realized Gain (Loss) and Change in
Unrealized Appreciation/Depreciation (1,136) (4,083) 38 (147,990) 16,889 (1,090)
------------ ------------ ------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ (874) $ (3,771) $ 214 $ (149,520) $ 16,428 $ (695)
============ ============ ============ ============ ============ ============
<CAPTION>
WORLDWIDE LATIN
HIGH INCOME AMERICAN
FUND FUND
SIX MONTHS SIX MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
1997 1997
(000) (000)
- ---------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME:
Dividends $ 86 $ 686
Interest 10,655 116
Security Lending -- --
Less Foreign Taxes Withheld -- --
------------ ------------
Total Income 10,741 802
------------ ------------
EXPENSES:
Investment Advisory Fees 850 767
Less: Fees Waived -- (100)
------------ ------------
Net Investment Advisory Fees 850 667
Administrative Fees 285 179
Custodian Fees 12 136
Filing and Registration Fees 12 1
Directors' Fees and Expenses 2 1
Professional Fees 21 20
Shareholder Reports 57 47
Transfer Agent Fees 43 36
Security Lending Fees -- --
Distribution Fees
Class A 105 94
Class B 473 123
Class C 238 116
Amortization of Organizational Costs 2 2
Blue Sky Fees 46 44
Country Tax Expense -- 120
Interest Expense 15 4
Other 10 5
Expenses Reimbursed by Adviser -- --
------------ ------------
Net Expenses 2,171 1,595
------------ ------------
Net Investment Income (Loss) 8,570 (793)
------------ ------------
NET REALIZED GAIN (LOSS) ON:
Investments 11,335 7,053
Foreign Currency Transactions 199 (338)
Futures
Securities Sold Short -- --
------------ ------------
Net Realized Gain (Loss) 11,534 6,715
------------ ------------
CHANGE IN UNREALIZED APPRECIATION/DEPREC
Investments (14,249) (12,183)
Foreign Currency Translations (76) --
Futures and Swaps
Securities Sold Short -- --
------------ ------------
Change in Unrealized Appreciation/
Depreciation (14,325) (12,183)
------------ ------------
Net Realized Gain (Loss) and Change in
Unrealized Appreciation/Depreciation (2,791) (5,468)
------------ ------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 5,779 $ (6,261)
============ ============
</TABLE>
- ---------------
* Commencement of operations
93
The accompanying notes are an integral part of the financial statements.
<PAGE> 444
MORGAN STANLEY FUNDS
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
(UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
GOVERNMENT
EMERGING AGGRESSIVE U.S. REAL HIGH YIELD OBLIGATIONS
MARKETS FUND EQUITY FUND ESTATE FUND FUND INTERNATIONAL MONEY MARKET
SIX MONTHS SIX MONTHS SIX MONTHS SIX MONTHS MAGNUM FUND FUND SIX
ENDED ENDED ENDED ENDED SIX MONTHS MONTHS ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, ENDED DECEMBER DECEMBER 31,
1997 1997 1997 1997 31, 1997 1997
(000) (000) (000) (000) (000) (000)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends $ 1,796 $ 361 $ 568 $ 39 $ 472 $ --
Interest 408 88 67 941 332 2,295
Security Lending -- -- -- -- -- --
Less Foreign Taxes Withheld (97) -- -- -- (57) --
------------ ------------ ------------ ------------ -------------- ------------
Total Income 2,107 449 635 980 747 2,295
------------ ------------ ------------ ------------ -------------- ------------
EXPENSES:
Investment Advisory Fees 1,383 378 158 85 289 183
Less: Fees Waived (208) (125) (96) (76) (69) (115)
------------ ------------ ------------ ------------ -------------- ------------
Net Investment Advisory Fees 1,175 253 62 9 220 68
Administrative Fees 293 106 41 29 97 41
Custodian Fees 421 21 27 8 71 16
Filing and Registration Fees 8 5 2 -- 12 --
Directors' Fees and Expenses 4 1 -- -- 1 1
Professional Fees 23 16 9 9 16 10
Shareholder Reports 61 38 27 33 34 29
Transfer Agent Fees 50 28 11 8 21 --
Security Lending Fees -- -- -- -- -- --
Distribution Fees
Class A 148 34 23 10 41 202
Class B 236 232 50 51 144 --
Class C 278 48 17 21 51 --
Amortization of Organizational Costs 2 5 8 3 4 --
Blue Sky Fees 59 50 18 12 27 56
Country Tax Expense 36 -- -- -- -- --
Interest Expense 21 -- -- -- -- --
Other 13 2 -- 2 1 1
Expenses Reimbursed by Adviser -- -- -- -- -- --
------------ ------------ ------------ ------------ -------------- ------------
Net Expenses 2,828 839 295 195 740 424
------------ ------------ ------------ ------------ -------------- ------------
Net Investment Income (Loss) (721) (390) 340 785 7 1,871
------------ ------------ ------------ ------------ -------------- ------------
NET REALIZED GAIN (LOSS) ON:
Investments (3,530) 11,143 1,693 679 (476) (1)
Foreign Currency Transactions 489 -- -- -- 50 --
Futures
Securities Sold Short -- (327) -- -- -- --
------------ ------------ ------------ ------------ -------------- ------------
Net Realized Gain (Loss) (3,041) 10,816 1,693 679 (426) (1)
------------ ------------ ------------ ------------ -------------- ------------
CHANGE IN UNREALIZED
APPRECIATION/DEPRECIATION ON:
Investments (51,389) 1,924 1,861 (164) (6,541) --
Foreign Currency Translations 476 -- -- -- 551 --
Futures and Swaps (581)
Securities Sold Short -- 251 -- -- -- --
------------ ------------ ------------ ------------ -------------- ------------
Change in Unrealized
Appreciation/Depreciation (51,494) 2,175 1,861 (164) (5,990) --
------------ ------------ ------------ ------------ -------------- ------------
Net Realized Gain (Loss) and Change in
Unrealized Appreciation/Depreciation (54,535) 12,991 3,554 515 (6,416) (1)
------------ ------------ ------------ ------------ -------------- ------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ (55,256) $ 12,601 $ 3,894 $ 1,300 $ (6,409) $ 1,870
============ ============ ============ ============ ============== ============
<CAPTION>
MONEY MARKET
FUND SIX
MONTHS ENDED
DECEMBER 31,
1997
(000)
- ------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Dividends $ --
Interest 5,451
Security Lending --
Less Foreign Taxes Withheld --
------------
Total Income 5,451
------------
EXPENSES:
Investment Advisory Fees 419
Less: Fees Waived (122)
------------
Net Investment Advisory Fees 297
Administrative Fees 91
Custodian Fees 30
Filing and Registration Fees 44
Directors' Fees and Expenses 1
Professional Fees 10
Shareholder Reports 27
Transfer Agent Fees --
Security Lending Fees --
Distribution Fees
Class A 470
Class B --
Class C --
Amortization of Organizational Costs --
Blue Sky Fees 38
Country Tax Expense --
Interest Expense --
Other 3
Expenses Reimbursed by Adviser --
------------
Net Expenses 1,011
------------
Net Investment Income (Loss) 4,440
------------
NET REALIZED GAIN (LOSS) ON:
Investments 6
Foreign Currency Transactions --
Futures
Securities Sold Short --
------------
Net Realized Gain (Loss) 6
------------
CHANGE IN UNREALIZED APPRECIATION/DEPREC
Investments --
Foreign Currency Translations --
Futures and Swaps --
Securities Sold Short --
------------
Change in Unrealized
Appreciation/Depreciation --
------------
Net Realized Gain (Loss) and Change in
Unrealized Appreciation/Depreciation 6
------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 4,446
============
</TABLE>
- ---------------
* Commencement of operations
94
The accompanying notes are an integral part of the financial statements.
<PAGE> 445
MORGAN STANLEY FUNDS
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
GLOBAL EQUITY ALLOCATION FUND
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
DECEMBER 31, 1997 JUNE 30, 1997
(000) (000)
- ------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 262 $ 245
Net Realized Gain 14,732 13,170
Change in Unrealized Appreciation/Depreciation (15,868) 17,251
---------- ----------
Net Increase (Decrease) in Net Assets Resulting
from Operations (874) 30,666
---------- ----------
DISTRIBUTIONS:
Net Investment Income:
Class A (1,628) (2,358)
Class B (1,028) (759)
Class C (1,187) (2,093)
---------- ----------
(3,843) (5,210)
---------- ----------
Net Realized Gain:
Class A (8,369) (2,101)
Class B (6,610) (751)
Class C (9,026) (2,262)
---------- ----------
(24,005) (5,114)
---------- ----------
Net Decrease in Net Assets Resulting from
Distributions (27,848) (10,324)
---------- ----------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 47,868 54,525
Distributions Reinvested 26,341 9,826
Redeemed (22,084) (36,345)
---------- ----------
Net Increase in Net Assets Resulting from
Capital Share Transactions 52,125 28,006
---------- ----------
Total Increase in Net Assets 23,403 48,348
NET ASSETS -- Beginning of Period 189,865 141,517
---------- ----------
NET ASSETS -- End of Period (Including
undistributed (distributions in excess of) net
investment income of $(915) and $2,666,
respectively) $ 213,268 $ 189,865
========== ==========
- ------------------------------------------------------------------------------------------
Capital Share Transactions:
(1) Class A:
---------------------
Shares:
Subscribed 749 1,091
Distributions Reinvested 658 293
Redeemed (593) (1,314)
---------- ----------
Net Increase in Class A Shares Outstanding 814 70
========== ==========
Dollars:
Subscribed $ 12,383 $ 16,569
Distributions Reinvested 9,235 4,157
Redeemed (9,651) (19,605)
---------- ----------
Net Increase $ 11,967 $ 1,121
========== ==========
Class B:
---------------------
Shares:
Subscribed 1,483 1,444
Distributions Reinvested 533 106
Redeemed (219) (160)
---------- ----------
Net Increase in Class B Shares Outstanding 1,797 1,390
========== ==========
Dollars:
Subscribed $ 23,968 $ 21,138
Distributions Reinvested 7,277 1,475
Redeemed (3,518) (2,336)
---------- ----------
Net Increase $ 27,727 $ 20,277
========== ==========
Class C:
---------------------
Shares:
Subscribed 714 1,160
Distributions Reinvested 713 300
Redeemed (553) (995)
---------- ----------
Net Increase in Class C Shares Outstanding 874 465
========== ==========
Dollars:
Subscribed $ 11,517 $ 16,818
Distributions Reinvested 9,829 4,194
Redeemed (8,915) (14,404)
---------- ----------
Net Increase $ 12,431 $ 6,608
========== ==========
- ------------------------------------------------------------------------------------------
</TABLE>
95
The accompanying notes are an integral part of the financial statements.
<PAGE> 446
MORGAN STANLEY FUNDS
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
GLOBAL EQUITY FUND
(UNAUDITED)
<TABLE>
<CAPTION>
OCTOBER 29, 1997* TO
DECEMBER 31, 1997
(000)
- ---------------------------------------------------------------------------
<S> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 312
Net Realized Gain 640
Change in Unrealized Appreciation /Depreciation (4,723)
----------
Net Decrease in Net Assets Resulting from
Operations (3,771)
----------
DISTRIBUTIONS:
Net Investment Income:
Class A (88)
Class B (188)
Class C (18)
----------
Net Decrease in Net Assets Resulting from
Distributions (294)
----------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 575,992
Distributions Reinvested 276
Redeemed (3,565)
----------
Net Increase in Net Assets Resulting from
Capital Share Transactions 572,703
----------
Total Increase in Net Assets 568,638
NET ASSETS -- Beginning of Period --
----------
NET ASSETS -- End of Period (Including
undistributed net investment income of $18) $ 568,638
==========
- ---------------------------------------------------------------------------
Capital Share Transactions:
(1) Class A:
---------------------
Shares:
Subscribed 5,643
Distributions Reinvested 8
Redeemed (61)
----------
Net Increase in Class A Shares Outstanding 5,590
==========
Dollars:
Subscribed $ 56,243
Distributions Reinvested 78
Redeemed (603)
----------
Net Increase $ 55,718
==========
Class B:
---------------------
Shares:
Subscribed 47,373
Distributions Reinvested 18
Redeemed (203)
----------
Net Increase in Class B Shares Outstanding 47,188
==========
Dollars:
Subscribed $ 472,648
Distributions Reinvested 180
Redeemed (1,986)
----------
Net Increase $ 470,842
==========
Class C:
---------------------
Shares:
Subscribed 4,721
Distributions Reinvested 2
Redeemed (100)
----------
Net Increase in Class C Shares Outstanding 4,623
==========
Dollars:
Subscribed $ 47,101
Distributions Reinvested 18
Redeemed (976)
----------
Net Increase $ 46,143
==========
</TABLE>
- -----------------
* Commencement of operations
- --------------------------------------------------------------------------------
96
The accompanying notes are an integral part of the financial statements.
<PAGE> 447
MORGAN STANLEY FUNDS
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
GLOBAL FIXED INCOME FUND
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
DECEMBER 31, 1997 JUNE 30, 1997
(000) (000)
- ---------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 176 $ 436
Net Realized Gain (Loss) (73) 111
Change in Unrealized Appreciation/Depreciation 111 (84)
------- --------
Net Increase in Net Assets Resulting from
Operations 214 463
------- --------
DISTRIBUTIONS:
Net Investment Income:
Class A (123) (218)
Class B (27) (46)
Class C (38) (74)
In Excess of Net Investment Income:
Class A -- (41)
Class B -- (9)
Class C -- (14)
------- --------
(188) (402)
------- --------
Net Realized Gain:
Class A (30) --
Class B (8) --
Class C (11) --
------- --------
(49) --
------- --------
Net Decrease in Net Assets Resulting from
Distributions (237) (402)
------- --------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 965 4,760
Distributions Reinvested 213 335
Redeemed (2,230) (6,304)
------- --------
Net Decrease in Net Assets Resulting from
Capital Share Transactions (1,052) (1,209)
------- --------
Total Decrease in Net Assets (1,075) (1,148)
NET ASSETS -- Beginning of Period 10,568 11,716
------- --------
NET ASSETS -- End of Period (Including
distributions in excess of net investment income
of $(75) and $(63), respectively) $ 9,493 $ 10,568
======= ========
- ---------------------------------------------------------------------------------------
Capital Share Transactions:
(1) Class A:
--------------------
Shares:
Subscribed 44 256
Distributions Reinvested 15 22
Redeemed (114) (382)
------- --------
Net Decrease in Class A Shares Outstanding (55) (104)
======= ========
Dollars:
Subscribed $ 440 $ 2,529
Distributions Reinvested 146 225
Redeemed (1,133) (3,839)
------- --------
Net Decrease $ (547) $ (1,085)
======= ========
Class B:
--------------------
Shares:
Subscribed 26 100
Distributions Reinvested 3 4
Redeemed (46) (76)
------- --------
Net Increase (Decrease) in Class B Shares
Outstanding (17) 28
======= ========
Dollars:
Subscribed $ 263 $ 999
Distributions Reinvested 28 41
Redeemed (459) (758)
------- --------
Net Increase (Decrease) $ (168) $ 282
======= ========
Class C:
--------------------
Shares:
Subscribed 26 123
Distributions Reinvested 4 7
Redeemed (64) (170)
------- --------
Net Decrease in Class C Shares Outstanding (34) (40)
======= ========
Dollars:
Subscribed $ 262 $ 1,232
Distributions Reinvested 39 69
Redeemed (638) (1,707)
------- --------
Net Decrease $ (337) $ (406)
======= ========
- ---------------------------------------------------------------------------------------
</TABLE>
97
The accompanying notes are an integral part of the financial statements.
<PAGE> 448
MORGAN STANLEY FUNDS
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
ASIAN GROWTH FUND
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
DECEMBER 31, 1997 JUNE 30, 1997
(000) (000)
- ---------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment (Loss) $ (1,530) $ (2,748)
Net Realized Gain (Loss) (79,131) (4,804)
Change in Unrealized of
Appreciation/Depreciation (68,859) (2,619)
---------- ----------
Net (Decrease) in Net Assets Resulting from
Operations (149,520) (10,171)
---------- ----------
DISTRIBUTIONS:
Net Realized Gain:
Class A (135) (33)
Class B (60) (10)
Class C (84) (24)
In Excess of Net Realized Gain:
Class A -- (4,110)
Class B -- (1,274)
Class C -- (3,072)
---------- ----------
Net Decrease in Net Assets Resulting from
Distributions (279) (8,523)
---------- ----------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 51,643 114,562
Distributions Reinvested 258 8,035
Redeemed (125,261) (220,149)
---------- ----------
Net (Decrease) in Net Assets Resulting from
Capital Share Transactions (73,360) (97,552)
---------- ----------
Total (Decrease) in Net Assets (223,159) (116,246)
NET ASSETS -- Beginning of Period 352,686 468,932
---------- ----------
NET ASSETS -- End of Period (Including net
investment loss of $(2,683) and $(1,153),
respectively) $ 129,527 $ 352,686
========== ==========
- ---------------------------------------------------------------------------------------
Capital Share Transactions:
(1) Class A:
---------------------
Shares:
Subscribed 3,200 4,724
Distributions Reinvested 15 243
Redeemed (6,061) (8,877)
---------- ----------
Net Decrease in Class A Shares Outstanding (2,846) (3,910)
========== ==========
Dollars:
Subscribed $ 35,434 $ 77,015
Distributions Reinvested 125 3,930
Redeemed (74,289) (144,501)
---------- ----------
Net Decrease $ (38,730) $ (63,556)
========== ==========
Class B:
---------------------
Shares:
Subscribed 885 1,466
Distributions Reinvested 7 77
Redeemed (1,349) (803)
---------- ----------
Net Increase (Decrease) in Class B Shares
Outstanding (457) 740
========== ==========
Dollars:
Subscribed $ 9,957 $ 23,406
Distributions Reinvested 55 1,210
Redeemed (15,713) (12,628)
---------- ----------
Net Increase (Decrease) $ (5,701) $ 11,988
========== ==========
Class C:
---------------------
Shares:
Subscribed 616 883
Distributions Reinvested 10 184
Redeemed (2,987) (3,989)
---------- ----------
Net Decrease in Class C Shares Outstanding (2,361) (2,922)
========== ==========
Dollars:
Subscribed $ 6,252 $ 14,140
Distributions Reinvested 78 2,895
Redeemed (35,259) (63,019)
---------- ----------
Net Decrease $ (28,929) $ (45,984)
========== ==========
- ---------------------------------------------------------------------------------------
</TABLE>
98
The accompanying notes are an integral part of the financial statements.
<PAGE> 449
MORGAN STANLEY FUNDS
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
AMERICAN VALUE FUND
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
DECEMBER 31, 1997 JUNE 30, 1997
(000) (000)
- ---------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income (Loss) $ (461) $ 424
Net Realized Gain 14,491 6,719
Change in Unrealized Appreciation /Depreciation 2,398 7,544
---------- ---------
Net Increase in Net Assets Resulting from
Operations 16,428 14,687
---------- ---------
DISTRIBUTIONS:
Net Investment Income:
Class A (122) (309)
Class B (28) (25)
Class C (26) (133)
In Excess of Net Investment Income:
Class A -- (1)
---------- ---------
(176) (468)
---------- ---------
Net Realized Gain:
Class A (5,303) (1,555)
Class B (5,203) (209)
Class C (3,628) (1,482)
---------- ---------
(14,134) (3,246)
---------- ---------
Net Decrease in Net Assets Resulting from
Distributions (14,310) (3,714)
---------- ---------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 215,106 38,027
Distributions Reinvested 12,507 3,292
Redeemed (24,569) (13,557)
---------- ---------
Net Increase in Net Assets Resulting from
Capital Share Transactions 203,044 27,762
---------- ---------
Total Increase in Net Assets 205,162 38,735
NET ASSETS -- Beginning of Period 82,087 43,352
---------- ---------
NET ASSETS -- End of Period (Including
distributions in excess of net investment income
of $(638) and $(1), respectively) $ 287,249 $ 82,087
========== =========
- ---------------------------------------------------------------------------------------
Capital Share Transactions:
(1) Class A:
---------------------
Shares:
Subscribed 4,128 1,025
Distributions Reinvested 269 119
Redeemed (846) (538)
---------- ---------
Net Increase in Class A Shares Outstanding 3,551 606
========== =========
Dollars:
Subscribed $ 82,860 $ 16,463
Distributions Reinvested 5,049 1,785
Redeemed (16,781) (8,501)
---------- ---------
Net Increase $ 71,128 $ 9,747
========== =========
Class B:
---------------------
Shares:
Subscribed 4,691 714
Distributions Reinvested 239 15
Redeemed (258) (27)
---------- ---------
Net Increase in Class B Shares Outstanding 4,672 702
========== =========
Dollars:
Subscribed $ 93,977 $ 11,773
Distributions Reinvested 4,461 228
Redeemed (5,093) (420)
---------- ---------
Net Increase $ 93,345 $ 11,581
========== =========
Class C:
---------------------
Shares:
Subscribed 1,910 623
Distributions Reinvested 160 85
Redeemed (137) (312)
---------- ---------
Net Increase in Class C Shares Outstanding 1,933 396
========== =========
Dollars:
Subscribed $ 38,269 $ 9,791
Distributions Reinvested 2,997 1,279
Redeemed (2,695) (4,636)
---------- ---------
Net Increase $ 38,571 $ 6,434
========== =========
- ---------------------------------------------------------------------------------------
</TABLE>
99
The accompanying notes are an integral part of the financial statements.
<PAGE> 450
MORGAN STANLEY FUNDS
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
VALUE FUND
(UNAUDITED)
<TABLE>
<CAPTION>
JULY 7, 1997* TO
DECEMBER 31, 1997
(000)
- ----------------------------------------------------------------------
<S> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 395
Net Realized Gain 452
Change in Unrealized Appreciation /Depreciation (1,542)
----------
Net Decrease in Net Assets Resulting from
Operations (695)
----------
DISTRIBUTIONS:
Net Investment Income:
Class A (305)
Class B (76)
Class C (21)
----------
(402)
----------
Net Realized Gain:
Class A (502)
Class B (431)
Class C (95)
----------
(1,028)
----------
Net Decrease in Net Assets Resulting from
Distributions (1,430)
----------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 220,549
Distributions Reinvested 1,274
Redeemed (9,419)
----------
Net Increase in Net Assets Resulting from
Capital Share Transactions 212,404
----------
Total Increase in Net Assets 210,279
NET ASSETS -- Beginning of Period --
----------
NET ASSETS -- End of Period (Including
distributions in excess of net investment income
of $(7)) $ 210,279
==========
- ----------------------------------------------------------------------
Capital Share Transactions:
(1) Class A:
---------------------
Shares:
Subscribed 10,704
Distributions Reinvested 75
Redeemed (613)
----------
Net Increase in Class A Shares Outstanding 10,166
==========
Dollars:
Subscribed $ 109,270
Distributions Reinvested 748
Redeemed (6,257)
----------
Net Increase $ 103,761
==========
Class B:
---------------------
Shares:
Subscribed 8,926
Distributions Reinvested 43
Redeemed (236)
----------
Net Increase in Class B Shares Outstanding 8,733
==========
Dollars:
Subscribed $ 90,944
Distributions Reinvested 429
Redeemed (2,401)
----------
Net Increase $ 88,972
==========
Class C:
---------------------
Shares:
Subscribed 1,996
Distributions Reinvested 10
Redeemed (75)
----------
Net Increase in Class C Shares Outstanding 1,931
==========
Dollars:
Subscribed $ 20,335
Distributions Reinvested 97
Redeemed (761)
----------
Net Increase $ 19,671
==========
- ----------------------------------------------------------------------
* Commencement of operations
</TABLE>
100
The accompanying notes are an integral part of the financial statements.
<PAGE> 451
MORGAN STANLEY FUNDS
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
WORLDWIDE HIGH INCOME FUND
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
DECEMBER 31, 1997 JUNE 30, 1997
(000) (000)
- ---------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 8,570 $ 13,435
Net Realized Gain 11,534 9,362
Change in Unrealized Appreciation /Depreciation (14,325) 14,412
---------- --------
Net Increase in Net Assets Resulting from
Operations 5,779 37,209
---------- --------
DISTRIBUTIONS:
Net Investment Income:
Class A (3,124) (5,678)
Class B (3,343) (4,269)
Class C (1,667) (3,020)
---------- --------
(8,134) (12,967)
---------- --------
Realized Gain:
Class A (6,916) (2,320)
Class B (8,787) (1,708)
Class C (4,231) (1,293)
---------- --------
(19,934) (5,321)
---------- --------
Net Decrease in Net Assets Resulting from
Distributions (28,068) (18,288)
---------- --------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 107,519 133,028
Distributions Reinvested 20,147 11,818
Redeemed (65,777) (63,040)
---------- --------
Net Increase in Net Assets Resulting from
Capital Share Transactions 61,889 81,806
---------- --------
Total Increase in Net Assets 39,600 100,727
NET ASSETS -- Beginning of Period 196,488 95,761
---------- --------
NET ASSETS -- End of Period (Including
undistributed net investment income of $747 and
$311, respectively) $ 236,088 $196,488
========== ========
- ---------------------------------------------------------------------------------------
Capital Share Transactions:
(1) Class A:
---------------------
Shares:
Subscribed 3,723 5,082
Distributions Reinvested 580 423
Redeemed (3,342) (3,469)
---------- --------
Net Increase in Class A Shares Outstanding 961 2,036
========== ========
Dollars:
Subscribed $ 53,448 $ 67,886
Distributions Reinvested 7,700 5,651
Redeemed (47,987) (46,537)
---------- --------
Net Increase $ 13,161 $ 27,000
========== ========
Class B:
---------------------
Shares:
Subscribed 2,829 3,787
Distributions Reinvested 604 246
Redeemed (912) (622)
---------- --------
Net Increase in Class B Shares Outstanding 2,521 3,411
========== ========
Dollars:
Subscribed $ 40,592 $ 50,939
Distributions Reinvested 7,924 3,287
Redeemed (12,982) (8,415)
---------- --------
Net Increase $ 35,534 $ 45,811
========== ========
Class C:
---------------------
Shares:
Subscribed 932 1,057
Distributions Reinvested 344 217
Redeemed (336) (596)
---------- --------
Net Increase in Class C Shares Outstanding 940 678
========== ========
Dollars:
Subscribed $ 13,479 $ 14,203
Distributions Reinvested 4,522 2,880
Redeemed (4,807) (8,088)
---------- --------
Net Increase $ 13,194 $ 8,995
========== ========
- ---------------------------------------------------------------------------------------
</TABLE>
101
The accompanying notes are an integral part of the financial statements.
<PAGE> 452
MORGAN STANLEY FUNDS
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
LATIN AMERICAN FUND
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
DECEMBER 31, 1997 JUNE 30, 1997
(000) (000)
- ---------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment (Loss) $ (793) $ (131)
Net Realized Gain 6,715 13,981
Change in Unrealized Appreciation/Depreciation (12,183) 10,200
---------- --------
Net Increase (Decrease) in Net Assets Resulting
from Operations (6,261) 24,050
---------- --------
DISTRIBUTIONS:
Net Investment Income:
Class A -- (117)
Class B -- (17)
Class C -- (13)
---------- --------
-- (147)
---------- --------
Net Realized Gain:
Class A (12,606) (2,192)
Class B (5,784) (359)
Class C (4,438) (727)
---------- --------
(22,828) (3,278)
---------- --------
Net Decrease in Net Assets Resulting from
Distributions (22,828) (3,425)
---------- --------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 93,970 114,111
Distributions Reinvested 20,741 3,304
Redeemed (85,469) (46,502)
---------- --------
Net Increase in Net Assets Resulitng from
Capital Share Transactions 29,242 70,913
---------- --------
Total Increase in Net Assets 153 91,538
NET ASSETS -- Beginning of Period 119,060 27,522
---------- --------
NET ASSETS -- End of Period (Including
undistributed (distribution in excess of) net
investment income of $(804) and $(11),
respectively) $ 119,213 $119,060
========== ========
- ---------------------------------------------------------------------------------------
Capital Share Transactions:
(1) Class A:
---------------------
Shares:
Subscribed 3,418 6,162
Distributions Reinvested 941 187
Redeemed (4,250) (2,975)
---------- --------
Net Increase in Class A Shares Outstanding 109 3,374
========== ========
Dollars:
Subscribed $ 58,970 $ 90,337
Distributions Reinvested 11,770 2,243
Redeemed (71,904) (41,558)
---------- --------
Net Increase (Decrease) $ (1,164) $ 51,022
========== ========
Class B:
---------------------
Shares:
Subscribed 1,185 752
Distributions Reinvested 445 30
Redeemed (209) (104)
---------- --------
Net Increase in Class B Shares Outstanding 1,421 678
========== ========
Dollars:
Subscribed $ 20,193 $ 11,139
Distributions Reinvested 5,385 353
Redeemed (3,340) (1,385)
---------- --------
Net Increase $ 22,238 $ 10,107
========== ========
Class C:
---------------------
Shares:
Subscribed 876 856
Distributions Reinvested 296 60
Redeemed (629) (266)
---------- --------
Net Increase in Class C Shares Outstanding 543 650
========== ========
Dollars:
Subscribed $ 14,807 $ 12,635
Distributions Reinvested 3,586 708
Redeemed (10,225) (3,559)
---------- --------
Net Increase $ 8,168 $ 9,784
========== ========
- ---------------------------------------------------------------------------------------
</TABLE>
102
The accompanying notes are an integral part of the financial statements.
<PAGE> 453
MORGAN STANLEY FUNDS
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
EMERGING MARKETS FUND
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
DECEMBER 31, 1997 JUNE 30, 1997
(000) (000)
- ---------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment (Loss) $ (721) $ (538)
Net Realized Gain (Loss) (3,041) 14,993
Change in Unrealized Appreciation/Depreciation (51,494) 7,475
---------- --------
Net Increase (Decrease) in Net Assets Resulting
from Operations (55,256) 21,930
---------- --------
DISTRIBUTIONS:
Net Investment Income:
Class A -- (291)
Class B -- (52)
Class C -- (44)
---------- --------
-- (387)
---------- --------
Net Realized Gain:
Class A (8,584) (871)
Class B (4,292) (182)
Class C (3,969) (503)
---------- --------
(16,845) (1,556)
---------- --------
Net Decrease in Net Assets Resulting from
Distributions (16,845) (1,943)
---------- --------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 115,227 133,953
Distributions Reinvested 15,915 1,855
Redeemed (93,844) (111,716)
---------- --------
Net Increase in Net Assets Resulting from
Capital Share Transactions 37,298 24,092
---------- --------
Total Increase (Decrease) in Net Assets (34,803) 44,079
NET ASSETS -- Beginning of Period 212,946 168,867
---------- --------
NET ASSETS -- End of Period (Including
distributions in excess of net investment of
$(1,380) and $(659), respectively) $ 178,143 $212,946
========== ========
- ---------------------------------------------------------------------------------------
Capital Share Transactions:
(1) Class A:
---------------------
Shares:
Subscribed 6,511 7,637
Distributions Reinvested 891 104
Redeemed (6,134) (8,424)
---------- --------
Net Increase (Decrease) in Class A Shares
Outstanding 1,268 (683)
========== ========
Dollars:
Subscribed $ 78,917 $ 89,680
Distributions Reinvested 8,101 1,103
Redeemed (73,618) (96,827)
---------- --------
Net Increase (Decrease) $ 13,400 $ (6,044)
========== ========
Class B:
---------------------
Shares:
Subscribed 2,075 2,028
Distributions Reinvested 457 20
Redeemed (531) (205)
---------- --------
Net Increase in Class B Shares Outstanding 2,001 1,843
========== ========
Dollars:
Subscribed $ 26,980 $ 23,982
Distributions Reinvested 4,064 223
Redeemed (5,896) (2,355)
---------- --------
Net Increase $ 25,148 $ 21,850
========== ========
Class C
---------------------
Shares:
Subscribed 720 1,753
Distributions Reinvested 421 51
Redeemed (1,268) (1,086)
---------- --------
Net Increase (Decrease) in Class C Shares
Outstanding (127) 718
========== ========
Dollars:
Subscribed $ 9,330 $ 20,292
Distributions Reinvested 3,750 528
Redeemed (14,330) (12,534)
---------- --------
Net Increase (Decrease) $ (1,250) $ 8,286
========== ========
- ---------------------------------------------------------------------------------------
</TABLE>
103
The accompanying notes are an integral part of the financial statements.
<PAGE> 454
MORGAN STANLEY FUNDS
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
AGGRESSIVE EQUITY FUND
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
DECEMBER 31, 1997 JUNE 30, 1997
(000) (000)
- ---------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment (Loss) $ (390) $ (135)
Net Realized Gain 10,816 3,674
Change in Unrealized Appreciation/Depreciation 2,175 3,205
---------- --------
Net Increase in Net Assets Resulting from
Operations 12,601 6,744
---------- --------
DISTRIBUTIONS:
Net Investment Income:
Class A -- (16)
Class B -- (5)
Class C -- (5)
---------- --------
-- (26)
---------- --------
Net Realized Gain:
Class A (3,187) (711)
Class B (5,696) (452)
Class C (1,157) (439)
---------- --------
(10,040) (1,602)
---------- --------
Net Decrease in Net Assets Resulting from
Distributions (10,040) (1,628)
---------- --------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 41,232 57,588
Distributions Reinvested 9,563 1,037
Redeemed (13,404) (7,818)
---------- --------
Net Increase in Net Assets Resulting from
Capital Share Transactions 37,391 50,807
---------- --------
Total Increase in Net Assets 39,952 55,923
NET ASSETS -- Beginning of Period 66,313 10,390
---------- --------
NET ASSETS -- End of Period (Including
undistributed (distributions in excess of) net
investment income of $(390) and $0,
respectively.) $ 106,265 $ 66,313
========== ========
- ---------------------------------------------------------------------------------------
Capital Share Transactions:
(1) Class A:
---------------------
Shares:
Subscribed 786 1,309
Distributions Reinvested 177 35
Redeemed (286) (392)
---------- --------
Net Increase in Class A Shares Outstanding 677 952
========== ========
Dollars:
Subscribed $ 14,243 $ 20,966
Distributions Reinvested 3,064 522
Redeemed (5,151) (6,373)
---------- --------
Net Increase $ 12,156 $ 15,115
========== ========
Class B:
---------------------
Shares:
Subscribed 1,254 1,905
Distributions Reinvested 314 18
Redeemed (269) (51)
---------- --------
Net Increase in Class B Shares Outstanding 1,299 1,872
========== ========
Dollars:
Subscribed $ 22,628 $ 30,344
Distributions Reinvested 5,363 262
Redeemed (4,869) (818)
---------- --------
Net Increase $ 23,122 $ 29,788
========== ========
Class C:
---------------------
Shares:
Subscribed 240 404
Distributions Reinvested 67 17
Redeemed (192) (42)
---------- --------
Net Increase in Class C Shares Outstanding 115 379
========== ========
Dollars:
Subscribed $ 4,361 $ 6,278
Distributions Reinvested 1,136 252
Redeemed (3,384) (626)
---------- --------
Net Increase $ 2,113 $ 5,904
========== ========
- ---------------------------------------------------------------------------------------
</TABLE>
104
The accompanying notes are an integral part of the financial statements.
<PAGE> 455
MORGAN STANLEY FUNDS
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
U.S. REAL ESTATE FUND
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
DECEMBER 31, 1997 JUNE 30, 1997
(000) (000)
- ---------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 340 $ 280
Net Realized Gain 1,693 2,077
Change in Unrealized Appreciation/Depreciation 1,861 1,622
------- -------
Net Increase in Net Assets Resulting from
Operations 3,894 3,979
------- -------
DISTRIBUTIONS:
Net Investment Income:
Class A (246) (162)
Class B (106) (57)
Class C (32) (31)
------- -------
(384) (250)
------- -------
Net Realized Gain:
Class A (1,796) (100)
Class B (1,083) (71)
Class C (334) (48)
------- -------
(3,213) (219)
------- -------
Net Decrease in Net Assets Resulting from
Distributions (3,597) (469)
------- -------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 17,674 23,984
Distributions Reinvested 3,326 268
Redeemed (8,171) (9,254)
------- -------
Net Increase in Net Assets Resulting from
Capital Share Transactions 12,829 14,998
------- -------
Total Increase in Net Assets 13,126 18,508
NET ASSETS -- Beginning of Period 24,316 5,808
------- -------
NET ASSETS -- End of Period (Including
undistributed net investment income of $12 and
$55, respectively.) $37,442 $24,316
======= =======
- ---------------------------------------------------------------------------------------
Capital Share Transactions:
(1) Class A:
---------------------
Shares:
Subscribed 603 1,003
Distributions Reinvested 118 13
Redeemed (389) (257)
------- -------
Net Increase in Class A Shares Outstanding 332 759
======= =======
Dollars:
Subscribed $10,309 $15,148
Distributions Reinvested 1,916 187
Redeemed (6,525) (3,998)
------- -------
Net Increase $ 5,700 $11,337
======= =======
Class B:
---------------------
Shares:
Subscribed 319 441
Distributions Reinvested 66 4
Redeemed (57) (185)
------- -------
Net Increase in Class B Shares Outstanding 328 260
======= =======
Dollars:
Subscribed $ 5,549 $ 6,607
Distributions Reinvested 1,069 54
Redeemed (1,004) (2,916)
------- -------
Net Increase $ 5,614 $ 3,745
======= =======
Class C:
---------------------
Shares:
Subscribed 104 150
Distributions Reinvested 21 2
Redeemed (36) (149)
------- -------
Net Increase in Class C Shares Outstanding 89 3
======= =======
Dollars:
Subscribed $ 1,816 $ 2,229
Distributions Reinvested 341 26
Redeemed (642) (2,339)
------- -------
Net Increase (Decrease) $ 1,515 $ (84)
======= =======
- ---------------------------------------------------------------------------------------
</TABLE>
105
The accompanying notes are an integral part of the financial statements.
<PAGE> 456
MORGAN STANLEY FUNDS
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
HIGH YIELD FUND
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
DECEMBER 31, 1997 JUNE 30, 1997
(000) (000)
- ---------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 785 $ 1,246
Net Realized Gain 679 312
Change in Unrealized Appreciation /Depreciation (164) 881
------- -------
Net Increase in Net Assets Resulting from
Operations 1,300 2,439
------- -------
DISTRIBUTIONS:
Net Investment Income:
Class A (286) (434)
Class B (358) (454)
Class C (138) (338)
------- -------
(782) (1,226)
------- -------
Realized Gain:
Class A (236) (20)
Class B (415) (24)
Class C (119) (20)
------- -------
(770) (64)
------- -------
Net Decrease in Net Assets Resulting from
Distributions (1,552) (1,290)
------- -------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 10,819 12,562
Distributions Reinvested 860 237
Redeemed (15,555) (2,025)
------- -------
Net Increase (Decrease) in Net Assets Resulting
from Capital Share Transactions (3,876) 10,774
------- -------
Total Increase (Decrease) in Net Assets (4,128) 11,923
NET ASSETS -- Beginning of Period 22,567 10,644
------- -------
NET ASSETS -- End of Period (Including
undistributed net investment income of $41 and
$38, respectively.) $18,439 $22,567
======= =======
- ---------------------------------------------------------------------------------------
Capital Share Transactions:
(1) Class A:
---------------------
Shares:
Subscribed 274 461
Distributions Reinvested 24 10
Redeemed (548) (101)
------- -------
Net Increase (Decrease) in Class A Shares
Outstanding (250) 370
======= =======
Dollars:
Subscribed $ 3,629 $ 5,790
Distributions Reinvested 301 131
Redeemed (7,228) (1,282)
------- -------
Net Increase (Decrease) $(3,298) $ 4,639
======= =======
Class B:
---------------------
Shares:
Subscribed 425 397
Distributions Reinvested 33 6
Redeemed (337) (20)
------- -------
Net Increase in Class B Shares Outstanding 121 383
======= =======
Dollars:
Subscribed $ 5,615 $ 4,971
Distributions Reinvested 411 72
Redeemed (4,447) (249)
------- -------
Net Increase $ 1,579 $ 4,794
======= =======
Class C:
---------------------
Shares:
Subscribed 119 144
Distributions Reinvested 12 3
Redeemed (289) (39)
------- -------
Net Increase (Decrease) in Class C Shares
Outstanding (158) 108
======= =======
Dollars:
Subscribed $ 1,575 $ 1,800
Distributions Reinvested 148 35
Redeemed (3,880) (494)
------- -------
Net Increase (Decrease) $(2,157) $ 1,341
======= =======
- ---------------------------------------------------------------------------------------
</TABLE>
106
The accompanying notes are an integral part of the financial statements.
<PAGE> 457
MORGAN STANLEY FUNDS
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
INTERNATIONAL MAGNUM FUND
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JULY 1, 1996* TO
DECEMBER 31, 1997 JUNE 30, 1997
(000) (000)
- ----------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 7 $ 170
Net Realized Gain (Loss) (426) 770
Change in Unrealized Appreciation /Depreciation (5,990) 4,184
------- -------
Net Increase (Decrease) in Net Assets Resulting
from Operations (6,409) 5,124
------- -------
DISTRIBUTIONS:
Net Investment Income:
Class A (488) (52)
Class B (330) (45)
Class C (53) (43)
------- -------
(871) (140)
------- -------
Net Realized Gain:
Class A (33) (4)
Class B (31) (4)
Class C (9) (4)
------- -------
(73) (12)
------- -------
Net Decrease in Net Assets Resulting from
Distributions (944) (152)
------- -------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 53,554 47,034
Distributions Reinvested 849 50
Redeemed (16,493) (2,724)
------- -------
Net Increase in Net Assets Resulting from
Capital Share Transactions 37,910 44,360
------- -------
Total Increase in Net Assets 30,557 49,332
NET ASSETS -- Beginning of Period 49,332 --
------- -------
NET ASSETS -- End of Period (Including
undistributed (distributions in excess of) net
investment income of $(97) and $30,
respectively.) $79,889 $49,332
======= =======
- ----------------------------------------------------------------------------------------
Capital Share Transactions:
(1) Class A:
---------------------
Shares:
Subscribed 1,800 1,722
Distributions Reinvested 38 1
Redeemed (502) (144)
------- -------
Net Increase in Class A Shares Outstanding 1,336 1,579
======= =======
Dollars:
Subscribed $24,479 $21,512
Distributions Reinvested 473 14
Redeemed (6,583) (1,786)
------- -------
Net Increase $18,369 $19,740
======= =======
Class B:
---------------------
Shares:
Subscribed 1,712 1,321
Distributions Reinvested 26 2
Redeemed (373) (6)
------- -------
Net Increase in Class B Shares Outstanding 1,365 1,317
======= =======
Dollars:
Subscribed $23,249 $16,670
Distributions Reinvested 322 18
Redeemed (4,938) (73)
------- -------
Net Increase $18,633 $16,615
======= =======
Class C:
---------------------
Shares:
Subscribed 429 728
Distributions Reinvested 4 1
Redeemed (372) (67)
------- -------
Net Increase in Class C Shares Outstanding 61 662
======= =======
Dollars:
Subscribed $ 5,826 $ 8,852
Distributions Reinvested 54 18
Redeemed (4,972) (865)
------- -------
Net Increase $ 908 $ 8,005
======= =======
- ----------------------------------------------------------------------------------------
* Commencement of operations
</TABLE>
107
The accompanying notes are an integral part of the financial statements.
<PAGE> 458
MORGAN STANLEY FUNDS
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
GOVERNMENT OBLIGATIONS MONEY MARKET FUND
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
DECEMBER 31, 1997 JUNE 30, 1997
(000) (000)
- ---------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 1,871 $ 5,375
Net Realized Gain (Loss) (1) 8
--------- ---------
Net Increase in Net Assets Resulting from
Operations 1,870 5,383
--------- ---------
DISTRIBUTIONS:
Net Investment Income (1,878) (5,375)
--------- ---------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 150,181 359,068
Distributions Reinvested 1,788 4,349
Redeemed (193,732) (414,635)
--------- ---------
Net Decrease in Net Assets Resulting from
Capital Share Transactions (41,763) (51,218)
--------- ---------
Total Decrease in Net Assets (41,771) (51,210)
NET ASSETS -- Beginning of Period 94,768 145,978
--------- ---------
NET ASSETS -- End of Period (Including
distributions in excess of net investment income
of $(7) and $0, respectively) $ 52,997 $ 94,768
========= =========
- ---------------------------------------------------------------------------------------
Capital Share Transactions:
(1) Shares
Subscribed 150,181 359,068
Distributions Reinvested 1,788 4,349
Redeemed (193,732) (414,635)
--------- ---------
Net Decrease in Shares Outstanding (41,763) (51,218)
========= =========
- ---------------------------------------------------------------------------------------
</TABLE>
108
The accompanying notes are an integral part of the financial statements.
<PAGE> 459
MORGAN STANLEY FUNDS
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
MONEY MARKET FUND
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
DECEMBER 31, 1997 JUNE 30, 1997
(000) (000)
- ---------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 4,440 $ 8,859
Net Realized Gain 6 13
---------- ---------
Net Increase in Net Assets Resulting from
Operations 4,446 8,872
---------- ---------
DISTRIBUTIONS:
Net Investment Income (4,508) (8,859)
---------- ---------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 535,228 677,641
Distributions Reinvested 3,865 7,110
Redeemed (314,640) (717,315)
---------- ---------
Net Increase (Decrease) in Net Assets Resulting
from Capital Share Transactions 224,453 (32,564)
---------- ---------
Total Increase (Decrease) in Net Assets 224,391 (32,551)
NET ASSETS -- Beginning of Period 138,422 170,973
---------- ---------
NET ASSETS -- End of Period (Including
distributions in excess of net investment income
of $(68) and $0, respectively) $ 362,813 $ 138,422
========== =========
- ---------------------------------------------------------------------------------------
Capital Share Transactions:
(1) Shares:
Subscribed 535,228 677,641
Distributions Reinvested 3,865 7,110
Redeemed (314,640) (717,315)
---------- ---------
Net Increase (Decrease) in Shares Outstanding 224,453 (32,564)
========== =========
- ---------------------------------------------------------------------------------------
</TABLE>
109
The accompanying notes are an integral part of the financial statements.
<PAGE> 460
MORGAN STANLEY FUNDS
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
GLOBAL EQUITY ALLOCATION FUND
(UNAUDITED)
<TABLE>
<CAPTION>
CLASS A
--------------------------------------------------------------------------------------------
SIX MONTHS JANUARY 4,
ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED 1993*
SELECTED PER SHARE DATA DECEMBER 31, JUNE 30, JUNE 30, JUNE 30, JUNE 30, TO JUNE 30,
AND RATIOS 1997 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 16.57 $ 14.75 $ 12.60 $ 11.99 $ 11.09 $ 10.00
------------ ------------ ------------ ------------ ------------ ------------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income
(Loss) 0.06 0.10 0.19 0.12 0.10 0.04
Net Realized and
Unrealized Gain
(Loss) (0.10) 2.76 2.82 0.67 0.90 1.05
------------ ------------ ------------ ------------ ------------ ------------
Total From Investment
Operations (0.04) 2.86 3.01 0.79 1.00 1.09
------------ ------------ ------------ ------------ ------------ ------------
DISTRIBUTIONS
Net Investment Income (0.36) (0.55) (0.39) -- (0.03) --
In Excess of Net
Investment Income -- -- -- (0.05) -- --
Net Realized Gain (1.83) (0.49) (0.47) (0.13) (0.07) --
------------ ------------ ------------ ------------ ------------ ------------
Total Distributions (2.19) (1.04) (0.86) (0.18) (0.10) --
------------ ------------ ------------ ------------ ------------ ------------
NET ASSET VALUE, END OF
PERIOD $ 14.34 $ 16.57 $ 14.75 $ 12.60 $ 11.99 $ 11.09
============ ============ ============ ============ ============ ============
TOTAL RETURN (1) (0.07)% 20.61% 24.62% 6.69% 9.02% 10.90%
============ ============ ============ ============ ============ ============
RATIOS AND SUPPLEMENTAL
DATA
Net Assets, End of Period
(000's) $ 74,593 $ 72,704 $ 63,706 $ 42,586 $ 33,425 $ 10,434
Ratio of Expenses to
Average Net Assets 1.70%** 1.70% 1.70% 1.70% 1.70% 1.70%**
Ratio of Net Investment
Income (Loss) to
Average Net Assets 0.73%** 0.59% 0.71% 1.01% 0.98% 1.04%**
Portfolio Turnover Rate 44% 45% 44% 39% 30% 14%
Average Commission Rate #
Per Share $ 0.0143 $ 0.0021 N/A N/A N/A N/A
As a Percentage of
Trade Amount 0.07% 0.83% N/A N/A N/A N/A
- -------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary
Expense Limitation
During the Period
Per Share Benefit to
Net Investment Income $ 0.01 $ 0.03 $ 0.10 $ 0.04 $ 0.09 $ 0.08
Ratios Before Expense
Limitation:
Expenses to Average Net
Assets 1.81%** 1.90% 2.06% 2.03% 2.58% 3.65%**
Net Investment Income
(Loss) to Average Net
Assets 0.63%** 0.41% 0.35% 0.68% 0.10% (0.91)%**
- -------------------------------------------------------------------------------------------------------------------------
<CAPTION>
CLASS B
--------------------------------------------
SIX MONTHS AUGUST 1,
ENDED YEAR ENDED 1995+ TO
SELECTED PER SHARE DATA DECEMBER 31, JUNE 30, JUNE 30,
AND RATIOS 1997 1997 1996
- -------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 16.15 $ 14.46 $ 13.01
------------ ------------ ------------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income
(Loss) (0.08) (0.05) 0.30
Net Realized and
Unrealized Gain
(Loss) (0.03) 2.73 1.98
------------ ------------ ------------
Total From Investment
Operations (0.11) 2.68 2.28
------------ ------------ ------------
DISTRIBUTIONS
Net Investment Income (0.28) (0.50) (0.35)
In Excess of Net
Investment Income -- -- --
Net Realized Gain (1.83) (0.49) (0.48)
------------ ------------ ------------
Total Distributions (2.11) (0.99) (0.83)
------------ ------------ ------------
NET ASSET VALUE, END OF
PERIOD $ 13.93 $ 16.15 $ 14.46
============ ============ ============
TOTAL RETURN (1) (0.52)% 19.64% 18.08%
============ ============ ============
RATIOS AND SUPPLEMENTAL
DATA
Net Assets, End of Period
(000's) $ 58,639 $ 38,962 $ 14,786
Ratio of Expenses to
Average Net Assets 2.45%** 2.45% 2.45%**
Ratio of Net Investment
Income (Loss) to
Average Net Assets (0.02)%** (0.11)% 0.45%**
Portfolio Turnover Rate 44% 45% 44%
Average Commission Rate #
Per Share $ 0.0143 $ 0.0021 N/A
As a Percentage of
Trade Amount 0.07% 0.83% N/A
- ------------------------------------------------------------------------------------------
Effect of Voluntary
Expense Limitation
During the Period
Per Share Benefit to
Net Investment Income $ 0.40 $ 0.09 $ 0.22
Ratios Before Expense
Limitation:
Expenses to Average Net
Assets 2.56%** 2.65% 2.81%**
Net Investment Income
(Loss) to Average Net
Assets (0.12)%** (0.30)% 0.09%**
- --------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS C
-------------------------------------------------------------------------------------------------
SIX MONTHS JANUARY 4,
ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED 1993*
SELECTED PER SHARE DATA DECEMBER 31, JUNE 30, JUNE 30, JUNE 30, JUNE 30, TO JUNE 30,
AND RATIOS 1997 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 16.24 $ 14.49 $ 12.43 $ 11.90 $ 11.05 $ 10.00
------------ ------------ ------------ ------------ ------------ ------------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income
(Loss) 0.00++ (0.03) 0.12 0.04 0.06 0.01
Net Realized and
Unrealized Gain
(Loss) (0.10) 2.73 2.75 0.65 0.86 1.04
------------ ------------ ------------ ------------ ------------ ------------
Total From Investment
Operations (0.10) 2.70 2.87 0.69 0.92 1.05
------------ ------------ ------------ ------------ ------------ ------------
DISTRIBUTIONS
Net Investment Income (0.24) (0.46) (0.33) -- -- --
In Excess of Net
Investment Income -- -- -- (0.03) -- --
Net Realized Gain (1.83) (0.49) (0.48) (0.13) (0.07) --
------------ ------------ ------------ ------------ ------------ ------------
Total Distributions (2.07) (0.95) (0.81) (0.16) (0.07) --
------------ ------------ ------------ ------------ ------------ ------------
NET ASSET VALUE, END OF
PERIOD $ 14.07 $ 16.24 $ 14.49 $ 12.43 $ 11.90 $ 11.05
============ ============ ============ ============ ============ ============
TOTAL RETURN (1) (0.42)% 19.69% 23.65% 5.84% 8.34% 10.50%
============ ============ ============ ============ ============ ============
RATIOS AND SUPPLEMENTAL
DATA
Net Assets, End of Period
(000's) $ 80,036 $ 78,199 $ 63,025 $ 40,460 $ 29,892 $ 6,995
Ratio of Expenses to
Average Net Assets 2.45%** 2.45% 2.45% 2.45% 2.45% 2.45%**
Ratio of Net Investment
Income (Loss) to
Average Net Assets (0.02)%** (0.16)% (0.04)% 0.25% 0.23% 0.29%**
Portfolio Turnover Rate 44% 45% 44% 39% 30% 14%
Average Commission Rate #
Per Share $ 0.0143 $ 0.0021 N/A N/A N/A N/A
As a Percentage of
Trade Amount 0.07% 0.83% N/A N/A N/A N/A
- -------------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary
Expense
Limitation During the
Period
Per Share Benefit to
Net Investment Income $ 0.01 $ 0.03 $ 1.16 $ 0.05 $ 0.12 $ 0.07
Ratios Before Expense
Limitation:
Expenses to Average Net
Assets 2.56%** 2.65% 2.81% 2.78% 3.34% 4.40%**
Net Investment Income
(Loss) to Average Net
Assets (0.11)%** (0.34)% (0.40)% (0.08)% (0.66)% (1.66)%**
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Commencement of operations
** Annualized
+ The Fund began offering Class B shares on August 1, 1995.
++ Amount per share is less than $0.01.
(1) Total return is calculated exclusive sale charges or deferred sales
charges. Total return for periods of less than one year are not
annualized.
# For fiscal years beginning on or after September 1, 1995, a portfolio
is required to disclose the average commission rate per share it paid
for trades on which commissions were charged.
110
The accompanying notes are an integral part of the financial statements.
<PAGE> 461
MORGAN STANLEY FUNDS
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
GLOBAL EQUITY FUND
(UNAUDITED)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
----------------- ----------------- -----------------
OCTOBER 29, 1997* OCTOBER 29, 1997* OCTOBER 29, 1997*
SELECTED PER SHARE DATA AND RATIOS DECEMBER 31, 1997 DECEMBER 31, 1997 DECEMBER 31, 1997
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 $ 10.00 $ 10.00
----------------- ----------------- -----------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.02 0.00+ 0.00+
Net Realized and Unrealized (Loss) (0.09) (0.09) (0.09)
----------------- ----------------- -----------------
Total From Investment Operations (0.07) (0.09) (0.09)
----------------- ----------------- -----------------
DISTRIBUTIONS
Net Investment Income (0.02) (0.00)+ (0.00)+
----------------- ----------------- -----------------
Total Distributions (0.02) 0.00+ 0.00+
----------------- ----------------- -----------------
NET ASSET VALUE, END OF PERIOD $ 9.91 $ 9.91 $ 9.91
================= ================= =================
TOTAL RETURN (1) (0.74)% (0.86)% (0.86)%
================= ================= =================
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 55,372 $ 467,465 $ 45,801
Ratio of Expenses to Average Net Assets 1.56%** 2.31%** 2.31%**
Ratio of Net Investment Income to
Average Net Assets 0.92%** 0.24%** 0.25%**
Portfolio Turnover Rate 0% 0% 0%
Average Commission Rate $ 0.0099 $ 0.0099 $ 0.0099
As a Percentage of Trade Amount 0.07% 0.07% 0.07%
- -------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense Limitation
During the Period
Per Share Benefit to Net Investment
Income $ -- $ -- $ --
Ratios Before Expense Limitation:
Expenses to Average Net Assets -- -- --
Net Investment Income to Average Net
Assets -- -- --
- -------------------------------------------------------------------------------------------------------
</TABLE>
* Commencement of operations
** Annualized
+ The amount is less than $0.01 per share.
(1) Total return is calculated exclusive of sales charges or deferred
sales charges. Total returns for periods of less than one year are not
annualized.
111
The accompanying notes are an integral part of the financial statements.
<PAGE> 462
MORGAN STANLEY FUNDS
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
GLOBAL FIXED INCOME FUND
(UNAUDITED)
<TABLE>
<CAPTION>
CLASS A
--------------------------------------------------------------------------------------------
SIX MONTHS JANUARY 4,
ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED 1993*
SELECTED PER SHARE DATA DECEMBER 31, JUNE 30, JUNE 30, JUNE 30, JUNE 30, TO JUNE 30,
AND RATIOS 1997 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 9.95 $ 9.94 $ 10.23 $ 9.53 $ 10.55 $ 10.00
------------ ------------ ------------ ------------ ------------ ------------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income 0.19 0.44 0.53 0.56 0.52 0.25
Net Realized and
Unrealized Gain
(Loss) 0.04 (0.02) (0.01) 0.50 (0.42) 0.55
------------ ------------ ------------ ------------ ------------ ------------
Total From Investment
Operations 0.23 0.42 0.52 1.06 0.10 0.80
------------ ------------ ------------ ------------ ------------ ------------
DISTRIBUTIONS
Net Investment Income (0.20) (0.35) (0.79) (0.36) (0.50) (0.25)
In Excess of Net
Investment Income -- (0.06) (0.02) -- (0.12) --
Net Realized Gain (0.05) -- -- -- (0.47) --
In Excess of Net
Realized Gain -- -- -- -- (0.03) --
------------ ------------ ------------ ------------ ------------ ------------
Total Distributions (0.25) (0.41) (0.81) (0.36) (1.12) (0.25)
------------ ------------ ------------ ------------ ------------ ------------
NET ASSET VALUE, END OF
PERIOD $ 9.93 $ 9.95 $ 9.94 $ 10.23 $ 9.53 $ 10.55
============ ============ ============ ============ ============ ============
TOTAL RETURN (1) 2.39% 4.27% 5.20% 11.41% 0.41% 8.02%
============ ============ ============ ============ ============ ============
RATIOS AND SUPPLEMENTAL
DATA
Net Assets, End of Period
(000's) $ 5,851 $ 6,407 $ 7,432 $ 11,092 $ 10,369 $ 6,633
Ratio of Expenses to
Average Net Assets 1.45%** 1.45% 1.45% 1.45% 1.45% 1.45%**
Ratio of Net Investment
Income to Average Net
Assets 3.84%** 4.40% 5.02% 5.84% 4.70% 5.00%**
Portfolio Turnover Rate 37% 170% 223% 169% 168% 55%
- -------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary
Expense Limitation
During the Period
Per Share Benefit to
Net Investment Income $ 0.09 $ 0.12 $ 0.07 $ 0.07 $ 0.11 $ 0.07
Ratios Before Expense
Limitation:
Expenses to Average Net
Assets 3.23%** 2.57% 2.16% 2.22% 2.48% 2.88%**
Net Investment Income
to Average Net Assets 2.10%** 3.25% 4.31% 5.07% 3.67% 3.57%**
- -------------------------------------------------------------------------------------------------------------------------
<CAPTION>
CLASS B
--------------------------------------------
SIX MONTHS AUGUST 1,
ENDED YEAR ENDED 1995+ TO
SELECTED PER SHARE DATA DECEMBER 31, JUNE 30, JUNE 30,
AND RATIOS 1997 1997 1996
- -------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 9.91 $ 9.91 $ 10.24
------------ ------------ ------------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income 0.12 0.41 0.64
Net Realized and
Unrealized Gain
(Loss) 0.07 (0.07) (0.26)
------------ ------------ ------------
Total From Investment
Operations 0.19 0.34 0.38
------------ ------------ ------------
DISTRIBUTIONS
Net Investment Income (0.17) (0.29) (0.69)
In Excess of Net
Investment Income -- (0.05) (0.02)
Net Realized Gain (0.05) -- --
In Excess of Net
Realized Gain -- -- --
------------ ------------ ------------
Total Distributions (0.22) (0.34) (0.71)
------------ ------------ ------------
NET ASSET VALUE, END OF
PERIOD $ 9.88 $ 9.91 $ 9.91
============ ============ ============
TOTAL RETURN (1) 1.99% 3.48% 3.76%
============ ============ ============
RATIOS AND SUPPLEMENTAL
DATA
Net Assets, End of Period
(000's) $ 1,539 $ 1,716 $ 1,440
Ratio of Expenses to
Average Net Assets 2.20%** 2.20% 2.20%**
Ratio of Net Investment
Income to Average Net
Assets 3.08%** 3.65% 3.38%**
Portfolio Turnover Rate 37% 170% 223%
- ------------------------------------------------------------------------------------------
Effect of Voluntary
Expense Limitation
During the Period
Per Share Benefit to
Net Investment Income $ 0.07 $ 0.13 $ 0.12
Ratios Before Expense
Limitation:
Expenses to Average Net
Assets 3.98%** 3.37% 3.57%**
Net Investment Income
to Average Net Assets 1.32%** 2.45% 2.01%**
- --------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS C
--------------------------------------------------------------------------------------------
SIX MONTHS JANUARY 4,
ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED 1993*
SELECTED PER SHARE DATA DECEMBER 31, JUNE 30, JUNE 30, JUNE 30, JUNE 30, TO JUNE 30,
AND RATIOS 1997 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 9.90 $ 9.90 $ 10.20 $ 9.54 $ 10.56 $ 10.00
------------ ------------ ------------ ------------ ------------ ------------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income 0.16 0.39 0.37 0.49 0.43 0.21
Net Realized and
Unrealized Gain
(Loss) 0.03 (0.05) 0.08 0.47 (0.40) 0.55
------------ ------------ ------------ ------------ ------------ ------------
Total From Investment
Operations 0.19 0.34 0.45 0.96 0.03 0.76
------------ ------------ ------------ ------------ ------------ ------------
DISTRIBUTIONS
Net Investment Income (0.17) (0.29) (0.73) (0.30) (0.44) (0.20)
In Excess of Net
Investment Income -- (0.05) (0.02) -- (0.11) --
Net Realized Gain (0.05) -- -- -- (0.47) --
In Excess of Net
Realized Gain -- -- -- -- (0.03) --
------------ ------------ ------------ ------------ ------------ ------------
Total Distributions (0.22) (0.34) (0.75) (0.30) (1.05) (0.20)
------------ ------------ ------------ ------------ ------------ ------------
NET ASSET VALUE, END OF
PERIOD $ 9.87 $ 9.90 $ 9.90 $ 10.20 $ 9.54 $ 10.56
============ ============ ============ ============ ============ ============
TOTAL RETURN (1) 1.99% 3.48% 4.47% 10.24% (0.25)% 7.61%
============ ============ ============ ============ ============ ============
RATIOS AND SUPPLEMENTAL
DATA
Net Assets, End of Period
(000's) $ 2,103 $ 2,445 $ 2,844 $ 5,965 $ 5,407 $ 6,120
Ratio of Expenses to
Average Net Assets 2.20%** 2.20% 2.20% 2.20% 2.20% 2.20%**
Ratio of Net Investment
Income to Average Net
Assets 3.09%** 3.65% 4.35% 5.09% 3.95% 4.25%**
Portfolio Turnover Rate 37% 170% 223% 169% 168% 55%
- -------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary
Expense
Limitation During the
Period
Per Share Benefit to
Net Investment Income $ 0.09 $ 0.12 $ 0.06 $ 0.08 $ 0.12 $ 0.07
Ratios Before Expense
Limitation:
Expenses to Average Net
Assets 3.98%** 3.35% 2.87% 2.97% 3.29% 3.63%**
Net Investment Income
to Average Net Assets 1.35%** 2.48% 3.68% 4.32% 2.86% 2.82%**
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Commencement of operations
** Annualized
+ The Fund began offering Class B shares on August 1, 1995.
(1) Total return is calculated exclusive of sales charges or deferred
sales charges. Total returns for periods of less than one year are not
annualized.
112
The accompanying notes are an integral part of the financial statements.
<PAGE> 463
MORGAN STANLEY FUNDS
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
ASIAN GROWTH FUND
(UNAUDITED)
<TABLE>
<CAPTION>
CLASS A
--------------------------------------------------------------------------------------------
SIX MONTHS JUNE 23,
ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED 1993*
SELECTED PER SHARE DATA DECEMBER 31, JUNE 30, JUNE 30, JUNE 30, JUNE 30, TO JUNE 30,
AND RATIOS 1997 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 16.62 $ 17.15 $ 16.42 $ 15.50 $ 12.00 $ 12.00
------------ ------------ ------------ ------------ ------------ ------------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Loss (0.03) (0.06) (0.04) -- (0.03) --
Net Realized and
Unrealized Gain
(Loss) (8.27) (0.14) 0.77 1.43 3.53 --
------------ ------------ ------------ ------------ ------------ ------------
Total From Investment
Operations (8.30) (0.20) 0.73 1.43 3.50 --
------------ ------------ ------------ ------------ ------------ ------------
DISTRIBUTIONS
Net Realized Gain (0.02) -- -- (0.49) -- --
In Excess of Net
Realized Gain -- (0.33) -- (0.02) -- --
------------ ------------ ------------ ------------ ------------ ------------
(0.02) (0.33) -- (0.51) -- --
------------ ------------ ------------ ------------ ------------ ------------
NET ASSET VALUE, END OF
PERIOD $ 8.30 $ 16.62 $ 17.15 $ 16.42 $ 15.50 $ 12.00
============ ============ ============ ============ ============ ============
TOTAL RETURN (1) (49.96)% (1.10)% 4.45% 9.50% 29.17% 0.00%
============ ============ ============ ============ ============ ============
RATIOS AND SUPPLEMENTAL
DATA
Net Assets, End of Period
(000's) $ 63,990 $ 175,448 $ 248,009 $ 178,667 $ 138,212 $ 11,770
Ratio of Expenses to
Average Net Assets 1.97%** 1.84% 1.88% 1.90% 1.90% 1.90%**
Ratio of Net Investment
Income (Loss) to
Average Net Assets (0.91)%** (0.31)% (0.16)% 0.04% (0.24)% (0.81)%**
Portfolio Turnover Rate 71% 74% 38% 34% 34% 0%
Average Commission Rate #
Per Share $ 0.0088 $ 0.0110 N/A N/A N/A N/A
As a Percentage of
Trade Amount 0.41% 0.51% N/A N/A N/A N/A
- -------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary
Expense Limitation
During
the Period
Per Share Benefit to
Net Investment Loss $ -- $ -- $ -- $ -- $ 0.03 $ 0.01
Ratios Before Expense
Limitation:
Expenses to Average Net
Assets -- -- -- -- 2.17% 11.83%**
Net Investment Income
(Loss) to Average Net
Assets -- -- -- -- (0.51)% (10.74)%**
Ratio of Expenses to
Average Net Assets
excluding country tax
expense 1.89%** -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------
<CAPTION>
CLASS B
--------------------------------------------
SIX MONTHS AUGUST 1,
ENDED YEAR ENDED 1995+
SELECTED PER SHARE DATA DECEMBER 31, JUNE 30, TO JUNE 30,
AND RATIOS 1997 1997 1996
- -------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 16.17 $ 16.81 $ 16.51
------------ ------------ ------------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Loss (0.13) (0.15) (0.03)
Net Realized and
Unrealized Gain
(Loss) (7.98) (0.16) 0.33
------------ ------------ ------------
Total From Investment
Operations (8.11) (0.31) 0.30
------------ ------------ ------------
DISTRIBUTIONS
Net Realized Gain (0.02) -- --
In Excess of Net
Realized Gain -- (0.33) --
------------ ------------ ------------
(0.02) (0.33) --
------------ ------------ ------------
NET ASSET VALUE, END OF
PERIOD $ 8.04 $ 16.17 $ 16.81
============ ============ ============
TOTAL RETURN (1) (50.17)% (1.79)% 1.82%
============ ============ ============
RATIOS AND SUPPLEMENTAL
DATA
Net Assets, End of Period
(000's) $ 27,558 $ 62,786 $ 52,853
Ratio of Expenses to
Average Net Assets 2.72%** 2.59% 2.61%**
Ratio of Net Investment
Income (Loss) to
Average Net Assets (1.64)%** (1.04)% (0.52%)**
Portfolio Turnover Rate 71% 74% 38%
Average Commission Rate #
Per Share $ 0.0088 $ 0.0110 N/A
As a Percentage of
Trade Amount 0.41% 0.51% N/A
- -------------------------------------------------------------------------
Effect of Voluntary
Expense Limitation
During
the Period
Per Share Benefit to
Net Investment Loss $ -- $ -- $ --
Ratios Before Expense
Limitation:
Expenses to Average Net
Assets -- -- --
Net Investment Income
(Loss) to Average Net
Assets -- -- --
Ratio of Expenses to
Average Net Assets
excluding country tax
expense 2.64%** -- --
- -------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS C
--------------------------------------------------------------------------------------------
SIX MONTHS JUNE 23,
ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED 1993*
SELECTED PER SHARE DATA DECEMBER 31, JUNE 30, JUNE 30, JUNE 30, JUNE 30, TO JUNE 30,
AND RATIOS 1997 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 16.14 $ 16.78 $ 16.19 $ 15.40 $ 12.00 $ 12.00
------------ ------------ ------------ ------------ ------------ ------------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Loss (0.25) (0.24) (0.13) (0.12) (0.10) --
Net Realized and
Unrealized Gain
(Loss) (7.84) (0.07) 0.72 1.42 3.50 --
------------ ------------ ------------ ------------ ------------ ------------
Total From Investment
Operations (8.09) (0.31) 0.59 1.30 3.40 --
------------ ------------ ------------ ------------ ------------ ------------
DISTRIBUTIONS
Net Realized Gain (0.02) -- -- (0.49) -- --
In Excess of Net
Realized Gain -- (0.33) -- (0.02) -- --
------------ ------------ ------------ ------------ ------------ ------------
(0.02) (0.33) -- (0.51) -- --
------------ ------------ ------------ ------------ ------------ ------------
NET ASSET VALUE, END OF
PERIOD $ 8.03 $ 16.14 $ 16.78 $ 16.19 $ 15.40 $ 12.00
============ ============ ============ ============ ============ ============
TOTAL RETURN (1) (50.14)% (1.79)% 3.64% 8.71% 28.33% 0.00%
============ ============ ============ ============ ============ ============
RATIOS AND SUPPLEMENTAL
DATA
Net Assets, End of Period
(000's) $ 37,979 $ 114,460 $ 168,070 $ 139,497 $ 116,889 $ 8,491
Ratio of Expenses to
Average Net Assets 2.72%** 2.59% 2.63% 2.63% 2.65% 2.65%**
Ratio of Net Investment
(Loss) to Average Net
Assets (1.65)%** (1.06)% (0.94)% (0.77%) (0.99)% (1.56)%**
Portfolio Turnover Rate 71% 74% 38% 34% 34% 0%
Average Commission Rate #
Per Share $ 0.0088 $ 0.0110 N/A N/A N/A N/A
As a Percentage of
Trade Amount 0.41% 0.51% N/A N/A N/A N/A
- -------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary
Expense
Limitation During the
Period
Per Share Benefit to
Net Investment Loss $ -- $ -- $ -- $ -- $ 0.03 $ 0.02
Ratios Before Expense
Limitation:
Expenses to Average Net
Assets -- -- -- -- 2.92% 12.64%**
Net Investment Income
(Loss) to Average Net
Assets -- -- -- -- (1.26)% (11.55)%**
Ratio of Expenses to
Average Net Assets
excluding country tax
expense 2.64%** -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Commencement of operations
** Annualized
+ The Fund began offering Class B shares on August 1, 1995.
(1) Total return is calculated exclusive of sales charges or deferred
sales charges. Total return for a periods of less than one year are
not annualized.
# For fiscal years beginning on or after September 1, 1995, a portfolio
is required to disclose the average commission rate per share it paid
for trades on which commissions were charged.
113
The accompanying notes are an integral part of the financial statements.
<PAGE> 464
MORGAN STANLEY FUNDS
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
AMERICAN VALUE FUND
(UNAUDITED)
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------------------------
SIX MONTHS OCTOBER 18,
ENDED YEAR ENDED YEAR ENDED YEAR ENDED 1993*
SELECTED PER SHARE DATA DECEMBER 31, JUNE 30, JUNE 30, JUNE 30, TO JUNE 30,
AND RATIOS 1997 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 17.59 $ 14.63 $ 12.89 $ 11.70 $ 12.00
------------ ------------ ------------ ------------ ------------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income
(Loss) 0.03 0.20 0.27 0.27 0.17
Net Realized and
Unrealized Gain
(Loss) 2.87 4.05 1.94 1.44 (0.30)
------------ ------------ ------------ ------------ ------------
Total from Investment
Operations 2.90 4.25 2.21 1.71 (0.13)
------------ ------------ ------------ ------------ ------------
DISTRIBUTIONS
Net Investment Income (0.04) (0.20) (0.27) (0.28) (0.17)
In Excess of Net
Investment Income -- (0.00)++ (0.01) -- --
Net Realized Gain (1.04) (1.09) (0.19) (0.24) --
------------ ------------ ------------ ------------ ------------
Total Distributions (1.08) (1.29) (0.47) (0.52) (0.17)
------------ ------------ ------------ ------------ ------------
NET ASSET VALUE, END OF
PERIOD $ 19.41 $ 17.59 $ 14.63 $ 12.89 $ 11.70
============ ============ ============ ============ ============
TOTAL RETURN (1) 16.66% 30.68% 17.41% 15.01% (1.12)%
============ ============ ============ ============ ============
RATIOS AND SUPPLEMENTAL
DATA
Net Assets, End of Period
(000's) $ 106,826 $ 34,331 $ 19,674 $ 20,675 $ 10,717
Ratio of Expenses to
Average Net Assets 1.50%** 1.50% 1.50% 1.50% 1.50%**
Ratio of Net Investment
Income (Loss) to
Average Net Assets (0.05)%** 1.25% 1.90% 2.29% 2.14%**
Portfolio Turnover Rate 82% 73% 41% 23% 17%
Average Commission Rate # $ 0.0528 $ 0.0452 N/A N/A N/A
- ---------------------------------------------------------------------------------------------------------
Effect of Voluntary
Expense
Limitation During the
Period
Per Share Benefit to
Net Investment Income $ 0.03 $ 0.04 $ 0.04 $ 0.05 $ 0.08
Ratios Before Expense
Limitation:
Expenses to Average Net
Assets 1.57%** 1.76% 1.81% 1.96% 2.48%**
Net Investment Income
to Average Net Assets (0.13)%** 0.98% 1.59% 1.83% 1.16%**
- ---------------------------------------------------------------------------------------------------------
<CAPTION>
CLASS B
--------------------------------------------
SIX MONTHS AUGUST 1,
ENDED YEAR ENDED 1995+ TO
SELECTED PER SHARE DATA DECEMBER 31, JUNE 30, JUNE 30,
AND RATIOS 1997 1997 1996
- -------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 17.59 $ 14.63 $ 13.37
------------ ------------ ------------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income
(Loss) (0.12) 0.09 0.15
Net Realized and
Unrealized Gain
(Loss) 2.94 4.05 1.46
------------ ------------ ------------
Total from Investment
Operations 2.82 4.14 1.61
------------ ------------ ------------
DISTRIBUTIONS
Net Investment Income (0.01) (0.09) (0.15)
In Excess of Net
Investment Income -- (0.00)++ (0.01)
Net Realized Gain (1.04) (1.09) (0.19)
------------ ------------ ------------
Total Distributions (1.05) (1.18) (0.35)
------------ ------------ ------
NET ASSET VALUE, END OF
PERIOD $ 19.36 $ 17.59 $ 14.63
============ ============ ============
TOTAL RETURN (1) 16.25% 29.77% 12.29%
============ ============ ============
RATIOS AND SUPPLEMENTAL
DATA
Net Assets, End of Period
(000's) $ 107,301 $ 15,331 $ 2,485
Ratio of Expenses to
Average Net Assets 2.25%** 2.25% 2.25%**
Ratio of Net Investment
Income (Loss) to
Average Net Assets (0.76)%** 0.40% 1.18%**
Portfolio Turnover Rate 82% 73% 41%
Average Commission Rate # $ 0.0528 $ 0.0452 N/A
- -------------------------------------------------------------------------
Effect of Voluntary
Expense
Limitation During the
Period
Per Share Benefit to
Net Investment Income $ 0.01 $ 0.06 $ 0.04
Ratios Before Expense
Limitation:
Expenses to Average Net
Assets 2.32%** 2.48% 2.61%**
Net Investment Income
to Average Net Assets (0.85)%** 0.14% 0.82%**
- -------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS C
----------------------------------------------------------------------------
SIX MONTHS OCTOBER 18,
ENDED YEAR ENDED YEAR ENDED YEAR ENDED 1993*
SELECTED PER SHARE DATA DECEMBER 31, JUNE 30, JUNE 30, JUNE 30, TO JUNE 30,
AND RATIOS 1997 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 17.59 $ 14.64 $ 12.89 $ 11.69 $ 12.00
------------ ------------ ------------ ------------ ------------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income
(Loss) (0.04) 0.08 0.16 0.17 0.11
Net Realized and
Unrealized Gain
(Loss) 2.86 4.05 1.94 1.44 (0.31)
------------ ------------ ------------ ------------ ------------
Total from Investment
Operations 2.82 4.13 2.10 1.61 (0.20)
------------ ------------ ------------ ------------ ------------
DISTRIBUTIONS
Net Investment Income (0.01) (0.09) (0.15) (0.17) (0.11)
In Excess of Net
Investment Income -- (0.00)++ (0.01) -- --
Net Realized Gain (1.04) (1.09) (0.19) (0.24) --
------------ ------------ ------------ ------------ ------------
Total Distributions (1.05) (1.18) (0.35) (0.41) (0.11)
------------ ------------ ------------ ------------ ------------
NET ASSET VALUE, END OF
PERIOD $ 19.36 $ 17.59 $ 14.64 $ 12.89 $ 11.69
============ ============ ============ ============ ============
TOTAL RETURN (1) 16.24% 29.67% 16.50% 14.13% (1.70)%
============ ============ ============ ============ ============
RATIOS AND SUPPLEMENTAL
DATA
Net Assets, End of Period
(000's) $ 73,122 $ 32,425 $ 21,193 $ 13,867 $ 7,237
Ratio of Expenses to
Average Net Assets 2.25%** 2.25% 2.25% 2.25% 2.25%**
Ratio of Net Investment
Income (Loss) to
Average Net Assets (0.82)%** 0.49% 1.17% 1.54% 1.39%**
Portfolio Turnover Rate 82% 73% 41% 23% 17%
Average Commission Rate # $ 0.0528 $ 0.0452 N/A N/A N/A
- ---------------------------------------------------------------------------------------------------------
Effect of Voluntary
Expense
Limitation During the
Period
Per Share Benefit to
Net Investment Income $ 0.00++ $ 0.04 $ 0.04 $ 0.05 $ 0.08
Ratios Before Expense
Limitation:
Expenses to Average Net
Assets 2.32%** 2.47% 2.58% 2.71% 3.28%**
Net Investment Income
to Average Net Assets (0.89)%** 0.22% 0.84% 1.08% 0.36%**
- ---------------------------------------------------------------------------------------------------------
</TABLE>
* Commencement of operations
** Annualized
+ The Fund began offering Class B shares on August 1, 1995.
++ Amount is less than $0.01 per share.
(1) Total return is calculated exclusive of sales charges or deferred
sales charges. Total returns for periods of less than one year are not
annualized.
# For fiscal years beginning on or after September 1, 1995, a portfolio
is required to disclose the average commission rate per share it paid
for trades on which commissions were charged.
114
The accompanying notes are an integral part of the financial statements.
<PAGE> 465
MORGAN STANLEY FUNDS
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
VALUE FUND
(UNAUDITED)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------------ ------------ ------------
JULY 7, JULY 7, JULY 7,
1997* 1997* 1997*
DECEMBER 31, DECEMBER 31, DECEMBER 31,
SELECTED PER SHARE DATA AND RATIOS 1997 1997 1997
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 $ 10.00 $ 10.00
------------ ------------ ------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.03 0.01 0.01
Net Realized and Unrealized Gain 0.15 0.14 0.13
------------ ------------ ------------
Total From Investment Operations 0.18 0.15 0.14
------------ ------------ ------------
DISTRIBUTIONS
Net Investment Income (0.03) (0.01) (0.01)
Net Realized Gain (0.05) (0.05) (0.05)
------------ ------------ ------------
Total Distributions (0.08) (0.06) (0.06)
------------ ------------ ------------
NET ASSET VALUE, END OF PERIOD $ 10.10 $ 10.09 $ 10.08
============ ============ ============
TOTAL RETURN (1) 1.84% 1.51% 1.43%
============ ============ ============
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 102,701 $ 88,112 $ 19,466
Ratio of Expenses to Average Net Assets 1.45%** 2.20%** 2.20%**
Ratio of Net Investment Income to
Average Net Assets 1.01%** 0.26%** 0.27%**
Portfolio Turnover Rate 15% 15% 15%
Average Commission Rate $ 0.0587 $ 0.0587 $ 0.0587
- ----------------------------------------------------------------------------------------
Effect of Voluntary Expense Limitation
During the Period
Per Share Benefit to Net Investment
Income $ 0.01 $ 0.01 $ 0.01
Ratios Before Expense Limitation:
Expenses to Average Net Assets 1.78%** 2.53%** 2.53%**
Net Investment Income to Average Net
Assets 0.70%** 0.06%** 0.06%**
- ----------------------------------------------------------------------------------------
</TABLE>
* Commencement of operations
** Annualized
(1) Total return is calculated exclusive of sales charges or deferred
sales charges. Total returns for periods of less than one year are not
annualized.
115
The accompanying notes are an integral part of the financial statements.
<PAGE> 466
MORGAN STANLEY FUNDS
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
WORLDWIDE HIGH INCOME FUND
(UNAUDITED)
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------------------------
SIX MONTHS APRIL 21,
ENDED YEAR ENDED YEAR ENDED YEAR ENDED 1994*
SELECTED PER SHARE DATA DECEMBER 31, JUNE 30, JUNE 30, JUNE 30, TO JUNE 30,
AND RATIOS 1997 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 14.26 $ 12.47 $ 11.57 $ 12.17 $ 12.00
------------ ------------ ------------ ------------ ------------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income 0.60 1.25 1.36 1.26 0.18
Net Realized and
Unrealized Gain
(Loss) (0.13) 2.30 0.80 (0.52) 0.16
------------ ------------ ------------ ------------ ------------
Total From Investment
Operations 0.47 3.55 2.16 0.74 0.34
------------ ------------ ------------ ------------ ------------
DISTRIBUTIONS
Net Investment Income (0.55) (1.25) (1.26) (1.22) (0.17)
Net Realized Gain (1.19) (0.51) -- (0.12) --
------------ ------------ ------------ ------------ ------------
Total Distributions (1.74) (1.76) (1.26) (1.34) (0.17)
------------ ------------ ------------ ------------ ------------
NET ASSET VALUE, END OF
PERIOD $ 12.99 $ 14.26 $ 12.47 $ 11.57 $ 12.17
============ ============ ============ ============ ============
TOTAL RETURN (1) 3.36% 30.29% 19.61% 6.87% 2.86%
============ ============ ============ ============ ============
RATIOS AND SUPPLEMENTAL
DATA
Net Assets, End of Period
(000's) $ 82,139 $ 76,439 $ 41,493 $ 14,819 $ 6,857
Ratio of Expenses to
Average Net Assets 1.43%** 1.52% 1.55% 1.55% 1.55%**
Ratio of Net Investment
Income to Average Net
Assets 8.05%** 9.73% 11.95% 11.53% 8.29%**
Portfolio Turnover Rate 67% 157% 220% 178% 19%
- ---------------------------------------------------------------------------------------------------------
Effect of Voluntary
Expense Limitation
During the Period
Per Share Benefit to
Net Investment Income $ -- $ -- $ 0.02 $ 0.05 $ 0.02
Ratios Before Expense
Limitation:
Expenses to Average Net
Assets -- -- 1.69% 1.97% 3.23%**
Net Investment Income
to Average Net Assets -- -- 11.81% 11.11% 6.61%**
- ---------------------------------------------------------------------------------------------------------
<CAPTION>
CLASS B
--------------------------------------------
SIX MONTHS AUGUST 1,
ENDED YEAR ENDED 1995+
SELECTED PER SHARE DATA DECEMBER 31, JUNE 30, TO JUNE 30,
AND RATIOS 1997 1997 1996
- -------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 14.20 $ 12.44 $ 11.63
------------ ------------ ------------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income 0.47 1.07 1.18
Net Realized and
Unrealized Gain
(Loss) (0.06) 2.35 0.72
------------ ------------ ------------
Total From Investment
Operations 0.41 3.42 1.90
------------ ------------ ------------
DISTRIBUTIONS
Net Investment Income (0.50) (1.15) (1.09)
Net Realized Gain (1.19) (0.51) --
------------ ------------ ------------
Total Distributions (1.69) (1.66) (1.09)
------------ ------------ ------------
NET ASSET VALUE, END OF
PERIOD $ 12.92 $ 14.20 $ 12.44
============ ============ ============
TOTAL RETURN (1) 2.96% 29.14% 17.07%
============ ============ ============
RATIOS AND SUPPLEMENTAL
DATA
Net Assets, End of Period
(000's) $ 103,847 $ 78,340 $ 26,174
Ratio of Expenses to
Average Net Assets 2.18%** 2.27% 2.30%**
Ratio of Net Investment
Income to Average Net
Assets 7.30%** 8.86% 12.06%**
Portfolio Turnover Rate 67% 157% 220%
- -------------------------------------------------------------------------
Effect of Voluntary
Expense Limitation
During the Period
Per Share Benefit to
Net Investment Income $ -- $ -- $ 0.02
Ratios Before Expense
Limitation:
Expenses to Average Net
Assets -- -- 2.47%**
Net Investment Income
to Average Net Assets -- -- 11.89%**
- -------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS C
----------------------------------------------------------------------------
SIX MONTHS APRIL 21,
ENDED YEAR ENDED YEAR ENDED YEAR ENDED 1994*
SELECTED PER SHARE DATA DECEMBER 31, JUNE 30, JUNE 30, JUNE 30, TO JUNE 30,
AND RATIOS 1997 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $ 14.21 $ 12.45 $ 11.58 $ 12.16 $ 12.00
------------ ------------ ------------ ------------ ------------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income 0.53 1.16 1.30 1.17 0.17
Net Realized and
Unrealized Gain
(Loss) (0.12) 2.26 0.77 (0.50) 0.15
------------ ------------ ------------ ------------ ------------
Total From Investment
Operations 0.41 3.42 2.07 0.67 0.32
------------ ------------ ------------ ------------ ------------
DISTRIBUTIONS
Net Investment Income (0.50) (1.15) (1.20) (1.13) (0.16)
Net Realized Gain (1.19) (0.51) -- (0.12) --
------------ ------------ ------------ ------------ ------------
Total Distributions (1.69) (1.66) (1.20) (1.25) (0.16)
------------ ------------ ------------ ------------ ------------
NET ASSET VALUE, END OF
PERIOD $ 12.93 $ 14.21 $ 12.45 $ 11.58 $ 12.16
============ ============ ============ ============ ============
TOTAL RETURN (1) 2.88% 29.12% 18.71% 6.20% 2.62%
============ ============ ============ ============ ============
RATIOS AND SUPPLEMENTAL
DATA
Net Assets, End of Period
(000's) $ 50,102 $ 41,709 $ 28,094 $ 11,880 $ 6,081
Ratio of Expenses to
Average Net Assets 2.18%** 2.27% 2.30% 2.30% 2.30%**
Ratio of Net Investment
Income to Average Net
Assets 7.31%** 9.04% 11.40% 10.72% 7.54%**
Portfolio Turnover Rate 67% 157% 220% 178% 19%
- ---------------------------------------------------------------------------------------------------------
Effect of Voluntary
Expense Limitation
During the Period
Per Share Benefit to
Net Investment Income $ -- $ -- $ 0.04 $ 0.05 $ 0.06
Ratios Before Expense
Limitation:
Expenses to Average Net
Assets -- -- 2.44% 2.74% 4.00%**
Net Investment Income
to Average Net Assets -- -- 11.26% 10.28% 5.84%**
- ---------------------------------------------------------------------------------------------------------
</TABLE>
* Commencement of operations
** Annualized
+ The Fund began offering Class B shares on August 1, 1995.
(1) Total return is calculated exclusive of sales charges or deferred
sales charges. Total return for periods of less than one year are not
annualized.
116
The accompanying notes are an integral part of the financial statements.
<PAGE> 467
MORGAN STANLEY FUNDS
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
LATIN AMERICAN FUND
(UNAUDITED)
<TABLE>
<CAPTION>
CLASS A
---------------------------------------------------------------
SIX MONTHS JULY 6,
ENDED YEAR ENDED YEAR ENDED 1994*
SELECTED PER SHARE DATA DECEMBER 31, JUNE 30, JUNE 30, JUNE 30,
AND RATIOS 1997 1997 1996 1995
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 17.39 $ 12.63 $ 9.08 $ 12.00
------------ ------------ ------------ ------------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income
(Loss) (0.08) 0.02 0.10 (0.02)
Net Realized and
Unrealized Gain
(Loss) (0.60) 6.46 3.47 (2.70)
------------ ------------ ------------ ------------
Total From Investment
Operations (0.68) 6.48 3.57 (2.72)
------------ ------------ ------------ ------------
DISTRIBUTIONS
Net Investment Income -- -- (0.02) --
In Excess of Net
Investment Income -- (0.09) -- --
Net Realized Gain (3.23) (1.63) -- --
Return of Capital -- -- -- (0.20)
------------ ------------ ------------ ------------
Total Distributions (3.23) (1.72) (0.02) (0.20)
------------ ------------ ------------ ------------
NET ASSET VALUE, END OF
PERIOD $ 13.48 $ 17.39 $ 12.63 $ 9.08
============ ============ ============ ============
TOTAL RETURN (1) (2.46)% 57.32% 39.35% (23.07)%
============ ============ ============ ============
RATIOS AND SUPPLEMENTAL
DATA
Net Assets, End of Period
(000's) $ 66,929 $ 84,401 $ 18,701 $ 7,658
Ratio of Expenses to
Average Net Assets 2.30%** 2.24% 2.11% 2.46%**
Ratio of Net Investment
Income (Loss) to
Average Net Assets (1.03)%** (0.08)% 1.18% (0.44)%**
Portfolio Turnover Rate 155% 241% 131% 107%
Average Commission Rate #
Per Share $ 0.0008 $ 0.0006 N/A N/A
As a Percentage of
Trade Amount 0.26% 0.31% N/A N/A
- ---------------------------------------------------------------------------------------------
Effect of Voluntary
Expense Limitation
During the Period
Per Share Benefit to
Net Investment Income $ 0.01 $ 0.10 $ 0.09 $ 0.13
Ratios Before Expense
Limitation:
Expenses to Average Net
Assets 2.46%** 2.61% 3.28% 4.30%**
Net Investment Income
(Loss) to Average Net
Assets (1.18)%** (0.61)% 0.01% (2.26)%**
Ratio of Expenses to
Average Net Assets
excluding country tax
expense 2.10%** 2.10% 2.10% 2.10%**
- ---------------------------------------------------------------------------------------------
<CAPTION>
CLASS B
----------------------------------------------
SIX MONTHS AUGUST 1,
ENDED YEAR ENDED 1995+ TO
SELECTED PER SHARE DATA DECEMBER 31, JUNE 30, JUNE 30,
AND RATIOS 1997 1997 1996
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 16.99 $ 12.45 $ 9.58
------------ ------------ ------------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income
(Loss) (0.07) (0.03) 0.03
Net Realized and
Unrealized Gain
(Loss) (0.63) 6.28 2.84
------------ ------------ ------------
Total From Investment
Operations (0.70) 6.25 2.87
------------ ------------ ------------
DISTRIBUTIONS
Net Investment Income -- -- --
In Excess of Net
Investment Income -- (0.08) --
Net Realized Gain (3.23) (1.63) --
Return of Capital -- -- --
------------ ------------ ------------
Total Distributions (3.23) (1.71) --
------------ ------------ ------------
NET ASSET VALUE, END OF
PERIOD $ 13.06 $ 16.99 $ 12.45
============ ============ ============
TOTAL RETURN (1) (2.66)% 56.17% 29.26%
============ ============ ============
RATIOS AND SUPPLEMENTAL
DATA
Net Assets, End of Period
(000's) $ 29,554 $ 14,314 $ 2,041
Ratio of Expenses to
Average Net Assets 3.05%** 2.99% 2.87%**
Ratio of Net Investment
Income (Loss) to
Average Net Assets (1.67)%** (0.78)% 0.88%**
Portfolio Turnover Rate 155% 241% 131%
Average Commission Rate #
Per Share $ 0.0008 $ 0.0006 N/A
As a Percentage of
Trade Amount 0.26% 0.31% N/A
- ----------------------------------------------------------------------------
Effect of Voluntary
Expense Limitation
During the Period
Per Share Benefit to
Net Investment Income $ 0.01 $ 0.02 $ 0.04
Ratios Before Expense
Limitation:
Expenses to Average Net
Assets 3.21%** 3.55% 3.89%**
Net Investment Income
(Loss) to Average Net
Assets (1.85)%** (1.34)% (0.14)%**
Ratio of Expenses to
Average Net Assets
excluding country tax
expense 2.85%** 2.85% 2.85%**
- ----------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS C
------------------------------------------------------------
SIX MONTHS JULY 6,
ENDED YEAR ENDED YEAR ENDED 1994*
SELECTED PER SHARE DATA DECEMBER 31, JUNE 30, JUNE 30, JUNE 30,
AND RATIOS 1997 1997 1996 1995
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 17.01 $ 12.43 $ 8.99 $ 12.00
------------ ------------ ------------ ------------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income
(Loss) (0.11) (0.07) 0.04 (0.08)
Net Realized and
Unrealized Gain
(Loss) (0.60) 6.31 3.40 (2.73)
------------ ------------ ------------ ------------
Total From Investment
Operations (0.71) 6.24 3.44 (2.81)
------------ ------------ ------------ ------------
DISTRIBUTIONS
In Excess of Net
Investment Income -- (0.03) -- --
Net Realized Gain (3.23) (1.63) -- --
Return of Capital -- -- -- (0.20)
------------ ------------ ------------ ------------
Total Distributions (3.23) (1.66) -- (0.20)
------------ ------------ ------------ ------------
NET ASSET VALUE, END OF
PERIOD $ 13.07 $ 17.01 $ 12.43 $ 8.99
============ ============ ============ ============
TOTAL RETURN (1) (2.75)% 56.04% 38.26% (23.83)%
============ ============ ============ ============
RATIOS AND SUPPLEMENTAL
DATA
Net Assets, End of Period
(000's) $ 22,730 $ 20,345 $ 6,780 $ 4,085
Ratio of Expenses to
Average Net Assets 3.05%** 2.99% 2.86% 3.20%**
Ratio of Net Investment
Income (Loss) to
Average Net Assets (1.75)%** (0.79)% 0.42% (1.16)%**
Portfolio Turnover Rate 155% 241% 131% 107%
Average Commission Rate #
Per Share $ 0.0008 $ 0.0006 N/A N/A
As a Percentage of
Trade Amount 0.26% 0.31% N/A N/A
- -----------------------------------------------------------------------------------------
Effect of Voluntary
Expense Limitation
During the Period
Per Share Benefit to
Net Investment Income $ 0.01 $ 0.05 $ 0.12 $ 0.12
Ratios Before Expense
Limitation:
Expenses to Average Net
Assets 3.21%** 3.40% 4.06% 5.20%**
Net Investment Income
(Loss) to Average Net
Assets (1.91)%** (1.36)% (0.78)% (3.16)%**
Ratio of Expenses to
Average Net Assets
excluding country tax
expense 2.85%** 2.85% 2.85% 2.85%**
- -----------------------------------------------------------------------------------------
</TABLE>
* Commencement of operations.
** Annualized
+ The Fund began offering Class B shares on August 1, 1995
(1) Total return is calculated exclusive of sales charges or deferred
sales charges.Total return for periods of less than one year are not
annualized.
# For fiscal years beginning on or after September 1, 1995, a portfolio
is required to disclose the average commission rate per share it paid
for trades on which commissions were charged.
117
The accompanying notes are an integral part of the financial statements.
<PAGE> 468
MORGAN STANLEY FUNDS
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
EMERGING MARKETS FUND
(UNAUDITED)
<TABLE>
<CAPTION>
CLASS A
---------------------------------------------------------------
SIX MONTHS JULY 6,
ENDED YEAR ENDED YEAR ENDED 1994* TO
SELECTED PER SHARE DATA DECEMBER 31, JUNE 30, JUNE 30, JUNE 30,
AND RATIOS 1997 1997 1996 1995
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 13.47 $ 12.06 $ 10.61 $ 12.00
------------ ------------ ------------ ------------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income
(Loss) (0.02) 0.01 0.05 0.05
Net Realized and
Unrealized Gain
(Loss) (3.01) 1.57 1.44 (1.44)
------------ ------------ ------------ ------------
Total From Investment
Operations (3.03) 1.58 1.49 (1.39)
------------ ------------ ------------ ------------
DISTRIBUTIONS
Net Investment Income -- -- (0.04) --
In Excess of Net
Investment Income -- (0.04) -- --
Net Realized Gain (1.00) (0.13) -- --
------------ ------------ ------------ ------------
Total Distributions (1.00) (0.17) (0.04) --
------------ ------------ ------------ ------------
NET ASSET VALUE, END OF
PERIOD $ 9.44 $ 13.47 $ 12.06 $ 10.61
============ ============ ============ ============
TOTAL RETURN (1) (22.19)% 13.54% 14.16% (11.58)%
============ ============ ============ ============
RATIOS AND SUPPLEMENTAL
DATA
Net Assets, End of Period
(000's) $ 95,359 $ 119,022 $ 114,850 $ 26,091
Ratio of Expenses to
Average Net Assets 2.20%** 2.21% 2.16% 2.33%**
Ratio of Net Investment
Income (Loss) to
Average Net Assets (0.31)%** (0.06)% 0.93% 0.81%**
Portfolio Turnover Rate 58% 82% 42% 32%
Average Commission Rate #
Per Share $ 0.0022 $ 0.0007 N/A N/A
As a Percentage of
Trade Amount 0.38% 0.39% N/A N/A
- ---------------------------------------------------------------------------------------------
Effect of Voluntary
Expense Limitation
During the Period
Per Share Benefit to
Net Investment Income $ 0.01 $ 0.03 $ 0.02 $ 0.04
Ratios Before Expense
Limitation:
Expenses to Average Net
Assets 2.40%** 2.41% 2.56% 3.10%**
Net Investment Income
(Loss) to Average Net
Assets (0.50)%** (0.27)% 0.53% 0.04%**
Ratio of Expenses to
Average Net Assets
excluding country tax
expense. 2.15%** 2.15% 2.15% 2.15%**
- ---------------------------------------------------------------------------------------------
<CAPTION>
CLASS B
----------------------------------------------
SIX MONTHS AUGUST 1,
ENDED YEAR ENDED 1995+ TO
SELECTED PER SHARE DATA DECEMBER 31, JUNE 30, JUNE 30,
AND RATIOS 1997 1997 1996
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 13.24 $ 11.94 $ 10.91
------------ ------------ ------------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income
(Loss) (0.02) (0.03) 0.01
Net Realized and
Unrealized Gain
(Loss) (2.99) 1.50 1.02
------------ ------------ ------------
Total From Investment
Operations (3.01) 1.47 1.03
------------ ------------ ------------
DISTRIBUTIONS
Net Investment Income -- -- --
In Excess of Net
Investment Income -- (0.04) --
Net Realized Gain (1.00) (0.13) --
------------ ------------ ------------
Total Distributions (1.00) (0.17) --
------------ ------------ ------------
NET ASSET VALUE, END OF
PERIOD $ 9.23 $ 13.24 $ 11.94
============ ============ ============
TOTAL RETURN (1) (22.50)% 12.67% 9.45%
============ ============ ============
RATIOS AND SUPPLEMENTAL
DATA
Net Assets, End of Period
(000's) $ 43,549 $ 35,966 $ 10,416
Ratio of Expenses to
Average Net Assets 2.95%** 2.96% 2.91%**
Ratio of Net Investment
Income (Loss) to
Average Net Assets (1.04)%** (0.64)% 0.30%**
Portfolio Turnover Rate 58% 82% 42%
Average Commission Rate #
Per Share $ 0.0022 $ 0.0007 N/A
As a Percentage of
Trade Amount 0.38% 0.39% N/A
- ---------------------------------------------------------------------------
Effect of Voluntary
Expense Limitation
During the Period
Per Share Benefit to
Net Investment Income $ 0.01 $ 0.01 $ 0.02
Ratios Before Expense
Limitation:
Expenses to Average Net
Assets 3.15%** 3.17% 3.31%**
Net Investment Income
(Loss) to Average Net
Assets (1.25)%** (0.87)% (0.10)%**
Ratio of Expenses to
Average Net Assets
excluding country tax
expense. 2.90%** 2.90% 2.90%**
- ---------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS C
------------------------------------------------------------
SIX MONTHS JULY 6,
ENDED YEAR ENDED YEAR ENDED 1994* TO
SELECTED PER SHARE DATA DECEMBER 31, JUNE 30, JUNE 30, JUNE 30,
AND RATIOS 1997 1997 1996 1995
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 13.26 $ 11.93 $ 10.53 $ 12.00
------------ ------------ ------------ ------------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment (Loss) (0.07) (0.08) (0.01) --
Net Realized and
Unrealized Gain
(Loss) (2.95) 1.55 1.41 (1.47)
------------ ------------ ------------ ------------
Total From Investment
Operations (3.02) 1.47 1.40 (1.47)
------------ ------------ ------------ ------------
DISTRIBUTIONS
Net Investment Income -- -- -- --
In Excess of Net
Investment Income -- (0.01) -- --
Net Realized Gain (1.00) (0.13) -- --
------------ ------------ ------------ ------------
Total Distributions (1.00) (0.14) -- --
------------ ------------ ------------ ------------
NET ASSET VALUE, END OF
PERIOD $ 9.24 $ 13.26 $ 11.93 $ 10.53
============ ============ ============ ============
TOTAL RETURN (1) (22.48)% 12.66% 13.30% (12.25)%
============ ============ ============ ============
RATIOS AND SUPPLEMENTAL
DATA
Net Assets, End of Period
(000's) $ 39,235 $ 57,958 $ 43,601 $ 22,245
Ratio of Expenses to
Average Net Assets 2.95%** 2.96% 2.91% 3.08%**
Ratio of Net Investment
Income (Loss) to
Average Net Assets (1.05)%** (0.79)% (0.11)% 0.06%**
Portfolio Turnover Rate 58% 82% 42% 32%
Average Commission Rate #
Per Share $ 0.0022 $ 0.0007 N/A N/A
As a Percentage of
Trade Amount 0.38% 0.39% N/A N/A
- -----------------------------------------------------------------------------------------
Effect of Voluntary
Expense
Limitation During the
Period
Per Share Benefit to
Net Investment Income $ 0.01 $ 0.02 $ 0.03 $ 0.04
Ratios Before Expense
Limitation:
Expenses to Average Net
Assets 3.15%** 3.17% 3.34% 3.90%**
Net Investment Income
(Loss) to Average Net
Assets (1.23)%** (1.00)% (0.54)% (0.76)%**
Ratio of Expenses to
Average Net Assets
excluding country tax
expense. 2.90%** 2.90% 2.90% 2.90%**
- -----------------------------------------------------------------------------------------
</TABLE>
* Commencement of operations.
** Annualized
+ The Fund began offering Class B shares on August 1, 1995.
(1) Total return is calculated exclusive of sales charges or deferred
sales charges. Total return for periods of less than one year are not
annualized.
# For fiscal years beginning on or after September 1, 1995, a portfolio
is required to disclose the average commission rate per share it paid
for trades on which commissions were charged.
118
The accompanying notes are an integral part of the financial statements.
<PAGE> 469
MORGAN STANLEY FUNDS
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
AGGRESSIVE EQUITY FUND
(UNAUDITED)
<TABLE>
<CAPTION>
CLASS A CLASS B
-------------------------------------------- --------------------------------------------
SIX MONTHS JANUARY 2, SIX MONTHS JANUARY 2,
ENDED YEAR ENDED 1996* ENDED YEAR ENDED 1996*
SELECTED PER SHARE DATA DECEMBER 31, JUNE 30, TO JUNE 30, DECEMBER 31, JUNE 30, TO JUNE 30,
AND RATIOS 1997 1997 1996 1997 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 16.98 $ 14.40 $ 12.00 $ 16.85 $ 14.38 $ 12.00
------------ ------------ ------------ ------------ ------------ ------------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income
(Loss) (0.04) 0.04 0.06 (0.08) (0.02) 0.03
Net Realized and
Unrealized Gain 2.81 3.95 2.40 2.74 3.86 2.39
------------ ------------ ------------ ------------ ------------ ------------
Total From Investment
Operations 2.77 3.99 2.46 2.66 3.84 2.42
------------ ------------ ------------ ------------ ------------ ------------
DISTRIBUTIONS
Net Investment Income -- (0.06) (0.06) -- (0.02) (0.04)
Net Realized Gain (1.93) (1.35) -- (1.93) (1.35) --
------------ ------------ ------------ ------------ ------------ ------------
Total Distributions (1.93) (1.41) (0.06) (1.93) (1.37) (0.04)
------------ ------------ ------------ ------------ ------------ ------------
NET ASSET VALUE, END OF
PERIOD $ 17.82 $ 16.98 $ 14.40 $ 17.58 $ 16.85 $ 14.38
============ ============ ============ ============ ============ ============
TOTAL RETURN (1) 16.66% 28.93% 20.52% 16.26% 28.01% 20.18%
============ ============ ============ ============ ============ ============
RATIOS AND SUPPLEMENTAL
DATA
Net Assets, End of Period
(000's) $ 35,689 $ 22,521 $ 5,382 $ 58,739 $ 34,382 $ 2,426
Ratio of Expenses to
Average Net Assets 1.50%** 1.57% 2.03%** 2.25%** 2.32% 2.67%**
Ratio of Net Investment
Income (Loss) to
Average Net Assets (0.43)%** (0.04)% 1.22%** (1.17)%** (0.83)% 0.43%**
Portfolio Turnover Rate 141% 241% 204% 141% 241% 204%
Average Commission Rate # $ 0.0581 $ 0.0536 N/A $ 0.0581 $ 0.0536 N/A
- -------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary
Expense
Limitation During the
Period
Per Share Benefit to
Net Investment Income $ 0.03 $ 0.22 $ 0.06 $ 0.02 $ 0.02 $ 0.07
Ratios Before Expense
Limitation:
Expenses to Average Net
Assets 1.79%** 2.38% 3.26%** 2.54%** 2.88% 3.79%**
Net Investment Income
to Average Net Assets (0.73)%** (0.85)% (0.01)%** (1.47)%** (1.43)% (0.69)%**
Ratio of Expenses to
Average Net Assets
excluding dividend
expense on securities
sold short 1.50%** 1.50% 1.50%** 2.25%** 2.25% 2.25%**
<CAPTION>
CLASS C
--------------------------------------------
SIX MONTHS JANUARY 2,
ENDED YEAR ENDED 1996*
SELECTED PER SHARE DATA DECEMBER 31, JUNE 30, TO JUNE 30,
AND RATIOS 1997 1997 1996
- -------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 16.83 $ 14.37 $ 12.00
------------ ------------ ------------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income
(Loss) (0.08) (0.06) 0.03
Net Realized and
Unrealized Gain 2.75 3.89 2.38
------------ ------------ ------------
Total From Investment
Operations 2.67 3.83 2.41
------------ ------------ ------------
DISTRIBUTIONS
Net Investment Income -- (0.02) (0.04)
Net Realized Gain (1.93) (1.35) --
------------ ------------ ------------
Total Distributions (1.93) (1.37) (0.04)
------------ ------------ ------------
NET ASSET VALUE, END OF
PERIOD $ 17.57 $ 16.83 $ 14.37
============ ============ ============
TOTAL RETURN (1) 16.21% 28.04% 20.10%
============ ============ ============
RATIOS AND SUPPLEMENTAL
DATA
Net Assets, End of Period
(000's) $ 11,837 $ 9,410 $ 2,582
Ratio of Expenses to
Average Net Assets 2.25%** 2.32% 2.67%**
Ratio of Net Investment
Income (Loss) to
Average Net Assets (1.21)%** (0.77)% 0.44%**
Portfolio Turnover Rate 141% 241% 204%
Average Commission Rate # $ 0.0581 $ 0.0536 N/A
- -------------------------------------------------------------------------
Effect of Voluntary
Expense
Limitation During the
Period
Per Share Benefit to
Net Investment Income $ 0.02 $ 0.07 $ 0.07
Ratios Before Expense
Limitation:
Expenses to Average Net
Assets 2.54%** 3.23% 3.80%**
Net Investment Income
to Average Net Assets (1.50)%** (1.67)% (0.69)%**
Ratio of Expenses to
Average Net Assets
excluding dividend
expense on securities
sold short 2.25%** 2.25% 2.25%**
- -------------------------------------------------------------------------
</TABLE>
* Commencement of operations
** Annualized
(1) Total return is calculated exclusive of sales charges or deferred
sales charges. Total returns for periods of less than one year are not
annualized.
# For fiscal years beginning on or after September 1, 1995, a portfolio
is required to disclose the average commission rate per share it paid
for trades on which commissions were charged.
119
The accompanying notes are an integral part of the financial statements.
<PAGE> 470
MORGAN STANLEY FUNDS
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
U.S. REAL ESTATE FUND
(UNAUDITED)
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------
SIX MONTHS MAY 1, 1996*
ENDED YEAR ENDED TO
SELECTED PER SHARE DATA DECEMBER 31, JUNE 30, JUNE 30,
AND RATIOS 1997 1997 1996
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 16.39 $ 12.52 $ 12.00
------------ ------------ ------------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income 0.21 0.37 0.08
Net Realized and
Unrealized Gain 2.02 4.03 0.48
------------ ------------ ------------
Total From Investment
Operations 2.23 4.40 0.56
------------ ------------ ------------
DISTRIBUTIONS
Net Investment Income (0.23) (0.29) (0.04)
Net Realized Gain (1.60) (0.24) --
------------ ------------ ------------
Total Distributions (1.83) (0.53) (0.04)
------------ ------------ ------------
NET ASSET VALUE, END OF
PERIOD $ 16.79 $ 16.39 $ 12.52
============ ============ ============
TOTAL RETURN (1) 13.83% 35.75% 4.63%
============ ============ ============
RATIOS AND SUPPLEMENTAL
DATA
Net Assets, End of Period
(000's) $ 20,768 $ 14,827 $ 1,829
Ratio of Expenses to
Average Net Assets 1.55%** 1.55% 1.55%**
Ratio of Net Investment
Income to Average Net
Assets 2.51%** 2.33% 4.11%**
Portfolio Turnover Rate 59% 143% 0%
Average Commission Rate # $ 0.0596 $ 0.0582 N/A
- ----------------------------------------------------------------------------
Effect of Voluntary
Expense Limitation
During the Period
Per Share Benefit to
Net Investment Income $ 0.05 $ 0.16 $ 0.08
Ratios Before Expense
Limitation:
Expenses to Average Net
Assets 2.16%** 2.51% 5.58%**
Net Investment Income
to Average Net Assets 1.90%** 1.36% 0.08%**
- ----------------------------------------------------------------------------
<CAPTION>
CLASS B
----------------------------------------------
SIX MONTHS MAY 1, 1996*
ENDED YEAR ENDED TO
SELECTED PER SHARE DATA DECEMBER 31, JUNE 30, JUNE 30,
AND RATIOS 1997 1997 1996
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 16.36 $ 12.52 $ 12.00
------------ ------------ ------------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income 0.10 0.15 0.07
Net Realized and
Unrealized Gain 2.03 4.12 0.48
------------ ------------ ------------
Total From Investment
Operations 2.13 4.27 0.55
------------ ------------ ------------
DISTRIBUTIONS
Net Investment Income (0.16) (0.19) (0.03)
Net Realized Gain (1.60) (0.24) --
------------ ------------ ------------
Total Distributions (1.76) (0.43) (0.03)
------------ ------------ ------------
NET ASSET VALUE, END OF
PERIOD $ 16.73 $ 16.36 $ 12.52
============ ============ ============
TOTAL RETURN (1) 13.40% 34.58% 4.54%
============ ============ ============
RATIOS AND SUPPLEMENTAL
DATA
Net Assets, End of Period
(000's) $ 12,764 $ 7,120 $ 2,197
Ratio of Expenses to
Average Net Assets 2.30%** 2.30% 2.30%**
Ratio of Net Investment
Income to Average Net
Assets 1.64%** 1.49% 3.35%**
Portfolio Turnover Rate 59% 143% 0%
Average Commission Rate # $ 0.0596 $ 0.0582 N/A
- ----------------------------------------------------------------------------
Effect of Voluntary
Expense Limitation
During the Period
Per Share Benefit to
Net Investment Income $ 0.04 $ 0.11 $ 0.07
Ratios Before Expense
Limitation:
Expenses to Average Net
Assets 2.91%** 3.39% 6.34%**
Net Investment Income
to Average Net Assets 1.02%** 0.39% (0.69)%**
- ----------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS C
----------------------------------------------
SIX MONTHS MAY 1, 1996*
ENDED YEAR ENDED TO
SELECTED PER SHARE DATA DECEMBER 31, JUNE 30, JUNE 30,
AND RATIOS 1997 1997 1996
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 16.36 $ 12.52 $ 12.00
------------ ------------ ------------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income 0.10 0.20 0.07
Net Realized and
Unrealized Gain 2.03 4.07 0.48
------------ ------------ ------------
Total From Investment
Operations 2.13 4.27 0.55
------------ ------------ ------------
DISTRIBUTIONS
Net Investment Income (0.16) (0.19) (0.03)
Net Realized Gain (1.60) (0.24) --
------------ ------------ ------------
Total Distributions (1.76) (0.43) (0.03)
------------ ------------ ------------
NET ASSET VALUE, END OF
PERIOD $ 16.73 $ 16.36 $ 12.52
============ ============ ============
TOTAL RETURN (1) 13.36% 34.56% 4.54%
============ ============ ============
RATIOS AND SUPPLEMENTAL
DATA
Net Assets, End of Period
(000's) $ 3,910 $ 2,369 $ 1,782
Ratio of Expenses to
Average Net Assets 2.30%** 2.30% 2.30%**
Ratio of Net Investment
Income to Average Net
Assets 1.66%** 1.46% 3.39%**
Portfolio Turnover Rate 59% 143% 0%
Average Commission Rate # $ 0.0596 $ 0.0582 N/A
- ----------------------------------------------------------------------------
Effect of Voluntary
Expense Limitation
During the Period
Per Share Benefit to
Net Investment Income $ 0.03 $ 0.17 $ 0.08
Ratios Before Expense
Limitation:
Expenses to Average Net
Assets 2.91%** 3.58% 6.32%**
Net Investment Income
to Average Net Assets 1.09%** 0.16% (0.63)%**
- ----------------------------------------------------------------------------
</TABLE>
* Commencement of operations
** Annualized
(1) Total return is calculated exclusive of sales charges or deferred
sales charges. Total returns for periods of less than one year are not
annualized.
# For fiscal years beginning on or after September 1, 1995, a portfolio
is required to disclose the average commission rate per share it paid
for trades on which commissions were charged.
120
The accompanying notes are an integral part of the financial statements.
<PAGE> 471
MORGAN STANLEY FUNDS
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
HIGH YIELD FUND
(UNAUDITED)
<TABLE>
<CAPTION>
CLASS A CLASS B
---------------------------------------------- ----------------------------------------------
SIX MONTHS MAY 1, 1996* SIX MONTHS MAY 1, 1996*
ENDED YEAR ENDED TO ENDED YEAR ENDED TO
SELECTED PER SHARE DATA DECEMBER 31, JUNE 30, JUNE 30, DECEMBER 31, JUNE 30, JUNE 30,
AND RATIOS 1997 1997 1996 1997 1997 1996
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 12.86 $ 11.92 $ 12.00 $ 12.86 $ 11.93 $ 12.00
------------ ------------ ------------ ------------ ------------ ------------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income 0.64 1.07 0.13 0.45 0.98 0.12
Net Realized and
Unrealized Gain
(Loss) 0.15 0.99 (0.09) 0.27 0.99 (0.09)
------------ ------------ ------------ ------------ ------------ ------------
Total From Investment
Operations 0.79 2.06 0.04 0.72 1.97 0.03
------------ ------------ ------------ ------------ ------------ ------------
DISTRIBUTIONS
Net Investment Income (0.51) (1.07) (0.12) (0.47) (0.99) (0.10)
Net Realized Gain (0.55) (0.05) -- (0.55) (0.05) --
------------ ------------ ------------ ------------ ------------ ------------
Total Distributions (1.06) (1.12) (0.12) (1.02) (1.04) (0.10)
------------ ------------ ------------ ------------ ------------ ------------
NET ASSET VALUE, END OF
PERIOD $ 12.59 $ 12.86 $ 11.92 $ 12.56 $ 12.86 $ 11.93
============ ============ ============ ============ ============ ============
TOTAL RETURN (1) 6.24% 18.12% 0.29% 5.67% 17.22% 0.21%
============ ============ ============ ============ ============ ============
RATIOS AND SUPPLEMENTAL
DATA
Net Assets, End of Period
(000's) $ 5,644 $ 8,980 $ 3,907 $ 9,931 $ 8,617 $ 3,421
Ratio of Expenses to
Average Net Assets 1.25%** 1.25% 1.25%** 2.00%** 2.00% 2.00%**
Ratio of Net Investment
Income to Average Net
Assets 7.41%** 8.83% 6.85%** 6.70%** 7.99% 6.08%**
Portfolio Turnover Rate 37% 104% 10% 37% 104% 10%
- -------------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary
Expense Limitation
During the Period
Per Share Benefit to
Net Investment Income $ 0.06 $ 0.10 $ 0.04 $ 0.05 $ 0.10 $ 0.04
Ratios Before Expense
Limitation:
Expenses to Average Net
Assets 1.90%** 2.04% 3.51%** 2.65%** 2.82% 4.25%**
Net Investment Income
to Average Net Assets 6.76%** 8.04% 4.59%** 5.98%** 7.17% 3.83%**
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS C
----------------------------------------------
SIX MONTHS MAY 1, 1996*
ENDED YEAR ENDED TO
SELECTED PER SHARE DATA DECEMBER 31, JUNE 30, JUNE 30,
AND RATIOS 1997 1997 1996
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 12.86 $ 11.93 $ 12.00
------------ ------------ ------------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income 0.33 0.99 0.12
Net Realized and
Unrealized Gain
(Loss) 0.39 0.98 (0.09)
------------ ------------ ------------
Total From Investment
Operations 0.72 1.97 0.03
------------ ------------ ------------
DISTRIBUTIONS
Net Investment Income (0.47) (0.99) (0.10)
Net Realized Gain (0.55) (0.05) --
------------ ------------ ------------
Total Distributions (1.02) (1.04) (0.10)
------------ ------------ ------------
NET ASSET VALUE, END OF
PERIOD $ 12.56 $ 12.86 $ 11.93
============ ============ ============
TOTAL RETURN (1) 5.66% 17.21% 0.21%
============ ============ ============
RATIOS AND SUPPLEMENTAL
DATA
Net Assets, End of Period
(000's) $ 2,864 $ 4,970 $ 3,316
Ratio of Expenses to
Average Net Assets 2.00%** 2.00% 2.00%**
Ratio of Net Investment
Income to Average Net
Assets 6.52%** 8.03% 6.07%**
Portfolio Turnover Rate 37% 104% 10%
- ----------------------------------------------------------------------------
Effect of Voluntary
Expense Limitation
During the Period
Per Share Benefit to
Net Investment Income $ 0.03 $ 0.11 $ 0.04
Ratios Before Expense
Limitation:
Expenses to Average Net
Assets 2.65%** 2.88% 4.25%**
Net Investment Income
to Average Net Assets 5.89%** 7.15% 3.82%**
- ----------------------------------------------------------------------------
</TABLE>
* Commencement of operations
** Annualized
(1) Total return is calculated exclusive of sales charges or deferred
sales charges. Total returns for periods of less than one year are not
annualized.
121
The accompanying notes are an integral part of the financial statements.
<PAGE> 472
MORGAN STANLEY FUNDS
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
INTERNATIONAL MAGNUM FUND
(UNAUDITED)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
---------------------------- ---------------------------- ----------------------------
SIX MONTHS JULY 1, SIX MONTHS JULY 1, SIX MONTHS JULY 1,
ENDED 1996* TO ENDED 1996* TO ENDED 1996* TO
SELECTED PER SHARE DATA DECEMBER 31, JUNE 30, DECEMBER 31, JUNE 30, DECEMBER 31, JUNE 30,
AND RATIOS 1997 1997 1997 1997 1997 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 13.91 $ 12.00 $ 13.84 $ 12.00 $ 13.83 $ 12.00
------------ ------------ ------------ ------------ ------------ ------------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income
(Loss) (0.08) 0.17 (0.12) 0.10 (0.03) 0.06
Net Realized and
Unrealized Gain
(Loss) (0.97) 1.88 (0.97) 1.85 (1.05) 1.88
------------ ------------ ------------ ------------ ------------ ------------
Total From Investment
Operations (1.05) 2.05 (1.09) 1.95 (1.08) 1.94
------------ ------------ ------------ ------------ ------------ ------------
DISTRIBUTIONS
Net Investment Income (0.18) (0.13) (0.13) (0.10) (0.08) (0.10)
Net Realized Gain (0.01) (0.01) (0.01) (0.01) (0.01) (0.01)
------------ ------------ ------------ ------------ ------------ ------------
Total Distributions (0.19) (0.14) (0.14) (0.11) (0.09) (0.11)
------------ ------------ ------------ ------------ ------------ ------------
NET ASSET VALUE, END OF
PERIOD $ 12.67 $ 13.91 $ 12.61 $ 13.84 $ 12.66 $ 13.83
============ ============ ============ ============ ============ ============
TOTAL RETURN (1) (7.52)% 17.30% (7.87)% 16.40% (7.88)% 16.27%
============ ============ ============ ============ ============ ============
RATIOS AND SUPPLEMENTAL
DATA
Net Assets, End of Period
(000's) $ 36,918 $ 21,961 $ 33,824 $ 18,215 $ 9,147 $ 9,156
Ratio of Expenses to
Average Net Assets 1.65%** 1.65% 2.40%** 2.40% 2.40%** 2.40%
Ratio of Net Investment
Income (Loss) to
Average Net Assets 0.43%** 1.39% (0.33)%** 0.54% (0.31)%** 0.29%
Portfolio Turnover Rate 22% 22% 22% 22% 22% 22%
Average Commission Rate $ 0.0211 $ 0.0318 $ 0.0211 $ 0.0318 $ 0.0211 $ 0.0318
As a Percentage of Trade
Amount 0.23% 0.33% 0.23% 0.33% 0.23% 0.33%
- -------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary
Expense Limitation
During the Period
Per Share Benefit to
Net Investment Income $ 0.04 $ 0.11 $ 0.07 $ 0.17 $ 0.02 $ 0.21
Ratios Before Expense
Limitation:
Expenses to Average Net
Assets 1.84%** 2.50% 2.59%** 3.34% 2.59%** 3.45%
Net Investment Income
(Loss) to Average Net
Assets 0.23%** 0.52% (0.53)%** (0.42)% (0.48)%** (0.77)%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Commencement of operations
** Annualized
(1) Total return is calculated exclusive of sales charges or deferred
sales charges. Total returns for periods of less than one year are not
annualized.
122
The accompanying notes are an integral part of the financial statements.
<PAGE> 473
MORGAN STANLEY FUNDS
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
GOVERNMENT OBLIGATIONS MONEY MARKET FUND
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
SELECTED PER SHARE DATA DECEMBER 31, JUNE 30, JUNE 30, JUNE 30, JUNE 30, JUNE 30,
AND RATIOS 1997 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------------ ------------ ------------ ------------ ------------ ------------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income 0.0235 0.0443 0.0464 0.0448 0.0243 0.0246
Net Realized and
Unrealized Gain
(Loss) -- -- (0.0011) -- 0.0011 0.0002
------------ ------------ ------------ ------------ ------------ ------------
Total From Investment
Operations 0.0235 0.0443 0.0453 0.0448 0.0254 0.0248
------------ ------------ ------------ ------------ ------------ ------------
DISTRIBUTIONS
Net Investment Income (0.0235) (0.0443) (0.0464) (0.0448) (0.0243) (0.0246)
Net Realized Gain -- -- (0.0001) -- (0.0011) (0.0002)
------------ ------------ ------------ ------------ ------------ ------------
Total Distributions (0.0235) (0.0443) (0.0465) (0.0448) (0.0254) (0.0248)
------------ ------------ ------------ ------------ ------------ ------------
NET ASSET VALUE, END OF
PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
============ ============ ============ ============ ============ ============
TOTAL RETURN (1) 2.37% 4.53% 4.72% 4.58% 2.45% 2.51%
============ ============ ============ ============ ============ ============
RATIOS AND SUPPLEMENTAL
DATA
Net Assets, End of Period
(000's) $ 52,997 $ 94,768 $ 145,978 $ 67,505 $ 102,551 $ 101,736
Ratio of Expenses to
Average Net Assets 0.95%* 0.95% 0.95% 0.95% 0.95% 0.95%
Ratio of Net Investment
Income to Average Net
Assets 4.65%* 4.43% 4.68% 4.61% 2.40% 2.50%
- -------------------------------------------------------------------------------------------------------------------------
Ratios Before Expense
Limitation:
Expenses to Average Net
Assets 1.24%* 1.27% 1.24% 1.12% 1.22% 1.19%
Net Investment Income
to Average Net Assets 4.37%* 4.10% 4.39% 4.44% 2.13% 2.26%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized
(1) Total returns for periods of less than one year are not annualized.
123
The accompanying notes are an integral part of the financial statements.
<PAGE> 474
MORGAN STANLEY FUNDS
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
MONEY MARKET FUND
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
SELECTED PER SHARE DATA DECEMBER 31, JUNE 30, JUNE 30, JUNE 30, JUNE 30, JUNE 30,
AND RATIOS 1997 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------------ ------------ ------------ ------------ ------------ ------------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income 0.0239 0.0450 0.0463 0.0446 0.0246 0.0243
Net Realized and
Unrealized Gain
(Loss) -- -- (0.0006) 0.0001 -- 0.0001
------------ ------------ ------------ ------------ ------------ ------------
Total From Investment
Operations 0.0239 0.0450 0.0457 0.0447 0.0246 0.0244
------------ ------------ ------------ ------------ ------------ ------------
DISTRIBUTIONS
Net Investment Income (0.0239) (0.0450) (0.0463) (0.0446) (0.0246) (0.0243)
Net Realized Gain -- -- -- (0.0001) -- (0.0001)
------------ ------------ ------------ ------------ ------------ ------------
Total Distributions (0.0239) (0.0450) (0.0463) (0.0447) (0.0246) (0.0244)
------------ ------------ ------------ ------------ ------------ ------------
NET ASSET VALUE, END OF
PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
============ ============ ============ ============ ============ ============
TOTAL RETURN (1) 2.42% 4.60% 4.72% 4.55% 2.49% 2.47%
============ ============ ============ ============ ============ ============
RATIOS AND SUPPLEMENTAL
DATA
Net Assets, End of Period
(000's) $ 362,813 $ 138,422 $ 170,973 $ 171,515 $ 176,599 $ 156,310
Ratio of Expenses to
Average Net Assets 0.98%* 0.98% 0.98% 0.98% 0.98% 0.98%
Ratio of Net Investment
Income to Average Net
Assets 4.78%* 4.50% 4.65% 4.45% 2.45% 2.44%
- -------------------------------------------------------------------------------------------------------------------------
Ratios Before Expense
Limitation:
Expenses to Average Net
Assets 1.12%* 1.27% 1.22% 1.18% 1.19% 1.20%
Net Investment Income
to Average Net Assets 4.65%* 4.20% 4.41% 4.25% 2.24% 2.22%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized
(1) Total returns for periods of less than one year are not annualized.
124
The accompanying notes are an integral part of the financial statements.
<PAGE> 475
MORGAN STANLEY FUNDS
NOTES TO FINANCIAL STATEMENTS
DECEMBER, 31 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
Morgan Stanley Fund, Inc. (the "Fund") was incorporated under the laws of
Maryland on August 14, 1992 and commenced operations on January 4, 1993. The
Fund is registered under the Investment Company Act of 1940, as amended, as an
open-end management investment company which offers redeemable shares of
diversified and non-diversified investment portfolios.
As of December 31, 1997, the Fund had fifteen separate, active investment
portfolios: Morgan Stanley Global Equity Allocation Fund, Morgan Stanley Global
Equity Fund, Morgan Stanley Global Fixed Income Fund, Morgan Stanley Asian
Growth Fund, Morgan Stanley American Value Fund, Morgan Stanley Value Fund,
Morgan Stanley Worldwide High Income Fund, Morgan Stanley Latin American Fund,
Morgan Stanley Emerging Markets Fund, Morgan Stanley Aggressive Equity Fund,
Morgan Stanley U.S. Real Estate Fund, Morgan Stanley High Yield Fund, Morgan
Stanley International Magnum Fund, Morgan Stanley Government Obligations Money
Market Fund and Morgan Stanley Money Market Fund (referred to herein
respectively as "Global Equity Allocation Fund," "Global Equity Fund", "Global
Fixed Income Fund," "Asian Growth Fund," "American Value Fund," " Value Fund,"
"Worldwide High Income Fund," "Latin American Fund," "Emerging Markets Fund,"
"Aggressive Equity Fund," "U.S. Real Estate Fund," "High Yield Fund,"
"International Magnum Fund," "Government Obligations Money Market Fund" and
"Money Market Fund," individually a "Portfolio" and collectively as the
"Portfolios").
The Fund currently offers three classes of shares, Class A, Class B and Class C
Shares (with the exception of the Government Obligations Money Market and Money
Market Funds). Class A shares are sold with a front-end sales charge of up to
5.75% (4.75% for shares sold in the Global Fixed Income Fund, Worldwide High
Income Fund and the High Yield Fund). For certain purchases of Class A shares
the front-end sales charge may be waived and a contingent deferred sales charge
of 1.00% imposed in the event of certain redemptions within one year of the
purchase. Class B shares are sold with a contingent deferred sales charge on
redemptions made within 5 years of purchase which declines annually from 5% for
redemptions made in year one, down to 1.50% in year five. The contingent
deferred sales charge is based on the lesser of the current market value of the
shares redeemed or the total cost of such shares. Class B shares will
automatically convert to Class A shares after the seventh year following
purchase. Class C shares are sold with a contingent deferred sales charge of 1%
for shares that are redeemed within one year of purchase, based on the lesser of
the current market value of the shares redeemed or the total cost of such
shares. All three classes of shares have identical voting, dividend, liquidation
and other rights. The Fund began offering the current Class B shares on August
1, 1995. Class B shares held prior to May 1, 1995 were renamed Class C shares.
The Value Fund commenced operations on July 7, 1997 and the Global Equity Fund
commenced operations on October 29, 1997.
The Board of Trustees has approved the acquisition of the assets and liabilities
of the Morgan Stanley U.S. Real Estate Fund, Morgan Stanley Global Fixed Income
Fund, and the VKAC Global Equity Fund by the VKAC Real Estate Securities Fund,
VKAC Global Government Securities Fund, and the Morgan Stanley Global Equity
Allocation Fund, respectively. These transactions, subject to shareholder
approval, are expected to be completed by June, 1998.
A. ACCOUNTING POLICIES: The following significant accounting policies are in
conformity with generally accepted accounting principles for investment
companies. Such policies are consistently followed by the Fund in the
preparation of the financial statements. Generally accepted accounting
principles require management to make estimates and assumptions that affect the
reported amounts and disclosures in the financial statements. Actual results may
differ from those estimates.
1. SECURITY VALUATION: Equity securities listed on a U.S. exchange and equity
securities traded on NASDAQ are valued at the latest quoted sales price on the
valuation date. Securities listed on a foreign exchange are valued at their
closing price. Unlisted securities and listed securities not traded on the
valuation date for which market quotations are readily available are valued at
the average of the mean between the current bid and asked prices obtained from
reputable brokers. Bonds and other fixed income securities may be valued
according to the broadest and most representative market. In addition, bonds and
other fixed income securities may be valued on the basis of prices provided by a
pricing service which are based primarily on institutional size trading in
similar groups of securities. Debt securities purchased with remaining
maturities of 60 days or less are valued at amortized cost, if it approximates
market value. Securities owned by the Government Obligations Money Market and
Money Market Funds are stated at amortized cost, which approximates market
value. All other securities and assets for which market values are not readily
available are valued at fair value as determined in good faith using methods
determined by the Board of Directors, although the actual calculations may be
done by others.
2. TAXES: It is each portfolio's intention to qualify as a regulated investment
company and distribute all of its taxable income. Accordingly, no provision for
Federal income taxes is required in the financial statements. A portfolio may be
subject to taxes imposed by countries in which it invests. Such taxes are
generally based on income and/or capital gains earned or repatriated. Taxes are
accrued and applied to net
125
<PAGE> 476
MORGAN STANLEY FUNDS
NOTES TO FINANCIAL STATEMENTS (CONT.)
DECEMBER, 31 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
investment income, net realized capital gains and net unrealized appreciation,
as applicable, as the income and/or capital gains are earned. Taxes may also be
based on the movement of foreign currency and are accrued based on the value of
investments denominated in such currency.
At June 30, 1997, the following Portfolios had available capital loss
carryforwards to offset future net capital gains, to the extent provided by U.S.
Federal income tax regulations, through the indicated expiration dates:
<TABLE>
<CAPTION>
EXPIRATION DATE
JUNE 30, 2004
PORTFOLIO (000)
- --------- -----------------------
<S> <C>
Government Obligations Money
Market............................. $ 90
Money Market......................... $ 98
</TABLE>
To the extent that capital loss carryforwards are used to offset any future net
capital gains realized during the carryforward period as provided by U.S.
Federal income tax regulations, no capital gains tax liability will be incurred
by a Portfolio for gains realized and not distributed. To the extent that
capital gains are so offset, such gains will not be distributed to shareholders.
Net capital and net currency losses incurred after October 31 and within the
taxable year are deemed to arise on the first business day of the Portfolio's
next taxable year. For the period from November 1, 1996 to June 30, 1997 certain
Portfolios incurred and elected to defer until July 1, 1997, for U.S. Federal
income tax purposes, net currency and capital losses of approximately:
<TABLE>
<CAPTION>
CURRENCY
AND CAPITAL
LOSSES
PORTFOLIO (000)
- --------- -------------------
<S> <C>
Global Fixed Income.................. $ 83
Asian Growth......................... 8,841
Latin American....................... 11
Emerging Markets..................... 223
</TABLE>
3. REPURCHASE AGREEMENTS: In connection with transactions in repurchase
agreements, a bank as custodian for the Fund takes possession of the underlying
securities, with a market value at least equal to the amount of the repurchase
transaction, including principal and accrued interest. To the extent that any
repurchase transaction exceeds one business day, the value of the collateral is
marked-to-market on a daily basis to determine the adequacy of the collateral.
In the event of default on the obligation to repurchase, the Fund has the right
to liquidate the collateral and apply the proceeds in satisfaction of the
obligation. In the event of default or bankruptcy by the counterparty to the
agreement, realization and/or retention of the collateral or proceeds may be
subject to legal proceedings.
4. FOREIGN CURRENCY TRANSLATION AND FOREIGN INVESTMENTS: The books and records
of the Fund are maintained in U.S. dollars. Foreign currency amounts are
translated into U.S. dollars at the mean of the bid and asked prices of such
currencies against U.S. dollars last quoted by a major bank as follows:
- investments, other assets and liabilities at the prevailing rates of
exchange on the valuation date;
- investment transactions and investment income at the prevailing rates of
exchange on the dates of such transactions.
Although the net assets of the Fund are presented at the foreign exchange rates
and market values at the close of the period, the Fund does not isolate that
portion of the results of operations arising as a result of changes in the
foreign exchange rates from the fluctuations arising from changes in the market
prices of the securities held at period end. Similarly, the Fund does not
isolate the effect of changes in foreign exchange rates from the fluctuations
arising from changes in the market prices of securities sold during the period.
Accordingly, realized and unrealized foreign currency gains (losses) are
included in the reported net realized and unrealized gains (losses) on
investment transactions and balances. However, pursuant to U.S. Federal income
tax regulations, the foreign currency portion of gains and losses realized on
sales and maturities of foreign denominated debt securities is treated as
ordinary income for U.S. Federal income tax purposes.
Net realized gains (losses) on foreign currency transactions represent net
foreign exchange gains (losses) from forward foreign currency exchange
contracts, disposition of foreign currencies, currency gains or losses realized
between the trade and settlement dates on securities transactions, and the
difference between the amount of investment income and foreign withholding taxes
recorded on the Fund's books and the U.S. dollar equivalent amounts actually
received or paid. Net unrealized currency gains (losses) from valuing foreign
currency denominated assets and liabilities at period end exchange rates are
reflected as a component of unrealized appreciation (depreciation) on
investments and foreign currency translations in the Statement of Assets and
Liabilities. The change in net unrealized currency gains (losses) for the period
is reflected on the Statement of Operations.
The net assets of certain Portfolios include issuers located in emerging
markets. There will be certain considerations and risks of these investments not
typically associated with investments in the United States. Changes in currency
exchange rates will affect the value of and investment income from such
securities. The smaller size of the markets themselves, lesser liquidity and
greater volatility contribute to risks in valuation as compared with the U.S.
securities markets. Also there is often substantially less publicly available
information about these issuers. Emerging markets may be subject to a greater
degree of governmental involvement in the economy and greater economic and
126
<PAGE> 477
MORGAN STANLEY FUNDS
NOTES TO FINANCIAL STATEMENTS (CONT.)
DECEMBER, 31 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
political uncertainty. Accordingly the price which the Fund realizes upon the
sale of securities in such markets may not be equal to its value as presented in
the financial statements.
Prior governmental approval for foreign investments may be required under
certain circumstances in some countries, and the extent of foreign investment in
domestic companies may be subject to limitations in other countries. Foreign
ownership limitations also may be imposed by the charters of individual
companies to prevent, among other concerns, violation of foreign investment
limitations. As a result, an additional class of shares (identified as "Foreign"
in the Portfolio of Investments) may be created and offered for investment. The
"local" and "foreign" shares' market values may vary.
5. FOREIGN CURRENCY EXCHANGE CONTRACTS: Certain Portfolios may enter into
foreign currency exchange contracts to attempt to protect securities and related
receivables and payables against changes in future foreign currency exchange
rates. A currency exchange contract is an agreement between two parties to buy
or sell currency at a set price on a future date. The market value of the
contract will fluctuate with changes in currency exchange rates. The contract is
marked-to-market daily and the change in market value is recorded by the
Portfolio as unrealized gain or loss. The Portfolio records realized gains or
losses when the contract is closed, equal to the difference between the value of
the contract at the time it was opened and the value of the contract at the time
it was closed. Risks may arise upon entering into these contracts from the
potential inability of counterparties to meet the terms of their contracts but
is generally limited to the amount of unrealized gain on the contracts, if any,
at the date of default. Risks may also arise from the unanticipated movements in
the value of a foreign currency relative to the U.S. dollar.
6. SHORT SALES: Certain Portfolios may sell securities short. A short sale is a
transaction in which the Portfolios sell securities it may or may not own, but
has borrowed, in anticipation of a decline in the market price of the
securities. The Portfolios are obligated to purchase securities at the market
price to replace the borrowed securities at the time of replacement. The
Portfolios may have to pay a premium to borrow the securities as well as pay
dividends or interests payable on the securities until they are replaced. The
Portfolios' obligation to replace the securities borrowed in connection with a
short sale will generally be secured by collateral deposited with the broker
that consists of cash, U.S. government securities or other liquid, high grade
debt obligations. In addition, the Portfolios will place in a segregated account
with its Custodian an amount of cash, U.S. government securities or other liquid
high grade debt obligations equal to the difference, if any, between (1) the
market value of the securities sold at the time they were sold short and (2) any
cash, U.S. government securities or other liquid high grade debt obligations
deposited as collateral with the broker in connection with the short sale (not
including the proceeds of the short sale). Short sales by the Portfolios involve
certain risks and special considerations. Possible losses from short sales
differ from losses that could be incurred from the purchase of a security,
because losses from short sales may be unlimited, whereas losses from purchases
cannot exceed the total amount invested.
7. PURCHASED OPTIONS: Certain Portfolios may purchase call or put options on
their portfolio securities. A Portfolio may purchase call options to protect
against an increase in the price of a security it anticipates purchasing. A
Portfolio may purchase put options on securities which it holds to protect
against a decline in the value of the security. Risks may arise from an
imperfect correlation between the change in market value of the securities held
by the Portfolio and the prices of options relating to the securities purchased
or sold by the Portfolio and from the possible lack of a liquid secondary market
for an option. The maximum exposure to loss for any purchased option is limited
to the premium initially paid for the option.
8. SECURITY LENDING: Certain Portfolios may lend investment securities to
qualified institutional investors who borrow securities in order to complete
certain transactions. By lending its investment securities, a Portfolio attempts
to increase its net investment income through the receipt of interest on the
loan. Any gain or loss in the market price of the securities loaned that might
occur and any interest earned or dividends declared during the term of the loan
would accrue to the account of the Portfolio. Risks of delay in recovery of the
securities or even loss of rights in the collateral may occur should the
borrower of the securities fail financially. Risks may also arise to the extent
that the value of the collateral decreases below the value of the securities
loaned.
Portfolios that lend securities receive cash, securities issued or guaranteed by
the U.S. Government or letters of credit as collateral in an amount equal to or
exceeding 100% of the current market value of the loaned securities. Any cash
received as collateral is invested in interest bearing repurchase agreements
with approved counterparties. A portion of the interest received on the
repurchase agreements is retained by the Fund and the remainder is rebated to
the borrower of the securities. The net amount of interest earned and interest
rebated is included in the Statement of Operations as interest income. The value
of loaned securities and related collateral outstanding at December 31, 1997 is
as follows:
<TABLE>
<CAPTION>
VALUE OF LOANED VALUE OF
SECURITIES COLLATERAL
PORTFOLIO (000) (000)
- ------------------------------------- ----------------------- ----------
<S> <C> <C>
Global Equity Allocation............. $ 15,878 $ 16,567
</TABLE>
127
<PAGE> 478
MORGAN STANLEY FUNDS
NOTES TO FINANCIAL STATEMENTS (CONT.)
DECEMBER, 31 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
At December 31, 1997, the Fund had invested the cash collateral in a repurchase
agreement with Goldman Sachs. Such repurchase agreement was collateralized by
U.S. Treasury obligations.
Morgan Stanley Trust Company, an affiliate of the Investment Sub-Adviser,
administers the security lending program and for its services the Fund incurred
fees in the amount of $14,808 for the six months ended December 31, 1997.
9. FORWARD COMMITMENTS AND WHEN-ISSUED/DELAYED DELIVERY SECURITIES: Each
Portfolio may make forward commitments to purchase or sell securities. Payment
and delivery for securities which have been purchased or sold on a forward
commitment basis can take place a month or more (not exceeding 120 days) after
the date of the transaction. Additionally each Portfolio may purchase securities
on a when-issued or delayed delivery basis. Securities purchased on a
when-issued or delayed delivery basis are purchased for delivery beyond the
normal settlement date at a stated price and no income accrues to the Portfolio
on such securities prior to delivery. When the Portfolio enters into a purchase
transaction on a when-issued or delayed basis, it establishes a segregated
account in which it maintains liquid assets in an amount at least equal in value
to the Portfolio's commitments to purchase such securities. Purchasing
securities on a forward commitment or when-issued or delayed delivery basis may
involve a risk that the market price at the time of delivery may be lower than
the agreed upon purchase price, in which case there could be an unrealized loss
at the time of delivery.
10. STRUCTURED SECURITIES: The Worldwide High Income Fund may invest in
interests in entities organized and operated solely for the purpose of
restructuring the investment characteristics of sovereign debt obligations. This
type of restructuring involves the deposit with or purchase by an entity of
specified instruments and the issuance by that entity of one or more classes of
securities ("Structured Securities") backed by, or representing interests in,
the underlying instruments. Structured Securities generally will expose the
Portfolio to credit risks equivalent to that of the underlying instruments.
Structured Securities are typically sold in private placement transactions with
no active trading market. Investments in Structured Securities may be more
volatile than their underlying instruments, however, any loss is limited to the
amount of the original investment.
11. ORGANIZATIONAL COSTS: The organizational costs of the Portfolios are being
amortized on a straight line basis over a period of five years beginning with
each respective Portfolio's commencement of operations. Van Kampen American
Capital, Inc. has agreed that in the event any of its initial shares in a
Portfolio which comprised the Fund at its inception are redeemed, the proceeds
on redemption will be reduced by the pro-rata portion of any unamortized
organizational costs in the same proportion as the number of shares redeemed
bears to the initial shares held at the same time of redemption.
12. FUTURES: Certain Portfolios may purchase and sell futures contracts. Futures
contracts provide for the sale by one party and purchase by another party of a
specified amount of a specified security, instrument or basket of instruments.
Futures contracts (secured by cash or government securities deposited with
brokers or custodians as "initial margin") are valued based upon their quoted
daily settlement prices; changes in initial settlement value (represented by
cash paid to or received from brokers as "variation margin") are accounted for
as unrealized appreciation (depreciation). When futures contracts are closed,
the difference between the opening value at the date of purchase and the value
at closing is recorded as realized gains or losses in the Statement of
Operations.
Certain Portfolios may use futures contracts in order to hedge against
unfavorable changes in the value of securities or to remain fully invested and
to reduce transaction costs. Futures contracts involve market risk in excess of
the amounts recognized in the Statement of Net Assets. Risks arise from the
possible movements in security values underlying these instruments. The change
in value of futures contracts primarily corresponds with the value of their
underlying instruments, which may not correlate with the change in value of the
hedged investments. In addition, there is the risk that a Portfolio may not be
able to enter into a closing transaction because of an illiquid secondary
market.
13. SWAP AGREEMENTS: Certain Portfolios may enter into swap agreements to
exchange the return generated by one security, instrument or basket of
instruments for the return generated by another security, instrument or basket
of instruments. The following summarizes swaps which may be entered into by the
Portfolios:
Interest Rate Swaps: Interest rate swaps involve the exchange of commitments to
pay and receive interest based on a notional principal amount. Net periodic
interest payments to be received or paid are accrued daily and are recorded in
the Statement of Operations as an adjustment to interest income. Interest rate
swaps are marked-to-market daily based upon quotations from market makers and
the change, if any, is recorded as unrealized appreciation or depreciation in
the Statement of Operations.
Total Return Swaps: Total return swaps involve commitments to pay interest in
exchange for a market-linked return based on a notional amount. To the extent
the total return of the security or index underlying the transaction exceeds or
falls short of the offsetting interest obligation, the Portfolio will receive a
payment from or make a payment to the counterparty, respectively. Total return
swaps are marked-to-market daily based upon quotations from market makers and
the change, if any, is recorded as unrealized gains
128
<PAGE> 479
MORGAN STANLEY FUNDS
NOTES TO FINANCIAL STATEMENTS (CONT.)
DECEMBER, 31 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
or losses in the Statement of Operations. Periodic payments received or made at
the end of each measurement period, but prior to termination, are recorded as
realized gains or losses in the Statement of Operations.
Realized gains or losses on maturity or termination of interest rate and total
return swaps are presented in the Statement of Operations. Because there is no
organized market for these swap agreements, the value reported in the Statement
of Net Assets may differ from that which would be realized in the event the
Portfolio terminated its position in the agreement. Risks may arise upon
entering into these agreements from the potential inability of the
counterparties to meet the terms of the agreements and generally are limited to
the amount of net interest payments to be received and/or favorable movements in
the value of the underlying security, if any, at the date of default.
14. OTHER: Security transactions are accounted for on the date the securities
are purchased or sold. Realized gains and losses on the sale of investment
securities are determined on the specific identified cost basis. Dividend income
is recorded on the ex-dividend date (except for certain foreign dividends which
may be recorded as soon as the Portfolio is informed of such dividends), net of
applicable withholding taxes where recovery of such taxes is not reasonably
assured. Interest income is recognized on the accrual basis except where
collection is in doubt. Discounts and premiums on securities purchased are
amortized according to the effective yield method over their respective lives.
Most expenses of the Fund can be directly attributed to a particular Portfolio.
Expenses which cannot be directly attributed are apportioned among the
Portfolios based upon relative net assets. Income, expenses (other than class
specific expenses) and realized and unrealized gains or losses are allocated to
each class of shares based upon their relative net assets. Distributions from
the Portfolios are recorded on the ex-distribution date.
Certain Portfolios own shares of real estate investment trusts ("REITs") which
report information on the source of their distributions annually. A portion of
distributions received from REITs during the six months is estimated to be a
return of capital and is recorded as a reduction of the cost of those
securities.
The amount and the character of income and capital gain distributions to be paid
by the Fund are determined in accordance with Federal income tax regulations
which may differ from generally accepted accounting principles. These
differences are primarily due to differing book and tax treatment for foreign
currency transactions, net operating losses, foreign taxes on net realized
gains, deductibility of interest expense on short sales and gains on certain
securities of corporations designated as "passive foreign investment companies."
Permanent book and tax basis differences relating to shareholder distributions
may result in reclassification among undistributed net investment income (loss),
accumulated net realized gain (loss) and paid in capital.
Permanent book and tax basis differences, if any, are not included in ending
undistributed (distributions in excess of) net investment income for the purpose
of presenting net investment income (loss) per share in the Financial
Highlights.
B. ADVISER: Van Kampen American Capital Investment Advisory Corp., (the
"Adviser") a wholly owned subsidiary of Van Kampen American Capital, Inc. (an
indirect wholly owned subsidiary of Morgan Stanley, Dean Witter, Discover &
Co.), Morgan Stanley Asset Management, Inc. ("MSAM" or a "Sub-Adviser") a wholly
owned subsidiary of Morgan Stanley, Dean Witter, Discover & Co., and Miller
Anderson & Sherred, LLP (a "Sub-Adviser") a wholly owned subsidiary of Morgan
Stanley, Dean Witter, Discover & Co. provide the Fund with investment advisory
services at a fee paid monthly and calculated at the annual rates based on
average daily net assets as indicated below. The Adviser has agreed to reduce
advisory fees payable to it and to reimburse the Portfolios, if necessary, if
the annual operating expenses, as defined, expressed as a percentage of average
daily net assets, exceed the maximum ratios indicated as follows:
<TABLE>
<CAPTION>
CLASS B
CLASS A AND CLASS C
MAX. OPERATING MAX. OPERATING
PORTFOLIO ADVISORY FEE EXPENSE RATIO EXPENSE RATIO
- --------- -------------------- ---------------------- ----------------------
<S> <C> <C> <C>
Global Equity Allocation............. 1.00% 1.70% 2.45%
Global Equity........................ 1.00% 1.80% 2.55%
Global Fixed Income.................. 0.75% 1.45% 2.20%
Asian Growth......................... 1.00% 1.90% 2.65%
American Value....................... 0.85% 1.50% 2.25%
Value................................ 0.80% 1.45% 2.20%
Worldwide High Income................ 0.75% 1.55% 2.30%
Latin American....................... 1.25% 2.10% 2.85%
Emerging Markets..................... 1.25% 2.15% 2.90%
Aggressive Equity.................... 0.90% 1.50% 2.25%
U.S. Real Estate..................... 1.00% 1.55% 2.30%
High Yield........................... 0.75% 1.25% 2.00%
International Magnum................. 0.80% 1.65% 2.40%
Government Obligations Money Market.. 0.45% 0.95% N/A
Money Market......................... 0.45% 0.98% N/A
</TABLE>
C. ADMINISTRATOR: Van Kampen American Capital Investment Advisory Corp. (the
"Administrator") also provides the Fund with administrative services pursuant to
an administrative agreement for a monthly fee which on an annual basis equals
0.25% of the average daily net assets of each portfolio, plus reimbursement of
out-of-pocket expenses. Under an agreement between the Adviser and The
129
<PAGE> 480
MORGAN STANLEY FUNDS
NOTES TO FINANCIAL STATEMENTS (CONT.)
DECEMBER, 31 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
Chase Manhattan Bank ("Chase"), through its affiliate Chase Global Funds
Services Company ("CGFSC"), Chase provides certain administrative services to
the Fund. Chase is compensated for such services by the Adviser from the fee it
receives from the Fund. Transfer agency services are provided to the Fund by
ACCESS Investor Services, Inc., an affiliate of the Adviser.
D. DISTRIBUTOR: Van Kampen American Capital Distributors, Inc. ("the
Distributor") a wholly owned subsidiary of Morgan Stanley, Dean Witter, Discover
& Co., serves as the Distributor of the Fund's shares. The Distributor is
entitled to receive from the Portfolios a distribution fee, which is accrued
daily and paid quarterly, of an amount of 0.25% of the Class A shares and up to
1.00%, on an annualized basis, of the average daily net assets attributable to
the Class B and Class C shares of each Portfolio. The Government Obligations
Money Market and Money Market Funds pay the Distributor a fee which is accrued
daily and paid monthly, up to 0.50%, on an annualized basis, of the average
daily net assets of those Portfolios.
The Distributor may receive a front end sales charge for purchases of Class A
shares. In addition, the Distributor may receive a contingent deferred sales
charge for certain purchases; for Class A shares of each Portfolio redeemed less
than one year following such purchases and for Class B and Class C shares of
each Portfolio redeemed within one to five years following such purchase. For
the six months ended December 31, 1997, the Distributor has advised the Fund
that it earned initial sales charges of $1,847,924 for Class A shares and
deferred sales charges of $27,563, $1,068,171 and $144,849 for Class A shares,
Class B shares and Class C shares, respectively.
E. CUSTODIAN: Morgan Stanley Trust Company ("MSTC"), a wholly owned subsidiary
of Morgan Stanley, Dean Witter, Discover & Co., acts as custodian for the Fund's
assets held outside the United States in accordance with a custodian agreement.
Custodian fees are computed and payable monthly based on assets held, investment
purchase and sales activity, an account maintenance fee, plus reimbursement for
certain out-of-pocket expenses.
For the six months ended December 31, 1997, the following Portfolios incurred
custody fees and had amounts payable to MSTC at December 31, 1997:
<TABLE>
<CAPTION>
MSTC CUSTODY CUSTODY FEES
FEES INCURRED PAYABLE TO MSTC
PORTFOLIO (000) (000)
- --------- -------------------- -----------------------
<S> <C> <C>
Global Equity Allocation............. $ 108 $ 94
Global Equity........................ 25 25
Global Fixed Income.................. 6 7
Asian Growth......................... 193 148
Worldwide High Income................ 3 35
Latin American....................... 134 93
Emerging Markets..................... 417 225
International Magnum................. 68 47
</TABLE>
In addition, a Portfolio may earn interest income or incur interest expense
relating to cash balances with MSTC.
F. PURCHASES AND SALES: For the six months ended December 31, 1997, purchases
and sales of investment securities other than long-term U.S. Government
securities and short-term investments were:
<TABLE>
<CAPTION>
PURCHASES SALES
PORTFOLIO (000) (000)
- --------- ----------------- --------
<S> <C> <C>
Global Equity Allocation............. $ 90,871 $ 97,476
Global Equity........................ 551,567 --
Global Fixed Income.................. 3,328 4,157
Asian Growth......................... 159,642 225,652
American Value....................... 305,357 137,017
Value................................ 195,717 14,190
Worldwide High Income................ 182,554 136,599
Latin American....................... 183,655 176,716
Emerging Markets..................... 122,995 111,868
Aggressive Equity.................... 136,310 111,569
U.S. Real Estate..................... 28,029 17,304
High Yield........................... 7,313 9,325
International Magnum................. 41,691 12,815
</TABLE>
Purchases and sales of long term U.S. Government securities during the six
months ended December 31, 1997 occurred in the Global Fixed Income Fund and
totaled $242,900 and $573,000, respectively.
G. OTHER: At December 31, 1997, the net assets of certain Portfolios were
substantially comprised of foreign denominated securities and currency. Changes
in currency exchange rates will affect the U.S. dollar value of and investment
income from such securities.
130
<PAGE> 481
MORGAN STANLEY FUNDS
NOTES TO FINANCIAL STATEMENTS (CONT.)
DECEMBER, 31 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
Foreign denominated assets and liabilities, including Portfolio securities and
foreign currency holdings, were translated at the following exchange rates as of
December 31, 1997:
<TABLE>
<CAPTION>
<S> <C> <C>
Argentine Peso................ 0.99981 = $1.00
Australian Dollar............. 1.53504 = $1.00
Austrian Schilling............ 12.63150 = $1.00
Belgian Franc................. 37.05100 = $1.00
Brazilian Real................ 1,785.00000 = $1.00
British Pound................. 0.60853 = $1.00
Canadian Dollar............... 1.42945 = $1.00
Colombian Peso................ 1,296.65000 = $1.00
Danish Krone.................. 6.85190 = $1.00
Egyptian Pound................ 3.40250 = $1.00
Finnish Markka................ 5.45095 = $1.00
French Franc.................. 6.01850 = $1.00
German Mark................... 1.79895 = $1.00
Hong Kong Dollar.............. 7.74900 = $1.00
Hungarian Forint.............. 203.95500 = $1.00
Indian Rupee.................. 39.20000 = $1.00
Indonesian Rupiah............. 5,500.00000 = $1.00
Irish Punt.................... 0.70284 = $1.00
Italian Lira.................. 1,769.00000 = $1.00
Japanese Yen.................. 130.47500 = $1.00
Malaysian Ringgit............. 3.88950 = $1.00
Mexican Peso.................. 8.06000 = $1.00
Netherlands Guilder........... 2.02765 = $1.00
New Zealand Dollar............ 1.72221 = $1.00
Pakistan Rupee................ 44.00600 = $1.00
Peruvian Sol.................. 2.72550 = $1.00
Philippine Peso............... 40.50000 = $1.00
Polish Zloty.................. 3.52500 = $1.00
Portuguese Escudo............. 184.05000 = $1.00
Singapore Dollar.............. 1.68150 = $1.00
South African Rand............ 4.86650 = $1.00
South Korean Won.............. 1,695.00000 = $1.00
Spanish Peseta................ 152.35000 = $1.00
Swedish Krona................. 7.93990 = $1.00
Swiss Franc................... 1.46050 = $1.00
Taiwan Dollar................. 32.62500 = $1.00
Thai Baht..................... 48.15000 = $1.00
Turkish Lira.................. 207,250.00000 = $1.00
Venezuelan Bolivar............ 504.30000 = $1.00
</TABLE>
During the six months ended December 31, 1997, the Asian Growth Fund, Latin
American Fund, Emerging Markets Fund, International Magnum Fund and Global
Equity Fund incurred approximately $135,604, $36,936, $32,109, $167 and
$112,298, respectively, as brokerage commissions with Morgan Stanley & Co.
Incorporated, an affiliated broker/ dealer.
At December 31, 1997 the Global Equity Allocation Fund and Emerging Markets Fund
owned shares of affiliated funds for which the Funds earned dividend income of
approximately $195,000 and $87,000, respectively. The Global Equity Allocation
Fund and Emerging Markets Fund incurred losses totaling $1,465,000 and $148,000,
respectively on sales of shares in affiliated funds during the period.
Certain legal expenses are paid to Skadden, Arps, Slate, Meagher & Flom, counsel
to the Fund, of which a trustee of the Fund is an affiliated person.
At December 31, 1997, cost and unrealized appreciation (depreciation) for U.S.
Federal income tax purposes of the investments of each Portfolio were:
<TABLE>
<CAPTION>
NET
APPRECIATION
COST APPREC. (DEPREC.) (DEPRECIATION)
PORTFOLIO (000) (000) (000) (000)
- ------------------------- -------- --------------- ---------- ---------------
<S> <C> <C> <C> <C>
Global Equity
Allocation............. $193,431 $ 25,896 $ (10,926) $ 14,970
Global Equity............ 604,967 22,898 (27,757) (4,859)
Global Fixed Income...... 9,310 213 (239) (26)
Asian Growth............. 158,645 3,651 (37,799) (34,148)
American Value........... 274,305 27,218 (12,118) 15,100
Value.................... 213,532 6,865 (8,407) (1,542)
Worldwide High Income.... 240,047 6,772 (7,271) (499)
Latin American........... 118,707 9,895 (8,189) 1,706
Emerging Markets......... 189,975 18,835 (49,482) (30,647)
Aggressive Equity........ 98,075 6,945 (1,306) 5,639
U.S. Real Estate......... 37,870 3,316 (185) 3,131
High Yield............... 17,668 1,002 (371) 631
International Magnum..... 82,016 4,242 (6,723) (2,481)
Government Obligations
Money Market........... 52,742 -- -- --
Money Market............. 362,669 -- -- --
</TABLE>
131
<PAGE> 482
FUNDS DISTRIBUTED BY VAN KAMPEN AMERICAN CAPITAL
- --------------------------------------------------------------------------------
EQUITY FUNDS
DOMESTIC
MS Aggressive Equity
VKAC Aggressive Growth
MS American Value
VKAC Comstock
VKAC Emerging Growth
VKAC Enterprise
VKAC Equity Income
VKAC Growth
VKAC Growth and Income
VKAC Harbor
VKAC Pace
VKAC Real Estate Securities
MS U.S. Real Estate
VKAC Utility
MS Value
INTERNATIONAL/GLOBAL
MS Asian Growth
MS Emerging Markets
MS Global Equity
VKAC Global Equity
MS Global Equity Allocation
VKAC Global Managed Assets
MS International Magnum
MS Latin American
FIXED-INCOME FUNDS
INCOME
VKAC Corporate Bond
MS Global Fixed Income
VKAC Global Government Securities
VKAC Government Securities
VKAC High Income Corporate Bond
MS High Yield
VKAC High Yield
VKAC Short-Term Global Income
VKAC Strategic Income
VKAC U.S. Government
VKAC U.S. Government Trust for Income
MS Worldwide High Income
TAX EXEMPT INCOME
VKAC California Insured Tax Free
VKAC Florida Insured Tax Free Income
VKAC High Yield Municipal
VKAC Insured Tax Free Income
VKAC Intermediate Term
Municipal Income
VKAC Municipal Income
VKAC New York Tax Free Income
VKAC Pennsylvania Tax Free Income
VKAC Tax Free High Income
CAPITAL PRESERVATION
VKAC Limited Maturity Government
VKAC Prime Rate Income Trust
VKAC Reserve
VKAC Senior Floating Rate
VKAC Tax Free Money
To find out more about any of these funds, ask
your financial adviser for a prospectus, which
contains more complete information, including
sales charges, risks, and expenses. Please read
it carefully before you invest or send money.
To view a current Van Kampen American Capital
or Morgan Stanley fund prospectus or to
receive additional fund information, choose
from one of the following:
- - visit our web site at WWW.VKAC.COM --
to view prospectuses, select INVESTORS'
PLACE, then DOWNLOAD A PROSPECTUS
- - call us at 1-800-341-2911 weekdays
from 7:00 a.m. to 7:00 p.m. Central time
(Telecommunications Device for the Deaf
users, call 1-800-421-2833)
- - e-mail us by visiting WWW.VKAC.COM
and selecting INVESTORS' PLACE
<PAGE> 483
MORGAN STANLEY FUNDS
- --------------------------------------------------------------------------------
DIRECTORS
Wayne W. Whalen
CHAIRMAN OF THE BOARD
Partner, Skadden, Arps, Slate, Meagher & Flom
(Illinois)
J. Miles Branagan
Private Investor; Formerly Chairman, Chief Executive Officer
and President, MDT Corporation
Richard M. DeMartini
President and Chief Operating Officer, Individual Asset
Management Group, a division of Morgan Stanley, Dean Witter,
Discover & Co.
Linda Hutton Heagy
Co-Managing Partner of Heldrick & Struggles
R. Craig Kennedy
President and Director, German Marshall Fund
of the United States
Jack E. Nelson
President, Nelson Investment Planning Services, Inc.
Don G. Powell
Chairman and Director,
Van Kampen American Capital, Inc.
Phillip B. Rooney
Vice Chairman and Director of The Servicemaster Company
Fernando Sisto
Professor Emeritus Stevens Institute of Technology;
Director, Dynalysis of Princeton
INVESTMENT ADVISER AND ADMINISTRATOR
Van Kampen American Capital Investment Advisory Corp.
One Parkview Plaza
Oakbrook Terrace, IL 60181
INVESTMENT SUB ADVISERS
Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas
New York, New York 10020
Miller Anderson & Sherrerd, LLP
One Tower Bridge
West Conshohocken, PA 19428
DISTRIBUTOR
Van Kampen American Capital Distributors, Inc.
One Parkview Plaza
Oakbrook Terrace, IL 60181
CUSTODIANS
Morgan Stanley Trust Company
One Pierrepont Plaza
Brooklyn, New York 11210
The Chase Manhattan Bank
3 Metrotech Center
Brooklyn, NY 11245
OFFICERS
Dennis J. McDonnell
PRESIDENT
Edward C. Wood III
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
Curtis W. Morell
VICE PRESIDENT AND CHIEF ACCOUNTING OFFICER
Ronald A. Nyberg
VICE PRESIDENT AND SECRETARY
Peter W. Hegel
VICE PRESIDENT
Alan T. Sachtleben
VICE PRESIDENT
Joseph P. Stadler
VICE PRESIDENT
Paul R. Wolkenberg
VICE PRESIDENT
John L. Sullivan
TREASURER
Tanya M. Loden
CONTROLLER
DIVIDEND DISBURSING AND TRANSFER AGENT
ACCESS Investor Services, Inc.
P.O. Box 418256
Kansas City, Missouri 64141
LEGAL COUNSEL
Skadden, Arps, Slate, Meahger & Flom (Illinois)
333 West Wacker Drive
Chicago, Illinois 60606
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
- --------------------------------------------------------------------------------
FOR INFORMATION ON HOW TO INVEST, PLEASE CONTACT YOUR ACCOUNT REPRESENTATIVE OR
THE FUND AT (800) 282-4404.
THIS REPORT IS AUTHORIZED FOR DISTRIBUTION ONLY WHEN PRECEDED OR ACCOMPANIED BY
PROSPECTUSES OF THE MORGAN STANLEY FUND, INC. WHICH DESCRIBES IN DETAIL EACH OF
THE INVESTMENT FUNDS' INVESTMENT POLICIES, FEES AND EXPENSES. PLEASE READ THE
PROSPECTUSES CAREFULLY BEFORE YOU INVEST OR SEND MONEY.
<PAGE> 484
APPENDIX E
SEMI-ANNUAL REPORT
FOR
VAN KAMPEN AMERICAN CAPITAL GLOBAL EQUITY FUND
DATED NOVEMBER 30, 1997 (UNAUDITED)
<PAGE> 485
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> 486
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> 487
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> 488
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> 489
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> 490
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> 491
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> 492
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> 493
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> 494
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> 495
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> 496
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> 497
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> 498
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> 499
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> 500
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> 501
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> 502
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> 503
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> 504
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> 505
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> 506
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> 507
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> 508
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> 509
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> 510
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> 511
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> 512
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> 513
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> 514
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> 515
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> 516
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> 517
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> 518
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> 519
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> 520
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> 521
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> 522
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> 523
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> 524
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> 525
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> 526
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> 527
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> 528
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> 529
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> 530
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> 531
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> 532
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> 533
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> 534
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> 535
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> 536
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> 537
APPENDIX F
MORGAN STANLEY GLOBAL EQUITY ALLOCATION FUND
VAN KAMPEN AMERICAN CAPITAL GLOBAL EQUITY FUND
PROFORMA FINANCIAL STATEMENTS
December 31, 1997 (Unaudited)
<PAGE> 538
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 See (2) 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 See (2) 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 See (2) 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> 539
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> 540
MS GLOBAL EQUITY ALLOCATION FUND - VKAC GLOBAL EQUITY FUND
PROFORMA COMBINED PORTFOLIO OF INVESTMENTS
December 31,1997
<TABLE>
<CAPTION>
(Unaudited) MS Glob. VKAC
Eq. Alloc. Glob Eq Proforma
Shares Shares Shares Value (000)
--------- -------- --------- -----------
<S> <C> <C> <C> <C>
Common Stocks (80.8%)
Australia (0.0%)
718 981 1,699 Broken Hill Proprietary Ltd. 16
227 3,587 3,814 Coles Myer Ltd. 18
334 281 615 Gio Australia Holdings Ltd. 2
271 370 641 MIM Holdings Ltd. -
755 0 (a)755 Westfield Trust (New) 1
-------
37
-------
Austria (0.7%)
200 400 600 Austria Mikro Systems International AG 30
700 2,200 (a)2,900 Austrian Airlines Osterreichische Luftverkehrs AG 62
2,100 6,500 (a)8,600 Bank Austria AG 436
1,864 2,664 (a)4,528 Bank Austria AG 224
200 600 800 Bau Holdings AG 50
600 1,500 2,100 Boehler-Udderholm AG 123
100 200 300 BWT AG 47
0 2,000 2,000 Creditanstalt Bank 128
1,300 3,300 4,600 Flughafen Wein AG 183
300 700 1,000 Generali AG 263
200 500 (a)700 Lenzing AG 42
600 1,700 2,300 Mayr-Melnhof Karton AG 124
300 800 (a)1,100 Oesterreichische Brau-Beteiligungs AG 55
1,500 4,100 5,600 Oesterreichische Elektrizitaetswirtschafts, 'A' AG 594
1,100 3,200 4,300 OMV AG 596
700 1,900 2,600 Radex-Heraklith Industriebet AG 89
500 1,400 1,900 Steyr-Daimler-Puch AG 51
600 1,700 2,300 VA Technologies AG 349
400 1,200 1,600 Wienerberger Baustoffindustrie AG 307
-------
3,753
-------
Canada (2.9%)
4,000 5,800 9,800 Abitibi-Consolidated, Inc. 137
3,300 4,700 8,000 Agrium, Inc. 97
3,300 4,800 (a)8,100 Air Canada 84
4,800 7,100 11,900 Alcan Aluminum Ltd. 328
1,500 2,200 3,700 Avenor, Inc. 53
5,800 8,500 14,300 Bank of Montreal 634
5,300 7,700 13,000 Bank of Nova Scotia 613
9,300 13,600 22,900 Barrick Gold Corp. 427
13,800 20,200 34,000 BCE, Inc. 1,134
7,100 0 7,100 Bombardier, Inc., 'A' 146
0 10,400 10,400 Bombardier, Inc., 'B' 214
3,000 4,400 7,400 CAE, Inc. 58
1,300 1,800 3,100 Cameco Corp. 101
9,100 13,300 22,400 Canadian Imperial Bank of Commerce 699
2,300 3,300 (a)5,600 Canadian Natural Resources Ltd. 120
</TABLE>
<PAGE> 541
MS GLOBAL EQUITY ALLOCATION FUND - VKAC GLOBAL EQUITY FUND
PROFORMA COMBINED PORTFOLIO OF INVESTMENTS (Continued)
December 31, 1997
<TABLE>
<CAPTION>
(Unaudited) MS Glob. VKAC
Eq. Alloc. Glob Eq Proforma
Shares Shares Shares Value (000)
--------- -------- --------- -----------
<S> <C> <C> <C> <C>
Canada (Continued)
3,500 5,100 8,600 Canadian Occidental Petroleum Ltd. 195
7,600 11,200 18,800 Canadian Pacific Ltd. 506
2,000 3,000 5,000 Canadian Tire Corp., 'A' 107
1,800 2,700 4,500 Cominco Ltd. 69
1,600 2,400 (a)4,000 Corel Corp. 6
1,300 1,900 3,200 Cott Corp. 27
2,200 3,300 5,500 Dofasco, Inc. 89
3,600 5,200 8,800 Domtar, Inc. 61
3,500 5,100 (a)8,600 Echo Bay Mines Ltd. 22
1,000 1,500 2,500 George Weston Ltd. 213
5,400 8,000 (a)13,400 Gulf Canada Resources Ltd. 94
4,700 6,900 11,600 Imasco Ltd. 410
3,700 5,400 9,100 Imperial Oil Ltd. 586
3,500 5,100 8,600 Inco Ltd. 146
1,300 1,900 3,200 IPL Energy, Inc. 146
6,400 9,400 15,800 Laidlaw, Inc. 'B' 216
1,500 2,300 3,800 Loewen Group, Inc. 98
3,500 5,000 8,500 MacMillan Bloedel Ltd. 88
1,600 2,300 3,900 Magna International, Inc., 'A' 245
3,900 5,600 (a)9,500 Methanex Corp. 75
1,800 2,600 4,400 Molson Companies Ltd., 'A' 79
2,500 3,600 6,100 Moore Corp. Ltd. 92
3,300 4,900 (a)8,200 Newbridge Networks Corp. 287
5,400 7,900 13,300 Noranda, Inc. 229
6,800 9,700 16,500 Norcen Energy Resources Ltd. 189
5,200 7,600 12,800 Northern Telecom Ltd. 1,139
12,100 17,600 29,700 Nova Corp. 283
6,500 9,500 16,000 Petro 253
4,700 6,900 11,600 Placer Dome, Inc. 146
1,200 1,800 3,000 Potash Corp. of Saskatchewan, Inc. 250
2,900 4,200 7,100 Power Corp. of Canada 254
2,900 4,300 (a)7,200 Provigo, Inc. 44
3,000 4,400 7,400 Ranger Oil Ltd. 50
2,900 4,200 (a)7,100 Renaissance Energy Ltd. 147
4,100 0 (a)4,100 Repap Enterprises, Inc. 1
3,900 5,700 (a)9,600 Rogers Communication, Inc., 'B' 46
6,900 10,000 16,900 Royal Bank of Canada 894
7,800 11,500 19,300 Seagram, Ltd 625
1,800 2,600 4,400 Suncor, Inc. 151
2,900 4,300 (a)7,200 Talisman Energy, Inc. 220
1,900 2,800 4,700 Teck Corp., 'B' 71
2,300 3,500 5,800 TELUS Corp. 129
12,800 18,700 31,500 Thomson Corp. 865
5,300 7,800 13,100 Transcanada Pipelines Ltd. 292
2,700 4,000 6,700 Westcoast Energy, Inc. 155
-------
15,135
-------
</TABLE>
<PAGE> 542
MS GLOBAL EQUITY ALLOCATION FUND - VKAC GLOBAL EQUITY FUND
PROFORMA COMBINED PORTFOLIO OF INVESTMENTS (Continued)
December 31, 1997
<TABLE>
<CAPTION>
(Unaudited) MS Glob. VKAC
Eq. Alloc. Glob Eq Proforma
Shares Shares Shares Value (000)
--------- -------- --------- -----------
<S> <C> <C> <C> <C>
France (4.3%)
693 1,250 1,943 Accor S.A. 361
2,650 4,700 7,350 Alcatel Alsthom 934
5,564 10,000 15,564 AXA S.A. 1,204
3,700 6,666 10,366 Banque Nationale de Paris RFD 551
1,877 4,850 6,727 Banque Paribas 585
1,200 2,100 3,300 BIC 241
478 899 1,377 Bouygues 156
582 1,070 1,652 Canal Plus 307
660 1,250 1,910 Carrefour S.A. 996
1,600 2,800 4,400 Casino Guichard Perrachon 245
500 0 500 Cie Bancaire S.A. 81
1,510 2,779 4,289 Cie de Saint-Gobain 609
2,209 4,027 6,236 Cie Generale des Eaux 870
4,550 8,150 12,700 Elf Aquitaine 1,477
550 950 1,500 Eridania Beghin-Say S.A. 234
200 350 550 Essilor International 164
18,700 30,800 49,500 France Telecom S.A. 1,795
1,368 2,450 3,818 Groupe Danone RFD 682
1,289 2,361 3,650 Havas S.A. 263
300 500 800 Imetal, S.A. 99
1,757 2,350 4,107 L'Air Liquide 643
1,192 2,100 3,292 L'Oreal 1,288
1,643 3,050 4,693 Lafarge Coppee S.A. 308
1,900 3,500 5,400 Lagardere S.C.A. 179
535 1,000 1,535 Legrand S.A. 306
1,505 2,750 4,255 LVMH Moet Hennessy Louis Vuitton 706
2,177 3,856 6,033 Lyonnaise des Eaux S.A. 668
2,123 3,916 6,039 Michelin (C.G.D.E.) 'B' 304
150 275 425 Pathe S.A. 82
1,175 2,150 3,325 Pernod-Ricard 196
380 0 380 Pinault S.A. 203
0 675 675 Pin Printemps Redo 360
340 600 940 Promodes 390
905 1,650 2,555 PSA Peugeot Citroen S.A. 322
5,902 10,679 16,581 Rhone-Poulenc S.A. 'A' 743
85 150 235 Sagem 105
1,936 3,400 5,336 Sanofi S.A. 594
2,297 4,200 6,497 Schneider S.A. 353
409 775 1,184 Simco S.A. 80
65 125 190 Societe Eurafrance S.A. 77
1,738 3,094 4,832 Societe Generale 658
13 25 (a)38 Sodexho S.A. (New) 20
125 225 350 Sodexho S.A. 187
2,108 3,850 5,958 Thomson CSF S.A. 188
4,205 7,550 11,755 Total S.A. 'B' 1,279
4,390 7,950 12,340 Usinor Sacilor 178
</TABLE>
<PAGE> 543
MS GLOBAL EQUITY ALLOCATION FUND - VKAC GLOBAL EQUITY FUND
PROFORMA COMBINED PORTFOLIO OF INVESTMENTS (Continued)
December 31, 1997
<TABLE>
<CAPTION>
(Unaudited) MS Glob. VKAC
Eq. Alloc. Glob Eq Proforma
Shares Shares Shares Value (000)
--------- -------- --------- -----------
<S> <C> <C> <C> <C>
France (Continued)
1,150 2,100 3,250 Valeo S.A. 220
-------
22,491
-------
Germany (4.9%)
900 1,400 2,300 adidas AG 302
850 1,350 (a)2,200 Agiv AG 42
4,500 6,500 11,000 Allianz AG 2,849
500 1,000 1,500 AMB Aachener & Muenchener Beteiligungs AG 164
10,700 16,500 27,200 BASF AG 964
13,600 21,000 34,600 Bayer AG 1,292
4,550 7,050 11,600 Bayerische Hypotheken Bank AG 566
4,750 7,400 12,150 Bayerische Vereinsbank AG 795
1,600 2,450 4,050 Beiersdorf AG 176
900 1,400 2,300 Bilfinger & Berger Bau AG 71
150 250 (a)400 Brau und Brunnen AG 40
550 800 1,350 CKAG Colonia Konzern AG 129
1,750 2,800 4,550 Continental AG 100
9,200 14,300 23,500 Daimler-Benz AG 1,649
2,000 2,500 4,500 Degussa AG 225
9,200 14,150 23,350 Deutsche Bank AG 1,648
38,770 60,000 98,770 Deutsche Telekom AG 1,859
0 1,800 1,800 Deutz AG 13
8,050 12,450 20,500 Dresdner Bank AG 946
935 1,485 2,420 Heidelberger Zement AG 172
1,650 2,600 4,250 Hochtief AG 168
200 300 500 Karstadt AG 171
1,150 0 (a)1,150 Kloeckner-Humboldt-Deutz AG 9
200 300 500 Linde AG 305
6,950 10,800 17,750 Lufthansa AG 340
250 400 650 MAN AG 188
650 1,050 1,700 Mannesmann AG 859
2,923 4,550 7,473 Merck KGAA 243
4,464 6,960 11,424 METRO AG 410
1,530 2,000 3,530 Muenchener Rueckversicherungs (Registered) 1,330
300 500 800 Preussag AG 244
6,100 9,400 15,500 RWE AG 831
1,110 1,700 2,810 SAP AG 854
1,350 2,050 3,400 Schering AG 328
10,300 16,000 26,300 Siemens AG 1,557
50 100 (a)150 Starbag AG 10
750 1,100 1,850 Thyssen AG 396
9,050 14,000 23,050 VEBA AG 1,570
678 800 1,478 Viag AG 796
550 800 1,350 Volkswagen AG 759
-------
25,370
-------
</TABLE>
<PAGE> 544
MS GLOBAL EQUITY ALLOCATION FUND - VKAC GLOBAL EQUITY FUND
PROFORMA COMBINED PORTFOLIO OF INVESTMENTS (Continued)
December 31, 1997
<TABLE>
<CAPTION>
(Unaudited) MS Glob. VKAC
Eq. Alloc. Glob Eq Proforma
Shares Shares Shares Value (000)
--------- -------- --------- -----------
<S> <C> <C> <C> <C>
Italy (3.1%)
25,422 40,250 65,672 Assicurazioni Generali S.p.A. 1,613
40,300 64,000 104,300 Banca Commerciale Italiana 363
15,900 25,000 40,900 Banco Ambrosiano Veneto 157
5,160 8,220 13,380 Benetton Group S.p.A. 219
4,700 7,000 11,700 Cartiere Burgo S.p.A. 70
68,500 110,000 178,500 Credito Italiano S.p.A. 550
19,000 29,000 48,000 Edison S.p.A. 290
220,000 348,000 568,000 Ente Nazionale Idrocarburi S.p.A. 3,220
4,500 5,000 9,500 Falck 43
92,930 146,700 239,630 Fiat S.p.A. 697
20,570 32,400 52,970 Fiat S.p.A. Di Risp NCS 88
11,000 15,000 26,000 Impreglio S.p.A. 20
24,100 38,500 62,600 Istituto Bancario San Paolo di Torina S.p.A. 598
17,700 27,750 45,450 Istituto Mobiliare Italiano S.p.A. 540
116,020 184,000 300,020 Istituto Nazionale delle Assicurazioni (INA) 608
6,800 10,500 17,300 Italcementi S.p.A. 121
4,650 7,000 11,650 Italcementi S.p.A. NCS 35
19,400 30,000 49,400 Italgas 204
6,478 10,400 (a)16,878 La Rinascente S.p.A. 126
14,000 22,500 36,500 Magneti Marelli S.p.A. 62
33,500 52,500 86,000 Mediaset S.p.A 422
14,050 22,000 36,050 Mediobanca S.p.A. 283
83,108 125,000 208,108 Montedison S.p.A. 187
28,900 40,000 68,900 Montedison S.p.A. Di Risp NCS 45
96,880 156,000 (a)252,880 Olivetti Group 153
44,640 70,000 114,640 Parmalat Finanziaria S.p.A. 164
45,000 70,000 115,000 Pirelli S.p.A. 307
9,269 13,000 22,269 R.A.S. 218
462 0 462 R.A.S. Di Risp 3
4,100 6,000 10,100 S.A.I. 112
5,000 7,000 12,000 Sasib S.p.A. 35
8,500 13,500 22,000 Sirti S.p.A. 133
21,000 30,000 51,000 Snia BPD S.p.A. 52
42,500 67,500 110,000 Telecom Italia Mobile Di Risp S.p.A. 313
182,800 287,500 470,300 Telecom Italia Mobile S.p.A 2,171
24,884 43,779 68,663 Telecom Italia Mobile S.p.A. 303
95,666 159,720 255,386 Telecom Italia S.p.A. 1,631
-------
16,156
-------
Japan (7.9%)
1,500 1,800 3,300 Advantest Corp. 187
19,800 24,000 43,800 Ajinomoto Co., Inc. 426
11,800 14,000 (a)25800 Aoki Corp. 8
1,600 1,900 3,500 Aoyama Trading Co., Ltd. 62
500 0 500 Asahi Bank Ltd. 2
11,800 14,000 25,800 Asahi Breweries Ltd. 375
35,400 42,000 77,400 Asahi Chemical Industry Co., Ltd. 262
</TABLE>
<PAGE> 545
MS GLOBAL EQUITY ALLOCATION FUND - VKAC GLOBAL EQUITY FUND
PROFORMA COMBINED PORTFOLIO OF INVESTMENTS (Continued)
December 31, 1997
<TABLE>
<CAPTION>
(Unaudited) MS Glob. VKAC
Eq. Alloc. Glob Eq Proforma
Shares Shares Shares Value (000)
--------- -------- --------- -----------
<S> <C> <C> <C> <C>
Japan (Continued)
33,600 40,000 73,600 Asahi Glass Co. 349
35,000 54,600 89,600 Bank of Tokyo-Mitsubishi 1,235
500 0 500 Bank of Yokohama 1
11,800 14,000 25,800 Bridgestone Corp. 559
14,800 17,000 31,800 Canon, Inc. 740
7,000 8,000 15,000 Casio Computer Co., Ltd. 108
3,800 4,000 7,800 Chiba Bank Ltd. 24
11,800 14,000 25,800 Chugai Pharmaceutical Ltd. 132
13,800 16,000 29,800 Dai Nippon Printing Co., Ltd. 559
12,800 15,000 27,800 Daiei, Inc. 115
11,800 14,000 25,800 Daikin Industries Ltd. 97
11,800 14,000 25,800 Daiwa House Industry 136
0 17,000 17,000 Denso Corp. 306
69 82 151 East Japan Railway Co. 681
7,800 9,000 16,800 Ebara Corp. 178
5,100 5,900 11,000 Fanuc Co. 416
7,000 8,000 15,000 Fuji Photo Film Co. 574
30,600 36,000 66,600 Fujitsu Ltd. 714
8,800 10,000 18,800 Furukawa Electric 80
15,800 19,000 34,800 Hankyu Corp. 163
11,800 14,000 25,800 Hazama-Gumi 13
59,000 69,000 128,000 Hitachi Ltd. 912
15,000 18,000 33,000 Honda Motor Co. 1,211
400 0 400 Industrial Bank of Japan 3
7,000 9,000 16,000 Ito-Yokado Co., Ltd. 815
36,000 43,000 79,000 Japan Airlines Co. 215
29,600 35,000 64,600 Japan Energy Corp. 61
800 0 800 Joyo Bank 3
5,800 7,000 12,800 Jusco Co. 180
20,800 25,000 45,800 KAO Corp. 659
23,600 28,000 51,600 Kajima Corp. 130
15,700 18,600 34,300 Kansai Electric Power Co. 581
18,600 22,000 40,600 Kawasaki Steel Corp. 55
28,600 33,000 61,600 Kinki Nippon Railway 329
23,600 28,000 51,600 Kirin Brewery Co., Ltd. 375
23,600 28,000 51,600 Komatsu Ltd. 259
35,400 42,000 77,400 Kubota Corp. 204
23,600 28,000 51,600 Kumagai Gumi Co., Ltd. 28
3,600 4,200 7,800 Kyocera Corp. 354
11,800 14,000 25,800 Kyowa Hakko Kogyo 112
31,000 35,000 66,000 Long-Term Credit Bank of Japan Ltd. 106
35,200 42,000 77,200 Marubeni Corp. 135
2,800 3,000 5,800 Marui Co. 90
35,400 42,000 77,400 Matsushita Electric Industrial Ltd. 1,132
35,400 42,000 77,400 Mitsubishi Chemical Corp. 111
33,000 39,000 72,000 Mitsubishi Corp. 568
41,400 49,000 90,400 Mitsubishi Electric Corp. 231
</TABLE>
<PAGE> 546
MS GLOBAL EQUITY ALLOCATION FUND - VKAC GLOBAL EQUITY FUND
PROFORMA COMBINED PORTFOLIO OF INVESTMENTS (Continued)
December 31, 1997
<TABLE>
<CAPTION>
(Unaudited) MS Glob. VKAC
Eq. Alloc. Glob Eq Proforma
Shares Shares Shares Value (000)
--------- -------- --------- -----------
<S> <C> <C> <C> <C>
Japan (Continued)
64,000 76,000 140,000 Mitsubishi Heavy Industries Ltd. 583
23,600 28,000 51,600 Mitsubishi Materials Corp. 83
10,000 15,000 25,000 Mitsubishi Trust and Banking Corp. 251
35,200 42,000 77,200 Mitsui & Co. 456
23,600 28,000 (a)51,600 Mitsui Engineering & Shipbuilding Co., Ltd. 33
400 0 400 Mitsui Trust & Banking Corp. 1
12,800 15,000 27,800 Mitsukoshi 74
4,000 5,000 9,000 Murata Manufacturing Co., Inc. 226
7,800 9,000 16,800 Mycal Corp. 140
20,600 24,000 44,600 NEC Corp. 475
11,800 14,000 25,800 NGK Insulators Ltd. 229
14,600 0 14,600 Nippon Denko Co., Ltd. 263
9,000 11,000 20,000 Nippon Express Co., Ltd. 100
11,800 14,000 25,800 Nippon Fire & Marine Insurance Co. 97
11,800 13,000 24,800 Nippon Light Metal Co. 36
11,800 14,000 25,800 Nippon Meat Packers, Inc. 352
33,600 40,000 73,600 Nippon Oil Co. 190
131,000 155,000 286,000 Nippon Steel Corp. 423
177 209 386 Nippon Telegraph & Telephone ADR 3,311
35,400 42,000 77,400 Nippon Yusen Kabushiki Kaisha 212
44,400 53,000 97,400 Nissan Motor Co., Ltd. 403
69,000 81,000 150,000 NKK Corp. 119
13,800 16,000 29,800 Odakyu Electric Railway Co. 129
23,600 28,000 51,600 OJI Paper Co., Ltd. 205
52,200 62,000 114,200 Osaka Gas Co. 261
11,800 14,000 25,800 Penta-Ocean Construction 36
3,000 4,000 7,000 Pioneer Electronic Corp. 108
1,000 1,000 2,000 Rohm Co. 204
25,200 40,000 65,200 Sakura Bank Ltd. 186
8,800 11,000 19,800 Sankyo Co., Ltd. 447
42,000 46,000 88,000 Sanwa Bank, Ltd. 890
35,400 42,000 77,400 Sanyo Electric Co., Ltd. 202
2,800 3,000 5,800 Secom Co. 370
2,300 2,700 5,000 Sega Enterprises Ltd. 90
11,800 14,000 25,800 Sekisui House Ltd. 166
23,600 28,000 51,600 Sharp Corp. 355
3,000 4,000 7,000 Shimano, Inc. 129
5,000 6,000 11,000 Shin-Etsu Chemical Co. 210
16,800 20,000 36,800 Shinizu Corp. 85
5,000 6,000 11,000 Shiseido Co., Ltd. 150
800 0 800 Shizuoka Bank 9
23,600 28,000 51,600 Showa Denko K.K. 45
0 700 700 Softbank Corp. 18
5,500 6,400 11,900 Sony Corp. 1,057
47,200 56,000 103,200 Sumitomo Chemical Co. 237
23,400 28,000 51,400 Sumitomo Corp. 287
15,800 19,000 34,800 Sumitomo Electric Industries 474
</TABLE>
<PAGE> 547
MS GLOBAL EQUITY ALLOCATION FUND - VKAC GLOBAL EQUITY FUND
PROFORMA COMBINED PORTFOLIO OF INVESTMENTS (Continued)
December 31, 1997
<TABLE>
<CAPTION>
(Unaudited) MS Glob. VKAC
Eq. Alloc. Glob Eq Proforma
Shares Shares Shares Value (000)
--------- -------- --------- -----------
<S> <C> <C> <C> <C>
Japan (Continued)
5,000 6,000 11,000 Sumitomo Forestry 54
42,400 50,000 92,400 Sumitomo Metal Industries 118
11,000 13,000 24,000 Sumitomo Metal Mining Co. 79
11,800 14,000 25,800 Sumitomo Osaka Cement Co., Ltd. 32
23,600 28,000 51,600 Taisei Corp., Ltd. 85
7,000 8,000 (a)15,000 Taisho Pharmaceutical Co. 383
14,800 17,000 31,800 Takeda Chemical Industries 906
23,600 28,000 51,600 Teijin Ltd. 108
15,800 19,000 34,800 Tobu Railway Co. 109
8,500 10,000 18,500 Tohoku Electric Power 281
600 0 600 Tokai Bank 3
35,400 42,000 77,400 Tokio Marine & Fire Insurance Co. 877
21,900 25,900 47,800 Tokyo Electric Power Co. 871
2,000 2,000 4,000 Tokyo Electron Ltd. 128
47,200 56,000 103,200 Tokyo Gas Co. 234
19,800 23,000 42,800 Tokyu Corp. 165
15,800 19,000 34,800 Toppan Printing Co., Ltd. 453
35,500 42,000 77,500 Toray Industries, Inc. 347
11,800 14,000 25,800 Toto Ltd. 165
23,600 28,000 51,600 Toyobo Ltd. 62
51,200 61,000 112,200 Toyota Motor Corp. 3,214
23,600 28,000 51,600 Ube Industries Ltd. 66
300 0 300 Yamaichi Securities -
-------
40,508
-------
Netherlands (1.6%)
11,845 19,362 31,207 ABN-Amro Holding N.V. 608
700 1,100 1,800 Akzo Nobel N.V. 310
5,800 9,900 15,700 Elsevier N.V. 254
0 1,200 1,200 Getronics NV 38
350 700 1,050 Heineken N.V. 183
7,195 11,207 18,402 ING Groep N.V. 775
68 0 68 ING Groep N.V. ADR 3
823 1,316 2,139 KLM Royal Dutch Airlines N.V. 79
3,866 7,108 10,974 Koninklijke Ahold N.V. 286
287 0 287 Koninklijke Hoogovens 12
900 1,500 2,400 Koninklijke KNP BT 55
9,587 6,660 16,247 Koninklijke PTT Nederland N.V. 678
200 400 600 Nedlloyd Groep N.V. 14
0 303 303 OCE NV 33
2,900 4,800 7,700 Phillips Electronics N.V. 462
18,800 29,200 48,000 Royal Dutch Petroleum N.V. 2,636
18,300 0 18,300 Royal Dutch Petroleum N.V. - New York Shares 992
296 500 796 Stork N.V. 27
5,600 8,800 14,400 Unilever N.V. 888
646 1,010 1,656 Wolters Kluwer N.V. 214
-------
8,547
-------
</TABLE>
<PAGE> 548
MS GLOBAL EQUITY ALLOCATION FUND - VKAC GLOBAL EQUITY FUND
PROFORMA COMBINED PORTFOLIO OF INVESTMENTS (Continued)
December 31, 1997
<TABLE>
<CAPTION>
(Unaudited) MS Glob. VKAC
Eq. Alloc. Glob Eq Proforma
Shares Shares Shares Value (000)
--------- -------- --------- -----------
<S> <S> <C> <C> <C>
Norway (0.5%)
2,200 3,200 5,400 AKER S.A. 'A' 97
1,900 2,800 4,700 Bergesen dy ASA, 'A' 111
800 1,200 2,000 Bergesen dy ASA, 'B' 47
18,600 27,000 45,600 Christiania Bank OG Kreditkasse 184
1,000 1,500 2,500 Dyno Industrier ASA 48
1,800 2,600 4,400 Elkem ASA 58
0 4,800 4,800 Hafslund ASA 'A' 29
3,300 0 3,300 Hafslund ASA 'B' 16
700 1,000 1,700 Helikopter Services Group ASA 21
1,400 2,000 3,400 Kvaerner ASA 173
1,100 1,600 2,700 Leif Hoegh & Co., ASA 55
4,500 7,333 (a)11833 NCL Holdings ASA 42
7,800 11,300 19,100 Norsk Hydro ASA 930
1,000 1,500 2,500 Norske Skogindustrier AGA 72
1,600 2,300 3,900 Orkla ASA 335
1,100 1,600 (a)2,700 Petroleum Geo-Services ASA 170
9,600 14,000 (a)23,600 Storebrand ASA 166
700 1,000 1,700 Unitor ASA 21
-------
2,575
-------
Portugal (1.1%)
10,500 15,000 25,500 Banco Comercial Portugues, S.A. (Registered) 521
5,500 7,900 13,400 Banco Espirito Santo e Comercial de Lisboa, S.A. 399
4,000 5,700 9,700 Banco Totta & Acores 'B' (Registered) 190
5,300 7,600 12,900 BPI-SGPS S.A. 314
500 800 1,300 Cia de Seguros Tranquilidade (Registered) 31
300 400 700 CIN, S.A. 44
5,600 7,900 13,500 Cimpor-Cimentos de Portugal, SGPS, S.A. 354
1,300 1,800 3,100 Corticeira Amorim, S.A. 37
24,500 35,000 59,500 EDP-Eletricidade de Portugal, S.A. 1,127
400 600 1,000 Engil-SGPS 10
1,100 2,000 3,100 INAPA Investimentos Participacoes e Gestao, S.A. 36
7,600 9,700 17,300 Jeronimo Martins, SGPS, S.A. 549
0 2,007 2,007 Jeronimo Martins - Provisional Certificates 11
6,000 8,600 14,600 Portucel Industrial-Empresa Produtora de Celulose, S.A 89
12,600 17,900 30,500 Portugal Telecom S.A. 1,416
800 1,200 (a)2,000 Sociedade de Construcoes Soares da Costa, S.A. 14
2,800 3,900 6,700 Sonae Investimentos-Sociedade Gestora de Participacoes 271
800 1,100 1,900 UNICER-Uniao Cervejeira, S.A. 26
-------
5,439
-------
Spain (2.3%)
340 500 840 Acerinox S.A. 124
264 0 (a)264 ACS S.A. 6
20 1,700 (a)1,720 Aguas de Barcelona 71
</TABLE>
<PAGE> 549
MS GLOBAL EQUITY ALLOCATION FUND - VKAC GLOBAL EQUITY FUND
PROFORMA COMBINED PORTFOLIO OF INVESTMENTS (Continued)
December 31, 1997
<TABLE>
<CAPTION>
(Unaudited) MS Glob. VKAC
Eq. Alloc. Glob Eq Proforma
Shares Shares Shares Value (000)
--------- -------- --------- -----------
<S> <C> <C> <C> <C>
Spain (Continued)
4,800 5,120 9,920 Argentaria S.A. 604
8,211 8,610 16,821 Autopistas Concesionaria Espanola S.A. 226
24,000 27,300 51,300 Banco Bilbao Vizcaya, S.A. (Registered) 1,660
12,200 13,200 25,400 Banco Central Hispanoamericano S.A. 619
21,900 19,500 41,400 Banco Santander S.A. 1,383
400 600 1,000 Corporacion Financiera Alba S.A. 105
1,698 2,200 3,898 Corporacion Mapfre S.A. 103
1,550 2,300 3,850 Dragados y Construcciones S.A. 82
1,300 2,000 3,300 Ebro Agricolas, Compania de Alimentacion S.A. 56
550 900 1,450 Empresa Nacional de Cellulosas S.A. 20
40,000 41,600 81,600 Endesa S.A. 1,450
317 0 317 Energia y Industrias Aragonesas 2
4,700 6,900 (a)11600 Ercros S.A. 11
1,600 2,400 4,000 Fomento de Construcciones y Contratas S.A. 152
5,200 6,000 11,200 Gas Natural SDG 'E' 581
1,635 0 1,635 General de Aguas De Barcelona S.A. 67
35,300 37,700 73,000 Iberdrola S.A. 961
656 945 1,601 Inmobiliaria Metropolitana Vasco Central S.A. 72
200 300 500 Portland Vaderrivas S.A. 45
11,600 12,200 23,800 Repsol S.A. 1,016
1,000 1,500 2,500 Tabacalera S.A. 'A' 203
34,600 38,000 72,600 Telefonica de Espana 2,074
8,100 11,800 19,900 Union Electrica Fenosa S.A. 191
2,400 2,100 4,500 Uralita S.A. 51
1,376 1,700 3,076 Vallehermoso S.A. 94
650 900 1,550 Viscofan Industria Navarra de Envolturas Celulosicas, SA 39
348 400 748 Zardoya-Otis S.A. 87
-------
12,155
-------
Sweden (2.0%)
21,100 32,000 53,100 ABB AB 'A' 629
3,500 0 (a)3,500 ABB AB 'B' 41
0 2,700 2,700 AGA AB 'A' 37
5,900 4,700 10,600 AGA AB 'B' 140
40,166 60,000 (a)100,166 Astra AB 'A' 1,735
9,100 0 9,100 Astra AB 'B' 153
4,650 7,400 12,050 Atlas Copco AB 'A' 360
2,500 2,900 5,400 Electrolux AB 'B' 375
1,200 1,500 2,700 Esselte AB 'B' 51
850 1,450 (a)2300 Granges AB 36
1,100 0 1,100 Hennes & Mauritz AB 'A' 49
5,000 8,000 13,000 Hennes & Mauritz AB 'B' 573
5,700 0 5,700 SCA AB 'B' 128
2,600 3,600 6,200 Securitas AB 'B' 187
3,200 4,600 7,800 Skandia Group Forsakrings AB 368
16,600 21,100 37,700 Skandinaviska Enskilda Banken 'A' 477
3,800 4,900 8,700 Skanska AB 'B' 357
</TABLE>
<PAGE> 550
MS GLOBAL EQUITY ALLOCATION FUND - VKAC GLOBAL EQUITY FUND
PROFORMA COMBINED PORTFOLIO OF INVESTMENTS (Continued)
December 31, 1997
<TABLE>
<CAPTION>
(Unaudited) MS Glob. VKAC
Eq. Alloc. Glob Eq Proforma
Shares Shares Shares Value (000)
--------- -------- --------- -----------
<S> <C> <C> <C> <C>
Sweden (Continued)
2,400 4,800 7,200 SKF AB 'B' 153
10,050 12,200 22,250 Stora Kopparbergs Bergslags Aktiebolag 280
0 7,500 7,500 Svenska Cellulosa 'B' 169
6,800 8,200 15,000 Svenska Handelsbanken 'A' 519
17,200 18,800 36,000 Swedish Match AB 120
27,600 36,800 64,400 Telefonaktiebolaget LM Ericsson 2,421
4,600 5,300 9,900 Trelleborg AB 'B' 125
11,300 15,600 26,900 Volvo AB 'B' 722
-------
10,205
-------
Switzerland (3.6%)
165 250 415 ABB AG (Bearer) 521
320 450 770 Adia S.A. (Bearer) 223
100 140 240 Alusuisse-Lonza Holding AG (Registered) 230
3,850 6,000 9,850 CS Holding AG (Registered) 1,523
15 30 45 Georg Fischer AG (Bearer) 62
115 170 285 Holderbank Financiere Glarus AG 'B' (Bearer) 232
105 170 275 Merkur Holding AG (Registered) 58
685 970 1,655 Nestle S.A. (Registered) 2,479
1,130 1,566 2,696 Novartis AG (Registered) 4,373
29 40 69 Roche Holding AG (Bearer) 1,062
121 171 292 Roche Holding AG-Genusshein 2,899
260 350 610 Schweizerische Rueckversicherungs-Gesellchaft (Registered) 1,141
85 130 215 SMH AG (Bearer) 119
35 45 80 Societe Generale de Surveillance Holding S.A. (Bearer) 153
70 100 170 Sulzer AG (Registered) 108
1,330 1,860 3,190 Swiss Bank Corp. (Registered) 991
65 90 155 SwissAir AG (Registered) 212
355 510 865 Union Bank of Switzerland (Bearer) 1,250
400 570 970 Union Bank of Switzerland (Registered) 279
835 1,170 2,005 Zuerich Versicherungs-Gesellschaft (Registered) 955
-------
18,870
-------
United Kingdom (8.5%)
18,200 34,200 52,400 Abbey National plc 943
11,665 21,975 33,640 Argyll Group plc 190
9,100 17,050 26,150 Arjo Wiggins Appleton plc 70
6,500 12,225 18,725 Associated British Foods plc 163
22,589 41,500 64,089 Barclays plc 1,706
14,300 26,825 41,125 Bass plc 640
40,266 75,625 115,891 B.A.T Industries plc 1,057
50,470 94,720 145,190 BG plc 'A' 653
0 107,350 107,350 BG plc 'B' 51
9,127 17,050 26,177 BICC plc 74
16,856 31,725 48,581 Blue Circle Industries plc 273
9,055 17,050 26,105 BOC Group plc 429
14,300 26,825 41,125 Boots Co. plc 592
9,100 17,050 26,150 BPB Industries plc 146
</TABLE>
<PAGE> 551
MS GLOBAL EQUITY ALLOCATION FUND - VKAC GLOBAL EQUITY FUND
PROFORMA COMBINED PORTFOLIO OF INVESTMENTS (Continued)
December 31, 1997
<TABLE>
<CAPTION>
(Unaudited) MS Glob. VKAC
Eq. Alloc. Glob Eq Proforma
Shares Shares Shares Value (000)
--------- -------- --------- -----------
<S> <C> <C> <C> <C>
United Kingdom (Continued)
6,468 12,225 18,693 British Aerospace plc 533
15,628 29,275 44,903 British Airways plc 413
76,115 140,163 216,278 British Petroleum Co. plc 2,855
20,800 39,025 59,825 British Sky Broadcasting Group plc 448
26,000 48,800 74,800 British Steel plc 161
75,400 141,550 216,950 British Telecommunications plc 1,709
54,606 102,500 157,106 BTR plc 475
3,856 7,300 11,156 Burmah Castrol plc 195
32,462 61,025 93,487 Cable & Wireless plc 822
14,335 26,825 41,160 Cadbury Schweppes plc 415
9,360 19,170 28,530 Caradon plc 83
57,200 107,350 (a)164550 Centrica plc 242
11,671 21,975 33,646 Coats Viyella plc 50
9,056 17,050 26,106 Commercial Union plc 364
6,500 12,225 18,725 Courtaulds plc 91
1,272 2,450 3,722 De La Rue plc 24
0 89,500 89,500 Diageo plc 819
11,730 12,860 (a)24590 EMI Group plc 205
37,700 70,775 108,475 General Electric plc 703
7,767 14,600 22,367 GKN plc 458
41,600 78,075 119,675 Glaxo Wellcome plc 2,845
9,090 17,050 26,140 Granada Group plc 399
15,600 29,275 44,875 Great Universal Stores plc 565
10,369 19,525 29,894 Guardian Royal Exchange plc 162
57,172 0 57,172 Guinness plc 526
28,570 53,700 82,270 HSBC Holdings plc 2,030
7,768 14,675 22,443 Hanson plc 100
16,900 31,725 48,625 Harrisons & Crosfield plc 113
11,700 21,975 33,675 Imperial Chemical Industries plc 526
15,613 29,275 44,888 Ladbroke Group plc 195
10,400 19,525 29,925 Land Securities plc 477
10,400 19,525 29,925 Lasmo plc 133
15,600 29,275 44,875 Legal & General Group plc 392
71,500 134,175 205,675 Lloyds TSB Group plc 2,676
10,418 19,525 29,943 Lonrho plc 46
45,500 85,375 130,875 Marks & Spencer plc 1,289
7,800 14,675 22,475 MEPC plc 188
18,200 34,200 52,400 National Power plc 516
9,098 17,050 26,148 North West Water plc 335
10,757 19,525 30,282 Peninsular & Oriental Steam Navigation Co. 344
19,478 36,575 56,053 Pilkington plc 117
26,009 48,800 74,809 Prudential Corp. plc 911
11,700 21,975 33,675 Rank Group plc 188
7,751 14,675 22,426 Redland plc 126
18,200 33,725 51,925 Reed International plc 495
22,100 41,500 63,600 Reuters Holdings plc 695
7,800 14,675 22,475 Rexam plc 110
</TABLE>
<PAGE> 552
MS GLOBAL EQUITY ALLOCATION FUND - VKAC GLOBAL EQUITY FUND
PROFORMA COMBINED PORTFOLIO OF INVESTMENTS (Continued)
December 31, 1997
<TABLE>
<CAPTION>
(Unaudited) MS Glob. VKAC
Eq. Alloc. Glob Eq Proforma
Shares Shares Shares Value (000)
--------- -------- --------- -----------
<S> <C> <C> <C> <C>
United Kingdom (Continued)
3,900 7,300 11,200 RMC Group plc 159
18,212 34,200 52,412 Royal & Sun Alliance Insurance Group plc 528
6,454 12,225 18,679 Royal Bank of Scotland plc 238
15,760 29,275 45,035 RTZ Corp. plc (Registered) 555
20,772 39,025 59,797 Sainsbury (J) plc 504
2,600 4,850 7,450 Schroders plc 234
12,993 24,425 37,418 Scottish Power plc 331
26,000 48,800 74,800 Sears plc 65
8,051 14,675 22,726 Sedgwick Group plc 53
6,500 12,225 18,725 Slough Estates plc 105
64,896 127,975 192,871 SmithKline Beecham plc 1,983
6,476 12,225 18,701 Southern Electric plc 156
18,185 34,200 52,385 Tarmac plc 98
10,354 19,525 29,879 Taylor Woodrow plc 87
24,742 46,325 71,067 Tesco plc 586
9,144 17,050 26,194 Thames Water plc 390
5,571 11,892 (a)17463 Thorn plc 45
6,500 0 6,500 Thorn EMI plc 'B' 2
6,466 12,225 18,691 TI Group plc 144
36,400 70,750 107,150 Unilever plc 922
42,892 80,525 123,417 Vodafone Group plc 892
11,700 21,975 33,675 Zeneca Group plc 1,185
-------
43,813
-------
United States (37.4%)
5,200 7,100 12,300 Abbott Laboratories 806
900 1,300 (a)2200 AccuStaff, Inc. 51
3,000 4,100 7,100 Adobe Systems, Inc. 293
700 1,100 (a)1800 Advanced Fibre Communications, Inc. 52
900 1,300 2,200 AGCO Corp. 64
900 1,300 2,200 A.H. Belo Corp., 'A' 123
800 1,200 2,000 Air Express International Corp. 61
900 1,200 2,100 Air Products & Chemicals, Inc. 173
500 700 1,200 Airborne Freight Corp. 75
600 900 1,500 Albank Financial Corp. 77
3,300 4,500 7,800 Albertson's, Inc. 370
1,100 1,500 2,600 Allegheny Teledyne, Inc. 67
600 800 (a)1400 Allen Telecom, Inc. 26
1,500 2,100 3,600 Allergan, Inc. 121
1,200 1,700 (a)2900 Allied Waste Industries, Inc. 68
5,100 7,000 12,100 Allstate Corp. 1,100
3,900 5,300 9,200 Alltel Corp. 378
900 1,200 2,100 Aluminum Co. of America 148
1,000 1,500 2,500 Alza Corp., 'A' 80
900 1,300 2,200 AMBAC Finacial Group, Inc. 101
700 1,000 1,700 American Bankers Insurance Group, Inc. 78
5,600 7,700 13,300 American Express Co. 1,187
</TABLE>
<PAGE> 553
MS GLOBAL EQUITY ALLOCATION FUND - VKAC GLOBAL EQUITY FUND
PROFORMA COMBINED PORTFOLIO OF INVESTMENTS (Continued)
December 31, 1997
<TABLE>
<CAPTION>
(Unaudited) MS Glob. VKAC
Eq. Alloc. Glob Eq Proforma
Shares Shares Shares Value (000)
--------- -------- --------- -----------
<S> <C> <C> <C> <C>
United States (Continued)
1,000 1,400 2,400 American General Corp. 130
8,200 11,300 19,500 American Greeting Corp., 'A' 793
8,600 11,800 20,400 American Home Products Corp. 1,561
5,500 7,500 13,000 American International Group, Inc. 1,414
700 1,000 (a)1700 American Power Conversion Corp. 40
1,000 1,300 2,300 American Stores Co. 47
15,400 21,100 36,500 American Telephone & Telegraph Co. 2,236
4,600 6,300 10,900 Ameritech Corp. 877
5,000 6,900 11,900 Amoco Corp. 1,013
2,700 3,700 6,400 AMP, Inc. 269
600 800 (a)1400 AMR Corp. 180
600 900 (a)1500 Amresco, Inc. 45
1,200 1,800 (a)3000 Andrew Corp. 72
6,700 9,200 15,900 Anheuser-Busch Cos., Inc., 'A' 700
1,100 1,600 (a)2700 Apple Computer, Inc. 35
9,900 13,500 (a)23400 Applied Material, Inc. 705
600 900 1,500 Aptar Group, Inc. 83
1,900 2,600 4,500 Armstrong World Industries, Inc., 'B' 336
800 1,100 1,900 Arvin Industries, Inc. 63
2,200 3,000 5,200 Asarco, Inc. 117
4,000 5,500 9,500 Ashland, Inc. 510
600 900 1,500 Associated Banc-Corp. 83
800 1,100 1,900 Astoria Financial Corp. 106
1,500 2,100 3,600 Atlantic Richfield Co. 288
1,300 1,800 (a)3100 Atmel Corp. 58
2,900 4,000 6,900 Automatic Data Processing, Inc. 423
1,100 1,600 2,700 Avnet, Inc. 178
800 1,200 2,000 AVX Corp. 37
2,200 3,000 5,200 Baker Hughes, Inc. 227
1,600 2,400 4,000 Baldor Electric Co. 87
1,000 1,500 2,500 Ballard Medical Products 61
5,200 7,100 12,300 Banc One Corp. 668
5,300 7,300 12,600 Bank of New York Co., Inc. 728
9,100 12,500 21,600 BankAmerica Corp. 1,577
3,200 4,400 7,600 BankBoston Corp. 714
1,000 1,400 2,400 Bankers Trust New York Corp. 270
1,300 1,900 (a)3200 Barnes & Noble, Inc. 107
2,900 4,000 6,900 Bausch & Lomb, Inc. 273
3,600 4,900 8,500 Baxter International, Inc. 429
9,600 12,200 21,800 Becton & Dickinson & Co. 1,090
700 1,100 1,800 Belden, Inc. 63
6,900 9,500 16,400 Bell Atlantic Corp. 1,492
9,500 13,000 22,500 BellSouth Corp. 1,267
600 800 1,400 Beneficial Corp. 116
600 900 1,500 Bergen Brunswig Corp., 'A' 63
600 900 1,500 Betz Laboratories, Inc. 92
2,900 4,100 (a)7000 Beverly Enterprises, Inc. 91
</TABLE>
<PAGE> 554
MS GLOBAL EQUITY ALLOCATION FUND - VKAC GLOBAL EQUITY FUND
PROFORMA COMBINED PORTFOLIO OF INVESTMENTS (Continued)
December 31, 1997
<TABLE>
<CAPTION>
(Unaudited) MS Glob. VKAC
Eq. Alloc. Glob Eq Proforma
Shares Shares Shares Value (000)
--------- -------- --------- -----------
<S> <C> <C> <C> <C>
United States (Continued)
3,600 5,000 8,600 BFGoodrich Co. 356
900 1,300 (a)2200 Biogen, Inc. 80
1,200 1,700 2,900 Biomet, Inc. 74
2,900 4,000 6,900 Birmingham Steel Corp. 109
1,300 1,900 (a)3200 BISYS Group, Inc. 106
700 1,000 (a)1700 Black Box Corp. 60
1,200 1,800 3,000 BMC Industries, Inc. 48
1,900 2,800 4,700 Bob Evans Farms, Inc. 104
4,900 6,700 11,600 Boeing Co. 568
800 1,200 2,000 Boise Cascade Corp. 61
600 900 (a)1500 Borders Group, Inc. 47
600 900 1,500 Bowater, Inc. 67
3,400 4,600 8,000 Briggs & Stratton Corp. 389
10,500 14,400 24,900 Bristol-Myers Squibb Co. 2,356
2,600 3,600 6,200 Brown-Forman Corp., 'B' 343
2,600 3,500 6,100 Browning-Ferris Industries, Inc. 226
2,400 3,300 5,700 Burlington Northern Railroad Co. 530
1,367 1,800 3,167 Burlington Resources, Inc. 142
900 1,300 (a)2200 California Energy Company, Inc. 63
1,100 1,600 2,700 Callaway Golf Co. 77
800 1,200 (a)2000 Cambridge Tech Partner, Inc. 83
500 800 1,300 Camco International, Inc. 83
2,900 4,000 6,900 Campbell Soup Co. 401
500 800 1,300 Capital RE Corp. 81
400 600 (a)1000 Catalina Marketing Corp. 46
6,100 8,300 14,400 Caterpillar, Inc. 699
1,190 1,700 2,890 CBS, Inc. 85
700 1,100 (a)1800 Centocor, Inc. 60
3,100 4,200 7,300 Central & South West Corp. 198
700 1,000 1,700 Central Louisiana Electric Co. 55
400 600 1,000 Central Newspapers, Inc., 'A' 74
700 1,000 1,700 Centura Banks, Inc. 117
700 1,100 1,800 Century Telephone Enterprises, Inc. 90
500 800 (a)1300 Chancellor Media Corp., 'A' 97
655 900 1,555 Charter One Financial Inc. 98
5,800 8,000 13,800 Chase Manhattan Corp. 1,511
8,500 11,600 20,100 Chevron Corp. 1,548
625 1,000 1,625 Chittenden Corp. 57
1,500 2,100 (a)3600 Choice Hotels International, Inc. 58
9,600 13,100 22,700 Chrysler Corp. 799
1,800 2,500 4,300 Chubb Corp. 325
1,900 2,600 4,500 CIGNA Corp. 779
4,000 5,500 9,500 Cincinatti Milacron, Inc. 246
900 1,300 2,200 CIPSCO, Inc. 97
1,500 2,200 (a)3700 Circus Circus Enterprises, Inc. 76
3,900 5,400 (a)9300 Cisco Systems, Inc. 518
5,400 7,400 12,800 Citicorp 1,618
</TABLE>
<PAGE> 555
MS GLOBAL EQUITY ALLOCATION FUND - VKAC GLOBAL EQUITY FUND
PROFORMA COMBINED PORTFOLIO OF INVESTMENTS (Continued)
December 31, 1997
<TABLE>
<CAPTION>
(Unaudited) MS Glob. VKAC
Eq. Alloc. Glob Eq Proforma
Shares Shares Shares Value (000)
--------- -------- --------- -----------
<S> <C> <C> <C> <C>
United States (Continued)
700 1,100 1,800 CKE Restaurants, Inc. 76
1,900 2,700 4,600 Clayton Homes, Inc. 83
1,900 2,600 4,500 Clorox Co. 356
500 800 1,300 CMAC Investment Corp. 78
600 900 1,500 CNF Transportation, Inc. 58
500 800 (a)1300 Coast Savings Financial, Inc. 89
1,500 2,100 3,600 Coastal Corp. 223
25,700 35,200 60,900 Coca-Cola Co. 4,057
900 1,200 2,100 Colgate Palmolive Co. 154
15,300 20,900 36,200 Columbia HCA/Healthcare Corp. 1,072
700 1,100 1,800 Comdisco, Inc. 60
3,800 4,300 8,100 Comerica, Inc. 731
1,000 1,500 2,500 Commercial Metals Co. 79
2,200 1,500 (a)3700 Commnet Cellular, Inc. 132
8,700 11,900 20,600 Compaq Computer Corp. 1,163
700 1,000 1,700 Compass Bancshares, Inc. 74
900 1,300 (a)2200 CompUSA, Inc. 68
6,600 9,000 15,600 Computer Associates International, Inc. 825
1,100 1,600 (a)2700 Computer Management Sciences 52
1,700 2,300 4,000 Conagra, Inc. 131
900 1,300 (a)2200 Concord EFS, Inc. 55
1,800 2,500 4,300 Conseco, Inc. 195
3,700 5,000 8,700 Consolidated Edison Co. of New York, Inc. 357
600 900 1,500 Consolidated Papers, Inc. 80
900 1,300 (a)2200 Consolidated Stores Corp. 97
600 900 (a)1500 Continental Airlines, 'B' 72
500 700 (a)1200 Cooper Cameron Corp. 73
2,200 3,000 5,200 Cooper Industries, Inc. 255
2,000 2,800 4,800 Cooper Tire & Rubber Co. 117
1,600 2,200 3,800 Coors (Adolph) 'B' 126
1,500 2,100 3,600 Corestates Financial Corp. 288
1,100 1,600 (a)2700 Corporate Express, Inc. 35
1,200 1,700 2,900 Countrywide Credit Industries, Inc. 124
1,300 1,900 (a)3200 Covance, Inc. 64
3,600 4,900 8,500 CPC International, Inc. 915
3,500 4,800 8,300 C.R. Bard, Inc. 260
1,300 1,900 3,200 Crompton & Knowles Corp. 85
100 100 200 Crown Cork & Seal, Inc. 10
4,700 6,400 11,100 CSX Corp. 599
300 0 300 Cummins Engine 18
2,600 3,500 6,100 Cyprus Amaz Minerals Co. 94
700 1,000 (a)1700 Cytec Industries, Inc. 80
800 1,200 2,000 Dallas Semiconductor Corp. 82
1,000 1,400 2,400 Dana Corp. 114
900 1,300 2,200 Danaher Corp. 139
6,200 8,400 14,600 Darden Restaurants, Inc. 183
6,400 8,800 15,200 Dayton Hudson Corp. 1,026
</TABLE>
<PAGE> 556
MS GLOBAL EQUITY ALLOCATION FUND - VKAC GLOBAL EQUITY FUND
PROFORMA COMBINED PORTFOLIO OF INVESTMENTS (Continued)
December 31, 1997
<TABLE>
<CAPTION>
(Unaudited) MS Glob. VKAC
Eq. Alloc. Glob Eq Proforma
Shares Shares Shares Value (000)
--------- -------- --------- -----------
<S> <C> <C> <C> <C>
United States (Continued)
900 1,300 2,200 Dean Foods Co. 131
6,800 9,300 16,100 Deere & Co. 939
1,600 2,200 (a)3800 Dell Computer Corp. 319
2,300 3,200 5,500 Delta Airlines Inc. 654
5,100 7,000 12,100 Deluxe Corp. 417
700 1,100 1,800 Deposit Guaranty Corp. 102
1,600 2,200 3,800 Dime Bancorp, Inc. 115
600 800 1,400 Dow Chemical Co. 142
1,000 1,500 (a)2500 Dress Barn, Inc. 71
7,200 9,800 17,000 Dresser Industries, Inc. 713
600 800 1,400 DTE Energy Co. 49
13,400 18,300 31,700 Du Pont (EI) de Nemours Co. 1,904
10,600 14,500 25,100 Dun & Bradstreet Corp. 777
600 900 (a)1500 Dura Pharmaceuticals, Inc. 69
4,400 6,000 10,400 Eastern Entreprises 468
1,300 1,800 3,100 Eastman Chemical Co. 185
4,200 5,800 10,000 Eastman Kodak Co. 608
900 1,300 2,200 Echlin, Inc. 80
800 1,200 2,000 Ecolab, Inc. 111
1,900 2,700 4,600 EG&G, Inc. 96
800 1,100 (a)1900 Electronic Arts, Inc. 72
700 1,000 (a)1700 Electronics for Imaging, Inc. 28
6,500 8,900 15,400 Eli Lilly & Co. 1,072
3,000 4,100 (a)7100 EMC Corp. 195
2,900 4,000 6,900 Emerson Electric Co. 389
2,100 3,100 5,200 Enova Corp. 141
2,300 3,100 5,400 Enron Corp. 224
15,000 20,500 35,500 Entergy Corp. 1,063
400 600 (a)1000 Etec Systems, Inc. 46
1,200 1,800 3,000 E.W. Blanch Holdings, Inc. 103
15,300 20,900 36,200 Exxon Corp. 2,215
0 1,100 1,100 Falcon Drilling Co., Inc. 39
8,900 12,200 21,100 Fannie Mae 1,204
1,000 1,500 2,500 Family Dollar Stores, Inc. 73
600 900 1,500 Fastenal Co. 57
700 1,000 (a)1700 Federal Express Corp. 104
900 1,300 2,200 Federal Signal Corp. 48
800 1,100 1,900 FINOVA Group, Inc. 94
900 1,300 2,200 First American Corp., Tennessee 109
3,500 4,800 8,300 First Chicago Corp. 693
500 800 1,300 First Commerce Corp. 87
1,050 1,575 2,625 First Commercial Corp. 154
700 1,000 1,700 First Hawaiian, Inc. 68
900 1,300 2,200 First Midwest Bancorp, Inc. 96
1,000 1,400 2,400 First Security Corp. 101
10,200 14,040 24,240 First Union Corp. (N.C.) 1,242
1,200 1,700 2,900 First Virginia Banks, Inc. 150
</TABLE>
<PAGE> 557
MS GLOBAL EQUITY ALLOCATION FUND - VKAC GLOBAL EQUITY FUND
PROFORMA COMBINED PORTFOLIO OF INVESTMENTS (Continued)
December 31, 1997
<TABLE>
<CAPTION>
(Unaudited) MS Glob. VKAC
Eq. Alloc. Glob Eq Proforma
Shares Shares Shares Value (000)
--------- -------- --------- -----------
<S> <C> <C> <C> <C>
United States (Continued)
100 0 100 Firstenergy Corp. 3
500 700 1,200 Firstmerit Corp. 34
900 1,300 (a)2200 FISERV, Inc. 108
5,400 7,400 12,800 Fleet Financial Group, Inc. 959
4,400 6,000 10,400 Fleming Cos., Inc. 140
2,800 3,800 6,600 Fluor Corp. 247
500 700 (a)1200 FMC Corp. 81
16,100 22,000 38,100 Ford Motor Co. 1,855
800 1,200 (a)2000 Forest Laboratories, Inc. 'A' 99
600 800 1,400 Fort James Corp. 54
3,200 4,400 7,600 Fortune Brands, Inc. 282
900 1,300 (a)2200 Fred Meyer, Inc. 80
700 900 1,600 Freddie Mac 67
4,700 6,400 11,100 Freeport McMoran Copper Corp., 'B' 175
1,200 1,800 (a)3000 Fruit of the Loom 77
2,100 2,900 5,000 Gannett Co., Inc. 309
2,100 2,850 4,950 Gap, Inc. 175
300 400 700 Gaylord Entertainment Co. 22
400 600 1,000 General Dynamics Corp. 86
30,500 41,700 72,200 General Electric Co. 5,298
1,600 2,200 3,800 General Mills, Inc. 272
8,700 11,900 20,600 General Motors Corp. 1,249
900 1,300 2,200 General RE Corp. 466
1,500 2,100 3,600 General Signal Corp. 152
400 600 (a)1000 Genesis Health Ventures, Inc. 26
900 1,300 2,200 Genzyme Corp. 61
1,200 1,800 3,000 Giant Food, Inc. 'A' 101
1,400 1,900 3,300 Goodyear Tire & Rubber Co. 210
1,100 1,500 2,600 GPU, Inc. 110
3,800 5,200 9,000 Great Atlantic & Pacific Tea Co. 267
2,400 3,300 5,700 Great Lakes Chemical Corp. 256
8,400 11,400 19,800 Green Tree Financial Corp. 519
11,500 15,700 27,200 GTE Corp. 1,421
500 700 (a)1200 GTECH Holdings Corp. 38
1,300 1,900 (a)3200 Gulfstream Aerospace Corp. 94
1,200 1,600 2,800 Halliburton Co. 145
1,000 1,400 2,400 Hannaford Brothers Co. 104
1,700 2,400 4,100 Harleysville Group, Inc. 98
600 900 1,500 Harman International Industries, Inc. 64
600 900 1,500 Harnischfeger Industries, Inc. 53
1,200 1,800 (a)3000 Harrah's Entertainment, Inc. 57
7,200 9,800 17,000 Harris Corp. 780
1,300 1,900 3,200 Harsco Corp. 138
900 1,300 2,200 Harte-Hanks Communications, Inc. 82
4,700 6,400 11,100 Hartford Financial Services Group 1,039
100 100 200 HBO & Co. 10
5,500 7,500 13,000 Hercules, Inc. 651
</TABLE>
<PAGE> 558
MS GLOBAL EQUITY ALLOCATION FUND - VKAC GLOBAL EQUITY FUND
PROFORMA COMBINED PORTFOLIO OF INVESTMENTS (Continued)
December 31, 1997
<TABLE>
<CAPTION>
(Unaudited) MS Glob. VKAC
Eq. Alloc. Glob Eq Proforma
Shares Shares Shares Value (000)
--------- -------- --------- -----------
<S> <C> <C> <C> <C>
United States (Continued)
600 900 1,500 Herman Miller, Inc. 82
800 1,100 1,900 Hershey Foods Corp. 118
13,400 18,300 31,700 Hewlett-Packard Co. 1,981
2,500 3,600 6,100 Hibernia Corp., 'A' 115
2,500 3,400 5,900 Hilton Hotels Corp. 176
2,700 3,700 6,400 H.J. Heinz Co. 325
10,600 14,500 25,100 Home Depot, Inc. 1,478
1,400 1,900 3,300 Honeywell, Inc. 226
0 12,643 12,643 Hong Kong Land Holdings 24
2,300 3,100 5,400 Houston Industries, Inc. 144
100 100 200 H&R Block, Inc. 9
670 900 1,570 Huntington Bancshares, Inc. 57
600 900 1,500 Illinois Central Corp. 51
1,000 1,500 2,500 IMCO Recycling, Inc. 40
2,300 3,350 5,650 Imperial Credit Mortgage Holdings 101
2,200 3,000 5,200 Ingersoll-Rand Co. 211
1,200 1,700 2,900 INMC Mortgage Holdings, Inc. 68
700 1,100 1,800 Integrated Health Services, Inc. 56
17,300 23,700 41,000 Intel Corp. 2,881
1,300 1,800 (a)3100Interim Services, Inc. 80
11,300 15,500 26,800 International Business Machines Corp. 2,803
3,100 4,200 7,300 International Flavors & Fragrances, Inc. 376
1,200 1,700 2,900 International Game Technology 73
1,300 1,800 (a)3100 International Rectifier Corp. 37
1,700 2,300 4,000 Interpublic Group of Cos., Inc. 199
1,000 1,400 2,400 Interstate Bakeries Corp. 90
1,000 1,500 2,500 Invacare Corp. 54
2,000 3,000 (a)5000 Iomega Corp. 62
2,000 1,200 (a)3200 Ionics, Inc. 125
5,500 7,500 13,000 ITT Industries, Inc. 408
600 900 (a)1500 Jacobs Engineering Group, Inc. 38
3,000 4,100 7,100 J.C. Penney Co., Inc. 428
600 800 1,400 Jefferson-Pilot Corp. 109
2,200 3,100 5,300 John H. Harland Co. 111
1,500 2,100 3,600 Johns Manville Corp. 36
13,900 19,000 32,900 Johnson & Johnson 2,168
5,900 8,100 14,000 Johnson Controls, Inc. 669
500 800 (a)1300 Jones Apparel Group, Inc. 56
7,300 9,900 17,200 Jostens, Inc. 397
1,600 2,200 3,800 Kansas City Southern Industries, Inc. 121
900 1,200 (a)2100 Kemet Corp. 41
700 1,000 1,700 Kennametal, Inc. 88
800 1,200 (a)2000 Kent Electronics Corp. 50
200 300 500 Kerr-McGee Corp. 32
5,400 6,400 11,800 KeyCorp. 836
500 700 1,200 Keyspan Energy Corp. 44
2,400 3,400 5,800 Kimball International, Inc., 'B' 107
</TABLE>
<PAGE> 559
MS GLOBAL EQUITY ALLOCATION FUND - VKAC GLOBAL EQUITY FUND
PROFORMA COMBINED PORTFOLIO OF INVESTMENTS (Continued)
December 31, 1997
<TABLE>
<CAPTION>
(Unaudited) MS Glob. VKAC
Eq. Alloc. Glob Eq Proforma
Shares Shares Shares Value (000)
--------- -------- --------- -----------
<S> <C> <C> <C> <C>
United States (Continued)
5,800 7,900 13,700 Kimberly-Clark Corp. 676
800 1,200 2,000 King World Productions, Inc. 116
900 1,300 (a)2200 KLA-Tencor Corp. 85
800 1,200 2,000 KN Energy, Inc. 108
500 700 1,200 Knight Ridder, Inc. 62
1,000 1,500 (a)2500 Komag, Inc. 37
700 1,100 (a)1800 LCI International, Inc. 55
700 1,000 (a)1700 Lear Corp. 81
900 1,300 (a)2200 Lexmark International Group, Inc. 84
1,400 2,000 3,400 LG&E Energy Corp. 84
750 1,200 1,950 Liberty Financial Cos., Inc. 74
2,500 3,400 5,900 Lincoln National Corp. 461
700 1,100 (a)1800 Littlefuse, Inc. 45
3,800 5,200 9,000 Lockheed Martin Corp. 887
3,400 4,700 8,100 Loews Corp. 860
1,000 1,400 2,400 Long Island Lighting Co. 72
800 1,100 1,900 Longs Drug Stores, Inc. 61
800 1,200 2,000 Louisiana-Pacific Corp. 38
4,600 6,300 10,900 Lowe's Cos., Inc. 520
800 1,200 2,000 Lubrizol Corp. 74
1,900 2,600 4,500 Lucent Technologies, Inc. 359
800 1,200 (a)2000 Mac Frugals Bargains Close-Outs, Inc. 82
1,000 1,500 2,500 Magna Group, Inc. 114
1,200 1,700 2,900 M.A. Hanna Co. 73
2,800 3,800 6,600 Mallinckrodt, Inc. 251
9,500 13,100 22,600 Manor Care, Inc. 791
200 300 (a)500 Markel Corp. 78
200 300 500 Marriott International, Inc. 35
800 1,200 2,000 Martin Marietta Corp. 73
2,800 3,800 6,600 May Department Stores Co. 348
900 1,300 2,200 Maytag Corp. 82
3,000 4,100 7,100 MBIA, Inc. 474
3,000 4,100 7,100 MBNA Corp. 194
1,200 1,800 3,000 McClatchy Newspapers, Inc. 82
1,500 2,100 3,600 McCormick & Co., Inc. 101
10,700 14,600 25,300 McDonald's Corp. 1,209
500 700 1,200 McGraw-Hill Cos., Inc. 89
1,200 1,700 2,900 MCN Corp. 117
1,200 1,800 3,000 Medical Assurance, Inc. 84
1,600 2,200 3,800 Medtronic, Inc. 199
3,800 5,200 9,000 Mellon Bank Corp. 546
500 700 1,200 Mercantile Stores Co., Inc. 73
11,500 15,800 27,300 Merck & Co., Inc. 2,902
1,800 2,400 4,200 Meredith Corp. 150
2,366 0 2,366 Meritor Automotive, Inc. 50
7,500 10,300 17,800 Merrill Lynch & Co., Inc. 1,299
800 1,100 (a)1900 Microchip Technology, Inc. 57
</TABLE>
<PAGE> 560
MS GLOBAL EQUITY ALLOCATION FUND - VKAC GLOBAL EQUITY FUND
PROFORMA COMBINED PORTFOLIO OF INVESTMENTS (Continued)
December 31, 1997
<TABLE>
<CAPTION>
(Unaudited) MS Glob. VKAC
Eq. Alloc. Glob Eq Proforma
Shares Shares Shares Value (000)
--------- -------- --------- -----------
<S> <C> <C> <C> <C>
United States (Continued)
10,900 14,900 (a)25800 Microsoft Corp. 3,335
1,400 2,000 3,400 Millenium Chemicals, Inc. 80
900 1,200 2,100 Millipore Corp. 71
500 800 1,300 Minerals Technologies, Inc. 59
2,300 3,200 5,500 Minnesota Mining & Manufacturing Co. 451
9,700 13,300 23,000 Mobil Corp. 1,660
1,175 1,675 2,850 Molex, Inc. 92
2,700 3,700 6,400 Monsanto 269
1,200 1,700 2,900 Montana Power Co. 92
1,000 1,400 2,400 Morgan (J.P.) & Co., Inc. 271
2,500 3,400 5,900 Morton International, Inc. 203
5,800 7,900 13,700 Motorola, Inc. 782
500 800 (a)1300 MSC Industrial Direct Co., Inc. 'A' 55
800 1,100 1,900 Murphy Oil Corp. 103
1,400 2,000 3,400 Mylan Laboratories, Inc. 71
1,500 2,100 (a)3600 Nabors Industries, Inc. 113
1,800 2,400 4,200 Nalco Chemical Co. 166
1,300 1,800 3,100 National City Corp. 204
1,400 2,000 3,400 National Commerce Bancorp. 120
700 1,100 1,800 National Fuel Gas Co. 88
600 900 1,500 National Service Industries, Inc. 74
6,600 8,900 15,500 NationsBank Corp. 944
1,200 1,700 (a)2900 NCS HealthCare, Inc. 76
1,900 2,700 4,600 New Century Energies, Inc. 221
1,000 1,500 2,500 New England Electric System 107
1,000 1,400 2,400 New Jersey Resources Corp. 96
1,600 2,300 3,900 New York State Electric & Gas Corp. 138
500 700 1,200 New York Times Co., 'A' 79
600 800 1,400 Newell Co. 60
200 300 500 Nicor, Inc. 21
800 1,100 (a)1900 Nine West Group, Inc. 49
500 800 1,300 Noble Affiliates, Inc. 46
1,000 1,500 (a)2500 Noble Drilling Corp. 77
600 900 1,500 Nordson Corp. 69
700 900 1,600 Norfolk Southern Corp. 49
900 1,300 2,200 Norrell Corp. 44
1,200 1,700 2,900 Northern Telecom Ltd. 258
500 700 1,200 Northrop Grumman Corp. 138
4,000 5,400 9,400 Norwest Corp. 363
1,100 1,600 (a)2700 Novacare Corp. 35
5,100 7,200 (a)12300 Novell, Inc. 92
600 900 (a)1500 Novellus Systems, Inc. 48
2,400 3,500 (a)5900 Office Depot, Inc. 141
2,300 3,200 (a)5500 OfficeMax, Inc. 78
700 1,100 1,800 Ohio Casualty Corp. 80
1,600 2,400 4,000 Old Kent Financial Corp. 159
2,100 3,000 5,100 Olsten Corp. 77
</TABLE>
<PAGE> 561
MS GLOBAL EQUITY ALLOCATION FUND - VKAC GLOBAL EQUITY FUND
PROFORMA COMBINED PORTFOLIO OF INVESTMENTS (Continued)
December 31, 1997
<TABLE>
<CAPTION>
(Unaudited) MS Glob. VKAC
Eq. Alloc. Glob Eq Proforma
Shares Shares Shares Value (000)
--------- -------- --------- -----------
<S> <C> <C> <C> <C>
United States (Continued)
600 900 1,500 OM Group, Inc. 55
1,200 1,800 3,000 Omnicare, Inc. 93
1,300 1,800 3,100 One Valley Bancorp., Inc. 120
4,200 5,700 (a)9900 Oracle System Corp. 221
1,000 1,400 (a)2400 O'Reilly Automotive, Inc. 63
1,000 1,400 2,400 Oregon Steel Mills, Inc. 51
800 1,200 2,000 Orion Capital Corp. 93
1,300 1,800 (a)3100 Oryx Energy Co. 79
1,400 2,000 3,400 Pacific Century Financial Corp. 84
4,700 6,400 11,100 Pacific Enterprises 418
2,500 3,400 5,900 Pall Corp. 122
700 1,000 1,700 Parker-Hannifin Corp. 78
600 900 (a)1500 Patterson Dental Co. 68
500 800 (a)1300 Payless ShoeSource, Inc. 87
3,300 4,500 7,800 Peco Energy Co. 189
700 1,000 1,700 Pennziol Co. 114
1,000 1,300 2,300 Peoples Energy Corp. 91
1,500 2,000 3,500 Pep Boys Manny, Moe & Jack 84
7,000 9,600 16,600 PepsiCo, Inc. 606
900 1,200 2,100 Perkin-Elmer Corp. 149
700 1,000 (a)1700 Personnel Group of America, Inc. 56
12,500 17,100 29,600 Pfizer, Inc. 2,208
1,100 1,500 2,600 PG&E Corp. 79
1,276 1,804 (a)3080 PharMerica, Inc. 32
3,400 4,600 8,000 Pharmacia & Upjohn, Inc. 293
8,400 11,500 19,900 Phelps Dodge Corp. 1,240
32,200 44,000 76,200 Philip Morris Cos., Inc. 3,454
7,300 10,000 17,300 Phillips Petroleum Co. 841
1,500 2,100 3,600 Phillips-Van Heusen Corp. 51
1,100 1,600 (a)2700 Photronics, Inc. 65
900 1,300 (a)2200 PhyCor, Inc. 59
1,200 1,800 3,000 Pier 1 Imports, Inc. 68
1,000 1,500 2,500 Pinnacle West Capital Corp. 106
700 1,000 1,700 Pioneer Natural Resources Co. 49
500 700 1,200 PMI Group, Inc. 87
2,500 3,400 5,900 PNC Bank Corp. 337
900 1,200 2,100 PPG Industries, Inc. 120
600 900 1,500 Pogo Producing Co. 44
700 1,000 1,700 Polaroid Corp. 83
600 900 (a)1500 Policy Management Systems Corp. 104
1,700 2,400 4,100 Potomac Electric Power Co. 106
7,000 9,500 16,500 PP&L Resources, Inc. 395
600 900 1,500 Precision Castparts Corp. 90
15,600 21,400 37,000 Procter & Gamble Co. 2,954
900 1,300 (a)2200 Profitt's Inc. 63
2,500 3,565 (a)6065 Promus Company, Inc. 255
600 900 1,500 Protective Life Corp. 90
</TABLE>
<PAGE> 562
MS GLOBAL EQUITY ALLOCATION FUND - VKAC GLOBAL EQUITY FUND
PROFORMA COMBINED PORTFOLIO OF INVESTMENTS (Continued)
December 31, 1997
<TABLE>
<CAPTION>
(Unaudited) MS Glob. VKAC
Eq. Alloc. Glob Eq Proforma
Shares Shares Shares Value (000)
--------- -------- --------- -----------
<S> <C> <C> <C> <C>
United States (Continued)
600 900 1,500 Provident Bankshares Corp. 96
700 1,100 1,800 Provident Companies, Inc. 70
17,000 23,200 40,200 Public Service Enterprise Group, Inc. 1,274
1,300 1,900 3,200 Puget Sound Energy, Inc. 97
500 700 1,200 Quanex Corp. 34
1,400 2,000 (a)3400 Quantum Corp. 68
900 1,300 2,200 Queens County Bancorp, Inc. 89
900 1,300 (a)2200 Quintiles Transnational Corp. 84
5,400 7,400 12,800 Raychem Corp. 551
600 900 1,500 Rayonier, Inc. WI 64
554 758 1,312 Raytheon Co., 'A' 65
5,600 7,700 13,300 Raytheon Co., 'B' 672
1,300 1,800 3,100 Readers Digest Association, Inc., 'A' 73
1,526 0 (a)1526 R & B FALCON CORP 53
0 1,000 1,000 Reading & Bates Corp. 41
1,000 1,400 (a)2400 Reebok International, Ltd. 69
800 1,200 2,000 Reliastar Financial Corp. 82
700 1,100 (a)1800 Renal Care Group, Inc. 58
1,400 1,900 3,300 Republic New York Corp. 377
600 800 1,400 Rite Aid Corp. 82
1,100 1,600 2,700 RLI Corp. 134
1,200 1,700 (a)2900 Robert Half International, Inc. 116
1,200 1,700 2,900 Rochester Gas & Electric Corp. 99
4,000 5,500 9,500 Rockwell International Corp. 496
1,000 1,400 2,400 Rohm & Haas Co. 230
800 1,200 (a)2000 Rowan Cos., Inc. 61
4,075 4,200 8,275 RPM, Inc. 126
600 900 (a)1500 R.P. Scherer Corp. 92
1,000 1,300 2,300 R.R. Donnelly & Sons Co. 86
0 25,000 25,000 Royal Dutch Petroleum ADR (Netherlands) 1,355
500 600 1,100 Russell Corp. 29
700 1,100 1,800 Ryder Systems, Inc. 59
500 700 1,200 SAFECO Corp. 59
1,300 1,900 (a)3200 Safeguard Scientifics, Inc. 100
300 400 (a)700 Samina Corp. 47
11,500 14,800 26,300 Sara Lee Corp. 1,481
7,399 10,100 17,499 SBC Communications, Inc. 1,282
1,300 1,800 3,100 SCANA Corp. 93
1,200 1,600 2,800 Schering-Plough Corp. 174
600 900 (a)1500 Scholastic Corp. 56
4,500 6,100 10,600 Scientific-Atlanta, Inc. 178
900 1,300 (a)2200 SCI Systems, Inc. 96
700 1,000 (a)1700 Sealed Air Corp. 105
9,100 12,400 21,500 Sears, Roebuck & Co. 973
2,900 3,900 6,800 Service Corp. International 251
200 300 500 Shared Medical Systems Corp. 33
1,500 2,100 3,600 Shaw Industries, Inc. 42
</TABLE>
<PAGE> 563
MS GLOBAL EQUITY ALLOCATION FUND - VKAC GLOBAL EQUITY FUND
PROFORMA COMBINED PORTFOLIO OF INVESTMENTS (Continued)
December 31, 1997
<TABLE>
<CAPTION>
(Unaudited) MS Glob. VKAC
Eq. Alloc. Glob Eq Proforma
Shares Shares Shares Value (000)
--------- -------- --------- -----------
<S> <C> <C> <C> <C>
United States (Continued)
700 1,100 (a)1800 Sierra Health Services, Inc. 61
400 600 (a)1000 Smith International, Inc. 61
1,200 1,800 3,000 Snap-On, Inc. 131
700 900 1,600 Sonat, Inc. 73
1,200 1,800 3,000 Sonoco Products Co. 104
3,800 5,100 8,900 Southern Co. 230
3,300 4,500 7,800 Sprint Corp. 457
1,200 1,700 2,900 St Paul Cos., Inc. 238
800 1,100 1,900 St. John Knits, Inc. 76
1,200 1,800 (a)3000 St. Jude Medical, Inc. 92
1,000 1,400 2,400 St. Paul Bancorp, Inc. 63
900 1,300 (a)2200 Starbucks Corp. 84
1,300 1,900 (a)3200 Steel Dynamics, Inc. 51
500 800 (a)1300 Steris Corp. 63
800 1,200 (a)2000 Sterling Commerce, Inc. 77
1,000 1,400 (a)2400 Sterling Software, Inc. 98
900 1,300 2,200 Stewart Enterprises, Inc. 'A' 103
600 900 1,500 Storage Technology Corp. 93
6,500 9,000 15,500 Sun Co., Inc. 653
8,400 11,500 (a)19900 Sun Microsystems, Inc. 795
600 900 1,500 Sunbeam Corp. 63
533 700 1,233 Sunburst Hospitality, Corp. 12
1,000 1,400 (a)2400 SunGuard Data Systems, Inc. 74
1,600 2,200 (a)3800 Sunrise Medical, Inc. 59
1,500 2,100 3,600 Superior Industries International 97
10,700 13,100 23,800 SUPERVALU Inc. 998
1,400 2,000 (a)3400 Sybase, Inc. 45
800 1,100 (a)1900 Sybron International Corp. 89
2,100 3,000 (a)5100 Symantec Corp. 112
700 1,000 1,700 Symbol Technologies, Inc. 64
700 1,000 (a)1700 Synopsys, Inc. 61
400 500 900 Sysco Corp. 41
2,800 3,800 6,600 Tandy Corp. 255
600 900 (a)1500 Tech Data Corp. 58
3,500 4,800 8,300 Tektronix, Inc. 329
0 5,566 5,566 TCI Ventures Group'A' 158
900 1,300 2,200 Telephone & Data Systems, Inc. 102
4,700 6,400 11,100 Texaco, Inc. 605
3,200 4,400 7,600 Texas Instruments, Inc. 342
4,700 6,400 11,100 Texas Utilities Co. 461
1,600 2,100 3,700 The Limited, Inc. 94
500 700 1,200 Thiokol Corp. 98
1,200 1,600 2,800 Thomas & Betts Corp. 132
4,100 5,600 (a)9700 3Com Corp. 339
1,400 2,000 (a)3400 360 Communications Co. 69
600 900 1,500 Tidewater, Inc. 83
600 900 1,500 TIG Holdings, Inc. 50
</TABLE>
<PAGE> 564
MS GLOBAL EQUITY ALLOCATION FUND - VKAC GLOBAL EQUITY FUND
PROFORMA COMBINED PORTFOLIO OF INVESTMENTS (Continued)
December 31, 1997
<TABLE>
<CAPTION>
(Unaudited) MS Glob. VKAC
Eq. Alloc. Glob Eq Proforma
Shares Shares Shares Value (000)
--------- -------- --------- -----------
<S> <C> <C> <C> <C>
United States (Continued)
5,600 7,600 13,200 TJX Companies, Inc. 454
1,600 2,200 3,800 Torchmark Corp. 160
600 900 1,500 Toro Co. 64
600 900 1,500 T. Rowe Price Associates, Inc. 94
800 1,200 2,000 Trans Financial, Inc. 78
800 1,100 1,900 Transamerica Corp. 202
600 900 1,500 Transatlantic Holdings, Inc. 107
11,300 15,500 26,800 Travelers, Inc. 1,445
1,100 1,600 (a)2700 Triad Guaranty, Inc. 78
700 1,000 1,700 Trinity Industries, Inc. 76
2,100 2,900 5,000 TRW, Inc. 267
3,200 4,300 7,500 Tupperware Corp. 209
5,900 8,100 14,000 Tyco International, Ltd. 632
500 800 (a)1300 Ucar International, Inc. 52
1,000 1,500 2,500 Ultramar Diamond Shamrock Corp. 80
10,200 13,900 24,100 Unicom Corp. 742
900 1,300 2,200 Unifi, Inc. 90
1,700 2,300 4,000 Union Carbide Corp. 172
600 800 1,400 Union Pacific Corp. 87
2,600 3,600 (a)6200 Unisys Corp. 86
1,000 1,400 2,400 United Asset Management Co. 59
900 1,300 2,200 United Cos. Financial Corp. 34
900 1,300 2,200 United Illuminating Co. 101
3,000 4,100 7,100 United Technologies Corp. 518
800 1,100 (a)1900 Universal Health Services, Inc. 96
700 1,000 (a)1700 U.S. Airways Group, Inc. 106
800 1,100 1,900 U.S. Bancorp. 213
800 1,200 (a)2000 U.S. Cellular Corp. 62
1,200 1,700 (a)2900 U.S. Filter Corp. 87
600 900 1,500 U.S. Industries, Inc. 45
3,900 5,300 9,200 U.S. Surgical Corp. 270
5,300 7,200 12,500 U.S. West Communications Group 565
5,300 7,300 12,600 USF&G Corp. 278
700 1,000 (a)1700 USG Corp. 83
7,300 10,000 17,300 UST, Inc. 640
9,900 13,500 23,400 USX-Marathon Group 791
20,200 27,600 47,800 USX-U.S. Steel Group, Inc. 1,495
1,200 1,700 2,900 UtliCorp. United, Inc. 113
1,000 1,400 2,400 Valero Energy Corp. 75
900 1,300 2,200 Varian Associates, Inc. 111
900 1,300 (a)2200 Vencor, Inc. 54
1,200 1,600 2,800 VF Corp. 129
1,300 1,900 (a)3200 Viking Office Products, Inc. 70
800 1,200 2,000 Vintage Petroleum, Inc. 38
1,500 2,200 3,700 Vishay Intertechnology, Inc. 87
600 900 1,500 Vulcan Materials Co. 153
567 819 1,386 Wachovia Corp. 112
</TABLE>
<PAGE> 565
MS GLOBAL EQUITY ALLOCATION FUND - VKAC GLOBAL EQUITY FUND
PROFORMA COMBINED PORTFOLIO OF INVESTMENTS (Continued)
December 31, 1997
<TABLE>
<CAPTION>
(Unaudited) MS Glob. VKAC
Eq. Alloc. Glob Eq Proforma
Shares Shares Shares Value (000)
--------- -------- --------- -----------
<S> <C> <C> <C> <C>
United States (Continued)
24,500 33,500 58,000 Wal-Mart Stores, Inc. 2,288
1,600 2,200 3,800 Walgreen Co. 119
900 1,300 2,200 Wallace Computer Services, Inc. 86
3,300 4,500 7,800 Walt Disney Co. 774
1,400 1,900 3,300 Warner-Lambert Co. 410
200 200 400 Waste Management, Inc. 11
800 1,200 (a)2000 Weatherford Enterra, Inc. 88
400 600 1,000 Webster Financial Corp. 67
4,200 5,700 9,900 Wendy's International, Inc. 238
700 1,100 1,800 Westamerica Bancorp. 184
900 1,200 (a)2100 Western Digital Corp. 34
800 1,100 1,900 Western National Corp. 56
11,500 15,800 27,300 Whitman Corp. 712
500 800 1,300 Wicor, Inc. 60
200 200 400 Williams Cos., Inc. 11
900 1,300 (a)2200 Wisconsin Central Transportation Corp. 51
800 1,200 2,000 Witco Corp. 82
100 100 (a)200 Wordcom, Inc. 6
1,500 2,000 3,500 Worthington Industries, Inc. 58
1,700 2,500 4,200 WPS Resources Corp. 142
900 1,300 2,200 W.R. Berkley Corp. 97
3,300 4,500 7,800 Xerox Corp. 576
900 1,300 2,200 York International Corp. 87
900 1,300 2,200 Zions Bancorp. 100
-------
193,066
-------
-------
Total Common Stocks 418,120
-------
Preferred Stocks (0.3%)
Austria (0.1%)
800 2,200 3,000 Bank Austria AG 143
1,064 1,464 2,528 Bank Austria AG 112
100 200 300 Bau Holding AG 14
0 1,100 1,100 Creditanstalt Bank 62
100 100 200 EA-Generali AG 22
-------
353
-------
Germany (0.2%)
4,150 6,400 10,550 RWE AG 446
776 1,150 1,926 SAP AG 630
-------
1,076
-------
Italy (0.0%)
31,850 49,700 81,550 Fiat S.p.A. 124
-------
Total Preferred Stocks 1,553
-------
</TABLE>
<PAGE> 566
MS GLOBAL EQUITY ALLOCATION FUND - VKAC GLOBAL EQUITY FUND
PROFORMA COMBINED PORTFOLIO OF INVESTMENTS (Continued)
December 31, 1997
<TABLE>
<CAPTION>
(Unaudited) MS Glob. VKAC
Eq. Alloc. Glob Eq Proforma
Shares Shares Shares Value (000)
--------- -------- --------- -----------
<S> <C> <C> <C> <C>
Investment Companies (1.7%)
United States (1.7%)
156,800 249,100 (b)405,900 Latin American Discovery Fund, Inc. 7,281
70,000 0 (b)70,000 Morgan Stanley Africa Investment Fund, Inc. 805
0 124,800 (b)124,800 Morgan Stanley Asia Pacific Fund, Inc. 928
-------
Total Investment Companies 9,014
-------
Rights (0.0%)
Spain (0.0%)
264 0 (a)264 ACS S.A., expiring 1/11/98 -
Total Rights -
Warrants (0.0%)
France (0.0%)
320 0 (a)320 Casino Guichard Perrachon, expiring 12/31/99 7
2,073 3,550 (a)5623 Cie Generale des Eaux, expiring 5/2/01 4
5 0 (a)5 Sodexho S.A., expiring 6/7/04 1
-------
12
-------
Hong Kong (0.0%)
585 0 (a)585 Peregine Investment Holdings Ltd., expiring 5/15/98 -
Italy (0.0%)
913 1,400 (a)2313 La Rinascente S.p.A., expiring 12/31/99 1
1,491 1,400 (a)2891 La Rinascente S.p.A., expiring 12/31/99 3
-------
4
-------
Switzerland (0.0%)
45 0 (a)45 Roche Holdings, expiring 5/5/98 5
-------
Total Warrants 21
-------
Covertible Debentures (0.0%)
France (0.0%)
FRF 32 0 32 Casino Guichard Perrachon 4.50%, 7/12/01 18
29 0 29 Sanofi S.A. 4.00%, 1/1/00 35
19 34 53 Simco S.A. 3.25%, 1/1/06 46
1 0 1 Sodexho S.A. 6.00%, 6/7/04 4
-------
103
-------
Italy (0.0%)
ITL 7,304 11,200 18,504 Mediobanca S.p.A. 4.50%, 1/1/00 10
2,125 0 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) 428,823
-------
</TABLE>
<PAGE> 567
MS GLOBAL EQUITY ALLOCATION FUND - VKAC GLOBAL EQUITY FUND
PROFORMA COMBINED PORTFOLIO OF INVESTMENTS (Continued)
December 31, 1997
<TABLE>
<CAPTION>
(Unaudited) MS Glob. VKAC
Eq. Alloc. Glob Eq Proforma
Shares Shares Shares Value (000)
--------- -------- --------- -----------
<S> <C> <C> <C> <C>
Repurchase Agreements (15.3%)
32,681 0 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
0 46,132 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 2 26 28 Australian Dollar 18
ATS 5 0 5 Austrian Schilling -
GBP 6 0 6 British Pound 9
CAD 77 0 77 Canadian Dollar 54
DKK 0 5 5 Danish Krone -
DEM 33 57 90 German Mark 50
HUF 0 1,078 1,078 Hungarian Forint 5
IDR 99,571 0 99,571 Indonesian Rupiah 18
ITL 146,403 201,860 348,263 Italian Lira 197
JPY 701 10,559 11,260 Japanese Yen 86
MYR 0 12 12 Malasian Ringit 3
NLG 0 31 31 Netherlands Guilder 15
PTE 1,397 0 1,397 Portuguese Escudo 8
SGD 2 47 49 Singapore Dollar 29
ESP 3,759 2,594 6,353 Spanish Peseta 42
SEK 2 207 209 Swedish Krona 26
THB 0 1,717 1,717 Thailand Baht 36
--------
Total Foreign Currency 596
--------
Other Assets in Excess of Liabilities (1.8%) 9,479
--------
Net Assets (100%) $517,711
========
</TABLE>
(a)- Non-income producing security.
(b)- The fund is advised by an affiliate.
ADR - American Depository Receipt
NCS - Non-convertible shares
<PAGE> 568
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.(6)
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> 569
<TABLE>
<S> <C> <C>
(c) Registrant's Custody Agreement with PNC Bank, N.A. (with respect to the Money Market Funds).(2)
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 Skadden, Arps, Slate, Meagher & Flom (Illinois).+
12 Form of Tax Opinion of Skadden, Arps, Slate, Meagher & Flom (Illinois) relating to the Reorganization.+
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> 570
<TABLE>
<S> <C> <C>
(h) Form of Assignment and Assumption Agreement (Sub-Administration Agreement) between Van
Kampen American Capital Investment Advisory Corp. and Miller Anderson & Sherrerd,
LLP.(5)
(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 (a) Consent of Price Waterhouse LLP relating to Morgan Stanley Global Equity Allocation
Fund.+
(b) Consent of Price Waterhouse LLP relating to Van Kampen American Capital Global Equity
Fund.+
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 dated September 28, 1997
as supplemented.+
</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.
(6) Included as Appendix A to the Statement of Additional Information.
+ Filed herewith.
C-3
<PAGE> 571
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 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.
(3) The undersigned registrant agrees that, if the Reorganization discussed
in the registration statement closes, the registrant will file with the
Securities and Exchange Commission by post-effective amendment an opinion of
council supporting the tax matters discussed in the registration statement.
C-4
<PAGE> 572
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 April 13, 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
/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 April 13, 1998
- ------------------------------------
Ronald A. Nyberg
Attorney-In-Fact
C-5
<PAGE> 573
SCHEDULE OF EXHIBITS TO FORM N-14
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<S> <C> <C>
11 Opinion of Skadden, Arps, Slate, Meagher & Flom (Illinois).
14 (a) Consent of Price Waterhouse LLP relating to Morgan Stanley
Global Equity Allocation Fund.
(b) Consent of Price Waterhouse LLP relating to Van Kampen
American Capital Global Equity Fund.
17 (a) Form of Proxy Card.
(b) Prospectus of Van Kampen American Capital Global Equity Fund
dated September 28, 1997 as supplemented.
</TABLE>
<PAGE> 1
EXHIBIT 11
Skadden, Arps, Slate, Meagher & Flom (Illinois)
333 West Wacker Drive
Chicago, Illinois 60606-1285
April 13, 1998
Morgan Stanley Fund, Inc.
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
Re: Morgan Stanley Fund, Inc. on behalf of its series,
Morgan Stanley Global Equity Allocation,
Registration Statement on Form N-14
(File No. 333-46839)
--------------------------------------------------
Ladies and Gentlemen:
We have acted as counsel to Morgan Stanley Fund, Inc. (the
"Company"), a Maryland corporation, on behalf of its series, Morgan Stanley
Global Equity Allocation Fund (the "MS Fund"), in connection with the
preparation of Pre-Effective Amendment No. 1 to the Company's Registration
Statement on Form N-14 (as amended, the "Registration Statement") to be filed
under the Securities Act of 1933, as amended (the "1933 Act"), with the
Securities and Exchange Commission (the "Commission") on or about April 13,
1998. The Registration Statement relates to the registration under the 1933 Act
of shares of common stock, $0.001 par value per share (the "Shares"), of the
Company designated for issuance by the MS Fund in connection with the proposed
reorganization of the Van Kampen American Capital Global Equity Fund (the "VK
Fund") with and into the MS Fund.
This opinion is delivered in accordance with the requirements
of Item 16(11) of Form N-14 under the 1933 Act.
<PAGE> 2
Morgan Stanley Fund, Inc.
April 13, 1998
Page 2
In connection with this opinion, we have examined originals or
copies, certified or otherwise identified to our satisfaction, of (i) the
Articles of Amendment and Restatement of the Company's Charter dated September
20, 1995 filed with the Secretary of State of the State of Maryland; (ii) the
By-Laws of the Company, as amended to date hereof; (iii) the resolutions adopted
by the Board of Directors of the Company relating to the authorization, issuance
and sale of the Shares, the filing of the Registration Statement and any
amendments or supplements thereto and related matters; and (iv) such other
documents as we have deemed necessary or appropriate as a basis for the opinions
set forth herein.
In such examination we have assumed the legal capacity of
natural persons, the genuineness of all signatures, the authenticity of all
documents submitted to us as originals, the conformity to original documents of
all documents submitted to us as certified, conformed, photostatic or other
copies and the authenticity of the originals of such latter documents. As to any
facts material to such opinion which were not independently established, we have
relied on statements or representations of officers and other representatives of
the Company or others.
Members of this firm are admitted to the practice of law in
the State of Illinois, and we do not express any opinion as to the laws of any
jurisdiction other than matters relating to Maryland General Corporation Law and
the federal laws of the United States of America to the extent referred to
specifically herein.
Based upon and subject to the foregoing, we are of the opinion
that the issuance and sale of Shares by the Company on behalf of the Fund have
been validly authorized and, assuming certificates therefor have been duly
executed, countersigned, registered and delivered or the shareholders' accounts
have been duly credited and the Shares represented thereby have been fully paid
for, such Shares will be validly issued, fully paid and nonassessable.
<PAGE> 3
Morgan Stanley Fund, Inc.
April 13, 1998
Page 3
We hereby consent to the filing of this opinion with the
Commission as Exhibit 11 to the Registration Statement. In giving this consent,
we do not hereby admit that we are in the category of persons whose consent is
required under Section 7 of the 1933 Act or the rules and regulations of the
Commission.
Very truly yours,
/s/ Skadden, Arps, Slate Meagher & Flom (Illinois)
<PAGE> 1
EXHIBIT 14(a)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Statement of
Additional Information of Morgan Stanley, Fund, Inc. dated April____, 1998
constituting part of this registration statement of Form N-14 of Morgan Stanley
Fund, Inc. (the "Registration Statement") of our report dated August 11, 1997,
relating to the financial statements and financial highlights of Morgan Stanley
Fund, Inc. appearing in the June 30, 1997 Annual Report to Shareholders of
Morgan Stanley Fund, Inc., which are also incorporated by reference into the
Registration Statement. We also consent to the use in the Statement of
Additional Information of Morgan Stanley Fund, Inc., constituting part of the
Registration Statement, of our report dated August 11, 1997, relating to the
financial statements and financial highlights of Morgan Stanley Fund, Inc.,
which appears in such Statement of Additional Information.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
April 8, 1998
<PAGE> 1
EXHIBIT 14(b)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Statement of
Additional Information constituting part of this registration statement on Form
N-14 of Morgan Stanley Fund, Inc. (the "Registration Statement") of our report
dated July 14, 1997, relating to the financial statements and financial
highlights of Van Kampen American Capital Global Equity Fund, which appears in
the Statement of Additional Information dated September 28, 1997 which is also
incorporated by reference in the Registration Statement. We also consent to
the use in the Statement of Additional Information of Van Kampen American
Capital Global Equity Fund dated September 28, 1997, incorporated by reference
in the Registration Statement, of our report dated July 14, 1997, relating to
the financial statements and financial highlights of Van Kampen American
Capital Global Equity Fund which appears in such Statement of Additional
Information. We also consent to the references to us under the "Other Service
Providers" and "Independent Accountants" appearing in the Registration
Statements or documents incorporated therein.
PRICE WATERHOUSE LLP
CHICAGO, IL
April 13, 1998
<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 Dennis J. McDonnell,
Ronald A. Nyberg, Weston B. Wetherell and Nicholas Delmaso and each of them,
with full power of substitution and revocation, as proxies of the undersigned to
attend the Special Meeting of Shareholders of Global Equity Fund to be held at
the offices of Van Kampen American Capital, Inc., One Parkview Plaza, Oakbrook
Terrace, Illinois 60181, on May 14, 1998 at 1:00 p.m., and at any adjournments
thereof (the "Special Meeting"), to vote all Shares of Global Equity Fund 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.
</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 14, 1998 at 1:00 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 1998
Date
- ------------------------------------ ----------------------------------------
Co-owner signature (if applicable) 1998
Date
</TABLE>
<PAGE> 1
EXHIBIT 17(b)
VAN KAMPEN AMERICAN CAPITAL GLOBAL EQUITY FUND
SUPPLEMENT DATED MARCH 9, 1998 TO THE PROSPECTUS DATED
SEPTEMBER 28, 1997, AS PREVIOUSLY SUPPLEMENTED ON JANUARY 2, 1998
The Trustees of the Fund have approved an Agreement and Plan of
Reorganization between the Fund and Morgan Stanley Global Equity Allocation Fund
(the "Global Equity Allocation Fund"), a series of Morgan Stanley Fund, Inc.
advised by Van Kampen American Capital Investment Advisory Corp., providing for
the transfer of assets and liabilities of the Fund to the Global Equity
Allocation Fund in exchange for shares of common stock of the Global Equity
Allocation Fund at its net asset value per share (the "Reorganization").
The Reorganization is subject to approval by the shareholders of the Fund.
Further details of the proposed Reorganization will be contained in the proxy
statement/prospectus expected to be mailed to shareholders in 1998.
The Global Equity Allocation Fund's net assets as of December 31, 1997 were
approximately $213 million. Its investment objective is to seek 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 Fund and the Global Equity Allocation Fund have similar
investment objectives, policies and practices, and are managed by the same
portfolio management team.
The Fund will continue its normal operations prior to the Reorganization.
The section of the Prospectus captioned "SHAREHOLDER SERVICES" hereby is
supplemented by adding the following:
INTERNET TRANSACTIONS. In addition to performing transactions on your account
through written instruction or by telephone, you may also perform certain
transactions through the Internet. Please refer to our web site @ www.vkac.com
for further instruction. Van Kampen American Capital and its subsidiaries,
including ACCESS (collectively, "VKAC"), and the Fund employ procedures
considered by them to be reasonable to confirm that instructions communicated
through the Internet are genuine. Such procedures include requiring use of a
personal identification number prior to acting upon Internet instructions and
providing written confirmation of instructions communicated through the
Internet. If reasonable procedures are employed, neither VKAC nor the Fund will
be liable for following instructions through the Internet which it reasonably
believes to be genuine. If an account has multiple owners, ACCESS may rely on
the instructions of any one owner.
<PAGE> 2
VAN KAMPEN AMERICAN CAPITAL
SUPPLEMENT DATED JANUARY 2, 1998 TO THE
PROSPECTUS DATED SEPTEMBER 28, 1997
VKAC GLOBAL EQUITY FUND
VKAC GLOBAL GOVERNMENT SECURITIES FUND
PROSPECTUS DATED OCTOBER 28, 1997
VKAC AGGRESSIVE GROWTH FUND
VKAC GREAT AMERICAN COMPANIES FUND
VKAC GROWTH FUND
VKAC HIGH YIELD FUND
VKAC PACE FUND
VKAC PROSPECTOR FUND
VKAC SHORT-TERM GLOBAL INCOME FUND
VKAC STRATEGIC INCOME FUND
VKAC UTILITY FUND
VKAC VALUE FUND
PROSPECTUS DATED DECEMBER 29, 1997
VKAC CORPORATE BOND FUND
VKAC EMERGING GROWTH FUND
VKAC HIGH INCOME CORPORATE BOND FUND
PROSPECTUS DATED JANUARY 28, 1997, AS PREVIOUSLY SUPPLEMENTED ON
FEBRUARY 11, 1997 AND AUGUST 4, 1997
VKAC U.S. GOVERNMENT TRUST FOR INCOME
PROSPECTUS DATED MARCH 28, 1997, AS PREVIOUSLY SUPPLEMENTED ON
AUGUST 4, 1997
VKAC GROWTH AND INCOME FUND
PROSPECTUS DATED APRIL 30, 1997, AS PREVIOUSLY SUPPLEMENTED ON
AUGUST 4, 1997
VKAC COMSTOCK FUND
VKAC ENTERPRISE FUND
VKAC EQUITY INCOME FUND
VKAC GOVERNMENT SECURITIES FUND
VKAC HARBOR FUND
VKAC REAL ESTATE SECURITIES FUND
PROSPECTUS DATED APRIL 30, 1997, AS PREVIOUSLY SUPPLEMENTED ON
APRIL 30, 1997 AND AUGUST 4, 1997
VKAC GLOBAL MANAGED ASSETS FUND
PROSPECTUS DATED APRIL 30, 1997, AS PREVIOUSLY SUPPLEMENTED ON
AUGUST 4, 1997 AND AUGUST 15, 1997
VKAC LIMITED MATURITY GOVERNMENT FUND
<PAGE> 3
The section of the Prospectus captioned "PURCHASE OF SHARES -- GENERAL"
hereby is supplemented by adding the following:
The Distributor is sponsoring a sales incentive program for A.G. Edwards &
Sons, Inc. ("A.G. Edwards"). The Distributor will reallow its portion of the
Fund's sales concession to A.G. Edwards on sales of Class A shares of the Fund
relating to the "rollover" of any savings into an Individual Retirement Account
("IRA"), the transfer of assets into an IRA and contributions to an IRA,
commencing on January 1, 1998 and terminating on April 15, 1998.
Pursuant to the Fund's Prospectus, the Fund's Class A shares may be
purchased at net asset value under certain defined circumstances by certain
classes or groups of investors. Certain net asset value categories described in
the section "NAV PURCHASE OPTIONS" under "PURCHASE OF SHARES -- CLASS A SHARES
- -- OTHER PURCHASE PROGRAMS" have been amended as follows:
(2) Current or retired directors, officers and employees of Morgan Stanley
Group Inc. and any of its subsidiaries, employees of an investment subadviser to
any fund described in (1) above or an affiliate of such subadviser, and such
persons' families and their beneficial accounts.
(3) Directors, officers, employees and registered representatives of
financial institutions that have a selling group agreement with the Distributor
and their spouses and children under 21 years of age when purchasing for any
accounts they beneficially own, or, in the case of any such financial
institution, when purchasing for retirement plans for such institution's
employees; provided that such purchases are otherwise permitted by such
institutions.
(4) Registered investment advisers who charge a fee for their services,
trust companies and bank trust departments investing on their own behalf or on
behalf of their clients. The Distributor may pay Participating Dealers through
which purchases are made an amount up to 0.50% of the amount invested, over a
12-month period.
(5) Trustees and other fiduciaries purchasing shares for retirement plans
which invest in multiple fund families through broker-dealer retirement plan
alliance programs that have entered into agreements with the Distributor and
which are subject to certain minimum size and operational requirements. Trustees
and other fiduciaries should refer to the Statement of Additional Information
for further detail with respect to such alliance programs.
An additional net asset value category, as described below, has been added
as item number 6 and the remaining items shall be renumbered accordingly.
<PAGE> 4
(6) Beneficial owners of shares of Participating Funds held by a retirement
plan or held in a tax-advantaged retirement account who purchase shares of the
Fund with proceeds from distributions from such a plan or retirement account
other than distributions taken to correct an excess contribution.
As stated in the Fund's Prospectus, the Fund reserves the right to amend or
terminate the terms of offering shares of the Fund at net asset value at any
time.
The third paragraph of the section of the Prospectus captioned "PURCHASE OF
SHARES -- CLASS C SHARES" is hereby amended as follows:
A commission or transaction fee of up to 1.00% of the purchase amount will
generally be paid to authorized dealers at the time of purchase. Authorized
dealers also will be paid ongoing commissions and transaction fees of up to
0.75% of the average daily net assets of the Fund's Class C shares generally
annually commencing in the second year after purchase. Additionally, the
Distributor may, from time to time, pay additional promotional incentives, in
the form of cash or other compensation, to authorized dealers that sell Class C
shares of the Fund.
The paragraph of the section of the Prospectus captioned "PURCHASE OF SHARES
- -- CLASS C SHARES -- WAIVER OF CONTINGENT DEFERRED SALES CHARGE" is hereby
amended as follows:
The CDSC is waived on redemptions of Class B shares and Class C shares (i)
following the death or disability (as defined in the Code) of a shareholder,
(ii) in connection with required minimum distributions from an IRA or other
retirement plan, (iii) pursuant to the Fund's systematic withdrawal plan but
limited to 12% annually of the initial value of the account; (iv) in
circumstances under which no commission or transaction fee is paid to authorized
dealers at the time of purchase of such shares; and (v) effected pursuant to the
right of the Fund to liquidate a shareholder's account as described herein under
"Redemption of Shares." The CDSC is also waived on redemptions of Class C shares
as it relates to the reinvestment of redemption proceeds in shares of the same
class of the Fund within 180 days after redemption. See the Statement of
Additional Information for further discussion of waiver provisions.
<PAGE> 5
EXHIBIT 17(B)
- ------------------------------------------------------------------------------
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. The Fund's investment
objective is to seek to provide long-term growth of capital. The Fund seeks to
achieve its investment objective by investing in an internationally diversified
portfolio of equity securities of companies located in any nation, including the
United States. There is no assurance that the Fund will achieve its investment
objective.
The Fund's investment adviser is Van Kampen American Capital Asset
Management, Inc. (the "Adviser"). Morgan Stanley Asset Management Inc. provides
sub-advisory services to the Adviser of the Fund (the "Subadviser"). This
Prospectus sets forth certain information that a prospective investor should
know before investing in the Fund. Please read it carefully and retain it for
future reference. The address of the Fund is One Parkview Plaza, Oakbrook
Terrace, Illinois 60181, and its telephone number is (800) 421-5666.
---------------------
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. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK OR DEPOSITORY INSTITUTION; FURTHER, SUCH SHARES ARE NOT
FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. SHARES OF THE FUND INVOLVE
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
A Statement of Additional Information, dated September 28, 1997, containing
additional information about the Fund is hereby incorporated in its entirety
into this Prospectus. A copy of the Statement of Additional Information may be
obtained without charge by calling (800) 421-5666 or for Telecommunications
Device for the Deaf at (800) 421-2833. The Statement of Additional Information
has been filed with the Securities and Exchange Commission (the "SEC") and is
available along with other related materials of the Fund at the SEC's internet
web site (http://www.sec.gov).
------------------
VAN KAMPEN AMERICAN CAPITAL SM
------------------
THIS PROSPECTUS IS DATED SEPTEMBER 28, 1997.
<PAGE> 6
- ------------------------------------------------------------------------------
TABLE OF CONTENTS
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 3
Shareholder Transaction Expenses............................ 5
Annual Fund Operating Expenses and Example.................. 6
Financial Highlights........................................ 8
The Trust................................................... 10
Investment Objective and Policies........................... 10
Investment Practices........................................ 14
Investment Advisory Services................................ 19
Alternative Sales Arrangements.............................. 22
Purchase of Shares.......................................... 25
Shareholder Services........................................ 35
Redemption of Shares........................................ 39
Distribution and Service Plans.............................. 42
Distributions from the Fund................................. 44
Tax Status.................................................. 44
Fund Performance............................................ 50
Description of Shares of the Fund........................... 52
Additional Information...................................... 53
</TABLE>
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, IN CONNECTION WITH THE OFFER CONTAINED IN THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE FUND, THE ADVISER OR THE DISTRIBUTOR. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER BY THE FUND OR BY THE DISTRIBUTOR TO
SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY
IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL FOR THE FUND TO MAKE
SUCH AN OFFER IN SUCH JURISDICTION.
2
<PAGE> 7
- ------------------------------------------------------------------------------
PROSPECTUS SUMMARY
- ------------------------------------------------------------------------------
THE 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"). The Trust is an open-end management investment
company organized as a Delaware business trust.
MINIMUM PURCHASE. $500 minimum initial investment for each class of shares and
$25 minimum for each subsequent investment for each class of shares (or less as
described under "Purchase of Shares").
INVESTMENT OBJECTIVE. The investment objective of the Fund is to seek to provide
long-term growth of capital. There is no assurance the Fund will achieve its
investment objective. See "Investment Objective and Policies."
INVESTMENT POLICY. The Fund seeks to achieve its investment objective by
investing in an internationally diversified portfolio of equity securities of
companies located in any nation, including the United States. See "Investment
Objective and Policies."
INVESTMENT RESULTS. The investment results of the Fund are shown in the table of
"Financial Highlights."
RISK FACTORS. Investing in equity securities of foreign issuers may subject the
Fund to risks of foreign political, economic and legal conditions and
developments. See "Investment Objective and Policies -- Risk Factors." The Fund
may purchase and sell options, futures contracts and related options, which
include additional risks. See "Investment Practices -- Using Options, Futures
Contracts and Related Options."
ALTERNATIVE SALES ARRANGEMENTS. The Fund offers three classes of shares to the
public, each with its own sales charge structure: Class A shares, Class B shares
and Class C shares. Each class has distinct advantages and disadvantages for
different investors, and investors may choose the class of shares that best
suits their circumstances and objectives. Each class of shares represents an
interest in the same portfolio of investments of the Fund. See "Alternative
Sales Arrangements."
Class A Shares. Class A shares are offered at net asset value per share plus a
maximum initial sales charge of 5.75% of the offering price (6.10% of the net
amount invested), reduced on investments of $50,000 or more. Investments of $1
million or more are not subject to any sales charge at the time of purchase, but
a contingent deferred sales charge ("CDSC") of 1.00% may be imposed on
redemptions made within one year of the purchase. Class A shares are subject to
an annual service fee of up to 0.25% of its average daily net assets
attributable to such class of shares. See "Purchase of Shares -- Class A Shares"
and "Distribution and Service Plans."
3
<PAGE> 8
Class B Shares. Class B shares are offered at net asset value per share and
are subject to a maximum CDSC of 5.00% on redemptions made within the first year
after purchase and declining thereafter to 0.00% after the fifth year. See
"Redemption of Shares." Class B shares are subject to a combined annual
distribution fee and service fee of up to 1.00% of the Fund's average daily net
assets attributable to such class of shares. See "Purchase of Shares -- Class B
Shares" and "Distribution and Service Plans." Class B shares convert
automatically to Class A shares eight years after the end of the calendar month
in which the shareholder's order to purchase was accepted. See "Alternative
Sales Arrangements -- Conversion Feature."
Class C Shares. Class C shares are offered at net asset value per share and
are subject to a CDSC of 1.00% on redemptions made within one year of purchase.
See "Redemption of Shares." Class C shares are subject to a combined annual
distribution fee and service fee of up to 1.00% of the Fund's average daily net
assets attributable to such class of shares. See "Purchase of Shares -- Class C
Shares" and "Distribution and Service Plans."
INVESTMENT ADVISERS. Van Kampen American Capital Asset Management, Inc. (the
"Adviser") is the Fund's investment adviser. Morgan Stanley Asset Management
Inc. (the "Subadviser") provides sub-advisory services to the Adviser.
DISTRIBUTOR. Van Kampen American Capital Distributors, Inc. (the "Distributor")
distributes the Fund's shares.
DISTRIBUTIONS FROM THE FUND. Dividends from net investment income and capital
gains, if any, are distributed annually. All dividends and distributions are
automatically reinvested in shares of the Fund at net asset value per share
(without sales charge) unless payment in cash is requested. See "Distributions
from the Fund."
The foregoing is qualified in its entirety by reference to the more
detailed information appearing elsewhere in this Prospectus.
4
<PAGE> 9
- ------------------------------------------------------------------------------
SHAREHOLDER TRANSACTION EXPENSES
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
SHARES SHARES SHARES
------- ------- -------
<S> <C> <C> <C>
Maximum sales charge imposed on
purchases (as a percentage of
offering price)................. 5.75%(1) None None
Maximum sales charge imposed on
reinvested dividends (as a
percentage of offering price)... None None None
Deferred sales charge (as a
percentage of the lesser of
original purchase price or Year
redemption proceeds)............ None(2) Year 1--5.00% 1--1.00%
Year 2--4.00% After--None
Year 3--3.00%
Year 4--2.50%
Year 5--1.50%
After--None
Redemption fees (as a percentage
of amount redeemed)............. None None None
Exchange fee...................... None None None
</TABLE>
- ------------------------------------------------------------------------------
(1) Reduced for purchases of $50,000 and over. See "Purchase of Shares -- Class
A Shares."
(2) Investments of $1 million or more are not subject to any sales charge at the
time of purchase, but a CDSC of 1.00% may be imposed on redemptions made
within one year of the purchase. See "Purchase of Shares -- Class A Shares."
5
<PAGE> 10
- ------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES AND EXAMPLE
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
SHARES SHARES SHARES
------- ------- -------
<S> <C> <C> <C>
Management Fees (as a percentage of average
daily net assets)........................ 1.00% 1.00% 1.00%
12b-1 Fees (as a percentage of average
daily net assets)(1)..................... 0.25% 1.00%(2) 1.00%(2)
Other Expenses (as a percentage of average
daily net assets)........................ 0.84% 0.86% 0.87%
Total Fund Operating Expenses (as a
percentage of average daily net
assets).................................. 2.09% 2.86% 2.87%
</TABLE>
- ------------------------------------------------------------------------------
(1) Class A shares are subject to an annual service fee of up to 0.25% of the
average daily net assets attributable to such class of shares. Class B
shares and Class C shares are each subject to a combined annual distribution
and service fee of up to 1.00% of the average daily net assets attributable
to such class of shares. See "Distribution and Service Plans."
(2) Long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales charges permitted as a Fund-level expense by NASD
Rules.
6
<PAGE> 11
<TABLE>
<CAPTION>
ONE THREE FIVE TEN
YEAR YEARS YEARS YEARS
EXAMPLE: ---- ----- ----- -----
<S> <C> <C> <C> <C>
You would pay the following expenses on a
$1,000 investment, assuming (i) an
operating expense ratio of 2.09% for
Class A shares, 2.86% for Class B shares
and 2.87% for Class C shares, (ii) a
5.00% annual return and (iii) redemption
at the end of each time period:
Class A................................ $77 $119 $163 $286
Class B................................ $79 $119 $166 $300*
Class C................................ $39 $ 89 $151 $320
You would pay the following expenses on the
same $1,000 investment assuming no
redemption at the end of each time
period:
Class A................................ $77 $119 $163 $286
Class B................................ $29 $ 89 $151 $300*
Class C................................ $29 $ 89 $151 $320
</TABLE>
- ------------------------------------------------------------------------------
* Based on conversion to Class A shares after eight years.
The purpose of the foregoing table is to assist an investor in understanding
the various costs and expenses that an investor in the Fund will bear directly
or indirectly. The "Example" reflects expenses based on the "Annual Fund
Operating Expenses" table as shown above carried out to future years and is
included to provide a means for the investor to compare expense levels of funds
with different fee structures over varying investment periods. To facilitate
such comparison, all funds are required by the SEC to utilize a 5.00% annual
return assumption. The ten year amount with respect to Class B shares of the
Fund reflects the lower aggregate 12b-1 and service fees applicable to such
shares after conversion to Class A shares. Class B shares acquired through the
exchange privilege are subject to the contingent deferred sales charge schedule
relating to the Class B shares of the fund from which the purchase of Class B
shares was originally made. Accordingly, future expenses as projected could be
higher than those determined in the above table if the investor's Class B shares
were exchanged from a fund with a higher CDSC. THE INFORMATION CONTAINED IN THE
ABOVE TABLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES
AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. For a more complete
description of such costs and expenses, see "Purchase of Shares," "Investment
Advisory Services," "Redemption of Shares" and "Distribution and Service Plans."
7
<PAGE> 12
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for a share of beneficial interest
outstanding throughout each of the periods indicated)
- --------------------------------------------------------------------------------
The following financial highlights have been audited by Price Waterhouse LLP,
independent accountants, whose report thereon was unqualified. The most recent
annual report (which contains financial highlights for the last five years) is
included in the Statement of Additional Information and may be obtained by
shareholders without charge by calling the telephone number on the cover of this
Prospectus. This information should be read in conjunction with the financial
statements and notes thereto included in the Statement of Additional
Information.
<TABLE>
<CAPTION>
CLASS A SHARES
-------------------------------------------------------------------------------------
YEAR ENDED MAY 31, AUG. 5, 1991
--------------------------------------------------- (COMMENCEMENT OF DISTRIBUTION)
1997(E) 1996(A) 1995(A) 1994 1993(A) TO MAY 31, 1992(A)
------- ------- ------- ------- ------- ------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period................................. $13.98 $11.79 $11.67 $ 10.76 $10.44 $ 9.33
-------- ------- ------- ------- ------- -----
Net Investment Gain (Loss)............. (.064) (.04) (.04) (.06) (.055) .025
Net Realized and Unrealized Gain on
Securities........................... 2.460 2.561 .42 1.0125 .7775 1.145
-------- ------- ------- ------- ------- -----
Total from Investment Operations........ 2.396 2.521 .38 .9525 .7225 1.17
-------- ------- ------- ------- ------- -----
Less:
Distributions in Excess of Net
Investment Income.................... .137 -0- -0- -0- -0- -0-
Distributions from and in Excess of Net
Realized Gain on Securities.......... .401 .331 .26 .0425 .4025 .06
-------- ------- ------- ------- ------- -----
Total Distributions..................... .538 .331 .26 .0425 .4025 .06
-------- ------- ------- ------- ------- -----
Net Asset Value, End of the Period...... $15.838 $13.98 $11.79 $ 11.67 $10.76 $10.44
======== ======= ======= ======= ======= =====
Total Return(b)......................... 17.67% 21.85% 3.36% 9.17% 7.13% 12.56%
Net Assets at End of the Period (In
millions).............................. $136.9 $106.7 $60.1 $41.8 $12.7 $8.4
Ratio of Expenses to Average Net
Assets(c).............................. 2.09% 2.22% 2.29% 2.46% 2.93% 2.07%
Ratio of Net Investment Loss to Average
Net Assets(c).......................... (.46%) (.30%) (.35%) (.46%) (.57%) .29%
Portfolio Turnover...................... 144% 94% 120% 116% 120% 135%
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 the Adviser not reimbursed certain expenses of the Fund. The impact on
the Ratios due to the Adviser's reimbursement of certain expenses for other
periods 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.
(e) The Fund changed its investment subadviser effective April 1, 1997. See
"Investment Advisory Services."
(Table continued on following page)
8
<PAGE> 13
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS -- (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS B SHARES
-------------------------------------------------------------------
NOV. 15, 1991
YEAR ENDED MAY 31, (COMMENCEMENT OF
---------------------------------------------- DISTRIBUTION)
1997(E) 1996(A) 1995(A) 1994 1993(A) TO MAY 31, 1992(A)
------- ------- ------- ------ ------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period......... $ 13.53 $11.50 $11.48 $10.67 $10.46 $ 9.78
------- ------ ------ ------ ------ -----
Net Investment Loss............................. (.139) (.14) (.13) (.13) (.135) (.005)
Net Realized and Unrealized Gain on
Securities.................................... 2.358 2.501 .41 .9825 .7475 .745
------- ------ ------ ------ ------ -----
Total from Investment Operations................. 2.219 2.361 .28 .8525 .6125 .74
------- ------ ------ ------ ------ -----
Less:
Distributions in Excess of Net Investment
Income........................................ .030 -0- -0- -0- -0- -0-
Distributions from and in Excess of Net Realized
Gain on Securities............................ .401 .331 .26 .0425 .4025 .06
------- ------ ------ ------ ------ -----
Total Distributions.............................. .431 .331 .26 .0425 .4025 .06
------- ------ ------ ------ ------ -----
Net Asset Value, End of the Period............... $15.318 $13.53 $11.50 $11.48 $10.67 $10.46
======= ====== ====== ====== ====== =====
Total Return(b).................................. 16.83% 20.90% 2.62% 8.21% 6.15% 7.58%
Net Assets at End of the Period (In millions).... $ 124.1 $ 92.8 $ 64.7 $ 48.8 $ 6.9 $ 1.2
Ratio of Expenses to Average Net Assets(c)....... 2.86% 2.99% 3.05% 3.21% 3.88% 3.11%
Ratio of Net Investment Loss to Average Net
Assets(c)....................................... (1.22%) (1.11%) (1.11%) (1.19%) (1.41%) (.12%)
Portfolio Turnover............................... 144% 94% 120% 116% 120% 135%
Average Commission Rate per Equity Share
Traded(d)....................................... $ .0206 $.0199 -- -- -- --
<CAPTION>
CLASS C SHARES
------------------------------------------------
JUNE 21, 1993
YEAR ENDED MAY 31, (COMMENCEMENT OF
--------------------------- DISTRIBUTION)
1997(E) 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) For the year ended May 31, 1993, the Ratios of Expenses and Net Investment
Loss to Average Net Assets for Class B Shares would have been 4.50% and
(2.02%), respectively, had the Adviser not reimbursed certain expenses of
the Fund. The impact on the Ratios due to the Adviser'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.
(e) The Fund changed its investment subadviser effective April 1, 1997. See
"Investment Advisory Services."
9
<PAGE> 14
- ------------------------------------------------------------------------------
THE TRUST
- ------------------------------------------------------------------------------
The Trust is an open-end management investment company, commonly known as a
mutual fund. A mutual fund provides, for those who have similar investment
goals, a practical and convenient way to invest in a diversified portfolio of
securities by combining their resources in an effort to achieve such goals.
Van Kampen American Capital Asset Management, Inc. (the "Adviser") provides
investment advisory and administrative services to the Fund. The Adviser and its
affiliates also manage other mutual funds distributed by Van Kampen American
Capital Distributors, Inc. (the "Distributor"). To obtain prospectuses and other
information on any of these other funds, please call the telephone number on the
cover page of the Prospectus.
- ------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES
- ------------------------------------------------------------------------------
The investment objective of the Fund is to seek to provide long-term growth of
capital. The Fund seeks to achieve its investment objective by investing in an
internationally diversified portfolio of equity securities of companies located
in any nation, including the United States. The Fund intends to be invested in
equity securities of companies located in at least three countries, including
the United States. Under normal market conditions, at least 65% of the Fund's
total assets are so invested. Equity securities include common stocks, preferred
stocks and warrants or options to acquire such securities. In selecting
portfolio securities, the Fund attempts to take advantage of the differences
between economic trends and the anticipated performance of securities markets in
various countries.
The Adviser, subject to the direction of the Trustees, provides the Fund with
an overall investment program consistent with the Fund's investment objective
and policies. The Subadviser, subject to overall review by the Adviser and the
Fund's Trustees, is responsible for recommending an optimal geographic equity
allocation and is responsible for providing advice with respect to specific
investments. Investments may be shifted among the world's various capital
markets and among different types of securities in accordance with ongoing
analysis provided by the Adviser and the Subadviser of trends and developments
affecting such markets and securities. The Adviser and the Subadviser are
sometimes referred to herein collectively as the Adviser.
10
<PAGE> 15
The Adviser utilizes a "top-down" approach in selecting investments for the
Fund that emphasizes country selection and weighting rather than individual
securities selection. This approach reflects the Adviser's philosophy that a
diversified selection of securities representing exposure to world markets based
upon the economic outlook and current valuation levels for each country is an
effective way to maximize the return and minimize the risk associated with
global investment. There is no assurance that the Adviser's approach will be
successful or that the Fund's investment objective will be realized.
The 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 other industrialized
countries throughout the world that comprise the Morgan Stanley Capital
International World Index. These countries currently are 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, the Fund may
invest a portion of its assets in emerging country equity securities. The Fund
currently intends 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
Adviser purchasing-power parity exchange rate model to arrive at an expected
total return in U.S. Dollars. The final country allocation decision 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 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,
11
<PAGE> 16
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 Fund.
The 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. ADRs are publicly traded on
exchanges or over-the-counter in the United States and are issued through
"sponsored" or "unsponsored" arrangements. In a sponsored ADR arrangement, the
foreign issuer assumes the obligation to pay some or all of the depositary's
transaction fees, whereas under an unsponsored arrangement, the foreign issuer
assumes no obligations and the depositary's transaction fees are paid by the ADR
holders. In addition, less information is available in the United States about
an unsponsored ADR than about a sponsored ADR. The Fund may invest in ADRs
through both sponsored and unsponsored arrangements.
The Fund may invest cash temporarily in short-term debt instruments. Such
temporary investments will only be made with cash held to maintain liquidity or
pending investment. See "Temporary Short-Term Investments" herein.
The investment policies, the percentage limitations and the types of
securities in which the Fund may invest may be changed by the Trustees, unless
expressly governed by those limitations as described under "Investment
Practices -- Investment Restrictions" which can be changed only by action of the
shareholders.
An investment in the Fund may not be appropriate for all investors. The Fund
is not 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 Fund. An investment in the Fund is
intended to be a long-term investment, and should not be used as a trading
vehicle.
RISK FACTORS. An investment in the Fund involves risks similar to those of
investing in foreign equity securities generally. Investment in equity
securities of foreign issuers may subject the Fund to risks of foreign
political, economic and legal conditions and developments. Such conditions or
developments might include favorable or unfavorable changes in currency exchange
rates, exchange control regulations (including currency blockage), expropriation
of assets of companies, imposition of withholding taxes on dividend or interest
payments, and possible difficulty in obtaining and enforcing judgments against a
foreign issuer. Also, foreign equity securities may not be as liquid and may be
more volatile than comparable domestic equity securities.
Issuers of foreign equity securities are subject to different, often less
comprehensive, accounting, reporting and disclosure requirements than domestic
issuers.
12
<PAGE> 17
Brokerage costs incurred in purchasing and selling securities in foreign
securities markets generally are higher than such costs in comparable
transactions in domestic securities markets, and foreign custodial costs
relating to the Fund's portfolio securities are higher than domestic custodial
costs. See also "Investment Practices" for a discussion of certain additional
risks related to investment practices that may be utilized by the Fund,
including use of options, futures contracts and related options.
FOREIGN CURRENCY TRANSACTIONS. The value of the Fund's portfolio securities
that are traded in foreign markets may be affected by changes in currency
exchange rates and exchange control regulations. In addition, the Fund will
incur costs in connection with conversions between various currencies. The
Fund's foreign currency exchange transactions generally will be conducted on a
spot basis (that is, cash basis) at the spot rate for purchasing or selling
currency prevailing in the foreign currency exchange market. The Fund purchases
and sells foreign currency on a spot basis in connection with the settlement of
transactions in securities traded in such foreign currency. The Fund does not
purchase and sell foreign currencies as an investment.
The Fund also may enter into contracts with banks or other foreign currency
brokers or dealers to purchase or sell foreign currencies at a future date
("forward contracts") and purchase and sell foreign currency futures contracts
to hedge against changes in foreign currency exchange rates. A foreign currency
forward contract is a negotiated agreement between the contracting parties to
exchange a specified amount of currency at a specified future time at a
specified rate. The rate can be higher or lower than the spot rate between the
currencies that are the subject of the contract.
The Fund may attempt to hedge against changes in the value of the United
States dollar in relation to a foreign currency by entering into a forward
contract for the purchase or sale of the amount of foreign currency invested or
to be invested, or by buying or selling a foreign currency futures contract for
such amount. Such hedging strategies may be employed before the Fund purchases a
foreign security traded in the hedged currency which the Fund anticipates
acquiring or between the date the foreign security is purchased or sold and the
date on which payment therefor is made or received. Hedging against a change in
the value of a foreign currency in the foregoing manner does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. Furthermore, such hedging transactions reduce
or preclude the opportunity for gain if the value of the hedged currency should
move in the direction opposite to the hedged position. The Fund will not
speculate in foreign currency forward or futures contracts or through the
purchase and sale of foreign currencies.
TEMPORARY SHORT-TERM INVESTMENTS. The Fund's policy is to be fully invested in
common stocks and securities convertible into common stocks. The Fund may,
13
<PAGE> 18
however, hold a portion of its assets in cash to meet redemptions and other
day-to-day operating expenses. In addition, the Fund may hold a portion or all
of assets in cash as a temporary defensive strategy when the Adviser determines
such a strategy is necessary in light of significant adverse market, economic,
political or other circumstances. It is impossible to predict when or for how
long the Fund will employ such defensive strategy. The Fund may invest cash held
for such purposes in obligations of the United States and of foreign
governments, including their political subdivisions, commercial paper, bankers'
acceptances, certificates of deposit, repurchase agreements collateralized by
these securities, and other short-term evidences of indebtedness. The Fund will
purchase commercial paper only if it is rated Prime-1 or Prime-2 by Moody's
Investors Services, Inc. or A-1 or A-2 by Standard & Poor's Ratings Group. The
Fund also may invest cash held for such purposes in short-term, high grade
foreign debt securities. High grade foreign debt securities are those debt
securities of foreign issuers which the Adviser determines to have
creditworthiness substantially equivalent to that of domestic issuers of debt
securities rated investment grade.
- ------------------------------------------------------------------------------
INVESTMENT PRACTICES
- ------------------------------------------------------------------------------
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements with
domestic or foreign banks or broker-dealers in order to earn a return on
temporarily available cash. 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,
thereby determining the yield during the holding period. Repurchase agreements
involve certain risks in the event of a default by the other party. The Fund
will not invest in repurchase agreements maturing in more than seven days if any
such investment, together with any other illiquid securities held by the Fund,
exceeds 10% of the value of the Fund's net assets. In the event of the
bankruptcy or other default of the seller of a repurchase agreement, the Fund
could experience delays in liquidating the underlying securities 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.
For the purpose of investing in repurchase agreements, the Adviser aggregates
the cash that certain funds advised or subadvised by the Adviser or certain of
its affiliates would otherwise invest separately into a joint account. The cash
in the joint account is then invested in repurchase agreements and the funds
that contributed to the joint account share pro rata in the net revenue
generated. The Adviser believes that the joint account produces efficiencies and
economies of scale that may contribute to reduced transaction costs, higher
returns, higher quality investments and greater diversity of investments for the
Fund than would be available to the
14
<PAGE> 19
Fund investing separately. The manner in which the joint account is managed is
subject to conditions set forth in an SEC exemptive order authorizing this
practice, which conditions are designed to ensure the fair administration of the
joint account and to protect the amounts in that account.
PORTFOLIO TRANSACTIONS AND BROKERAGE PRACTICES. The Adviser is responsible for
the placement of orders for the purchase and sale of portfolio securities for
the Fund and the negotiation of brokerage commissions on such transactions.
Brokerage firms are selected on the basis of their professional capability for
the type of transaction and the value and quality of execution of services on a
continuing basis. The Adviser is authorized to place portfolio transactions to
the extent permitted by law, with brokerage firms affiliated with the Fund and
with brokerage firms participating in the distribution of shares of the Fund and
other Van Kampen American Capital mutual funds if it reasonably believes that
the quality of the execution and the commission are comparable to that available
from other qualified firms. The Adviser is authorized to pay higher commissions
to brokerage firms that provide investment and research information than to
firms which do not provide such services if the Adviser determines that such
commissions are reasonable in relation to the overall services provided. The
information received may be used by the Adviser in managing the assets of other
advisory accounts as well as in the management of the assets of the Fund.
PORTFOLIO TURNOVER. A change in securities held by the Fund is known as
"portfolio turnover" and may involve the payment by the Fund of brokerage
commissions or dealer mark-up and other transaction costs on the sale of
securities as well as on the investment of the proceeds in other securities. The
portfolio turnover rate for a fiscal year is the ratio of the lesser of
purchases or sales of portfolio securities to the average value of portfolio
securities, excluding debt securities whose maturities at acquisition were one
year or less. The rate may exceed 100% in any given year, which is higher than
that of many other investment companies. A higher portfolio turnover rate
increases the Fund's transactions costs, including brokerage commissions, and
may result in the realization of more short-term capital gains than if the Fund
had a lower portfolio turnover. The turnover rate will not be a limiting factor,
however, if the Adviser deems portfolio changes appropriate. The Fund's annual
portfolio turnover rate is shown in the table of "Financial Highlights."
LOANS OF PORTFOLIO SECURITIES. The Fund may lend portfolio securities to
unaffiliated brokers, dealers and financial institutions provided that (a)
immediately after any such loan, the value of the securities loaned does not
exceed 15% of the total value of the Fund's assets, and (b) any securities loan
is collateralized in accordance with applicable regulatory requirements. Lending
portfolio securities involves risks of delay in recovery of the loaned
securities or, in some cases, loss of rights in the collateral should the
borrower fail financially.
15
<PAGE> 20
RESTRICTED SECURITIES. The Fund may invest up to 10% of its net assets in
restricted securities and other illiquid assets. As used herein, restricted
securities are those that have been sold in the United States without
registration under the Securities Act of 1933 ("1933 Act") and are thus subject
to restrictions on resale. Excluded from the limitation, however, are any
restricted securities which are eligible for resale pursuant to Rule 144A under
the 1933 Act and which have been determined to be liquid by the Trustees or by
the Adviser pursuant to Board-approved guidelines. The determination of
liquidity is based on the volume of reported trading in the institutional
secondary market for each security. Since it is not possible to predict with
assurance how the markets for restricted securities sold and offered under Rule
144A will develop, the Trustees will carefully monitor the Fund's investment in
these securities focusing on such factors, among others, as valuation, liquidity
and availability of information. This investment practice could have the effect
of increasing the level of illiquidity in the Fund to the extent that qualified
institutional buyers become for a time uninterested in purchasing these
restricted securities. These difficulties and delays could result in the Fund's
inability to realize a favorable price upon disposition of restricted
securities, and in some cases might make disposition of such securities at the
time desired by the Fund impossible. Since market quotations are not readily
available for restricted securities, such securities will be valued by a method
that the Fund's Trustees believe accurately reflects fair value. Also excluded
from this limitation 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.
SHORT SALES AGAINST THE BOX. The Fund may from time to time make short sales
of securities it owns or has the right to acquire. A short sale is "against the
box" to the extent that the Fund contemporaneously owns or has the right to
obtain at no added cost securities identical to those sold short. In a short
sale, the Fund does not immediately deliver the securities sold and does not
receive the proceeds from the sale. The Fund is said to have a short position in
the securities sold until it delivers the securities sold, at which time it
receives the proceeds of the sale. The Fund may not make short sales or maintain
a short position if doing so would cause more than 25% of its total assets,
taken at market value, to be held as collateral for such sales.
To secure its obligation to deliver the securities sold short, the Fund will
deposit in escrow in a separate account with its Custodian an equal amount of
the securities sold short or securities convertible into or exchangeable for
such securities. The Fund may close out a short position by purchasing and
delivering an equal amount of the securities sold short, rather than by
delivering securities already held by the Fund, because the Fund may want to
continue to receive interest and dividend
16
<PAGE> 21
payments on securities in its portfolio that are convertible into the securities
sold short.
USING OPTIONS, FUTURES CONTRACTS AND RELATED OPTIONS. The Fund expects to
utilize options, futures contracts and options thereon in several different
ways, depending upon the status of the Fund's portfolio and the Adviser's
expectations concerning the securities markets.
In times of stable or rising security prices, the Fund generally seeks to be
fully invested in the equity securities. Even when the Fund is fully invested,
however, prudent management requires that at least a small portion of assets be
available as cash to honor redemption requests and for other short-term needs.
The Fund also may have cash on hand that has not yet been invested. The portion
of the Fund's assets that is invested in cash equivalents does not fluctuate
with security market prices, so that, in times of rising market prices, the Fund
may underperform the market in proportion to the amount of cash equivalents in
its portfolio. By purchasing futures contracts, however, the Fund can seek to
"equitize" the cash portion of its assets and may obtain performance equivalent
to investing 100% of its assets in equity securities.
If the Adviser anticipates a market decline, the Fund may seek to reduce its
exposure to the securities markets by increasing its cash position. By selling
futures contracts instead of portfolio securities, a similar result may be
achieved to the extent that the performance of the stock index futures contracts
correlates to the performance of the Fund's portfolio securities. Sales of
futures contracts frequently may be accomplished more rapidly and at less cost
than the actual sale of securities. Once the desired hedged position has been
effected, the Fund could then liquidate securities in a more deliberate manner,
reducing its futures position simultaneously to maintain the desired balance, or
it could maintain the hedged position.
As an alternative to selling stock index futures contracts, the Fund can
purchase stock index puts (or stock index futures puts) to hedge the portfolio's
risk in a declining market. Since the value of a put increases as the index
declines below a specified level, the portfolio's value is protected against a
market decline to the degree the performance of the index correlates with the
performance of the Fund's investment portfolio. If the market remains stable or
advances, the Fund can refrain from exercising the put and its portfolio will
participate in the advance, having incurred only the premium cost for the put.
The Fund is authorized to purchase and sell over-the-counter options ("OTC
Options"). OTC options are purchased from or sold to securities dealers,
financial institutions or other parties ("Counterparties") through direct
bilateral agreement with the Counterparty. The Fund will sell only OTC Options
(other than over-the-counter currency options) that are subject to a buy-back
provision permitting the Fund to require to the Counterparty to sell the option
back to the Fund at a formula
17
<PAGE> 22
price within seven days. The staff of the SEC currently takes the position that,
in general, OTC options on securities other than U.S. Government securities
purchased by the Fund, and portfolio securities covering OTC options sold by the
Fund, are illiquid securities subject to the Fund's limitation on investing no
more than 10% of its assets in illiquid securities.
In certain cases the options and futures markets provide investment or risk
management opportunities that are not available from direct investments in
securities. In addition, some strategies can be performed with greater ease and
at lower cost by utilizing the options and futures markets rather than
purchasing or selling portfolio securities.
Potential Risks of Options, Futures Contracts and Related Options. The
purchase and sale of options and futures contracts involve risks different from
those involved with direct investments in underlying securities. While
utilization of options, futures contracts and similar instruments may be
advantageous to the Fund, if the Adviser is not successful in employing such
instruments in managing the Fund's investments, the Fund's performance will be
worse than if the Fund did not make such investments. In addition, the Fund
would pay commissions and other costs in connection with such investments, which
may increase the Fund's expenses and reduce its return.
In order to prevent leverage in connection with the purchase of futures
contracts by the Fund, an amount of cash or liquid securities equal to the
market value of the obligation under the futures contracts (less any related
margin deposits) will be maintained in a segregated account with the Custodian.
The Fund may not invest more than 10% of its net assets in illiquid securities,
including OTC Options and repurchase agreements which have a maturity of longer
than seven days.
INVESTMENT RESTRICTIONS. The Fund has adopted a number of fundamental
investment restrictions that may not be changed without approval by a vote of a
majority of the outstanding voting securities of the Fund (as defined in the
Investment Company Act of 1940, as amended (the "1940 Act")). The percentage
limitations need only be met at the time the investment is made or other
relevant action taken. These restrictions provide, among other things, that the
Fund may not:
1. 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.
2. 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
18
<PAGE> 23
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.
3. 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.
4. 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.
- ------------------------------------------------------------------------------
INVESTMENT ADVISORY SERVICES
- ------------------------------------------------------------------------------
THE ADVISER. The Adviser is a wholly-owned subsidiary of Van Kampen American
Capital, Inc. ("Van Kampen American Capital"). Van Kampen American Capital is a
diversified asset management company with more than two million retail investor
accounts, extensive capabilities for managing institutional portfolios, and more
than $60 billion under management or supervision. Van Kampen American Capital's
more than 50 open-end and 37 closed-end funds and more than 2,500 unit
investment trusts are professionally distributed by leading financial advisers
nationwide. Van Kampen American Capital Distributors, Inc., the distributor of
the Fund and the sponsor of the Funds mentioned above, is also a wholly-owned
subsidiary of Van Kampen American Capital. Van Kampen American Capital is an
indirect wholly-owned subsidiary of Morgan Stanley, Dean Witter, Discover & Co.
The Adviser's principal office 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;
19
<PAGE> 24
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.
THE SUBADVISER. The Subadviser is an indirect wholly-owned subsidiary of
Morgan Stanley, Dean Witter, Discover & Co. and is an affiliate of the Adviser.
The Subadviser provides portfolio management and named fiduciary services to
various closed-end and open-end investment companies, taxable and nontaxable
institutions, international organizations and individuals investing in United
States and international equities and fixed income securities. At September 15,
1997, the Subadviser had, together with its affiliated investment management
companies, assets under management (including assets under fiduciary advisory
control) totaling approximately $190 billion. The Subadviser emphasizes a global
investment strategy and benefits from research coverage of a broad spectrum of
investment opportunities worldwide and draws upon the capabilities of its asset
management specialists located in various offices throughout the world,
including New York, London, Tokyo, Singapore, Bombay, Hong Kong, Milan and
Sydney. The Subadviser also draws upon the research capabilities of Morgan
Stanley, Dean Witter, Discover & Co. and its other affiliates as well as the
research and investment ideas of other companies whose brokerage services the
Subadviser utilizes. The address of the Subadviser is 1221 Avenue of the
Americas, New York, New York 10020.
MSAM began providing subadvisory services to the Fund effective April 1, 1997.
John Govett & Co. Limited ("Govett") had provided subadvisory services to the
Fund until March 31, 1997. The MSAM subadvisory agreement is similar to the
former Govett subadvisory agreement, except that the MSAM subadvisory agreement
permits, but does not require, the Adviser and MSAM to allocate to MSAM
responsibility for selecting investments in domestic securities as well as
foreign securities. Govett's responsibilities had been limited solely to foreign
securities. Effective April 1, 1997, MSAM has assumed the responsibility for
advising the Fund with respect to investments in domestic securities.
ADVISORY AGREEMENTS. The Trust retains the Adviser to manage the investment of
the Fund's assets and to place orders for the purchase and sale of the Fund's
portfolio securities. Under an investment advisory agreement between the Adviser
and the Trust (the "Advisory Agreement"), the Trust pays the Adviser a monthly
fee computed at the annual rate of 1.00% of the Fund's average daily net assets.
Under the Advisory Agreement, the Trust also reimburses the Adviser for the cost
of the Fund's accounting services, which include maintaining its financial books
and records and calculating its daily net asset value. Operating expenses paid
by the Fund include shareholder service agency fees, service fees, distribution
fees,
20
<PAGE> 25
custodian fees, legal and accounting fees, the costs of reports and proxies to
shareholders, trustees' fees (other than those who are affiliated persons as
defined in the 1940 Act of the Adviser, Distributor or Van Kampen American
Capital), and all other business expenses not specifically assumed by the
Adviser. Advisory (management) fee, and total operating expense, ratios are
shown under the caption "Annual Fund Operating Expenses and Example" herein.
The Adviser has entered into a sub-advisory 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 an optimal geographic
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 investments in domestic securities. Pursuant to the Sub-advisory
Agreement, the Subadviser receives on an annual basis 50% of the compensation
received by the Adviser.
From time to time as the Adviser, the Subadviser or the Distributor may deem
appropriate, they may voluntarily undertake to reduce the Fund's expenses by
reducing the fees payable to them to the extent of, or bearing expenses in
excess of, such limitations as they may establish.
The Adviser may utilize, at its own expense, credit analysis, research and
trading support services provided by its affiliate, Van Kampen American Capital
Investment Advisory Corp.
PERSONAL INVESTMENT POLICIES. The Fund, the Adviser and the Subadviser have
adopted Codes of Ethics designed to recognize the fiduciary relationship between
the Fund and the Adviser, Subadviser and their employees. The Codes permit
directors, trustees, officers and employees to buy and sell securities for their
personal accounts subject to certain restrictions. Persons with access to
certain sensitive information are subject to pre-clearance and other procedures
designed to prevent conflicts of interest.
PORTFOLIO MANAGEMENT. Effective April 1, 1997, Barton M. Biggs, Madhav Dhar,
Francine J. Bovich and Ann D. Thivierge assumed the primary responsibility for
the day-to-day management of the Fund's portfolio.
Since 1980, Mr. Biggs has been Chairman and a director of the Subadviser, and
a Managing Director of the Subadviser and Morgan Stanley & Co. Incorporated
since 1975. Mr. Biggs is a director of Morgan Stanley Group, Inc. and a director
and chairman of other investment companies of the Subadviser. Mr. Biggs holds a
B.A. from Yale University and an M.B.A. from New York University.
Mr. Dhar is Managing Director of the Subadviser and Morgan Stanley & Co.
Incorporated. He has been with the Subadviser since 1984. Mr. Dhar is a co-head
21
<PAGE> 26
of the Subadviser's emerging markets group, and has been involved in the
launching of the Subadviser's country funds. Mr. Dhar holds a B.S. from St.
Stephens College in Delhi University (India) and an M.B.A. from Carnegie-Mellon
University.
Ms. Bovich has been with the Subadviser since 1993. She is responsible for
portfolio management and communication of MSAM's asset allocation strategy to
institutional investor clients. Prior to 1993, Ms. Bovich was a Principal and
Executive Vice President of Westwood Management Corp. Prior to that, Ms. Bovich
was a Managing Director of Citicorp Investment Management, Inc. where she was
responsible for the Institutional Investment Management group. Ms. Bovich holds
a B.A. in Economics from Connecticut College and an M.B.A. in Finance from New
York University.
Ms. Thivierge is a Principal of the Subadviser. She is a member of MSAM asset
allocation committee, primarily representing the Total Fund Management team
since its inception in 1991. Ms. Thivierge has been with the Subadviser since
1986. Prior to 1986, Ms. Thivierge was with Edgewood Management Company. Ms.
Thivierge holds a B.A. in International Relations from James Madison College,
Michigan State University, and an M.B.A. in Finance from New York University.
- ------------------------------------------------------------------------------
ALTERNATIVE SALES ARRANGEMENTS
- ------------------------------------------------------------------------------
The Alternative Sales Arrangements permit an investor to choose the method of
purchasing shares of the Fund that is most beneficial given the amount of the
purchase and the length of time the investor expects to hold the shares.
CLASS A SHARES. Class A shares are sold at net asset value plus an initial
maximum sales charge of up to 5.75% of the offering price (6.10% of the net
amount invested), reduced on investments of $50,000 or more. Investments of $1
million or more are not subject to any sales charge at the time of purchase, but
a CDSC of 1.00% may be imposed on certain redemptions made within one year of
the purchase. Class A shares are subject to an ongoing service fee at an annual
rate of up to 0.25% of the Fund's aggregate average daily net assets
attributable to the Class A shares. Certain purchases of Class A shares qualify
for reduced initial sales charges. See "Purchase of Shares -- Class A Shares."
CLASS B SHARES. Class B shares are sold at net asset value and are subject to
a deferred sales charge if redeemed within five years of purchase. Class B
shares are subject to an ongoing service fee at an annual rate of up to 0.25% of
the Fund's aggregate average daily net assets attributable to the Class B shares
and an ongoing distribution fee at an annual rate of up to 0.75% of the Fund's
aggregate average daily net assets attributable to the Class B shares. Class B
shares enjoy the benefit of permitting all of the investor's dollars to work
from the time the investment is made. The ongoing distribution fee paid by Class
B shares will cause such shares to
22
<PAGE> 27
have a higher expense ratio and to pay lower dividends than those related to
Class A shares. Class B shares convert automatically to Class A shares eight
years after the end of the calendar month in which the shareholder's order to
purchase was accepted. See "Purchase of Shares -- Class B Shares."
CLASS C SHARES. Class C shares are sold at net asset value and are subject to
a deferred sales charge if redeemed within one year of purchase. Class C shares
are subject to an ongoing service fee at an annual rate of up to 0.25% of the
Fund's aggregate average daily net assets attributable to the Class C shares and
an ongoing distribution fee at an annual rate of up to 0.75% of the Fund's
aggregate average daily net assets attributable to the Class C shares. Class C
shares enjoy the benefit of permitting all of the investor's dollars to work
from the time the investment is made. The ongoing distribution fee paid by Class
C shares will cause such shares to have a higher expense ratio and to pay lower
dividends than those related to Class A shares. See "Purchase of Shares -- Class
C Shares."
CONVERSION FEATURE. Class B shares purchased on or after June 1, 1996, and any
dividend reinvestment plan shares received thereon, automatically convert to
Class A shares eight years after the end of the calendar month in which the
shares were purchased. Class B shares purchased before June 1, 1996, and any
dividend reinvestment plan shares received thereon, automatically convert to
Class A shares six years after the end of the calendar month in which the shares
were purchased. Class C shares purchased before January 1, 1997, and any
dividend reinvestment plan shares received thereon, automatically convert to
Class A shares ten years after the end of the calendar month in which such
shares were purchased. Such conversion will be on the basis of the relative net
asset values per share, without the imposition of any sales load, fee or other
charge.
The conversion of such shares to Class A shares is subject to the continuing
availability of an opinion of counsel to the effect that (i) the assessment of
the higher distribution fee and transfer agency costs with respect to such
shares does not result in the Fund's dividends or distributions constituting
"preferential dividends" under the Internal Revenue Code of 1986, as amended
(the "Code"), and (ii) the conversion of shares does not constitute a taxable
event under federal income tax law. The conversion may be suspended if such an
opinion is no longer available and such shares might continue to be subject to
the higher aggregate fees applicable to such shares for an indefinite period.
FACTORS FOR CONSIDERATION. In deciding which class of shares to purchase,
investors should take into consideration their investment goals, present and
anticipated purchase amounts, time horizons and temperaments. Investors should
consider whether, during the anticipated life of their investment in the Fund,
the higher aggregate fees and CDSC on Class B shares and Class C shares would be
less than the initial sales charge on Class A shares purchased at the same time,
and to what extent such differential would be offset by the higher dividends per
share on Class A
23
<PAGE> 28
shares. To assist investors in making this determination, the table under the
caption "Annual Fund Operating Expenses and Example" sets forth examples of the
charges applicable to each class of shares. In this regard, Class A shares may
be more beneficial to the investor who qualifies for reduced initial sales
charges or purchases at net asset value. It is presently the policy of the
Distributor not to accept any order of $500,000 or more for Class B shares or
any order of $1 million or more for Class C shares as it ordinarily would be
more beneficial for such an investor to purchase Class A shares.
Class A shares are not subject to an ongoing distribution fee and,
accordingly, receive correspondingly higher dividends per share. However,
because initial sales charges are deducted at the time of purchase for accounts
under $1 million, investors in Class A shares do not have all their funds
invested initially and, therefore, initially own fewer shares. Other investors
might determine that it is more advantageous to purchase either Class B shares
or Class C shares and have all their funds invested initially, although
remaining subject to a CDSC. Ongoing distribution fees on Class B shares and
Class C shares may be offset to the extent of the additional funds originally
invested and any return realized on those funds. However, there can be no
assurance as to the return, if any, which will be realized on such additional
funds. For investments held for ten years or more, the relative value upon
liquidation of the three classes tends to favor Class A shares or Class B
shares, rather than Class C shares.
Class A shares may be appropriate for investors who prefer to pay the sales
charge up front, want to take advantage of the reduced sales charges available
on larger investments, wish to maximize their current income from the start,
prefer not to pay redemption charges or have a longer-term investment horizon.
Class B shares may be appropriate for investors who wish to avoid a front-end
sales charge, put 100% of their investment dollars to work immediately or have a
longer-term investment horizon. Class C shares may be appropriate for investors
who wish to avoid a front-end sales charge, put 100% of their investment dollars
to work immediately, have a shorter-term investment horizon or desire a short
CDSC.
The distribution expenses incurred by the Distributor in connection with the
sale of the shares will be reimbursed, in the case of Class A shares, from the
proceeds of the initial sales charge and, in the case of Class B shares and
Class C shares, from the proceeds of the ongoing distribution fee and any CDSC
incurred upon redemption within five years or one year, respectively, of
purchase. Sales personnel of broker-dealers distributing the Fund's shares and
other persons entitled to receive compensation for selling such shares may
receive differing compensation for selling such shares. INVESTORS SHOULD
UNDERSTAND THAT THE PURPOSE AND FUNCTION OF THE CDSC AND ONGOING DISTRIBUTION
FEE WITH RESPECT TO THE CLASS B SHARES AND CLASS C SHARES ARE THE SAME AS THOSE
OF THE INITIAL SALES CHARGE WITH RESPECT TO CLASS A SHARES. See "Distribution
and Service Plans."
24
<PAGE> 29
GENERAL. Dividends paid by the Fund with respect to Class A shares, Class B
shares and Class C shares will be calculated in the same manner at the same time
on the same day except that the higher distribution fees and transfer agency
costs relating to Class B shares or Class C shares will be borne by the
respective class. See "Distributions from the Fund." Shares of the Fund may be
exchanged, subject to certain limitations, for shares of the same class of
certain other mutual funds advised by the Adviser and its affiliates and
distributed by the Distributor. See "Shareholder Services -- Exchange
Privilege."
- ------------------------------------------------------------------------------
PURCHASE OF SHARES
- ------------------------------------------------------------------------------
GENERAL
The Fund offers three classes of shares to the public on a continuous basis
through the Distributor as principal underwriter, which is located at One
Parkview Plaza, Oakbrook Terrace, Illinois 60181. Shares also are offered
through members of the National Association of Securities Dealers, Inc. ("NASD")
who are acting as securities dealers ("dealers") and NASD members or eligible
non-NASD members who are acting as brokers or agents for investors ("brokers").
The term "dealers" and "brokers" are sometimes referred to herein as "authorized
dealers."
Initial investments must be at least $500 for each class of shares, and
subsequent investments must be at least $25 for each class of shares. Both
minimums may be waived by the Distributor for plans involving periodic
investments. Shares of the Fund may be sold in foreign countries where
permissible. The Fund and the Distributor reserve the right to refuse any order
for the purchase of shares. The Fund also reserves the right to suspend the sale
of the Fund's shares in response to conditions in the securities markets or for
other reasons.
Shares of the Fund may be purchased on any business day through authorized
dealers. Shares also may be purchased by completing the application accompanying
this Prospectus and forwarding the application, through the authorized dealer,
to the shareholder service agent, ACCESS Investor Services, Inc. ("ACCESS"), a
wholly-owned subsidiary of Van Kampen American Capital. When purchasing shares
of the Fund, investors must specify whether the purchase is for Class A shares,
Class B shares or Class C shares.
Shares are offered at the next determined net asset value per share, plus a
front-end or contingent deferred sales charge depending on the class of shares
chosen by the investor, as shown in the tables herein. Net asset value per share
for each class is determined once daily as of the close of trading on the New
York Stock Exchange ("Exchange") (currently 4:00 p.m. New York time) each day
the Exchange is open. Net asset value per share for each class is determined by
dividing
25
<PAGE> 30
the value of the Fund's securities, cash and other assets (including accrued
interest) attributable to such class, less all liabilities (including accrued
expenses) attributable to such class, by the total number of shares of the class
outstanding. With respect to foreign securities, income is accrued by the Fund
on the ex date or when data becomes available, whichever is later. Securities
listed or traded on a national securities exchange are valued at the last sale
price. Unlisted securities and listed securities for which the last sale price
is not available are valued at the most recent bid price. Options and futures
contracts are valued at the last sale price or if no sales are reported, at the
mean between the bid and asked prices. Short-term investments and other
securities are valued in the manner described in the Statement of Additional
Information.
Generally, the net asset values per share of the Class A shares, Class B
shares and Class C shares are expected to be substantially the same. Under
certain circumstances, however, the per share net asset values of the Class A
shares, Class B shares and Class C shares may differ from one another,
reflecting the daily expense accruals of the higher distribution fee and
transfer agency costs applicable with respect to the Class B shares and Class C
shares and the differential in the dividends paid on the classes of shares. The
price paid for shares purchased is based on the next calculation of net asset
value (plus sales charges, where applicable) after an order is received by an
authorized dealer, provided such order is transmitted to the Distributor prior
to the Distributor's close of business on such day. Orders received by
authorized dealers after the close of the Exchange are priced based on the next
close, provided they are received by the Distributor prior to the Distributor's
close of business on such day. It is the responsibility of authorized dealers to
transmit orders received by them to the Distributor so they will be received
prior to such time. Orders of less than $500 are mailed by the authorized dealer
and processed at the offering price next calculated after receipt by ACCESS.
Each class of shares represents an interest in the same portfolio of
investments of the Fund, has the same rights and is identical in all respects,
except that (i) Class B shares and Class C shares bear the expenses of the
deferred sales arrangement and any expenses (including the higher distribution
fee and transfer agency costs) resulting from such sales arrangement, (ii)
generally, each class has exclusive voting rights with respect to approvals of
the Rule 12b-1 distribution plan pursuant to which its distribution fee or
service fee is paid, (iii) each class has different exchange privileges, (iv)
certain shares are subject to a conversion feature and (v) certain shares have
different shareholder service options available. The net income attributable to
Class B shares and Class C shares and the dividends payable on Class B shares
and Class C shares will be reduced by the amount of the distribution fee and
other expenses associated with such shares. Sales personnel of authorized
dealers distributing the Fund's shares and other persons entitled to receive
compensation for selling such shares may receive differing compensation for
selling Class A shares, Class B shares or Class C shares.
26
<PAGE> 31
The Distributor may from time to time implement programs under which an
authorized dealer's sales force may be eligible to win nominal awards for
certain sales efforts or under which the Distributor will reallow to any
authorized dealer that sponsors sales contests or recognition programs
conforming to criteria established by the Distributor, or participates in sales
programs sponsored by the Distributor, an amount not exceeding the total
applicable sales charges on the sales generated by the authorized dealer at the
public offering price during such programs. Other programs provide, among other
things and subject to certain conditions, for certain favorable distribution
arrangements for shares of the Fund. Also, the Distributor in its discretion may
from time to time, pursuant to objective criteria established by the
Distributor, pay fees to, and sponsor business seminars for, qualifying
authorized dealers for certain services or activities which are primarily
intended to result in sales of shares of the Fund. Fees may include payment for
travel expenses, including lodging, incurred in connection with trips taken by
invited registered representatives and members of their families to locations
within or outside of the United States for meetings or seminars of a business
nature. In some instances additional compensation or promotional incentives may
be offered to brokers, dealers or financial intermediaries that have sold or may
sell significant amounts of shares during specified periods of time. The
Distributor may provide additional compensation to Edward D. Jones & Co. or an
affiliate thereof based on a combination of its sales of shares and increases in
assets under management. All of the foregoing payments are made by the
Distributor out of its own assets. Such fees paid for such services and
activities with respect to the Fund will not exceed in the aggregate 1.25% of
the average daily net assets of the Fund on an annual basis. These programs will
not change the price an investor will pay for shares or the amount that a Fund
will receive from such sale.
CLASS A SHARES
The public offering price of Class A shares is the next determined net asset
value plus a sales charge, as set forth below.
SALES CHARGE TABLE
<TABLE>
<CAPTION>
REALLOWED
AS % OF TO DEALERS
SIZE OF AS % OF NET AMOUNT (AS A % OF
INVESTMENT OFFERING PRICE INVESTED OFFERING PRICE)
<S> <C> <C> <C>
- ------------------------------------------------------------------------------
Less than $50,000.................... 5.75% 6.10% 5.00%
$50,000 but less than $100,000....... 4.75% 4.99% 4.00%
$100,000 but less than $250,000...... 3.75% 3.90% 3.00%
$250,000 but less than $500,000...... 2.75% 2.83% 2.25%
$500,000 but less than $1,000,000.... 2.00% 2.04% 1.75%
$1,000,000 or more*.................. * * *
- ------------------------------------------------------------------------------
</TABLE>
* No sales charge is payable at the time of purchase on investments of $1
million or more, although for such investments the Fund imposes a CDSC
of 1.00% on redemptions made within one year of the purchase. A
commission will be paid to authorized dealers who initiate and are
27
<PAGE> 32
responsible for purchases of $1 million or more as follows: 1.00% on
sales to $2 million, plus 0.80% on the next $1 million and 0.50% on the
excess over $3 million.
In addition to the reallowances from the applicable public offering price
described above, the Distributor may, from time to time, pay or allow additional
reallowances or promotional incentives, in the form of cash or other
compensation, to authorized dealers that sell shares of the Fund. Authorized
dealers which are reallowed all or substantially all of the sales commissions
may be deemed to be underwriters for purposes of the 1933 Act.
The Distributor may also pay financial institutions (which may include banks)
and other industry professionals that provide services to facilitate
transactions in shares of the Fund for their clients a transaction fee up to the
level of the reallowance allowable to authorized dealers described herein. Such
financial institutions, other industry professionals and authorized dealers are
hereinafter referred to as "Service Organizations." Banks are currently
prohibited under the Glass-Steagall Act from providing certain underwriting or
distribution services. If banking firms were prohibited from acting in any
capacity or providing any of the described services, the Distributor would
consider what action, if any, would be appropriate. The Distributor does not
believe that termination of a relationship with a bank would result in any
material adverse consequences to the Fund. State securities laws regarding
registration of banks and other financial institutions may differ from the
interpretations of federal law expressed herein, and banks and other financial
institutions may be required to register as dealers pursuant to certain state
laws.
QUANTITY DISCOUNTS
Investors purchasing Class A shares may, under certain circumstances, be
entitled to pay reduced sales charges. The circumstances under which such
investors may pay reduced sales charges are described below.
Investors, or their authorized dealers, must notify the Fund at the time of
the purchase order whenever a quantity discount is applicable to purchases. Upon
such notification, an investor will receive the lowest applicable sales charge.
Quantity discounts may be modified or terminated at any time. For more
information about quantity discounts, investors should contact their authorized
dealer or the Distributor.
A person eligible for a reduced sales charge includes an individual, their
spouse and children under 21 years of age and any corporation, partnership or
sole proprietorship which is 100% owned, either alone or in combination, by any
of the foregoing; a trustee or other fiduciary purchasing for a single trust or
for a single fiduciary account, or a "company" as defined in Section 2(a)(8) of
the 1940 Act.
28
<PAGE> 33
As used herein, "Participating Funds" refers to certain open-end investment
companies advised by the Adviser or Van Kampen American Capital Investment
Advisory Corp. and distributed by the Distributor as determined from time to
time by the Fund's Board of Trustees.
Volume Discounts. The size of investment shown in the preceding sales charge
table applies to the total dollar amount being invested by any person in shares
of the Fund, or in any combination of shares of the Fund and shares of other
Participating Funds, although other Participating Funds may have different sales
charges.
Cumulative Purchase Discount. The size of investment shown in the preceding
sales charge table may also be determined by combining the amount being invested
in shares of the Participating Funds plus the current offering price of all
shares of the Participating Funds which have been previously purchased and are
still owned.
Letter of Intent. A Letter of Intent provides an opportunity for an investor
to obtain a reduced sales charge by aggregating the investments over a
thirteen-month period to determine the sales charge as outlined in the preceding
sales charge table. The size of investment shown in the preceding sales charge
table also includes purchases of shares of the Participating Funds over a
thirteen-month period based on the total amount of intended purchases plus the
value of all shares of the Participating Funds previously purchased and still
owned. An investor may elect to compute the thirteen-month period starting up to
90 days before the date of execution of a Letter of Intent. Each investment made
during the period receives the reduced sales charge applicable to the total
amount of the investment goal. If the goal is not achieved within the period,
the investor must pay the difference between the sales charges applicable to the
purchases made and the sales charges previously paid. The initial purchase must
be for an amount equal to at least 5% of the minimum total purchased amount of
the level selected. If trades not initially made under a Letter of Intent
subsequently qualify for a lower sales charge through the 90-day back-dating
provisions, an adjustment will be made at the expiration of the Letter of Intent
to give effect to the lower charge. Such adjustments in sales charge will be
used to purchase additional shares for the shareholder at the applicable
discount category. Additional information is contained in the application form
accompanying this Prospectus.
OTHER PURCHASE PROGRAMS
Purchasers of Class A shares may be entitled to reduced initial sales charges
in connection with unit investment trust reinvestment programs and purchases by
registered representatives of selling firms or purchases by persons affiliated
with the Fund or the Distributor. The Fund reserves the right to modify or
terminate these arrangements at any time.
29
<PAGE> 34
Unit Investment Trust Reinvestment Programs. The Fund permits unitholders of
unit investment trusts to reinvest distributions from such trusts in Class A
shares of the Fund, at net asset value and with no minimum initial or subsequent
investment requirement, if the administrator of an investor's unit investment
trust program meets certain uniform criteria relating to cost savings by the
Fund and the Distributor. The total sales charge for all other investments made
from unit trust distributions will be 1.00% of the offering price (1.01% of net
asset value). Of this amount, the Distributor will pay to the authorized dealer,
if any, through which such participation in the qualifying program was initiated
0.50% of the offering price as a dealer concession or agency commission. Persons
desiring more information with respect to this program, including the applicable
terms and conditions thereof, should contact their authorized dealer or the
Distributor.
The administrator of such a unit investment trust must have an agreement with
the Distributor pursuant to which the administrator will (1) submit a single
bulk order and make payment with a single remittance for all investments in the
Fund during each distribution period by all investors who choose to invest in
the Fund through the program and (2) provide ACCESS with appropriate backup data
for each participating investor in a computerized format fully compatible with
ACCESS's processing system.
As further requirements for obtaining these special benefits, the Fund also
requires that all dividends and other distributions by the Fund be reinvested in
additional shares without any systematic withdrawal program. There will be no
minimum for reinvestments from unit investment trusts. The Fund will send
account activity statements to such participants on a monthly basis only, even
if their investments are made more frequently. The Fund reserves the right to
modify or terminate this program at any time.
NAV Purchase Options. Class A shares of the Fund may be purchased at net asset
value, upon written assurance that the purchase is made for investment purposes
and that the shares will not be resold except through redemption by the Fund,
by:
(1) Current or retired trustees or directors of funds advised by the Adviser
or Van Kampen American Capital Investment Advisory Corp. and such persons'
families and their beneficial accounts.
(2) Current or retired directors, officers and employees of Morgan Stanley,
Dean Witter, Discover & Co. and any of its subsidiaries, employees of an
investment subadviser to any fund described in (1) above or an affiliate
of such subadviser, and such persons' families and their beneficial
accounts.
(3) Directors, officers, employees and registered representatives of financial
institutions that have a selling group agreement with the Distributor and
their spouses and children under 21 years of age when purchasing for any
30
<PAGE> 35
accounts they beneficially own, or, in the case of any such financial
institution, when purchasing for retirement plans for such institution's
employees.
(4) Registered investment advisers, trust companies and bank trust departments
investing on their own behalf or on behalf of their clients provided that
the aggregate amount invested in the Fund alone, or any combination of
shares of the Fund and shares of other Participating Funds as described
herein under "Purchase of Shares -- Class A Shares -- Volume Discounts,"
during the thirteen-month period commencing with the first investment
pursuant hereto equals at least $1 million. The Distributor may pay
authorized dealers through which purchases are made an amount up to 0.50%
of the amount invested, over a twelve-month period following such
transaction.
(5) Trustees and other fiduciaries purchasing shares for retirement plans of
organizations with retirement plan assets of $3 million or more and which
invest in multiple fund families through national wirehouse alliance
programs.
(6) Accounts as to which a bank or broker-dealer charges an account management
fee ("wrap accounts"), provided the bank or broker-dealer has a separate
agreement with the Distributor.
(7) Trusts created under pension, profit sharing or other employee benefit
plans qualified under Section 401(a) of the Code, or custodial accounts
held by a bank created pursuant to Section 403(b) of the Code and
sponsored by non-profit organizations defined under Section 501(c)(3) of
the Code and assets held by an employer or trustee in connection with an
eligible deferred compensation plan under Section 457 of the Code. Such
plans will qualify for purchases at net asset value provided, for plans
initially establishing accounts with the Distributor in the Participating
Funds after February 1, 1997, that (1) the initial amount invested in the
Participating Funds is at least $500,000 or (2) such shares are purchased
by an employer sponsored plan with more than 100 eligible employees. Such
plans that have been established with a Participating Fund or have
received proposals from the Distributor prior to February 1, 1997 based on
net asset value purchase privileges previously in effect will be qualified
to purchase shares of the Participating Funds at net asset value for
accounts established on or before May 1, 1997. Section 403(b) and similar
accounts for which Van Kampen American Capital Trust Company served as
custodian will not be eligible for net asset value purchases based on the
aggregate investment made by the plan or the number of eligible employees,
except under certain uniform criteria established by the Distributor from
time to time. Prior to February 1, 1997, a commission will be paid to
authorized dealers who initiate and are responsible for such purchases
within a rolling twelve-month period as
31
<PAGE> 36
follows: 1.00% on sales to $5 million, plus 0.50% on the next $5 million
and 0.25% on the excess over $10 million. For purchases on February 1,
1997 and thereafter, a commission will be paid as follows: 1.00% on sales
to $2 million, plus 0.80% on the next $1 million, plus 0.50% on the next
$47 million and 0.25% on the excess over $50 million.
(8) Individuals who are members of a "qualified group". For this purpose, a
qualified group is one which (i) has been in existence for more than six
months, (ii) has a purpose other than to acquire shares of the Fund or
similar investments, (iii) has given and continues to give its endorsement
or authorization, on behalf of the group, for purchase of shares of the
Fund and other Participating Funds, (iv) has a membership that the
authorized dealer can certify as to the group's members and (v) satisfies
other uniform criteria established by the Distributor for the purpose of
realizing economies of scale in distributing such shares. A qualified
group does not include one whose sole organizational nexus, for example,
is that its participants are credit card holders of the same institution,
policy holders of an insurance company, customers of a bank or
broker-dealer, clients of an investment adviser or other similar groups.
Shares purchased in each group's participants account in connection with
this privilege will be subject to a CDSC of 1.00% in the event of
redemption within one year of purchase, and a commission will be paid to
authorized dealers who initiate and are responsible for such sales to each
individual as follows: 1.00% on sales to $2 million, plus 0.80% on the
next $1 million and 0.50% on the excess over $3 million.
The term "families" includes a person's spouse, children under 21 years of age
and grandchildren, parents, and a person's spouse's parents.
Purchase orders made pursuant to clause (4) may be placed either through
authorized dealers as described above or directly with ACCESS by the investment
adviser, trust company or bank trust department, provided that ACCESS receives
federal funds for the purchase by the close of business on the next business day
following acceptance of the order. An authorized dealer may charge a transaction
fee for placing an order to purchase shares pursuant to this provision or for
placing a redemption order with respect to such shares. Authorized dealers will
be paid a service fee as described herein under "Distribution and Service Plans"
on purchases made as described in (3) through (8) above. The Fund may terminate,
or amend the terms of, offering shares of the Fund at net asset value to such
groups at any time.
CLASS B SHARES
Class B shares are offered at net asset value. Class B shares which are
redeemed within five years of purchase are subject to a CDSC at the rates set
forth in the
32
<PAGE> 37
following table charged as a percentage of the dollar amount subject thereto.
The charge is assessed on an amount equal to the lesser of the then current
market value or the cost of the shares being redeemed. Accordingly, no sales
charge is imposed on increases in net asset value above the initial purchase
price. In addition, no charge is assessed on shares derived from reinvestment of
dividends or capital gains distributions. It is presently the policy of the
Distributor not to accept any order for Class B shares in an amount of $500,000
or more because it ordinarily will be more advantageous for an investor making
such an investment to purchase Class A shares.
The amount of the CDSC, if any, varies depending on the number of years from
the time of payment for the purchase of Class B shares until the time of
redemption of such shares. Solely for purposes of determining the number of
years from the time of any payment for the purchases of shares, all payments
during a month are aggregated and deemed to have been made on the last day of
the month.
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES CHARGE
AS A PERCENTAGE OF
YEAR SINCE PURCHASE DOLLAR AMOUNT SUBJECT TO CHARGE
- ------------------------------------------------------------------------------
<S> <C>
First........................................ 5.00%
Second....................................... 4.00%
Third........................................ 3.00%
Fourth....................................... 2.50%
Fifth........................................ 1.50%
Sixth and After.............................. None
</TABLE>
------------------------------------------------------------------------------
In determining whether a CDSC is applicable to a redemption, it is assumed
that the redemption is first of any shares in the shareholder's Fund account
that are not subject to a CDSC, second of shares held for over five years or
shares acquired pursuant to reinvestment of dividends or distributions and third
of shares held longest during the five-year period.
To provide an example, assume an investor purchased 100 shares at $10 per
share (at a cost of $1,000) and in the second year after purchase, the net asset
value per share is $12 and, during such time, the investor has acquired 10
additional shares upon dividend reinvestment. If at such time the investor makes
his or her first redemption of 50 shares (proceeds of $600), 10 shares will not
be subject to charge because of dividend reinvestment. With respect to the
remaining 40 shares, the charge is applied only to the original cost of $10 per
share and not to the increase in net asset value of $2 per share. Therefore,
$400 of the $600 redemption proceeds is subject to a deferred sales charge at a
rate of 4.00% (the applicable rate in the second year after purchase).
A commission or transaction fee of 4.00% of the purchase amount will be paid
to authorized dealers and at the time of purchase. Additionally, the Distributor
may,
33
<PAGE> 38
from time to time, pay additional promotional incentives, in the form of cash or
other compensation, to authorized dealers that sell Class B shares of the Fund.
CLASS C SHARES
Class C shares are offered at net asset value. Class C shares which are
redeemed within the first year of purchase are subject to a CDSC of 1.00%. The
charge is assessed on an amount equal to the lesser of the then current market
value or the cost of the shares being redeemed. Accordingly, no sales charge is
imposed on increases in net asset value above the initial purchase price. In
addition, no charge is assessed on shares derived from reinvestment of dividends
or capital gains distributions. It is presently the policy of the Distributor
not to accept any order in an amount of $1 million or more for Class C shares
because it ordinarily will be more advantageous for an investor making such an
investment to purchase Class A shares.
In determining whether a CDSC is applicable to a redemption, it is assumed
that the redemption is first, of any shares in the shareholder's Fund account
that are not subject to a CDSC, and second, of shares held for more than one
year or shares acquired pursuant to reinvestment of dividends or distributions.
A commission or transaction fee of 1.00% of the purchase amount will be paid
to authorized dealers at the time of purchase. Authorized dealers also will also
be paid ongoing commissions and transaction fees of up to 0.75% of the average
daily net assets of the Fund's Class C shares annually commencing in the second
year after purchase. Additionally, the Distributor may, from time to time, pay
additional promotional incentives in the form of cash or other compensation, to
authorized dealers that sell Class C shares of the Fund.
WAIVER OF CONTINGENT DEFERRED SALES CHARGE
The CDSC is waived on redemptions of Class B shares and Class C shares (i)
following the death or disability (as defined in the Code) of a shareholder,
(ii) in connection with required minimum distributions from an IRA or other
retirement plan, (iii) pursuant to the Fund's systematic withdrawal plan but
limited to 12% annually of the initial value of the account and (iv) effected
pursuant to the right of the Fund to liquidate a shareholder's account as
described herein under "Redemption of Shares." The CDSC is also waived on
redemptions of Class C shares as it relates to the reinvestment of redemption
proceeds in shares of the same class of the Fund within 120 days after
redemption. See the Statement of Additional Information for further discussion
of waiver provisions.
34
<PAGE> 39
- ------------------------------------------------------------------------------
SHAREHOLDER SERVICES
- ------------------------------------------------------------------------------
The Fund offers a number of shareholder services designed to facilitate
investment in its shares at little or no extra cost to the investor. The
following is a description of such services.
INVESTMENT ACCOUNT. Each shareholder has an investment account under which the
investor's shares are held by ACCESS, the Fund's transfer agent. ACCESS performs
bookkeeping, data processing and administrative services relative to the
maintenance of shareholder accounts. Except as described in this Prospectus,
after each share transaction in an account, the shareholder receives a statement
showing the activity in the account. Each shareholder who has an account in any
of the Participating Funds will receive statements quarterly from ACCESS showing
any reinvestments of dividends and capital gains distributions and any other
activity in the account since the preceding statement. Such shareholders also
will receive separate confirmations for each purchase or sale transaction other
than reinvestment of dividends and capital gains distributions and systematic
purchases or redemptions. Additions to an investment account may be made at any
time by purchasing shares through authorized dealers or by mailing a check
directly to ACCESS.
SHARE CERTIFICATES. Generally, the Fund will not issue share certificates.
However, upon written or telephone request to the Fund, a share certificate will
be issued representing shares (with the exception of fractional shares) of the
Fund. A shareholder will be required to surrender such certificates upon
redemption thereof. In addition, if such certificates are lost the shareholder
must write to Van Kampen American Capital Funds, c/o ACCESS, P.O. Box 418256,
Kansas City, MO 64141-9256, requesting an "affidavit of loss" and obtain a
Surety Bond in a form acceptable to ACCESS. On the date the letter is received
ACCESS will calculate a fee for replacing the lost certificate equal to no more
than 2.00% of the net asset value of the issued shares, and bill the party to
whom the certificate was mailed.
REINVESTMENT PLAN. A convenient way for investors to accumulate additional
shares is by accepting dividends and capital gains distributions in shares of
the Fund. Such shares are acquired at net asset value (without sales charge) on
the record date. Unless the shareholder instructs otherwise, the reinvestment
plan is automatic. This instruction may be made by telephone by calling (800)
421-5666 ((800) 421-2833 for the hearing impaired) or in writing to ACCESS. The
investor may, on the initial application or prior to any declaration, instruct
that dividends be paid in cash and capital gains distributions be reinvested at
net asset value, or that both dividends and capital gains distributions be paid
in cash.
35
<PAGE> 40
AUTOMATIC INVESTMENT PLAN. An automatic investment plan is available under
which a shareholder can authorize ACCESS to charge a bank account on a regular
basis to invest pre-determined amounts in the Fund. Additional information is
available from the Distributor or authorized dealers.
RETIREMENT PLANS. Eligible investors may establish individual retirement
accounts ("IRAs"); SEP and pension and profit sharing plans; 401(k) plans; or
Section 403(b)(7) plans in the case of employees of public school systems and
certain non-profit organizations. Documents and forms containing detailed
information regarding these plans are available from the Distributor. Van Kampen
American Capital Trust Company serves as custodian under the IRA, 403(b)(7) and
Keogh plans. Details regarding fees, as well as full plan administration for
profit sharing, pension and 401(k) plans are available from the Distributor.
AUTOMATED CLEARING HOUSE ("ACH") DEPOSITS. Holders of Class A shares can use
ACH to have redemption proceeds deposited electronically into their bank
accounts. Redemptions transferred to a bank account via the ACH plan are
available to be credited to the account on the second business day following
normal payment. In order to utilize this option, the shareholder's bank must be
a member of Automated Clearing House. In addition, the shareholder must fill out
the appropriate section of the account application. The shareholder must also
include a voided check or deposit slip from the bank account into which
redemptions are to be deposited together with the completed application. Once
ACCESS has received the application and the voided check or deposit slip, such
shareholder's designated bank account, following any redemption, will be
credited with the proceeds of such redemption. Once enrolled in the ACH plan, a
shareholder may terminate participation at any time by writing ACCESS.
DIVIDEND DIVERSIFICATION. A shareholder may, upon written request or by
completing the appropriate section of the application form accompanying this
Prospectus or by calling (800) 421-5666 ((800) 421-2833 for the hearing
impaired), elect to have all dividends and other distributions paid on a class
of shares of the Fund invested into shares of the same class of any
Participating Fund so long as the investor has a pre-existing account for such
class of shares of the other fund. Both accounts must be of the same type,
either non-retirement or retirement. If the accounts are retirement accounts,
they must both be for the same class and of the same type of retirement plan
(e.g. IRA, 403(b)(7), 401(k), Keogh) and for the benefit of the same individual.
If a qualified, pre-existing account does not exist, the shareholder must
establish a new account subject to minimum investment and other requirements of
the fund into which distributions would be invested. Distributions are invested
into the selected fund at its net asset value as of the payable date of the
distribution.
EXCHANGE PRIVILEGE. Shares of the Fund may be exchanged for shares of the same
class of any Participating Fund based on the net asset values of each fund on
36
<PAGE> 41
the date of the exchange without sales charge. Shares of any Participating Fund
may be exchanged for shares of any other Participating Fund only if shares of
that Participating Fund are available for sale; however, during periods of
suspension of sales, shares of a Participating Fund may be available for sale
only to existing shareholders of a Participating Fund. Shareholders seeking an
exchange into a Participating Fund should obtain and read the current prospectus
for such Fund. Additional funds may be added from time to time as determined by
the Fund's Board of Trustees as Participating Funds.
When Class B shares and Class C shares are exchanged among Participating
Funds, the holding period for purposes of computing the CDSC is based upon the
date of the initial purchase of such shares from a Participating Fund (the
"original fund"). Upon redemption from the Participating Funds complex of funds,
Class B shares and Class C shares are subject to the CDSC schedule imposed by
the original fund.
Exchanges of shares are sales and may result in a gain or loss for federal
income tax purposes. If the shares exchanged have been held for less than 91
days, the sales charge paid on such shares is carried over and included in the
tax basis of the shares acquired.
A shareholder wishing to make an exchange may do so by sending a written
request to ACCESS, or by contacting the telephone transaction line at (800)
421-5684. A shareholder automatically has telephone exchange privileges unless
otherwise designated in the application form accompanying this Prospectus. Van
Kampen American Capital and its subsidiaries, including ACCESS (collectively,
"VKAC"), 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 VKAC nor the Fund will be liable for
following telephone instructions which it reasonably believes to be genuine.
VKAC and the Fund may be liable for any losses due to unauthorized or fraudulent
instructions if reasonable procedures are not followed. Exchanges are effected
at the net asset value per share next calculated after the request is received
in good order with adjustment for any additional sales charge (if applicable).
If the exchanging shareholder does not have an account in the fund whose shares
are being acquired, a new account will be established with the same
registration, dividend and capital gains options (except dividend
diversification) and authorized dealer of record as the account from which
shares are exchanged, unless otherwise specified by the shareholder. In order to
establish a systematic withdrawal plan for the new account or reinvest dividends
from the new account into another fund, however, an exchanging shareholder must
file a specific written request. The Fund reserves the
37
<PAGE> 42
right to reject any order to acquire its shares through exchange. In addition,
the Fund may modify, restrict or terminate the exchange privilege at any time on
60 days' notice to its shareholders of any termination or material amendment.
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 prior to investing.
SYSTEMATIC WITHDRAWAL PLAN. Any investor whose shares in a single account
total $10,000 or more at the offering price next computed after receipt of
instructions may establish a monthly, quarterly, semi-annual or annual
withdrawal plan. Any investor whose shares is a single account total $5,000 or
more at the offering price next computed after receipt of instructions may
establish a quarterly, semi-annual or annual withdrawal plan. This plan provides
for the orderly use of the entire account, not only the income but also the
capital, if necessary. Each withdrawal constitutes a redemption of shares on
which any capital gain or loss will be recognized. The planholder may arrange
for monthly, quarterly, semi-annual, or annual checks in any amount not less
than $25. Such a systematic withdrawal plan may also be maintained by an
investor purchasing shares for a retirement plan established on a form made
available by the Fund. See "Shareholder Services -- Retirement Plans."
Class B shareholders and Class C shareholders who establish a withdrawal plan
may redeem up to 12% annually of the shareholder's initial account balance
without incurring a CDSC. Initial account balance means the amount of the
shareholder's investment at the time the election to participate in the plan is
made.
Under the plan, sufficient shares of the Fund are redeemed to provide the
amount of the periodic withdrawal payment. Dividends and capital gains
distributions on shares held under this plan are reinvested in additional shares
at the next determined net asset value. If periodic withdrawals continuously
exceed reinvested dividends and capital gains distributions, the shareholder's
original investment will be correspondingly reduced and ultimately exhausted.
Withdrawals made concurrently with the purchase of additional shares ordinarily
will be disadvantageous to the shareholder because of the duplication of sales
charges. Any taxable gain or loss will be recognized by the shareholder upon
redemption of shares.
38
<PAGE> 43
- ------------------------------------------------------------------------------
REDEMPTION OF SHARES
- ------------------------------------------------------------------------------
REGULAR REDEMPTIONS. Shareholders may redeem for cash some or all of their
shares of the Fund at any time. To do so, a written request in proper form must
be sent directly to ACCESS, P.O. Box 418256, Kansas City, Missouri 64141-9256.
Shareholders may also place redemption requests through an authorized dealer.
Orders received from authorized dealers must be at least $500 unless transmitted
via the FUNDSERV network. The redemption price for such shares is the net asset
value next calculated after an order is received by an authorized dealer
provided such order is transmitted to the Distributor prior to the Distributor's
close of business on such day. It is the responsibility of authorized dealers to
transmit redemption requests received by them to the Distributor so they will be
received prior to such time.
As described herein under "Purchase of Shares," redemptions of Class B shares
and Class C shares are subject to a CDSC. In addition, a CDSC of 1.00% may be
imposed on certain redemptions of Class A shares made within one year of
purchase for investments of $1 million or more. The CDSC incurred upon
redemption is paid to the Distributor in reimbursement for distribution-related
expenses. A custodian of a retirement plan account may charge fees based on the
custodian's fee schedule.
The request for redemption must be signed by all persons in whose names the
shares are registered. Signatures must conform exactly to the account
registration. If the proceeds of the redemption exceed $50,000, or if the
proceeds are not to be paid to the record owner at the record address, or if the
record address has changed within the previous 30 days, signature(s) must be
guaranteed by one of the following: a bank or trust company; a broker-dealer; a
credit union; a national securities exchange, registered securities association
or clearing agency; a savings and loan association; or a federal savings bank.
Generally, a properly signed written request with any required signature
guarantee is all that is required for a redemption. In some cases, however,
other documents may be necessary. For example, although the Fund normally does
not issue certificates for shares, it will do so if a special request has been
made to ACCESS. In the case of shareholders holding certificates, the
certificates for the shares being redeemed must accompany the redemption
request. In the event the redemption is requested by a corporation, partnership,
trust, fiduciary, executor or administrator, and the name and title of the
individual(s) authorizing such redemption is not shown in the account
registration, a copy of the corporate resolution or other legal documentation
appointing the authorized signer and certified within the prior 60 days must
accompany the redemption request. IRA redemption requests should be sent to the
IRA custodian to be forwarded to
39
<PAGE> 44
ACCESS. Where Van Kampen American Capital Trust Company serves as
custodian, special IRA, 403(b)(7), or Keogh distribution forms must be obtained
from and be forwarded to Van Kampen American Capital Trust Company, P.O. Box
944, Houston, Texas 77001-0944. Contact the custodian for information.
In the case of redemption requests sent directly to ACCESS, the redemption
price is the net asset value per share next determined after the request is
received. Payment for shares redeemed will be made by check mailed within seven
days after acceptance by ACCESS of the request and any other necessary documents
in proper order. Such payment may be postponed or the right of redemption
suspended as provided by the rules of the SEC. If the shares to be redeemed have
been recently purchased by check, ACCESS may delay mailing a redemption check
until it confirms the purchase check has cleared, which may take up to fifteen
days. A taxable gain or loss will be recognized by the shareholder upon
redemption of shares.
The Fund may redeem any shareholder account with a net asset value on the date
of the notice of redemption less than the minimum initial investment as
specified in this Prospectus. At least 60 days advance written notice of any
such involuntary redemption is required and the shareholder is given an
opportunity to purchase the required value of additional shares at the next
determined net asset value without sales charge. Any applicable CDSC will be
deducted from the proceeds of this redemption. Any involuntary redemption may
only occur if the shareholder account is less than the minimum initial
investment due to shareholder redemptions.
TELEPHONE REDEMPTIONS. In addition to the regular redemption procedures set
forth above, the Fund permits redemption of shares by telephone and for
redemption proceeds to be sent to the address of record for the account or to
the bank account of record as described below. To establish such privilege, a
shareholder must complete the appropriate section of the application
accompanying this Prospectus or call the Fund at (800) 421-5666 to request that
a copy of the Telephone Redemption Authorization form be sent to them for
completion. To redeem shares, contact the telephone transaction line at (800)
421-5684. VKAC 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 VKAC nor the Fund
will be liable for following telephone instructions which it reasonably believes
to be genuine. VKAC and the Fund may be liable for any losses due to
unauthorized or fraudulent instructions if reasonable procedures are not
followed. Telephone redemptions may not be available if the shareholder cannot
reach ACCESS by telephone, whether because all telephone lines are busy or for
any other reason; in such case, a shareholder would have to use
40
<PAGE> 45
the Fund's regular redemption procedure previously described. Requests received
by ACCESS prior to 4:00 p.m., New York time, on a regular business day will be
processed at the net asset value per share determined that day. These privileges
are available for all accounts other than retirement accounts. The telephone
redemption privilege is not available for shares represented by certificates. If
an account has multiple owners, ACCESS may rely on the instructions of any one
owner.
For redemptions authorized by telephone, amounts of $50,000 or less may be
redeemed daily if the proceeds are to be paid by check and amounts of at least
$1,000 up to $1 million may be redeemed daily if the proceeds are to be paid by
wire. The proceeds must be payable to the shareholder(s) of record and sent to
the address of record for the account or wired directly to their predesignated
bank account. This privilege is not available if the address of record has been
changed within 30 days prior to a telephone redemption request. Proceeds from
redemptions are expected to be wired on the next business day following the date
of redemption. This service is also not available with respect to shares held in
an individual retirement account (IRA) for which Van Kampen American Capital
Trust Company acts as custodian. The Fund reserves the right at any time to
terminate, limit or otherwise modify this redemption privilege.
REDEMPTION UPON DISABILITY. The Fund will waive the CDSC on redemptions
following the disability of a Class B shareholder or 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 disability before it determines to waive the
CDSC on Class B shares and Class C shares.
In cases of disability, the CDSC on Class B shares and Class C shares will be
waived where the 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 initial determination of disability. This waiver of the CDSC on
Class B shares and Class C shares applies to a total or partial redemption, but
only to redemptions of shares held at the time of the initial determination of
disability.
REINSTATEMENT PRIVILEGE. A Class A shareholder or Class B shareholder who has
redeemed shares of the Fund may reinstate any portion or all of the proceeds of
such redemption in Class A shares of the Fund. A Class C shareholder who has
redeemed shares of the Fund may reinstate any portion or all of the net proceeds
of such redemption in Class C shares of the Fund with credit given for any CDSC
paid
41
<PAGE> 46
upon such redemption. Such reinstatement is made at the net asset value (without
sales charge except as described under "Shareholder Services -- Exchange
Privilege") next determined after the order is received, which must be within
180 days after the date of the redemption. Reinstatement at net asset value is
also offered to participants in those eligible retirement plans held or
administered by Van Kampen American Capital Trust Company for repayment of
principal (and interest) on their borrowings on such plans.
- ------------------------------------------------------------------------------
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 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 each class. The Distribution Plan and the Service
Plan are being implemented through an agreement with the Distributor and
sub-agreements between the Distributor and brokers, dealers or financial
intermediaries (collectively, "Selling Agreements") that may provide for their
customers or clients certain services or assistance.
CLASS A SHARES. The Fund may spend an aggregate amount up to 0.25% per year of
the average daily net assets attributable to the Class A shares of the Fund
pursuant to the Distribution Plan and Service Plan. From such amount, the Fund
may spend up to 0.25% per year of the Fund's average daily net assets
attributable to the Class A shares pursuant to the Service Plan in connection
with the ongoing provision of services to holders of such shares by the
Distributor and by brokers, dealers or financial intermediaries and in
connection with the maintenance of such shareholders' accounts. The Fund pays
the Distributor the lesser of the balance of the 0.25% not paid to such brokers,
dealers or financial intermediaries or the amount of the Distributor's actual
distribution related expense.
CLASS B SHARES. The Fund may spend up to 0.75% per year of the average daily
net assets attributable to the Class B shares of the Fund pursuant to the
Distribution Plan. In addition, the Fund may spend up to 0.25% per year of the
Fund's average daily net assets attributable to the Class B shares pursuant to
the Service Plan in connection with the ongoing provision of services to holders
of such shares by the Distributor and by brokers, dealers or financial
intermediaries and in connection with the maintenance of such shareholders'
accounts.
CLASS C SHARES. The Fund may spend up to 0.75% per year of the average daily
net assets attributable to the Class C shares of the Fund pursuant to the
Distribution Plan. From such amount, the Fund, or the Distributor as agent for
the
42
<PAGE> 47
Fund, pays brokers, dealers or financial intermediaries in connection with the
distribution of the Class C shares up to 0.75% of the Fund's average daily net
assets attributable to Class C shares maintained in the Fund more than one year
by such broker's, dealer's or financial intermediary's customers. The Fund pays
the Distributor the lesser of the balance of 0.75% not paid to such brokers,
dealers or financial intermediaries or the amount of the Distributor's actual
distribution-related expense attributable to the Class C shares. In addition,
the Fund may spend up to 0.25% per year of the Fund's average daily net assets
attributable to the Class C shares pursuant to the Service Plan in connection
with the ongoing provision of services to holders of such shares by the
Distributor and by brokers, dealers or financial intermediaries and in
connection with the maintenance of such shareholders' accounts.
OTHER INFORMATION. Amounts payable to the Distributor with respect to the
Class A shares under the Distribution Plan in a given year may not fully
reimburse the Distributor for its actual distribution-related expenses during
such year. In such event, with respect to the Class A shares, there is no
carryover of such reimbursement obligations to succeeding years.
The Distributor's actual expenses with respect to Class B shares or Class C
shares for any given year may exceed the amounts payable to the Distributor with
respect to such class of shares under the Distribution Plan, the Service Plan
and payments received pursuant to the CDSC. In such event, with respect to any
such class of shares, any unreimbursed expenses will be carried forward and paid
by the Fund (up to the amount of the actual expenses incurred) in future years
so long as such Distribution Plan is in effect. Except as mandated by applicable
law, the Fund does not impose any limit with respect to the number of years into
the future that such unreimbursed expenses may be carried forward (on a Fund
level basis). Because such expenses are accounted on a Fund level basis, in
periods of extreme net asset value fluctuation such amounts with respect to a
particular Class B share or Class C share may be greater or less than the amount
of the initial commission (including carrying cost) paid by the Distributor with
respect to such share. In such circumstances, a shareholder of a share may be
deemed to incur expenses attributable to other shareholders of such class. As of
May 31, 1997, there were $3,958,720 and $286,561 of unreimbursed distribution
expenses with respect to Class B shares and Class C shares, respectively,
representing 3.19% and 2.20% of the Fund's average net assets attributable to
Class B shares and Class C shares, respectively. If the Distribution Plan was
terminated or not continued, the Fund would not be contractually obligated to
pay the Distributor for any expenses not previously reimbursed by the Fund or
recovered through CDSCs.
The Distributor will not use the proceeds from the CDSC applicable to a
particular class of shares to defray distribution-related expenses attributable
to any other class of shares. Various federal and state laws prohibit national
banks and
43
<PAGE> 48
some state-chartered commercial banks from underwriting or dealing in the Fund's
shares. In addition, state securities laws on this issue may differ from the
interpretations of federal law, and banks and financial institutions may be
required to register as dealers pursuant to state law. In the unlikely event
that a court were to find that these laws prevent such banks from providing such
services described above, the Fund would seek alternate providers and expects
that shareholders would not experience any disadvantage.
- ------------------------------------------------------------------------------
DISTRIBUTIONS FROM THE FUND
- ------------------------------------------------------------------------------
In addition to any increase in the value of shares which the Fund may achieve,
shareholders may receive two kinds of return from the Fund: dividends and
capital gains distributions.
DIVIDENDS. Dividends from stocks and interest earned from other investments
are the Fund's main source of income. Substantially all of this income, less
expenses, is distributed annually as dividends to shareholders. Unless the
shareholder instructs otherwise, dividends are automatically applied to purchase
additional shares of the Fund at the next determined net asset value. See
"Shareholder Services -- Reinvestment Plan."
The per share dividends on Class B shares and Class C shares may be lower than
the per share dividends on Class A shares as a result of the higher distribution
fees and transfer agency costs applicable to such classes of shares.
CAPITAL GAINS. The Fund may realize capital gains or losses when it sells
securities, depending on whether the sales prices for the securities are higher
or lower than their purchase prices. The Fund distributes to shareholders at
least once a year the excess, if any, of its total profits on the sale of
securities during the year over its total losses on the sale of securities,
including capital losses carried forward from prior years under tax laws. As in
the case of income dividends, capital gains distributions are automatically
reinvested in additional shares of the Fund at net asset value unless the
shareholder elects otherwise. See "Shareholder Services -- Reinvestment Plan."
- ------------------------------------------------------------------------------
TAX STATUS
- ------------------------------------------------------------------------------
FEDERAL INCOME TAXATION. The Fund has qualified and intends to continue to
qualify each year and to elect to be treated as a regulated investment company
under Subchapter M of the Code. To qualify as a regulated investment company,
44
<PAGE> 49
the Fund must comply with certain requirements of the Code relating to, among
other things, the source of its income and diversification of its assets.
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), 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.
In order to avoid a 4% excise tax, the Fund will be required to distribute, by
December 31 of each year, at least 98% of its ordinary income (not including
tax-exempt income) for such year and at least 98% of its capital gain net income
(the latter of which generally is computed on the basis of the one-year period
ending on October 31 of such year), plus any amounts that were not distributed
in previous taxable years. For purposes of the excise tax, any ordinary income
or capital gain net income retained by, and subject to federal income tax in the
hands of, the Fund will be treated as having been distributed.
If the Fund failed to qualify as a regulated investment company or failed to
satisfy the 90% distribution requirement in any taxable year, the Fund would be
taxed as an ordinary corporation on its taxable income (even if such income were
distributed to its shareholders) and all distributions out of earnings and
profits would be taxed to shareholders as ordinary income. To qualify again as a
regulated investment company in a subsequent year, the Fund may be required to
pay an interest charge on 50% of its earnings and profits attributable to
non-regulated investment company years and would be required to distribute such
earnings and profits to shareholders (less any interest charge). In addition, if
the Fund failed to qualify as a regulated investment company for its first
taxable year or, if immediately after qualifying as a regulated investment
company for any taxable year, it failed to qualify for a period greater than one
taxable year, the Fund would be required to recognize any net built-in gains
(the excess of aggregate gains, including items of income, over aggregate losses
that would have been realized if it had been liquidated) in order to qualify as
a regulated investment company in a subsequent year.
Some of the Fund's investment practices are subject to special provisions of
the Code that, among other things, may defer the use of certain losses of the
Fund and affect the holding period of the securities held by the Fund and the
character of the gains or losses realized by the Fund. These provisions may also
require the Fund to mark-to-market some of the positions in its portfolio (i.e.,
treat them as if they were sold for fair market value at the end of the
tax-year), which may cause the Fund to recognize income without receiving cash
with which to make distributions in
45
<PAGE> 50
amounts necessary to satisfy the 90% distribution requirement and the
distribution requirements for avoiding income and excise taxes. The Fund 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
regulated investment company.
The Fund's ability to dispose of portfolio securities may be limited by the
requirement for qualification as a regulated investment company that less than
30% of the Fund's annual gross income be derived from the disposition of
securities held for less than three months. Under recently enacted legislation,
this requirement will no longer be applicable to the Fund beginning on June 1,
1998.
Investments of the Fund in securities issued at a discount or providing for
deferred interest or payment of interest in kind are subject to special tax
rules that will affect the amount, timing and character of distributions to
shareholders. For example, with respect to securities issued at a discount, the
Fund will be required to accrue as income each year a portion of the discount
and to distribute such income each year in order to maintain its qualification
as a regulated investment company and to avoid income and excise taxes. In order
to generate sufficient cash to make distributions necessary to satisfy the 90%
distribution requirement and to avoid income and excise taxes, the Fund may have
to dispose of securities that it would otherwise have continued to hold.
DISTRIBUTIONS. Distributions of the Fund's net investment income are taxable
to shareholders as ordinary income to the extent of the Fund's earnings and
profits, whether paid in cash or reinvested in additional shares. Distributions
of the Fund's net capital gains ("capital gains dividends"), if any, are taxable
to shareholders as long-term capital gains regardless of the length of time
shares of the Fund have been held by such shareholders. Distributions in excess
of the Fund's earnings and profits will first reduce the adjusted tax basis of a
holder's shares and, after such adjusted tax basis is reduced to zero, will
constitute capital gains to such holder (assuming such shares are held as a
capital asset). For a summary of the tax rates applicable to capital gains
(including capital gains dividends), see "Capital Gains Rates Under the 1997 Tax
Act" below. Tax-exempt shareholders not subject to federal income tax on their
income generally will not be taxed on distributions from the Fund.
Shareholders receiving distributions in the form of additional shares issued
by the Fund will be treated for federal income tax purposes as receiving a
distribution in an amount equal to the fair market value of the shares received,
determined as of the distribution date. The basis of such shares will equal the
fair market value on the distribution date.
The Fund will inform shareholders of the source and tax status of all
distributions promptly after the close of each calendar year. Fund distributions
will not qualify
46
<PAGE> 51
for the dividends received deduction for corporations, except to the extent the
Fund receives dividends from domestic corporations.
Although dividends generally will be treated as distributed when paid,
dividends declared in October, November or December, payable to shareholders of
record on a specified date in such month and paid during January of the
following year will be treated as having been distributed by the Fund and
received by the shareholders on the December 31 prior to the date of payment. In
addition, certain other distributions made after the close of a taxable year of
the Fund may be "spilled back" and treated as paid by the Fund (except for
purposes of the 4% excise tax) during such taxable year. In such case,
shareholders will be treated as having received such dividends in the taxable
year in which the distribution was actually made.
Income from investments in foreign securities received by the Fund may be
subject to income, withholding and other taxes imposed by foreign countries and
U.S. possessions. Tax conventions between certain countries and the United
States may reduce or eliminate such taxes. Investors may be entitled to claim
United States foreign tax credits with respect to such taxes, subject to certain
provisions and limitations contained in the Code. If more than 50% in value of
the Fund's total assets at the close of its fiscal year consists of securities
of foreign issuers, the Fund will be eligible to and may file elections with the
Internal Revenue Service pursuant to which shareholders of the Fund will be
required to (i) include their respective pro rata portions of such taxes in
their United States income tax returns as gross income, and (ii) treat such
respective pro rata portions as taxes paid by them. Each shareholder will be
entitled, subject to certain limitations, to either deduct his respective pro
rata portions of such foreign taxes in computing his taxable incomes or use them
as foreign tax credits against his United States federal income taxes. No
deduction for such foreign taxes may be claimed by a shareholder who does not
itemize deductions. Each shareholder will be notified annually whether the
foreign taxes paid by the Fund will "pass through" for that year and, if so,
such notification will designate (i) the shareholder's portion of the foreign
taxes paid to each such country and (ii) the portion of dividends that represent
income derived from sources within each such country. The amount of foreign
taxes for which a shareholder may claim a credit in any year will be subject to
an overall limitation such that the credit may not exceed the shareholder's
United States federal income tax attributable to the shareholder's foreign
source taxable income. This limitation generally applies separately to certain
specific categories of foreign source income including "passive income" which
includes, among other types of income, dividends and interest. The foregoing is
only a general description of the foreign tax credit under current law. Because
application of the depends on the particular circumstances of each shareholder,
shareholders are advised to consult their own tax advisers.
47
<PAGE> 52
Under Code Section 988, foreign currency gains or losses from certain forward
contracts not traded in the interbank market as well as certain other gains or
losses attributable to currency exchange rate fluctuations are typically treated
as ordinary income or loss. Such income or loss may increase or decrease (or
possibly eliminate) the Fund's income available for distribution. If, under the
rules governing the tax treatment of foreign currency gains and losses, the
Fund's income available for distribution is decreased or eliminated, all or a
portion of the dividends declared by the Fund may be treated for federal income
tax purposes as a return of capital or, in some circumstances, as capital gain.
Generally, a shareholder's tax basis in Fund shares will be reduced to the
extent that an amount distributed to such shareholder is treated as a return of
capital.
The 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: (1) at least 75% of its gross income is passive or (2) an
average of at least 50% of its assets produce, or are held for the production
of, passive income. Under certain circumstances, a regulated investment company
that holds stock of a PFIC will be subject to federal income tax (i) on a
portion of any "excess distribution" received on the stock or (ii) on any gain
from a sale or disposition of the stock (collectively, "PFIC income"), plus
interest thereon, even if the regulated investment company distributes the PFIC
income as a taxable dividend to its stockholders. The balance of the PFIC income
will be included in the regulated investment company's investment company
taxable income and, accordingly, will not be taxable to it to the extent that
income is distributed to its shareholders. If the 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 by the Fund to satisfy the distribution requirement for avoiding
income and excise taxes. In many instances it may be very difficult to make this
election due to certain requirements imposed with respect to the election.
Under provisions of the Taxpayer Relief Act of 1997 (the "1997 Tax Act")
generally effective for taxable years ending after 1997, the Fund 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 distributions of, the PFIC stock. This amount would not be deductible
from the Fund's taxable income.
48
<PAGE> 53
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 dispositions of
PFIC stock.
The Fund is required, in certain circumstances, to withhold 31% of dividends
and certain other payments, including redemptions, paid to shareholders who do
not furnish to the Fund their correct taxpayer identification number (in the
case of individuals, their social security number) and certain required
certifications or who are otherwise subject to backup withholding.
SALE OF SHARES. The sale of shares (including transfers in connection with a
redemption or repurchase of shares) will be a taxable transaction for federal
income tax purposes. Selling shareholders will generally recognize gain or loss
in an amount equal to the difference between their adjusted tax basis in the
shares and the amount received. If such shares are held as a capital asset, the
gain or loss will be a capital gain or loss. Any loss recognized upon a taxable
disposition of shares held for six months or less will be treated as a long-term
capital loss to the extent of any capital gains dividends received with respect
to such shares. For a summary of the tax rates applicable to capital gains, see
"Capital Gains Rates Under the 1997 Tax Act" below. For purposes of determining
whether shares have been held for six months or less, the holding period is
suspended for any periods during which the shareholder's risk of loss is
diminished as a result of holding one or more other positions in substantially
similar or related property or through certain options or short sales.
CAPITAL GAINS RATES UNDER THE 1997 TAX ACT. Under 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. 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 regulated investment companies and to sales and
exchanges of interests in regulated investment companies, 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 gains dividends by regulated investment companies such
as the Fund as well as to sales and exchanges of shares in regulated investment
companies such as the Fund. 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
49
<PAGE> 54
capital gains dividends received on such shares (see "Sale of Shares" above), it
is unclear how such capital losses offset the capital gains referred to above.
Shareholders should consult their own tax advisors as to the application of the
new capital gains rates to their particular circumstances.
GENERAL. The federal, state and local income tax discussion set forth above
is for general information only. Prospective investors should consult their
advisors regarding the specific federal tax consequences of purchasing, holding
and disposing of shares, as well as the effects of state, local and foreign tax
law and any proposed tax law changes.
- ------------------------------------------------------------------------------
FUND PERFORMANCE
- ------------------------------------------------------------------------------
From time to time the Fund may advertise its total return for prior periods.
Any such advertisement would include at least average annual total return
quotations for a one year period or for the life of the Fund. Other total return
quotations, aggregate or average, over other time periods may also be included.
The total return of the Fund for a particular period represents the increase
(or decrease) in the value of a hypothetical investment in the Fund from the
beginning to the end of the period. Total return is calculated by subtracting
the value of the initial investment from the ending value and showing the
difference as a percentage of the initial investment; the calculation assumes
the initial investment is made at the current maximum public offering price
(which includes a maximum sales charge of 5.75% for Class A shares); that all
income dividends or capital gains distributions during the period are reinvested
in Fund shares at net asset value; and that any applicable CDSC has been paid.
The Fund's total return will vary depending on market conditions, the securities
comprising the Fund's portfolio, the Fund's operating expenses and unrealized
net capital gains or losses during the period. Total return is based on
historical earnings and asset value fluctuations and is not intended to indicate
future performance. No adjustments are made to reflect any income taxes payable
by shareholders on dividends and distributions paid by the Fund.
Average annual total return quotations for periods of two or more years are
computed by finding the average annual compounded rate of return over the period
that would equate the initial amount invested to the ending redeemable value.
Total return is calculated separately for Class A shares, Class B shares and
Class C shares of the Fund. Class A shares total return figures include the
maximum sales charge of 5.75%; Class B shares and Class C shares total return
figures include any applicable CDSC. Because of the differences in sales charges
and distribution fees, the total returns for each of the classes will differ.
50
<PAGE> 55
From time to time, the Fund may include in its sales literature and
shareholder reports a quotation of the current "distribution rate" for each
class of shares of the Fund. Distribution rate is a measure of the level of
income and short-term capital gain dividends, if any, distributed for a
specified period. Distribution rate differs from yield, which is a measure of
the income actually earned by the Fund's investments, and from total return
which is a measure of the income actually earned by the Fund's investments plus
the effect of any realized and unrealized appreciation or depreciation of such
investments during a stated period. Distribution rate is, therefore, not
intended to be a complete measure of the Fund's performance. Distribution rate
may sometimes be greater than yield since, for instance, it may not include the
effect of amortization of bond premiums, and may include non-recurring
short-term capital gains and premiums from futures transactions engaged in by
the Fund. Distribution rates will be computed separately for each class of the
Fund's shares.
In reports or other communications to shareholders or in advertising material,
the Fund may compare its performance with that of other mutual funds as listed
in the ratings or rankings prepared by Lipper Analytical Services, Inc., CDA,
Morningstar Mutual Funds or similar independent services which monitor the
performance of mutual funds, with the Consumer Price Index, the Dow Jones
Industrial Average Index, Standard & Poor's indices, or NASDAQ, other
appropriate indices of investment securities, or with investment or savings
vehicles. The performance information may also include evaluations of the Fund
published by nationally recognized ranking services and by nationally recognized
financial publications. Such comparative performance information will be stated
in the same terms in which the comparative data or indices are stated. Such
advertisements and sales material may also include a yield quotation as of a
current period. In each case, such total return and yield information, if any,
will be calculated pursuant to rules established by the SEC and will be computed
separately for each class of the Fund's shares. For these purposes, the
performance of the Fund, as well as the performance of other mutual funds or
indices, do not reflect sales charges, the inclusion of which would reduce Fund
performance. The Fund will include performance data for each class of shares of
the Fund in any advertisement or information including performance data of the
Fund.
The Fund may also utilize performance information in hypothetical
illustrations provided in narrative form. These hypotheticals will be
accompanied by standard performance information required by the SEC as described
above.
The Fund's Annual Report and Semi-Annual Report contain additional performance
information. A copy of the Annual Report or Semi-Annual Report may be obtained
without charge by calling or writing the Fund at the telephone number and
address printed on the cover of this Prospectus.
51
<PAGE> 56
- ------------------------------------------------------------------------------
DESCRIPTION OF SHARES OF THE FUND
- ------------------------------------------------------------------------------
The Trust was originally incorporated in the State of Maryland on May 25,
1990. The Trust was reorganized as a business trust under the laws of the state
of Delaware on August 31, 1995 and adopted its current name as of that time. The
authorized capitalization of the Trust consists of an unlimited number of shares
of beneficial interest, par value $0.01 per share. The Trust may establish from
time to time one or more separate series, such as the Fund, and authorize
separate classes of shares of such series. The Fund currently offers three
classes of shares, designated Class A shares, Class B shares and Class C shares.
Other classes may be established from time to time. Shares issued by the Fund
are fully paid, non-assessable and, except as described herein, have no
preemptive or conversion rights.
Each class of shares represents an interest in the same assets of the Fund and
generally are identical in all respects except that each class bears certain
distribution expenses and has exclusive voting rights with respect to its
distribution fee. There are no conversion, preemptive or other subscription
rights, except with respect to the conversion of certain shares into Class A
shares as described herein. In the event of liquidation, each of the shares of
the Fund is entitled to its portion of all of the Fund's net assets after all
debt and expenses of the Fund have been paid. Since Class B shares and Class C
shares pay higher distribution fees and transfer agency costs, the liquidation
proceeds to Class B shareholders and Class C shareholders are likely to be lower
than to other shareholders.
The Fund does not contemplate holding regular meetings of shareholders to
elect Trustees or otherwise. However, the holders of 10% or more of the
outstanding shares may by written request require a meeting to consider the
removal of Trustees by a vote of two-thirds of the shares then outstanding cast
in person or by proxy at such meeting. The Fund will assist such holders in
communicating with other shareholders of the Fund to the extent required by the
1940 Act. More detailed information concerning the Fund is set forth in the
Statement of Additional Information.
The Trust's Declaration of Trust provides that no Trustee, officer or
shareholder of the Fund shall be held to any personal liability, nor shall
resort be had to their private property for the satisfaction of any obligation
or liability of the Fund but the assets of the Fund only shall be liable.
52
<PAGE> 57
- ------------------------------------------------------------------------------
ADDITIONAL INFORMATION
- ------------------------------------------------------------------------------
This Prospectus and the Statement of Additional Information do not contain all
the information set forth in the Registration Statement filed by the Trust with
the SEC under the 1933 Act. Copies of the Registration Statement may be obtained
at a reasonable charge from the SEC or may be examined, without charge, at the
office of the SEC in Washington, D.C.
The fiscal year end of the Fund is May 31. The Fund sends to its shareholders
at least semi-annually reports showing the Fund's portfolio and other
information. An Annual Report, containing financial statements audited by the
Fund's independent accountants, is sent to shareholders each year. After the end
of each year, shareholders will receive federal tax information regarding
dividends and capital gains distributions.
For Automated Telephone Service which provides 24-hour direct dial access to
fund facts and shareholder account information, dial (800) 847-2424. For
inquiries through Telecommunications Device for the Deaf (TDD) dial (800)
421-2833.
53
<PAGE> 58
EXISTING SHAREHOLDERS--
FOR INFORMATION ON YOUR
EXISTING ACCOUNT PLEASE CALL
THE FUND'S TOLL-FREE
NUMBER--(800) 341-2911
PROSPECTIVE INVESTORS--CALL
YOUR BROKER OR (800) 421-5666
DEALERS--FOR DEALER
INFORMATION, SELLING
AGREEMENTS, WIRE ORDERS, OR
REDEMPTIONS CALL THE
DISTRIBUTOR'S TOLL-FREE
NUMBER--(800) 421-5666
FOR SHAREHOLDER AND DEALER
INQUIRIES THROUGH
TELECOMMUNICATIONS DEVICE
FOR THE DEAF (TDD)
DIAL (800) 421-2833
FOR AUTOMATED TELEPHONE
SERVICES DIAL (800) 847-2424
VAN KAMPEN AMERICAN CAPITAL
GLOBAL EQUITY FUND
One Parkview Plaza
Oakbrook Terrace, IL 60181
Investment Adviser
VAN KAMPEN AMERICAN CAPITAL
ASSET MANAGEMENT, INC.
One Parkview Plaza
Oakbrook Terrace, IL 60181
Investment Subadviser
MORGAN STANLEY ASSET
MANAGEMENT INC.
1221 Avenue of the Americas
New York, New York 10020
Distributor
VAN KAMPEN AMERICAN CAPITAL
DISTRIBUTORS, INC.
One Parkview Plaza
Oakbrook Terrace, IL 60181
Transfer Agent
ACCESS INVESTOR SERVICES, INC.
P.O. Box 418256
Kansas City, MO 64141-9256
Attn: Van Kampen American Capital
Global Equity Fund
Custodian
STATE STREET BANK AND
TRUST COMPANY
225 West Franklin Street
P.O. Box 1713
Boston, MA 02105-1713
Attn: Van Kampen American Capital
Global Equity Fund
Legal Counsel
SKADDEN, ARPS, SLATE,
MEAGHER & FLOM (ILLINOIS)
333 West Wacker Drive
Chicago, IL 60606
Independent Accountants
PRICE WATERHOUSE LLP
1201 Louisiana
Suite 2900
Houston, TX 77002
<PAGE> 59
------------------------------------------------------------------------------
GLOBAL EQUITY FUND
------------------------------------------------------------------------------
P R O S P E C T U S
SEPTEMBER 28, 1997
------ A WEALTH OF KNOWLEDGE - A KNOWLEDGE OF WEALTH ------
VAN KAMPEN AMERICAN CAPITAL
------------------------------------------------------------------------
