<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 6, 1998
1933 ACT REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM N-14
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. ____ [ ]
POST-EFFECTIVE AMENDMENT NO. ____ [ ]
---------------------
VAN KAMPEN AMERICAN CAPITAL
REAL ESTATE SECURITIES FUND
(Exact Name of Registrant as Specified in Agreement and Declaration of Trust)
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: COMMON SHARES OF BENEFICIAL INTEREST,
PAR VALUE $0.01 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 is organized as follows:
-- Cross Reference Sheet with respect to Van Kampen American Capital Real
Estate Securities Fund
-- Questions and Answers to Shareholders of Morgan Stanley U.S. Real Estate
Fund
-- Notice of Special Meeting of Shareholders of Morgan Stanley U.S. Real
Estate Fund
-- Prospectus/Proxy Statement regarding the proposed Reorganization of
Morgan Stanley U.S. Real Estate Fund into Van Kampen American Capital
Real Estate Securities Fund
-- Prospectus of Van Kampen American Capital Real Estate Securities Fund
-- Statement of Additional Information regarding the proposed
Reorganization of Morgan Stanley U.S. Real Estate Fund into Van Kampen
American Capital Real Estate Securities Fund
-- Part C Information
-- Exhibits
<PAGE> 3
VAN KAMPEN AMERICAN CAPITAL REAL ESTATE SECURITIES 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 Van Kampen
American Capital Real Estate
Securities Fund (incorporated by
reference)
Item 6. Information about the Company Being Acquired......... Outside front cover page of
Prospectus/Proxy Statement;
Summary; Exhibit A; Prospectus and
Statement of Additional
Information of the Morgan Stanley
U.S. Real Estate Fund
(incorporated by reference)
Item 7. Voting Information................................... Other Information; Voting
Information and Requirements
Item 8. Interest of Certain Persons and Experts.............. Summary; The Proposed Reorganization
Item 9. Additional Information Required for Reoffering by
Persons Deemed to be Underwriters.................. Not applicable
PART B INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION
Item 10. Cover Page........................................... Cover Page
Item 11. Table of Contents.................................... Table of Contents
Item 12. Additional Information about the Registrant.......... Additional Information about the Van
Kampen American Capital Real
Estate Securities Fund;
Incorporation of Documents by
Reference
Item 13. Additional Information about the Company Being
Acquired........................................... Additional Information about the
Morgan Stanley U.S. Real Estate
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 MORGAN STANLEY
U.S. REAL ESTATE
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
Morgan Stanley U.S. Real Estate Fund (the "MS Real Estate Fund") into Van
Kampen American Capital Real Estate Securities Fund (the "VKAC Real Estate
Fund"), a fund that pursues a similar investment objective. [If the
Reorganization is completed, it is expected that the surviving VKAC Real
Estate Fund subsequently will be renamed as the Morgan Stanley Real Estate
Securities Fund.]
Q WHY IS THE REORGANIZATION BEING RECOMMENDED?
A After several transactions in 1996 and 1997, Van Kampen American Capital,
Inc. ("VKAC") has become an indirect wholly-owned subsidiary of Morgan
Stanley, Dean Witter, Discover & Co., Inc. VKAC through its subsidiaries
acts as the adviser, distributor and shareholder servicing agent of the Van
Kampen American Capital-sponsored family of retail funds. VKAC has recently
also assumed similar roles for the Morgan Stanley-sponsored family of
retail funds. The purpose of the proposed Reorganization is to permit the
shareholders of the MS Real Estate Fund to (i) achieve certain economies of
scale from the VKAC Real Estate Fund's larger net asset size 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 MS Real Estate Fund approve the
Reorganization, the assets and liabilities of the MS Real Estate Fund
will be combined with those of the VKAC Real Estate Fund, and you
will become a shareholder of the VKAC Real Estate Fund. You will receive
shares of the VKAC Real Estate Fund equal in value at the time of issuance
to your shares of the MS Real Estate 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 Real Estate 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 VKAC Real Estate
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 MS Real Estate 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 MS Real
Estate Fund.
Q HOW DO ADVISORY AND OTHER OPERATING FEES PAID BY THE MS REAL ESTATE FUND
COMPARE TO THOSE PAYABLE BY THE VKAC REAL ESTATE FUND?
A The VKAC Real Estate Fund is advised by Van Kampen American Capital Asset
Management, Inc. ("Asset Management"), a subsidiary of VKAC. The MS Real
Estate Fund is advised by Van Kampen American Capital Investment Advisory
Corp. ("Advisory Corp."), also a subsidiary of VKAC. Each fund is
subadvised by Morgan Stanley Asset Management, Inc. ("MSAM" or the
"Subadviser"), an indirect, wholly owned subsidiary of Morgan Stanley, Dean
Witter, Discover & Co., Inc. Management of the funds anticipates that, as a
result of the Reorganization, shareholders of the MS Real Estate Fund would
be subject to lower gross total operating expenses as a percentage of net
assets. The contractual advisory fees payable by the MS Real Estate Fund
are the same as the contractual advisory fees applicable to the VKAC Real
Estate Fund. The advisory fees and other operating expenses of the MS Real
Estate Fund currently are less than those of the VKAC Real Estate Fund but
only because voluntary expense waivers and reimbursements from Advisory
Corp. There can be no assurance that such waivers or reimbursements will
continue for the MS Real Estate Fund if the Reorganization is not
completed. Furthermore, if the Reorganization is completed, it is
anticipated that Asset Management would waive advisory fees and other
expenses for the surviving VKAC Real Estate Fund as necessary so that net
operating expenses (after expense reimbursement) are not higher than the
current net operating expenses (after expense reimbursement) being paid by
the MS Real Estate Fund.
Q WHAT WILL I HAVE TO DO TO OPEN AN ACCOUNT IN THE VKAC REAL ESTATE FUND?
WHAT HAPPENS TO MY ACCOUNT IF THE REORGANIZATION IS APPROVED?
A If the Reorganization is approved, your interest in shares of the MS Real
Estate Fund automatically will be converted into shares of the VKAC Real
Estate Fund, and we will send you written confirmation that this change has
taken place. You will receive the same class of shares of the VKAC Real
Estate Fund equal in value to your class of shares of the MS Real Estate
Fund. Holders of Class A shares of the MS Real Estate Fund will receive
Class A shares of the
<PAGE> 6
VKAC Real Estate Fund; holders of Class B shares of the MS Real Estate Fund
will receive Class B shares of the VKAC Real Estate Fund; and holders of
Class C shares of the MS Real Estate Fund will receive Class C shares
of the VKAC Real Estate Fund. No certificates for VKAC Real Estate
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 MS Real
Estate Fund, it is not necessary to return such certificates; however,
shareholders may want to present such certificates to receive
certificates of the VKAC Real Estate Fund (to simplify proof of and to
preserve the tax basis of separate lots of shares).
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 MS Real Estate Fund will recognize no gain or loss upon the receipt
solely of the shares of the VKAC Real Estate Fund in connection with the
Reorganization. Additionally, the MS Real Estate 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 VKAC Real Estate Fund
or as a result of its liquidation.
Q WHAT IF I REDEEM OR EXCHANGE MY SHARES OF THE MS REAL ESTATE FUND BEFORE
THE REORGANIZATION TAKES PLACE?
A If you choose to redeem or exchange your shares of the MS Real Estate 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
Please vote on each issue using blue or black ink to mark an X in one of the
boxes provided on the proxy card.
APPROVAL OF REORGANIZATION --
mark "For," "Against" or "Abstain"
OTHER BUSINESS - mark "For," "Against" or "Abstain"
Sign, date and return the proxy card in the enclosed postage-paid envelope. All
registered owners of an account, as shown in the address, must sign the card.
When signing as attorney, trustee, executor, administrator, custodian, guardian
or corporate officer, please indicate your full title.
PROXY
MORGAN STANLEY U.S. REAL ESTATE FUND
SPECIAL MEETING OF SHAREHOLDERS
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
SAMPLE
1. FOR [ ] AGAINST [ ] ABSTAIN [ ] THE PROPOSAL TO APPROVE THE AGREEMENT AND
PLAN OF REORGANIZATION XXXXXXXX.
2. FOR [ ] AGAINST [ ] ABSTAIN [ ] TO ACT UPON ANY AND ALL OTHER BUSINESS.
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
<PAGE> 8
MORGAN STANLEY U.S. REAL ESTATE FUND
ONE PARKVIEW PLAZA
OAKBROOK TERRACE, ILLINOIS 60181
(800) 421-5666
NOTICE OF SPECIAL MEETING
, 1998
A Special Meeting of shareholders of Morgan Stanley U.S. Real Estate Fund (the
"MS Real Estate Fund") will be held at the offices of Van Kampen American
Capital, Inc., One Parkview Plaza, Oakbrook Terrace, Illinois 60181, on
, , 1998 at 2:00 p.m. (the "Special Meeting"), for the following
purposes:
(1) To approve an Agreement and Plan of Reorganization pursuant to which the
MS Real Estate Fund would (i) transfer all of its assets to the Van Kampen
American Capital Real Estate Securities Fund (the "VKAC Real Estate Fund") in
exchange solely for Class A, B and C shares of beneficial interest of the VKAC
Real Estate Fund and the VKAC Real Estate Fund's assumption of the liabilities
of the MS Real Estate Fund, (ii) distribute such shares of the VKAC Real
Estate Fund to the holders of shares of the MS Real Estate 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 , 1998 are
entitled to vote at the Special Meeting or any adjournment thereof.
For the Board of Directors,
Ronald A. Nyberg
Secretary
, 1998
---------------------
PLEASE VOTE PROMPTLY BY SIGNING AND
RETURNING THE ENCLOSED PROXY.
---------------------
<PAGE> 9
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This Prospectus/Proxy Statement shall not constitute an offer to sell
or the solicitation of an offer to buy nor shall there be any sale of these
securities in any jurisdiction in which such offer, solicitation or sale would
be unlawful prior to registration or qualification under the securities laws of
any such jurisdiction.
SUBJECT TO COMPLETION -- DATED MARCH 6, 1998
PROSPECTUS/PROXY STATEMENT
VAN KAMPEN AMERICAN CAPITAL
REAL ESTATE SECURITIES FUND
RELATING TO THE ACQUISITION OF ASSETS AND LIABILITIES OF
MORGAN STANLEY U.S. REAL ESTATE FUND
This Prospectus/Proxy Statement is being furnished to shareholders of Morgan
Stanley U.S. Real Estate Fund (the "MS Real Estate Fund") and relates to the
special meeting of shareholders of the MS Real Estate Fund to be held at the
offices of Van Kampen American Capital, Inc., One Parkview Plaza, Oakbrook
Terrace, Illinois 60181 on , 1998 at 2:00 p.m. and at any and
all adjournments thereof (the "Special Meeting"). Shareholders of record as of
the close of business on , 1998 are entitled to vote at the
Special Meeting or any adjournment thereof. The purpose of the Special Meeting
is to approve or disapprove the proposed reorganization of the MS Real Estate
Fund (the "Reorganization") into the Van Kampen American Capital Real Estate
Securities Fund (the "VKAC Real Estate Fund"). The Reorganization would result
in shareholders of the MS Real Estate Fund in effect exchanging their Class A, B
and C shares of the MS Real Estate Fund for corresponding Class A, B and C
shares of the VKAC Real Estate Fund. The purpose of the Reorganization is to
permit the shareholders of the MS Real Estate Fund to (i) achieve certain
economies of scale from the VKAC Real Estate Fund's larger net asset size 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 VKAC Real Estate Fund is an open-end management investment company
organized as a Delaware business trust. The MS Real Estate 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 primary
investment objective of the VKAC Real Estate Fund is to seek long-term growth of
capital, with the secondary investment objective of providing current income.
The investment objective of the MS Real Estate Fund is similar to, but not
identical with, the investment objectives of the VKAC Real Estate Fund. The
investment objective of the MS Real Estate Fund is to provide above-average
current income and long-term capital appreciation. There can be no assurance
that either fund will achieve its investment objective. The address, principal
executive office and telephone number of the VKAC Real Estate Fund and the MS
Real Estate 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 MS Real Estate Fund shareholders on or about
, 1998.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE REGULATORS, NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE REGULATORS PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS/PROXY STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
---------------------
<PAGE> 10
This Prospectus/Proxy Statement sets forth concisely the information
shareholders of the MS Real Estate Fund should know before voting on the
Reorganization (in effect, investing in Class A, B or C shares of the VKAC Real
Estate Fund) and constitutes an offering of Class A, B and C shares of
beneficial interest, par value $.01 per share, of the VKAC Real Estate Fund
only. Please read it carefully and retain it for future reference. A Statement
of Additional Information dated , 1998, relating to this Prospectus/Proxy
Statement (the "Reorganization SAI") has been filed with the Securities and
Exchange Commission (the "SEC") and is incorporated herein by reference. A
Prospectus (the "VKAC Fund Prospectus") and Statement of Additional Information
containing additional information about the VKAC Real Estate Fund, each dated
April 30, 1997 (and as currently supplemented), have been filed with the SEC and
are incorporated herein by reference. A copy of the VKAC Fund Prospectus
accompanies this Prospectus/Proxy Statement. A Prospectus (the "MS Fund
Prospectus") and Statement of Additional Information containing additional
information about the MS Real Estate Fund, each dated October 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 VKAC Real Estate Fund or the MS Real Estate 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 VKAC REAL ESTATE FUND AND THE MS REAL ESTATE FUND WILL FURNISH, WITHOUT
CHARGE, A COPY OF ITS MOST RECENT ANNUAL REPORT AND 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 VKAC Real Estate Fund and the Morgan Stanley Fund, on behalf of the MS
Real Estate 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 VKAC Real Estate Fund and the Morgan Stanley Fund on
behalf of the MS Real Estate 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 VKAC Real Estate Fund and by the Morgan Stanley Fund on
behalf of the MS Real Estate Fund, such information is filed electronically with
the SEC through the SEC's Electronic Data Gathering, Analysis and Retrieval
system (EDGAR).
The date of this Prospectus/Proxy Statement is , 1998.
2
<PAGE> 11
THE PROPOSED REORGANIZATION
A. SUMMARY
The following is a summary of, and is qualified by reference to, the more
complete information contained in this Prospectus/Proxy Statement and the
information attached hereto or incorporated herein by reference. As discussed
more fully below and elsewhere in this Prospectus/Proxy Statement, the Board of
Directors of the Morgan Stanley Fund (the "Board of Directors") believes the
proposed Reorganization (as defined herein) is in the best interests of
shareholders of the MS Real Estate Fund. As a result of the Reorganization,
shareholders of the MS Real Estate Fund would acquire an interest in the VKAC
Real Estate Fund.
Shareholders should read the entire Prospectus/Proxy Statement carefully
together with (i) the MS Fund Prospectus incorporated herein by reference and
(ii) the VKAC 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 VKAC Real Estate Fund only.
THE REORGANIZATION
This Prospectus/Proxy Statement is being furnished to shareholders of the MS
Real Estate Fund in connection with the proposed combination of the MS Real
Estate Fund with and into the VKAC Real Estate Fund pursuant to the terms and
conditions of the Agreement and Plan of Reorganization between the MS Real
Estate Fund and the VKAC Real Estate Fund (the "Agreement"). The Agreement
provides that the MS Real Estate Fund would (i) transfer all of its assets to
the VKAC Real Estate Fund in exchange solely for Class A, B and C shares of
beneficial interest of the VKAC Real Estate Fund and the VKAC Real Estate Fund's
assumption of the liabilities of the MS Real Estate Fund, (ii) dissolve pursuant
to a plan of liquidation and dissolution to be adopted by the Board of Directors
promptly following the Closing (as defined herein) and (iii) as part of such
dissolution, distribute to each shareholder of the MS Real Estate Fund shares of
the respective class of shares of the VKAC Real Estate Fund equal in value to
their existing shares of the MS Real Estate Fund (collectively, the
"Reorganization").
The Board of Directors has determined that the Reorganization is in the best
interests of shareholders of each class of shares of the MS Real Estate Fund and
that the interests of such shareholders will not be diluted as a result of the
Reorganization. Similarly, the Board of Trustees of the VKAC Real Estate Fund
(the "Board of Trustees") has determined that the Reorganization is in the best
interests of the VKAC Real Estate Fund and that the interests of each class of
shares of existing shareholders of the VKAC Real Estate Fund will not be diluted
as a result of the Reorganization. The Board of Directors unanimously approved
the
3
<PAGE> 12
Reorganization and the Agreement on October 24, 1997. The Board of Trustees
unanimously approved the Reorganization and the Agreement on October 24, 1997.
The VKAC Real Estate Fund, as the primary beneficiary of the Reorganization,
generally will bear all of the costs of soliciting approval of the
Reorganization in the event the Reorganization is consummated. These costs
include expenses paid by the MS Real Estate Fund except that the investment
adviser of the MS Real Estate Fund, in its capacity as the investment adviser of
the MS Real Estate Fund, will reimburse the MS Real Estate Fund for any
remaining unamortized organizational expenses at the time of Closing. See "THE
PROPOSED REORGANIZATION -- Expenses" below.
The Board of Directors is asking shareholders of the MS Real Estate Fund to
approve the Reorganization at the Special Meeting to be held on , 1998.
If shareholders of the MS Real Estate Fund approve the Reorganization, it is
expected that the Closing will be after the close of business on ,
1998, but it may be at a different time as described herein.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" THE REORGANIZATION.
APPROVAL OF THE REORGANIZATION REQUIRES THE [FAVORABLE VOTE OF THE HOLDERS OF A
MAJORITY OF THE OUTSTANDING SHARES ENTITLED TO VOTE]. SEE "VOTING INFORMATION
AND REQUIREMENTS" BELOW.
REASONS FOR THE PROPOSED REORGANIZATION
After several transactions in 1996 and 1997, Van Kampen American Capital, Inc.
("VKAC") has become an indirect wholly-owned subsidiary of Morgan Stanley, Dean
Witter Discover & Co. 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 Directors
believes that the proposed Reorganization would be in the best interests of the
shareholders of the MS Real Estate Fund because it would permit the shareholders
of the MS Real Estate Fund to (i) achieve certain economics of scale from the
VKAC Real Estate Fund's larger net asset size 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.
In determining whether to recommend approval of the Reorganization to
shareholders of the MS Real Estate Fund, the Board of Directors 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 MS Real Estate Fund and the
VKAC Real Estate Fund before the
4
<PAGE> 13
Reorganization and the estimated expense ratios of the VKAC Real Estate Fund
after the Reorganization; (iii) the comparative investment performance of the MS
Real Estate Fund and the VKAC Real Estate Fund; (iv) the terms and conditions of
the Agreement and whether the Reorganization would result in dilution of MS Real
Estate Fund or VKAC Real Estate 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; (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; (ix) the future growth
prospects of the MS Real Estate Fund; and (x) the anticipated tax consequences
of the Reorganization.
In this regard, the Board of Directors reviewed information provided by Van
Kampen American Capital Investment Advisory Corp. ("Advisory Corp."), the
investment adviser of the MS Real Estate Fund, Van Kampen American Capital Asset
Management, Inc. ("Asset Management"), the investment adviser of the VKAC Real
Estate Fund, and VKAC, the parent corporation of Advisory Corp. and Asset
Management, relating to the anticipated impact to the shareholders of the MS
Real Estate Fund and the VKAC Real Estate 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 MS Real Estate 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 MS Real Estate Fund with the assets of the
VKAC Real Estate Fund should lead to reduced total operating expenses for
shareholders of the MS Real Estate 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. The contractual advisory
fees payable by the MS Real Estate Fund are the same as the contractual
advisory fees payable by the VKAC Real Estate Fund. The advisory fees and
other expenses of the MS Real Estate Fund are currently less than those of
the VKAC Real Estate Fund but only because of such voluntary fee waivers
and expense reimbursements from Advisory Corp. There can be no assurance
that such waivers or reimbursements will continue for the MS Real Estate
Fund if the Reorganization is not completed. Management anticipates that
the Reorganization also should lead to certain economics affecting the
total operating expenses of the VKAC Real Estate Fund compared to its
current total operating expenses and, if the Reorganization is completed,
it is anticipated that Asset Management would waive advisory
5
<PAGE> 14
fees and/or reimburse expenses for the surviving VKAC Real Estate Fund as
necessary so that net operating expenses (after waiver and reimbursement)
remain the same or less than the current net operating expenses (after
waiver and reimbursement) of the MS Real Estate Fund.
(2) Elimination of Separate Operations. Consolidating the MS Real Estate Fund
and the VKAC Real Estate 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 MS Real Estate
Fund with those of the VKAC Real Estate 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 VKAC Real Estate Fund generally permits 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 Directors unanimously
determined that the Reorganization is in the best interests of the shareholders
of the MS Real Estate Fund.
COMPARISON OF THE VKAC REAL ESTATE FUND AND THE MS REAL ESTATE FUND
GENERAL. The VKAC Real Estate Securities Fund and the MS Real Estate
Securities Fund have similar investment objectives and similar investment
policies and practices. Both funds seek long-term growth of capital and current
income and both funds invest primarily in securities of companies engaged in the
real estate industry, with emphasis on investment in real estate investment
trusts ("REITs") in trying to achieve the investment objectives. Both funds use
Morgan Stanley Asset Management, Inc. as subadviser ("MSAM" or the
"Subadviser"). The primary differences between the funds are as follows: (i) the
VKAC Real Estate Fund places less emphasis on achieving current income and has
less emphasis on investing in income-producing equity securities than the MS
Real Estate Fund (although the MS Real Estate Fund limits investment in debt
securities to 35% of its total assets while the VKAC Real Estate Fund has no
similar limit on investing in debt securities); (ii) the VKAC Real Estate Fund
is a diversified fund whereas the MS Real Estate Fund is a non-diversified fund
which means that although the MS Real Estate Fund can concentrate more of its
assets in specific issuers the MS Real Estate Fund also bears the increased
risks associated with such concentration; and (iii) the VKAC Real Estate Fund
allows for more investment in foreign securities directly and through depository
receipts while the MS Real Estate Fund focuses primarily on investments in U.S.
issuers or non-U.S. issuers engaged in the U.S. real estate industry. See
further information comparing the funds below and under the heading "Risk
Factors".
6
<PAGE> 15
INVESTMENT OBJECTIVES AND POLICIES. The primary investment objective of the
VKAC Real Estate Fund is to provide long-term growth of capital. A secondary
objective of the VKAC Real Estate Fund is to provide current income. The VKAC
Real Estate Fund seeks to achieve its investment objectives by investing
principally in a portfolio of securities of companies operating in the real
estate industry. The investment objective of the MS Real Estate Fund is to
provide above-average current income and long-term capital appreciation by
investing primarily in equity securities of companies in the U.S. real estate
industry, including REITs. The primary difference between the two investment
objectives is that the objective of the MS Real Estate Fund places somewhat
greater emphasis on the provision of current income than does the VKAC Real
Estate Fund. However, income distributions for the year ended December 31, 1997,
were higher for the VKAC Real Estate Fund than the MS Real Estate Fund. The VKAC
Real Estate Fund paid income distributions totaling $0.380 per Class A share for
the year, representing a distribution rate of 2.62% based upon the December 31,
1997 maximum offering price. The MS Real Estate Fund paid income distributions
totaling $0.345 per Class A share for the year, representing a distribution rate
of 1.94% based upon the December 31, 1997 maximum offering price. In the absence
of expense reimbursement, the income available for distribution would have been
reduced. As a result, the distribution rate would have been reduced as well. The
estimated Class A share distribution rate assuming no reimbursement of expenses
for the MS Real Estate Fund is 1.33%.
Both funds use similar definitions of companies in the "real estate industry"
to generally include any company that derives at least 50% of its assets (marked
to market), gross income or net profits from the ownership, construction,
management or sale of residential, commercial or industrial real estate. Real
estate industry companies may include among others: equity real estate
investment trusts, which pool investors' funds for investment primarily in
commercial real estate properties; mortgage real estate investment trusts, which
invest pooled funds in real estate related loans; brokers or real estate
developers; and companies with substantial real estate holdings, such as paper
and lumber producers and hotel and entertainment companies. Under normal market
conditions, the VKAC Real Estate Fund invests at least 65% of its total assets
in a diversified portfolio of securities of companies operating in the real
estate industry ("Real Estate Securities"). Such securities include equity
securities (common stocks, preferred stocks and convertible securities) and debt
securities. The VKAC Real Estate Fund may invest up to 25% of its total assets
in securities of foreign issuers, some or all of which may be Real Estate
Securities and may invest in American Depository Receipts ("ADRs"), European
Depository Receipts ("EDRs") or other securities representing underlying shares
of foreign issuers. In connection with investing in securities of foreign
issuers, the VKAC Real Estate Fund allows for investments in forward foreign
currency exchange contracts. Under normal market conditions, the MS Real Estate
Fund
7
<PAGE> 16
invests at least 65% of its total assets in income producing equity securities
(which include common stock, preferred stock, convertible securities, rights and
warrants to purchase common stocks and publicly traded limited partnership
interests in master limited partnerships) of U.S. and non-U.S. companies
principally engaged in the U.S. real estate industry. The MS Real Estate Fund
seeks to invest in equity securities of companies that provide a dividend yield
that exceeds the composite dividend yield of securities comprising the Standard
& Poor's Composite Index of 500 Stocks. Under normal market conditions, the MS
Real Estate Fund may invest up to 35% of its total assets in debt securities.
Each fund's investments in debt securities must be rated, at the time of
investment, at least Baa by Moody's Investor Services Inc. ("Moody's"), BBB by
Standard & Poor's Rating Group ("S&P"), comparably rated by another nationally
recognized statistical rating organization or, if unrated, determined by the
respective fund's investment adviser to be of comparable quality. Each fund may
engage in portfolio management strategies and techniques involving options,
futures contracts and options on futures contracts. Each fund may enter into
repurchase agreements. Each fund may purchase or sell securities on a
when-issued or delayed delivery basis. For temporary defensive purposes, each
fund may invest up to 100% of its total assets in short-term investments,
including obligations issued or guaranteed by the U.S. Government, commercial
paper, bankers' acceptances, certificates of deposit, repurchase agreements
collateralized by these securities, and other short-term evidences of
indebtedness and, with respect to the MS Real Estate 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 Real Estate Fund limit on
restricted and illiquid securities is 15% of such Fund's net assets whereas the
MS Real Estate Fund limit on illiquid securities is 15% of such Fund's net
assets and the MS Real Estate Fund limit on restricted securities is 10% of such
Fund's net assets. The MS Real Estate Fund allows for lending of its portfolio
securities up to 33 1/3% of such Fund's total assets. Each fund allows for a
limited amount of borrowing; the VKAC Real Estate Fund limit is 33 1/3% of such
Fund's total assets for temporary borrowing to facilitate payment of redemption
requests whereas the MS Real Estate Fund limit is 10% of such Fund's total
assets for emergency or extraordinary purposes. The MS Real Estate Fund allows
for investment in zero coupon debt securities, payment in kind securities,
deferred payment securities, and certain other derivative transactions such as
structured notes, caps and floors.
INVESTMENT ADVISER AND SUB-ADVISER. The VKAC Real Estate Fund is advised by
Asset Management, which is a wholly-owned subsidiary of VKAC. The MS Real Estate
Fund is advised by Advisory Corp., which also is a wholly-owned subsidiary of
VKAC. VKAC is a diversified asset management company with more than two million
retail investor accounts, extensive capabilities for managing institutional
portfolios, and more than $52 billion under management or supervision. Van
8
<PAGE> 17
Kampen American Capital's more than 60 open-end and 39 closed-end funds and more
than 2,500 unit investment trusts are professionally distributed by leading
financial advisers nationwide. VKAC is an indirect wholly-owned subsidiary of
Morgan Stanley, Dean Witter, Discover & Co. ("MSDWD"). The principal offices of
Asset Management and Advisory Corp. are located at One Parkview Plaza, Oakbrook
Terrace, Illinois 60181.
MSAM is the investment subadviser of each fund. MSAM is an indirect wholly-
owned subsidiary of MSDWD. MSAM, with principal offices at 1221 Avenue of the
Americas, New York, NY 10020, conducts a worldwide portfolio management
business. It provides a broad range of portfolio management services to
customers in the United States and abroad.
MSDWD and various of its directly or indirectly owned subsidiaries, including
Morgan Stanley & Co. Incorporated, a registered broker-dealer and investment
adviser, and Morgan Stanley International are engaged in a wide range of
financial services. Their principal businesses include securities underwriting,
distribution and trading; merger, acquisition, restructuring and other corporate
finance advisory activities; merchant banking; stock brokerage and research
services; asset management; credit services; trading of futures, options,
foreign exchange, commodities and swaps (involving foreign exchange,
commodities, indices and interest rates); real estate advice, financing and
investing; and global custody, securities clearance services and securities
lending.
ADVISORY AND OTHER FEES. The contractual advisory fees of the VKAC Real Estate
Fund and the MS Real Estate Fund are the same. Each fund is obligated to pay its
respective adviser a monthly fee based on its average daily net asset value at
the annual rate of 1.00%. While the VKAC Real Estate Fund currently pays Asset
Management at such rate, the MS Real Estate Fund currently pays Advisory Corp.
at an annual rate of 0.39% due to a voluntary fee waiver by Advisory Corp. 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. For a complete description of
the VKAC Real Estate Fund's advisory services, see the sections of the VKAC Fund
Prospectus and Statement of Additional Information entitled "Investment Advisory
Services" and "Investment Advisory and Other Services -- Investment Advisory
Agreement", respectively. For a complete description of the MS Real Estate
Fund's advisory services, see the sections of the MS Fund Prospectus and
Statement of Additional Information entitled "Management of the Company --
Investment Adviser" and "Management of the Company -- Investment Advisory and
Administrative Agreements", respectively.
Subadvisory fees are paid to MSAM by the respective funds' adviser. The
subadvisory fees of the VKAC Real Estate Fund are 50% of the compensation
received by Asset Management. The subadvisory fees of the MS Real Estate Fund
are as follows: if the average daily net assets during the monthly period are
less than
9
<PAGE> 18
or equal to $500 million, then Advisory Corp. shall pay MSAM one-half of the
total investment advisory fee payable to Advisory Corp. by the Fund (after
application of any fee waivers in effect) for such monthly period; and if the
Fund's average daily net assets for the monthly period are greater than $500
million, then Advisory Corp. shall pay MSAM a fee for such monthly period equal
to the greater of (a) one-half of what the total investment advisory fee payable
to Advisory Corp. by the Fund (after application of any fee waivers in effect)
for such monthly period would have been had the Fund's average daily net assets
during such period been equal to $500 million, or (b) forty-five percent of the
total investment advisory fee payable to Advisory Corp. by the Fund (after
application of any fee waivers in effect) for such monthly period.
The total operating expenses of the VKAC Real Estate Fund for the 12 month
period ended December 31, 1997 were 1.77%, 2.52% and 2.52% of the average daily
net assets attributable to Class A, B and C shares, respectively. No expense
reimbursements were in effect with respect to the VKAC Real Estate Fund during
such period.
The total operating expenses (after fee waiver and expense reimbursement) of
the MS Real Estate Fund for the six month period ended December 31, 1997 (on an
annualized basis) were 1.55%, 2.30% and 2.30% of average daily net assets
attributable to Class A, B and C shares, respectively. In the absence of fee
waiver and expense reimbursement, total operating expenses of the MS Real Estate
Fund would have been 2.16%, 2.91% and 2.91% with respect to Class A, B and C
shares, respectively, for that same period.
The advisory fees and other operating expenses of the MS Real Estate Fund are
currently less than that of the VKAC Real Estate Fund but only because of
voluntary fee waivers and expense reimbursements from Advisory Corp. There can
be no assurance that such waivers or reimbursements will continue for the MS
Real Estate Fund if the Reorganization is not completed. Furthermore, if the
Reorganization is completed, it is anticipated that Asset Management would waive
advisory fees and/or reimburse other expenses for the surviving VKAC Real Estate
Fund as necessary so that net operating expenses (after waiver and
reimbursement) are not higher than the current net operating expenses (after
waiver and reimbursement) being paid by the MS Real Estate Fund.
Both the VKAC Real Estate Fund and the MS Real Estate 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 VKAC Real Estate
Fund and the MS Real Estate 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 VKAC Real Estate
Fund and the MS Real Estate 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
10
<PAGE> 19
shareholders. The distributor of both the MS Real Estate Fund's shares and the
VKAC Real Estate Fund's shares is Van Kampen American Capital Distributors, Inc.
("VKAC Distributors"), a subsidiary of VKAC. For a complete description of these
arrangements with respect to the VKAC Real Estate Fund, see the section of the
VKAC Fund Prospectus entitled "The Distribution and Service Plans." For a
complete description of these arrangements with respect to the MS Real Estate
Fund, see the section of the MS Fund Prospectus entitled "Management of the
Company -- Distributor."
The table below sets forth (i) the fees and expenses paid by the VKAC Real
Estate Fund for the fiscal year ended December 31, 1997 and the MS Real Estate
Fund for the current fiscal year through December 31, 1997 (on an annualized
basis) and (ii) pro forma expenses for the combined fund.
11
<PAGE> 20
EXPENSE COMPARISON TABLE
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
------------------------------------- -------------------------------------
VKAC REAL MS REAL VKAC REAL MS REAL
ESTATE FUND ESTATE FUND PRO FORMA ESTATE FUND ESTATE 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)..... 4.75%(1) 5.75% 4.75%(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 4.00%(2) 5.00%(2) 4.00%(2)
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net
assets)
Management Fees.................... 1.00% 0.39%(4) 0.82%(5) 1.00% 0.39%(4) 0.82%(5)
Rule 12b-1 Fees.................... 0.25% 0.25% 0.25% 1.00% 1.00% 1.00%
Other Expenses..................... 0.52% 0.91%(4) 0.48% 0.52% 0.91%(4) 0.48%
----- ----- ----- ----- ----- -----
Total Fund Operating Expenses...... 1.77% 1.55%(4) 1.55%(5) 2.52% 2.30%(4) 2.30%(5)
----- ----- ----- ----- ----- -----
Expense Example of Total Operating
Expenses Assuming Redemption at
the End of the Period(6)
One Year.......................... $ 65 $ 72 $ 63 $ 66 $ 73 $ 63
Three Years....................... 101 104 94 108 102 102
Five Years........................ 139 137 128 149 138 138
Ten Years......................... 246 231 223 267 245 245
Expense Example of Total Operating
Expenses Assuming No Redemption at
the End of the Period(6)
One Year.......................... $ 65 $ 72 $ 63 $ 26 $ 23 $ 23
Three Years....................... 101 104 94 78 72 72
Five Years........................ 139 137 128 134 123 123
Ten Years......................... 246 231 223 267 245 245
<CAPTION>
CLASS C SHARES
-------------------------------------
VKAC REAL MS REAL
ESTATE FUND ESTATE 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.................... 1.00% 0.39%(4) 0.82%(5)
Rule 12b-1 Fees.................... 1.00% 1.00% 1.00%
Other Expenses..................... 0.52% 0.91%(4) 0.48%
----- ----- -----
Total Fund Operating Expenses...... 2.52% 2.30%(4) 2.30%(5)
----- ----- -----
Expense Example of Total Operating
Expenses Assuming Redemption at
the End of the Period(6)
One Year.......................... $ 36 $ 33 $ 33
Three Years....................... 78 72 72
Five Years........................ 134 123 123
Ten Years......................... 286 264 264
Expense Example of Total Operating
Expenses Assuming No Redemption at
the End of the Period(6)
One Year.......................... $ 26 $ 23 $ 23
Three Years....................... 78 72 72
Five Years........................ 134 123 123
Ten Years......................... 286 264 264
</TABLE>
(See notes on the following page)
12
<PAGE> 21
Notes to Expense Comparison Table
(1) Class A shares of the VKAC Real Estate Fund received pursuant to the
Reorganization will not be subject to a sales charge upon purchase.
(2) Class B Shares of the VKAC Real Estate Fund are subject to a contingent
deferred sales charge equal to 4.00% of the lesser of the then current net
asset value or the original purchase price on Class B Shares redeemed
during the first or second year after purchase, which charge is reduced to
zero after a five year period as follows: Year 1 -- 4.00%; Year 2 -- 4.00%;
Year 3 -- 3.00%; Year 4 -- 2.50%; Year 5 -- 1.50%; and Year 6 -- 0.00%.
Class B Shares of the MS Real Estate Fund are subject to a contingent
deferred sales charge equal to 5.00% of the lesser of the then current net
asset value on 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%; and Year 6 -- 0.00%. [Class B
Shares of the VKAC Real Estate Fund received pursuant to the Reorganization
as subject to the deferred sales charge schedule of the fund (either the MS
Real Estate Fund or other fund distributed by VKAC Distributors) from which
the purchases of such Class B Shares are originally made.]
(3) Class C shares of the VKAC Real Estate Fund and MS Real Estate 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 and expense reimbursement. Absent such
waiver/reimbursement, "Management Fees" for the MS Real Estate Fund would
have been 1.00% with respect to Class A, B and C shares, "Other Expenses"
for the MS Real Estate Fund would have been 0.91%, 0.91% and 0.91% with
respect to Class A, B and C shares, respectively, and "Total Fund Operating
Expenses" for the MS Real Estate Fund would have been 2.16%, 2.91% and
2.91% with respect to Class A, B and C shares, respectively.
(5) Asset Management has agreed to waive a portion of its advisory fees and/or
to reimburse a portion of expenses if the Reorganization is completed so
that total operating expenses do not exceed the current net operating
expenses of the MS Real Estate Fund prior to the Reorganization. Asset
Management in its discretion may terminate voluntary fee waivers and/or
reimbursements at any time. Absent such waiver/reimbursement, pro forma
"Management Fees" would be 1.00% with respect to Class A, B and C shares,
and pro forma "Total Fund Operating Expense" would be 1.73%, 2.48% and
2.48%, with respect to Class A, B and C shares, respectively.
(6) Expenses examples reflect what an investor would pay on a $1,000
investment, assuming a 5% annual return with either redemption or no
redemption at the end of each time period as noted in the above table. The
Pro Forma column reflects expenses estimated to be paid on new shares
purchased from the combined fund subsequent to the Reorganization.
13
<PAGE> 22
DISTRIBUTION, PURCHASE, VALUATION, REDEMPTION AND EXCHANGE OF SHARES. Both the
VKAC Real Estate Fund and the MS Real Estate Fund offer three classes of shares.
The Class A shares of the VKAC Real Estate Fund and the MS Real Estate Fund are
subject to an initial sales charge of up to 4.75% and 5.75%, respectively. The
initial sales charge applicable to Class A shares of the VKAC Real Estate Fund
will be waived for Class A shares acquired in the Reorganization. Any subsequent
purchases of Class A shares of the VKAC Real Estate Fund after the
Reorganization will be subject to an initial sales charge of up to 4.75%,
excluding Class A shares purchased through the dividend reinvestment plan.
Purchases of Class A shares of the VKAC Real Estate Fund or the MS Real Estate
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 the VKAC Real Estate Fund and the MS Real Estate Fund do
not incur a sales charge when they are purchased, but generally are subject to a
contingent deferred sales charge of 4.00% and 5.00%, respectively, if redeemed
within the first year after purchase, which charge is reduced to zero after a
five year period. The deferred sales charge schedule differs between the funds
only in year one and is the same in years two through five.
The Class C shares of both the VKAC Real Estate Fund and the MS Real Estate
Fund do not incur a sales charge when purchased, but generally 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 MS Real Estate Fund in connection with the Reorganization. The
holding period and conversion period for Class B shares or Class C shares of the
VKAC Real Estate Fund received in connection with the Reorganization will be
measured from the earlier time (i) the holder purchased such shares from the MS
Real Estate Fund or (ii) the holder purchased such shares from any other Van
Kampen American Capital or Morgan Stanley Fund and subsequently exchanged them
for shares of the MS Real Estate Fund. [Class B Shares of the VKAC Real Estate
Fund received pursuant to the Reorganization are subject to the deferred sales
charge schedule of the fund (either the MS Real Estate Fund or other fund
distributed by VKAC Distributors) from which the purchase of such Class B Shares
was originally made.]
Shares of the VKAC Real Estate Fund or the MS Real Estate Fund may be
purchased by check, by electronic transfer, by bank wire and by exchange from
certain other funds distributed by VKAC Distributors. For a complete description
regarding purchase of shares and exchange of shares of the VKAC Real Estate
Fund, see the sections of the VKAC Fund Prospectus entitled "Purchase of Shares"
and "Shareholder Services--Exchange Privilege." For a complete description
regarding
14
<PAGE> 23
purchase of shares and exchange of shares of the MS Real Estate Fund, see the
sections of the MS Fund Prospectus entitled "Purchase of Shares" and
"Shareholder Services--Exchange Privilege".
Shares of the VKAC Real Estate Fund and the MS Real Estate 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 VKAC Real Estate Fund or the MS Real Estate Fund may be redeemed
or exchanged by mail or by special redemption privileges (telephone exchange,
telephone redemption, by check or electronic transfer). If a shareholder of
either fund attempts to redeem shares within a short time after they have been
purchased by check, the respective fund may delay payment of the redemption
proceeds until such fund can verify that payment for the purchase of the shares
has been (or will be) received.
No further purchases of the shares of the MS Real Estate Fund may be made
after the date on which the shareholders of the MS Real Estate Fund approve the
Reorganization, and the stock transfer books of the MS Real Estate 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 MS Real Estate Fund.
Redemption requests or transfer instructions received by the MS Real Estate Fund
after that date will be treated by the MS Real Estate Fund as requests for the
redemption or instructions for transfer of the shares of the VKAC Real Estate
Fund credited to the accounts of the shareholders of the MS Real Estate Fund.
Redemption requests or transfer instructions received by the MS Real Estate Fund
after the close of business on the day prior to the date of Closing will be
forwarded to the VKAC Real Estate Fund. For a complete description of the
redemption arrangements for the VKAC Real Estate Fund, see the section of the
VKAC Fund Prospectus entitled "Redemption of Shares," and, for the MS Real
Estate Fund, see the section of the MS Fund Prospectus entitled "Redemption of
Shares."
15
<PAGE> 24
CAPITALIZATION. The following table sets forth the capitalization of the VKAC
Real Estate Fund and the MS Real Estate 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>
VKAC MS REAL
REAL ESTATE ESTATE FUND PRO FORMA
----------- ----------- ---------
<S> <C> <C> <C>
NET ASSETS (IN THOUSANDS)
Class A shares................. $ 51,314 $ 20,768 $ 72,033
Class B shares................. 73,199 12,764 85,893
Class C shares................. 17,435 3,910 21,328
---------- ----------- ----------
Total................... $ 141,948 $ 37,442 $ 179,254
========== =========== ==========
NET ASSET VALUE PER SHARE
Class A shares................. $ 13.81 $ 16.79 $ 13.80
Class B shares................. 13.80 16.73 13.79
Class C shares................. 13.79 16.73 13.78
SHARES OUTSTANDING (IN THOUSANDS)
Class A shares................. 3,716 1,237 5,221
Class B shares................. 5,304 763 6,230
Class C shares................. 1,264 234 1,548
---------- ----------- ----------
Total................... 10,284 2,234 12,999
========== =========== ==========
SHARES AUTHORIZED
Class A shares................. Unlimited 375,000,000 Unlimited
Class B shares................. Unlimited 375,000,000 Unlimited
Class C shares................. Unlimited 375,000,000 Unlimited
</TABLE>
PERFORMANCE INFORMATION. The average annual total returns for VKAC Real Estate
Fund for the one-year and three-year periods ended December 31, 1997 and for the
period beginning June 9, 1994 (the date Class A shares of the VKAC Real Estate
Fund were first offered for sale to the public) through December 31, 1997 were
14.91%, 21.79% and 18.43% with respect to its Class A shares; for the one-year
and three-year periods ended December 31, 1997 and for the period beginning June
9, 1994 (the date Class B shares of the VKAC Real Estate Fund were first offered
for sale to the public) through December 31, 1997 were 15.76%, 22.13%, and
18.71% 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 9, 1994 (the
date Class C shares of the VKAC Real Estate Fund were first offered to the
public) through December 31, 1997 were 18.78%, 22.77% and 19.22% with respect to
its Class C shares.
The average annual total returns for the MS Real Estate Fund for the one-year
period ended December 31, 1997, and for the period beginning May 1, 1996 (the
date Class A shares of the MS Real Estate Fund were first offered for sale to
16
<PAGE> 25
the public) through December 31, 1997 were 17.33% and 28.70% with respect to its
Class A shares; for the one-year period ended December 31, 1997 and for the
period beginning May 1, 1996 (the date Class B shares of the MS Real Estate Fund
were first offered for sale to the public) through December 31, 1997 were 18.40%
and 30.28% with respect to its Class B shares; and for the one-year period ended
December 31, 1997 and for the period beginning May 1, 1996 (the date Class C
shares of the MS Real Estate Fund were first offered for sale to the public)
through December 31, 1997 were 22.43% and 32.28% 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 VKAC Real Estate Fund and the MS Real
Estate Fund. The foregoing total returns also assume reinvestment of all
dividends and distributions. The total returns, yields and distribution rates
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 and expense reimbursements, the
total returns, yields and distribution rates would have been reduced.
Management's discussion of the VKAC Real Estate Fund's and MS Real Estate
Fund's performance as of the end of each fund's last fiscal year 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 Real Estate Fund obtains certain
administrative services from Chase Global Funds Services Company, a corporate
affiliate of The Chase Manhattan Bank ("Chase"). The VKAC Real Estate Fund
obtains certain accounting and legal services from Advisory Corp. and VKAC,
respectively. The custodians for the MS Real Estate Fund are Chase for domestic
securities and cash and Morgan Stanley Trust Company, an affiliate of the
Advisor, for foreign assets. The custodian for the VKAC Real Estate Fund is
State Street Bank and Trust Company.
GOVERNING LAW. The MS Real Estate Fund is a series of the Morgan Stanley Fund,
an open-end management investment company organized as a Maryland corporation.
The VKAC Real Estate Fund is 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' organization documents contain
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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 VKAC Real Estate Fund has authorized the
issuance of an unlimited number of shares. Consistent with Maryland law, the
Morgan Stanley Fund has authorized a specific number of shares available for the
MS Real Estate 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 VKAC
Real Estate Fund 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 VKAC Real Estate Fund 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
VKAC Real Estate Fund 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 Real Estate Fund believes the risk of
liability to a VKAC Real Estate Fund shareholder beyond his or her investment is
remote.
Shareholders of a Maryland corporation currently have no personal liability
for the corporation's acts or obligations, except that a shareholder may be
liable to the extent that: (1) the dividends a shareholder receives exceed the
amount which properly could have been paid under Maryland law, (2) the
consideration paid to a shareholder by the Maryland corporation for stock was
paid in violation of Maryland law or (3) a shareholder otherwise receives any
distribution, payment or release which exceeds the amount which a shareholder
could properly receive under Maryland law.
Neither fund is required, and neither fund anticipates, holdings annual
meetings of its shareholders. Both funds do have certain mechanics whereby
shareholders can
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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 VKAC Real Estate Fund 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 directors. The responsibilities, powers
and fiduciary duties of trustees under Delaware law are substantially the same
as those for directors under Maryland law. [Election of trustees by shareholders
of the VKAC Real Estate Fund requires the vote of a plurality of the shares
present in person or by proxy at a meeting assuming a majority of such Trust's
shares are present. Election of directors by shareholders of the Morgan Stanley
Fund requires the vote of a majority of the shares present in person or by proxy
at a meeting assuming a majority of such Funds' shares are present.] For the
VKAC Real Estate Fund 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 VKAC Real Estate Fund 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 Real
Estate Fund under Delaware law and the MS Real Estate 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 as 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 VKAC Real Estate Fund and the MS Real Estate
Fund are similar. The investment policies of the VKAC Real Estate Fund and the
MS Real Estate Fund are similar insofar as they each invest, under normal market
conditions, at least 65% of the fund's total assets in certain securities of
companies principally engaged in the real estate industry. Each of the VKAC Real
Estate Fund and the MS Real Estate Fund also engages in certain common
investment practices such as the purchase and sale of securities on a "when
issued" and "delayed delivery" basis, the ability to borrow up to a certain
percentage of its
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net assets in order to pay for redemptions, to utilize options, futures and
options on futures, to engage in repurchase agreements and to invest up to a
certain percentage of its assets in restricted securities and illiquid
securities. To the extent that the investment objectives and investment policies
and practices of the VKAC Real Estate Fund and the MS Real Estate Fund are
similar, the risks associated with an investment in the funds are similar.
CONCENTRATION. Although the funds do not invest directly in real estate, an
investment in the fund generally will be subject to the risks associated with
real estate because of their policy of concentration in the securities of
companies in the real estate industry. These risks include, among others:
declines in the value of real estate; risks related to general and local
economic conditions; overbuilding and increased competition; increases in
property taxes and operating expenses; changes in zoning laws; casualty or
condemnation losses; variations in rental income: changes in neighborhood
values; the appeal of properties to tenants and changes in interest rates. The
value of securities of companies which service the real estate industry also
will be affected by such risks. If the funds have rental income or income from
the disposition of real property acquired as a result of a default on securities
the funds own, the receipt of such income may adversely affect their ability to
retain their tax status as regulated investment companies.
Real estate investment trusts are dependent upon management skill, may not be
diversified and are subject to the risks of financing projects. Such real estate
investment trusts are also subject to heavy cash flow dependency, defaults by
borrowers, self-liquidation and the possibility of failing to qualify for
tax-free pass-through of income under the Internal Revenue Code of 1986, as
amended (the "Code") and to maintain exemption from the Investment Company Act
of 1940, as amended (the "1940 Act"). Real estate investment trusts are not
taxed on income distributed to shareholders provided they comply with several
requirements of the Code. The funds indirectly bear their proportionate share of
any expenses paid by the real estate investment trusts in which they invest.
Because the funds concentrate their investments in securities of real estate
companies the funds may be more susceptible than investment companies without
such a policy to any single economic, political or regulatory occurrence
affecting the real estate industry.
Investment in either of the VKAC Real Estate Fund or the MS Real Estate 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.
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DIFFERENCES IN RISKS
The VKAC Real Estate Fund and the MS Real Estate Fund engage in some
dissimilar investment practices. To the extent that the investment practices of
the funds differ, the risks associated with an investment in the VKAC Real
Estate Fund are different from the risks associated with an investment in the MS
Real Estate Fund. An investment in the VKAC Real Estate Fund may not be
appropriate for all MS Real Estate Fund shareholders. For a complete description
of the risks of an investment in the VKAC Real Estate Fund, see the sections in
the VKAC Fund Prospectus entitled "Investment Objective and Policies," "Risk
Factors" and "Investment Practices." For a complete description of the risks of
an investment in the MS Real Estate Fund, see the sections in the MS Fund
Prospectus entitled "Investment Objectives and Policies," "Additional Investment
Information" and "Investment Limitations."
DIVERSIFICATION. The MS Real Estate Fund is a non-diversified investment
company. The VKAC Real Estate Fund is a diversified investment company. A
non-diversified investment company such as the MS Real Estate fund generally is
more susceptible to economic, political or regulatory events that adversely
affect an issuer in which such fund invests than a diversified investment
company such as the VKAC Real Estate Fund. A diversified investment company such
as the VKAC Real Estate Fund, however, is less likely to benefit from economic,
political or regulatory events that beneficially affect issuers in which it
invests because it generally invests a smaller percentage of its assets in each
issuer in which it invests.
FOREIGN SECURITIES. the VKAC Real Estate Fund may invest up to 25% of its
assets in securities issued by foreign issuers of developed countries. Some or
all of such securities may be Real Estate Securities. 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. Since the VKAC
Real Estate Fund may invest in securities denominated or quoted in currencies
other than the United States dollar, changes in foreign currency exchange rates
may affect the value of investments in the portfolio and the accrued income and
unrealized appreciation or depreciation of investments. Changes in foreign
currency exchange rates relative to the U.S. dollar will affect the U.S. dollar
value of the Fund's asset denominated in that currency and the Fund's yield on
such assets.
The VKAC Real Estate Fund also 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
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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 obligation 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 and the
financial information about a company may not be as reliable for an unsponsored
ADR as it is for a sponsored ADR. The VKAC Real Estate fund may invest in ADRs
through both sponsored and unsponsored arrangements.
With respect to certain foreign countries, there is the possibility of
expropriation of assets, confiscatory taxation, political or social instability
or diplomatic developments which could affect investment in those countries.
There may be less publicly available information about a foreign security than
about a United States security, and foreign entities may not be subject to
accounting, auditing and financial reporting standards and requirements
comparable to those of United States entities. In addition, certain foreign
investments may be subject to foreign withholding taxes, which would reduce the
total return on such investments and the amounts available for distributions by
the VKAC Real Estate Fund to its shareholders. Foreign financial markets, while
growing in volume, generally have less trading volume than United States
markets, and securities of many foreign companies are less liquid and their
prices mere volatile that securities of comparable domestic companies. The
foreign markets also have different clearance and settlement procedures and in
certain market there have been times when settlements have been unable to keep
pace with the volume of securities transactions making it difficult to conduct
such transactions. Delays in settlement could have an adverse affect on the VKAC
Real Estate Fund's ability to purchase and sell portfolio securities in a timely
fashion. Costs associated with transactions in foreign securities, including
custodial costs and foreign brokerage commissions, are generally higher than
costs associated with transactions in United States securities. In addition, the
VKAC Real Estate Fund will incur costs in connection with conversions between
various currencies. There is generally less government supervision and
regulation of exchanges, financial institutions and issuers in foreign countries
than there is in the United States.
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 VKAC Real Estate Fund or the MS Real Estate Fund at (800)
421-5666 and asking for the "Reorganization SAI".
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TERMS OF THE AGREEMENT
Pursuant to the Agreement, the VKAC Real Estate Fund would acquire all of the
assets and the liabilities of the MS Real Estate Fund series of the Morgan
Stanley Fund on the date of the Closing in consideration for Class A, B and C
shares of the VKAC Real Estate Fund.
Subject to the MS Real Estate 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 VKAC Real Estate Fund and the MS Real Estate Fund
may mutually agree.
On the date of Closing, the MS Real Estate Fund will transfer to the VKAC Real
Estate Fund all of the assets and liabilities of the MS Real Estate Fund. The
VKAC Real Estate Fund will in turn transfer to the MS Real Estate Fund a number
of its Class A, B and C shares equal in value to the value of the net assets of
the MS Real Estate Fund transferred to the VKAC Real Estate Fund as of the date
of Closing, as determined in accordance with the valuation method described in
the VKAC Real Estate 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 VKAC Real Estate Fund and the MS Real
Estate 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 MS Real Estate Fund expects to distribute the Class A, B and C shares of
the VKAC Real Estate Fund to the shareholders of the MS Real Estate Fund
promptly after the Closing and then dissolve pursuant to a plan of dissolution
adopted by the Board.
The VKAC Real Estate Fund and the MS Real Estate Fund have made certain
standard representations and warranties to each other regarding their
capitalization, 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 MS Real Estate 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;
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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 VKAC Real Estate 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 MS
Real Estate Fund, provided that no such amendment after such approval shall be
made if it would have a material adverse affect on the interests of MS Real
Estate 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 recommends that you vote to approve the Reorganization, as it
believes the Reorganization is in the best interests of the MS Real Estate
Fund's shareholders and that the interests of the MS Real Estate 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 BENEFICIAL INTEREST. Beneficial interests in the VKAC Real Estate
Fund being offered hereby are represented by transferable Class A, B and C
shares, par value $0.01 per share.
VOTING RIGHTS OF SHAREHOLDERS. Holders of shares of the VKAC Real Estate Fund
are entitled to one vote per share on matters as to which they are entitled to
vote.
The VKAC Real Estate Fund is an open-end management investment company
registered with the SEC under the 1940 Act. The MS Real Estate Fund operates as
a series of the Morgan Stanley Fund, 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 VKAC Real Estate
Fund, as well as shareholders of the MS Real Estate Fund, are entitled, under
current law, to vote with respect to certain other matters, including changes in
fundamental
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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 MS Real Estate Fund or VKAC Real
Estate 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).
CONTINUATION OF SHAREHOLDER ACCOUNTS AND PLANS; SHARE CERTIFICATES
If the Reorganization is approved, the VKAC Real Estate Fund will establish an
account for each MS Real Estate Fund shareholder containing the appropriate
number of shares of the VKAC Real Estate Fund. The shareholder services and
shareholder programs of the VKAC Real Estate Fund and the MS Real Estate Fund
are substantially identical. Shareholders of the MS Real Estate Fund who are
accumulating MS Real Estate Fund shares under the dividend reinvestment plan, or
who are receiving payment under the systematic withdrawal plan with respect to
MS Real Estate Fund shares, will retain the same rights and privileges after the
Reorganization in connection with the VKAC Real Estate Fund Class A, B or C
shares received in the Reorganization through substantially identical plans
maintained by the VKAC Real Estate Fund. [Van Kampen American Capital Trust
Company will continue to serve as custodian for the assets of MS Real Estate
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 MS Real Estate Fund to whom
certificates have been issued to surrender their certificates. Upon dissolution
of the MS Real Estate Fund, such certificates will become null and void.
However, MS Real Estate Fund shareholders holding such certificates may want to
present such certificates to receive certificates of the VKAC Real Estate 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 MS Real Estate Fund
and shareholders of the VKAC Real Estate 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 MS
Real Estate 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
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subject to change or different interpretations (possibly on a retroactive
basis). This summary is limited to shareholders who hold their MS Real Estate
Fund shares as capital assets. No advance rulings have been or will be sought
from the Service regarding any matter discussed in this 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
VKAC Real Estate 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 VKAC Real Estate Fund of the assets of the MS Real
Estate Fund in exchange solely for Class A, B and C shares of the VKAC
Real Estate Fund and the assumption by the VKAC Real Estate Fund of the
liabilities of the MS Real Estate 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 MS Real Estate Fund or the VKAC
Real Estate Fund upon the transfer to the VKAC Real Estate Fund of the
assets of the MS Real Estate Fund in exchange solely for the Class A, B
and C shares of the VKAC Real Estate Fund and the assumption by the VKAC
Real Estate Fund of the liabilities of the MS Real Estate Fund.
3. The VKAC Real Estate Fund's basis in the MS Real Estate Fund assets
received in the Reorganization will, in each instance, equal the basis of
such assets in the hands of the MS Real Estate Fund immediately prior to
the transfer, and the VKAC Real Estate Fund's holding period of such
assets will, in each instance, include the period during which the assets
were held by the MS Real Estate Fund.
4. No gain or loss will be recognized by the shareholders of the MS Real
Estate Fund upon the exchange of their shares of the MS Real Estate Fund
for the Class A, B or C shares of the VKAC Real Estate Fund.
5. The aggregate tax basis in the Class A, B and C shares of the VKAC Real
Estate Fund received by the shareholders of the MS Real Estate Fund will
be the same as the aggregate tax basis of the shares of the MS Real
Estate 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 VKAC Real Estate
Fund received by the shareholders of the MS Real Estate Fund will
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include the holding period of the shares of the MS Real Estate Fund
surrendered in exchange therefor if such surrendered shares of the MS
Real Estate 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 VKAC Real Estate Fund and the MS Real Estate Fund and
assume that the Reorganization will be consummated as described in the Agreement
and that redemptions of shares of the MS Real Estate Fund occurring prior to the
Closing will consist solely of redemptions in the ordinary course of business.
The VKAC Real Estate 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 MS Real Estate Fund and its
shareholders.
EXPENSES
The expenses of the Reorganization, including expenses incurred by the MS Real
Estate Fund, generally will be borne by the VKAC Real Estate Fund in the event
the Reorganization is completed. Management believes that shareholders of the
VKAC Real Estate Fund are the primary beneficiaries of benefits from the
Reorganization. Management of the MS Real Estate Fund and the VKAC Real Estate
Fund estimates total Reorganization costs of approximately $136,000. In
addition, as part of the Reorganization, the MS Real Estate Fund will write-off
the remaining unamortized organizational expenses of approximately $10,000,
which will be reimbursed by Advisory Corp., in its capacity as the investment
adviser of the MS Real Estate Fund. In the event the Reorganization is not
completed, VKAC will bear the costs associated with the Reorganization. The
Board of Trustees and the Board of Directors have reviewed and approved the
foregoing arrangements with respect to expenses and other charges relating to
the Reorganization.
As noted above, shareholders of the MS Real Estate Fund may redeem their
shares or exchange their shares for shares of certain other funds 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.
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RATIFICATION OF INVESTMENT OBJECTIVE, INVESTMENT POLICIES AND
RESTRICTIONS OF THE MUNICIPAL FUND
Approval of the Reorganization will constitute the ratification by MS Real
Estate Fund shareholders of the investment objective, investment policies and
restrictions, distribution plan and advisory agreement of the VKAC Real Estate
Fund. Approval of the Reorganization will constitute approval of amendments to
any of the fundamental investment restrictions of the MS Real Estate 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 VKAC Real Estate
Fund will be passed on by Skadden Arps, 333 West Wacker Drive, Chicago, Illinois
60606, which serves as counsel to the VKAC Real Estate Fund and the MS Real
Estate Fund. Wayne W. Whalen, a partner of Skadden Arps, is a Trustee of the
VKAC Real Estate Fund and a Director of the MS Real Estate Fund.
D. RECOMMENDATION OF THE BOARD
The Board of Directors 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 MS Real Estate Fund. THE BOARD OF
DIRECTORS RECOMMENDS VOTING "FOR" THE PROPOSED REORGANIZATION.
OTHER INFORMATION
A. SHAREHOLDERS OF THE VKAC REAL ESTATE FUND AND
THE MS REAL ESTATE FUND
At the close of business on , 1998, there were
Class A shares, Class B shares and Class C shares,
respectively, of the VKAC Real Estate Fund. As of such date, the trustees and
officers of the VKAC Real Estate Fund as a group own less than 1% of the shares
of the VKAC Real Estate Fund. As of such date, no person was known by the VKAC
Real Estate Fund to own beneficially or of record as much as 5% of the Class A,
B or C shares or Class B shares of the VKAC Real Estate Fund [except as
follows:]
At the close of business on , 1998, the record date with
respect to the Special Meeting, there were Class A shares,
Class B shares and Class C shares, respectively, of
the MS Real Estate Fund. As of such date, the trustees and officers of the MS
Real Estate Fund as a group own less than 1% of the outstanding shares of the MS
Real
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Estate Fund. As of such date, no person was known by the MS Real Estate Fund to
own beneficially or of record as much as 5% of the Class A, B or C shares of the
MS Real Estate Fund [except as follows:]
B. SHAREHOLDER PROPOSALS
As a general matter, the VKAC Real Estate 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 MS Real Estate
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 VKAC Real
Estate Fund or the MS Real Estate 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 MS Real Estate Fund are entitled to one vote per
share on matters as to which they are entitled to vote. The MS Real Estate Fund
does not utilize cumulative voting.
Each valid proxy given by a shareholder of the MS Real Estate 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 MS Real Estate 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.
29
<PAGE> 38
It is not anticipated that any action will be asked of the shareholders of the
MS Real Estate 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 MS REAL ESTATE 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 MS Real Estate 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 MS Real Estate 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 Advisory Corp., VKAC, or by dealers or their representatives.
In addition, such solicitation servicing may also be provided by First Data
Investor Services Group, a solicitation firm located in Boston, Massachusetts,
at a cost estimated to be approximately $3,000, plus reasonable expenses.
, 1998
PLEASE SIGN AND RETURN YOUR PROXY PROMPTLY.
YOUR VOTE IS IMPORTANT AND YOUR PARTICIPATION
IN THE AFFAIRS OF YOUR FUND DOES MAKE A DIFFERENCE.
30
<PAGE> 39
EXHIBIT A
MANAGEMENT'S DISCUSSION OF
VKAC REAL ESTATE FUND AND MS REAL ESTATE FUND PERFORMANCE
Management's Discussion of the VKAC Real Estate Fund's Performance as of the
Annual Report dated December 31, 1997.
LETTER TO SHAREHOLDERS
February 1, 1998
Dear Shareholder,
The new year ushers in what promises to be an exciting and challenging time
for investors. The Taxpayer Relief Act of 1997 signed into law 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
These continue to be the best of times for the U.S. economy. Growth is strong,
consumers are optimistic, unemployment is low, the budget is headed for surplus,
and our nation's currency is rising around the world.
Despite the strength in the economy, there is 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
A-1
<PAGE> 40
1.7 percent during 1997. A strong dollar and significant productivity gains
helped offset inflationary pressures caused by rising wages.
After increasing short-term interest rates by 0.25 percent in March, the
Federal Reserve Board left monetary policy unchanged for the remainder of the
year. In addition to signs that the economy was slowing modestly from its
breakneck pace of early 1997, Fed policy-makers were concerned about the impact
that higher U.S. interest rates might have on the struggling economies of
Southeast Asia. Generally, higher U.S. interest rates cause the dollar to rise
relative to other currencies. With nearly all Asian currencies already down
significantly, a hike in U.S. rates would force monetary authorities in Asia to
choose between letting their currencies decline further or matching the rate
increase, thereby slowing their already-sluggish economies.
MARKET OVERVIEW
Bolstered by solid economic growth and low inflation, stock prices continued
their advance during the reporting period. Over the 12 months through December,
the Wilshire 5000 Index, which measures the performance of all publicly traded
U.S. companies, gained 29.17 percent. And with its 22.64 percent advance in
1997, the Dow Jones Industrial Average completed its third consecutive year of
20 percent-plus gains for the first time in the history of the index.
But while U.S. stocks kept rising, volatility also picked up. During the
spring, stronger-than-expected economic growth and a subsequent hike in
short-term interest rates caused stock prices to fall by 10 percent. Later in
the year, investors were unnerved by the spreading economic crisis in Asia.
Between early August and late October, the DJIA fell by 16 percent before
rebounding sharply to close the reporting period near record-high territory.
Within the equity market, large stocks continued to outperform their small-cap
cousins. For the year, the Russell 1000 Index of large-cap companies returned
30.49 percent, compared to 20.52 percent for the Russell 2000 Index of small
stocks. A wave of consolidations helped make Financial Services the
top-performing industry group. The Dow Jones Financial Index soared 48.44
percent during 1997.
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. However, 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. Such a scenario usually benefits stock prices, and we
believe that a
A-2
<PAGE> 41
portfolio of high-quality domestic stocks should continue to perform well. 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.
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 Fund, including a question-and-answer section
with 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
Chairman
Van Kampen American Capital
Asset Management, Inc.
Dennis J. McDonnell
President
Van Kampen American Capital
Asset Management, Inc.
PERFORMANCE RESULTS FOR THE PERIOD ENDED DECEMBER 31, 1997
VAN KAMPEN AMERICAN CAPITAL REAL ESTATE SECURITIES FUND
<TABLE>
<CAPTION>
A SHARES B SHARES C SHARES
-------- -------- --------
<S> <C> <C> <C>
Total Returns
One year total return based on
NAV(1)............................ 20.66% 19.76% 19.78%
One-year total return(2)............ 14.91% 15.76% 18.78%
Life-of-Fund average annual total
return(2)*........................ 18.43% 18.71% 19.22%
Commencement Date................... 06/09/94 06/09/94 06/09/94
</TABLE>
- ---------------
(1) Assumes reinvestment of all distributions for the period and does not
include payment of the maximum sales charge (4.75% for A shares) or
contingent deferred sales charge for early withdrawal (4% for B shares and
1% for C shares).
(2)Standardized total return. Assumes reinvestment of all distributions for the
period and includes payment of the maximum sales charge (A shares) or
contingent deferred sales charge for early withdrawal (B and C shares).
* Total return is calculated from June 30, 1994 (the date the Fund's investment
strategy was implemented) through the end of the period.
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. This performance was achieved during generally
A-3
<PAGE> 42
rising stock prices. Fund shares, when redeemed, may be worth more or less than
their original cost.
Investing in REITs involves unique risks in addition to those risks associated
with investing in the real estate industry in general. Equity REITs may be
affected by changes in the value of the underlying property owned by the REITs,
while mortgage REITs may be affected by the quality of any credit extended.
REITs are dependent upon management skills, are not diversified and are subject
to the risks of financing projects. REITs are subject to heavy cash flow
dependency, default by borrowers, self-liquidation and the possibilities of
failing to qualify for tax-exempt status under the Internal Revenue Code of
1986, as amended. REITs, especially mortgage REITs, are also subject to some
interest rate risk (e.g., as interest rates rise, the value of REITs may
decline).
Market forecasts provided in this report may not necessarily come to pass.
A-4
<PAGE> 43
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 Standard & Poor's 500-Stock
Index and the NAREIT Equity REIT Index over time. These indices are unmanaged
statistical composites, and do not reflect any commissions or fees which would
be incurred by an investor purchasing the securities they represent. Similarly,
their 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-5
<PAGE> 44
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
Van Kampen American Capital Real Estate Securities Fund vs. Standard & Poor's
500-Stock Index and the NAREIT Equity REIT Index (June 30, 1994 through December
31, 1997)
[GRAPH]
<TABLE>
<CAPTION>
Standard & Poor's NAREIT Equity VKAC Real Estate
500-Stock Index REIT Index Securities Fund
<S> <C> <C>
10000 10000 9527
10315 9881 9446
10703 9849 9456
10489 9663 9340
10708 9229 8964
10285 9839 8648
10487 9446 9549
10741 9150 9137
11129 9317 9281
11505 9245 9328
11826 9162 9213
12256 9481 9536
12559 9660 9760
13000 9735 9950
12996 9783 10997
13598 9917 10345
13530 9622 10026
14085 9640 10143
14414 10128 10733
14884 10259 10904
14987 10323 11065
15186 10241 10985
15390 10200 11007
15742 10390 11364
15886 10494 11609
15140 10480 11653
15425 10014 12167
16353 10977 12501
16780 11223 12843
18011 11639 13504
17714 12062 15007
18800 12059 15018
18912 12755 15215
18192 12692 15031
19255 12205 14519
20383 12549 15043
21361 13111 15936
23030 13435 16581
21707 13328 16463
22959 14478 17798
22168 13997 17361
23156 14221 17621
23616 14496 18107
- --------------------------------
Fund's Total Return
1 Year Avg. Annual = 14.91%
3 Year Avg. Annual = 21.79%
Inception Avg. Annual = 18.43%
- --------------------------------
</TABLE>
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 (4.75% 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-6
<PAGE> 45
GLOSSARY OF TERMS
DOW JONES INDUSTRIAL AVERAGE:
The oldest and most widely recognized stock market average, which reflects the
performance of 30 actively traded stocks of well-established, blue chip
performance.
FEDERAL RESERVE BOARD (FED):
A seven-member group that oversees the operations of the Federal Reserve
System, the central bank system of the United States. Currently led by Chairman
Alan Greenspan, the Fed meets eight times a year to establish monetary policy
and monitor the country's economic pulse.
GROWTH INVESTING:
An investing strategy that seeks to identify stocks that tend to offer
greater-than-average earnings growth. Growth stocks typically trade at higher
prices than value stocks, due to their expected earnings growth.
NET ASSET VALUE (NAV):
The value of a mutual fund share, calculated by deducting a fund's liabilities
from its total assets and dividing this amount by the number of shares
outstanding. The NAV does not include any initial or contingent deferred sales
charge.
P/E RATIO:
The price-to-earnings ratio shows the "multiple" of earnings at which a stock
is selling. It is calculated by dividing a stock's current price by its current
earnings per share. A high multiple means that investors are optimistic about
future growth and have bid up the stock's price.
REAL ESTATE INVESTMENT TRUSTS (REITS):
Publicly traded companies that own, develop, and operate apartment complexes,
hotels, office buildings, and other commercial properties.
STANDARD AND POOR'S 500-STOCK INDEX:
An index of the 500 largest, most actively traded stocks on the New York Stock
Exchange. It provides a guide to the overall health of the U.S. stock market.
The S&P 500 is a much broader index than the Dow Jones Industrial Average and
reflects the stock market more accurately.
A-7
<PAGE> 46
VALUATION:
The estimated or determined worth of a stock, based on its price relative to
its earnings.
VALUE INVESTING:
A strategy that seeks to identify stocks that are sound investments but are
temporarily out of favor in the marketplace, due to concerns about short-term
performance. As a result, they trade at prices below the value that investors
believe they are actually worth.
A-8
<PAGE> 47
PORTFOLIO MANAGEMENT REVIEW
VAN KAMPEN AMERICAN CAPITAL REAL ESTATE SECURITIES FUND
We recently spoke with the management team of the Van Kampen American Capital
Real Estate Securities Fund about the key events and economic forces that shaped
the markets during the most recent fiscal year. The team is led by portfolio
managers Russell C. Platt and Theodore R. Bigman. The following excerpts reflect
their views on the Fund's performance during the 12-month period ended December
31, 1997.
Q
WHAT WERE THE MARKET CONDITIONS IN WHICH THE FUND OPERATED DURING THE
PAST 12 MONTHS?
A
A strong U.S. economy and a cooperative bond market in the past year were
beneficial to the real estate industry, which continues on the path of
recovery that began in 1993. While the total return for the period was not as
great as the one generated a year earlier, it was solid and more in line with
the type of returns that we believe investors can expect at this point in the
real estate cycle. Real estate investments generally tracked the Standard &
Poor's 500-Stock Index, but displayed defensive characteristics during the more
volatile periods in the broader market, particularly in the latter part of the
year.
The past 12 months were characterized by numerous mergers and acquisitions in
the real estate market. An impressive total of 15 public transactions occurred,
most notably Equity Office Properties' surprising merger with rival Beacon
Office Properties, and Starwood Lodging's successful bid for ITT Corp. Public
mergers in 1997 totaled $26.7 billion, representing a significant increase from
the year before, in which six public REIT mergers accounted for only $5.0
billion. Companies were able to finance these transactions through an active
issuance market, with an estimated $39 billion in debt and equity capital raised
by the end of the year.
Q
HOW DID YOU POSITION THE PORTFOLIO DURING THE REPORTING PERIOD?
A
We continued to support the thesis that efficient markets will, over
time, drive values in the public and private markets into equilibrium; in
that environment, understanding asset value is critical. As a result, our
security-selection process is based on finding those stocks that we believe
offer the best value relative to their underlying net property assets. While
real estate cycles in the physical property market can last for long periods of
time, valuations in the public markets can fluctuate quite rapidly. This caused
us to over-and underweight property sectors throughout the year despite
conditions in the physical market. Our investment style led us to overweight
positions in the office and high-end hotel sectors, which
Please see footnotes on page three
A-9
<PAGE> 48
contributed handsomely to the Fund's returns for the year. In addition, our
value style of investing allowed the Fund to perform particularly well during
times of greatest market volatility.
Q
WHAT WAS THE FUND'S PERFORMANCE OVER THE REPORTING PERIOD?
A
The Fund achieved a total return of 20.66 percent(1) (Class A shares at
net asset value) for the 12-month period ended December 31, 1997. This
performance compares favorably to the total return of the NAREIT (National
Association of Real Estate Investment Trusts) Equity REIT Index of 10.98 percent
over the same period. The NAREIT Index is an unmanaged index that reflects the
performance of a broad range of equity REITs of all property types. By
comparison, the Standard & Poor's 500-Stock Index registered a total return of
33.31 percent in the 12 months ended December 31, 1997. The S&P 500-Stock Index
is a broad-based, unmanaged index that reflects the general performance of the
stock market. Keep in mind that these indices are unmanaged statistical
composites that do not reflect any commissions, fees, or sales charges that
would be incurred by an investor purchasing the securities they represent.
Please refer to the chart on page three for additional Fund performance results.
Q
WHAT FACTORS OR SECTORS CONTRIBUTED TO THE FUND'S SUCCESS OVER ITS FISCAL
YEAR?
A
With respect to the overall portfolio, our value style of investing was
beneficial during the period. Recall that the NAREIT Equity REIT Index
registered a total return of 35.5 percent in 1996, of which 19.0 percent
occurred in the fourth quarter (with a 12.2 percent return in the final month
alone). Given that level of performance, many growth and "momentum" companies
sold at significant premiums to underlying real estate values, and thus
experienced a retracement of stock prices in the first six months of this year.
Our value focus allowed us to avoid a number of companies in which the
retrenchment was often significant.
Our sector weightings and stock selection within sectors also contributed to the
Fund's total return in the first half of the year. After last year's outstanding
performance, office and hotel property sectors continued to show above-average
performance during the past six months, and our overweighted positions in these
sectors positively contributed to the total return. Limited new supply in both
sectors has allowed for better returns. We were somewhat surprised by the
above-average performance in the retail sector in the first half of the year,
and our holdings in regional malls added significantly to returns. Our stock
selection in the manufactured-home sector and the industrial sector also
contributed to the Fund's success. For additional Fund portfolio highlights,
please refer to page eight.
Please see footnotes on page three
A-10
<PAGE> 49
Q
WHAT IS YOUR OUTLOOK FOR THE REAL ESTATE MARKET AND FOR THE FUND?
A
As we continue to advance in this current real estate recovery cycle, we
see more property sectors approaching equilibrium, or a balanced
supply-and-demand equation. We are also beginning to see greater amounts
of development in many property sectors due to the fact that rental rates have
recovered greatly. In many cases, the new development is justified. We do not
yet feel that we are at a level of development that will bring about the demise
of this cycle; nonetheless, it is incumbent upon us to be alert and increasingly
careful in our company analysis and stock selection. For example, in calculating
the net asset value for some of the Southeastern multi-family companies, we have
computed a greater vacancy rate, because certain markets in this region have
excess supply. In addition, we are attempting to focus our investments in
companies that have a Northeastern or West Coast focus when possible; these are
markets in which is it very difficult to develop, so we believe the
supply-and-demand balance will remain in check.
In conclusion, we believe that, as the real estate cycle ages, understanding the
underlying real estate value of these securities will become increasingly
important. In this environment, we feel strongly that our value style of
investing will prevail.
<TABLE>
<S> <C>
/s/ RUSSEL C. PLATT /s/ THEODORE R. BIGMAN
Russel C. Platt Theodore R. Bigman
Portfolio Manager Portfolio Manager
</TABLE>
Please see footnotes on page three
A-11
<PAGE> 50
PORTFOLIO HIGHLIGHTS
VAN KAMPEN AMERICAN CAPITAL
REAL ESTATE SECURITIES FUND
TOP TEN HOLDINGS AS A PERCENTAGE OF LONG TERM INVESTMENTS
<TABLE>
<CAPTION>
AS OF AS OF
JUNE 30, 1997 DECEMBER 31, 1997
<S> <C> <C> <C>
Taubman Centers, Inc. ....... 5.5% ................... 1.9%
Chateau Properties, Inc. .... 4.8% ................... 5.5%
Arden Realty Group, Inc. .... 4.7% ................... 2.3%
Nationwide Health Properties,
Inc. ...................... 4.7% ................... 4.8%
Bay Apartment Communities,
Inc. ...................... 4.3% ................... 3.5%
Host Marriott Corp. ......... 4.2% ................... 2.1%
Essex Property Trust,
Inc. ...................... 4.0% ................... 4.0%
Pacific Gulf Properties,
Inc. ...................... 3.8% ................... 2.6%
Capstar Hotel Co. ........... 3.7% ................... N/A
Brandywine Realty Trust ..... 3.6% ................... 3.7%
</TABLE>
N/A=Not Applicable
TOP FIVE PORTFOLIO SECTORS AS A PERCENTAGE OF LONG-TERM INVESTMENTS
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997 AS OF JUNE 30, 1997
<S> <C> <C> <C>
Office/Industrial.......... 28.9% Office/Industrial.......... 25.2%
Apartments................. 19.5% Apartments................. 19.6%
Hotel & Lodging............ 11.3% Hotel & Lodging............ 13.9%
Shopping Malls............. 10.7% Shopping Malls............. 11.1%
Shopping Centers........... 7.4% Healthcare Facilities...... 10.4%
</TABLE>
A-12
<PAGE> 51
Management's Discussion of the MS Real Estate Fund's Performance as of the
Annual Report dated June 30, 1997.
LETTER TO SHAREHOLDERS
MORGAN STANLEY
U.S. REAL ESTATE FUND
INVESTMENT OVERVIEW
(UNAUDITED)
COMPOSITION OF NET ASSETS (AT JUNE 30, 1997)
<TABLE>
<S> <C> <C> <C> <C>
APARTMENT (19.7%) 19.7
HEALTHCARE (9.7%) 9.7
LAND (2.2%) 2.2
LODGING/LEISURE
(12.5%) 12.5
MARNUFACTURED HOMES
(6.6%) 6.6
OFFICE & INDUSTRIAL
(21.2%) 21.2
RETAIL (15.2%) 15.2
SELF STORAGE (1.3%) 1.3
OTHER (11.6%) 11.6
</TABLE>
<TABLE>
<CAPTION>
TOTAL RETURNS**
-------------------------------------
AVERAGE ANNUAL
ONE YEAR SINCE INCEPTION
----------------- -----------------
WITH WITHOUT WITH WITHOUT
SALES SALES SALES SALES
CHARGE* CHARGE CHARGE* CHARGE
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Shares 27.98% 35.75% 28.47% 35.17%
- -------------------------------------------------------------------------
Class B Shares 29.97% 34.58% 30.79% 33.88%
- -------------------------------------------------------------------------
Class C Shares 33.56% 34.56% 34.05% 34.05%
- -------------------------------------------------------------------------
NAREIT Equity Index N/A 33.87% N/A 32.67%
- -------------------------------------------------------------------------
</TABLE>
* The returns above are calculated using the applicable sales charge for Class
A shares and the applicable deferred sales charge for Class B and Class C
shares.
** Total returns for the Fund reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waivers and reimbursements, total
returns would be lower.
The NAREIT Equity Index is an unmanaged market weighted index of tax qualified
REITs listed on the New York Stock Exchange, American Stock Exchange and the
NASDAQ National Market System, including dividends.
A-13
<PAGE> 52
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT
[GRAPH]
TOP FIVE HOLDINGS
<TABLE>
<CAPTION>
PERCENT OF
ISSUER INDUSTRY NET ASSETS
- -----------------------------------------------------------------------
<S> <C> <C>
Chateau Properties, Inc. REIT Manufactured Homes 4.8%
- -----------------------------------------------------------------------
American General Hospitality Corp. Lodging/Leisure 4.5%
- -----------------------------------------------------------------------
Nationwide Health Properties, Inc. Healthcare 3.9%
- -----------------------------------------------------------------------
Essex Property Trust, Inc. REIT Apartment 3.5%
- -----------------------------------------------------------------------
Urban Shopping Centers, Inc. REIT Retail 3.4%
- -----------------------------------------------------------------------
</TABLE>
TOP FIVE SECTORS
<TABLE>
<CAPTION>
VALUE PERCENT OF
SECTOR (000) NET ASSETS
- ------------------------------------------------------------------------
<S> <C> <C>
Office & Industrial $5,177 21.2%
- ------------------------------------------------------------------------
Apartment 4,783 19.7%
- ------------------------------------------------------------------------
Retail 3,700 15.2%
- ------------------------------------------------------------------------
Lodging/Leisure 3,039 12.5%
- ------------------------------------------------------------------------
Healthcare 2,351 9.7%
- ------------------------------------------------------------------------
</TABLE>
In accordance with SEC regulations, Fund performance since inception as shown at
left assumes that: the maximum sales charge was deducted from the initial
investment of $10,000 in Class A shares; the maximum deferred sales charge was
deducted from the value of the investment of $10,000 in Class B shares; all
recurring fees (including management fees) were deducted; and all dividends and
distributions were reinvested.
Past performance is not predictive of future performance.
A-14
<PAGE> 53
The investment objective of the U.S. Real Estate Fund is to provide above-
average current income and long-term capital appreciation by investing primarily
in equity securities of companies in the U.S. real estate industry, including
real estate investment trusts (REITs).
For the year ended June 30, 1997, the Fund had a total return exclusive of
sales charge of 35.75% for the Class A shares, 34.58% for the Class B shares and
34.56% for the Class C shares, and a total return with sales charge of 27.98%
for the Class A shares, 29.97% for the Class B shares and 33.56% for the Class C
shares, as compared to 33.87% for the National Association of Real Estate
Investment Trusts (NAREIT) Equity Index. For the period from inception through
June 30, 1997 the Fund had an average annual total return exclusive of sales
charge of 35.17% for the Class A shares, 33.88% for the Class B shares and
34.05% for the Class C shares, and a total return with sales charge of 28.47%
for the Class A shares 30.79%, for the Class B shares and 34.05% for the Class C
shares, as compared with 32.67% for the NAREIT Equity Index.
Valuations in the REIT market have gone through some interesting gyrations
during the first half of 1997. The Morgan Stanley REIT Index ("RMS") which
measures the performance of REITs on a continuous basis -- as opposed to the
Index which measures performance on a month-end basis -- rose approximately 4%
through the beginning of the year and climbed to a high on March 12. RMS
proceeded to hit its low on April 25 following a decline throughout the month.
This represented a decline of more than 8.5% from its mid-March peak. Since that
low, RMS has proceeded straight up, gaining 9.9% and achieving new highs through
quarter-end.
The decline in the early part of the second quarter resulted from a
combination of the correction in the broad equity market as well as a
significant amount of new equity issuance. We did not expect to see strong
appreciation until this supply was absorbed. In fact, in the face of declining
valuations in the period from mid-March through April, REITs continued to raise
capital and raised in excess of $3.5 billion of equity in 25 separate offerings.
Some observers were disappointed to see the REIT market fall along with the
broad equity market in March and April. Our reaction is that REITs have not lost
their defensive characteristics. However, REIT stocks can only retain their
defensive characteristics if their stock prices reflect the underlying value of
their real estate. In the fourth quarter of last year, a number of stocks,
particularly some of the larger cap names, had traded to levels that were at
quite significant premiums to their underlying asset values. These were the
stocks that were most penalized during the correction. We continue to believe
that REITs should be viewed as a separate asset class, distinct from stocks and
bonds, providing diversification within a portfolio. Clearly there is some
correction to other financial assets but as demonstrated by on-going analysis
provided by NAREIT the correlation continues
A-15
<PAGE> 54
to wane. This research affirms our basic theory that real estate stocks will
move based on underlying real estate value.
As suggested above, new equity issuance in the REIT market continues at a
torrid pace. Through June 30, 1997 REITs had raised almost $10 billion in new
equity. This continues a theme of more real estate moving into the control of
the public markets. With a private institutional real estate market of
approximately $1 trillion and equity capitalization at $110 billion, REITs
continue to capture a bigger share of the pie. We see continued equity issuance
by existing REITs as proceeds have primarily been used to pay for the
acquisition of individual properties, portfolios of properties and entire
companies. One wildcard in the growth potential of the assets held by public
companies is the exchange of property for shares by the institutional owners of
real estate. In the second quarter we saw a beginning of this trend as Meridian
Industrial Trust entered into transactions providing both an insurance company
and a corporate pension fund with shares in exchange for industrial properties.
After a dearth of initial public offerings over the course of the last two
years, there were 8 IPOs in the first two quarters raising in excess of $2
billion (this does not include two IPOs concluded immediately after the end of
June). The majority of capital raised was for office companies. We expect to see
a continuance of these IPOs as a result of the arbitrage between the private and
public real estate markets. The sectors that will feature the most new issuance
will be those in which it is not hard to assemble a meaningful collection of
assets combined with public market valuations that provide premium pricing.
At December 31, 1996 we provided our investment strategy for overweighting and
underweighting asset classes and geographic regions and thought it would be
appropriate to look at calendar 1997 year-to-date total returns in each sector
according to the Index. It is interesting to note that once again sector bets on
the office and hotel sectors contributed to excess performance, despite
prognosticators claiming that after 1996 REITs had moved to a stock picker's
game. We have been
A-16
<PAGE> 55
surprised by the continued strength in the strip center and regional mall
segments of retail and have continued to underweight the retail sector.
<TABLE>
<CAPTION>
TOTAL PERFORMANCE
SECTOR YEAR TO DATE CALENDAR 1997
- --------------------------------------------------------------------------
<S> <C>
Apartments 6.2%
- --------------------------------------------------------------------------
Manufactured Homes 3.6%
- --------------------------------------------------------------------------
Strip Centers 7.5%
- --------------------------------------------------------------------------
Regional Malls 7.6%
- --------------------------------------------------------------------------
Outlet Centers -4.2%
- --------------------------------------------------------------------------
Industrial 1.7%
- --------------------------------------------------------------------------
Office 5.4%
- --------------------------------------------------------------------------
Self Storage -1.2%
- --------------------------------------------------------------------------
Triple Net Lease 3.4%
- --------------------------------------------------------------------------
Hotel 11.8%
- --------------------------------------------------------------------------
Healthcare 2.7%
- --------------------------------------------------------------------------
Overall 5.7%
- --------------------------------------------------------------------------
</TABLE>
From the perspective of the Fund, approximately 65% of the outperformance
since December 31 was as a result of stock selection and the remainder was from
sector allocation. The largest contributions from a sector allocation
perspective were: overweighting of hotels, underweighting of self storage, and
underweighting of outlet centers. As we have discussed previously, real estate
cycles in the physical property markets tend to last a long time, however,
valuations in the public markets continue to fluctuate and as a result we had
some modest movements in the Fund. The most significant top-down adjustments
were increasing the weighting in the multifamily sector since valuations were
beaten down, and decreasing the weighting in the office and industrial sectors
as we took profits on some office stocks and reduced industrial positions due to
stock valuations continuing to move far above underlying value.
A-17
<PAGE> 56
The following chart provides a summary of the largest contributors to the
performance of the Fund both from a top-down and bottom-up perspective, along
with the rationales for the positions.
<TABLE>
<CAPTION>
FUND POSITION SECTOR RATIONALE
- -----------------------------------------------------------------------
<S> <C> <C>
Bottom-up
- -----------------------------------------------------------------------
Essex Properties Apartments Attractive Pacific markets
- -----------------------------------------------------------------------
Chateau Properties Manufactured Favorable risk-return
Homes
- -----------------------------------------------------------------------
Urban Shopping Centers Regional Malls High-end retail continues
to improve
- -----------------------------------------------------------------------
Pacific Gulf Properties Industrial Small cap with
Pacific-focus
- -----------------------------------------------------------------------
Meridian Industrial Trust Industrial Small cap growth story
- -----------------------------------------------------------------------
Extended Stay of America Hotels Momentum investors exit
- -----------------------------------------------------------------------
Top-down
- -----------------------------------------------------------------------
Overweighting Hotels Lack of new supply at
upper-end
- -----------------------------------------------------------------------
Underweighting Self storage Public market premiums
excessive
- -----------------------------------------------------------------------
Underweighting Outlet centers Sector continues to worsen
- -----------------------------------------------------------------------
</TABLE>
Russell Platt
Portfolio Manager
Theodore R. Bigman
Portfolio Manager
July 1997
A-18
<PAGE> 57
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.
VAN KAMPEN AMERICAN CAPITAL
REAL ESTATE SECURITIES FUND
One Parkview Plaza
Oakbrook Terrace, IL 60181
Investment Adviser of the VKAC Real Estate Fund
VAN KAMPEN AMERICAN CAPITAL
ASSET MANAGEMENT INC.
One Parkview Plaza
Oakbrook Terrace, IL 60181
Distributor of the VKAC Real Estate Fund
VAN KAMPEN AMERICAN CAPITAL
DISTRIBUTORS, INC.
One Parkview Plaza
Oakbrook Terrace, IL 60181
Transfer Agent of the VKAC Real Estate Fund
ACCESS INVESTOR SERVICES, INC.
P.O. Box 418256
Kansas City, MO 64141-9256
Custodian of the VKAC Real Estate Fund
STATE STREET BANK AND
TRUST COMPANY
225 Franklin Street, P.O. Box 1713
Boston, MA 02105-1713
Legal Counsel of the VKAC Real Estate Fund
SKADDEN, ARPS, SLATE,
MEAGHER & FLOM (ILLINOIS)
333 West Wacker Drive
Chicago, IL 60606
Independent Auditors of the VKAC Real Estate Fund
PRICE WATERHOUSE LLP
200 East Randolph
Chicago, IL 60601
<PAGE> 58
PROSPECTUS/PROXY STATEMENT
VAN KAMPEN AMERICAN CAPITAL REAL ESTATE SECURITIES FUND
RELATING TO THE ACQUISITION OF ASSETS AND LIABILITIES OF
MORGAN STANLEY U.S. REAL ESTATE FUND
, 1998
------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PROPOSAL 1: THE PROPOSED REORGANIZATION............................. 3
A. SUMMARY..................................................... 3
The Reorganization........................................ 3
Reasons for the Proposed Reorganization................... 4
Comparison of the VKAC Real Estate Fund and the MS Real
Estate Fund............................................... 6
B. RISK FACTORS................................................ 19
Similarity of Risks....................................... 19
Differences in Risks...................................... 21
C. THE PROPOSED REORGANIZATION................................. 22
Terms of the Agreement.................................... 23
Description of Securities to be Issued.................... 24
Continuation of Shareholder Accounts and Plans; Share
Certificates.............................................. 25
Federal Income Tax Consequences........................... 25
Expenses.................................................. 27
Ratification of Investment Objective, Investment Policies
and Restrictions of the VKAC Real Estate Fund........... 28
Legal Matters............................................. 28
D. RECOMMENDATION OF THE BOARD................................. 28
OTHER INFORMATION................................................... 28
A. SHAREHOLDERS OF THE VKAC REAL ESTATE FUND AND THE MS REAL
ESTATE FUND............................................... 28
B. SHAREHOLDER PROPOSALS....................................... 29
VOTING INFORMATION AND REQUIREMENTS................................. 29
EXHIBIT A: MANAGEMENT'S DISCUSSION OF VKAC REAL ESTATE FUND AND MS
REAL ESTATE FUND PERFORMANCE...................................... A-1
</TABLE>
------------------------------------------------------------------------------
-- A WEALTH OF KNOWLEDGE - A KNOWLEDGE OF WEALTH --
VAN KAMPEN AMERICAN CAPITAL
------------------------------------------------------------------------------
<PAGE> 59
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 MARCH 6, 1998
VAN KAMPEN AMERICAN CAPITAL REAL ESTATE SECURITIES FUND
ONE PARKVIEW PLAZA
OAKBROOK TERRACE, ILLINOIS 60181
(800) 421-5666
---------------------
STATEMENT OF ADDITIONAL INFORMATION
VAN KAMPEN AMERICAN CAPITAL REAL ESTATE SECURITIES FUND
RELATING TO THE ACQUISITION OF ASSETS AND LIABILITIES OF
MORGAN STANLEY U.S. REAL ESTATE FUND
DATED , 1998
---------------------
This Statement of Additional Information provides information about the Van
Kampen American Capital Real Estate Securities Fund (the "VKAC Real Estate
Fund"), an open-end management investment company organized as a Delaware
business trust, in addition to information contained in the Prospectus/Proxy
Statement of the VKAC Real Estate Fund, dated , 1998, which also serves
as the proxy statement of the Morgan Stanley U.S. Real Estate Fund (the "MS Real
Estate Fund"), a series of the Morgan Stanley Fund, Inc., an open-end management
investment company organized as a Maryland corporation ("Morgan Stanley Fund"),
in connection with the issuance of Class A, B and C shares of the VKAC Real
Estate Fund to shareholders of the MS Real Estate 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 VKAC Real Estate 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 MS Real Estate Fund.......................... 2
Additional Information About the VKAC Real Estate Fund...................... 2
Additional Information About the MS Real Estate Fund........................ 2
Financial Statements........................................................ 2
</TABLE>
The VKAC Real Estate 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> 60
PROPOSED REORGANIZATION OF THE MS REAL ESTATE FUND
The shareholders of the MS Real Estate Fund are being asked to approve an
acquisition of all the assets of the MS Real Estate Fund solely in exchange for
Class A, B and C shares of the VKAC Real Estate Fund and the VKAC Real Estate
Fund's assumption of the liabilities of the MS Real Estate Fund (the
"Reorganization") pursuant to an Agreement and Plan of Reorganization by and
between the VKAC Real Estate Fund and the Morgan Stanley Fund, on behalf of the
MS Real Estate Fund (the "Agreement"). A copy of the form of the Agreement is
attached hereto as Appendix A.
ADDITIONAL INFORMATION ABOUT THE VKAC REAL ESTATE FUND
Incorporated herein by reference in its entirety is the Statement of
Additional Information of the VKAC Real Estate Fund, dated April 30, 1997,
attached as Appendix B to this Statement of Additional Information.
ADDITIONAL INFORMATION ABOUT THE MS REAL ESTATE FUND
Incorporated herein by reference in its entirety is the Statement of
Additional Information of the MS Real Estate Fund, dated October 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 VKAC Real Estate Fund for the fiscal year
ended December 31, 1997, as included in Appendix D hereto, (ii) the audited
financial statements of the MS Real Estate Fund for fiscal year ended June 30,
1997 as included in Appendix C hereto and (iii) the unaudited financial
statements of the MS Real Estate Fund for the six months ended December 31,
1997, as included in Appendix E hereto.
PRO FORMA FINANCIAL STATEMENTS
Set forth in Appendix F hereto are unaudited pro forma financial statements
of the VKAC Real Estate Fund giving effect to the Reorganization which include:
(i) Pro Forma Condensed Statement of Assets and Liabilities at December 31,
1997, (ii) Pro Forma Condensed Statement of Operations for the year ended
December 31, 1997 and (iii) Pro Forma Portfolio of Investments at December 31,
1997.
2
<PAGE> 61
APPENDIX A
AGREEMENT AND PLAN OF REORGANIZATION
[TO COME]
<PAGE> 62
APPENDIX B
STATEMENT OF ADDITIONAL INFORMATION
OF
VAN KAMPEN AMERICAN CAPITAL
REAL ESTATE SECURITIES FUND
Dated April 30, 1997
as supplemented
<PAGE> 63
STATEMENT OF ADDITIONAL INFORMATION
VAN KAMPEN AMERICAN CAPITAL REAL ESTATE SECURITIES FUND
Van Kampen American Capital Real Estate Securities Fund (the "Fund") is a
diversified, 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 at (800) 421-5666.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
General Information....................................................... B- 2
Investment Policies and Techniques........................................ B- 3
Investment Restrictions................................................... B-11
Trustees and Officers..................................................... B-13
Legal Counsel............................................................. B-20
Investment Advisory Agreement............................................. B-21
Distributor............................................................... B-22
Distribution and Service Plans............................................ B-22
Transfer Agent............................................................ B-23
Portfolio Transactions and Brokerage...................................... B-23
Determination of Net Asset Value.......................................... B-24
Purchase and Redemption of Shares......................................... B-25
Exchange Privilege........................................................ B-28
Tax Status of the Fund.................................................... B-29
Fund Performance.......................................................... B-29
Other Information......................................................... B-30
Report of Independent Accountants......................................... B-31
Financial Statements...................................................... B-32
Notes to Financial Statements............................................. B-40
</TABLE>
THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED APRIL 30, 1997.
B-1
<PAGE> 64
GENERAL INFORMATION
The Fund was incorporated originally in Maryland on April 14, 1994 under
the name American Capital Real Estate Securities Fund, Inc. As of August 19,
1995, the Fund was reorganized as a series of Van Kampen American Capital Real
Estate Securities Fund (the "Trust"), a Delaware business trust, and adopted its
current name.
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 a wholly-owned subsidiary of VK/AC
Holding, Inc. VK/AC Holding, Inc. is a wholly-owned subsidiary of MSAM Holdings
II, Inc. which, in turn, is a wholly-owned subsidiary of Morgan Stanley Group
Inc. The principal office of the Fund, the Adviser, the Distributor and VKAC is
located at One Parkview Plaza, Oakbrook Terrace, Illinois 60181.
Morgan Stanley Group Inc. 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 (involving foreign exchange,
commodities, indices and interest rates): real estate advice, financing and
investing; and global custody, securities clearance services and securities
lending.
On February 5, 1997, Morgan Stanley Group Inc. and Dean Witter, Discover &
Co. announced that they had entered into an Agreement and Plan of Merger to form
a new company to be named Morgan Stanley, Dean Witter, Discover & Co. Subsequent
to certain conditions being met, it is currently anticipated that the
transaction will close in mid-1997. Thereafter, Van Kampen American Capital
Asset Management, Inc. will be an indirect subsidiary of Morgan Stanley, Dean
Witter, Discover & Co.
Dean Witter, Discover & Co. is a financial services company with three
major businesses: full service brokerage, credit services and asset management
of more than $100 billion in customer accounts.
VKAC offers one of the industry's broadest lines of
investments -- encompassing mutual funds, closed-end funds and unit investment
trusts -- and is the nation's 5th largest broker-sold mutual fund group
according to Strategic Insight, July 1995. VKAC manages or supervises more than
$57 billion in 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, with more than 80 analysts devoted to various
specializations.
VKAC's equity fund philosophy is normally to remain fully invested to
achieve consistent long-term returns.
VKAC believes that investment real estate is an asset class that often is
overlooked by investors.
As of April 4, 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 set forth below.
<TABLE>
<CAPTION>
AMOUNT OF CLASS
NAME AND ADDRESS OWNERSHIP AT OF PERCENTAGE
OF HOLDER APRIL 4, 1997 SHARES OWNERSHIP
---------------- ------------- ------ ----------
<S> <C> <C> <C>
Merrill Lynch Pierce 547,637 shares B 17.40%
Fenner & Smith Inc. 74,762 shares C 8.64%
Mutual Fund Operations
Attn Fund Administration
4800 Deer Lake Dr., E. 3rd FL
Jacksonville, FL 32246-6484
(Table continued of following page)
</TABLE>
B-2
<PAGE> 65
<TABLE>
<CAPTION>
AMOUNT OF CLASS
NAME AND ADDRESS OWNERSHIP AT OF PERCENTAGE
OF HOLDER APRIL 4, 1997 SHARES OWNERSHIP
---------------- ------------- ------ ----------
<S> <C> <C> <C>
Van Kampen American Capital Trust 355,860 shares A 14.29%
Company 290,719 shares B 9.24%
2800 Post Oak Blvd. 44,297 shares C 5.12%
Houston, Texas 77056
PaineWebber for the Benefit of 74,747 shares C 8.64%
Schoellkopf Shenandoah
Partnership, Ltd.
3303 Lee Parkway
Suite 405
Dallas, TX 75219-5109
</TABLE>
Van Kampen American Capital Trust Company acts as custodian for certain
employee benefits and individual retirement accounts.
INVESTMENT POLICIES AND TECHNIQUES
The Fund's primary investment objective is to seek to provide long-term
growth of capital. Current income is a secondary investment objective. The
following disclosures supplement disclosures set forth in the Prospectus.
Readers must refer also to the Prospectus for a complete presentation.
DEPOSITARY RECEIPTS
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
options on futures contracts. Set forth below is certain additional information
regarding options, futures contracts and related options. See Prospectus for
further information.
SELLING CALL AND PUT OPTIONS
Purpose. The principal reason for selling options is to obtain, through
receipt of premiums, a greater current return or total return than would be
realized on the underlying securities alone.
Selling Options. The purchaser of a call option pays a premium to the
seller (i.e., the writer) for the right to buy the underlying security from the
writer at a specified price during a certain period. The Fund sells 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 but is designed to provide a hedge against a
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 seller (i.e., the
writer) for the right to sell the underlying security to the writer at a
specified price during a certain period. The Fund sells put options only on
B-3
<PAGE> 66
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.
Closing Purchase Transactions and Offsetting Transactions. In order to
terminate its position as a seller 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.
The Fund could sell 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 seller 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 seller, 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.
The exercise price of call options may be below ("in-the-money"), equal to
("at-the-money"), or above ("out-of-the-money") the current market value of the
underlying securities or futures contracts at the time the options are written.
The converse applies to put options.
Risks of Selling Options. By selling a call option, the Fund loses the
potential for gain on the underlying security above the exercise price while the
option is outstanding; by selling 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. In
addition, the Fund may purchase call options 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.
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 upon exercise of the option. Receipt of this
cash
B-4
<PAGE> 67
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 seller 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 sell or purchase options which are listed on an exchange
as well as options which are traded over-the-counter.
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.
RISK FACTORS APPLICABLE TO OPTIONS ON U.S. GOVERNMENT SECURITIES
Treasury Bonds and Notes. Because trading interest in options written on
Treasury bonds and notes tends to center on the most recently auctioned issues,
the exchanges will not continue indefinitely to introduce options with new
expirations to replace expiring options on particular issues. Instead, the
expirations introduced at the commencement of options trading on a particular
issue will be allowed to run their course, with the possible addition of a
limited number of new expirations as the original ones expire. Options trading
on each issue of bonds or notes will thus be phased out as new options are
listed on more recent issues, and options representing a full range of
expirations will not ordinarily be available for every issue on which options
are traded.
Treasury Bills. Because the deliverable Treasury bill changes from week to
week, sellers of Treasury bill calls cannot provide in advance for their
potential exercise settlement obligations by acquiring and holding the
underlying security. However, if the Fund holds a long position in Treasury
bills with a principal amount of the securities deliverable upon exercise of the
option, the position may be hedged from a risk standpoint by the writing of a
call option. For so long as the call option is outstanding, the Fund will hold
the Treasury bills in a segregated account with its Custodian so that it will be
treated as being covered.
Mortgage-Related Securities. The following special considerations will be
applicable to options on mortgage-related securities. Currently such options are
only traded over-the-counter. Since the remaining principal balance of a
mortgage-related security declines each month as a result of mortgage payments,
the Fund as a seller of a mortgage-related call holding mortgage-related
securities as "cover" to satisfy its delivery obligation in the event of
exercise may find that the mortgage-related securities it holds no longer have a
sufficient remaining principal balance for this purpose. Should this occur, the
Fund will purchase additional mortgage-related securities from the same pool (if
obtainable) or replacement mortgage-related securities in the cash market in
order to maintain its cover. A mortgage-related security held by the Fund to
cover an option position in any but the nearest expiration month may cease to
represent cover for the option in the event of a decline in the coupon rate at
which new pools are originated under the FHA/VA loan ceiling in effect at any
given time. If this should occur, the Fund will no longer be covered, and the
Fund will either enter into a closing purchase transaction or replace such
mortgage-related security with a mortgage-related security which represents
cover. When the Fund closes its position or replaces such mortgage-related
security, it may realize an unanticipated loss and incur transaction costs.
FOREIGN CURRENCY OPTIONS
The Fund may purchase put and call 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 5% of the
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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 -- 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 rules and interpretations of the Commodity Futures
Trading Commission ("CFTC") under which the Fund is exempt from registration as
a "commodity pool."
Types of Contracts. An interest rate futures contract is an agreement
pursuant to which a party agrees to take or make delivery of a specified debt
security (such as U.S. Treasury bonds, U.S. Treasury notes, U.S. Treasury bills
and GNMA Certificates) at a specified future time and at a specified price.
Interest rate futures contracts also include cash settlement contracts based
upon a specified interest rate such as the London interbank offering rate for
dollar deposits, LIBOR.
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 times
the difference between the stock index value at a specified time and the price
at which the futures contract is originally struck. No physical delivery of the
underlying stocks in the index is made.
Foreign stock index futures traded outside the United States include the
Nikkei Index of 225 Japanese stocks traded on the 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
Chicago Mercantile Exchange 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,
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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 purchase price is paid or received upon the purchase or sale of a
futures contract. Initially, the Fund is 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 between 2% and 10%) 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 purchases 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 otherwise
fully invested ("anticipatory hedge"). Such purchase of a futures contract
serves 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,
provides 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 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 this imperfect correlation, the Fund could buy or sell futures
contracts in a greater 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
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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, currency 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 depositary
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 the 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
futures contracts and 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 of 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.
CFTC regulations require, among other things, (i) that futures and related
options be used solely for bona fide hedging purposes (or meet certain
conditions as specified in CFTC regulations) and (ii) that the Fund not enter
into futures and related options for which the aggregate initial margin and
premiums exceed 5% of the fair market value of the Fund's assets. 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.
OPTIONS ON FUTURES CONTRACTS
The Fund could also purchase and sell options on futures contracts. Options
on futures contracts to be sold 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 purchaser 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 is 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
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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 sell put options at a lower strike price (a "put bear
spread") to offset part of the cost of the strategy to the Fund. The purchase of
call options on futures contracts is intended to serve the same purpose as the
actual purchase of the futures contract.
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 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 sold 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
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.
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
futures 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 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, 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. Option on futures contracts to be sold or purchased by the
Fund will be traded on United States or foreign exchange or over-the-counter.
ADDITIONAL RISKS OF OPTIONS ON FUTURES CONTRACTS, FORWARD CONTRACTS AND OPTIONS
ON FOREIGN CURRENCIES
Unlike transactions entered into by the Fund in futures contracts, 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 Securities and Exchange Commission ("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 purchaser 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 seller and a trader of forward contracts could
lose amounts substantially in excess of their initial investments, due to the
margin and collateral requirements associated with such positions.
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
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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. Further,
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 the 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 effects of other
political and economic events. In addition, exchange-traded options on 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 decisions, (iii) delays in the Fund's
ability to act upon economic events occurring in foreign markets during
nonbusiness 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.
FORWARD COMMITMENTS
Relative to a Forward Commitment purchase, the Fund maintains a segregated
account (which is marked to market daily) of cash, cash equivalents or liquid
securities (which may have maturities which are longer than the term of the
Forward Commitment) with the Fund's custodian in an aggregate amount equal to
the amount of its commitment as long as the obligation to purchase continues.
Since the market value of both the securities or currency subject to the Forward
Commitment and the securities or currency held in the segregated account may
fluctuate, the use of Forward Commitments may magnify the impact of interest
rate changes on the Fund's net asset value.
A Forward Commitment sale is covered if the Fund owns or has the right to
acquire the underlying securities or currency subject to the Forward Commitment.
A Forward Commitment sale is for cross-hedging purposes if it is not covered,
but is designed to provide a hedge against a decline in value of a security or
currency which the Fund owns or has the right to acquire. In either
circumstance, the Fund maintains in a segregated account (which is marked to
market daily) either the security or currency covered by the Forward Commitment
or cash, cash equivalents or liquid securities (which may have maturities which
are longer than the term of the Forward Commitment) with the Fund's custodian in
an aggregate amount equal to the amount of its commitment as long as the
obligation to sell continues. By entering into a Forward Commitment sale
transaction, the Fund foregoes or reduces the potential for both gain and loss
in the security which is being hedged by the Forward Commitment sale. See the
Prospectus for further information.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with domestic or foreign
banks or broker-dealers. 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
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be loans under the Investment Company Act of 1940, as amended (the "1940 Act").
The Fund will make payment 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 is 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.
INVESTMENT RESTRICTIONS
The Fund has adopted the following fundamental investment 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 of the Fund 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. With respect to 75% of its total assets, invest more than 5% of its
assets in the securities of any one issuer (except the U.S. Government,
its agencies and instrumentalities) or purchase more than 10% of the
outstanding voting securities of any one 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.
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 or securities except by the purchase of a portion of an
issue of bonds, debentures or other obligations of types commonly
distributed to institutional investors publicly or privately (in the
latter case the investment will be subject to the stated limits on
investments in "restricted securities"), and except by the purchase of
securities subject to repurchase agreements.
5. Buy or sell real estate including real estate limited partnerships,
provided that the foregoing prohibition does not apply to a purchase
and sale of (i) securities which are secured by real estate, (ii)
securities representing interests in real estate, and (iii) securities
of companies operating in the real estate industry, including real
estate investment trusts. The Fund may hold and sell real estate
acquired as a result of the ownership of its securities.
6. 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.
7. 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
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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."
8. Concentrate its investment in any one industry, except that the Fund
will invest more than 25% of its total assets in the real estate
industry and 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.
9. Write, purchase or sell puts, calls or combinations thereof, except
that the Fund may (a) write covered or fully collateralized call
options, write secured put options, and enter into closing or
offsetting purchase transactions with respect to such options, (b)
purchase and sell options to the extent that the premiums paid for all
such options owned at any time do not exceed 10% of its total assets
and (c) engage in transactions in futures contracts and related options
transactions provided that such transactions are entered into for bona
fide hedging purposes (or meet certain conditions as specified in CFTC
regulations), and provided further that the aggregate initial margin
and premiums do not exceed 5% of the fair market value of the Fund's
total assets.
10. The Fund may not 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.
In addition to the foregoing fundamental investment policies which may not
be changed without shareholder approval, the Fund is subject to the following
policies which may be amended by the Fund's Trustees and which apply at the time
of purchase of portfolio securities.
1. The Fund may not make investments for the purpose of exercising control
or management although the Fund retains the right to vote securities
held by it and 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.
2. The Fund may not 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.
3. The Fund may not invest in the securities issued by other investment
companies as part of a merger, reorganization or other acquisition,
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. 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 Stock Exchange or American Stock Exchange.
Warrants or rights acquired in units or attached to other securities
are not subject to the foregoing limitation.
5. The Fund may not invest in securities of any company if any officer or
trustee/director of the Fund or of the Adviser owns more than 1/2 of 1%
of the outstanding securities of such company, and such officers and
trustees/directors who own more than 1/2 of 1% own in the aggregate
more than 5% of the outstanding securities of such issuer.
6. 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.
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7. 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.
8. The Fund may not purchase or otherwise acquire any security if, as a
result, more than 15% 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 does not apply to restricted
securities eligible for resale pursuant to Rule 144A under the
Securities Act of 1933 which the Board of 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 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.
The Fund may, notwithstanding any other fundamental investment policy or
limitation, invest all of its assets in the securities of a single open-end
management investment company with substantially the same fundamental investment
objectives, policies and restrictions as the Fund.
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 hereof, the term "Fund Complex"
includes each of the open-end investment companies advised by the Advisers
(excluding the 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 of each of the funds in the
Fund Complex.
Linda Hutton Heagy........................ Partner, Ray & Berndtson, Inc. An executive recruiting
Sears Tower and management consulting firm. Formerly, Executive Vice
233 South Wacker Drive President of ABN AMRO, N.A., a Dutch bank holding
Suite 4020 company. Prior to 1992, Executive Vice President of La
Chicago, IL 60606 Salle National Bank. Trustee of each of the funds in the
Date of Birth: 06/03/48 Fund Complex.
</TABLE>
B-13
<PAGE> 76
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
--------------------- --------------------------
<S> <C>
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 of
each of the funds in the Fund Complex.
Dennis J. McDonnell*...................... President and a Director of VKAC. President, Chief
One Parkview Plaza Operating Officer and a Director of the Advisers.
Oakbrook Terrace, IL 60181 Director or officer of certain other subsidiaries of
Date of Birth: 05/20/42 VKAC. Prior to November 1996, Executive Vice President
and a Director of VKAC Holding. President and Trustee 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.
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 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 of each of
the funds in the Fund Complex.
Phillip B. Rooney......................... Private investor. Director, Illinois Tool Works, Inc., a
348 East Third Street manufacturing company; Director, The Servicemaster
Hinsdale, IL 60521 Company, a business and consumer services company;
Date of Birth: 07/08/44 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,
WMX Technologies Inc., an environmental services company,
and prior to that President and Chief Operating Officer,
WMX Technologies Inc. Trustee 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 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 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 trustees are "interested persons" (within the meaning of Section 2(a)(19)
of the 1940 Act). Mr. McDonnell is an interested person of the Advisers and
the Fund by reason of his positions with VKAC and its affiliates. 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
B-14
<PAGE> 77
advised by Asset Management by reason of his firm in the past acting as legal
counsel to Asset Management.
OFFICERS
Messrs. 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>
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.
</TABLE>
B-15
<PAGE> 78
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
------------ ----------------- ---------------------
<S> <C> <C>
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.
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.
</TABLE>
B-16
<PAGE> 79
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
------------ ----------------- ---------------------
<S> <C> <C>
Nicholas Dalmaso............ Assistant Secretary Assistant Vice President and Senior
Date of Birth: 03/01/65 Attorney of VKAC. Assistant 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.
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>
B-17
<PAGE> 80
Each of the trustees holds the same position with each of the funds in the
Fund Complex. As of December 31, 1996, there were 51 funds in the Fund Complex.
Each trustee 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 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. Each fund in the Fund Complex also 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 each fund in the Fund
Complex advised by Advisory Corp. (each a "VK Fund" and collectively the "VK
Funds") 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, 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 funds in the Fund
Complex advised by Asset Management (each an "AC Fund" or collectively 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 trustees 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 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
trustee's 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
B-18
<PAGE> 81
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 fund in the Fund Complex has adopted a retirement plan. Under the
Fund's retirement plan, a Non-Affiliated Trustee who is receiving 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 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. Each
trustee has served as a member of the Board of Trustees 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.
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.
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* 1994 $1,577 $ 583 $2,500 $104,875
Philip P. Gaughan 160 -0- -0- 16,875
Linda Hutton Heagy* 1995 995 70 2,500 104,875
Dr. Roger Hilsman 995 -0- -0- 103,750
R. Craig Kennedy* 1995 995 46 2,500 104,875
Donald C. Miller 1,577 -0- -0- 104,875
Jack E. Nelson* 1995 1,577 292 2,500 97,875
David Rees 200 -0- -0- 22,000
Jerome L. Robinson* 1995 1,120 -0- -0- 101,625
Lawrence J. Sheehan 200 -0- -0- 22,000
Dr. Fernando Sisto* 1994 995 1,018 2,000 104,875
Wayne W. Whalen* 1995 1,577 198 2,500 104,875
William S. Woodside 995 -0- -0- 104,875
</TABLE>
- ---------------
* Currently a member of the Board of Trustees. Mr. Phillip B. Rooney also is a
current member of the Board of Trustees but is not included in the
compensation table because he did not serve on the Board of Trustees or
receive any compensation from the Fund prior to April 14, 1997. Messrs.
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.
(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. Gaughan and Rees retired from
the Board of Trustees on January 26, 1996 and January 29, 1996,
respectively. Mr. Sheehan was removed from the Board of Trustees effective
January 29, 1996. Messrs. Hilsman, Miller and Woodside retired from the
Board of Trustees on December 31, 1996.
B-19
<PAGE> 82
(2) The amounts shown in this column represent the Aggregate Compensation before
Deferral with respect to the Fund's fiscal year ended December 31, 1996. The
following trustees deferred compensation from the Fund during the fiscal
year ended December 31, 1996: Mr. Branagan, $977; Mr. Gaughan, $160; Ms.
Heagy, $710; Mr. Kennedy, $400; Mr. Miller, $1,577; Mr. Nelson, $1,577; Mr.
Rees, $200; Mr. Robinson, $1,120; and Mr. Whalen, $1,577. 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 Trust as of December 31, 1996 is as
follows: Mr. Branagan, $973; Mr. Gaughan, $416; Ms. Heagy, $1,072; Mr.
Kennedy, $854; Mr. Miller, $1,669; Mr. Nelson, $1,662; Mr. Rees, $208; Mr.
Robinson, $1,092; Mr. Sisto, $1,019; and Mr. Whalen, $1,677. 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 December 31, 1996. The retirement
plan is described above the Compensation Table.
(4) 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 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. Each incumbent nominee to the Board of Trustees has
served as a member of the Board of Trustees since he or she was first
appointed or elected in the year set forth in the Compensation Table.
(5) The amounts shown in this column represent the aggregate compensation paid
by all 51 of the investment companies in the Fund Complex as of December 31,
1996 before deferral by the trustees under the deferred compensation plan.
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 April 4, 1997, the trustees and officers of the Fund as a group owned
less than 1% of the shares of the Fund. As of April 4, 1997, no trustee or
officer of the Fund owns or would be able to acquire 5% or more of the common
stock of VK/AC Holding, Inc.
LEGAL COUNSEL
Skadden, Arps, Slate, Meagher & Flom (Illinois).
B-20
<PAGE> 83
INVESTMENT ADVISORY AGREEMENTS
The Fund and the Adviser are parties to an investment advisory agreement
(the "Advisory Agreement"). Under the Advisory Agreement, the Fund retains the
Adviser to manage the investment of the Fund's 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 objectives. 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 materials. 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. Under the Advisory
Agreement, the Fund pays to the Adviser as compensation for the services
rendered, facilities furnished, and expenses paid by it a fee payable monthly
computed on average daily net assets of the Fund at the annual rate of 1% of the
average daily net assets of the Fund.
Under the Advisory Agreement, the Fund bears the cost of its accounting
services, which includes 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 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 Fund. The services provided by the
Adviser are at cost. The Fund 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 company for any actions or omissions if
it acted without willful misfeasance, bad faith, negligence or reckless
disregard of its obligations.
The average net asset value for purposes of computing the advisory fee is
determined by taking the average of all of the 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 direct
or indirect majority owned subsidiary of VK/AC Holding, Inc., in connection with
the purchase and sale of portfolio investments of the Fund, 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 Fund's benefit, and to
advise the Trustees of the Fund of any other commissions, fees, brokerage or
similar payments which may be possible under applicable laws 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 Fund for any fiscal year exceed the most restrictive
expense limitations applicable in the states where the Fund'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 Fund monthly an amount sufficient to
make up the deficiency, subject to readjustment during the year. Ordinary
business expenses include the investment advisory fee and other operating costs
paid by the Fund 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 the 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.
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For the period June 9, 1994 through December 31, 1994 the Fund paid no
management fees to the Adviser and incurred no charges for accounting services.
For the fiscal years ended December 31, 1995 and 1996, the Adviser received
$98,904 and $312,156, respectively, in advisory fees from the Fund. For such
period, the Fund paid $48,971 and $58,843, respectively, for accounting
services. A substantial portion of these amounts was paid to the Adviser in
reimbursement of personnel, facilities and equipment costs attributable to the
provision of accounting services to the Fund.
DISTRIBUTOR
The Distributor acts as the principal underwriter of the Fund'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 Fund 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 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 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.
During the period June 9, 1994 through December 31, 1994, and the fiscal
years ended December 31, 1995 and 1996, total commissions on the sale of share
of the Fund were $104,027, $68,340 and $206,662, respectively. Of such totals,
the amounts retained by the Distributor was $4,695, $7,152 and $21,129,
respectively. The remainder was reallowed to dealers.
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
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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 December 31, 1996, the Fund's aggregate expenses
under the Plans for Class A shares were $29,695 or 0.25% of the Class A shares'
average net assets. Such expenses were paid to reimburse the Distributor for
payments made to financial intermediaries for servicing Fund shareholders and
for administering the Plans. For the fiscal year ended December 31, 1996, the
Fund's aggregate expenses under the Plans for Class B shares were $150,884 or
1.00% of the Class B shares' average net assets. Such expenses were paid to
reimburse the Distributor for the following payments: $117,378 for commissions
and transaction fees paid to financial intermediaries in respect of sales of
Class B shares of the Fund and $33,506 for fees paid to financial intermediaries
for servicing Class B shareholders and administering the Plans. For the fiscal
year ended December 31, 1996, the Fund's aggregate expenses under the Plans for
Class C shares were $42,491 or 1.00% of the Class C shares' average net assets.
Such expenses were paid to reimburse the Distributor for the following payments:
$25,559 for commissions and transaction fees paid to financial intermediaries in
respect of sales of Class C shares of the Fund and $16,932 for fees paid to
financial intermediaries for servicing Class C shareholders and administering
the Class C Plan.
TRANSFER AGENT
During the fiscal years ended December 31, 1994, 1995 and 1996, ACCESS,
shareholder service agent and dividend disbursing agent for the Fund, received
fees aggregating $-0-, $107,182 and $115,264, 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 Fund and of the other Van Kampen
American Capital mutual funds as a factor in the selection of firms to execute
portfolio transactions for the Fund.
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, 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
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supplemental investment research services from dealers 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 its 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 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 are 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.
During the period June 9, 1994 through December 31, 1994 and for the fiscal
years ended December 31, 1995 and 1996, the Fund paid $38,935, $93,865 and
$138,961, respectively, in brokerage commissions on portfolio transactions.
During the fiscal year ended December 31, 1996, the Fund paid $83,327 in
brokerage commissions on transactions totalling $46,160,374 to brokers selected
primarily on the basis of research services provided to the Adviser.
Prior to December 20, 1994, the Fund placed brokerage transactions with
brokers that were considered affiliated persons of the Adviser's former parent,
The Travelers Inc. Such affiliated persons included Smith Barney, Inc. ("Smith
Barney") and Robinson Humphrey, Inc. ("Robinson Humphrey"). Effective December
20, 1994, Smith Barney and Robinson Humphrey ceased to be affiliates of the
Adviser. During the period June 9, 1994 to December 20, 1994, the Fund paid
Smith Barney, Inc. $1,260 in commissions, representing 3.24% of transactions to
total commissions and representing 2.18% of value of brokerage transactions to
total brokerage transactions. No commissions were paid to Robinson Humphrey
during this same period. Effective October 31, 1996, Morgan Stanley Group Inc.
became an affiliate of the Advisor. No commissions were paid to Morgan Stanley
Group Inc. or its affiliates during the year ended December 31, 1996. The
negotiated commission paid to an affiliated broker on any transaction would be
comparable to that payable to a non-affiliated broker in a similar transaction.
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
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<PAGE> 87
country or countries may not take place on all business days in New York.
Furthermore, trading takes place 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 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.
PURCHASE AND REDEMPTION OF SHARES
The following information supplements the section in the Fund's Prospectus
captioned "Purchase of Shares."
PURCHASE OF SHARES
Shares of the Fund are sold in a continuous offering and may be purchased
on any business day through authorized dealers.
ALTERNATIVE SALES ARRANGEMENTS
The Fund issues three classes of shares: Class A shares, Class B shares and
Class C shares. The three classes of shares each represent interests in the same
portfolio of investments of the Fund, have the same rights and are identical in
all respects, except that Class B shares and Class C shares bear the expenses of
the deferred sales arrangements, distribution fees, and any expenses (including
higher transfer agency costs) resulting from such sales arrangements, and except
that each class has exclusive voting rights with respect to the Rule 12b-1
distribution plan pursuant to which its distribution fees are paid.
INVESTMENTS BY MAIL
A shareholder investment account may be opened by completing the
application accompanying the prospectus and forwarding the application, through
the authorized dealer, to ACCESS, at P.O. Box 419319, Kansas City, Missouri
64141-6319. The account is opened only upon acceptance of the application by the
ACCESS. The minimum initial investment of $500 per class of shares, in the form
of a check payable to the Fund, must accompany the application. This minimum may
be waived by the Distributor for plans involving continuing investments. Minimum
subsequent investments of at least $25 per class of shares may be mailed
directly to ACCESS. All such investments are made at the public offering price
of Fund shares next computed following receipt of payment by ACCESS.
Confirmations of the opening of an account and of all subsequent transactions in
the account are forwarded by ACCESS to the investor's authorized dealer.
In processing applications and investments, ACCESS acts as agent for the
investor and for the authorized dealer named thereon, and also as agent for the
Distributor, in accordance with the terms of the Prospectus. If ACCESS ceases to
act as such, a successor company named by the Fund will act in the same
capacities so long as the account remains open.
CUMULATIVE PURCHASE DISCOUNT
The reduced sales charges reflected in the sales charge table as shown in
the Prospectus under "Purchase of Shares -- Class A Shares" apply to purchases
of Class A shares of the Fund where the aggregate investment is $100,000 or
more. For purposes of determining eligibility for volume discounts, spouses and
their children under 21 years of age are treated as a single purchaser, as is a
trustee or other fiduciary of a single trust estate or a single fiduciary
account. An aggregate investment includes all shares of the Fund and all shares
of certain other participating Van Kampen American Capital mutual funds
described in the Prospectus (the "Participating Funds") which have been
previously purchased and are still owned, plus the shares being
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<PAGE> 88
purchased. The current offering price is used to determine the value of all such
shares. The same reduction is applicable to purchases under a Letter of Intent
as described in the next paragraph. 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
Purchases of Class A shares of the Participating Funds described above
under "Cumulative Purchase Discount," made pursuant to the Letter of Intent and
still owned are also included in determining the applicable quantity discount. A
Letter of Intent permits an investor to establish a total investment goal to be
achieved by any number of investments over a thirteen-month period. Each
investment made during the period will receive the reduced sales charge
applicable to the amount represented by the goal as if it were a single
investment. Escrowed shares totaling 5% of the dollar amount of the Letter of
Intent are held by ACCESS in the name of the shareholder. The effective date of
a Letter of Intent may be back-dated up to 90 days in order that any investments
made during this 90-day period, valued at the investor's cost, can become
subject to the Letter of Intent. 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 escrowed 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 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 investments in the amount of $1,000,000 or more of Class A shares of
the Fund ("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 causes 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. 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.
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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 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 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 (the
"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 such Fund without the imposition of a CDSC -- Class
B and C may not exceed
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<PAGE> 90
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.
(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 CDSC -- Class B and C will be waived upon
such involuntary redemption.
(e) Reinvestment of Redemption Proceeds in Shares of the Same Fund Within
120 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 120 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 exchanged 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.
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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.
TAX STATUS OF THE FUND
The Trust and any of its series, including the Fund, will be treated as
separate corporations for federal income tax purposes. The Fund intends 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 ended
December 31, 1996 was 33.17% and (ii) the two year and seven month period ended
December 31, 1996 was 17.55%. 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 ended December 31, 1996 was 34.82% and (ii) the two year
and seven month period ended December 31, 1996 was 18.01%. The average annual
total return (computed in the manner described in the Prospectus) for Class C
shares of the Fund for (i) the one year period ended December 31, 1996 was
37.86% and (ii) the two year and seven month period ended December 31, 1996 was
18.99%. 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.
From time to time, in reports or other communications, or in advertising or
sales materials the Adviser may graphically illustrate the relative average
annual returns of the following categories for the prior 10-year period:
Inflation, Short-Term Government Securities, Long-Term Government Securities,
Equity REITs and Common Stocks.
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;
(3) illustrate allocations among different types of mutual funds for investors
at different stages of their lives; and (4) 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 Funds.
The Fund's primary investment objective is to seek to provide long-term
growth of capital. Current income is a secondary investment objective. The Fund
seeks to achieve its investment objectives by investing principally in
securities of companies in the real estate industry. In addition, Fund attempts
to remain fully invested to achieve consistent long-term performance. Investment
real estate is an asset class that often is overlooked by investors. Now, with
many real estate investment trusts being publicly traded, investors have an
opportunity to add this important asset to their portfolios.
B-29
<PAGE> 92
OTHER INFORMATION
CUSTODY OF ASSETS -- All securities owned by the Fund and all cash, including
proceeds from the sale of shares of the Fund and of securities in the Fund's
investment portfolio, are held by State Street Bank and Trust Company, 225
Franklin Street, Boston, Massachusetts 02110, as Custodian.
SHAREHOLDER REPORTS -- Semi-annual 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 annual
audits of the Fund's financial statements.
B-30
<PAGE> 93
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Trustees of
Van Kampen American Capital Real Estate Securities 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 mate-
rial respects, the financial position of Van Kampen American Capital Real Es-
tate Securities Fund (the "Fund") at December 31, 1996 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 re-
ferred to as "financial statements") are the responsibility of the Fund's man-
agement; 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 re-
quire 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 dis-
closures in the financial statements, assessing the accounting principles used
and significant estimates made by management, and evaluating the overall finan-
cial statement presentation. We believe that our audits, which included confir-
mation of securities at December 31, 1996 by correspondence with the custodian,
provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Houston, Texas
February 7, 1997
B-31
<PAGE> 94
PORTFOLIO OF INVESTMENTS
December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number
of Shares Description Market Value
- --------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS
APARTMENTS 19.0%
55,100 Ambassador Apartments, Inc............................. $ 1,301,737
38,000 Avalon Properties, Inc................................. 1,092,500
44,500 Bay Apartment Communities, Inc......................... 1,602,000
43,300 BRE Properties, Inc., Class A.......................... 1,071,675
34,800 Camden Property Trust.................................. 996,150
36,900 Columbus Realty Trust.................................. 839,475
33,600 Equity Residential Properties Trust.................... 1,386,000
35,100 Gables Residential Trust............................... 1,017,900
30,000 Oasis Residential, Inc................................. 682,500
42,800 Summit Properties, Inc................................. 946,950
-----------
10,936,887
-----------
HEALTHCARE FACILITIES 4.2%
38,900 Nationwide Health Properties, Inc...................... 943,325
44,490 Omega Healthcare Investors, Inc........................ 1,479,293
-----------
2,422,618
-----------
HOTEL & LODGING 12.3%
35,400 American General Hospitality Corp...................... 840,750
21,700 Felcor Suite Hotels, Inc............................... 767,638
42,900 Franchise Finance Corp. of America..................... 1,185,113
78,700 Innkeepers USA Trust................................... 1,091,962
28,200 Patriot American Hospitality, Inc...................... 1,216,125
35,600 Starwood Lodging Trust................................. 1,962,450
-----------
7,064,038
-----------
MANUFACTURED HOME COMMUNITIES 2.1%
34,300 Sun Communities, Inc................................... 1,183,350
-----------
OFFICE/INDUSTRIAL 27.2%
46,800 Arden Realty Group, Inc................................ 1,298,700
34,500 Beacon Properties Corp................................. 1,263,563
67,000 Bedford Property Investors, Inc........................ 1,172,500
50,300 Cali Realty Corp....................................... 1,553,012
38,900 CarrAmerica Realty Corp................................ 1,137,825
26,300 Crescent Real Estate Equities Trust.................... 1,387,325
45,700 First Industrial Realty Trust, Inc..................... 1,388,137
34,800 Highwoods Properties, Inc.............................. 1,174,500
50,000 Meridan Industrial Trust, Inc.......................... 1,050,000
29,600 Reckson Associates Realty Corp......................... 1,250,600
34,500 Security Capital Industrial Trust...................... 737,438
33,600 Spieker Properties, Inc................................ 1,209,600
28,900 Trinet Corporate Realty Trust, Inc..................... 1,025,950
-----------
15,649,150
-----------
</TABLE>
B-32
See Notes to Financial Statements
<PAGE> 95
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number
of Shares Description Market Value
- --------------------------------------------------------------------------------
<S> <C> <C>
SELF-STORAGE 5.6%
56,700 Public Storage, Inc................................... $ 1,757,700
53,400 Storage Trust Realty.................................. 1,441,800
-----------
3,199,500
-----------
SHOPPING CENTERS 11.9%
72,600 Bradley Real Estate, Inc.............................. 1,306,800
53,000 Excel Realty Trust, Inc............................... 1,344,875
48,600 JDN Realty Corp....................................... 1,342,575
28,100 Kimco Realty Corp..................................... 979,987
29,200 Regency Realty Corp................................... 766,500
20,500 Vornado Realty Trust.................................. 1,076,250
-----------
6,816,987
-----------
SHOPPING MALLS 10.0%
33,300 CBL & Associates Properties, Inc...................... 861,638
55,900 JP Realty, Inc........................................ 1,446,412
48,200 Macerich Co........................................... 1,259,225
53,684 Simon DeBartolo Group, Inc............................ 1,664,204
17,800 Urban Shopping Centers, Inc........................... 516,200
-----------
5,747,679
-----------
TOTAL LONG-TERM INVESTMENTS 92.3%
(Cost $41,123,617) (a).......................................... 53,020,209
REPURCHASE AGREEMENT 6.2%
Lehman Brothers, Inc. ($3,560,000 par collateralized by U.S.
Government obligations in a pooled cash account, 6.75% coupon,
dated 12/31/96, to be sold on 01/02/97 at $3,561,335)........... 3,560,000
OTHER ASSETS IN EXCESS OF LIABILITIES 1.5%....................... 890,089
-----------
NET ASSETS 100.0%................................................ $57,470,298
-----------
</TABLE>
(a) At December 31, 1996, for federal income tax purposes cost is $41,142,739;
the aggregate gross unrealized appreciation is $11,882,426 and the
aggregate gross unrealized depreciation is $4,956, resulting in net
unrealized appreciation of $11,877,470.
B-33
See Notes to Financial Statements
<PAGE> 96
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Long-Term Investments, at Market Value (Cost $41,123,617) (Note
1)................................................................ $53,020,209
Repurchase Agreement (Note 1)..................................... 3,560,000
Cash.............................................................. 2,151
Receivables:
Fund Shares Sold................................................. 755,700
Dividends........................................................ 337,142
Unamortized Organizational Expenses (Note 1)...................... 7,800
Other............................................................. 995
-----------
Total Assets..................................................... 57,683,997
-----------
LIABILITIES:
Payables:
Fund Shares Repurchased.......................................... 64,448
Distributor and Affiliates (Note 2).............................. 48,589
Investment Advisory Fee (Note 2)................................. 41,915
Income and Capital Gain Distributions............................ 6,804
Deferred Compensation and Retirement Plans (Note 2)............... 11,919
Accrued Expenses.................................................. 40,024
-----------
Total Liabilities................................................ 213,699
-----------
NET ASSETS........................................................ $57,470,298
-----------
NET ASSETS CONSIST OF:
Capital (Note 3).................................................. $45,473,856
Net Unrealized Appreciation on Investments........................ 11,896,592
Accumulated Net Realized Gain on Investments...................... 107,270
Accumulated Distributions in Excess of Net Investment Income (Note
1)................................................................ (7,420)
-----------
NET ASSETS........................................................ $57,470,298
-----------
MAXIMUM OFFERING PRICE PER SHARE:
Class A Shares:
Net asset value and redemption price per share (Based on net
assets of $23,306,753 and 1,791,710 shares of beneficial interest
issued and outstanding).......................................... $ 13.01
Maximum sales charge (4.75%* of offering price).................. .65
-----------
Maximum offering price to public................................. $ 13.66
-----------
Class B Shares:
Net asset value and offering price per share (Based on net assets
of $26,511,420 and 2,038,095 shares of beneficial interest issued
and outstanding)................................................. $ 13.01
-----------
Class C Shares:
Net asset value and offering price per share (Based on net assets
of $7,652,125 and 588,677 shares of beneficial interest issued
and outstanding)................................................. $ 13.00
-----------
</TABLE>
*On sales of $100,000 or more, the sales charge will be reduced.
B-34
See Notes to Financial Statements
<PAGE> 97
STATEMENT OF OPERATIONS
For the Year Ended December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividends.......................................................... $ 1,733,960
Interest........................................................... 70,343
-----------
Total Income...................................................... 1,804,303
-----------
EXPENSES:
Investment Advisory Fee (Note 2)................................... 312,156
Distribution (12b-1) and Service Fees (Attributed to Classes A, B
and C of $29,695, $150,884 and $42,491, respectively) (Note 5).... 223,070
Shareholder Services (Note 2)...................................... 142,460
Registration and Filing Fees....................................... 84,265
Accounting......................................................... 58,842
Printing........................................................... 55,039
Trustees Fees and Expenses (Note 2)................................ 15,631
Legal (Note 2)..................................................... 5,669
Amortization of Organizational Expenses (Note 1)................... 3,284
Other ............................................................. 65,856
-----------
Total Expenses.................................................... 966,272
Less Expenses Reimbursed (Note 2) ................................ 4,500
-----------
Net Expenses...................................................... 961,772
-----------
NET INVESTMENT INCOME.............................................. $ 842,531
-----------
REALIZED AND UNREALIZED GAIN/LOSS ON SECURITIES:
Net Realized Gain on Investments................................... $ 2,148,797
-----------
Unrealized Appreciation/Depreciation on Securities:
Beginning of the Period........................................... 2,160,856
End of the Period:
Investments....................................................... 11,896,592
-----------
Net Unrealized Appreciation on Securities During the Period........ 9,735,736
-----------
NET REALIZED AND UNREALIZED GAIN ON SECURITIES..................... $11,884,533
-----------
NET INCREASE IN NET ASSETS FROM OPERATIONS......................... $12,727,064
-----------
</TABLE>
B-35
See Notes to Financial Statements
<PAGE> 98
STATEMENT OF CHANGES IN NET ASSETS
For the Years Ended December 31, 1996 and 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1996 December 31, 1995
- -------------------------------------------------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income................... $ 842,531 $ 459,194
Net Realized Gain on Securities......... 2,148,797 91,899
Net Unrealized Appreciation on
Securities During the Period............ 9,735,736 1,906,293
----------- -----------
Change in Net Assets from Operations.... 12,727,064 2,457,386
----------- -----------
Distributions from Net Investment
Income.................................. (842,531) (458,414)
Distributions in Excess of Net
Investment Income (Note 1).............. (144,086) (4,194)
----------- -----------
Distributions from and in Excess of Net
Investment Income*...................... (986,617) (462,608)
Return of Capital Distribution* (Note
1)...................................... -0- (272,249)
Distributions from Net Realized Gain on
Securities (Note 1)*.................... (1,848,388) -0-
----------- -----------
Total Distributions..................... (2,835,005) (734,857)
----------- -----------
NET CHANGE IN NET ASSETS FROM INVESTMENT
ACTIVITIES.............................. 9,892,059 1,722,529
----------- -----------
FROM CAPITAL TRANSACTIONS (NOTE 3):
Proceeds from Shares Sold............... 28,516,882 13,999,412
Net Asset Value of Shares Issued Through
Dividend Reinvestment................... 2,353,502 563,747
Cost of Shares Repurchased.............. (6,887,785) (7,692,332)
----------- -----------
NET CHANGE IN NET ASSETS FROM CAPITAL
TRANSACTIONS............................ 23,982,599 6,870,827
----------- -----------
TOTAL INCREASE IN NET ASSETS............ 33,874,658 8,593,356
NET ASSETS:
Beginning of the Period................. 23,595,640 15,002,284
----------- -----------
End of the Period (Including accumulated
distributions in excess of net
investment income of $7,420 and $3,453,
respectively).......................... $57,470,298 $23,595,640
----------- -----------
</TABLE>
<TABLE>
<CAPTION>
Year Ended Year Ended
*Distributions by Class December 31, 1996 December 31, 1995
---------------------------------------------------------------------------
<S> <C> <C>
Distributions from and in Excess of
Net Investment Income (Note 1):
Class A Shares.................... $ (433,206) $(187,314)
Class B Shares.................... (431,231) (232,040)
Class C Shares.................... (122,180) (43,254)
----------- ---------
$ (986,617) $(462,608)
----------- ---------
Return of Capital Distribution
(Note 1):
Class A Shares.................... $ -0- $(110,152)
Class B Shares.................... -0- (136,629)
Class C Shares.................... -0- (25,468)
----------- ---------
$ -0- $(272,249)
----------- ---------
Distributions from Net Realized
Gain on Securities (Note 1):
Class A Shares.................... $ (717,981) $ -0-
Class B Shares.................... (877,571) -0-
Class C Shares.................... (252,836) -0-
----------- ---------
$(1,848,388) $ -0-
----------- ---------
</TABLE>
See Notes to Financial Statements
B-36
<PAGE> 99
FINANCIAL HIGHLIGHTS
The following schedule presents financial highlights for one share of the Fund
outstanding throughout the periods indicated.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 9, 1994
(Commencement of
Investment
Year Ended Year Ended Operations) to
December 31, December 31, December 31,
Class A Shares 1996 1995 (a) 1994 (a)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value, Beginning of the
Period........................... $10.00 $9.27 $9.43
------- ------ -----
Net Investment Income........... .351 .27 .23
Net Realized and Unrealized
Gain/Loss on Securities....... 3.514 .85 (.18)
------- ------ -----
Total from Investment Operations. 3.865 1.12 .05
------- ------ -----
Less:
Distributions from and in Excess
of Net Investment Income (Note
1)............................. .380 .2456 .153
Return of Capital Distribution
(Note 1)........................ -0- .1444 .057
Distributions from Net Realized
Gain on Securities (Note 1)... .477 -0- -0-
------- ------ -----
Total Distributions.............. .857 .39 .21
------- ------ -----
Net Asset Value, End of the
Period........................... $13.008 $10.00 $9.27
------- ------ -----
Total Return (b)................. 39.82% 12.39% .24%(c)
Net Assets at End of the Period
(In millions).................... $23.3 $8.5 $4.6
Ratio of Expenses to Average Net
Assets**......................... 2.60% 2.67% 1.26%
Ratio of Net Investment Income to
Average Net Assets**............. 3.21% 2.92% 4.28%
Portfolio Turnover............... 97% 94% 28%*
Average Commission Paid Per
Equity Share Traded (d).......... $.0486 -- --
*Non-Annualized
**If certain expenses had not been assumed by VKAC, total return would have been
lower and the ratios would have been as follows:
Ratio of Expenses to Average Net
Assets........................... 2.61% 3.16% 3.03%
Ratio of Net Investment Income to
Average Net Assets............... 3.19% 2.44% 2.52%
</TABLE>
(a) Based on average 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) Total return calculated from June 30, 1994 (date the Fund's investment
strategy was implemented) through December 31, 1994, non-annualized.
(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-37
See Notes to Financial Statements
<PAGE> 100
FINANCIAL HIGHLIGHTS (CONTINUED)
The following schedule presents financial highlights for one share of the Fund
outstanding throughout the periods indicated.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 9, 1994
(Commencement of
Investment
Year Ended Year Ended Operations) to
December 31, December 31, December 31,
Class B Shares 1996 1995 (a) 1994 (a)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value, Beginning of
the Period...................... $10.00 $9.28 $9.43
------- ------ -----
Net Investment Income.......... .266 .19 .20
Net Realized and Unrealized
Gain/Loss on Securities...... 3.519 .843 (.176)
------- ------ -----
Total from Investment
Operations...................... 3.785 1.033 .024
------- ------ -----
Less:
Distributions from and in
Excess of Net Investment
Income (Note 1)............... .300 .197 .1268
Return of Capital Distribution
(Note 1)....................... -0- .116 .0472
Distributions from Net Realized
Gain on Securities (Note 1).. .477 -0- -0-
------- ------ -----
Total Distributions............. .777 .313 .174
------- ------ -----
Net Asset Value, End of the
Period.......................... $13.008 $10.00 $9.28
------- ------ -----
Total Return (b)................ 38.82% 11.37% (.04%)(c)
Net Assets at End of the Period
(In millions)................... $26.5 $12.0 $9.1
Ratio of Expenses to Average Net
Assets**........................ 3.37% 3.50% 1.84%
Ratio of Net Investment Income
to Average Net Assets**......... 2.39% 2.07% 3.81%
Portfolio Turnover.............. 97% 94% 28%*
Average Commission Paid Per
Equity Share Traded (d)......... $.0486 -- --
*Non-Annualized
**If certain expenses had not been assumed by VKAC, total return would have been
lower and the ratios would have been as follows:
Ratio of Expenses to Average Net
Assets.......................... 3.39% 3.99% 3.60%
Ratio of Net Investment Income
to Average Net Assets........... 2.37% 1.58% 2.05%
</TABLE>
(a) Based on average 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) Total return calculated from June 30, 1994 (date the Fund's investment
strategy was implemented) through December 31, 1994, non-annualized.
(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-38
See Notes to Financial Statements
<PAGE> 101
FINANCIAL HIGHLIGHTS (CONTINUED)
The following schedule presents financial highlights for one share of the Fund
outstanding throughout the periods indicated.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 9, 1994
(Commencement of
Investment
Year Ended Year Ended Operations) to
December 31, December 31, December 31,
Class C Shares 1996 1995(a) 1994(a)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value, Beginning of the
Period........................... $9.99 $9.28 $9.43
------- ------ -----
Net Investment Income........... .266 .20 .22
Net Realized and Unrealized
Gain/Loss on Securities....... 3.520 .823 (.178)
------- ------ -----
Total from Investment Operations. 3.786 1.023 .042
------- ------ -----
Less:
Distributions from and in Excess
of Net Investment Income (Note
1)............................. .300 .197 .1399
Return of Capital Distribution
(Note 1)........................ -0- .116 .0521
Distributions from Net Realized
Gain on Securities (Note 1)... .477 -0- -0-
------- ------ -----
Total Distributions.............. .777 .313 .192
------- ------ -----
Net Asset Value, End of the
Period........................... $12.999 $9.99 $9.28
------- ------ -----
Total Return (b)................. 38.86% 11.26% .15%(c)
Net Assets at End of the Period
(In millions).................... $7.7 $3.1 $1.3
Ratio of Expenses to Average Net
Assets**......................... 3.38% 3.54% 1.62%
Ratio of Net Investment Income to
Average Net Assets**............. 2.39% 2.11% 3.92%
Portfolio Turnover............... 97% 94% 28%*
Average Commission Paid Per
Equity Share Traded (d).......... $ .0486 -- --
*Non-Annualized.
**If certain expenses had not been assumed by VKAC, total return would have been
lower and the ratios would have been as follows:
Ratio of Expenses to Average Net
Assets........................... 3.40% 4.03% 3.38%
Ratio of Net Investment Income to
Average Net Assets............... 2.38% 1.62% 2.15%
</TABLE>
(a) Based on average 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) Total return calculated from June 30, 1994 (date the Fund's investment
strategy was implemented) through December 31, 1994, non-annualized.
(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-39
See Notes to Financial Statements
<PAGE> 102
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
Van Kampen American Capital Real Estate Securities Fund (the "Fund") is orga-
nized as 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 primary investment objective is to seek long-term growth of
capital by investing principally in securities of companies operating in the
real estate industry. The Fund commenced investment operations on June 9, 1994.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The prepa-
ration 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 as-
sets 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 ex-
change are valued at their sale price as of the close of such securities ex-
change. Unlisted securities and listed securities for which the last sales
price is not available are valued at the last bid price. For those securities
where quotations or prices are not available, valuations are determined in ac-
cordance 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 invest-
ments 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 re-
purchase agreements. Repurchase agreements are fully collateralized by the un-
derlying debt security. The Fund will make payment for such securities 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.
B-40
<PAGE> 103
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1996
- --------------------------------------------------------------------------------
C. INVESTMENT INCOME--Dividend income is recorded on the ex-dividend date and
interest income is recorded on an accrual basis.
D. 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 $16,000. These
costs are being amortized on a straight line basis over the 60 month period
ending May 31, 1999. Van Kampen American Capital Asset Management Inc. (the
"Adviser") has agreed that in the event any of the initial shares of the Fund
originally purchased by VKAC are redeemed by the Fund during the amortization
period, the Fund will be reimbursed for any unamortized organizational expenses
in the same proportion as the number of shares redeemed bears to the number of
initial shares held at the time of redemption.
E. FEDERAL INCOME TAXES--It is the Fund's policy to comply with the require-
ments 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.
Net realized gains or losses may differ for financial reporting and tax pur-
poses primarily as a result of the deferral of losses for tax purposes result-
ing from wash sales.
F. DISTRIBUTION OF INCOME AND GAINS--The Fund declares and pays dividends quar-
terly from net investment income. Net realized gains, if any, are distributed
annually. Distributions from net realized gains for book purposes may include
short-term capital gains. All short-term capital gains are included in ordinary
income for tax purposes.
The Fund distributes the return of capital it receives from the Real Estate
Investment Trusts (the "REITs") in which the Fund invests. The REITs pay dis-
tributions based on cash flow, without regard to depreciation and amortization.
As a result, a portion of the distributions paid to the Fund and subsequently
distributed to shareholders may be a return of capital.
Due to inherent differences in the recognition of income, expenses and real-
ized gains/losses under generally accepted accounting principles and federal
income tax purposes, permanent differences between book and tax basis reporting
for the 1996 fiscal year have been identified and appropriately reclassified.
As a result, permanent differences relating to the characterization of distri-
butions for tax purposes totaling $122,095 were reclassified from accumulated
undistributed net investment income to accumulated net realized gain on securi-
ties. Additionally, permanent differences relating to certain expenses which
are not deductible for tax purposes totaling $18,024 were reclassified from ac-
cumulated undistributed net investment income to capital.
B-41
<PAGE> 104
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1996
- --------------------------------------------------------------------------------
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 equal to
1.00% of the average net assets of the Fund. This fee is payable monthly. Dur-
ing the period, the Adviser had a subadvisory agreement with Hines Interest Re-
alty Advisers Limited Partnership ("Hines"), who provided advisory services to
the Fund and the Adviser with respect to the Fund's investments in real estate.
The Adviser paid 50% of its investment advisory fee to Hines for these servic-
es. Effective December 31, 1996, the subadvisory agreement was terminated.
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.
For the year ended December 31, 1996, the Fund recognized expenses of approx-
imately $58,800 representing Van Kampen American Capital Distributors, Inc.'s
or its affiliates' (collectively "VKAC") 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 De-
cember 31, 1996, the Fund recognized expenses of approximately $115,300, repre-
senting ACCESS' cost of providing transfer agency and shareholder services plus
a profit.
For the year ended December 31, 1996, the Fund reimbursed VKAC approximately
$18,000 related to the direct cost of consolidating the VKAC open-end fund com-
plex. Payment was contingent upon the realization by the Fund of cost
effeciencies in shareholder services resulting from the consolidation.
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 has implemented deferred compensation and retirement plans for its
trustees. Under the deferred compensation plan, trustees may elect to defer all
or a portion of their compensation to a later date. The retirement plan covers
those trustees who are not officers of VKAC. For the year ended December 31,
1996 VKAC reimbursed the Fund for all expenses related to the retirement plan.
At December 31, 1996, VKAC owned 30,044 and 53 shares of Classes A and B,
respectively.
B-42
<PAGE> 105
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1996
- --------------------------------------------------------------------------------
3. CAPITAL TRANSACTIONS
The Fund has outstanding three classes of shares of beneficial interest, Clas-
ses 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 December 31, 1996, capital aggregated $18,669,483, $20,711,364 and
$6,093,009 for Classes A, B, and C, respectively. For the year ended December
31, 1996, transactions were as follows:
<TABLE>
<CAPTION>
SHARES VALUE
- -------------------------------------------------------------------------------
<S> <C> <C>
Sales:
Class A............................................... 1,142,133 $13,064,447
Class B............................................... 1,012,720 11,615,644
Class C............................................... 336,995 3,836,791
--------- -----------
Total Sales............................................ 2,491,848 $28,516,882
--------- -----------
Dividend Reinvestment:
Class A............................................... 89,245 $ 1,046,880
Class B............................................... 86,852 1,022,967
Class C............................................... 24,037 283,655
--------- -----------
Total Dividend Reinvestment............................ 200,134 $ 2,353,502
--------- -----------
Repurchases:
Class A............................................... (289,138) $(3,174,901)
Class B............................................... (265,477) (2,844,469)
Class C............................................... (78,881) (868,415)
--------- -----------
Total Repurchases...................................... (633,496) $(6,887,785)
--------- -----------
</TABLE>
B-43
<PAGE> 106
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1996
- --------------------------------------------------------------------------------
At December 31, 1995, capital aggregated $7,740,366, $10,925,536 and
$2,843,379 for Classes A, B, and C, respectively. For the year ended December
31, 1995, transactions were as follows:
<TABLE>
<CAPTION>
SHARES VALUE
- -------------------------------------------------------------------------------
<S> <C> <C>
Sales:
Class A............................................... 646,768 $ 6,021,837
Class B............................................... 622,484 5,774,399
Class C............................................... 233,898 2,203,176
--------- -----------
Total Sales............................................ 1,503,150 $13,999,412
--------- -----------
Dividend Reinvestment:
Class A............................................... 25,453 $ 242,173
Class B............................................... 27,485 259,807
Class C............................................... 6,486 61,767
--------- -----------
Total Dividend Reinvestment............................ 59,424 $ 563,747
--------- -----------
Repurchases:
Class A............................................... (321,567) $(3,030,909)
Class B............................................... (425,761) (3,987,424)
Class C............................................... (72,725) (673,999)
--------- -----------
Total Repurchases...................................... (820,053) $(7,692,332)
--------- -----------
</TABLE>
B-44
<PAGE> 107
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1996
- --------------------------------------------------------------------------------
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 for Class B and
C shares will be imposed on most redemptions made within five years of the pur-
chase 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 respec-
tive deferred sales arrangements, including higher distribution and service
fees and incremental transfer agency costs.
<TABLE>
<CAPTION>
CONTINGENT
DEFERRED SALES
CHARGE
---------------
YEAR OF REDEMPTION CLASS B CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C>
First........................................................... 4.00% 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 December 31, 1996, VKAC, as Distributor for the Fund, re-
ceived net commissions on sales of the Fund's Class A shares of approximately
$20,900 and CDSC on the redeemed shares of approximately $51,700. Sales charges
do not represent expenses of the Fund.
4. INVESTMENT TRANSACTIONS
During the period, the cost of purchases and proceeds from sales of invest-
ments, excluding short-term investments, were $48,039,509 and $29,581,317, re-
spectively.
5. 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 (collec-
tively the "Plans"). The Plans govern payments for the distribution of the
Fund's shares, ongoing shareholder services and maintenance of shareholder ac-
counts.
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 December 31, 1996, are payments to VKAC of approxi-
mately $156,400.
B-45
<PAGE> 108
APPENDIX C
STATEMENT OF ADDITIONAL INFORMATION
OF
MORGAN STANLEY FUND, INC.
DATED OCTOBER 28, 1997
<PAGE> 109
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> 110
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> 111
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> 112
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> 113
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
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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
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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.
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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.
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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.
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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.
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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,
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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
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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
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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.
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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.
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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).
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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
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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.
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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.
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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).
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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);
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(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;
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(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;
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<PAGE> 132
(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");
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<PAGE> 133
(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
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<PAGE> 134
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>
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<PAGE> 135
<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> 136
<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> 137
<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> 138
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.
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<PAGE> 139
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.
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<PAGE> 140
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
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<PAGE> 141
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> 142
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> 143
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> 144
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> 145
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> 146
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> 147
<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> 148
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> 149
(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> 150
(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> 151
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> 152
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> 153
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> 154
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> 155
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> 156
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> 157
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> 158
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> 159
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> 160
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> 161
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> 162
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> 163
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> 164
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> 165
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> 166
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> 167
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> 168
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> 169
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> 170
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> 171
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> 172
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> 173
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> 174
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> 175
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> 176
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> 177
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> 178
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> 179
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> 180
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> 181
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> 182
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> 183
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> 184
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> 185
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> 186
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> 187
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> 188
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> 189
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> 190
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> 191
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> 192
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> 193
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> 194
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> 195
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> 196
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> 197
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> 198
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> 199
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> 200
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> 201
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> 202
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> 203
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> 204
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> 205
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> 206
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> 207
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> 208
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> 209
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> 210
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> 211
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> 212
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> 213
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> 214
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> 215
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> 216
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> 217
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> 218
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> 219
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> 220
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> 221
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> 222
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> 223
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> 224
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> 225
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> 226
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> 227
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> 228
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> 229
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> 230
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> 231
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> 232
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> 233
APPENDIX D
VAN KAMPEN AMERICAN CAPITAL REAL ESTATE SECURITIES FUND
FINANCIAL STATEMENTS
DECEMBER 31, 1997
<PAGE> 234
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES OF
VAN KAMPEN AMERICAN CAPITAL REAL ESTATE SECURITIES 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 Real
Estate Securities Fund (the "Fund") at December 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 December 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
Chicago, Illinois
February 6, 1998
D-1
<PAGE> 235
PORTFOLIO OF INVESTMENTS
December 31, 1997
<TABLE>
<CAPTION>
Number
of Shares Description Market Value
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON AND PREFERRED STOCKS 95.6%
APARTMENTS 18.7%
12,600 Amli Residential Properties Trust......................................... $ 280,350
112,800 Avalon Properties, Inc.................................................... 3,489,750
148,900 Bay Apartment Communities, Inc............................................ 5,807,100
155,900 Essex Property Trust, Inc................................................. 5,456,500
21,900 Irvine Apartment Communities, Inc......................................... 696,694
128,100 Oasis Residential, Inc.................................................... 2,858,231
41,100 Pennsylvania Real Estate Investment....................................... 1,009,519
182,458 Security Capital Atlantic, Inc............................................ 3,854,425
122,700 Walden Residential Properties, Inc........................................ 3,128,850
----------
26,581,419
----------
DEVELOPMENT 4.7%
192,680 Atlantic Gulf Communities Corp. (a)....................................... 867,060
24,741 Atlantic Gulf Communities Corp. - Convertible Preferred Ser B (a)......... 247,410
35,402 Atlantic Gulf Communities Corp. - Convertible Preferred Ser B,
144A - Private Placement (a) (b).......................................... 354,020
49,482 Atlantic Gulf Communities Corp. Warrants, 16,494 shares of each
Class A, B and C, expiring 06/23/04 (a)................................... 72,805
100,191 Atlantic Gulf Communities Corp. Warrants, 33,397 shares of each
Class A, B and C, expiring 06/24/01, 144A
- Private Placement (a) (b)............................................... 0
212,500 Brookfield Properties Corp................................................ 3,542,375
85,300 Brookfield Properties Corp. - Common Share Installment Receipts (a)....... 1,013,364
28,400 Catellus Development Corp. (a)............................................ 568,000
----------
6,665,034
----------
HEALTHCARE FACILITIES 6.2%
252,500 Nationwide Health Properties, Inc......................................... 6,438,750
62,690 Omega Healthcare Investors, Inc........................................... 2,421,401
----------
8,860,151
----------
HOTEL & LODGING 10.9%
68,000 American General Hospitality Corp......................................... 1,819,000
147,300 Capstar Hotel Co. (a)..................................................... 5,054,231
122,600 Extended Stay America, Inc. (a)........................................... 1,524,838
</TABLE>
D-2 See Notes to Financial statements
<PAGE> 236
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1997
<TABLE>
<CAPTION>
Number
of Shares Description Market Value
HOTEL & LODGING (CONTINUED)
<S> <C> <C>
292,600 Host Marriott Corp. (a).............................................. $ 5,742,275
52,500 Suburban Lodges of America, Inc. (a)................................. 698,906
24,900 Vail Resorts, Inc. (a)............................................... 645,844
-----------
15,485,094
-----------
MANUFACTURED HOME COMMUNITIES 6.6%
208,094 Chateau Properties, Inc.............................................. 6,554,961
104,000 Manufactured Home Communities, Inc................................... 2,808,000
-----------
9,362,961
-----------
OFFICE/INDUSTRIAL 27.7%
210,600 Arden Realty Group, Inc.............................................. 6,475,950
156,000 Bedford Property Investors, Inc...................................... 3,412,500
193,600 Brandywine Realty Trust.............................................. 4,864,200
141,000 CarrAmerica Realty Corp.............................................. 4,467,939
63,986 Equity Office Properties Trust....................................... 2,019,558
143,900 Great Lakes REIT, Inc................................................ 2,797,056
219,900 Pacific Gulf Properties, Inc......................................... 5,222,625
174,200 Prime Group Realty Trust............................................. 3,527,550
46,800 Reckson Associates Realty Corp....................................... 1,187,550
97,900 Trizec Hahn Corp..................................................... 2,270,056
199,020 Wellsford Real Properties, Inc., 144A - Private Placement (a) (b).... 3,109,688
-----------
39,354,672
-----------
PRODUCER MANUFACTURING 0.1%
1,300 ITT Corp. (a)........................................................ 107,738
-----------
SELF-STORAGE 3.2%
33,500 Public Storage, Inc.................................................. 984,062
120,900 Shurgard Storage Centers, Inc., Class A.............................. 3,506,100
-----------
4,490,162
-----------
SHOPPING CENTERS 7.2%
160,400 Burnham Pacific Properties, Inc...................................... 2,456,125
179,500 Federal Realty Investment Trust...................................... 4,622,125
22,300 First Washington Realty Trust, Inc. - Preferred Ser A
(Convertible into 28,589 common shares).............................. 747,050
</TABLE>
D-3
<PAGE> 237
Portfolio of Investments (Continued)
December 31, 1997
<TABLE>
<CAPTION>
Number
of Shares Description Market Value
SHOPPING CENTERS (CONTINUED)
<S> <C> <C>
70,500 Pan Pacific Retail Properties, Inc.................................... $ 1,506,937
800 Ramco-Gershenson Properties Trust..................................... 15,750
59,900 Western Investment Real Estate Trust.................................. 823,625
------------
10,171,612
------------
SHOPPING MALLS 10.3%
137,400 CBL & Associates Properties, Inc...................................... 3,392,062
90,400 First Union Real Estate Investments................................... 1,469,000
572,800 Taubman Centers, Inc.................................................. 7,446,400
65,800 Urban Shopping Centers, Inc........................................... 2,294,775
------------
14,602,237
------------
TOTAL COMMON AND PREFERRED STOCKS 95.6%........................................... 135,681,080
------------
CONVERTIBLE CORPORATE OBLIGATIONS 0.5%
Brookfield Properties Corp. - Installment Receipts
Representing Subordinated Debenture
($868,400 par, 6.00% coupon, 02/14/07 maturity).................................... 698,107
------------
TOTAL LONG-TERM INVESTMENTS 96.1%
(Cost $121,582,426).............................................................. 136,379,187
Repurchase Agreement 5.4%
Swiss Bank Corp. ($7,660,000 par collateralized by U.S.
Government obligations in a pooled cash account, dated 12/31/97, to be sold on
01/02/98 at $7,662,596) (Cost $7,660,000).......................................... 7,660,000
------------
TOTAL INVESTMENTS 101.5%
(Cost $129,242,426).............................................................. 144,039,187
LIABILITIES IN EXCESS OF OTHER ASSETS (1.5%)....................................... (2,091,581)
------------
NET ASSETS 100.0%................................................................. $141,947,606
============
</TABLE>
(a) Non-income producing security as this stock does not declare dividends.
(b) 144A securities are those which are exempt from registration under Rule
144A of the Securities Act of 1933. These securities may only be resold in
transactions exempt from registration which are normally transactions with
qualified institutional buyers.
D-4 See Notes to Financial Statements
<PAGE> 238
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1997
<TABLE>
<S> <C>
ASSETS:
Total Investments (Cost $129,242,426).............................................. $144,039,187
Receivables:
Fund Shares Sold.................................................................. 1,060,434
Dividends......................................................................... 887,143
Investments Sold.................................................................. 320,287
Interest.......................................................................... 17,416
Unamortized Organizational Costs................................................... 4,403
Other.............................................................................. 977
------------
Total Assets...................................................................... 146,329,847
------------
LIABILITIES:
Payables:
Investments Purchased............................................................. 3,881,015
Distributor and Affiliates........................................................ 126,860
Investment Advisory Fee........................................................... 114,763
Income Distributions.............................................................. 91,318
Fund Shares Repurchased........................................................... 69,474
Custodian Bank.................................................................... 10,660
Trustees' Deferred Compensation and Retirement Plans............................... 22,858
Accrued Expenses................................................................... 65,293
------------
Total Liabilities................................................................. 4,382,241
------------
NET ASSETS......................................................................... $141,947,606
============
NET ASSETS CONSIST OF:
Capital............................................................................ $124,906,541
Net Unrealized Appreciation........................................................ 14,796,761
Accumulated Net Realized Gain...................................................... 2,266,205
Accumulated Distributions in Excess of Net Investment Income....................... (21,901)
------------
NET ASSETS......................................................................... $141,947,606
============
MAXIMUM OFFERING PRICE PER SHARE:
Class A Shares:
Net asset value and redemption price per share (Based on net assets of
$51,313,568 and 3,715,666 shares of beneficial interest issued and
outstanding)....................................................................... $13.81
Maximum sales charge (4.75%* of offering price).................................. .69
------------
Maximum offering price to public................................................. $14.50
============
Class B Shares:
Net asset value and offering price per share (Based on net assets of
$73,198,558 and 5,304,248 shares of beneficial interest issued and
outstanding)....................................................................... $13.80
============
Class C Shares:
Net asset value and offering price per share (Based on net assets of
$17,435,480 and 1,264,396 shares of beneficial interest issued and
outstanding)....................................................................... $13.79
============
</TABLE>
*On sales of $100,000 or more, the sales charge will be reduced.
D-5
<PAGE> 239
STATEMENT OF OPERATIONS
For the Year Ended December 31, 1997
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividends............................................................................ $ 4,183,631
Interest............................................................................. 406,183
------------
Total Income........................................................................ 4,589,814
------------
EXPENSES:
Investment Advisory Fee.............................................................. 1,010,205
Distribution (12b-1) and Service Fees (Attributed to Classes A, B and C of $93,668,
$506,509 and $130,234, respectively)............................................... 730,411
Shareholder Services................................................................. 268,613
Registration and Filing Fees......................................................... 80,023
Trustees' Fees and Expenses.......................................................... 13,143
Legal................................................................................ 4,517
Amortization of Organizational Costs................................................. 3,397
Other................................................................................ 155,948
------------
Total Expenses...................................................................... 2,266,257
------------
NET INVESTMENT INCOME................................................................ $ 2,323,557
============
REALIZED AND UNREALIZED GAIN/LOSS:
Net Realized Gain.................................................................... $ 15,177,147
------------
Unrealized Appreciation/Depreciation
Beginning of the Period............................................................. 11,896,592
End of the Period................................................................... 14,796,761
------------
Net Unrealized Appreciation During the Period........................................ 2,900,169
------------
NET REALIZED AND UNREALIZED GAIN..................................................... $ 18,077,316
============
NET INCREASE IN NET ASSETS FROM OPERATIONS........................................... $ 20,400,873
============
</TABLE>
D-6 See Notes to Financial Statements
<PAGE> 240
STATEMENT OF CHANGES IN NET ASSETS
For the Years Ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1997 December 31, 1996
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income............................................ $ 2,323,557 $ 842,531
Net Realized Gain................................................ 15,177,147 2,148,797
Net Unrealized Appreciation During the Period.................... 2,900,169 9,735,736
------------ -----------
Change in Net Assets from Operations............................. 20,400,873 12,727,064
------------ -----------
Distributions from Net Investment Income......................... (2,323,557) (842,531)
Distributions in Excess of Net Investment Income................. (152,383) (144,086)
------------ -----------
Distributions from and in Excess of Net Investment Income*....... (2,475,940) (986,617)
Distributions from Net Realized Gain*............................ (12,883,431) (1,848,388)
------------ -----------
Total Distributions.............................................. (15,359,371) (2,835,005)
------------ -----------
NET CHANGE IN NET ASSETS FROM INVESTMENT ACTIVITIES.............. 5,041,502 9,892,059
------------ -----------
FROM CAPITAL TRANSACTIONS:
Proceeds from Shares Sold........................................ 130,239,448 28,516,882
Net Asset Value of Shares Issued Through
Dividend Reinvestment.......................................... 12,862,961 2,353,502
Cost of Shares Repurchased....................................... (63,666,603) (6,887,785)
------------ -----------
NET CHANGE IN NET ASSETS FROM CAPITAL TRANSACTIONS............... 79,435,806 23,982,599
------------ -----------
TOTAL INCREASE IN NET ASSETS..................................... 84,477,308 33,874,658
NET ASSETS:
Beginning of the Period.......................................... 57,470,298 23,595,640
------------ -----------
End of the Period
(Including accumulated distributions in excess of net
investment income of $21,901 and $7,420 respectively)........... $141,947,606 $57,470,298
============ ===========
</TABLE>
<TABLE>
<CAPTION>
Year Ended Year Ended
*Distributions by Class December 31, 1997 December 31, 1996
<S> <C> <C>
Distributions from and in Excess of
Net Investment Income:
Class A Shares.......................................... $ (1,094,042) $ (433,206)
Class B Shares.......................................... (1,102,759) (431,231)
Class C Shares.......................................... (279,139) (122,180)
------------ -----------
$ (2,475,940) $ (986,617)
============ ===========
Distributions from Net Realized Gain:
Class A Shares.......................................... $ (4,664,049) $ (717,981)
Class B Shares.......................................... (6,626,846) (877,571)
Class C Shares.......................................... (1,592,536) (252,836)
------------ -----------
$(12,883,431) $(1,848,388)
============ ===========
</TABLE>
D-7 See Notes to Financial Statements
<PAGE> 241
FINANCIAL HIGHLIGHTS
The following schedule presents financial highlights for one share of the Fund
outstanding throughout the periods indicated.
<TABLE>
<CAPTION>
June 9, 1994
(Commencement of
Investment
Operations) to
Year Ended December 31, December 31,
Class A Shares 1997 1996 1995 (a) 1994 (a)
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period.......................................... $13.008 $ 10.00 $ 9.27 $9.43
------- ------- ------ -----
Net Investment Income.......................................................... .364 .351 .27 .23
Net Realized and Unrealized Gain/Loss.......................................... 2.220 3.514 .85 (.18)
------- ------- ------ -----
Total from Investment Operations.................................................. 2.584 3.865 1.12 .05
------- ------- ------ -----
Less:
Distributions from and in Excess of
Net Investment Income......................................................... .380 .380 .2456 .153
Return of Capital Distribution................................................. -0- -0- .1444 .057
Distributions from Net Realized Gain........................................... 1.402 .477 -0- -0-
------- ------- ------ -----
Total Distributions............................................................... 1.782 .857 .39 .21
------- ------- ------ -----
Net Asset Value, End of the Period................................................ $13.810 $13.008 $10.00 $9.27
======= ======= ====== =====
Total Return (b).................................................................. 20.66% 39.82% 12.39% .24%(c)
Net Assets at End of the Period (In millions)..................................... $ 51.3 $ 23.3 $ 8.5 $ 4.6
Ratio of Expenses to Average Net Assets**......................................... 1.77% 2.60% 2.67% 1.26%
Ratio of Net Investment Income to
Average Net Assets**............................................................. 2.77% 3.21% 2.92% 4.28%
Portfolio Turnover................................................................ 159% 97% 94% 28%*
Average Commission Paid Per
Equity Share Traded (d).......................................................... $ .0594 $ .0486 - -
</TABLE>
*Non-Annualized
**If certain expenses had not been assumed by VKAC, total return would have
been lower and the ratios would have been as follows:
<TABLE>
<S> <C> <C> <C> <C>
Ratio of Expenses to Average Net Assets........................................... N/A 2.61% 3.16% 3.03%
Ratio of Net Investment Income to
Average Net Assets............................................................... N/A 3.19% 2.44% 2.52%
</TABLE>
N/A = Not Applicable
(a) Based on average 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) Total return calculated from June 30, 1994 (date the Fund's investment
strategy was implemented) through December 31, 1994, non-annualized.
(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 periods prior to 1996.
D-8 See Notes to Financial Statements
<PAGE> 242
FINANCIAL HIGHLIGHTS (CONTINUED)
The following schedule presents financial highlights for one share of the Fund
outstanding throughout the periods indicated.
<TABLE>
<CAPTION>
June 9, 1994
(Commencement of
Investment
Operations) to
Year Ended December 31, December 31,
Class B Shares 1997 1996 1995 (a) 1994 (a)
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period........................................ $13.008 $ 10.00 $ 9.28 $ 9.43
------- ------- ------ ------
Net Investment Income........................................................ .272 .266 .19 .20
Net Realized and Unrealized Gain/Loss........................................ 2.206 3.519 .843 (.176)
------- ------- ------ ------
Total from Investment Operations................................................ 2.478 3.785 1.033 .024
Less: ------- ------- ------ ------
Distributions from and in Excess of
Net Investment Income....................................................... .284 .300 .197 .1268
Return of Capital Distribution............................................... -0- -0- .116 .0472
Distributions from Net Realized Gain......................................... 1.402 .477 -0- -0-
------- ------- ------ ------
Total Distributions............................................................. 1.686 .777 .313 .174
------- ------- ------ ------
Net Asset Value, End of the Period.............................................. $13.800 $13.008 $10.00 $ 9.28
======= ======= ====== ======
Total Return (b)................................................................ 19.76% 38.82% 11.37% (.04%)(c)
Net Assets at End of the Period (In millions)................................... $ 73.2 $ 26.5 $ 12.0 $ 9.1
Ratio of Expenses to Average Net Assets**....................................... 2.52% 3.37% 3.50% 1.84%
Ratio of Net Investment Income to
Average Net Assets**........................................................... 2.03% 2.39% 2.07% 3.81%
Portfolio Turnover.............................................................. 159% 97% 94% 28%*
Average Commission Paid Per
Equity Share Traded (d)........................................................ $ .0594 $ .0486 - -
</TABLE>
*Non-Annualized
**If certain expenses had not been assumed by VKAC, total return would have
been lower and the ratios would have been as follows:
<TABLE>
<S> <C> <C> <C> <C>
Ratio of Expenses to Average Net Assets......................................... N/A 3.39% 3.99% 3.60%
Ratio of Net Investment Income to
Average Net Assets............................................................ N/A 2.37% 1.58% 2.05%
</TABLE>
N/A = Not Applicable
(a) Based on average 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) Total return calculated from June 30, 1994 (date the Fund's investment
strategy was implemented) through December 31, 1994, non-annualized.
(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 periods prior to 1996.
D-9 See Notes to Financial Statements
<PAGE> 243
FINANCIAL HIGHLIGHTS (CONTINUED)
The following schedule presents financial highlights for one share of the Fund
outstanding throughout the periods indicated.
<TABLE>
<CAPTION>
June 9, 1994
(Commencement of
Investment
Operations) to
Year Ended December 31, December 31,
Class C Shares 1997 1996 1995 (a) 1994 (a)
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period........................................... $12.999 $ 9.99 $ 9.28 $ 9.43
------- ------- ------ ------
Net Investment Income............................................................ .271 .266 .20 .22
Net Realized and Unrealized Gain/Loss............................................ 2.206 3.520 .823 (.178)
------- ------- ------ ------
Total from Investment Operations................................................... 2.477 3.786 1.023 .042
------- ------- ------ ------
Less:
Distributions from and in Excess of
Net Investment Income........................................................... .284 .300 .197 .1399
Return of Capital Distribution.................................................. -0- -0- .116 .0521
Distributions from Net Realized Gain............................................ 1.402 .477 -0- -0-
------- ------- ------ ------
Total Distribution................................................................. 1.686 .777 .313 .192
------- ------- ------ ------
Net Asset Value, End of the Period................................................. $13.790 $12.999 $ 9.99 $ 9.28
======= ======= ====== ======
Total Return (b)................................................................... 19.78% 38.86% 11.26% .15%(c)
Net Assets at End of the Period (In millions)...................................... $ 17.4 $ 7.7 $ 3.1 $ 1.3
Ratio of Expenses to Average Net Assets**.......................................... 2.52% 3.38% 3.54% 1.62%
Ratio of Net Investment Income to
Average Net Assets**............................................................. 2.00% 2.39% 2.11% 3.92%
Portfolio Turnover................................................................. 159% 97% 94% 28%*
Average Commission Paid Per
Equity Share Traded (d).......................................................... $ .0594 $ .0486 - -
</TABLE>
*Non-Annualized.
**If certain expenses had not been assumed by VKAC, total return would have
been lower and the ratios would have been as follows:
<TABLE>
<S> <C> <C> <C> <C>
Ratio of Expenses to Average Net Assets............................................ N/A 3.40% 4.03% 3.38%
Ratio of Net Investment Income to
Average Net Assets................................................................. N/A 2.38% 1.62% 2.15%
</TABLE>
N/A = Not Applicable
(a) Based on average 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) Total return calculated from June 30, 1994 (date the Fund's investment
strategy was implemented) through December 31, 1994, non-annualized.
(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 periods prior to 1996.
D-10 See Notes to Financial Statements
<PAGE> 244
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
1. SIGNIFICANT ACCOUNTING POLICIES
Van Kampen American Capital Real Estate Securities Fund (the "Fund") is
organized as 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 primary investment objective is to seek long-term
growth of capital by investing principally in securities of companies operating
in the real estate industry. The Fund commenced investment operations on June
9, 1994.
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. 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 securities 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. INCOME AND EXPENSES-Dividend income is recorded on the ex-dividend date and
interest income is recorded on an accrual basis. Expenses of the Fund are
allocated on a pro rata basis to each class of shares, except for distribution
and service fees and transfer agency costs which are unique to each class of
shares.
D-11
<PAGE> 245
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 1997
D. ORGANIZATIONAL COSTS-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 $16,000. These
costs are being amortized on a straight line basis over the 60 month period
ending May 31, 1999. The Adviser has agreed that in the event any of the
initial shares of the Fund originally purchased by VKAC are redeemed by the
Fund during the amortization period, the Fund will be reimbursed for any
unamortized organizational costs in the same proportion as the number of shares
redeemed bears to the number of initial shares held at the time of redemption.
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.
Net realized gains or losses may differ for financial reporting and tax
purposes primarily as a result of the deferral of losses for tax purposes
resulting from wash sales.
At December 31, 1997, for federal income tax purposes cost of long- and
short-term investments is $129,401,768; the aggregate gross unrealized
appreciation is $15,544,158 and the aggregate gross unrealized depreciation is
$906,739, resulting in net unrealized appreciation of $14,637,419.
F. DISTRIBUTION OF INCOME AND GAINS-The Fund declares and pays dividends
quarterly from net investment income. Net realized gains, if any, are
distributed annually. Distributions from net realized gains for book purposes
may include short-term capital gains. All short-term capital gains are included
in ordinary income for tax purposes.
For Federal income tax purposes, the following information is furnished with
respect to the distributions paid by the Fund during its taxable year ended
December 31, 1997. The Fund designated $3,828,135 as a 28% rate capital gain
distribution and $545,346 as a 20% rate capital gain distribution. Shareholders
were sent a 1997 Form 1099-DIV in January 1998 representing their proportionate
share of the capital gain distribution to be reported on their income tax
returns.
The Fund distributes the return of capital it receives from the Real Estate
Investment Trusts (the "REITs") in which the Fund invests. The REITs pay
distributions based on cash flow, without regard to depreciation and
amortization. As a result, a portion of the distributions paid to the Fund and
subsequently distributed to shareholders may be a return of capital.
Due to inherent differences in the recognition of income, expenses and
realized gains/losses under generally accepted accounting principles and
federal income tax purposes, permanent differences between book and tax basis
reporting for the 1997 fiscal year have been identified and appropriately
reclassified. As a result, permanent differences relating to the
characterization of distributions for tax purposes totaling $134,781 were
reclassified from accumulated undistributed net investment income to
accumulated net realized gain/loss. Additionally, permanent book and tax
differences relating to the recognition of certain expenses which are not
deductible for tax purposes totaling $3,121 were reclassified from accumulated
undistributed net investment income to capital.
D-12
<PAGE> 246
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997
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 equal to
1.00% of the average net assets of the Fund. This fee is payable monthly.
For the year ended December 31, 1997, the Fund recognized expenses of
approximately $3,700 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 year ended December 31, 1997, the Fund recognized expenses of
approximately $31,800 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
December 31, 1997, the Fund recognized expenses of approximately $199,900,
representing ACCESS' cost of providing transfer agency and shareholder services
plus a profit.
For the year ended December 31, 1997, the Fund reimbursed VKAC approximately
$2,000 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.
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.
For the year ended December 31, 1997, the Fund paid brokerage commissions to
Dean Witter, an affiliate of VKAC, totaling $7,608.
At December 31,1997, VKAC owned 10,605 and 53 shares of Classes A and B,
respectively.
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 December 31, 1997, capital aggregated $44,679,411, $65,025,381 and
$15,201,749 for Classes A, B, and C, respectively. For the year ended December
31, 1997, transactions were as follows:
D-13
<PAGE> 247
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997
<TABLE>
<CAPTION>
SHARES VALUE
- --------------------------------------------------------------------------
<S> <C> <C>
Sales:
Class A....................................... 5,170,889 $ 72,826,990
Class B....................................... 3,529,184 48,022,266
Class C....................................... 692,679 9,390,192
---------- ------------
Total Sales..................................... 9,392,752 $130,239,448
========== ============
Dividend Reinvestment:
Class A....................................... 393,875 $ 5,266,583
Class B....................................... 458,508 6,117,855
Class C....................................... 110,872 1,478,523
---------- ------------
Total Dividend Reinvestment..................... 963,255 $ 12,862,961
========== ============
Repurchases:
Class A....................................... (3,640,808) $(52,082,516)
Class B....................................... (721,539) (9,824,495)
Class C....................................... (127,832) (1,759,592)
---------- ------------
Total Repurchases............................... (4,490,179) $(63,666,603)
========== ============
</TABLE>
At December 31, 1996, capital aggregated $18,669,483, $20,711,364 and
$6,093,009 for Classes A, B, and C, respectively. For the year ended December
31, 1996, transactions were as follow:
<TABLE>
<CAPTION>
SHARES VALUE
- -----------------------------------------------------------------------------
<S> <C> <C>
Sales:
Class A.......................................... 1,142,133 $13,064,447
Class B.......................................... 1,012,720 11,615,644
Class C.......................................... 336,995 3,836,791
--------- -----------
Total Sales........................................ 2,491,848 $28,516,882
========= ===========
Dividend Reinvestment:
Class A.......................................... 89,245 $ 1,046,880
Class B.......................................... 86,852 1,022,967
Class C.......................................... 24,037 283,655
--------- -----------
Total Dividend Reinvestment........................ 200,134 $ 2,353,502
========= ===========
Repurchases:
Class A.......................................... (289,138) $(3,174,901)
Class B.......................................... (265,477) (2,844,469)
Class C.......................................... (78,881) (868,415)
--------- -----------
Total Repurchases.................................. (633,496) $(6,887,785)
========= ===========
</TABLE>
D-14
<PAGE> 248
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997
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 for Class B and
C shares 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.
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE
YEAR OF REDEMPTION CLASS B CLASS C
<S> <C> <C>
First 4.00% 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 December 31, 1997, VKAC, as Distributor for the Fund,
received net commissions on sales of the Fund's Class A shares of approximately
$67,200 and CDSC on the redeemed shares of approximately $116,400. 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 $214,589,921 and
$149,389,626, respectively.
5. 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 December 31, 1997, are payments retained by VKAC of
approximately $509,300.
D-15
<PAGE> 249
APPENDIX E
SEMI-ANNUAL REPORT
FOR
MORGAN STANLEY FUNDS
DATED DECEMBER 31, 1997 (UNAUDITED)
<PAGE> 250
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> 251
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> 252
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> 253
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> 254
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> 255
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> 256
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> 257
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> 258
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> 259
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> 260
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> 261
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> 262
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> 263
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> 264
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> 265
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> 266
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> 267
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> 268
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> 269
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> 270
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> 271
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> 272
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> 273
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> 274
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> 275
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> 276
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> 277
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> 278
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> 279
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> 280
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> 281
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> 282
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> 283
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> 284
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> 285
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> 286
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> 287
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> 288
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> 289
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> 290
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> 291
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> 292
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> 293
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> 294
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> 295
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> 296
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> 297
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> 298
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> 299
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> 300
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> 301
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> 302
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> 303
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> 304
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> 305
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> 306
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> 307
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> 308
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> 309
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> 310
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> 311
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> 312
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> 313
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> 314
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> 315
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> 316
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> 317
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> 318
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> 319
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> 320
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> 321
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> 322
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> 323
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> 324
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> 325
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> 326
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> 327
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> 328
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> 329
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> 330
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> 331
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> 332
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> 333
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> 334
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> 335
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> 336
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> 337
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> 338
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> 339
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> 340
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> 341
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> 342
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> 343
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> 344
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> 345
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> 346
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> 347
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> 348
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> 349
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> 350
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> 351
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> 352
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> 353
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> 354
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> 355
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> 356
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> 357
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> 358
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> 359
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> 360
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> 361
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> 362
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> 363
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> 364
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> 365
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> 366
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> 367
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> 368
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> 369
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> 370
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> 371
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> 372
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> 373
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> 374
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> 375
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> 376
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> 377
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> 378
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> 379
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> 380
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> 381
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> 382
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> 383
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> 384
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> 385
APPENDIX F
VKAC REAL ESTATE SECURITIES FUND
MS U.S. REAL ESTATE FUND
PROFORMA COMBINED PORTFOLIO OF INVESTMENTS
December 31, 1997 (Unaudited)
<PAGE> 386
VKAC REAL ESTATE SECURITIES FUND-MS U.S. REAL ESTATE FUND
PROFORMA CONDENSED STATEMENT OF ASSETS AND LIABILITIES
December 31, 1997
(Unaudited)
Amounts in thousands, except for footnotes and per share data
<TABLE>
<CAPTION>
VKAC Real
Estate Securities MS US Real
Fund Estate Fund Adjustments Proforma
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total Investments (Cost of $129,242,
$37,308, and $166,550, respectively) $144,039 $41,001 $185,040
Other Assets Less Liabilities (2,091) (3,559) (136) (5,786)
-------------------------------------------------------------------
Net Assets $141,948 $37,442 ($136) $179,254
===================================================================
Net Assets Consist of:
Capital $124,907 $33,399 $158,306
Accumulated Undistributed Net Investment
Income (22) 12 (136) (146)
Net Unrealized Appreciation/Depreciation
on Investments 14,797 3,693 18,490
Accumulated Net Realized Gain/Loss
on Investments 2,266 338 2,604
-------------------------------------------------------------------
Net Assets $141,948 $37,442 ($136) $179,254
===================================================================
Class A Shares:
Net Assets $51,314 $20,768 ($49) $72,033
Shares Outstanding 3,716 1,237 5,221
---------------------------- -----------
Net Asset Value per Share $13.81 $16.79 $13.80
============================ ===========
Class B Shares:
Net Assets $73,199 $12,764 ($70) $85,893
Shares Outstanding 5,304 763 6,230
---------------------------- -----------
Net Asset Value per Share $13.80 $16.73 $13.79
============================ ===========
Class C Shares:
Net Assets $17,435 $3,910 ($17) $21,328
Shares Outstanding 1,264 234 1,548
---------------------------- -----------
Net Asset Value per Share $13.79 $16.73 $13.78
============================ ===========
</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 VKAC Real Estate
Securities 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 VKAC Real Estate
Securities Fund of approximately 7,505,000 class A shares, 926,000 class B
shares and 284,000 class C shares in exchange for the assets and liabilities of
the MS Real Estate Securities Fund.
(3) In connection with this transaction, the VKAC Real Estate Securities Fund
will incur a non-recurring cost associated with the transaction of
approximately $136,000, or $0.013 per share.
<PAGE> 387
VKAC REAL ESTATE SECURITIES FUND-MS U.S. REAL ESTATE FUND
PROFORMA CONDENSED STATEMENT OF OPERATIONS
For the Year Ended December 31, 1997
(Unaudited)
Amounts in thousands
<TABLE>
<CAPTION>
VKAC Real
Estate MS US Real
Securities Fund Estate Fund Adjustments Proforma
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment Income:
Dividends $4,184 $900 $5,084
Interest 406 120 526
------------------------------------------------------------------------
Total Income 4,590 1,020 0 5,610
------------------------------------------------------------------------
Expenses:
Investment Advisory Fees 1,010 258 1,268
Fees Waived (2) 0 (166) (180) (346)
Distribution (12b-1) and Service Fees 730 147 877
All Other Expenses (1) 526 240 (38) 728
------------------------------------------------------------------------
Total Expenses 2,266 479 (218) 2,527
------------------------------------------------------------------------
Net Investment Income $2,324 $541 $218 $3,083
========================================================================
Realized and Unrealized Gain/Loss on Investments:
Realized Gain/Loss on Investments $15,177 $3,349 $18,526
Net Change in Unrealized Appreciation/
Depreciation During the Period 2,900 1,782 4,682
------------------------------------------------------------------------
Net Realized and Unrealized Gain/Loss
on Investments $18,077 $5,131 $0 $23,208
Net Increase/Decrease in Net Assets
from Operations $20,401 $5,672 $218 $26,291
========================================================================
</TABLE>
(1) 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.
(2) The Adviser has agreed to cap expenses after the transaction at 1.55%,
2.30% and 2.30% 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> 388
VKAC REAL ESTATE SECURITIES FUND-MS U.S. REAL ESTATE FUND
PROFORMA PORTFOLIO OF INVESTMENTS
December 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares Value(000)
-------------------------------
<S> <C> <C>
Common Stocks and Equivalents 95.4%
Apartments 18.7%
Aml Residential Properties Trust 16,000 $ 356
Avalon Properties, Inc. 143,700 4,446
Bay Apartment Communities, Inc. 187,500 7,311
Essex Property Trust, Inc. 197,300 6,906
Irvine Apartment Communities, Inc. 27,700 881
Oasis Residential, Inc. 162,100 3,617
Pennsylvania Real Estate Investment 50,600 1,243
Security Capital Atlantic, Inc. 230,490 4,869
Walden Residential Properties, Inc. 148,100 3,777
---------------
33,406
---------------
Development 4.6%
Atlantic Gulf Communities Corp. (a) 238,104 1,071
Atlantic Gulf Communities Corp. - Preferred Ser B
(Convertible into 43,025 common shares) (a) 24,741 247
Atlantic Gulf Communities Corp. - Preferred Shares,
144A - Private Placement (a)(b) 49,438 509
Atlantic Gulf Communities Corp. Warrants, 26,103
shares each of Classes A, B and C, expiring 06/23/04 (a) 78,309 115
Atlantic Gulf Communities Corp. Warrants, 33,397
shares Class A, B and C, expiring 06/24/01, 144A-
Private Placement(a)(b)
Brookfield Properties Corp. 263,100 4,387
Brookfield Properties Corp. - Common Share Installment
Receipts (a) 105,800 1,257
Catellus Development Corp.(a) 36,000 720
---------------
8,306
---------------
Healthcare Facilities 6.2%
Nationwide Health Properties, Inc. 319,300 8,142
Omega Healthcare Investors, Inc. 79,190 3,058
---------------
11,200
---------------
Hotel & Lodging 11.0%
American General Hospitality Corp. 85,700 2,292
Capstar Hotel Co. (a) 184,100 6,317
Extended Stay America, Inc.(a) 155,700 1,937
Host Marriott Corp. (a) 368,600 7,233
John Q. Hammons Hotels, Inc. (a) 31,700 285
Suburban Lodges of America, Inc. (a) 65,100 867
Vail Resorts, Inc. (a) 31,400 815
---------------
19,746
---------------
</TABLE>
<PAGE> 389
VKAC REAL ESTATE SECURITIES FUND-MS U.S. REAL ESTATE FUND
PROFORMA PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares Value(000)
-------------------------------
<S> <C> <C>
Manufactured Home Communities 6.6%
Chateau Properties, Inc. 262,942 $ 8,283
Manufactured Home Communities, Inc. 131,700 3,556
---------------
11,839
---------------
Office/Industrial 27.5%
Arden Realty Group, Inc. 267,200 8,215
Bedford Property Investors, Inc. 197,400 4,319
Brandywine Realty Trust 244,766 6,150
CarrAmerica Realty Corp. 180,200 5,710
Equity Office Properties Trust 83,393 2,633
Great Lakes REIT, Inc. 178,300 3,466
Pacific Gulf Properties, Inc. 278,900 6,623
Prime Group Realty Trust 208,600 4,225
Reckson Associates Realty Corp. 54,400 1,381
Trizec Hahn Corp 118,916 2,757
Wellsford Real Properties, Inc., 144A-Private
Placement (a)(b) 244,371 3,819
---------------
49,298
---------------
Producer Manufacturing 0.1%
ITT Corp. (a) 1,700 141
---------------
Self-Storage 3.2%
Public Storage, Inc. 42,300 1,242
Shurgard Storage Centers, Inc., Class A 153,000 4,437
---------------
5,679
---------------
Shopping Centers 7.2%
Burnham Pacific Properties, Inc. 203,900 3,122
Federal Realty Investment Trust 227,700 5,863
First Washington Realty Trust, Inc.-Preferred Ser A
(Convertible into 28,589 common shares) 27,800 931
Pan Pacific Retail Properties, Inc. 88,400 1,890
Ramco-Gershenson Properties Trust 1,000 20
Western Investment Real Estate Trust 76,300 1,049
---------------
12,875
---------------
Shopping Malls 10.3%
CBL & Associates Properties, Inc. 173,600 4,286
First Union Real Estate Investments 114,300 1,857
Taubman Centers, Inc. 729,100 9,478
Urban Shopping Centers, Inc. 82,700 2,884
---------------
18,505
---------------
</TABLE>
<PAGE> 390
VKAC REAL ESTATE SECURITIES FUND-MS U.S. REAL ESTATE FUND
PROFORMA PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares Value (000)
-----------------------------
<S> <C> <C>
-----------
$ 170,995
Total Common Stocks and Equivalents -----------
Convertible Corporate Obligations 0.5%
Brookfield Properties Corp. - Installment Receipts
Representing Subordinated Debenture ($1,092 Par,
6.00% coupon, 02/14/07 maturity) 878
-----------
Total Convertible Corporate Obligations 878
-----------
-----------
Total Long-Term Investments 95.4 171,873
-----------
Repurchase Agreements 7.3%
Chase Securities, Inc. ($5,507,000, 5.95 coupon, dated 12/31/97, to be sold on 01/02/98
at $5,508,820, collateralized by U.S. Treasury Bonds, 7.875%, due 11/15/04) 5,507
Swiss Bank Corp. ($7,660,000 par collateralized by U.S. Government
obligations in a pooled cash account, 6.10% coupon, dated 12/31/97,
to be sold on 01/02/98 at $7,662,596) 7,660
-----------
Total Repurchase Agreements 13,167
-----------
Total Investments 103.2%
(Cost $166,549,966) 185,040
Liabilities in Excess of Other Assets (3.2%) (5,786)
-----------
Net Assets 100% $ 179,254
===========
</TABLE>
(a) Non-income producing security at this stock currently does not declare
dividends.
(b) 144A securities are those which are exempt from registration under Rule
144A of the Securities Act of 1933. These securities may only be resold in
transactions exempt from registration which are normally transactions with
qualified institutional buyers.
<PAGE> 391
PART C: OTHER INFORMATION
ITEM 15. INDEMNIFICATION
Reference is made to Article 8, Section 8.4 of the Registrant's Agreement
and Declaration of Trust.
Article 8, Section 8.4 of the Agreement and Declaration of Trust provides
that each officer and trustee of the Registrant shall be indemnified by the
Registrant against all liabilities incurred in connection with the defense or
disposition of any action, suit or other proceeding, whether civil or criminal,
in which the officer or trustee may be or may have been involved by reason of
being or having been an officer or trustee, except that such indemnity shall not
protect any such person against a liability to the Registrant or any shareholder
thereof to which such person would otherwise be subject by reason of (i) not
acting in good faith in the reasonable belief that such person's actions were
not in the best interests of the Trust, (ii) having acted with willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his or her office or (iii) for a criminal proceeding
had reasonable cause to believe the conduct was unlawful (collectively,
"Disabling Conduct"). Absent a court determination that an officer or trustee
seeking indemnification was not liable on the merits or guilty of Disabling
Conduct in the conduct of his or her office, the decision by the Registrant to
indemnify such person must be based upon the reasonable determination of
independent counsel or non-party independent trustees, after review of the
facts, that such officer or trustee is not guilty of Disabling Conduct in the
conduct of his or her office.
The Registrant has purchase insurance on behalf of its officers and
trustees protecting such persons from liability arising from their activities as
officers or trustees of the Registrant. The insurance does not protect or
purport to protect such persons from liability to the Registrant or to its
shareholders to which such officers or trustee would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of their office.
Conditional advancing of indemnification monies may be made if the trustee
or officer undertakes to repay the advance unless it is ultimately that he or
she is entitled to the indemnification and only if the following conditions are
met: (1) the trustee or officer provides security for the undertaking; (2) the
Registrant is insured against losses arising from lawful advances; or (3) a
majority of a quorum of the Registrant's disinterested, non-party trustees, or
an independent legal counsel in a written opinion, shall determine, based upon a
review of readily available facts, that a recipient of the advance ultimately
will be found entitled to indemnification.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Securities Act") may be permitted to trustees, 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 such indemnification is against public policy as
expressed in the Securities 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 the trustee, officer,
or controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such trustee, officer or controlling person
in connection with the shares 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 Securities
Act and will be governed by the final adjudication of such issue.
ITEM 16. EXHIBITS
<TABLE>
<S> <C>
(1) -- (a) First Amended and Restated Agreement and Declaration of
Trust(1)
-- (b) Certificate of Amendment(1)
-- (c) Amended and Restated Certificate of Designation(2)
(2) -- Amended and Restated Bylaws(1)
(4) -- Form of Agreement and Plan of Reorganization for Morgan Stanley
U.S. Real Estate Fund into Van Kampen American Capital Real
Estate Securities Fund+
(5) -- Specimen Stock Certificate for:
-- (a) Class A Shares(2)
-- (b) Class B Shares(2)
</TABLE>
C-1
<PAGE> 392
<TABLE>
<S> <C>
-- (c) Class C Shares(2)
(6) -- Investment Advisory Agreement(2)
(7) -- (a) Distribution and Service Agreement(2)
-- (b) Dealer Agreement(2)
-- (c) Form of Broker Agreement(2)
-- (d) Form of Bank Agreement(2)
(9) -- (a) Custodian Agreement(2)
-- (b) Data Access Services Agreement(2)
(10) -- (a) Plan of Distribution Pursuant to Rule 12b-1(2)
-- (b) Service Plan(2)
-- (c) Amended Multi-Class Plan(2)
(11) -- Opinion of Skadden, Arps, Slate, Meagher & Flom (Illinois)
relating to
Van Kampen American Capital Real Estate Securities Fund(2)
(12) -- Form of Tax Opinion of Skadden, Arps, Slate, Meagher & Flom
(Illinois) relating to the Reorganization+
(13) -- (a) Fund Accounting Agreement(2)
(14) -- (a) Consent of Price Waterhouse LLP and Coopers Lybrand relating
to Morgan Stanley U.S. Real Estate Fund+
-- (b) Consent of KPMG Peat Marwick LLP relating to Van Kampen
American Capital Real Estate Securities Fund+
(16) -- Power of Attorney(2)
(17) -- (a) Copy of 24f-2 Election of Registrant(2)
-- (b) Form of proxy card for Morgan Stanley U.S. Real Estate
Fund++
-- (c) Prospectus of Morgan Stanley U.S. Real Estate Fund dated
August 29, 1997+
</TABLE>
- ---------------
+ To be filed by amendment.
++ Filed herein.
(1) Incorporated herein by reference to Post-Effective Amendment No. 5 to
Registrant's Registration Statement on Form N-1A, File Number 33-77800,
filed on April 22, 1996.
(2) Incorporated herein by reference to Post-Effective Amendment No. 6 to
Registrant's Registration Statement on Form N-1A, File Number 33-77800,
filed on April 29, 1997.
ITEM 17. UNDERTAKINGS.
(1) The undersigned registrant agrees that prior to any public re-offering
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
re-offering prospectus will contain the information called for by the applicable
registration form for re-offerings 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 shall file with the
Securities and Exchange Commission by post-effective amendment an opinion of
counsel supporting the tax matters discussed in the registration statement.
C-2
<PAGE> 393
SIGNATURES
AS REQUIRED BY THE SECURITIES ACT OF 1933, THIS REGISTRATION STATEMENT HAS
BEEN SIGNED ON BEHALF OF THE REGISTRANT IN THE CITY OF OAKBROOK TERRACE AND
STATE OF ILLINOIS, ON THE 5TH DAY OF MARCH, 1998.
VAN KAMPEN AMERICAN CAPITAL REAL
ESTATE SECURITIES FUND
By /s/ RONALD A. NYBERG
------------------------------------
Ronald A. Nyberg
Vice President and Secretary
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED, ON MARCH 5, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
Principal Executive Officer:
/s/ DENNIS J. MCDONNELL* President
- -----------------------------------------------------
Dennis J. McDonnell
Principal Financial Officer:
/s/ EDWARD C. WOOD III* Vice President and Chief Financial Officer
- -----------------------------------------------------
Edward C. Wood III
Trustees:
/s/ J. MILES BRANAGAN* Trustee
- -----------------------------------------------------
J. Miles Branagan
/s/ RICHARD M. DeMARTINI* Trustee
- -----------------------------------------------------
Richard M. DeMartini
/s/ LINDA HUTTON HEAGY* Trustee
- -----------------------------------------------------
Linda Hutton Heagy
/s/ R. CRAIG KENNEDY* Trustee
- -----------------------------------------------------
R. Craig Kennedy
/s/ JACK E. NELSON* Trustee
- -----------------------------------------------------
Jack E. Nelson
/s/ PHILLIP B. ROONEY* Trustee
- -----------------------------------------------------
Phillip B. Rooney
/s/ FERNANDO SISTO Sc.D.* Trustee
- -----------------------------------------------------
Fernando Sisto
/s/ WAYNE W. WHALEN* Trustee and Chairman
- -----------------------------------------------------
Wayne W. Whalen
- ------------
* Signed by Ronald A. Nyberg pursuant to a power of attorney.
/s/ RONALD A. NYBERG
- -----------------------------------------------------
Ronald A. Nyberg
Attorney-in-Fact
</TABLE>
C-3
<PAGE> 394
SCHEDULE OF EXHIBITS TO FORM N-14
VAN KAMPEN AMERICAN CAPITAL REAL ESTATE SECURITIES FUND
<TABLE>
<CAPTION>
EXHIBIT PAGE
- ------- ----
<S> <C> <C>
(17) -- (b) Form of proxy card for Morgan Stanley U.S. Real Estate Fund
</TABLE>
<PAGE> 1
EXHIBIT (17)(b)
PROXY
MORGAN STANLEY U.S. REAL ESTATE FUND
SPECIAL MEETING OF SHAREHOLDERS
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned holder of shares of Common Stock, par value $0.001
per share ( the "Shares") of the MORGAN STANLEY U.S. REAL ESTATE FUND, a series
of Morgan Stanley Fund, Inc., a Maryland corporation (the "MS Real Estate
Fund"), hereby appoints Don G. Powell, Dennis J. McDonnell and Ronald A.
Nyberg, and each of them, with full power of substitution and revocation, as
proxies to represent the undersigned at the Special Meeting of Shareholders to
be held at the offices of Van Kampen American Capital, Inc., One Parkview
Plaza, Oakbrook Terrace, Illinois 60181, on , 1998 at 2:00 p.m., and any
and all adjournments thereof (the "Special Meeting"), and thereat to vote all
Shares which the undersigned would be entitled to vote, with all powers the
undersigned would possess if personally present, in accordance with the
following instructions.
If more than one of the proxies, or their substitutes, are present at
the Special Meeting or any adjournment thereof, they jointly (or, if only
one is present and voting then that one) shall have authority and may exercise
all powers granted hereby. This Proxy, when properly executed, will be voted in
accordance with the instructions marked hereon by the undersigned. IF NO
SPECIFICATION IS MADE, THIS PROXY WILL BE VOTED "FOR" EACH OF THE PROPOSALS
DESCRIBED HEREIN AND IN THE DISCRETION OF THE PROXIES UPON SUCH OTHER BUSINESS
AS MAY PROPERLY COME BEFORE THE MEETING.
Account No. No. of Shares Class of Shares Proxy No.
<TABLE>
<S> <C> <C> <C> <C> <C>
1. FOR AGAINST ABSTAIN
--- ------- ------- The proposal to approve the Agreement and Plan of
Reorganization pursuant to which the MS Real Estate Fund
--- ------- ------- would (i) transfer all of its assets to the Van Kampen American Capital Real Estate
Securities Fund (the "VKAC Real Estate Fund") in exchange solely for Class A, B,
and C shares of beneficial interest of the VKAC Real Estate Fund and VKAC Real Estate
Fund's assumption of the liabilities of the MS Real Estate Fund, (ii) distribute
such shares of the VKAC Real Estate Fund to the holders of shares of the MS Real
Estate Fund and (iii) be dissolved, all as more fully described in the
Prospectus/Proxy
Statement.
2. FOR AGAINST ABSTAIN
--- ------- ------- To act upon any and all other business which may come
before the Special Meeting or any adjournment thereof.
</TABLE>
The undersigned hereby acknowledges receipt of the accompanying Notice
of Special Meeting and Proxy Statement for the Special Meeting to be held on
__, 1998 at 2:00 p.m.
Please sign this Proxy exactly as your name or names appear on the books
of the Global Equity Fund. When signing as attorney, trustee, executor,
administrator, custodian, guardian or corporate officer, please give full title.
If shares are held jointly, each holder should sign.
<TABLE>
<S> <C>
- ------------------------------------ ----------------------------------------
Shareholder signature 1998
Date
- ------------------------------------ ----------------------------------------
Co-owner signature (if applicable) 1998
Date
</TABLE>
