UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 811-07683
Morgan Stanley Special Value Fund
(Exact name of registrant as specified in charter)
522 Fifth Avenue, New York, New York | 10036 | |
(Address of principal executive offices) | (Zip code) |
Randy Takian
522 Fifth Avenue, New York, New York 10036
522 Fifth Avenue, New York, New York 10036
(Name and address of agent for service)
Registrant’s telephone number, including area code: 212-296-6990
Date of fiscal year end: July 31, 2009
Date of reporting period: July 31, 2009
Item 1 — Report to Shareholders
INVESTMENT MANAGEMENT | ![]() |
Welcome, Shareholder:
In this report, you’ll learn about how your investment in Morgan Stanley Special Value Fund performed during the annual period. We will provide an overview of the market conditions, and discuss some of the factors that affected performance during the reporting period. In addition, this report includes the Fund’s financial statements and a list of Fund investments.
This material must be preceded or accompanied by a prospectus for the fund being offered.
Market forecasts provided in this report may not necessarily come to pass. There is no assurance that the Fund will achieve its investment objective. The Fund is subject to market risk, which is the possibility that market values of securities owned by the Fund will decline and, therefore, the value of the Fund’s shares may be less than what you paid for them. Accordingly, you can lose money investing in this Fund. Please see the prospectus for more complete information on investment risks.
Fund Report
For the year ended July 31, 2009
Total Return for the 12 Months Ended July 31, 2009
Russell | Lipper | ||||||||||||||
2000® | Small-Cap | ||||||||||||||
Value | Value Funds | ||||||||||||||
Class A | Class B | Class C | Class I | Index1 | Index2 | ||||||||||
–10.50% | –11.17% | –11.14% | –10.14% | –20.67% | –16.55% | ||||||||||
The performance of the Fund’s four share classes varies because each has different expenses. The Fund’s total returns assume the reinvestment of all distributions but do not reflect the deduction of any applicable sales charges. Such costs would lower performance. See Performance Summary for standardized performance and benchmark information.
Market Conditions
U.S. equities experienced significant volatility in the 12-month period ended July 31, 2009. Dramatic declines in the first seven months of the period, amidst the worsening credit crisis and weakening economy, were followed by a rebound beginning in March 2009, as investors began to sense the worst might have passed.
In the second half of 2008, the stock market was roiled by deeply troubling signs at a number of large financial institutions and the failure of several large firms. The subsequent government interventions and forced consolidations within the financial sector were not enough to eliminate widespread deterioration in investor confidence. The credit markets essentially froze, and the already slowing economy fell further into recession. Mutual fund tax-loss selling, which historically occurs in October, and forced selling by hedge funds also contributed to selling pressure across the equity markets. The aggressive policy actions taken by the Federal Reserve (the “Fed”) and the federal government did little to bolster investor sentiment at the time. However, conditions moderated somewhat in December of 2008 as oil prices fell substantially below their July 2008 highs, liquidity measures showed signs of improvement, Congress approved loans to U.S. automakers, and the Fed signaled its intention to keep its target federal funds rate low for some time.
The respite at year end was short-lived. The early months of 2009 brought more negative news and volatility to the market. A dismal fourth quarter earnings reporting season was capped off with pessimistic corporate outlooks. Job losses continued, fourth quarter gross domestic product estimates were revised downward, and consumer confidence fell to record lows. The new Treasury secretary announced a bank rescue plan that lacked sufficient detail and was not well received by the markets.
In March, however, several positive announcements led the market to rally. On the corporate front, investors welcomed merger and acquisition activity in the pharmaceuticals industry, improved retail sales numbers, and reports of profitability at two large banks. Furthermore, the Treasury publicized a plan to buy banks’ distressed assets, while the Fed announced it would purchase over $300 billion in Treasuries and over $1 trillion of government-backed mortgage securities. Both of these announcements received positive responses from the market. The rally extended into April and May as investors became more optimistic about potential economic stabilization, with employment, retail sales, and consumer sentiment data steadying or improving. Investors also appeared more willing to overlook
2
negative news, such as the H1N1 (swine flu) virus and Chrysler’s bankruptcy filing.
June saw a temporary pause in the market’s appreciation. Oil and commodity prices rose, the U.S. dollar fell, and unemployment remained high. Borrowing costs also increased. These conditions stoked inflation fears and a debate on whether policy makers would be able or willing to raise interest rates in the future. However, in July, corporate earnings reports for the second quarter of 2009 beat expectations in a number of industries, bolstering investor sentiment and leading the market to rally strongly during the final month of the reporting period.
Across the market capitalization spectrum, no particular segment outperformed meaningfully, with all segments posting considerable declines for the period. Growth stocks performed better than value stocks within the large-cap segment, but there was no significant difference in the returns of the two styles within the small-cap segment. All sectors within the Russell 2000® Value Index had negative returns for the period but the degree of declines varied considerably. The sectors with the smallest declines were consumer staples, technology, health care, and utilities. The relative outperformance of these sectors primarily reflected investors’ preference for defensive (or less economically sensitive) sectors. The technology sector included many companies with significant cash on their balance sheets, which was attractive to investors during a period when many other companies’ financial health was questionable or weakened. Furthermore, both consolidation activity and the speculation of potential mergers and acquisitions, especially among small-cap companies, helped support the technology sector’s performance during the period. In contrast, energy, autos and transportation, and producer durables were hit hardest by the weakening environment, as these groups are highly sensitive to the economic cycle.
Performance Analysis
All share classes of Morgan Stanley Special Value Fund outperformed the Russell 2000® Value Index (the “Index”) and the Lipper Small-Cap Value Funds Index for the 12 months ended July 31, 2009, assuming no deduction of applicable sales charges.
The primary contributors to the Fund’s outperformance of the Index included an overweight and stock selection in the health care sector. Holdings in specialty pharmaceuticals and health care services were especially beneficial. An overweight and stock selection in the consumer discretionary sector also added to relative results, driven mainly by a few business services holdings and a specialty retailer. Strong relative performance from several packaging companies and several engineering and construction stocks in the portfolio helped bolster the positive contribution of the materials and processing sector.
The Fund’s relative performance was somewhat diminished by other investments. Stock selection in the technology sector detracted from results as the performance of holdings in software and services stocks, as well as semiconductors stocks, lagged. An overweight position in the producer durables sector was disadvantageous to the portfolio during a period in which the sector was among the weakest-performing groups in the Index. In the autos and transportation sector, stock selection had a negative impact on relative performance. The sector is small within the small-cap value universe, and the portfolio
3
held only a few stocks in this group which suffered waning performance during the period.
There is no guarantee that any sectors mentioned will continue to perform as discussed herein or that securities in such sectors will be held by the Fund in the future.
TOP 10 HOLDINGS as of 07/31/09 | ||||
MAXIMUS, Inc. | 3 | .8% | ||
AAR Corp. | 3 | .7 | ||
PharMerica Corp. | 2 | .9 | ||
HEALTHSOUTH Corp. | 2 | .9 | ||
Corn Products International, Inc. | 2 | .5 | ||
ProAssurance Corp. | 2 | .5 | ||
Zep Inc. | 2 | .5 | ||
NBTY, Inc. | 2 | .2 | ||
AerCap Holdings NV (Netherlands) | 2 | .2 | ||
Syniverse Holdings Inc. | 2 | .2 |
TOP FIVE INDUSTRIES as of 07/31/09 | ||||
Miscellaneous Commercial Services | 6 | .8% | ||
Property/Casualty Insurers | 6 | .0 | ||
Aerospace & Defense | 5 | .9 | ||
Investment Company | 4 | .4 | ||
Services to the Health Industry | 3 | .9 |
Subject to change daily. Provided for informational purposes only and should not be deemed as a recommendation to buy or sell the securities mentioned above. Top 10 holdings and top five industries are as a percentage of net assets. Morgan Stanley is a full-service securities firm engaged in securities trading and brokerage activities, investment banking, research and analysis, financing and financial advisory services.
Investment Strategy
The Fund will normally invest at least 80 percent of its assets in common stocks of small companies that the Fund’s “Investment Adviser,” Morgan Stanley Investment Advisors Inc., believes are undervalued relative to the marketplace or similar companies. Under current market conditions, the Investment Adviser considers a company to be a small cap company if it has a total market capitalization at the time of purchase of $100 million to the higher of $2 billion or the high end of the range of companies represented in the Russell 2000® Value Index. The Fund may use derivative instruments, as discussed in the Fund’s prospectus, to gain exposure to common stocks of small companies. These derivative instruments will be counted toward the 80 percent policy discussed above to the extent they have economic characteristics similar to the common stocks included within the 80 percent policy. The Fund may invest in foreign securities (including depositary receipts) that are listed in the United States on a national securities exchange.
For More Information About Portfolio Holdings
Each Morgan Stanley fund provides a complete schedule of portfolio holdings in its semiannual and annual reports within 60 days of the end of the fund’s second and fourth fiscal quarters. The semiannual reports and the annual reports are filed electronically with the Securities and Exchange Commission (SEC) on Form N-CSRS and Form N-CSR, respectively. Morgan Stanley also delivers the semiannual and annual reports to fund shareholders and makes these reports available on its public web site, www.morganstanley.com. Each Morgan Stanley fund also files a complete schedule of portfolio holdings
4
with the SEC for the fund’s first and third fiscal quarters on Form N-Q. Morgan Stanley does not deliver the reports for the first and third fiscal quarters to shareholders, nor are the reports posted to the Morgan Stanley public web site. You may, however, obtain the Form N-Q filings (as well as the Form N-CSR and N-CSRS filings) by accessing the SEC’s web site, http://www.sec.gov. You may also review and copy them at the SEC’s public reference room in Washington, DC. Information on the operation of the SEC’s public reference room may be obtained by calling the SEC at (800) SEC-0330. You can also request copies of these materials, upon payment of a duplicating fee, by electronic request at the SEC’s e-mail address (publicinfo@sec.gov) or by writing the public reference section of the SEC, Washington, DC 20549-0102.
Proxy Voting Policy and Procedures and Proxy Voting Record
You may obtain a copy of the Fund’s Proxy Voting Policy and Procedures without charge, upon request, by calling toll free (800) 869-NEWS or by visiting the Mutual Fund Center on our Web site at www.morganstanley.com. It is also available on the Securities and Exchange Commission’s Web site at http://www.sec.gov.
You may obtain information regarding how the Fund voted proxies relating to portfolio securities during the most recent twelve-month period ended June 30 without charge by visiting the Mutual Fund Center on our Web site at www.morganstanley.com. This information is also available on the Securities and Exchange Commission’s Web site at http://www.sec.gov.
Householding Notice
To reduce printing and mailing costs, the Fund attempts to eliminate duplicate mailings to the same address. The Fund delivers a single copy of certain shareholder documents, including shareholder reports, prospectuses and proxy materials, to investors with the same last name who reside at the same address. Your participation in this program will continue for an unlimited period of time unless you instruct us otherwise. You can request multiple copies of these documents by calling (800) 869-NEWS, 8:00 a.m. to 8:00 p.m., ET. Once our Customer Service Center has received your instructions, we will begin sending individual copies for each account within 30 days.
5
Performance Summary
Performance of $10,000 Investment — Class B
Over 10 Years
![LINE GRAPH](https://capedge.com/proxy/N-CSR/0000950123-09-049207/y02176y0217603.gif)
6
Average Annual Total Returns — Period Ended July 31, 2009
Class A Shares | * | Class B Shares | ** | Class C Shares | † | Class I Shares | †† | |||||||||
(since 07/28/97 | ) | (since 10/29/96 | ) | (since 07/28/97 | ) | (since 07/28/97 | ) | |||||||||
Symbol | SVFAX | SVFBX | SVFCX | SVFDX | ||||||||||||
1 Year | −10.50 | %3 | −11.17 | %3 | −11.14 | %3 | −10.14 | %3 | ||||||||
−15.20 | 4 | −14.93 | 4 | −11.89 | 4 | — | ||||||||||
5 Years | 5.96 | 3 | 5.17 | 3 | 5.20 | 3 | 6.25 | 3 | ||||||||
4.83 | 4 | 5.01 | 4 | 5.20 | 4 | — | ||||||||||
10 Years | 8.64 | 3 | 7.98 | 3 | 7.84 | 3 | 8.91 | 3 | ||||||||
8.06 | 4 | 7.98 | 4 | 7.84 | 4 | — | ||||||||||
Since Inception | 7.91 | 3 | 8.56 | 3 | 7.12 | 3 | 8.17 | 3 | ||||||||
7.42 | 4 | 8.56 | 4 | 7.12 | 4 | — |
Performance data quoted represents past performance, which is no guarantee of future results and current performance may be lower or higher than the figures shown. For most recent month-end performance figures, please visit www.morganstanley.com/im or speak with your Financial Advisor. Investment returns and principal value will fluctuate and fund shares, when redeemed, may be worth more or less than their original cost. The graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. Performance for Class A, Class B, Class C, and Class I shares will vary due to differences in sales charges and expenses. See the Fund’s current prospectus for complete details on fees and sales charges.
* | The maximum front-end sales charge for Class A is 5.25%. | |
** | The maximum contingent deferred sales charge (CDSC) for Class B is 5.0%. The CDSC declines to 0% after six years. Effective April 2005, Class B shares will generally convert to Class A shares approximately eight years after the end of the calendar month in which the shares were purchased. Performance for periods greater than eight years reflects this conversion (beginning April 2005). | |
† | The maximum contingent deferred sales charge for Class C is 1.0% for shares redeemed within one year of purchase. | |
†† | Class I has no sales charge. | |
(1) | The Russell 2000® Value Index measures the performance of the small-cap value segment of the U.S. equity universe. It includes those Russell 2000® Index companies with lower price-to-book ratios and lower forecasted growth values. The Russell 2000® Index is a subset of the Russell 3000® Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2,000 of the smallest securities based on a combination of their market capitalization and current index membership. The Index is unmanaged and its returns do not include any sales charges or fees. Such costs would lower performance. It is not possible to invest directly in an index. | |
(2) | The Lipper Small-Cap Value Funds Index is an equally weighted performance index of the largest qualifying funds (based on net assets) in the Lipper Small-Cap Value Funds classification. The Index, which is adjusted for capital gains distributions and income dividends, is unmanaged and should not be considered an investment. There are currently 30 funds represented in this Index. The Fund was in the Lipper Small-Cap Value Funds classification as of the date of this report. | |
(3) | Figure shown assumes reinvestment of all distributions and does not reflect the deduction of any sales charges. | |
(4) | Figure shown assumes reinvestment of all distributions and the deduction of the maximum applicable sales charge. See the Fund’s current prospectus for complete details on fees and sales charges. | |
‡ | Ending value assuming a complete redemption on July 31, 2009. |
7
Expense Example
As a shareholder of the Fund, you incur two types of costs: (1) transaction costs, including sales charges (loads) on purchase payments and redemption fees; and (2) ongoing costs, including advisory fees; distribution and service (12b-1) fees; and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period 02/01/09 – 07/31/09.
Actual Expenses
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table below provides information about hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing cost of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as sales charges (loads) and redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs, and will not help you determine the relative total cost of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Expenses Paid | ||||||||||||
Beginning | Ending | During Period@ | ||||||||||
Account Value | Account Value | 02/01/09 – | ||||||||||
02/01/09 | 07/31/09 | 07/31/09 | ||||||||||
Class A | ||||||||||||
Actual (28.99% return) | $ | 1,000.00 | $ | 1,289.90 | $ | 7.66 | ||||||
Hypothetical (5% annual return before expenses) | $ | 1,000.00 | $ | 1,018.10 | $ | 6.76 | ||||||
Class B | ||||||||||||
Actual (28.62% return) | $ | 1,000.00 | $ | 1,286.20 | $ | 11.90 | ||||||
Hypothetical (5% annual return before expenses) | $ | 1,000.00 | $ | 1,014.38 | $ | 10.49 | ||||||
Class C | ||||||||||||
Actual (28.73% return) | $ | 1,000.00 | $ | 1,287.30 | $ | 11.91 | ||||||
Hypothetical (5% annual return before expenses) | $ | 1,000.00 | $ | 1,014.38 | $ | 10.49 | ||||||
Class I | ||||||||||||
Actual (29.35% return) | $ | 1,000.00 | $ | 1,293.50 | $ | 6.26 | ||||||
Hypothetical (5% annual return before expenses) | $ | 1,000.00 | $ | 1,019.34 | $ | 5.51 |
@ | Expenses are equal to the Fund’s annualized expense ratios of 1.35%, 2.10%, 2.10% and 1.10% for Class A, Class B, Class C and Class I shares, respectively, multiplied by the average account value over the period, multiplied by 181/365 (to reflect the one-half year period). If the Fund had borne all of its expenses, the annualized expense ratios would have been 1.36%, 2.11%, 2.11% and 1.11% for Class A, Class B, Class C and Class I shares, respectively. |
8
Investment Advisory Agreement Approval
Nature, Extent and Quality of Services
The Board reviewed and considered the nature and extent of the investment advisory services provided by the Investment Adviser (as defined herein) under the advisory agreement, including portfolio management, investment research and fixed income securities trading. The Board also reviewed and considered the nature and extent of the non-advisory, administrative services provided by the Fund’s Administrator (as defined herein) under the administration agreement, including accounting, clerical, bookkeeping, compliance, business management and planning, and the provision of supplies, office space and utilities at the Investment Adviser’s expense. (The Investment Adviser and the Administrator together are referred to as the “Adviser” and the advisory and administration agreements together are referred to as the “Management Agreement.”) The Board also compared the nature of the services provided by the Adviser with similar services provided by non-affiliated advisers as reported to the Board by Lipper Inc. (“Lipper”).
The Board reviewed and considered the qualifications of the portfolio managers, the senior administrative managers and other key personnel of the Adviser who provide the advisory and administrative services to the Fund. The Board determined that the Adviser’s portfolio managers and key personnel are well qualified by education and/or training and experience to perform the services in an efficient and professional manner. The Board concluded that the nature and extent of the advisory and administrative services provided were necessary and appropriate for the conduct of the business and investment activities of the Fund. The Board also concluded that the overall quality of the advisory and administrative services was satisfactory.
Performance, Fees and Expenses of the Fund
The Board reviewed the performance, fees and expenses of the Fund compared to its peers, as determined by Lipper, and to appropriate benchmarks where applicable. The Board discussed with the Adviser the performance goals and the actual results achieved in managing the Fund. When considering a fund’s performance, the Board and the Adviser place emphasis on trends and longer-term returns (focusing on one-year, three-year and five-year performance, as of December 31, 2008, as applicable). When a fund underperforms its benchmark and/or its peer group average, the Board and the Adviser discuss the causes of such underperformance and, where necessary, they discuss specific changes to investment strategy or investment personnel. The Board noted that the Fund’s performance was better than its peer group average for the one-, three- and five-year periods. The Board discussed with the Adviser the level of the advisory and administration fees (together, the “management fee”) for this Fund relative to comparable funds advised by the Adviser and compared to its peers as determined by Lipper. In addition to the management fee, the Board also reviewed the Fund’s total expense ratio. The Board noted that the management fee and total
9
expense ratio were lower than the peer group average. After discussion, the Board concluded that the Fund’s management fee, total expense ratio and performance were competitive with the peer group average.
Economies of Scale
The Board considered the size and growth prospects of the Fund and how that relates to the Fund’s total expense ratio and particularly the Fund’s management fee rate, which includes breakpoints. In conjunction with its review of the Adviser’s profitability, the Board discussed with the Adviser how a change in assets can affect the efficiency or effectiveness of managing the Fund and whether the management fee level is appropriate relative to current and projected asset levels and/or whether the management fee structure reflects economies of scale as asset levels change. The Board has determined that its review of the actual and potential economies of scale of the Fund support its decision to approve the Management Agreement.
Profitability of the Adviser and Affiliates
The Board considered information concerning the costs incurred and profits realized by the Adviser and its affiliates during the last year from their relationship with the Fund and during the last two years from their relationship with the Morgan Stanley Fund Complex and reviewed with the Adviser the cost allocation methodology used to determine the profitability of the Adviser and affiliates. The Board has determined that its review of the analysis of the Adviser’s expenses and profitability supports its decision to approve the Management Agreement.
Other Benefits of the Relationship
The Board considered other benefits to the Adviser and its affiliates derived from their relationship with the Fund and other funds advised by the Adviser. These benefits may include, among other things, “float” benefits derived from handling of checks for purchases and sales, research received by the Adviser generated from commission dollars spent on funds’ portfolio trading and fees for distribution and/or shareholder servicing. The Board reviewed with the Adviser each of these arrangements and the reasonableness of its costs relative to the services performed. The Board has determined that its review of the other benefits received by the Adviser or its affiliates supports its decision to approve the Management Agreement.
Resources of the Adviser and Historical Relationship Between the Fund and the Adviser
The Board considered whether the Adviser is financially sound and has the resources necessary to perform its obligations under the Management Agreement. The Board also reviewed and considered the historical relationship between the Fund and the Adviser, including the organizational structure of the Adviser, the policies and procedures formulated and adopted by the Adviser for managing the Fund’s operations and the
10
Board’s confidence in the competence and integrity of the senior managers and key personnel of the Adviser. The Board concluded that the Adviser has the financial resources necessary to fulfill its obligations under the Management Agreement and that it is beneficial for the Fund to continue its relationship with the Adviser.
Other Factors and Current Trends
The Board considered the controls and procedures adopted and implemented by the Adviser and monitored by the Fund’s Chief Compliance Officer and concluded that the conduct of business by the Adviser indicates a good faith effort on its part to adhere to high ethical standards in the conduct of the Fund’s business.
General Conclusion
After considering and weighing all of the above factors, the Board concluded that it would be in the best interest of the Fund and its shareholders to approve renewal of the Management Agreement for another year. In reaching this conclusion the Board did not give particular weight to any single factor referenced above. The Board considered these factors over the course of numerous meetings, some of which were in executive session with only the Independent Board members and their counsel present. It is possible that individual Board members may have weighed these factors differently in reaching their individual decisions to approve the Management Agreement.
11
Morgan Stanley Special Value Fund
Portfolio of Investments - July 31, 2009
NUMBER OF | |||||||||||||
SHARES | VALUE | ||||||||||||
Common Stocks (95.0%) | |||||||||||||
Aerospace & Defense (5.9%) | |||||||||||||
544,980 | AAR Corp. (a) | $ | 10,425,467 | ||||||||||
24,700 | HEICO Corp. (Class A) | 698,516 | |||||||||||
140,700 | Moog Inc. (Class A) (a) | 3,793,272 | |||||||||||
133,800 | Spirit AeroSystems Holdings, Inc. (Class A) (a) | 1,740,738 | |||||||||||
16,657,993 | |||||||||||||
Agricultural Commodities/Milling (2.5%) | |||||||||||||
253,500 | Corn Products International, Inc. | 7,098,000 | |||||||||||
Air Freight/Couriers (2.2%) | |||||||||||||
152,900 | Forward Air Corp. | 3,536,577 | |||||||||||
221,400 | UTI Worldwide Inc. (British Virgin) (a) | 2,794,068 | |||||||||||
6,330,645 | |||||||||||||
Apparel/Footwear (0.9%) | |||||||||||||
187,035 | Maidenform Brands, Inc. (a) | 2,586,694 | |||||||||||
Apparel/Footwear Retail (0.9%) | |||||||||||||
209,750 | Stage Stores, Inc. | 2,617,680 | |||||||||||
Chemicals: Agricultural (0.6%) | |||||||||||||
43,400 | Scotts Miracle – Gro Co. (The) (Class A) | 1,694,770 | |||||||||||
Chemicals: Specialty (0.7%) | |||||||||||||
80,200 | Cytec Industries Inc. | 2,013,020 | |||||||||||
Computer Peripherals (1.2%) | |||||||||||||
141,790 | Zebra Technologies Corp. (Class A) (a) | 3,465,348 | |||||||||||
Consumer Sundries (1.9%) | |||||||||||||
251,700 | Central Garden & Pet Co. (a) | 3,085,842 | |||||||||||
191,800 | Central Garden & Pet Co. (a) (Class A) | 2,165,422 | |||||||||||
5,251,264 | |||||||||||||
Containers/Packaging (3.6%) | |||||||||||||
136,600 | Pactiv Corp. (a) | 3,439,588 | |||||||||||
93,342 | Rock-Tenn Co. (Class A) | 4,196,656 | |||||||||||
48,731 | Silgan Holdings Inc. | 2,449,220 | |||||||||||
10,085,464 | |||||||||||||
Data Processing Services (1.6%) | |||||||||||||
260,400 | Acxiom Corp. (a) | 2,512,860 | |||||||||||
114,500 | Broadridge Financial Solutions Inc. | 1,977,415 | |||||||||||
4,490,275 | |||||||||||||
Electric Utilities (2.6%) | |||||||||||||
111,500 | ALLETE, Inc. | 3,565,770 | |||||||||||
165,100 | Avista Corp. | 3,057,652 | |||||||||||
38,700 | Portland General Eletric Co. | 736,461 | |||||||||||
7,359,883 | |||||||||||||
Electronic Components (0.6%) | |||||||||||||
68,432 | Rogers Corp. (a) | 1,707,378 | |||||||||||
Electronic Equipment/Instruments (1.9%) | |||||||||||||
301,500 | Checkpoint Systems, Inc. (a) | 5,224,995 | |||||||||||
Electronic Production Equipment (0.3%) | |||||||||||||
52,400 | Cognex Corp. | 864,600 | |||||||||||
Engineering & Construction (3.2%) | |||||||||||||
83,500 | Aecom Technology Corp. (a) | 2,705,400 | |||||||||||
113,093 | Orion Marine Group, Inc. (a) | 2,528,759 | |||||||||||
148,600 | Stantec Inc. (Canada) (a) | 3,761,066 | |||||||||||
8,995,225 | |||||||||||||
Finance/Rental/Leasing (2.2%) | |||||||||||||
820,600 | AerCap Holdings NV (Netherlands) (a) | 6,269,384 | |||||||||||
See Notes to Financial Statements
12
Morgan Stanley Special Value Fund
Portfolio of Investments - July 31, 2009 continued
NUMBER OF | |||||||||||||
SHARES | VALUE | ||||||||||||
Financial Conglomerates (1.6%) | |||||||||||||
1,439,800 | Conseco, Inc. (a) | $ | 4,477,778 | ||||||||||
Food: Specialty/Candy (2.2%) | |||||||||||||
174,400 | NBTY, Inc. (a) | 6,313,280 | |||||||||||
Gas Distributors (1.1%) | |||||||||||||
115,300 | UGI Corp. | 3,048,532 | |||||||||||
Industrial Machinery (0.6%) | |||||||||||||
117,800 | John Bean Technologies Corp. | 1,632,708 | |||||||||||
Industrial Specialties (3.5%) | |||||||||||||
229,900 | Polypore International, Inc. (a) | 2,839,265 | |||||||||||
431,272 | Zep Inc. | 6,934,854 | |||||||||||
9,774,119 | |||||||||||||
Information Technology Services (0.7%) | |||||||||||||
370,300 | Ness Technologies Inc. (a) | 1,969,996 | |||||||||||
Life/Health Insurance (3.2%) | |||||||||||||
308,400 | Employers Holdings, Inc. | 4,292,928 | |||||||||||
111,900 | Reinsurance Group of America, Inc. | 4,643,850 | |||||||||||
8,936,778 | |||||||||||||
Medical Specialties (2.3%) | |||||||||||||
56,540 | Bio-Rad Laboratories, Inc. (Class A) (a) | 4,378,458 | |||||||||||
118,700 | Hill-Rom Holdings, Inc. | 2,034,518 | |||||||||||
6,412,976 | |||||||||||||
Medical/Nursing Services (2.9%) | |||||||||||||
387,600 | PharMerica Corp. (a) | 8,124,096 | |||||||||||
Miscellaneous Commercial Services (6.8%) | |||||||||||||
137,100 | Brink’s Co. (The) | 3,722,265 | |||||||||||
38,000 | Copart, Inc. (a) | 1,341,780 | |||||||||||
203,900 | Gartner, Inc. (a) | 3,486,690 | |||||||||||
252,210 | MAXIMUS, Inc. | 10,749,190 | |||||||||||
19,299,925 | |||||||||||||
Multi-Line Insurance (1.7%) | |||||||||||||
244,200 | Max Capital Group Ltd. (Bermuda) | 4,876,674 | |||||||||||
Oilfield Services/Equipment (1.2%) | |||||||||||||
121,072 | Exterran Holdings Inc. (a) | 2,105,442 | |||||||||||
81,170 | Superior Energy Services, Inc. (a) | 1,346,610 | |||||||||||
3,452,052 | |||||||||||||
Other Consumer Services (1.7%) | |||||||||||||
159,600 | Brink’s Home Security Holdings, Inc. (a) | 4,759,272 | |||||||||||
Packaged Software (2.2%) | |||||||||||||
173,000 | Informatica Corp. (a) | 3,181,470 | |||||||||||
426,147 | MSC. Software Corp. (a) | 3,115,135 | |||||||||||
6,296,605 | |||||||||||||
Pharmaceuticals: Other (3.4%) | |||||||||||||
161,800 | ICON PLC (ADR) (Ireland) | 3,802,300 | |||||||||||
212,120 | Perrigo Co. | 5,756,937 | |||||||||||
9,559,237 | |||||||||||||
Property/Casualty Insurers (6.0%) | |||||||||||||
264,500 | AmTrust Financial Services, Inc. | 3,232,190 | |||||||||||
162,800 | Argo Group International Holdings, Ltd. (Bermuda) (a) | 5,470,080 | |||||||||||
171,600 | Platinum Underwriters Holdings, Ltd. (Bermuda) | 5,791,500 | |||||||||||
102,800 | Validus Holdings, Ltd. (Bermuda) | 2,333,560 | |||||||||||
16,827,330 | |||||||||||||
Publishing: Books/Magazines (1.0%) | |||||||||||||
197,900 | Dolan Media (a) | 2,697,377 | |||||||||||
Real Estate Development (1.1%) | |||||||||||||
247,996 | Forestar Group, Inc. (a) | 3,228,908 | |||||||||||
Real Estate Investment Trusts (1.4%) | |||||||||||||
137,600 | Potlatch Corp. | 4,068,832 | |||||||||||
See Notes to Financial Statements
13
Morgan Stanley Special Value Fund
Portfolio of Investments - July 31, 2009 continued
NUMBER OF | |||||||||||||
SHARES | VALUE | ||||||||||||
Recreational Products (0.3%) | |||||||||||||
25,200 | Polaris Industries Inc. | $ | 954,324 | ||||||||||
Regional Banks (0.9%) | |||||||||||||
266,852 | Provident New York Bancorp | 2,588,464 | |||||||||||
Restaurants (1.7%) | |||||||||||||
243,100 | AFC Enterprises, Inc. (a) | 1,806,233 | |||||||||||
1,228,280 | Denny’s Corp. (a) | 2,837,327 | |||||||||||
4,643,560 | |||||||||||||
Savings Banks (1.5%) | |||||||||||||
177,500 | First Niagara Financial Group, Inc. | 2,334,125 | |||||||||||
144,874 | MB Financial, Inc. | 1,992,018 | |||||||||||
4,326,143 | |||||||||||||
Semiconductors (1.0%) | |||||||||||||
209,900 | Microsemi Corp. (a) | 2,865,135 | |||||||||||
Services to the Health Industry (3.9%) | |||||||||||||
166,000 | Allscripts-Misys Healthcare Solutions, Inc. (a) | 2,860,180 | |||||||||||
559,900 | HEALTHSOUTH Corp. (a) | 8,062,560 | |||||||||||
10,922,740 | |||||||||||||
Specialty Insurance (2.5%) | |||||||||||||
138,686 | ProAssurance Corp. (a) | 7,042,475 | |||||||||||
Specialty Telecommunications (2.2%) | |||||||||||||
356,086 | Syniverse Holdings Inc. (a) | 6,242,188 | |||||||||||
Steel (0.3%) | |||||||||||||
70,617 | Quanex Building Products Corp. | 839,636 | |||||||||||
Telecommunication Equipment (2.6%) | |||||||||||||
84,600 | ADTRAN, Inc. | 2,043,936 | |||||||||||
290,600 | Tekelec (a) | 5,344,134 | |||||||||||
7,388,070 | |||||||||||||
Tools/Hardware (0.7%) | |||||||||||||
58,236 | Snap-On Inc. | 2,074,949 | |||||||||||
Total Common Stocks (Cost $236,488,959) | 268,356,777 | ||||||||||||
PRINCIPAL | |||||||||||||
AMOUNT IN | |||||||||||||
THOUSANDS | |||||||||||||
Convertible Bond (1.0%) | |||||||||||||
Information Technology Services | |||||||||||||
$3,947 | Epicor Software Corp. 2.375% 05/15/27 (Cost $3,587,572) | 2,738,231 | |||||||||||
NUMBER OF | |||||||||||||
SHARES (000) | |||||||||||||
Short-Term Investment (b) (4.4%) | |||||||||||||
Investment Company | |||||||||||||
12,570 | Morgan Stanley Institutional Liquidity Funds – Money Market Portfolio – Institutional Class (Cost $12,570,004) | 12,570,004 | |||||||||||
Total Investments (Cost $252,646,535) (c) | 100.4 | % | 283,665,012 | ||||||||||
Liabilities in Excess of Other Assets | (0.4 | ) | (1,259,114 | ) | |||||||||
Net Assets | 100.0 | % | $ | 282,405,898 | |||||||||
ADR | American Depositary Receipt. | |
(a) | Non-income producing security. | |
(b) | See Note 5 to the financial statements regarding investments in Morgan Stanley Institutional Liquidity Funds – Money Market Portfolio – Institutional Class. | |
(c) | The aggregate cost for federal income tax purposes is $261,086,219. The aggregate gross unrealized appreciation is $46,246,099 and the aggregate gross unrealized depreciation is $23,667,306 resulting in net unrealized appreciation of $22,578,793. |
See Notes to Financial Statements
14
Morgan Stanley Special Value
Summary of Investments - July 31, 2009
PERCENT OF | ||||||||
TOTAL | ||||||||
INDUSTRY | VALUE | INVESTMENTS | ||||||
Miscellaneous Commercial Services | $ | 19,299,925 | 6.8 | % | ||||
Property/Casualty Insurers | 16,827,330 | 5.9 | ||||||
Aerospace & Defense | 16,657,993 | 5.9 | ||||||
Investment Company | 12,570,004 | 4.4 | ||||||
Services to the Health Industry | 10,922,740 | 3.9 | ||||||
Containers/Packaging | 10,085,464 | 3.6 | ||||||
Industrial Specialties | 9,774,119 | 3.5 | ||||||
Pharmaceuticals: Other | 9,559,237 | 3.4 | ||||||
Engineering & Construction | 8,995,225 | 3.2 | ||||||
Life/Health Insurance | 8,936,778 | 3.1 | ||||||
Medical/Nursing Services | 8,124,096 | 2.9 | ||||||
Telecommunication Equipment | 7,388,070 | 2.6 | ||||||
Electric Utilities | 7,359,883 | 2.6 | ||||||
Agricultural Commodities/Milling | 7,098,000 | 2.5 | ||||||
Specialty Insurance | 7,042,475 | 2.5 | ||||||
Medical Specialties | 6,412,976 | 2.3 | ||||||
Air Freight/Couriers | 6,330,645 | 2.2 | ||||||
Food: Specialty/Candy | 6,313,280 | 2.2 | ||||||
Packaged Software | 6,296,605 | 2.2 | ||||||
Finance/Rental/Leasing | 6,269,384 | 2.2 | ||||||
Specialty Telecommunications | 6,242,188 | 2.2 | ||||||
Consumer Sundries | 5,251,264 | 1.9 | ||||||
Electronic Equipment/Instruments | 5,224,995 | 1.8 | ||||||
Multi-Line Insurance | 4,876,674 | 1.7 | ||||||
Other Consumer Services | 4,759,272 | 1.7 | ||||||
Information Technology Services | 4,708,227 | 1.7 | ||||||
Restaurants | 4,643,560 | 1.6 | ||||||
Data Processing Services | 4,490,275 | 1.6 | ||||||
Financial Conglomerates | 4,477,778 | 1.6 | ||||||
Savings Banks | 4,326,143 | 1.5 | ||||||
Real Estate Investment Trusts | 4,068,832 | 1.4 | ||||||
Computer Peripherals | 3,465,348 | 1.2 | ||||||
Oilfield Services/Equipment | 3,452,052 | 1.2 | ||||||
Real Estate Development | 3,228,908 | 1.1 | ||||||
Gas Distributors | 3,048,532 | 1.1 | ||||||
Semiconductors | 2,865,135 | 1.0 | ||||||
Publishing: Books/Magazines | 2,697,377 | 1.0 | ||||||
Apparel/Footwear Retail | 2,617,680 | 0.9 | ||||||
Regional Banks | 2,588,464 | 0.9 | ||||||
Apparel/Footwear | 2,586,694 | 0.9 | ||||||
Tools/Hardware | 2,074,949 | 0.7 | ||||||
Chemicals: Specialty | 2,013,020 | 0.7 | ||||||
Electronic Components | 1,707,378 | 0.6 | ||||||
Chemicals: Agricultural | 1,694,770 | 0.6 | ||||||
Industrial Machinery | 1,632,708 | 0.6 | ||||||
Recreational Products | 954,324 | 0.3 | ||||||
Electronic Production Equipment | 864,600 | 0.3 | ||||||
Steel | 839,636 | 0.3 | ||||||
$ | 283,665,012 | 100.0 | % | |||||
See Notes to Financial Statements
15
Morgan Stanley Special Value Fund
Financial Statements
Statement of Assets and Liabilities
July 31, 2009
Assets: | ||||
Investments in securities, at value (cost $240,076,531) | $ | 271,095,008 | ||
Investment in affiliate, at value (cost $12,570,004) | 12,570,004 | |||
Receivable for: | ||||
Investments sold | 611,257 | |||
Shares of beneficial interest sold | 399,163 | |||
Dividends | 151,442 | |||
Interest | 19,869 | |||
Dividends from affiliate | 2,225 | |||
Prepaid expenses and other assets | 41,674 | |||
Total Assets | 284,890,642 | |||
Liabilities: | ||||
Payable for: | ||||
Investments purchased | 1,168,173 | |||
Shares of beneficial interest redeemed | 890,081 | |||
Investment advisory fee | 148,024 | |||
Distribution fee | 103,566 | |||
Transfer agent fee | 34,072 | |||
Administration fee | 18,004 | |||
Accrued expenses and other payables | 122,824 | |||
Total Liabilities | 2,484,744 | |||
Net Assets | $ | 282,405,898 | ||
Composition of Net Assets: | ||||
Paid-in-capital | $ | 301,774,312 | ||
Net unrealized appreciation | 31,018,477 | |||
Accumulated undistributed net investment income | 819,554 | |||
Accumulated net realized loss | (51,206,445 | ) | ||
Net Assets | $ | 282,405,898 | ||
Class A Shares: | ||||
Net Assets | $ | 204,174,456 | ||
Shares Outstanding (unlimited authorized, $.01 par value) | 20,210,600 | |||
Net Asset Value Per Share | $10.10 | |||
Maximum Offering Price Per Share, (net asset value plus 5.54% of net asset value) | $10.66 | |||
Class B Shares: | ||||
Net Assets | $59,760,828 | |||
Shares Outstanding (unlimited authorized, $.01 par value) | 7,225,676 | |||
Net Asset Value Per Share | $8.27 | |||
Class C Shares: | ||||
Net Assets | $17,021,993 | |||
Shares Outstanding (unlimited authorized, $.01 par value) | 2,053,708 | |||
Net Asset Value Per Share | $8.29 | |||
Class I Shares: | ||||
Net Assets | $1,448,621 | |||
Shares Outstanding (unlimited authorized, $.01 par value) | 135,320 | |||
Net Asset Value Per Share | $10.71 | |||
See Notes to Financial Statements
16
Morgan Stanley Special Value Fund
Financial Statements continued
Statement of Operations
For the year ended July 31, 2009
Net Investment Income: | ||||
Income | ||||
Dividends | $ | 5,045,880 | ||
Dividends from affiliate | 168,137 | |||
Interest | 139,198 | |||
Total Income | 5,353,215 | |||
Expenses | ||||
Investment advisory fee | 1,876,367 | |||
Distribution fee (Class A shares) | 453,394 | |||
Distribution fee (Class B shares) | 729,222 | |||
Distribution fee (Class C shares) | 166,493 | |||
Transfer agent fees and expenses | 629,500 | |||
Administration fee | 224,044 | |||
Shareholder reports and notices | 133,383 | |||
Professional fees | 91,743 | |||
Registration fees | 46,420 | |||
Custodian fees | 20,825 | |||
Trustees’ fees and expenses | 6,161 | |||
Other | 36,269 | |||
Total Expenses | 4,413,821 | |||
Less: Rebate from Morgan Stanley affiliated cash sweep (Note 5) | (15,791 | ) | ||
Net Expenses | 4,398,030 | |||
Net Investment Income | 955,185 | |||
Realized and Unrealized Loss: | ||||
Net Realized Loss | (44,622,199 | ) | ||
Net Change in Unrealized Appreciation/Depreciation | (16,054,596 | ) | ||
Net Loss | (60,676,795 | ) | ||
Net Decrease | $ | (59,721,610 | ) | |
See Notes to Financial Statements
17
Morgan Stanley Special Value Fund
Financial Statements continued
Statements of Changes in Net Assets
FOR THE YEAR | FOR THE YEAR | |||||||
ENDED | ENDED | |||||||
JULY 31, 2009 | JULY 31, 2008 | |||||||
Decrease in Net Assets: | ||||||||
Operations: | ||||||||
Net investment income (loss) | $ | 955,185 | $ | (2,165,795 | ) | |||
Net realized gain (loss) | (44,622,199 | ) | 63,273,761 | |||||
Net change in unrealized appreciation/depreciation | (16,054,596 | ) | (113,666,081 | ) | ||||
Net Decrease | (59,721,610 | ) | (52,558,115 | ) | ||||
Distributions to Shareholders from Net Realized Gain: | ||||||||
Class A shares | (20,619,167 | ) | (62,182,270 | ) | ||||
Class B shares | (10,268,497 | ) | (43,431,875 | ) | ||||
Class C shares | (2,233,834 | ) | (8,652,023 | ) | ||||
Class I shares | (186,134 | ) | (9,280,916 | ) | ||||
Total Distributions | (33,307,632 | ) | (123,547,084 | ) | ||||
Net decrease from transactions in shares of beneficial interest | (42,583,198 | ) | (17,314,583 | ) | ||||
Net Decrease | (135,612,440 | ) | (193,419,782 | ) | ||||
Net Assets: | ||||||||
Beginning of period | 418,018,338 | 611,438,120 | ||||||
End of Period (Including accumulated undistributed net investment income of $819,554 and $11,474, respectively) | $ | 282,405,898 | $ | 418,018,338 | ||||
See Notes to Financial Statements
18
Morgan Stanley Special Value Fund
Notes to Financial Statements - July 31, 2009
1. Organization and Accounting Policies
Morgan Stanley Special Value Fund (the “Fund”) is registered under the Investment Company Act of 1940, as amended (the “Act”), as a diversified, open-end management investment company. The Fund’s investment objective is to seek long-term capital appreciation. The Fund was organized as a Massachusetts business trust on June 21, 1996 and commenced operations on October 29, 1996. On July 28, 1997, the Fund converted to a multiple class share structure.
The Fund offers Class A shares, Class B shares, Class C shares and Class I shares. The four classes are substantially the same except that most Class A shares are subject to a sales charge imposed at the time of purchase and some Class A shares, and most Class B shares and Class C shares are subject to a contingent deferred sales charge imposed on shares redeemed within eighteen months, six years and one year, respectively. Class I shares are not subject to a sales charge. Additionally, Class A shares, Class B shares and Class C shares incur distribution expenses.
The Fund will assess a 2% redemption fee on Class A shares, Class B shares, Class C shares and Class I shares, which is paid directly to the Fund, for shares redeemed or exchanged within thirty days of purchase, subject to certain exceptions. The redemption fee is designed to protect the Fund and its remaining shareholders from the effects of short-term trading.
The following is a summary of significant accounting policies:
A. Valuation of Investments — (1) an equity portfolio security listed or traded on the New York Stock Exchange (“NYSE”) or American Stock Exchange or other exchange is valued at its latest sale price prior to the time when assets are valued; if there were no sales that day, the security is valued at the mean between the last reported bid and asked price; (2) an equity portfolio security listed or traded on the Nasdaq is valued at the Nasdaq Official Closing Price; if there were no sales that day, the security is valued at the mean between the last reported bid and asked price; (3) all other portfolio securities for which over-the-counter market quotations are readily available are valued at the mean between the last reported bid and asked price. In cases where a security is traded on more than one exchange, the security is valued on the exchange designated as the primary market; (4) for equity securities traded on foreign exchanges, the last reported sale price or the latest bid price may be used if there were no sales on a particular day; (5) when market quotations are not readily available including circumstances under which Morgan Stanley Investment Advisors Inc. (the “Investment Adviser”) determines that the latest sale price, the bid price or the mean between the last reported bid and asked price do not reflect a security’s market value, portfolio securities are valued at their fair value as determined in good faith under procedures established by and under the general supervision of the Fund’s Trustees. Occasionally, developments affecting the closing prices of securities and other assets may occur between the times at which valuations of such securities are
19
Morgan Stanley Special Value Fund
Notes to Financial Statements - July 31, 2009 continued
determined (that is, close of the foreign market on which the securities trade) and the close of business on the NYSE. If developments occur during such periods that are expected to materially affect the value of such securities, such valuations may be adjusted to reflect the estimated fair value of such securities as of the close of the NYSE, as determined in good faith by the Fund’s Trustees or by the Investment Adviser using a pricing service and/or procedures approved by the Trustees of the Fund; (6) certain portfolio securities may be valued by an outside pricing service approved by the Fund’s Trustees; (7) investments in open-end mutual funds, including the Morgan Stanley Institutional Liquidity Funds, are valued at net asset value as of the close of each business day; and (8) short-term debt securities having a maturity date of more than sixty days at time of purchase are valued on a mark-to-market basis until sixty days prior to maturity and thereafter at amortized cost based on their value on the 61st day. Short-term debt securities having a maturity date of sixty days or less at the time of purchase are valued at amortized cost, which approximates market value.
B. Accounting for Investments — Security transactions are accounted for on the trade date (date the order to buy or sell is executed). Realized gains and losses on security transactions are determined by the identified cost method. Dividend income and other distributions are recorded on the ex-dividend date. Discounts are accreted and premiums are amortized over the life of the respective securities and are included in interest income. Interest income is accrued daily as earned.
C. Multiple Class Allocations — Investment income, expenses (other than distribution fees), and realized and unrealized gains and losses are allocated to each class of shares based upon the relative net asset value on the date such items are recognized. Distribution fees are charged directly to the respective class.
D. Federal Income Tax Policy — It is the Fund’s policy to comply with the requirements of Subchapter M of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of its taxable income to its shareholders. Therefore, no federal income tax provision is required. The Fund files tax returns with the U.S. Internal Revenue Service, New York State and New York City. The Fund follows the provisions of the Financial Accounting Standards Board (“FASB”) Interpretation No. 48 (“FIN 48”) Accounting for Uncertainty in Income Taxes. FIN 48 sets forth a minimum threshold for financial statement recognition of the benefit of a tax position taken or expected to be taken in a tax return. There are no unrecognized tax benefits in the accompanying financial statements. If applicable, the Fund recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in other expenses in the Statement of Operations. Each of the tax years in the four-year period ended July 31, 2009, remains subject to examination by taxing authorities.
E. Dividends and Distributions to Shareholders — Dividends and distributions to shareholders are recorded on the ex-dividend date.
20
Morgan Stanley Special Value Fund
Notes to Financial Statements - July 31, 2009 continued
F. Use of Estimates — The preparation of financial statements in accordance with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts and disclosures. Actual results could differ from those estimates.
G. Subsequent Events — The Fund considers events or transactions that occur after the date of the Statement of Assets and Liabilities but before the financial statements are issued to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure. Subsequent events have been evaluated through September 25, 2009, the date of issuance of these financial statements.
2. Fair Valuation Measurements
The Fund adopted FASB Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“SFAS 157”), effective August 1, 2008. In accordance with SFAS 157, fair value is defined as the price that the Fund would receive to sell an investment or pay to transfer a liability in a timely transaction with an independent buyer in the principal market, or in the absence of a principal market the most advantageous market for the investment or liability. SFAS 157 establishes a three-tier hierarchy to distinguish between (1) inputs that reflect the assumptions market participants would use in pricing an asset or liability developed based on market data obtained from sources independent of the reporting entity (observable inputs) and (2) inputs that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing an asset or liability developed based on the best information available in the circumstances (unobservable inputs) and to establish classification of fair value measurements for disclosure purposes. Various inputs are used in determining the value of the Fund’s investments. The inputs are summarized in the three broad levels listed below.
• | Level 1 — unadjusted quoted prices in active markets for identical investments | |
• | Level 2 — other significant observable inputs (including quoted prices for similar investments, interest rates, prepayment speeds, credit risk, etc.) | |
• | Level 3 — significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments) |
The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities and the determination of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to each security.
21
Morgan Stanley Special Value Fund
Notes to Financial Statements - July 31, 2009 continued
The following is a summary of the inputs used as of July 31, 2009 in valuing the Fund’s investments carried at value:
FAIR VALUE MEASUREMENTS AT JULY 31, 2009 USING | ||||||||||||||||
UNADJUSTED | ||||||||||||||||
QUOTED PRICE IN | SIGNIFICANT | SIGNIFICANT | ||||||||||||||
ACTIVE MARKET FOR | OTHER OBSERVABLE | UNOBSERVABLE | ||||||||||||||
IDENTICAL ASSETS | INPUTS | INPUTS | ||||||||||||||
INVESTMENT TYPE | TOTAL | (LEVEL 1) | (LEVEL 2) | (LEVEL 3) | ||||||||||||
Common Stocks | ||||||||||||||||
Aerospace & Defense | $ | 16,657,993 | $ | 16,657,993 | — | — | ||||||||||
Agricultural Commodities/Milling | 7,098,000 | 7,098,000 | — | — | ||||||||||||
Air Freight/Couriers | 6,330,645 | 6,330,645 | — | — | ||||||||||||
Apparel/Footwear | 2,586,694 | 2,586,694 | — | — | ||||||||||||
Apparel/Footwear Retail | 2,617,680 | 2,617,680 | — | — | ||||||||||||
Chemicals: Agricultural | 1,694,770 | 1,694,770 | — | — | ||||||||||||
Chemicals: Specialty | 2,013,020 | 2,013,020 | — | — | ||||||||||||
Computer Peripherals | 3,465,348 | 3,465,348 | — | — | ||||||||||||
Consumer Sundries | 5,251,264 | 5,251,264 | — | — | ||||||||||||
Containers/Packaging | 10,085,464 | 10,085,464 | — | — | ||||||||||||
Data Processing Services | 4,490,275 | 4,490,275 | — | — | ||||||||||||
Electric Utilities | 7,359,883 | 7,359,883 | — | — | ||||||||||||
Electronic Components | 1,707,378 | 1,707,378 | — | — | ||||||||||||
Electronic Equipment/Instruments | 5,224,995 | 5,224,995 | — | — | ||||||||||||
Electronic Production Equipment | 864,600 | 864,600 | — | — | ||||||||||||
Engineering & Construction | 8,995,225 | 8,995,225 | — | — | ||||||||||||
Finance/Rental/Leasing | 6,269,384 | 6,269,384 | — | — | ||||||||||||
Financial Conglomerates | 4,477,778 | 4,477,778 | — | — | ||||||||||||
Food: Specialty/Candy | 6,313,280 | 6,313,280 | — | — | ||||||||||||
Gas Distributors | 3,048,532 | 3,048,532 | — | — | ||||||||||||
Industrial Machinery | 1,632,708 | 1,632,708 | — | — | ||||||||||||
Industrial Specialties | 9,774,119 | 9,774,119 | — | — | ||||||||||||
Information Technology Services | 1,969,996 | 1,969,996 | — | — | ||||||||||||
Life/Health Insurance | 8,936,778 | 8,936,778 | — | — | ||||||||||||
Medical Specialties | 6,412,976 | 6,412,976 | — | — | ||||||||||||
Medical/Nursing Services | 8,124,096 | 8,124,096 | — | — | ||||||||||||
Miscellaneous Commercial Services | 19,299,925 | 19,299,925 | — | — | ||||||||||||
Multi-Line Insurance | 4,876,674 | 4,876,674 | — | — | ||||||||||||
Oilfield Services/Equipment | 3,452,052 | 3,452,052 | — | — | ||||||||||||
Other Consumer Services | 4,759,272 | 4,759,272 | — | — | ||||||||||||
Packaged Software | 6,296,605 | 6,296,605 | — | — | ||||||||||||
Pharmaceuticals: Other | 9,559,237 | 9,559,237 | — | — | ||||||||||||
Property/Casualty Insurers | 16,827,330 | 16,827,330 | — | — | ||||||||||||
Publishing: Books/Magazines | 2,697,377 | 2,697,377 | — | — | ||||||||||||
Real Estate Development | 3,228,908 | 3,228,908 | — | — | ||||||||||||
Real Estate Investment Trusts | 4,068,832 | 4,068,832 | — | — | ||||||||||||
Recreational Products | 954,324 | 954,324 | — | — | ||||||||||||
Regional Banks | 2,588,464 | 2,588,464 | — | — |
22
Morgan Stanley Special Value Fund
Notes to Financial Statements - July 31, 2009 continued
FAIR VALUE MEASUREMENTS AT JULY 31, 2009 USING | ||||||||||||||||
UNADJUSTED | ||||||||||||||||
QUOTED PRICE IN | SIGNIFICANT | SIGNIFICANT | ||||||||||||||
ACTIVE MARKET FOR | OTHER OBSERVABLE | UNOBSERVABLE | ||||||||||||||
IDENTICAL ASSETS | INPUTS | INPUTS | ||||||||||||||
INVESTMENT TYPE | TOTAL | (LEVEL 1) | (LEVEL 2) | (LEVEL 3) | ||||||||||||
Restaurants | $ | 4,643,560 | $ | 4,643,560 | — | — | ||||||||||
Savings Banks | 4,326,143 | 4,326,143 | — | — | ||||||||||||
Semiconductors | 2,865,135 | 2,865,135 | — | — | ||||||||||||
Services to the Health Industry | 10,922,740 | 10,922,740 | — | — | ||||||||||||
Specialty Insurance | 7,042,475 | 7,042,475 | — | — | ||||||||||||
Specialty Telecommunications | 6,242,188 | 6,242,188 | — | — | ||||||||||||
Steel | 839,636 | 839,636 | — | — | ||||||||||||
Telecommunication Equipment | 7,388,070 | 7,388,070 | — | — | ||||||||||||
Tools/Hardware | 2,074,949 | 2,074,949 | — | — | ||||||||||||
Total Common Stocks | 268,356,777 | 268,356,777 | — | — | ||||||||||||
Convertible Bond | 2,738,231 | — | 2,738,231 | — | ||||||||||||
Short-Term Investment | ||||||||||||||||
Investment Company | 12,570,004 | 12,570,004 | — | — | ||||||||||||
Total | $ | 283,665,012 | $ | 280,926,781 | $2,738,231 | — | ||||||||||
On April 9, 2009, FASB issued Staff Position No. 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (“FSP 157-4”). FSP 157-4 provides additional guidance for estimating fair value in accordance with SFAS 157, when the volume and level of activity for the asset or liability have significantly decreased. FSP 157-4 also requires additional disaggregation of the current SFAS 157 required disclosures. FSP 157-4 is effective for interim and annual reporting periods ending after June 15, 2009. The Fund has adopted the provision of FSP 157-4 as of July 31, 2009 and it did not have a material impact on the Fund’s financial statements.
3. Investment Advisory/Administration Agreements
Pursuant to an Investment Advisory Agreement with the Investment Adviser, the Fund pays an advisory fee, accrued daily and payable monthly, by applying the following annual rates to the net assets of the Fund determined as of the close of each business day: 0.67% to the portion of the daily net assets not exceeding $500 million; 0.645% to the portion of the daily net assets exceeding $500 million but not exceeding $1 billion; and 0.62% to the portion of the daily net assets in excess of $1 billion.
Pursuant to an Administration Agreement with Morgan Stanley Services Company Inc. (the “Administrator”), an affiliate of the Investment Adviser, the Fund pays an administration fee, accrued daily and payable monthly, by applying the annual rate of 0.08% to the Fund’s daily net assets.
23
Morgan Stanley Special Value Fund
Notes to Financial Statements - July 31, 2009 continued
Under an agreement between the Administrator and State Street Bank and Trust Company (“State Street”), State Street provides certain administrative services to the Fund. For such services, the Administrator pays State Street a portion of the fee the Administrator receives from the Fund.
4. Plan of Distribution
Shares of the Fund are distributed by Morgan Stanley Distributors Inc. (the “Distributor”), an affiliate of the Investment Adviser and Administrator. The Fund has adopted a Plan of Distribution (the “Plan”) pursuant to Rule 12b-1 under the Act. The Plan provides that the Fund will pay the Distributor a fee which is accrued daily and paid monthly at the following annual rates: (i) Class A – up to 0.25% of the average daily net assets of Class A shares; (ii) Class B – up to 1.0% of the average daily net assets of Class B shares; and (iii) Class C – up to 1.0% of the average daily net assets of Class C shares.
In the case of Class B shares, provided that the Plan continues in effect, any cumulative expenses incurred by the Distributor but not yet recovered may be recovered through the payment of future distribution fees from the Fund pursuant to the Plan and contingent deferred sales charges paid by investors upon redemption of Class B shares. Although there is no legal obligation for the Fund to pay expenses incurred in excess of payments made to the Distributor under the Plan and the proceeds of contingent deferred sales charges paid by investors upon redemption of shares, if for any reason the Plan is terminated, the Trustees will consider at that time the manner in which to treat such expenses. The Distributor has advised the Fund that such excess amounts totaled $2,988,466 at July 31, 2009.
In the case of Class A shares and Class C shares, expenses incurred pursuant to the Plan in any calendar year in excess of 0.25% or 1.0% of the average daily net assets of Class A or Class C, respectively, will not be reimbursed by the Fund through payments in any subsequent year, except that expenses representing a gross sales credit to Morgan Stanley Financial Advisors and other authorized financial representatives at the time of sale may be reimbursed in the subsequent calendar year. For the year ended July 31, 2009, the distribution fee was accrued for Class A shares and Class C shares at the annual rate of 0.25% and 1.00%, respectively.
The Distributor has informed the Fund that for the year ended July 31, 2008, it received contingent deferred sales charges from certain redemptions of the Fund’s Class A shares, Class B shares and Class C shares of $5,203, $52,707 and $2,462, respectively and received $139,038 in front-end sales charges from sales of the Fund’s Class A shares. The respective shareholders pay such charges which are not an expense of the Fund.
5. Security Transactions and Transactions with Affiliates
The Fund invests in Morgan Stanley Institutional Liquidity Funds – Money Market Portfolio – Institutional Class, an open-end management investment company managed by an affiliate of the Investment Adviser. Investment advisory fees paid by the Fund are reduced by an amount equal to the advisory and administrative service
24
Morgan Stanley Special Value Fund
Notes to Financial Statements - July 31, 2009 continued
fees paid by Morgan Stanley Institutional Liquidity Funds – Money Market Portfolio – Institutional Class with respect to assets invested by the Fund in Morgan Stanley Institutional Liquidity Funds – Money Market Portfolio – Institutional Class. For the year ended July 31, 2009, advisory fees paid were reduced by $15,791 relating to the Fund’s investment in Morgan Stanley Institutional Liquidity Funds – Money Market Portfolio – Institutional Class. Income distributions earned by the Fund are recorded as “dividends from affiliate” in the Statement of Operations and totaled $168,137 for the year ended July 31, 2009. During the year ended July 31, 2009, the cost of purchases and sales of investments in Morgan Stanley Institutional Liquidity Funds – Money Market Portfolio – Institutional Class aggregated $101,403,598 and $103,666,353, respectively.
The cost of purchases and proceeds from sales of portfolio securities, excluding short-term investments, for the year ended July 31, 2009 aggregated $148,750,009 and $220,716,799, respectively. The Fund had purchases and sales with other Morgan Stanley funds of $1,533,262 and $32,774,950, respectively, including net realized losses of $9,442,928.
For the year ended July 31, 2009, the Fund incurred brokerage commissions of $9,102 with Morgan Stanley & Co., Inc., an affiliate of the Investment Adviser, Administrator and Distributor, for portfolio transactions executed on behalf of the Fund.
For the period June 1, 2009 (the date on which Citigroup, Inc. became an affiliate of the Investment Adviser, Administrator and Distributor) through July 31, 2009, the Fund incurred brokerage commissions of $182 with Citigroup, Inc., for portfolio transactions executed on behalf of the Fund.
Morgan Stanley Trust, an affiliate of the Investment Adviser, Administrator and Distributor, is the Fund’s transfer agent.
The Fund has an unfunded Deferred Compensation Plan (the “Compensation Plan”) which allows each independent Trustee to defer payment of all, or a portion, of the fees he or she receives for serving on the Board of Trustees. Each eligible Trustee generally may elect to have the deferred amounts credited with a return equal to the total return on one or more of the Morgan Stanley funds that are offered as investment options under the Compensation Plan. Appreciation/depreciation and distributions received from these investments are recorded with an offsetting increase/decrease in the deferred compensation obligation and do not affect the net asset value of the Fund.
25
Morgan Stanley Special Value Fund
Notes to Financial Statements - July 31, 2009 continued
6. Expense Offset
The expense offset represents a reduction of the fees and expenses for interest earned on cash balances maintained by the Fund with the transfer agent. For the year ended July 31, 2009, the Fund did not have an expense offset.
7. Shares of Beneficial Interest
Transactions in shares of beneficial interest were as follows:
FOR THE YEAR | FOR THE YEAR | |||||||||||||||
ENDED | ENDED | |||||||||||||||
JULY 31, 2009 | JULY 31, 2008 | |||||||||||||||
SHARES | AMOUNT | SHARES | AMOUNT | |||||||||||||
CLASS A SHARES | ||||||||||||||||
Sold | 5,014,184 | $ | 45,580,854 | 3,763,011 | $ | 51,745,548 | ||||||||||
Conversion from Class B | 317,743 | 2,917,785 | 736,164 | 11,209,645 | ||||||||||||
Reinvestment of distributions | 2,651,243 | 20,361,545 | 4,356,453 | 58,637,858 | ||||||||||||
Redeemed | (6,642,326 | ) | (59,584,672 | ) | (6,809,690 | ) | (100,639,649 | ) | ||||||||
Net increase – Class A | 1,340,844 | 9,275,512 | 2,045,938 | 20,953,402 | ||||||||||||
CLASS B SHARES | ||||||||||||||||
Sold | 220,111 | 1,698,555 | 496,771 | 5,888,830 | ||||||||||||
Conversion to Class A | (384,314 | ) | (2,917,785 | ) | (851,247 | ) | (11,209,645 | ) | ||||||||
Reinvestment of distributions | 1,581,847 | 9,997,273 | 3,472,140 | 39,825,439 | ||||||||||||
Redeemed | (4,887,341 | ) | (37,143,961 | ) | (5,088,303 | ) | (65,302,556 | ) | ||||||||
Net decrease – Class B | (3,469,697 | ) | (28,365,918 | ) | (1,970,639 | ) | (30,797,932 | ) | ||||||||
CLASS C SHARES | ||||||||||||||||
Sold | 218,034 | 1,641,083 | 208,802 | 3,046,221 | ||||||||||||
Reinvestment of distributions | 341,191 | 2,159,739 | 714,687 | 8,211,750 | ||||||||||||
Redeemed | (787,423 | ) | (6,043,829 | ) | (851,327 | ) | (10,512,784 | ) | ||||||||
Net increase (decrease) – Class C | (228,198 | ) | (2,243,007 | ) | 72,162 | 745,187 | ||||||||||
CLASS I SHARES | ||||||||||||||||
Sold | 71,333 | 705,174 | 133,854 | 2,050,022 | ||||||||||||
Reinvestment of distributions | 19,845 | 161,338 | 558,312 | 7,872,193 | ||||||||||||
Redeemed | (2,206,106 | ) | (22,116,297 | ) | (1,143,217 | ) | (18,137,455 | ) | ||||||||
Net decrease – Class I | (2,114,928 | ) | (21,249,785 | ) | (451,051 | ) | (8,215,240 | ) | ||||||||
Net decrease in Fund | (4,471,979 | ) | $ | (42,583,198 | ) | (303,590 | ) | $ | (17,314,583 | ) | ||||||
8. Federal Income Tax Status
The amount of dividends and distributions from net investment income and net realized capital gains are determined in accordance with federal income tax regulations which may differ from generally accepted accounting principles. These “book/tax” differences are either considered temporary or permanent in nature. To the extent these differences are permanent in nature, such amounts are reclassified within the capital
26
Morgan Stanley Special Value Fund
Notes to Financial Statements - July 31, 2009 continued
accounts based on their federal tax-basis treatment; temporary differences do not require reclassification. Dividends and distributions which exceed net investment income and net realized capital gains for tax purposes are reported as distributions of paid-in-capital.
The tax character of distributions paid was as follows:
FOR THE YEAR | FOR THE YEAR | |||||||
ENDED | ENDED | |||||||
JULY 31, 2009 | JULY 31, 2008 | |||||||
Ordinary income | $ | 58,642 | $ | 17,326,938 | ||||
Long-term capital gains | 33,248,990 | 106,220,146 | ||||||
Total distributions | $ | 33,307,632 | $ | 123,547,084 | ||||
As of July 31, 2009, the tax-basis components of accumulated losses were as follows:
Undistributed ordinary income | $ | 820,470 | ||||||
Undistributed long-term gains | — | |||||||
Net accumulated earnings | 820,470 | |||||||
Capital loss carryforward | (8,544,012 | ) | ||||||
Post-October losses | (34,222,628 | ) | ||||||
Temporary differences | (1,037 | ) | ||||||
Net unrealized appreciation | 22,578,793 | |||||||
Total accumulated losses | $ | (19,368,414 | ) | |||||
As of July 31, 2009, the Fund had a net capital loss carryforward of $8,544,012, to offset future capital gains to the extent provided by regulations, which will expire on July 31, 2017.
As of July 31, 2009, the Fund had temporary book/tax differences primarily attributable to post-October losses (capital losses incurred after October 31 within the taxable year which are deemed to arise on the first business day of the Fund’s next taxable year) and capital loss deferrals on wash sales.
Permanent differences, primarily due to real estate investment trusts sold by the Fund, resulted in the following reclassifications among the Fund’s components of net assets at July 31, 2009:
ACCUMULATED | ||||||||||
UNDISTRIBUTED | ACCUMULATED | |||||||||
NET INVESTMENT | NET REALIZED | |||||||||
INCOME | LOSS | PAID-IN-CAPITAL | ||||||||
$ | (147,105 | ) | $ | 147,105 | — | |||||
27
Morgan Stanley Special Value Fund
Notes to Financial Statements - July 31, 2009 continued
9. Accounting Pronouncements
In May 2009, FASB issued Statement of Financial Accounting Standards No. 165, Subsequent Events (“SFAS 165”), which is intended to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. SFAS 165 is effective for interim or annual financial periods ending after June 15, 2009. The Fund has adopted the provisions of SFAS 165 as of July 31, 2009. Although the adoption of SFAS 165 did not materially impact its financial position, results of operations, or changes in net assets, the Fund is now required to provide additional disclosures, which are included in Note 1.
In June 2009, FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles – a replacement of FASB Statement No. 162 (“SFAS 168”). SFAS 168 will become the source of authoritative U.S. Generally Accepted Accounting Principles recognized by the FASB to be applied by nongovernmental entities. Once in effect, all of the Codification’s content will carry the same level of authority, effectively superseding FASB Statement No. 162. SFAS 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Fund does not anticipate that SFAS 168 will have a material impact on its financial statements.
28
Morgan Stanley Special Value Fund
Financial Highlights
Selected ratios and per share data for a share of beneficial interest outstanding throughout each period:
FOR THE YEAR ENDED JULY 31, | |||||||||||||||||||||||||
2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||||||||||||
Class A Shares | |||||||||||||||||||||||||
Selected Per Share Data: | |||||||||||||||||||||||||
Net asset value, beginning of period | $12.97 | $18.62 | $20.84 | $22.28 | $18.24 | ||||||||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||
Net investment income (loss)(1) | 0.05 | (0.03 | ) | (0.04 | ) | (0.04 | ) | 0.04 | |||||||||||||||||
Net realized and unrealized gain (loss) | (1.77 | ) | (1.56 | ) | 4.07 | 1.70 | 4.55 | ||||||||||||||||||
Total income (loss) from investment operations | (1.72 | ) | (1.59 | ) | 4.03 | 1.66 | 4.59 | ||||||||||||||||||
Less distributions from net realized gain | (1.15 | ) | (4.06 | ) | (6.25 | ) | (3.10 | ) | (0.55 | ) | |||||||||||||||
Net asset value, end of period | $10.10 | $12.97 | $18.62 | $20.84 | $22.28 | ||||||||||||||||||||
Total Return(2) | (10.50 | ) | % | (9.32 | ) | % | 20.93 | % | 8.50 | % | 25.45 | % | |||||||||||||
Ratios to Average Net Assets(3): | |||||||||||||||||||||||||
Total expenses (before expense offset) | 1.34%(4 | ) | 1.25%(4 | ) | 1.21%(4 | ) | 1.28 | % | 1.27 | % | |||||||||||||||
Net investment income (loss) | 0.57%(4 | ) | (0.18 | ) | %(4) | (0.19 | ) | %(4) | (0.22 | ) | % | 0.14 | % | ||||||||||||
Rebate from Morgan Stanley affiliate | 0.00%(5 | ) | 0.00%(5 | ) | 0.00%(5 | ) | — | — | |||||||||||||||||
Supplemental Data: | |||||||||||||||||||||||||
Net assets, end of period, in thousands | $204,174 | $244,668 | $313,180 | $283,281 | $274,050 | ||||||||||||||||||||
Portfolio turnover rate | 54 | % | 47 | % | 44 | % | 28 | % | 41 | % |
(1) | The per share amounts were computed using an average number of shares outstanding during the period. | |
(2) | Does not reflect the deduction of sales charge. Calculated based on the net asset value as of the last business day of the period. | |
(3) | Reflects overall Fund ratios for investment income and non-class specific expenses. | |
(4) | The ratios reflect the rebate of certain Fund expenses in connection with investments in a Morgan Stanley affiliate during the period. The effect of the rebate on the ratios is disclosed in the above table as “Rebate from Morgan Stanley affiliate.” | |
(5) | Amount is less than 0.01%. |
See Notes to Financial Statements
29
Morgan Stanley Special Value Fund
Financial Highlights continued
FOR THE YEAR ENDED JULY 31, | |||||||||||||||||||||||||
2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||||||||||||
Class B Shares | |||||||||||||||||||||||||
Selected Per Share Data: | |||||||||||||||||||||||||
Net asset value, beginning of period | $11.00 | $16.55 | $19.25 | $20.95 | $17.31 | ||||||||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||
Net investment loss(1) | (0.01 | ) | (0.12 | ) | (0.17 | ) | (0.19 | ) | (0.11 | ) | |||||||||||||||
Net realized and unrealized gain (loss) | (1.57 | ) | (1.37 | ) | 3.72 | 1.59 | 4.30 | ||||||||||||||||||
Total income (loss) from investment operations | (1.58 | ) | (1.49 | ) | 3.55 | 1.40 | 4.19 | ||||||||||||||||||
Less distributions from net realized gain | (1.15 | ) | (4.06 | ) | (6.25 | ) | (3.10 | ) | (0.55 | ) | |||||||||||||||
Net asset value, end of period | $8.27 | $11.00 | $16.55 | $19.25 | $20.95 | ||||||||||||||||||||
Total Return(2) | (11.17 | ) | % | (9.99 | ) | % | 20.00 | % | 7.68 | % | 24.55 | % | |||||||||||||
Ratios to Average Net Assets(3): | |||||||||||||||||||||||||
Total expenses (before expense offset) | 2.09%(4 | ) | 2.00%(4 | ) | 1.97%(4 | ) | 2.03 | % | 2.04 | % | |||||||||||||||
Net investment loss | (0.18 | ) | %(4) | (0.93 | ) | %(4) | (0.95 | ) | %(4) | (0.97 | ) | % | (0.63 | ) | % | ||||||||||
Rebate from Morgan Stanley affiliate | 0.00%(5 | ) | 0.00%(5 | ) | 0.00%(5 | ) | — | — | |||||||||||||||||
Supplemental Data: | |||||||||||||||||||||||||
Net assets, end of period, in thousands | $59,761 | $117,603 | $209,575 | $251,970 | $352,265 | ||||||||||||||||||||
Portfolio turnover rate | 54 | % | 47 | % | 44 | % | 28 | % | 41 | % |
(1) | The per share amounts were computed using an average number of shares outstanding during the period. | |
(2) | Does not reflect the deduction of sales charge. Calculated based on the net asset value as of the last business day of the period. | |
(3) | Reflects overall Fund ratios for investment income and non-class specific expenses. | |
(4) | The ratios reflect the rebate of certain Fund expenses in connection with investments in a Morgan Stanley affiliate during the period. The effect of the rebate on the ratios is disclosed in the above table as “Rebate from Morgan Stanley affiliate.” | |
(5) | Amount is less than 0.01%. |
See Notes to Financial Statements
30
Morgan Stanley Special Value Fund
Financial Highlights continued
FOR THE YEAR ENDED JULY 31, | |||||||||||||||||||||||||
2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||||||||||||
Class C Shares | |||||||||||||||||||||||||
Selected Per Share Data: | |||||||||||||||||||||||||
Net asset value, beginning of period | $11.02 | $16.57 | $19.27 | $20.97 | $17.30 | ||||||||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||
Net investment loss(1) | (0.01 | ) | (0.12 | ) | (0.17 | ) | (0.19 | ) | (0.10 | ) | |||||||||||||||
Net realized and unrealized gain (loss) | (1.57 | ) | (1.37 | ) | 3.72 | 1.59 | 4.32 | ||||||||||||||||||
Total income (loss) from investment operations | (1.58 | ) | (1.49 | ) | 3.55 | 1.40 | 4.22 | ||||||||||||||||||
Less distributions from net realized gain | (1.15 | ) | (4.06 | ) | (6.25 | ) | (3.10 | ) | (0.55 | ) | |||||||||||||||
Net asset value, end of period | $8.29 | $11.02 | $16.57 | $19.27 | $20.97 | ||||||||||||||||||||
Total Return(2) | (11.14 | ) | % | (9.98 | ) | % | 19.97 | % | 7.72 | % | 24.61 | % | |||||||||||||
Ratios to Average Net Assets(3): | |||||||||||||||||||||||||
Total expenses (before expense offset) | 2.09%(4 | ) | 2.00%(4 | ) | 1.97%(4 | ) | 2.02 | % | 1.93 | % | |||||||||||||||
Net investment loss | (0.18 | ) | %(4) | (0.93 | ) | %(4) | (0.95 | ) | %(4) | (0.96 | ) | % | (0.52 | ) | % | ||||||||||
Rebate from Morgan Stanley affiliate | 0.00%(5 | ) | 0.00%(5 | ) | 0.00%(5 | ) | — | — | |||||||||||||||||
Supplemental Data: | |||||||||||||||||||||||||
Net assets, end of period, in thousands | $17,022 | $25,138 | $36,613 | $36,311 | $42,352 | ||||||||||||||||||||
Portfolio turnover rate | 54 | % | 47 | % | 44 | % | 28 | % | 41 | % |
(1) | The per share amounts were computed using an average number of shares outstanding during the period. | |
(2) | Does not reflect the deduction of sales charge. Calculated based on the net asset value as of the last business day of the period. | |
(3) | Reflects overall Fund ratios for investment income and non-class specific expenses. | |
(4) | The ratios reflect the rebate of certain Fund expenses in connection with investments in a Morgan Stanley affiliate during the period. The effect of the rebate on the ratios is disclosed in the above table as “Rebate from Morgan Stanley affiliate.” | |
(5) | Amount is less than 0.01%. |
See Notes to Financial Statements
31
FOR THE YEAR ENDED JULY 31, | |||||||||||||||||||||||||
2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||||||||||||
Class I Shares | |||||||||||||||||||||||||
Selected Per Share Data: | |||||||||||||||||||||||||
Net asset value, beginning of period | $13.60 | $19.28 | $21.34 | $22.69 | $18.52 | ||||||||||||||||||||
Income from investment operations: | |||||||||||||||||||||||||
Net investment income(1) | 0.23 | 0.01 | 0.01 | 0.00 | 0.08 | ||||||||||||||||||||
Net realized and unrealized gain (loss) | (1.97 | ) | (1.63 | ) | 4.18 | 1.75 | 4.64 | ||||||||||||||||||
Total income (loss) from investment operations | (1.74 | ) | (1.62 | ) | 4.19 | 1.75 | 4.72 | ||||||||||||||||||
Less distributions from net realized gain | (1.15 | ) | (4.06 | ) | (6.25 | ) | (3.10 | ) | (0.55 | ) | |||||||||||||||
Net asset value, end of period | $10.71 | $13.60 | $19.28 | $21.34 | $22.69 | ||||||||||||||||||||
Total Return(2) | (10.14 | ) | % | (9.13 | ) | % | 21.23 | % | 8.76 | % | 25.77 | % | |||||||||||||
Ratios to Average Net Assets(3): | |||||||||||||||||||||||||
Total expenses (before expense offset) | 1.09%(4 | ) | 1.00%(4 | ) | 0.97%(4 | ) | 1.03 | % | 1.04 | % | |||||||||||||||
Net investment income | 0.82%(4 | ) | 0.07%(4 | ) | 0.05%(4 | ) | 0.03 | % | 0.37 | % | |||||||||||||||
Rebate from Morgan Stanley affiliate | 0.00%(5 | ) | 0.00%(5 | ) | 0.00%(5 | ) | — | — | |||||||||||||||||
Supplemental Data: | |||||||||||||||||||||||||
Net assets, end of period, in thousands | $1,449 | $30,609 | $52,070 | $54,930 | $404,168 | ||||||||||||||||||||
Portfolio turnover rate | 54 | % | 47 | % | 44 | % | 28 | % | 41 | % |
(1) | The per share amounts were computed using an average number of shares outstanding during the period. | |
(2) | Calculated based on the net asset value as of the last business day of the period. | |
(3) | Reflects overall Fund ratios for investment income and non-class specific expenses. | |
(4) | The ratios reflect the rebate of certain Fund expenses in connection with investments in a Morgan Stanley affiliate during the period. The effect of the rebate on the ratios is disclosed in the above table as “Rebate from Morgan Stanley affiliate.” | |
(5) | Amount is less than 0.01%. |
32
Morgan Stanley Special Value Fund
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Trustees of
Morgan Stanley Special Value Fund:
Morgan Stanley Special Value Fund:
We have audited the accompanying statement of assets and liabilities of Morgan Stanley Special Value Fund (the “Fund”), including the portfolio of investments, as of July 31, 2009, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also 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, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of July 31, 2009, by correspondence with the custodian and brokers; where replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Morgan Stanley Special Value Fund as of July 31, 2009, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America.
Deloitte & Touche LLP
New York, New York
September 25, 2009
New York, New York
September 25, 2009
33
Morgan Stanley Special Value Fund
An Important Notice Concerning Our U.S. Privacy Policy (unaudited)
We are required by federal law to provide you with a copy of our Privacy Policy annually.
This Policy applies to individual clients who are current and former advisory clients of certain Morgan Stanley Investment Management’s U.S. investment advisers and to current and former individual investors in certain U.S. mutual funds advised by Morgan Stanley and its affiliates.
The Policy is not applicable to partnerships, corporations, trusts or other non-individual clients or account holders, nor is this Policy applicable to individuals who are either beneficiaries of a trust for which we serve as trustee or participants in an employee benefit plan administered or advised by us. This Policy is, however, applicable to individuals who select us to be a custodian of securities or assets in individual retirement accounts, 401(k) accounts, or accounts subject to the Uniform Gifts to Minors Act.
Please note that we may amend this Policy at any time, and will inform you of any changes to this Policy as required by law.
We Respect Your Privacy
We appreciate that you have provided us with your personal financial information and understand your concerns about safeguarding such information. We strive to maintain the privacy of such information while we help you achieve your financial objectives.
This Policy describes what nonpublic personal information we collect about you, how we collect it, when we may share it with others, and how others may use it. It discusses the steps you may take to limit our sharing of information about you with affiliated Morgan Stanley companies (“other Morgan Stanley companies”), including but not limited to our global financial services affiliates that are part of out integrated securities and investment management business, and our credit services affiliates. It also discloses how you may limit our affiliates’ use of shared information for marketing purposes.
Throughout this Policy, we refer to the non-public information that personally identifies you or your accounts as “personal information.”
1. What Personal Information Do We Collect About You?
To better serve you and manage our business, it is important that we collect and maintain accurate information about you. We obtain this information from applications and other forms you submit to us, from your dealings with us, from consumer reporting agencies and from third parties and other sources.
For example:
• | We collect information such as your name, address, e-mail address, phone number and account title. |
34
Morgan Stanley Special Value Fund
An Important Notice Concerning Our U.S. Privacy Policy (unaudited) continued
• | We may obtain information about account balances, your use of account(s) and the types of products and services you prefer to receive from us through your dealings and transactions with us and other sources. |
• | We may obtain information about your creditworthiness and credit history from consumer reporting agencies. |
• | We may collect background information from and through third-party vendors to verify representations you have made and to comply with various regulatory requirements. |
2. When Do We Disclose Personal Information We Collect About You?
To provide you with the products and services you request, to better serve you, to manage our business and as otherwise required or permitted by law, we may disclose personal information we collect about you to other Morgan Stanley companies and to non-affiliated third parties.
A. Information We Disclose to Other Morgan Stanley Companies. In order to manage your account(s) effectively, including servicing and processing your transactions, to let you know about products and services offered by us and other Morgan Stanley companies, to manage our business, and as otherwise required or permitted by law, we may disclose personal information to other Morgan Stanley companies. Offers for products and services from other Morgan Stanley companies are developed under conditions designed to safeguard your personal information.
B. Information We Disclose to Third Parties. We do not disclose personal information that we collect about you to non-affiliated third parties except to enable them to provide marketing services on our behalf, to perform joint marketing agreements with other financial institutions, and as otherwise required or permitted by law. For example, some instances where we may disclose information about you to third parties include: for servicing and processing transactions, to offer our own products and services, to protect against fraud, for institutional risk control, to respond to judicial process or to perform services on our behalf.
Morgan Stanley recognizes that your relationship with your Financial Advisor is important. If your Financial Advisor’s affiliation with Morgan Stanley ends and he/she joins a non-affiliated securities broker-dealer with which Morgan Stanley has entered into an agreement limiting the use of information, Morgan Stanley will permit your Financial Advisor to retain certain of your contact information, limited to your name, address, e-mail address, phone number and account title.
When we share personal information with a non-affiliated third parties, they are required to limit their use of personal information to the particular purpose for which it was shared and they are not allowed to share personal information with others except to fulfill that limited purpose.
35
Morgan Stanley Special Value Fund
An Important Notice Concerning Our U.S. Privacy Policy (unaudited) continued
3. | How Do We Protect the Security and Confidentiality of Personal Information We Collect About You? |
We maintain physical, electronic and procedural security measures to help safeguard the personal information we collect about you. We have internal policies governing the proper handling of client information. Third parties that provide support or marketing services on our behalf may also receive personal information, and we require them to adhere to confidentiality standards with respect to such information.
4. | How Can You Limit the Sharing of Certain Types of Personal Information with Other Morgan Stanley Companies? |
We respect your privacy and offer you choices as to whether we share with other Morgan Stanley companies personal information that was collected to determine your eligibility for products and services you request (“eligibility information”). Please note that, even if you direct us not to share eligibility information with other Morgan Stanley companies (“opt-out”), we may still share personal information, including eligibility information, with those companies in circumstances excluded from the opt-out under applicable law, such as to process transactions or to service your account. We may also share certain other types of personal information with other Morgan Stanley companies – such as your name, address, telephone number, e-mail address and account number(s), and information about your transactions and experiences with us.
5. | How Can You Limit the Use of Certain Types of Personal Information by Other Morgan Stanley Companies for Marketing? |
You may limit other Morgan Stanley companies from marketing their products or services to you based on your personal information that they receive from other Morgan Stanley companies. This information includes your income, assets and account history. Your choice to limit marketing offers from other Morgan Stanley companies will apply until you tell us to change your choice.
If you wish to opt-out of share and to limit marketing offers, you may do so by:
• | Calling us at 800.350.6414 Monday-Friday between 8 a.m. and 8 p.m. (ET) |
• | Writing to us at the following address: Morgan Stanley Privacy Department Harborside Financial Center, Plaza Two, 3rd Floor Jersey City, NJ 07311 |
If you choose to write to us, your written request should include your name, address, telephone number and account number(s) to which the opt-out applies and should not be sent with any other correspondence. In order to process your request, we require that the request be provided by you directly and not through a third party.
36
Morgan Stanley Special Value Fund
An Important Notice Concerning Our U.S. Privacy Policy (unaudited) continued
If you have previously notified us about your privacy preferences, it is not necessary to do so again unless you decide to change your preferences. Your opt-out preference will remain in effect with respect to this Policy (as it may be amended) until you notify us otherwise in writing. If you have a joint account, your direction for us not to share this information with other Morgan Stanley companies and for those Morgan Stanley companies not to use your personal information for marketing will be applied to all account holders on that account.
Please understand that if you opt-out, you and any joint account holders may not receive information about Morgan Stanley products and services that could help you manage your financial resources and achieve your investment objectives.
If you hold more that one account with Morgan Stanley, you may receive multiple privacy policies from us, and would need to follow the direction stated in each particular policy for each account you have with us.
Special Notice to Residents of Vermont
This section supplements our Policy with respect to our individual clients who have a Vermont address and supersedes anything to the contrary in the about Policy with respect to those clients only.
The State of Vermont requires financial institutions to obtain your consent prior to sharing personal information that they collect about you with affiliated companies and non-affiliated third parties other than in certain limited circumstances. Except as permitted by law, we will not share personal information we collect about you with non-affiliated third parties or other Morgan Stanley companies unless you provide us with your written consent to share such information (“opt-in”). If you wish to receive offers for investment products and services offered by or through other Morgan Stanley companies, please notify us in writing at the following address:
Morgan Stanley Privacy Department
Harborside Financial Center, Plaza Two,
3rd Floor Jersey City, NJ 07311
Harborside Financial Center, Plaza Two,
3rd Floor Jersey City, NJ 07311
Your authorization should include your name, address, telephone number and account number(s) to which the opt-in applies and should not be sent with any other correspondence. In order to process your authorization, we require that the authorization be provided by you directly and not through a third-party.
37
Morgan Stanley Special Value Fund
Trustee and Officer Information (unaudited)
Independent Trustees:
Number of | ||||||||||||
Portfolios | ||||||||||||
in Fund | ||||||||||||
Term of | Complex | |||||||||||
Office and | Overseen | |||||||||||
Position(s) | Length of | by | ||||||||||
Name, Age and Address of | Held with | Time | Principal Occupation(s) | Independent | Other Directorships | |||||||
Independent Trustee | Registrant | Served* | During Past 5 Years | Trustee** | Held by Independent Trustee | |||||||
Frank L. Bowman (64) c/o Kramer Levin Naftalis & Frankel LLP Counsel to the Independent Trustees 1177 Avenue of the Americas New York, NY 10036 | Trustee | Since August 2006 | President, Strategic Decisions, LLC (consulting) (since February 2009); Director or Trustee of various Retail Funds and Institutional Funds (since August 2006); Chairperson of the Insurance Sub-Committee of the Compliance and Insurance Committee (since February 2007); served as President and Chief Executive Officer of the Nuclear Energy Institute (policy organization) through November 2008; retired as Admiral, U.S. Navy in January 2005 after serving over 8 years as Director of the Naval Nuclear Propulsion Program and Deputy Administrator–Naval Reactors in the National Nuclear Security Administration at the U.S. Department of Energy (1996-2004), Knighted as Honorary Knight Commander of the Most Excellent Order of the British Empire; Awarded the Officer de l’Orde National du Mérite by the French Government. | 168 | Director of the Armed Services YMCA of the USA; member, BP America External Advisory Council (energy); member, National Academy of Engineers. | |||||||
Michael Bozic (68) c/o Kramer Levin Naftalis & Frankel LLP Counsel to the Independent Trustees 1177 Avenue of the Americas New York, NY 10036 | Trustee | Since April 1994 | Private investor; Chairperson of the Compliance and Insurance Committee (since October 2006); Director or Trustee of the Retail Funds (since April 1994) and Institutional Funds (since July 2003); formerly, Chairperson of the Insurance Committee (July 2006-September 2006); Vice Chairman of Kmart Corporation (December 1998-October 2000), Chairman and Chief Executive Officer of Levitz Furniture Corporation (November 1995-November 1998) and President and Chief Executive Officer of Hills Department Stores (May 1991-July 1995); variously Chairman, Chief Executive Officer, President and Chief Operating Officer (1987-1991) of the Sears Merchandise Group of Sears, Roebuck & Co. | 170 | Director of various business organizations. |
38
Morgan Stanley Special Value Fund
Trustee and Officer Information (unaudited) continued
Number of | ||||||||||||
Portfolios | ||||||||||||
in Fund | ||||||||||||
Term of | Complex | |||||||||||
Office and | Overseen | |||||||||||
Position(s) | Length of | by | ||||||||||
Name, Age and Address of | Held with | Time | Principal Occupation(s) | Independent | Other Directorships | |||||||
Independent Trustee | Registrant | Served* | During Past 5 Years | Trustee** | Held by Independent Trustee | |||||||
Kathleen A. Dennis (56) c/o Kramer Levin Naftalis & Frankel LLP Counsel to the Independent Trustees 1177 Avenue of the Americas New York, NY 10036 | Trustee | Since August 2006 | President, Cedarwood Associates (mutual fund and investment management consulting) (since July 2006); Chairperson of the Money Market and Alternatives Sub-Committee of the Investment Committee (since October 2006) and Director or Trustee of various Retail Funds and Institutional Funds (since August 2006); formerly, Senior Managing Director of Victory Capital Management (1993-2006). | 168 | Director of various non-profit organizations. | |||||||
Dr. Manuel H. Johnson (60) c/o Johnson Smick Group, Inc. 888 16th Street, N.W. Suite 740 Washington, D.C. 20006 | Trustee | Since July 1991 | Senior Partner, Johnson Smick International, Inc. (consulting firm); Chairperson of the Investment Committee (since October 2006) and Director or Trustee of the Retail Funds (since July 1991) and Institutional Funds (since July 2003); Co-Chairman and a founder of the Group of Seven Council (G7C) (international economic commission); formerly, Chairperson of the Audit Committee (July 1991-September 2006); Vice Chairman of the Board of Governors of the Federal Reserve System and Assistant Secretary of the U.S. Treasury. | 170 | Director of NVR, Inc. (home construction); Director of Evergreen Energy. | |||||||
Joseph J. Kearns (67) c/o Kearns & Associates LLC PMB754 23852 Pacific Coast Highway Malibu, CA 90265 | Trustee | Since August 1994 | President, Kearns & Associates LLC (investment consulting); Chairperson of the Audit Committee (since October 2006) and Director or Trustee of the Retail Funds (since July 2003) and Institutional Funds (since August 1994); formerly, Deputy Chairperson of the Audit Committee (July 2003-September 2006) and Chairperson of the Audit Committee of Institutional Funds (October 2001-July 2003); CFO of the J. Paul Getty Trust. | 171 | Director of Electro Rent Corporation (equipment leasing) and The Ford Family Foundation. |
39
Morgan Stanley Special Value Fund
Trustee and Officer Information (unaudited) continued
Number of | ||||||||||||
Portfolios | ||||||||||||
in Fund | ||||||||||||
Term of | Complex | |||||||||||
Office and | Overseen | |||||||||||
Position(s) | Length of | by | ||||||||||
Name, Age and Address of | Held with | Time | Principal Occupation(s) | Independent | Other Directorships | |||||||
Independent Trustee | Registrant | Served* | During Past 5 Years | Trustee** | Held by Independent Trustee | |||||||
Michael F. Klein (50) c/o Kramer Levin Naftalis & Frankel LLP Counsel to the Independent Trustees 1177 Avenue of the Americas New York, NY 10036 | Trustee | Since August 2006 | Managing Director, Aetos Capital, LLC (since March 2000) and Co-President, Aetos Alternatives Management, LLC (since January 2004); Chairperson of the Fixed Income Sub-Committee of the Investment Committee (since October 2006) and Director or Trustee of various Retail Funds and Institutional Funds (since August 2006); formerly, Managing Director, Morgan Stanley & Co. Inc. and Morgan Stanley Dean Witter Investment Management, President, Morgan Stanley Institutional Funds (June 1998-March 2000) and Principal, Morgan Stanley & Co. Inc. and Morgan Stanley Dean Witter Investment Management (August 1997-December 1999). | 168 | Director of certain investment funds managed or sponsored by Aetos Capital, LLC. Director of Sanitized AG and Sanitized Marketing AG (specialty chemicals). | |||||||
Michael E. Nugent (73) c/o Triumph Capital, L.P. 445 Park Avenue New York, NY 10022 | Chairperson of the Board and Trustee | Chairperson of the Boards since July 2006 and Trustee since July 1991 | General Partner, Triumph Capital, L.P. (private investment partnership); Chairperson of the Boards of the Retail Funds and Institutional Funds (since July 2006); Director or Trustee of the Retail Funds (since July 1991) and Institutional Funds (since July 2001); formerly, Chairperson of the Insurance Committee (until July 2006). | 170 | None. | |||||||
W. Allen Reed (62)† c/o Kramer Levin Naftalis & Frankel LLP Counsel to the Independent Trustees 1177 Avenue of the Americas New York, NY 10036 | Trustee | Since August 2006 | Chairperson of the Equity Sub-Committee of the Investment Committee (since October 2006) and Director or Trustee of various Retail Funds and Institutional Funds (since August 2006); formerly, President and CEO of General Motors Asset Management; Chairman and Chief Executive Officer of the GM Trust Bank and Corporate Vice President of General Motors Corporation (August 1994-December 2005). | 168 | Director of Temple-Inland Industries (packaging and forest products); Director of Legg Mason, Inc. and Director of the Auburn University Foundation. |
40
Morgan Stanley Special Value Fund
Trustee and Officer Information (unaudited) continued
Number of | ||||||||||||
Portfolios | ||||||||||||
in Fund | ||||||||||||
Term of | Complex | |||||||||||
Office and | Overseen | |||||||||||
Position(s) | Length of | by | ||||||||||
Name, Age and Address of | Held with | Time | Principal Occupation(s) | Independent | Other Directorships | |||||||
Independent Trustee | Registrant | Served* | During Past 5 Years | Trustee** | Held by Independent Trustee | |||||||
Fergus Reid (77) c/o Lumelite Plastics Corporation 85 Charles Colman Blvd. Pawling, NY 12564 | Trustee | Since June 1992 | Chairman of Lumelite Plastics Corporation; Chairperson of the Governance Committee and Director or Trustee of the Retail Funds (since July 2003) and Institutional Funds (since June 1992). | 171 | Trustee and Director of certain investment companies in the JPMorgan Funds complex managed by JP Morgan Investment Management Inc. |
Interested Trustee:
Number of | ||||||||||||
Portfolios | ||||||||||||
in Fund | ||||||||||||
Term of | Complex | |||||||||||
Office and | Overseen | |||||||||||
Position(s) | Length of | by | ||||||||||
Name, Age and Address of | Held with | Time | Principal Occupation(s) | Interested | Other Directorships | |||||||
Interested Trustee | Registrant | Served* | During Past 5 Years | Trustee** | Held by Interested Trustee | |||||||
James F. Higgins (61) c/o Morgan Stanley Trust Harborside Financial Center Plaza Two Jersey City, NJ 07311 | Trustee | Since June 2000 | Director or Trustee of the Retail Funds (since June 2000) and Institutional Funds (since July 2003); Senior Advisor of Morgan Stanley (since August 2000). | 169 | Director of AXA Financial, Inc. and The Equitable Life Assurance Society of the United States (financial services). |
* | This is the earliest date the Trustee began serving the funds advised by Morgan Stanley Investment Advisors Inc. (the “Investment Adviser”) (the “Retail Funds”) or the funds advised by Morgan Stanley Investment Management Inc. and Morgan Stanley AIP GP LP (the “Institutional Funds”). | |
** | The Fund Complex includes all open-end and closed-end funds (including all of their portfolios) advised by the Investment Adviser and any funds that have an investment adviser that is an affiliated person of the Investment Adviser (including, but not limited to, Morgan Stanley Investment Management Inc.). | |
† | For the period September 26, 2008 through February 5, 2009, W. Allen Reed was an Interested Trustee. At all other times covered by this report, Mr. Reed was an Independent Trustee. |
41
Morgan Stanley Special Value Fund
Trustee and Officer Information (unaudited) continued
Executive Officers:
Term of | ||||||
Office and | ||||||
Position(s) | Length of | |||||
Name, Age and Address of | Held with | Time | ||||
Executive Officer | Registrant | Served* | Principal Occupation(s) During Past 5 Years | |||
Randy Takian (35) 522 Fifth Avenue New York, NY 10036 | President and Principal Executive Officer | Since September 2008 | President and Principal Executive Officer (since September 2008) of funds in the Fund Complex; President and Chief Executive Officer of Morgan Stanley Services Company Inc. (since September 2008). President of the Investment Adviser (since July 2008). Head of the Retail and Intermediary business within Morgan Stanley Investment Management (since July 2008). Head of Liquidity and Bank Trust business (since July 2008) and the Latin American franchise (since July 2008) at Morgan Stanley Investment Management. Managing Director, Director and/or Officer of the Investment Adviser and various entities affiliated with the Investment Adviser. Formerly Head of Strategy and Product Development for the Alternatives Group and Senior Loan Investment Management. Formerly with Bank of America (July 1996-March 2006), most recently as Head of the Strategy, Mergers and Acquisitions team for Global Wealth and Investment Management. | |||
Kevin Klingert (47) 522 Fifth Avenue New York, NY 10036 | Vice President | Since June 2008 | Global Head, Chief Operating Officer and acting Chief Investment Officer of the Global Fixed Income Group of Morgan Stanley Investment Management Inc. and the Investment Adviser (since March 2008). Head of Global Liquidity Portfolio Management and co-Head of Liquidity Credit Research of Morgan Stanley Investment Management (since December 2007). Managing Director of Morgan Stanley Investment Management Inc. and the Investment Adviser (since December 2007). Previously, Managing Director on the Management Committee and head of Municipal Portfolio Management and Liquidity at BlackRock (October 1991 to January 2007). | |||
Carsten Otto (45) 522 Fifth Avenue New York, NY 10036 | Chief Compliance Officer | Since October 2004 | Managing Director and Global Head of Compliance for Morgan Stanley Investment Management (since April 2007) and Chief Compliance Officer of the Retail Funds and Institutional Funds (since October 2004). Formerly, U.S. Director of Compliance (October 2004-April 2007) and Assistant Secretary and Assistant General Counsel of the Retail Funds. | |||
Stefanie V. Chang Yu (42) 522 Fifth Avenue New York, NY 10036 | Vice President | Since December 1997 | Managing Director and Secretary of the Investment Adviser and various entities affiliated with the Investment Adviser; Vice President of the Retail Funds (since July 2002) and Institutional Funds (since December 1997). |
42
Morgan Stanley Special Value Fund
Trustee and Officer Information (unaudited) continued
Term of | ||||||
Office and | ||||||
Position(s) | Length of | |||||
Name, Age and Address of | Held with | Time | ||||
Executive Officer | Registrant | Served* | Principal Occupation(s) During Past 5 Years | |||
Francis J. Smith (44) c/o Morgan Stanley Trust Harborside Financial Center Plaza Two Jersey City, NJ 07311 | Treasurer and Chief Financial Officer | Treasurer since July 2003 and Chief Financial Officer since September 2002 | Executive Director of the Investment Adviser and various entities affiliated with the Investment Adviser; Treasurer and Chief Financial Officer of the Retail Funds (since July 2003). | |||
Mary E. Mullin (42) 522��Fifth Avenue New York, NY 10036 | Secretary | Since June 1999 | Executive Director of the Investment Adviser and various entities affiliated with the Investment Adviser; Secretary of the Retail Funds (since July 2003) and Institutional Funds (since June 1999). |
* | This is the earliest date the Officer began serving the Retail Funds or Institutional Funds. |
2009 Federal Tax Notice (unaudited)
For Federal income tax purposes, the following information is furnished with respect to the distributions paid by the Fund during its taxable year ended July 31, 2009. For corporate shareholders, 100% of the dividends qualified for the dividend received deduction. The Fund designated and paid $33,248,990 as a long-term capital gain distribution.
For Federal income tax purposes, the following information is furnished with respect to the Fund’s earnings for its taxable year ended July 31, 2009. When distributed, certain earnings may be subject to a maximum tax rate of 15% as provided for by the Jobs and Growth Tax Relief Reconciliation Act of 2003. The Fund designated up to a maximum of $4,426,171 as taxable at this lower rate.
In January, the Fund provides tax information to shareholders for the preceding calendar year.
43
Trustees
Michael Bozic
Kathleen A. Dennis
James F. Higgins
Dr. Manuel H. Johnson
Joseph J. Kearns
Michael F. Klein
Michael E. Nugent
W. Allen Reed
Fergus Reid
Officers
Chairperson of the Board
Randy Takian
President and Principal Executive Officer
Kevin Klingert
Vice President
Carsten Otto
Chief Compliance Officer
Stefanie V. Chang Yu
Vice President
Francis J. Smith
Treasurer and Chief Financial Officer
Mary E. Mullin
Secretary
Transfer Agent
Harborside Financial Center, Plaza Two
Jersey City, New Jersey 07311
Independent Registered Public Accounting Firm
Two World Financial Center
New York, New York 10281
Legal Counsel
1095 Avenue of the Americas
New York, New York 10036
Counsel to the Independent Trustees
1177 Avenue of the Americas
New York, New York 10036
Investment Adviser
522 Fifth Avenue
New York, New York 10036
This report is submitted for the general information of the shareholders of the Fund. For more detailed information about the Fund, its fees and expenses and other pertinent information, please read its Prospectus. The Fund’s Statement of Additional Information contains additional information about the Fund, including its trustees. It is available, without charge, by calling (800) 869-NEWS.
This report is not authorized for distribution to prospective investors in the Fund unless preceded or accompanied by an effective Prospectus. Read the Prospectus carefully before investing.
Morgan Stanley Distributors Inc., member FINRA.
![[MORGAN STANLEY LOGO]](https://capedge.com/proxy/N-CSR/0000950123-09-049207/y02176msk50l1.gif)
![[MORGAN STANLEY LOGO]](https://capedge.com/proxy/N-CSR/0000950123-09-049207/y02176msk50l1.gif)
INVESTMENT MANAGEMENT
Morgan Stanley
Special Value Fund
![(Morgan Stanley Graphic)](https://capedge.com/proxy/N-CSR/0000950123-09-049207/y02176arcvr.gif)
Annual Report
July 31, 2009
SVFANN
IU09-03960P-Y07/09
TABLE OF CONTENTS
Item 2. Code of Ethics.
(a) The Fund has adopted a code of ethics (the “Code of Ethics”) that applies to its principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, regardless of whether these individuals are employed by the Fund or a third party.
(b) No information need be disclosed pursuant to this paragraph.
(c) Not applicable.
(d) Not applicable.
(e) Not applicable.
(f)
(1) The Fund’s Code of Ethics is attached hereto as Exhibit 12 A.
(2) Not applicable.
(3) Not applicable.
Item 3. Audit Committee Financial Expert.
The Fund’s Board of Trustees has determined that Joseph J. Kearns, an “independent” Trustee, is an “audit committee financial expert” serving on its audit committee. Under applicable securities laws, a person who is determined to be an audit committee financial expert will not be deemed an “expert” for any purpose, including without limitation for the purposes of Section 11 of the Securities Act of 1933, as a result of being designated or identified as an audit committee financial expert. The designation or identification of a person as an audit committee financial expert does not impose on such person any duties, obligations, or liabilities that are greater than the duties, obligations, and liabilities imposed on such person as a member of the audit committee and Board of Trustees in the absence of such designation or identification
2
Item 4. Principal Accountant Fees and Services.
(a)(b)(c)(d) and (g). Based on fees billed for the periods shown:
Registrant | Covered Entities(1) | |||||||
2009 | ||||||||
Audit Fees | $ | 37,650 | N/A | |||||
Non-Audit Fees | ||||||||
Audit-Related Fees | $ | (2) | $ | 6,418,000 | (2) | |||
Tax Fees | $ | 6,001 | (3) | $ | 881,000 | (4) | ||
All Other Fees | $ | $ | ||||||
Total Non-Audit Fees | $ | 6,001 | $ | 7,299,000 | ||||
Total | $ | 43,651 | $ | 7,299,000 |
Registrant | Covered Entities(1) | |||||||
2008 | ||||||||
Audit Fees | $ | 37,650 | ||||||
Non-Audit Fees | ||||||||
Audit-Related Fees | $ | 325 | (2) | $ | 4,555,000 | (2) | ||
Tax Fees | $ | 5,726 | (3) | $ | 747,000 | (4) | ||
All Other Fees | $ | $ | (5) | |||||
Total Non-Audit Fees | $ | 6,051 | $ | 5,302,000 | ||||
Total | $ | 43,701 | $ | 5,302,000 |
N/A- | Not applicable, as not required by Item 4. | |
(1) | Covered Entities include the Adviser (excluding sub-advisors) and any entity controlling, controlled by or under common control with the Adviser that provides ongoing services to the Registrant. | |
(2) | Audit-Related Fees represent assurance and related services provided that are reasonably related to the performance of the audit of the financial statements of the Covered Entities’ and funds advised by the Adviser or its affiliates, specifically data verification and agreed-upon procedures related to asset securitizations and agreed-upon procedures engagements. | |
(3) | Tax Fees represent tax compliance, tax planning and tax advice services provided in connection with the preparation and review of the Registrant’s tax returns. | |
(4) | Tax Fees represent tax compliance, tax planning and tax advice services provided in connection with the review of Covered Entities’ tax returns. | |
(5) | All other fees represent project management for future business applications and improving business and operational processes. |
3
(e)(1) The audit committee’s pre-approval policies and procedures are as follows:
APPENDIX A
AUDIT COMMITTEE
AUDIT AND NON-AUDIT SERVICES
PRE-APPROVAL POLICY AND PROCEDURES
OF THE
MORGAN STANLEY RETAIL AND INSTITUTIONAL FUNDS
AS ADOPTED AND AMENDED JULY 23, 2004,1
AUDIT AND NON-AUDIT SERVICES
PRE-APPROVAL POLICY AND PROCEDURES
OF THE
MORGAN STANLEY RETAIL AND INSTITUTIONAL FUNDS
AS ADOPTED AND AMENDED JULY 23, 2004,1
1. Statement of Principles
The Audit Committee of the Board is required to review and, in its sole discretion, pre-approve all Covered Services to be provided by the Independent Auditors to the Fund and Covered Entities in order to assure that services performed by the Independent Auditors do not impair the auditor’s independence from the Fund.
The SEC has issued rules specifying the types of services that an independent auditor may not provide to its audit client, as well as the audit committee’s administration of the engagement of the independent auditor. The SEC’s rules establish two different approaches to pre-approving services, which the SEC considers to be equally valid. Proposed services either: may be pre-approved without consideration of specific case-by-case services by the Audit Committee (“general pre-approval”); or require the specific pre-approval of the Audit Committee or its delegate (“specific pre-approval”). The Audit Committee believes that the combination of these two approaches in this Policy will result in an effective and efficient procedure to pre-approve services performed by the Independent Auditors. As set forth in this Policy, unless a type of service has received general pre-approval, it will require specific pre-approval by the Audit Committee (or by any member of the Audit Committee to which pre-approval authority has been delegated) if it is to be provided by the Independent Auditors. Any proposed services exceeding pre-approved cost levels or budgeted amounts will also require specific pre-approval by the Audit Committee.
The appendices to this Policy describe the Audit, Audit-related, Tax and All Other services that have the general pre-approval of the Audit Committee. The term of any general pre-approval is 12 months from the date of pre-approval, unless the Audit Committee considers and provides a different period and states otherwise. The Audit Committee will annually review and pre-approve the services that may be provided by the Independent Auditors without obtaining specific pre-approval from the Audit Committee. The Audit Committee will add to or subtract from the list of general pre-approved services from time to time, based on subsequent determinations.
1 | This Audit Committee Audit and Non-Audit Services Pre-Approval Policy and Procedures (the “Policy”), adopted as of the date above, supersedes and replaces all prior versions that may have been adopted from time to time. |
4
The purpose of this Policy is to set forth the policy and procedures by which the Audit Committee intends to fulfill its responsibilities. It does not delegate the Audit Committee’s responsibilities to pre-approve services performed by the Independent Auditors to management.
The Fund’s Independent Auditors have reviewed this Policy and believes that implementation of the Policy will not adversely affect the Independent Auditors’ independence.
2. Delegation
As provided in the Act and the SEC’s rules, the Audit Committee may delegate either type of pre-approval authority to one or more of its members. The member to whom such authority is delegated must report, for informational purposes only, any pre-approval decisions to the Audit Committee at its next scheduled meeting.
3. Audit Services
The annual Audit services engagement terms and fees are subject to the specific pre-approval of the Audit Committee. Audit services include the annual financial statement audit and other procedures required to be performed by the Independent Auditors to be able to form an opinion on the Fund’s financial statements. These other procedures include information systems and procedural reviews and testing performed in order to understand and place reliance on the systems of internal control, and consultations relating to the audit. The Audit Committee will approve, if necessary, any changes in terms, conditions and fees resulting from changes in audit scope, Fund structure or other items.
In addition to the annual Audit services engagement approved by the Audit Committee, the Audit Committee may grant general pre-approval to other Audit services, which are those services that only the Independent Auditors reasonably can provide. Other Audit services may include statutory audits and services associated with SEC registration statements (on Forms N-1A, N-2, N-3, N-4, etc.), periodic reports and other documents filed with the SEC or other documents issued in connection with securities offerings.
The Audit Committee has pre-approved the Audit services in Appendix B.1. All other Audit services not listed in Appendix B.1 must be specifically pre-approved by the Audit Committee (or by any member of the Audit Committee to which pre-approval has been delegated).
4. Audit-related Services
Audit-related services are assurance and related services that are reasonably related to the performance of the audit or review of the Fund’s financial statements and, to the extent they are Covered Services, the Covered Entities or that are traditionally performed by the Independent Auditors. Because the Audit Committee believes that the provision of Audit-related services does not impair the independence of the auditor and is consistent with the SEC’s rules on auditor independence, the Audit Committee may grant general pre-approval to Audit-related services. Audit-related services include, among others, accounting consultations related to accounting, financial reporting or disclosure matters
5
not classified as “Audit services”; assistance with understanding and implementing new accounting and financial reporting guidance from rulemaking authorities; agreed-upon or expanded audit procedures related to accounting and/or billing records required to respond to or comply with financial, accounting or regulatory reporting matters; and assistance with internal control reporting requirements under Forms N-SAR and/or N-CSR.
The Audit Committee has pre-approved the Audit-related services in Appendix B.2. All other Audit-related services not listed in Appendix B.2 must be specifically pre-approved by the Audit Committee (or by any member of the Audit Committee to which pre-approval has been delegated).
5. Tax Services
The Audit Committee believes that the Independent Auditors can provide Tax services to the Fund and, to the extent they are Covered Services, the Covered Entities, such as tax compliance, tax planning and tax advice without impairing the auditor’s independence, and the SEC has stated that the Independent Auditors may provide such services.
Pursuant to the preceding paragraph, the Audit Committee has pre-approved the Tax Services in Appendix B.3. All Tax services in Appendix B.3 must be specifically pre-approved by the Audit Committee (or by any member of the Audit Committee to which pre-approval has been delegated).
6. All Other Services
The Audit Committee believes, based on the SEC’s rules prohibiting the Independent Auditors from providing specific non-audit services, that other types of non-audit services are permitted. Accordingly, the Audit Committee believes it may grant general pre-approval to those permissible non-audit services classified as All Other services that it believes are routine and recurring services, would not impair the independence of the auditor and are consistent with the SEC’s rules on auditor independence.
The Audit Committee has pre-approved the All Other services in Appendix B.4. Permissible All Other services not listed in Appendix B.4 must be specifically pre-approved by the Audit Committee (or by any member of the Audit Committee to which pre-approval has been delegated).
7. Pre-Approval Fee Levels or Budgeted Amounts
Pre-approval fee levels or budgeted amounts for all services to be provided by the Independent Auditors will be established annually by the Audit Committee. Any proposed services exceeding these levels or amounts will require specific pre-approval by the Audit Committee. The Audit Committee is mindful of the overall relationship of fees for audit and non-audit services in determining whether to pre-approve any such services.
8. Procedures
All requests or applications for services to be provided by the Independent Auditors that do not require specific approval by the Audit Committee will be submitted to the Fund’s Chief Financial Officer and must include a detailed description of the services to be
6
rendered. The Fund’s Chief Financial Officer will determine whether such services are included within the list of services that have received the general pre-approval of the Audit Committee. The Audit Committee will be informed on a timely basis of any such services rendered by the Independent Auditors. Requests or applications to provide services that require specific approval by the Audit Committee will be submitted to the Audit Committee by both the Independent Auditors and the Fund’s Chief Financial Officer, and must include a joint statement as to whether, in their view, the request or application is consistent with the SEC’s rules on auditor independence.
The Audit Committee has designated the Fund’s Chief Financial Officer to monitor the performance of all services provided by the Independent Auditors and to determine whether such services are in compliance with this Policy. The Fund’s Chief Financial Officer will report to the Audit Committee on a periodic basis on the results of its monitoring. Both the Fund’s Chief Financial Officer and management will immediately report to the chairman of the Audit Committee any breach of this Policy that comes to the attention of the Fund’s Chief Financial Officer or any member of management.
9. Additional Requirements
The Audit Committee has determined to take additional measures on an annual basis to meet its responsibility to oversee the work of the Independent Auditors and to assure the auditor’s independence from the Fund, such as reviewing a formal written statement from the Independent Auditors delineating all relationships between the Independent Auditors and the Fund, consistent with Independence Standards Board No. 1, and discussing with the Independent Auditors its methods and procedures for ensuring independence.
10. Covered Entities
Covered Entities include the Fund’s investment adviser(s) and any entity controlling, controlled by or under common control with the Fund’s investment adviser(s) that provides ongoing services to the Fund(s). Beginning with non-audit service contracts entered into on or after May 6, 2003, the Fund’s audit committee must pre-approve non-audit services provided not only to the Fund but also to the Covered Entities if the engagements relate directly to the operations and financial reporting of the Fund. This list of Covered Entities would include:
Morgan Stanley Retail Funds
Morgan Stanley Investment Advisors Inc.
Morgan Stanley & Co. Incorporated
Morgan Stanley DW Inc.
Morgan Stanley Investment Management Inc.
Morgan Stanley Investment Management Limited
Morgan Stanley Investment Management Private Limited
Morgan Stanley Asset & Investment Trust Management Co., Limited
Morgan Stanley Investment Management Company
Van Kampen Asset Management
Morgan Stanley Services Company, Inc.
Morgan Stanley Distributors Inc.
Morgan Stanley Trust FSB
Morgan Stanley Investment Advisors Inc.
Morgan Stanley & Co. Incorporated
Morgan Stanley DW Inc.
Morgan Stanley Investment Management Inc.
Morgan Stanley Investment Management Limited
Morgan Stanley Investment Management Private Limited
Morgan Stanley Asset & Investment Trust Management Co., Limited
Morgan Stanley Investment Management Company
Van Kampen Asset Management
Morgan Stanley Services Company, Inc.
Morgan Stanley Distributors Inc.
Morgan Stanley Trust FSB
7
Morgan Stanley Institutional Funds
Morgan Stanley Investment Management Inc.
Morgan Stanley Investment Advisors Inc.
Morgan Stanley Investment Management Limited
Morgan Stanley Investment Management Private Limited
Morgan Stanley Asset & Investment Trust Management Co., Limited
Morgan Stanley Investment Management Company
Morgan Stanley & Co. Incorporated
Morgan Stanley Distribution, Inc.
Morgan Stanley AIP GP LP
Morgan Stanley Alternative Investment Partners LP
Morgan Stanley Investment Management Inc.
Morgan Stanley Investment Advisors Inc.
Morgan Stanley Investment Management Limited
Morgan Stanley Investment Management Private Limited
Morgan Stanley Asset & Investment Trust Management Co., Limited
Morgan Stanley Investment Management Company
Morgan Stanley & Co. Incorporated
Morgan Stanley Distribution, Inc.
Morgan Stanley AIP GP LP
Morgan Stanley Alternative Investment Partners LP
(e)(2) Beginning with non-audit service contracts entered into on or after May 6, 2003, the audit committee also is required to pre-approve services to Covered Entities to the extent that the services are determined to have a direct impact on the operations or financial reporting of the Registrant. 100% of such services were pre-approved by the audit committee pursuant to the Audit Committee’s pre-approval policies and procedures (attached hereto).
(f) Not applicable.
(g) See table above.
(h) The audit committee of the Board of Trustees has considered whether the provision of services other than audit services performed by the auditors to the Registrant and Covered Entities is compatible with maintaining the auditors’ independence in performing audit services.
Item 5. Audit Committee of Listed Registrants.
(a) | The Fund has a separately-designated standing audit committee established in accordance with Section 3(a)(58)(A) of the Exchange Act whose members are: Joseph Kearns, Michael Nugent and Allen Reed. |
(b) Not applicable.
Item 6. Schedule of Investments
(a) Refer to Item 1.
(b) Not applicable.
8
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies.
Applicable only to reports filed by closed-end funds.
Item 8. Portfolio Managers of Closed-End Management Investment Companies
Applicable only to reports filed by closed-end funds.
Item 9. Closed-End Fund Repurchases
Applicable only to reports filed by closed-end funds.
Item 10. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 11. Controls and Procedures
(a) The Fund’s principal executive officer and principal financial officer have concluded that the Fund’s disclosure controls and procedures are sufficient to ensure that information required to be disclosed by the Fund in this Form N-CSR was recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, based upon such officers’ evaluation of these controls and procedures as of a date within 90 days of the filing date of the report.
(b) There were no changes in the registrant’s internal control over financial reporting that
occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.
occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.
Item 12. Exhibits
(a) The Code of Ethics for Principal Executive and Senior Financial Officers is attached hereto.
(b) A separate certification for each principal executive officer and principal financial officer of the registrant are attached hereto as part of EX-99.CERT.
9
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Morgan Stanley Special Value Fund
/s/ Randy Takian Randy Takian
Principal Executive Officer
September 17, 2009
Principal Executive Officer
September 17, 2009
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
/s/ Randy Takian Randy Takian
Principal Executive Officer
September 17, 2009
Principal Executive Officer
September 17, 2009
/s/ Francis Smith Francis Smith
Principal Financial Officer
September 17, 2009
Principal Financial Officer
September 17, 2009
10