UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number: 811-10273 Morgan Stanley International Value Equity Fund (Exact name of registrant as specified in charter) 1221 Avenue of the Americas, New York, New York 10020 (Address of principal executive offices) (Zip code) Ronald E. Robison 1221 Avenue of the Americas, New York, New York 10020 (Name and address of agent for service) Registrant's telephone number, including area code: 212-762-4000 Date of fiscal year end: August 31, 2004 Date of reporting period: February 29, 2004 Item 1 - Report to Shareholders
Welcome, Shareholder:
In this report, you'll learn about how your investment in Morgan Stanley International Value Equity Fund performed during the semiannual 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. |
Fund Report | |
For the six-month period ended February 29, 2004 | |
Total Return for the Six Months Ended February 29, 2004
Class A | Class B | Class C | Class D | Morgan Stanley Capital International (MSCI) EAFE Index1 | Lipper International Funds Index2 | |||||||||||||||||||||||||||
25.04% | 24.57 | % | 24.67 | % | 25.31 | % | 25.22 | % | 23.04 | % | ||||||||||||||||||||||
Past performance is no guarantee of future results and current performance may be lower or higher than the figures shown. For more up-to-date information, including month-end performance firgures, please visit morganstanley.com 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 performance of the Fund's four share classes varies because each has different expenses. The Fund's total return figures 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 information. |
Market Conditions
The six-month period ended February 29, 2004 was marked by strong performance from cyclical sectors such as technology and industrials. These sectors led the market during the first four months of the period as the global economic recovery continued to show momentum. This trend held until the final two months of the period, when more defensive sectors such as consumer staples, pharmaceuticals and energy improved performance and assumed leadership of the market.
Regional performance for the period varied. Commodity-based countries such as Canada, Australia and New Zealand performed well, supported by rising commodity prices and the falling U.S. dollar. European markets also demonstrated great strength during the period as the U.S. dollar fell against the Euro. By contrast, the U.K. market lagged its European peers thanks to the preponderance of underperforming defensive sectors in its composition. Japan was similarly weak, although this underperformance may have stemmed in part from profit-taking after the sharp rally in the third quarter of last year.
Performance Analysis
International Value Equity Fund performed in line with the MSCI EAFE Index and outperformed the Lipper International Funds Index for the six months ended February 29, 2004. Although these positions became a positive driver for the Fund in the final two months of the period, this improved performance was not enough to counter the negative net effect of performance early in the period. In addition, the Fund's emphasis on mid-to-large-cap companies limited its exposure to the strong gains of smaller-cap companies.
The Fund benefited from several stock selection decisions over the period. Although the Fund was underweighted in the outperforming financials sector relative to the MSCI EAFE Index over the period, stock selection in areas such as Japanese non-life insurance financials more than compensated for the underweight. Favorable stock selection in the telecommunications sector likewise played a positive role in performance, as the Fund had entered the period slightly overweighted and added to selective holdings over the period based on our bottom-up analysis of several key companies.
2
TOP 10 HOLDINGS | |||||||
Unilever NV | 3.3 | % | |||||
Nestle SA | 2.8 | ||||||
Reed Elsevier PLC | 2.7 | ||||||
Total S.A. | 2.7 | ||||||
Fuji Photo Film Co., Ltd. | 2.5 | ||||||
BP PLC | 2.5 | ||||||
British American Tobacco PLC | 2.4 | ||||||
Novartis AG | 2.3 | ||||||
Royal Bank of Scotland Group PLC | 2.3 | ||||||
Imperial Tobacco Group PLC | 2.1 | ||||||
TOP 5 COUNTRIES | |||||||
United Kingdom | 33.0 | % | |||||
Japan | 20.2 | ||||||
Switzerland | 10.4 | ||||||
France | 8.4 | ||||||
Netherlands | 8.3 | ||||||
Data as of February 29, 2004. Subject to change daily. All percentages are a percentage of net assets. Provided for informational purposes only and should not be deemed a recommendation to buyor sell the securities mentioned. 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% of its assets in a diversified portfolio of common stocks and other equity securities, including depositary receipts and securities convertible into common stock, of companies located outside of the United States. These companies may be of any asset size and may be located in developed or emerging market countries. The Fund invests in at least three different countries located outside of the United States. A company will be considered located outside of the United States if it (a) is not organized under the laws of the United States, (b) does not have securities which are principally traded on a U.S. stock exchange, (c) does not derive at least 50% of its revenues from goods produced or sold, investments made, or services performed in the United States, or (d) does not maintain at least 50% of its assets in the United States.
Proxy Voting Policies and Procedures
A description of the Fund's policies and procedures with respect to the voting of proxies relating to the Fund's portfolio securities is available without charge, upon request, by calling (800) 869-NEWS (6397). This information is also available on the Securities and Exchange Commission's Web site at http://www.sec.gov.
3
Performance Summary | |
Average Annual Total Returns — Period Ended February 29, 2004
Class A Shares* (since 04/26/01) | Class B Shares** (since 04/26/01) | Class C Shares† (since 04/26/01) | Class D Shares†† (since 04/26/01) | |||||||||||||||||||||||
Symbol | IVQAX | IVQBX | IVQCX | IVQDX | ||||||||||||||||||||||
1 Year | 49.99% | 3 | 48.77% | 3 | 48.96% | 3 | 50.47% | 3 | ||||||||||||||||||
42.12 | 4 | 43.77 | 4 | 47.96 | 4 | — | ||||||||||||||||||||
Since Inception | 8.07 | 3 | 7.24 | 3 | 7.25 | 3 | 8.33 | 3 | ||||||||||||||||||
6.04 | 4 | 6.31 | 4 | 7.25 | 4 | — | ||||||||||||||||||||
Past performance is not predictive of future returns. Investment return and principal value will fluctuate. When you sell fund shares, they may be worth less than their original cost. The table does 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 D shares will vary due to differences in sales charges and expenses. |
Notes on Performance
(1) | The Morgan Stanley Capital International (MSCI) EAFE Index measures the performance for a diverse range of global stock markets within Europe, Australasia, and the Far East. The performance of the Index is listed in U.S. dollars and assumes reinvestment of net dividends. "Net dividends" reflects a reduction in dividends after taking into account withholding of taxes by certain foreign countries represented in the Index. Indexes are unmanaged and their 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 International Funds Index is an equally weighted performance index of the largest qualifying funds (based on net assets) in the Lipper International 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. |
(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. |
* | 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. |
† | The maximum contingent deferred sales charge for Class C is 1% for shares redeemed within one year of purchase. |
†† | Class D has no sales charge. |
4
Morgan Stanley International Value Equity Fund
Portfolio of Investments February 29, 2004 (unaudited)
NUMBER OF SHARES | VALUE | ||||||||||
Common Stocks and Preferred Stock (95.2%) | |||||||||||
Australia (2.1%) | |||||||||||
Financial Conglomerates | |||||||||||
414,216 | AMP Ltd. | $ | 1,569,129 | ||||||||
Major Banks | |||||||||||
163,662 | National Australia Bank Ltd. | 3,909,687 | |||||||||
Major Telecommunications | |||||||||||
1,873,761 | Telstra Corp., Ltd. | 6,924,330 | |||||||||
Total Australia | 12,403,146 | ||||||||||
Austria (0.4%) | |||||||||||
Major Telecommunications | |||||||||||
142,060 | Telekom Austria AG* | 2,067,094 | |||||||||
Belgium (0.5%) | |||||||||||
Financial Conglomerates | |||||||||||
125,395 | Fortis | 2,916,234 | |||||||||
Denmark (0.4%) | |||||||||||
Food: Specialty/Candy | |||||||||||
50,839 | Danisco AS | 2,513,366 | |||||||||
Finland (1.0%) | |||||||||||
Telecommunication Equipment | |||||||||||
264,916 | Nokia Oyj | 5,833,416 | |||||||||
France (8.4%) | |||||||||||
Food: Major Diversified | |||||||||||
35,453 | Groupe Danone | 6,212,596 | |||||||||
Integrated Oil | |||||||||||
85,321 | Total S.A. | 15,665,192 | |||||||||
Major Banks | |||||||||||
87,231 | BNP Paribas S.A. | 5,540,185 | |||||||||
40,952 | Societe Generale | 3,654,599 | |||||||||
9,194,784 | |||||||||||
Major Telecommunications | |||||||||||
223,049 | France Telecom S.A* | 6,176,300 | |||||||||
Pharmaceuticals: Major | |||||||||||
149,961 | Aventis S.A. | 11,537,759 | |||||||||
Total France | 48,786,631 | ||||||||||
Germany (1.9%) | |||||||||||
Electric Utilities | |||||||||||
21,766 | E. ON AG | 1,478,904 | |||||||||
Major Telecommunications | |||||||||||
207,584 | Deutsche Telekom AG (Registered Shares)* | $ | 4,078,355 | ||||||||
Motor Vehicles | |||||||||||
5,419 | Porsche AG (Pref.) | 3,170,015 | |||||||||
Multi-Line Insurance | |||||||||||
21,658 | Muenchener Rueckver AG (Registered Shares) | 2,538,722 | |||||||||
Total Germany | 11,265,996 | ||||||||||
Italy (4.1%) | |||||||||||
Integrated Oil | |||||||||||
357,253 | ENI SpA | 7,036,716 | |||||||||
Major Banks | |||||||||||
1,170,473 | UniCredito Italiano SpA | 6,198,544 | |||||||||
Major Telecommunications | |||||||||||
4,692,274 | Telecom Italia SpA – RNC* | 10,461,260 | |||||||||
Total Italy | 23,696,520 | ||||||||||
Japan (20.2%) | |||||||||||
Advertising/Marketing Services | |||||||||||
19,000 | Asatsu – DK Inc. | 478,480 | |||||||||
Broadcasting | |||||||||||
533 | Fuji Television Network, Inc. | 2,337,976 | |||||||||
Commercial Printing/Forms | |||||||||||
599,000 | Dai Nippon Printing Co., Ltd. | 9,325,092 | |||||||||
Computer Processing Hardware | |||||||||||
424,513 | Fujitsu Ltd.* | 2,557,963 | |||||||||
Electric Utilities | |||||||||||
173,000 | Kansai Electric Power Co., Inc. | 3,136,813 | |||||||||
131,700 | Tokyo Electric Power Co., Inc. | 2,894,505 | |||||||||
6,031,318 | |||||||||||
Electrical Products | |||||||||||
98,000 | Sumitomo Electric Industries, Ltd. | 840,897 | |||||||||
Electronic Equipment/Instruments | |||||||||||
151,000 | Canon, Inc. | 7,370,238 | |||||||||
257,000 | Konica Minolta Holdings, Inc. | 2,951,264 | |||||||||
10,321,502 | |||||||||||
See Notes to Financial Statements
5
Morgan Stanley International Value Equity Fund
Portfolio of Investments February 29, 2004 (unaudited) continued
NUMBER OF SHARES | VALUE | ||||||||||
Electronics/Appliances | |||||||||||
467,000 | Fuji Photo Film Co., Ltd. | $ | 14,583,059 | ||||||||
Food Retail | |||||||||||
92,900 | Lawson, Inc. | 3,215,769 | |||||||||
Gas Distributors | |||||||||||
1,202,000 | Tokyo Gas Co., Ltd. | 4,468,974 | |||||||||
Home Building | |||||||||||
268,000 | Sekisui House, Ltd. | 2,557,289 | |||||||||
Household/Personal Care | |||||||||||
265,000 | Kao Corp. | 5,593,636 | |||||||||
Investment Banks/Brokers | |||||||||||
273,000 | Daiwa Securities Group Inc. | 1,835,000 | |||||||||
Major Telecommunications | |||||||||||
1,382 | Nippon Telegraph & Telephone Corp. (NTT) | 6,403,773 | |||||||||
Movies/Entertainment | |||||||||||
23,400 | Oriental Land Co. Ltd. | 1,442,143 | |||||||||
Pharmaceuticals: Major | |||||||||||
342,400 | Sankyo Co., Ltd. | 7,415,531 | |||||||||
Pharmaceuticals: Other | |||||||||||
58,000 | Shionogi & Co., Ltd. | 1,018,718 | |||||||||
246,000 | Yamanouchi Pharmaceutical Co., Ltd. | 8,245,055 | |||||||||
9,263,773 | |||||||||||
Property – Casualty Insurers | |||||||||||
455 | Millea Holdings, Inc. | 5,833,333 | |||||||||
322,000 | Mitsui Sumitomo Insurance Co., Ltd. | 2,830,769 | |||||||||
8,664,102 | |||||||||||
Railroads | |||||||||||
470 | Central Japan Railway Co. | 4,071,612 | |||||||||
Real Estate Development | |||||||||||
515,000 | Mitsubishi Estate Co., Ltd. | 5,998,901 | |||||||||
Recreational Products | |||||||||||
23,900 | Nintendo Co., Ltd. | 2,298,077 | |||||||||
Semiconductors | |||||||||||
30,100 | Rohm Co., Ltd. | 3,404,167 | |||||||||
Specialty Telecommunications | |||||||||||
639 | Vodafone Holdings K.K. | $ | 1,468,764 | ||||||||
Tobacco | |||||||||||
507 | Japan Tobacco, Inc. | 3,630,714 | |||||||||
Total Japan | 118,208,512 | ||||||||||
Netherlands (8.3%) | |||||||||||
Financial Conglomerates | |||||||||||
254,230 | ING Groep NV (Share Certificates) | 6,249,055 | |||||||||
Food: Major Diversified | |||||||||||
265,780 | Unilever NV (Share Certificates) | 19,369,820 | |||||||||
Food: Specialty/Candy | |||||||||||
82,239 | CSM NV | 1,838,626 | |||||||||
Industrial Specialties | |||||||||||
116,441 | Akzo Nobel NV | 4,507,025 | |||||||||
Integrated Oil | |||||||||||
208,734 | Royal Dutch Petroleum Co. | 10,350,138 | |||||||||
Major Telecommunications | |||||||||||
773,099 | Koninklijke (Royal) KPN NV* | 6,131,564 | |||||||||
Total Netherlands | 48,446,228 | ||||||||||
New Zealand (0.6%) | |||||||||||
Major Telecommunications | |||||||||||
842,056 | Telecom Corporation of New Zealand Ltd. | 3,312,832 | |||||||||
South Korea (1.0%) | |||||||||||
Semiconductors | |||||||||||
24,672 | Samsung Electronics Co., Ltd. (GDR) | 5,760,912 | |||||||||
Spain (1.4%) | |||||||||||
Major Telecommunications | |||||||||||
490,047 | Telefonica S.A.* | 7,999,738 | |||||||||
Sweden (1.2%) | |||||||||||
Major Banks | |||||||||||
96,886 | ForeningsSparbanken AB | 1,845,597 | |||||||||
Regional Banks | |||||||||||
779,579 | Nordea Bank AB | 5,424,056 | |||||||||
Total Sweden | 7,269,653 | ||||||||||
See Notes to Financial Statements
6
Morgan Stanley International Value Equity Fund
Portfolio of Investments February 29, 2004 (unaudited) continued
NUMBER OF SHARES | VALUE | ||||||||||
Switzerland (10.4%) | |||||||||||
Chemicals: Agricultural | |||||||||||
75,931 | Syngenta AG | $ | 5,292,689 | ||||||||
Chemicals: Specialty | |||||||||||
33,170 | Ciba Specialty Chemicals AG (Registered Shares)* | 2,394,794 | |||||||||
Construction Materials | |||||||||||
95,920 | Holcim Ltd. (Regular Shares) | 5,000,263 | |||||||||
Financial Conglomerates | |||||||||||
106,298 | UBS AG (Registered Shares) | 7,851,174 | |||||||||
Food: Major Diversified | |||||||||||
61,302 | Nestle S.A. (Registered Shares) | 16,257,259 | |||||||||
Major Banks | |||||||||||
98,640 | Credit Suisse Group | 3,607,638 | |||||||||
Pharmaceuticals: Major | |||||||||||
308,369 | Novartis AG (Registered Shares) | 13,658,364 | |||||||||
63,622 | Roche Holding AG | 6,597,912 | |||||||||
20,256,276 | |||||||||||
Total Switzerland | 60,660,093 | ||||||||||
Taiwan (0.3%) | |||||||||||
Major Telecommunications | |||||||||||
114,313 | Chunghwa Telecom Co., Ltd. (ADR) | 1,879,306 | |||||||||
United Kingdom (33.0%) | |||||||||||
Aerospace & Defense | |||||||||||
966,215 | Rolls-Royce Group PLC | 3,967,569 | |||||||||
Beverages: Alcoholic | |||||||||||
1,043,343 | Allied Domecq PLC | 8,807,115 | |||||||||
Broadcasting | |||||||||||
2,812,813 | ITV PLC* | 7,271,410 | |||||||||
Catalog/Specialty Distribution | |||||||||||
342,227 | GUS PLC | 4,669,385 | |||||||||
Chemicals: Specialty | |||||||||||
356,685 | BOC Group PLC | 6,194,827 | |||||||||
Construction Materials | |||||||||||
133,375 | RMC Group PLC | 1,725,185 | |||||||||
Electric Utilities | |||||||||||
814,715 | National Grid Transco PLC | $ | 6,554,069 | ||||||||
Financial Conglomerates | |||||||||||
204,239 | Lloyds TSB Group PLC | 1,706,877 | |||||||||
Food: Specialty/Candy | |||||||||||
1,059,394 | Cadbury Schweppes PLC | 8,779,474 | |||||||||
Household/Personal Care | |||||||||||
206,741 | Reckitt Benckiser PLC | 5,425,502 | |||||||||
Integrated Oil | |||||||||||
1,778,016 | BP PLC | 14,361,531 | |||||||||
Life/Health Insurance | |||||||||||
374,264 | HHG PLC (CDI)* | 303,811 | |||||||||
472,142 | Prudential PLC | 4,337,968 | |||||||||
4,641,779 | |||||||||||
Major Banks | |||||||||||
1,303,921 | Barclays PLC | 11,773,355 | |||||||||
415,640 | Royal Bank of Scotland Group PLC | 13,219,497 | |||||||||
24,992,852 | |||||||||||
Miscellaneous Commercial Services | |||||||||||
1,925,525 | Hays PLC | 5,031,589 | |||||||||
2,084,690 | Rentokil Initial PLC | 7,607,049 | |||||||||
12,638,638 | |||||||||||
Other Metals/Minerals | |||||||||||
809,350 | BHP Billiton PLC | 7,462,620 | |||||||||
Other Transportation | |||||||||||
151,150 | BAA PLC | 1,481,138 | |||||||||
Pharmaceuticals: Major | |||||||||||
465,903 | GlaxoSmithKline PLC | 9,748,305 | |||||||||
Publishing: Books/Magazines | |||||||||||
1,703,088 | Reed Elsevier PLC | 15,758,969 | |||||||||
Pulp & Paper | |||||||||||
353,063 | Bunzl PLC | 2,939,105 | |||||||||
Tobacco | |||||||||||
920,606 | British American Tobacco PLC | 14,124,517 | |||||||||
559,670 | Imperial Tobacco Group PLC | 12,107,193 | |||||||||
26,231,710 | |||||||||||
See Notes to Financial Statements
7
Morgan Stanley International Value Equity Fund
Portfolio of Investments February 29, 2004 (unaudited) continued
NUMBER OF SHARES | VALUE | ||||||||||
Wholesale Distributors | |||||||||||
394,089 | Wolseley PLC | $ | 5,983,838 | ||||||||
Wireless Telecommunications | |||||||||||
4,647,000 | Vodafone Group PLC | 11,644,342 | |||||||||
Total United Kingdom | 192,986,240 | ||||||||||
Total Common Stocks and Preferred Stock (Cost $444, 693,162) | 556,005,917 | ||||||||||
PRINCIPAL AMOUNT IN THOUSANDS | |||||||||||
Short-Term Investment (2.4%) | |||||||||||
Repurchase Agreement | |||||||||||
$ | 14,024 | Joint repurchase agreement account 1.04% due 03/01/04 (dated 02/27/04; proceeds $14,025,215) (a) (Cost $14,024,000) | 14,024,000 | ||||||||
Total Investments (Cost $458,717,162) (b)(c) | 97.6 | % | 570,029,917 | |||||||
Other Assets In Excess of Liabilities | 2.4 | 13,929,464 | ||||||||
Net Assets | 100.0 | % | $ | 583,959,381 | ||||||
ADR | American Depository Receipt. |
GDR | Global Depository Receipt. |
* | Non-income producing security. |
(a) | Collateralized by federal agency and U.S. Treasury obligations. |
(b) | Securities have been designated as collateral in an amount equal to $19,494,153 in connection with open forward foreign currency contracts. |
(c) | The aggregate cost for federal income tax purposes approximates the aggregate cost for book purposes. The aggregate gross unrealized appreciation is $112,581,853 and the aggregate gross unrealized depreciation is $1,269,098, resulting in net unrealized appreciation of $111,312,755. |
Forward Foreign Currency Contracts Open at February 29, 2004:
CONTRACTS TO DELIVER | IN EXCHANGE FOR | DELIVERY DATE | UNREALIZED APPRECIATION/ (DEPRECIATION) | |||||||||||||||||||
$ | 385,372 | EUR | 308,598 | 03/01/04 | $ | 66 | ||||||||||||||||
EUR | 86,001 | $ | 107,415 | 03/01/04 | — | |||||||||||||||||
GBP | 206,004 | $ | 385,372 | 03/01/04 | 865 | |||||||||||||||||
$ | 107,415 | JPY | 11,715,061 | 03/01/04 | (135 | ) | ||||||||||||||||
$ | 56,744 | EUR | 45,471 | 03/02/04 | 49 | |||||||||||||||||
EUR | 341,184 | $ | 424,159 | 03/02/04 | (1,979 | ) | ||||||||||||||||
GBP | 30,475 | $ | 56,744 | 03/02/04 | (137 | ) | ||||||||||||||||
$ | 424,159 | JPY | 46,363,427 | 03/02/04 | 414 | |||||||||||||||||
JPY | 2,100,000,000 | EUR | 15,642,458 | 05/17/04 | 213,948 | |||||||||||||||||
Net unrealized appreciation | $ | 213,091 | ||||||||||||||||||||
Currency Abbreviations:
GBP | British Pound. |
EUR | Euro. |
JPY | Japanese Yen. |
See Notes to Financial Statements
8
Morgan Stanley International Value Equity Fund
Summary of Investments February 29, 2004 (unaudited)
INDUSTRY | VALUE | PERCENT OF NET ASSETS | ||||||||
Advertising/Marketing Services | $ | 478,480 | 0.1 | % | ||||||
Aerospace & Defense | 3,967,569 | 0.7 | ||||||||
Beverages: Alcoholic | 8,807,115 | 1.5 | ||||||||
Broadcasting | 9,609,386 | 1.7 | ||||||||
Catalog/Specialty Distribution | 4,669,385 | 0.8 | ||||||||
Chemicals: Agricultural | 5,292,689 | 0.9 | ||||||||
Chemicals: Specialty | 8,589,621 | 1.5 | ||||||||
Commercial Printing/Forms | 9,325,092 | 1.6 | ||||||||
Computer Processing Hardware | 2,557,963 | 0.4 | ||||||||
Construction Materials | 6,725,448 | 1.1 | ||||||||
Electric Utilities | 14,064,291 | 2.4 | ||||||||
Electrical Products | 840,897 | 0.1 | ||||||||
Electronic Equipment/Instruments | 10,321,502 | 1.8 | ||||||||
Electronics/Appliances | 14,583,059 | 2.5 | ||||||||
Financial Conglomerates | 20,292,469 | 3.5 | ||||||||
Food Retail | 3,215,769 | 0.5 | ||||||||
Food: Major Diversified | 41,839,675 | 7.2 | ||||||||
Food: Specialty/Candy | 13,131,466 | 2.2 | ||||||||
Gas Distributors | 4,468,974 | 0.8 | ||||||||
Home Building | 2,557,289 | 0.4 | ||||||||
Household/Personal Care | 11,019,138 | 1.9 | ||||||||
Industrial Specialties | 4,507,025 | 0.8 | ||||||||
Integrated Oil | 47,413,577 | 8.1 | ||||||||
Investment Banks/Brokers | 1,835,000 | 0.3 | ||||||||
Life/Health Insurance | 4,641,779 | 0.8 | ||||||||
Major Banks | 49,749,102 | 8.5 | ||||||||
Major Telecommunications | 55,434,552 | 9.5 | ||||||||
Miscellaneous Commercial Services | 12,638,638 | 2.2 | ||||||||
Motor Vehicles | 3,170,015 | 0.5 | ||||||||
Movies/Entertainment | 1,442,143 | 0.3 | ||||||||
Multi-Line Insurance | 2,538,722 | 0.4 | ||||||||
Other Metals/Minerals | 7,462,620 | 1.3 | ||||||||
Other Transportation | 1,481,138 | 0.2 | ||||||||
Pharmaceuticals: Major | 48,957,871 | 8.4 | ||||||||
Pharmaceuticals: Other | 9,263,773 | 1.6 | ||||||||
Property – Casualty Insurers | $ | 8,664,102 | 1.5 | % | ||||||
Publishing: Books/Magazines | 15,758,969 | 2.7 | ||||||||
Pulp & Paper | 2,939,105 | 0.5 | ||||||||
Railroads | 4,071,612 | 0.7 | ||||||||
Real Estate Development | 5,998,901 | 1.0 | ||||||||
Recreational Products | 2,298,077 | 0.4 | ||||||||
Regional Banks | 5,424,056 | 0.9 | ||||||||
Repurchase Agreement | 14,024,000 | 2.4 | ||||||||
Semiconductors | 9,165,079 | 1.6 | ||||||||
Specialty Telecommunications | 1,468,764 | 0.3 | ||||||||
Telecommunication Equipment | 5,833,416 | 1.0 | ||||||||
Tobacco | 29,862,424 | 5.1 | ||||||||
Wholesale Distributors | 5,983,838 | 1.0 | ||||||||
Wireless Telecommunications | 11,644,342 | 2.0 | ||||||||
$ | 570,029,917 | 97.6 | % | |||||||
TYPE OF INVESTMENT | VALUE | PERCENT OF NET ASSETS | ||||||||
Common Stocks | $ | 552,835,902 | 94.7 | % | ||||||
Preferred Stock | 3,170,015 | 0.5 | ||||||||
Short-Term Investment | 14,024,000 | 2.4 | ||||||||
$ | 570,029,917 | 97.6 | % | |||||||
See Notes to Financial Statements
9
Morgan Stanley International Value Equity Fund
Financial Statements
Statement of Assets and Liabilities
February 29, 2004 (unaudited)
Assets: | ||||||
Investments in securities, at value (cost $458,717,162) | $ | 570,029,917 | ||||
Unrealized appreciation on open forward foreign currency contracts | 213,091 | |||||
Cash (including $13,795,368 in foreign currency) | 13,795,863 | |||||
Receivable for: | ||||||
Shares of beneficial interest sold | 2,862,532 | |||||
Investments sold | 2,836,414 | |||||
Dividends | 617,536 | |||||
Foreign withholding taxes reclaimed | 431,682 | |||||
Prepaid expenses and other assets | 89,954 | |||||
Total Assets | 590,876,989 | |||||
Liabilities: | ||||||
Payable for: | ||||||
Investments purchased | 5,582,404 | |||||
Shares of beneficial interest redeemed | 526,412 | |||||
Investment management fee | 470,444 | |||||
Distribution fee | 198,410 | |||||
Accrued expenses and other payables | 139,938 | |||||
Total Liabilities | 6,917,608 | |||||
Net Assets | $ | 583,959,381 | ||||
Composition of Net Assets: | ||||||
Paid-in-capital | $ | 467,448,872 | ||||
Net unrealized appreciation | 111,353,800 | |||||
Accumulated net investment loss | (912,786 | ) | ||||
Accumulated net realized gain | 6,069,495 | |||||
Net Assets | $ | 583,959,381 | ||||
Class A Shares: | ||||||
Net Assets | $ | 19,905,238 | ||||
Shares Outstanding (unlimited authorized, $.01 par value) | 1,644,877 | |||||
Net Asset Value Per Share | $ | 12.10 | ||||
Maximum Offering Price Per Share, (net asset value plus 5.54% of net asset value) | $ | 12.77 | ||||
Class B Shares: | ||||||
Net Assets | $ | 198,449,890 | ||||
Shares Outstanding (unlimited authorized, $.01 par value) | 16,484,256 | |||||
Net Asset Value Per Share | $ | 12.04 | ||||
Class C Shares: | ||||||
Net Assets | $ | 42,665,567 | ||||
Shares Outstanding (unlimited authorized, $.01 par value) | 3,553,640 | |||||
Net Asset Value Per Share | $ | 12.01 | ||||
Class D Shares: | ||||||
Net Assets | $ | 322,938,686 | ||||
Shares Outstanding (unlimited authorized, $.01 par value) | 26,678,108 | |||||
Net Asset Value Per Share | $ | 12.11 | ||||
See Notes to Financial Statements
10
Morgan Stanley International Value Equity Fund
Financial Statements continued
Statement of Operations
For the six months ended February 29, 2004 (unaudited)
Net Investment Loss: | ||||||
Income | ||||||
Dividends (net of $343,106 foreign withholding tax) | $ | 3,008,469 | ||||
Interest | 98,335 | |||||
Total Income | 3,106,804 | |||||
Expenses | ||||||
Investment management fee | 2,484,598 | |||||
Distribution fee (Class A shares) | 19,514 | |||||
Distribution fee (Class B shares) | 856,613 | |||||
Distribution fee (Class C shares) | 176,748 | |||||
Transfer agent fees and expenses | 418,931 | |||||
Custodian fees | 108,636 | |||||
Registration fees | 52,064 | |||||
Professional fees | 43,079 | |||||
Shareholder reports and notices | 40,669 | |||||
Trustees' fees and expenses | 2,198 | |||||
Other | 11,273 | |||||
Total Expenses | 4,214,323 | |||||
Net Investment Loss | (1,107,519 | ) | ||||
Net Realized and Unrealized Gain: | ||||||
Net Realized Gain on: | ||||||
Investments | 21,397,117 | |||||
Foreign exchange transactions | 387,064 | |||||
Net Realized Gain | 21,784,181 | |||||
Net Change in Unrealized Appreciation/Depreciation on: | ||||||
Investments | 87,042,142 | |||||
Translation of forward foreign currency contracts, other assets and liabilities denominated in foreign currencies | 1,389,828 | |||||
Net Appreciation | 88,431,970 | |||||
Net Gain | 110,216,151 | |||||
Net Increase | $ | 109,108,632 | ||||
See Notes to Financial Statements
11
Morgan Stanley International Value Equity Fund
Financial Statements continued
Statement of Changes in Net Assets
FOR THE SIX MONTHS ENDED FEBRUARY 29, 2004 | FOR THE YEAR ENDED AUGUST 31, 2003 | |||||||||
(unaudited | ) | |||||||||
Increase (Decrease) in Net Assets: | ||||||||||
Operations: | ||||||||||
Net investment income (loss) | $ | (1,107,519 | ) | $ | 2,209,062 | |||||
Net realized gain (loss) | 21,784,181 | (4,903,637 | ) | |||||||
Net change in unrealized appreciation | 88,431,970 | 33,477,840 | ||||||||
Net Increase | 109,108,632 | 30,783,265 | ||||||||
Dividends to Shareholders from Net Investment Income: | ||||||||||
Class A shares | (192,836 | ) | (66,893 | ) | ||||||
Class B shares | (813,512 | ) | (102,829 | ) | ||||||
Class C shares | (216,411 | ) | (47,743 | ) | ||||||
Class D shares | (4,302,257 | ) | (1,176,635 | ) | ||||||
Total Dividends | (5,525,016 | ) | (1,394,100 | ) | ||||||
Net increase from transactions in shares of beneficial interest | 68,036,285 | 130,604,410 | ||||||||
Net Increase | 171,619,901 | 159,993,575 | ||||||||
Net Assets: | ||||||||||
Beginning of period | 412,339,480 | 252,345,905 | ||||||||
End of Period (Including an accumulated net investment loss of $912,786 and accumulated undistributed investment income of $5,719,749, respectively) | $ | 583,959,381 | $ | 412,339,480 | ||||||
See Notes to Financial Statements
12
Morgan Stanley International Value Equity Fund
Notes to Financial Statements February 29, 2004 (unaudited)
1. Organization and Accounting Policies
Morgan Stanley International Value Equity 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 long-term capital appreciation. The Fund seeks to achieve its objective by investing primarily in common stocks and other securities, including depository receipts and securities convertible into common stock, of companies located outside of the United States. The Fund was organized as a Massachusetts business trust on January 11, 2001 and commenced operations on April 26, 2001.
The Fund offers Class A shares, Class B shares, Class C shares and Class D 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 one year, six years and one year, respectively. Class D shares are not subject to a sales charge. Additionally, Class A shares, Class B shares and Class C shares incur distribution expenses.
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 or Morgan Stanley Investment Advisors Inc. (the "Investment Manager") or Morgan Stanley Investment Management Limited (the "Sub-Advisor"), an affiliate of the Investment Manager, 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 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 Manager using a pricing service and/or procedures approved by the Trustees
13
Morgan Stanley International Value Equity Fund
Notes to Financial Statements February 29, 2004 (unaudited) continued
of the Fund; (6) certain portfolio securities may be valued by an outside pricing service approved by the Fund's Trustees; (7) 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.
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 except for certain dividends on foreign securities which are recorded as soon as the Fund is informed after the ex-dividend date. Discounts are accreted and premiums are amortized over the life of the respective securities. Interest income is accrued daily.
C. Repurchase Agreements — Pursuant to an Exemptive Order issued by the Securities and Exchange Commission, the Fund, along with other affiliated entities managed by the Investment Manager, may transfer uninvested cash balances into one or more joint repurchase agreement accounts. These balances are invested in one or more repurchase agreements and are collateralized by cash, U.S. Treasury or federal agency obligations. The Fund may also invest directly with institutions in repurchase agreements. The Fund's custodian receives the collateral, which is marked-to-market daily to determine that the value of the collateral does not decrease below the repurchase price plus accrued interest.
D. 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.
E. Foreign Currency Translation and Forward Foreign Currency Contracts — The books and records of the Fund are maintained in U.S. dollars as follows: (1) the foreign currency market value of investment securities, other assets and liabilities and forward foreign currency contracts ("forward contracts") are translated at the exchange rates prevailing at the end of the period; and (2) purchases, sales, income and expenses are translated at the exchange rates prevailing on the respective dates of such transactions. The resultant exchange gains and losses are recorded as realized and unrealized gain/loss on foreign exchange transactions. Pursuant to U.S. federal income tax regulations, certain foreign exchange gains/losses included in realized and unrealized gain/loss are included in or are a reduction of ordinary income for federal income tax purposes. The Fund does not isolate that portion of the results of operations arising as a result of changes in the foreign exchange rates from the changes in the market prices of the securities. Forward contracts are valued daily at the appropriate exchange rates. The resultant unrealized exchange gains and losses are recorded as unrealized foreign currency gain or loss. The Fund records realized gains or losses on delivery of the currency or at the time the forward contract is extinguished (compensated) by entering into a closing transaction prior to delivery.
14
Morgan Stanley International Value Equity Fund
Notes to Financial Statements February 29, 2004 (unaudited) continued
F. Federal Income Tax Policy — It is the Fund's policy to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of its taxable income to its shareholders. Accordingly, no federal income tax provision is required.
G. Dividends and Distributions to Shareholders — Dividends and distributions to shareholders are recorded on the ex-dividend date.
H. Use of Estimates — The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and disclosures. Actual results could differ from those estimates.
2. Investment Management and Sub Advisory Agreements
Pursuant to an Investment Management Agreement, the Fund pays the Investment Manager a management fee, accrued daily and payable monthly, by applying the annual rate of 1.0% to the net assets of the Fund determined as of the close of each business day.
Under a Sub-Advisory Agreement between the Sub-Advisor and the Investment Manager, the Sub-Advisor provides the Fund with investment advice and portfolio management relating to the Fund's investments in securities, subject to the overall supervision of the Investment Manager. As compensation for its services provided pursuant to the Sub-Advisory Agreement, the Investment Manager paid the Sub-Advisor compensation of $1,118,069 for the six months ended February 29, 2004.
3. Plan of Distribution
Shares of the Fund are distributed by Morgan Stanley Distributors Inc. (the "Distributor"), an affiliate of the Investment Manager and Sub-Advisor. 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; (ii) Class B – 1.0% of the average daily net assets of Class B; and (iii) Class C – up to 1.0% of the average daily net assets of Class C.
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 $4,916,131 at February 29, 2004.
15
Morgan Stanley International Value Equity Fund
Notes to Financial Statements February 29, 2004 (unaudited) continued
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 or other selected broker-dealer representatives may be reimbursed in the subsequent calendar year. For the six months ended February 29, 2004, the distribution fee was accrued for Class A shares and Class C shares at the annual rate of 0.25% and 1.0%, respectively.
The Distributor has informed the Fund that for the six months ended February 29, 2004, it received contingent deferred sales charges from certain redemptions of the Fund's Class B shares and Class C shares of $188,895 and $1,743, respectively and received $95,006 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.
4. Security Transactions and Transactions with Affiliates
The cost of purchases and proceeds from sales of portfolio securities, excluding short-term investments, for the six months ended February 29, 2004 aggregated $168,577,371, and $112,669,183, respectively.
Morgan Stanley Trust, an affiliate of the Investment Manager and Distributor, is the Fund's transfer agent.
5. Purposes of and Risks Relating to Certain Financial Instruments
The Fund may enter into forward contracts to facilitate settlement of foreign currency denominated portfolio transactions or to manage foreign currency exposure associated with foreign currency denominated securities.
Forward contracts involve elements of market risk in excess of the amounts reflected in the Statement of Assets and Liabilities. The Fund bears the risk of an unfavorable change in the foreign exchange rates underlying the forward contracts. Risks may also arise upon entering into these contracts from the potential inability of the counterparties to meet the terms of their contracts.
At February 29, 2004 investments in securities of issuers in the United Kingdom were 33.0% of the Fund's net assets. These investments, as well as other non-U.S. securities, may be affected by economic or political developments in this region.
At February 29, 2004 the Fund's cash balance consisted principally of interest bearing deposits with J.P. Morgan Chase, the Fund's custodian.
16
Morgan Stanley International Value Equity Fund
Notes to Financial Statements February 29, 2004 (unaudited) continued
6. Shares of Beneficial Interest
Transactions in shares of beneficial interest were as follows:
FOR THE SIX MONTHS ENDED FEBRUARY 29, 2004 | FOR THE YEAR ENDED AUGUST 31, 2003 | ||||||||||||||||||
(unaudited) | |||||||||||||||||||
SHARES | AMOUNT | SHARES | AMOUNT | ||||||||||||||||
CLASS A SHARES | |||||||||||||||||||
Sold | 745,711 | $ | 8,265,935 | 7,815,592 | $ | 73,357,894 | |||||||||||||
Reinvestment of dividends | 14,970 | 168,115 | 6,532 | 57,093 | |||||||||||||||
Redeemed | (1,139,064 | ) | (11,762,984 | ) | (6,807,908 | ) | (64,466,822 | ) | |||||||||||
Net increase (decrease) – Class A | (378,383 | ) | (3,328,934 | ) | 1,014,216 | 8,948,165 | |||||||||||||
CLASS B SHARES | |||||||||||||||||||
Sold | 3,182,013 | 35,155,560 | 4,376,290 | 38,333,996 | |||||||||||||||
Reinvestment of dividends | 64,267 | 719,145 | 10,636 | 92,543 | |||||||||||||||
Redeemed | (1,741,351 | ) | (19,207,753 | ) | (5,082,826 | ) | (44,130,517 | ) | |||||||||||
Net increase (decrease) – Class B | 1,504,929 | 16,666,952 | (695,900 | ) | (5,703,978 | ) | |||||||||||||
CLASS C SHARES | |||||||||||||||||||
Sold | 833,856 | 9,162,450 | 1,601,607 | 13,774,538 | |||||||||||||||
Reinvestment of dividends | 17,791 | 198,545 | 5,021 | 43,632 | |||||||||||||||
Redeemed | (244,503 | ) | (2,669,251 | ) | (1,281,761 | ) | (10,945,201 | ) | |||||||||||
Net increase – Class C | 607,144 | 6,691,744 | 324,867 | 2,872,969 | |||||||||||||||
CLASS D SHARES | |||||||||||||||||||
Sold | 6,298,839 | 69,298,189 | 20,304,374 | 179,785,600 | |||||||||||||||
Reinvestment of dividends | 316,234 | 3,551,312 | 106,487 | 930,697 | |||||||||||||||
Redeemed | (2,211,963 | ) | (24,842,978 | ) | (6,357,467 | ) | (56,229,043 | ) | |||||||||||
Net increase – Class D | 4,403,110 | 48,006,523 | 14,053,394 | 124,487,254 | |||||||||||||||
Net increase in Fund | 6,136,800 | $ | 68,036,285 | 14,696,577 | $ | 130,604,410 | |||||||||||||
7. 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 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.
17
Morgan Stanley International Value Equity Fund
Notes to Financial Statements February 29, 2004 (unaudited) continued
As of August 31, 2003, the Fund had a net capital loss carryforward of $5,215,772 of which $2,443,651 will expire on August 31, 2010, and $2,772,121 will expire on August 21, 2011 to offset future capital gains to the extent provided by regulations.
As of August 31, 2003, 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), capital loss deferrals on wash sales and mark-to-market of open forward foreign currency exchange contracts.
8. Legal Matters
The Investment Manager, certain affiliates of the Investment Manager, certain officers of such affiliates and certain investment companies advised by the Investment Manager or its affiliates, including the Fund, are named as defendants in a number of similar class action complaints which were recently consolidated. This consolidated action also names as defendants certain individual Trustees and Directors of the Morgan Stanley funds. The consolidated amended complaint generally alleges that defendants, including the Fund, violated their statutory disclosure obligations and fiduciary duties by failing properly to disclose (i) that the Investment Manager and certain affiliates of the Investment Manager allegedly offered economic incentives to brokers and others to recommend the funds advised by the Investment Manager or its affiliates to investors rather than funds managed by other companies, and (ii) that the funds advised by the Investment Manager or its affiliates, including the Fund, allegedly paid excessive commissions to brokers in return for their efforts to recommend these funds to investors. The complaint seeks, among other things, unspecified compensatory damages, rescissionary damages, fees and costs. The defendants intend to move to dismiss the action and otherwise vigorously to defend it. While the Fund believes that it has meritorious defenses, the ultimate outcome of this matter is not presently determinable at this early stage of the litigation, and no provision has been made in the Fund's financial statements for the effect, if any, of this matter.
18
Morgan Stanley International Value Equity Fund
Financial Highlights
Selected ratios and per share data for a share of beneficial interest outstanding throughout each period:
FOR THE SIX MONTHS ENDED FEBRUARY 29, 2004 | FOR THE YEAR ENDED AUGUST 31, 2003 | FOR THE YEAR ENDED AUGUST 31, 2002 | FOR THE PERIOD APRIL 26, 2001* THROUGH AUGUST 31, 2001 | |||||||||||||||
(unaudited) | ||||||||||||||||||
Class A Shares | ||||||||||||||||||
Selected Per Share Data: | ||||||||||||||||||
Net asset value, beginning of period | $ | 9.80 | $ | 9.21 | $ | 9.60 | $ | 10.00 | ||||||||||
Income (loss) from investment operations: | ||||||||||||||||||
Net investment income (loss)‡ | (0.01 | ) | 0.09 | 0.03 | 0.03 | |||||||||||||
Net realized and unrealized gain (loss) | 2.45 | 0.57 | (0.33 | ) | (0.43 | ) | ||||||||||||
Total income (loss) from investment operations | 2.44 | 0.66 | (0.30 | ) | (0.40 | ) | ||||||||||||
Less dividends from net investment income | (0.14 | ) | (0.07 | ) | (0.09 | ) | — | |||||||||||
Net asset value, end of period | $ | 12.10 | $ | 9.80 | $ | 9.21 | $ | 9.60 | ||||||||||
Total Return† | 25.04 | %(1) | 7.12 | % | (3.03 | )% | (4.00) | % (1) | ||||||||||
Ratios to Average Net Assets(3): | ||||||||||||||||||
Expenses | 1.52 | %(2) | 1.59 | % | 1.70 | % | 1.88 | %(2) | ||||||||||
Net investment income (loss) | (0.27) | % (2) | 1.02 | % | 0.47 | % | 0.87 | %(2) | ||||||||||
Supplemental Data: | ||||||||||||||||||
Net assets, end of period, in thousands | $19,905 | $19,827 | $9,297 | $9,013 | ||||||||||||||
Portfolio turnover rate | 24 | %(1) | 32 | % | 52 | % | 13 | %(1) | ||||||||||
* | Commencement of operations. |
‡ | Does not reflect the deduction of sales charge. Calculated based on the net asset value as of the last business day of the period. |
† | The per share amounts were computed using an average number of shares outstanding during the period. |
(1) | Not annualized. |
(2) | Annualized. |
(3) | Reflects overall Fund ratios for investment income and non-class specific expenses. |
See Notes to Financial Statements
19
Morgan Stanley International Value Equity Fund
Financial Highlights continued
FOR THE SIX MONTHS ENDED FEBRUARY 29, 2004 | FOR THE YEAR ENDED AUGUST 31, 2003 | FOR THE YEAR ENDED AUGUST 31, 2002 | FOR THE PERIOD APRIL 26, 2001* THROUGH AUGUST 31, 2001 | |||||||||||||||
(unaudited) | ||||||||||||||||||
Class B Shares | ||||||||||||||||||
Selected Per Share Data: | ||||||||||||||||||
Net asset value, beginning of period | $ | 9.71 | $ | 9.14 | $ | 9.57 | $ | 10.00 | ||||||||||
Income (loss) from investment operations: | ||||||||||||||||||
Net investment income (loss)‡ | (0.06 | ) | 0.01 | (0.03 | ) | 0.00 | ||||||||||||
Net realized and unrealized gain (loss) | 2.44 | 0.57 | (0.33 | ) | (0.43 | ) | ||||||||||||
Total income (loss) from investment operations | 2.38 | 0.58 | (0.36 | ) | (0.43 | ) | ||||||||||||
Less dividends from net investment income | (0.05 | ) | (0.01 | ) | (0.07 | ) | — | |||||||||||
Net asset value, end of period | $ | 12.04 | $ | 9.71 | $ | 9.14 | $ | 9.57 | ||||||||||
Total Return† | 24.57 | %(1) | 6.32 | % | (3.74 | )% | (4.30) | % (1) | ||||||||||
Ratios to Average Net Assets(3): | ||||||||||||||||||
Expenses | 2.27 | %(2) | 2.36 | % | 2.45 | % | 2.63 | %(2) | ||||||||||
Net investment income (loss) | (1.02) | % (2) | 0.25 | % | (0.28 | )% | 0.12 | %(2) | ||||||||||
Supplemental Data: | ||||||||||||||||||
Net assets, end of period, in thousands | $198,450 | $145,382 | $143,200 | $114,541 | ||||||||||||||
Portfolio turnover rate | 24 | %(1) | 32 | % | 52 | % | 13 | %(1) | ||||||||||
* | Commencement of operations. |
† | Does not reflect the deduction of sales charge. Calculated based on the net asset value as of the last business day of the period. |
‡ | The per share amounts were computed using an average number of shares outstanding during the period. |
(1) | Not annualized. |
(2) | Annualized. |
(3) | Reflects overall Fund ratios for investment income and non-class specific expenses. |
See Notes to Financial Statements
20
Morgan Stanley International Value Equity Fund
Financial Highlights continued
FOR THE SIX MONTHS ENDED FEBRUARY 29, 2004 | FOR THE YEAR ENDED AUGUST 31, 2003 | FOR THE YEAR ENDED AUGUST 31, 2002 | FOR THE PERIOD APRIL 26, 2001* THROUGH AUGUST 31, 2001 | |||||||||||||||
(unaudited) | ||||||||||||||||||
Class C Shares | ||||||||||||||||||
Selected Per Share Data: | ||||||||||||||||||
Net asset value, beginning of period | $ | 9.69 | $ | 9.13 | $ | 9.57 | $ | 10.00 | ||||||||||
Income (loss) from investment operations: | ||||||||||||||||||
Net investment income (loss)‡ | (0.06 | ) | 0.02 | (0.03 | ) | 0.00 | ||||||||||||
Net realized and unrealized gain (loss) | 2.45 | 0.56 | (0.34 | ) | (0.43 | ) | ||||||||||||
Total income (loss) from investment operations | 2.39 | 0.58 | (0.37 | ) | (0.43 | ) | ||||||||||||
Less dividends from net investment income | (0.07 | ) | (0.02 | ) | (0.07 | ) | — | |||||||||||
Net asset value, end of period | $ | 12.01 | $ | 9.69 | $ | 9.13 | $ | 9.57 | ||||||||||
Total Return† | 24.67 | %(1) | 6.24 | % | (3.73 | )% | (4.30) | % (1) | ||||||||||
Ratios to Average Net Assets(3): | ||||||||||||||||||
Expenses | 2.27 | %(2) | 2.36 | % | 2.45 | % | 2.63 | %(2) | ||||||||||
Net investment income (loss) | (1.02) | % (2) | 0.25 | % | (0.28 | )% | 0.12 | %(2) | ||||||||||
Supplemental Data: | ||||||||||||||||||
Net assets, end of period, in thousands | $42,666 | $28,556 | $23,946 | $15,558 | ||||||||||||||
Portfolio turnover rate | 24 | %(1) | 32 | % | 52 | % | 13 | %(1) | ||||||||||
* | Commencement of operations. |
† | Does not reflect the deduction of sales charge. Calculated based on the net asset value as of the last business day of the period. |
‡ | The per share amounts were computed using an average number of shares outstanding during the period. |
(1) | Not annualized. |
(2) | Annualized. |
(3) | Reflects overall Fund ratios for investment income and non-class specific expenses. |
See Notes to Financial Statements
21
Morgan Stanley International Value Equity Fund
Financial Highlights continued
FOR THE SIX MONTHS ENDED FEBRUARY 29, 2004 | FOR THE YEAR ENDED AUGUST 31, 2003 | FOR THE YEAR ENDED AUGUST 31, 2002 | FOR THE PERIOD APRIL 26, 2001* THROUGH AUGUST 31, 2001 | |||||||||||||||
(unaudited) | ||||||||||||||||||
Class D Shares | ||||||||||||||||||
Selected Per Share Data: | ||||||||||||||||||
Net asset value, beginning of period | $ | 9.81 | $ | 9.23 | $ | 9.60 | $ | 10.00 | ||||||||||
Income (loss) from investment operations: | ||||||||||||||||||
Net investment income‡ | (0.00 | ) | 0.12 | 0.10 | 0.04 | |||||||||||||
Net realized and unrealized gain (loss) | 2.47 | 0.55 | (0.37 | ) | (0.44 | ) | ||||||||||||
Total income (loss) from investment operations | 2.47 | 0.67 | (0.27 | ) | (0.40 | ) | ||||||||||||
Less dividends from net investment income | (0.17 | ) | (0.09 | ) | (0.10 | ) | — | |||||||||||
Net asset value, end of period | $ | 12.11 | $ | 9.81 | $ | 9.23 | $ | 9.60 | ||||||||||
Total Return† | 25.31 | %(1) | 7.39 | % | (2.82 | )% | (4.00) | % (1) | ||||||||||
Ratios to Average Net Assets(3): | ||||||||||||||||||
Expenses | 1.27 | %(2) | 1.36 | % | 1.45 | % | 1.63 | %(2) | ||||||||||
Net investment income (loss) | (0.02) | % (2) | 1.25 | % | 0.72 | % | 1.12 | %(2) | ||||||||||
Supplemental Data: | ||||||||||||||||||
Net assets, end of period, in thousands | $322,939 | $218,574 | $75,903 | $12,128 | ||||||||||||||
Portfolio turnover rate | 24 | %(1) | 32 | % | 52 | % | 13 | %(1) | ||||||||||
* | Commencement of operations. |
† | Calculated based on the net asset value as of the last business day of the period. |
‡ | The per share amounts were computed using an average number of shares outstanding during the period. |
(1) | Not annualized. |
(2) | Annualized. |
(3) | Reflects overall Fund ratios for investment income and non-class specific expenses. |
See Notes to Financial Statements
22
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Trustees Michael Bozic Officers Charles A. Fiumefreddo Mitchell M. Merin Ronald E. Robison Barry Fink Joseph J. McAlinden Stefanie V. Chang Francis J. Smith Thomas F. Caloia Mary E. Mullin Transfer Agent Morgan Stanley Trust Independent Auditors Deloitte & Touche LLP Investment Manager Morgan Stanley Investment Advisors Inc. Sub-Advisor Morgan Stanley Investment Management Limited The financial statements included herein have been taken from the records of the Fund without examination by the independent auditors and accordingly they do not express an opinion thereon. 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. Investments and services offered through Morgan Stanley DW Inc., member SIPC. Morgan Stanley Distributors Inc., member NASD. © 2004 Morgan Stanley 39906RPT-RA04-00028P-AO2/04 | MORGAN STANLEY FUNDS | |
Morgan Stanley International Value Equity Fund Semiannual Report February 29, 2004 | ||
Item 2. Code of Ethics. Not applicable for semiannual reports. Item 3. Audit Committee Financial Expert. Not applicable for semiannual reports. Item 4. Principal Accountant Fees and Services Not applicable for semiannual reports. Item 5. Audit Committee of Listed Registrants. Not applicable for semiannual reports. Item 6. [Reserved.] Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies. Not applicable for semiannual reports. Item 8. [Reserved.] Item 9 - 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. There were no significant changes or corrective actions with regard to significant deficiencies or material weaknesses in the Fund's internal controls or in other factors that could significantly affect the Fund's internal controls subsequent to the date of their evaluation. (b) There were no changes in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. Item 10 Exhibits (a) Code of Ethics - Not applicable for semiannual reports. (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. 2 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 International Value Equity Fund /s/ Ronald E. Robison Ronald E. Robison Principal Executive Officer April 20, 2004 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/ Ronald E. Robison Ronald E. Robison Principal Executive Officer April 20, 2004 /s/ Francis Smith Francis Smith Principal Financial Officer April 20, 2004 3 EXHIBIT 10 B1 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER CERTIFICATIONS I, Ronald E. Robison, certify that: 1. I have reviewed this report on Form N-CSR of Morgan Stanley International Value Equity Fund; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; [b) Omitted.] c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): 4 a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: April 20, 2004 /s/ Ronald E. Robison Ronald E. Robison Principal Executive Officer 5 EXHIBIT 10 B2 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER CERTIFICATIONS I, Francis Smith, certify that: 6. I have reviewed this report on Form N-CSR of Morgan Stanley International Value Equity Fund; 7. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 8. Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 9. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) for the registrant and have: b) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; [b) Omitted.] e) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and f) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 10. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): c) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and 6 d) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: April 20, 2004 /s/ Francis Smith Francis Smith Principal Financial Officer 7 SECTION 906 CERTIFICATION Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Morgan Stanley International Value Equity Fund In connection with the Report on Form N-CSR (the "Report") of the above-named issuer for the period ended February 29, 2004 that is accompanied by this certification, the undersigned hereby certifies that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Issuer. Date: April 20, 2004 /s/ Ronald E. Robison --------------------------- Ronald E. Robison Principal Executive Officer A signed original of this written statement required by Section 906 has been provided to Morgan Stanley International Value Equity Fund and will be retained by Morgan Stanley International Value Equity Fund and furnished to the Securities and Exchange Commission or its staff upon request. 8 SECTION 906 CERTIFICATION Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Morgan Stanley International Value Equity Fund In connection with the Report on Form N-CSR (the "Report") of the above-named issuer for the period ended February 29, 2004 that is accompanied by this certification, the undersigned hereby certifies that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Issuer. Date: April 20, 2004 /s/ Francis Smith ---------------------- Francis Smith Principal Financial Officer A signed original of this written statement required by Section 906 has been provided to Morgan Stanley International Value Equity Fund and will be retained by Morgan Stanley International Value Equity Fund and furnished to the Securities and Exchange Commission or its staff upon request. 9