As filed with the U.S. Securities and Exchange Commission on September 30, 2015
Securities Act File No. 333-206028
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-14
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933 x
Pre-Effective Amendment No. 1 x
Post-Effective Amendment No. o
(Check appropriate box or boxes)
Morgan Stanley Institutional Fund Trust
(Exact Name of Registrant as Specified in Charter)
522 Fifth Avenue
New York, New York 10036
(Address of Principal Executive Offices: (Number, Street, City, State, Zip Code))
(800) 548-7786
(Area Code and Telephone Number)
Joseph C. Benedetti, Esq.
Morgan Stanley Investment Management Inc.
522 Fifth Avenue
New York, New York 10036
(Name and Address of Agent for Service)
Copy to:
Carl Frischling, Esq. |
| Stuart M. Strauss, Esq. |
Approximate Date of Proposed Public Offering: As soon as practicable after the effective date of this Registration Statement.
No filing fee is required because an indefinite number of common shares of beneficial interest of Morgan Stanley Institutional Fund Trust have previously been registered pursuant to Rule 24f-2 under the Investment Company Act of 1940.
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
MORGAN STANLEY LIMITED DURATION U.S.
GOVERNMENT TRUST
522 Fifth Avenue
New York, NY 10036
(800) 548-7786
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD NOVEMBER 10, 2015
To the Shareholders of Morgan Stanley Limited Duration U.S. Government Trust:
Notice is hereby given of a Special Meeting of Shareholders (the "Meeting") of Morgan Stanley Limited Duration U.S. Government Trust (the "Acquired Fund"), to be held in Conference Room 3G, Third Floor, 522 Fifth Avenue, New York, NY 10036, at 10:30 a.m., New York time, on November 10, 2015, and any adjournments or postponements thereof, for the following purposes:
1. To consider and vote upon a proposal to approve the actions and transactions described in that certain Agreement and Plan of Reorganization, dated June 10, 2015 (the "Reorganization Agreement"), between the Acquired Fund and Morgan Stanley Institutional Fund Trust (the "Trust"), on behalf of the Limited Duration Portfolio (the "Acquiring Fund"), pursuant to which substantially all of the assets and liabilities of the Acquired Fund will be transferred to the Acquiring Fund in exchange for shares of the Acquiring Fund of the classes described in the accompanying Proxy Statement and Prospectus and pursuant to which the Acquired Fund will be liquidated and terminated (the "Reorganization"). As a result of this transaction, shareholders of the Acquired Fund will become shareholders of the Acquiring Fund receiving shares of the Acquiring Fund with a value equal to the aggregate net asset value of their shares of the Acquired Fund held immediately prior to the Reorganization; and
2. To approve adjournments of the Meeting from time to time to solicit additional proxies if a quorum is not present.
3. To act upon such other matters as may properly come before the Meeting.
Upon consummation of the Reorganization, it is anticipated that the Acquiring Fund will, in accordance with changes approved by its Board of Trustees, change its name to the Short Duration Income Portfolio, its investment policy and strategy will change to include a duration target of approximately one year or less from the current zero to three year range, and the Fund's portfolio will be concentrated in investment grade fixed income securities denominated in U.S. dollars. The Acquiring Fund will also change its benchmark to the Bank of America/Merrill Lynch 1-Year U.S. Treasury Note Index.
The Reorganization is more fully described in the accompanying Proxy Statement and Prospectus and in the Reorganization Agreement attached as Exhibit A thereto. Shareholders of record of the Acquired Fund as of the close of business on August 24, 2015 are entitled to notice of, and to vote at, the Meeting, and any adjournments or postponements thereof. Please read the Proxy Statement and Prospectus carefully before telling us, through your Proxy or in person, how you wish your shares to be voted. Alternatively, if you are eligible to vote telephonically by touchtone telephone or electronically on the Internet (as discussed in the enclosed Proxy Statement and Prospectus), you may do so in lieu of attending the Meeting in person. The Board of Trustees of the Trust, on behalf of the Acquired Fund, recommends that you vote in favor of the Reorganization. WE URGE YOU TO PROMPTLY SIGN, DATE AND MAIL THE ENCLOSED PROXY OR RECORD YOUR VOTE ELECTRONICALLY VIA TELEPHONE OR THE INTERNET.
By Order of the Board of Trustees,
Mary E. Mullin
Secretary
[ ], 2015
You can help avoid the necessity and expense of sending follow-up letters to ensure a quorum by promptly returning the enclosed Proxy. If you are unable to be present in person, please fill in, sign and return the enclosed Proxy in order that the necessary quorum is represented at the Meeting. The enclosed envelope requires no postage if mailed in the United States. Shareholders will be able to vote telephonically by touchtone telephone or electronically on the Internet by following instructions on their proxy form.
MORGAN STANLEY INSTITUTIONAL FUND TRUST
LIMITED DURATION PORTFOLIO
522 Fifth Avenue
New York, NY 10036
(800) 548-7786
This Proxy Statement and Prospectus is being furnished to shareholders ("Shareholders") of Morgan Stanley Limited Duration U.S. Government Trust ("MS Limited Duration U.S. Government Trust" or the "Acquired Fund") in connection with a Special Meeting of Shareholders (the "Meeting") to be held in Conference Room 3G, Third Floor, 522 Fifth Avenue, New York, NY 10036, at 10:30 a.m., New York time, on November 10, 2015, and any adjournments or postponements thereof, for the following purposes:
1. To consider and vote upon a proposal to approve the actions and transactions described in that certain Agreement and Plan of Reorganization, dated June 10, 2015 (the "Reorganization Agreement"), between the Acquired Fund and Morgan Stanley Institutional Fund Trust (the "Trust"), on behalf of the Limited Duration Portfolio ("MSIFT Limited Duration" or the "Acquiring Fund"), pursuant to which substantially all of the assets and the liabilities of the Acquired Fund will be transferred to the Acquiring Fund in exchange for shares of the Acquiring Fund of the classes described in the accompanying Proxy Statement and Prospectus and pursuant to which the Acquired Fund will be liquidated and terminated (the "Reorganization"). As a result of this transaction, Shareholders of the Acquired Fund will become shareholders of the Acquiring Fund receiving shares of the Acquiring Fund with a value equal to the aggregate net asset value ("NAV") of their shares of the Acquired Fund held immediately prior to the Reorganization; and
2. To approve adjournments of the Meeting from time to time to solicit additional proxies if a quorum is not present.
3. To act upon such other matters as may properly come before the Meeting.
Upon consummation of the Reorganization, it is anticipated that the Acquiring Fund will, in accordance with changes approved by its Board of Trustees, change its name to the Short Duration Income Portfolio, its investment policy and strategy will change to include a duration target of approximately one year or less from the current zero to three year range, and the Fund's portfolio will be concentrated in investment grade fixed income securities denominated in U.S. dollars. The Acquiring Fund will also change its benchmark to the Bank of America/Merrill Lynch 1-Year U.S. Treasury Note Index.
The terms and conditions of the transaction are more fully described in this Proxy Statement and Prospectus and in the Reorganization Agreement attached hereto as Exhibit A. The address and telephone number of the Acquired Fund are the same as those of the Acquiring Fund set forth above. This Proxy Statement also constitutes a Prospectus of the Acquiring Fund, filed by the Trust with the Securities and Exchange Commission (the "Commission") as part of the Trust's Registration Statement on Form N-14 (the "Registration Statement"). The Acquired Fund and Acquiring Fund are referred to collectively as the "Funds."
The Trust is an open-end management investment company. The investment objective of the Acquiring Fund is to seek above-average total return over a market cycle of three to five years.
This Proxy Statement and Prospectus sets forth concisely information about the Acquiring Fund that Shareholders of the Acquired Fund should know before voting on the Reorganization Agreement. A copy of the prospectus for the Acquiring Fund, dated January 30, 2015, as may be amended and supplemented from time to time, is attached as Exhibit B, which prospectus forms a part of Post-Effective Amendment No. 124 to the Trust's Registration Statement on Form N-1A (File Nos. 002-89729; 811-03980), and incorporated herein by reference (the "Acquiring Fund's Prospectus"). Also incorporated herein by reference is the prospectus of the Acquired Fund (the "Acquired Fund's Prospectus"), dated September 30, 2015, as may be amended and supplemented from time to time, which prospectus forms a part of Post-Effective Amendment No. 36 to the Acquired Fund's Registration Statement on Form N-1A (File Nos. 033-41187; 811-06330).
In addition, also enclosed and incorporated herein by reference is the Annual Report of the Acquiring Fund for the fiscal year ended September 30, 2014 and the Semi-Annual Report of the Acquiring Fund for the six-month period ended March 31, 2015 (File No. 811-03980). Also incorporated herein by reference is the Annual Report of the Acquired Fund for the fiscal year ended May 31, 2015 (File No. 811-06330). A Statement of Additional Information relating to the Reorganization, described in this Proxy Statement and Prospectus, dated [ ], 2015, has been filed with the Commission and is also incorporated herein by reference. Such documents are available upon request and without charge by calling (800) 548-7786 with respect to each of the Acquired Fund and Acquiring Fund or by visiting the Commission's website at www.sec.gov.
Shareholders are advised to read and retain this Proxy Statement and Prospectus for future reference.
The Securities and Exchange Commission has not approved or disapproved these securities or passed upon the adequacy of this Prospectus. Any representation to the contrary is a criminal offense.
This Proxy Statement and Prospectus is dated [ ], 2015.
TABLE OF CONTENTS
PROXY STATEMENT AND PROSPECTUS
Synopsis | 1 | ||||||
General | 1 | ||||||
The Reorganization | 1 | ||||||
Fee Tables | 2 | ||||||
Annual Fund Operating Expenses | 4 | ||||||
Portfolio Turnover | 5 | ||||||
Tax Consequences of the Reorganization | 5 | ||||||
Comparison of Acquired Fund and Acquiring Fund | 5 | ||||||
Voting Information | 12 | ||||||
Record Date | 12 | ||||||
Quorum | 12 | ||||||
Voting Procedures | 13 | ||||||
Expenses of Solicitation | 13 | ||||||
Vote Required | 14 | ||||||
Performance Information | 14 | ||||||
The Reorganization | 15 | ||||||
The Board's Considerations | 15 | ||||||
The Reorganization Agreement | 17 | ||||||
Tax Aspects of the Reorganization | 18 | ||||||
Description of Shares | 19 | ||||||
Capitalization Tables (unaudited) | 20 | ||||||
Appraisal Rights | 20 | ||||||
Comparison of Investment Objectives, Principal Policies and Restrictions | 20 | ||||||
Investment Objectives and Policies | 20 | ||||||
MS Limited Duration U.S. Government Trust (Acquired Fund) | 21 | ||||||
MSIFT Limited Duration (Acquiring Fund) | 21 | ||||||
MSIFT Short Duration Income Portfolio (Combined Fund) | 22 | ||||||
Investment Restrictions | 22 | ||||||
Additional Information About the Acquiring Fund and the Acquired Fund | 24 | ||||||
General | 24 | ||||||
Rights of Acquired Fund Shareholders and Acquiring Fund Shareholders | 24 | ||||||
Financial Information | 25 | ||||||
Shareholder Proposals | 25 | ||||||
Management | 25 | ||||||
Description of Shares and Shareholder Inquiries | 26 | ||||||
Dividends, Distributions and Taxes | 26 | ||||||
Purchases, Exchanges and Redemptions | 26 | ||||||
Proposal 2: Approval of Adjournment to Solicit Additional Proxies | 26 | ||||||
Share Information | 27 | ||||||
Financial Statements and Experts | 27 | ||||||
Legal Matters | 28 | ||||||
Available Information | 28 | ||||||
Other Business | 28 | ||||||
Exhibit A – Agreement and Plan of Reorganization | A-1 | ||||||
Exhibit B – Prospectus of the Acquiring Fund dated January 30, 2015, as may be amended and supplemented from time to time | B-1 | ||||||
Exhibit C – Annual Report for the Acquiring Fund for the fiscal year ended September 30, 2014 | C-1 | ||||||
Exhibit D – Semi-Annual Report for the Acquiring Fund for the six-month period ended March 31, 2015 | D-1 |
SYNOPSIS
The following is a synopsis of certain information contained in or incorporated by reference in this Proxy Statement and Prospectus. This synopsis is only a summary and is qualified in its entirety by the more detailed information contained or incorporated by reference in this Proxy Statement and Prospectus and the Reorganization Agreement. Shareholders should carefully review this Proxy Statement and Prospectus and the Reorganization Agreement in their entirety and, in particular, the Acquiring Fund's Prospectus, which is attached to this Proxy Statement and Prospectus as Exhibit B and incorporated herein by reference.
General
This Proxy Statement and Prospectus is being furnished to Shareholders of the Acquired Fund, an open-end management investment company, in connection with the solicitation by the Board of Trustees of the Acquired Fund (the "Board" or "Board of Trustees"), of proxies ("Proxies") to be used at the Meeting to consider the Reorganization. It is expected that the first mailing of this Proxy Statement and Prospectus will be made on or about [ ], 2015.
Pursuant to the Reorganization, Advisor Class Shareholders of the Acquired Fund will receive Class A shares of the Acquiring Fund and Class I Shareholders of the Acquired Fund will receive Class I shares of the Acquiring Fund. The shares to be issued by the Acquiring Fund in connection with the Reorganization (the "Acquiring Fund Shares") will be issued at NAV without any sales charges. Any subsequent purchases of Class A shares of the Acquiring Fund after the Reorganization by the former Class A Shareholders of the Acquired Fund will not be subject to an initial sales charge. See "Synopsis—Comparison of Acquired Fund and Acquiring Fund—Purchases, Exchanges and Redemptions" below. Further information relating to the Acquiring Fund is set forth herein and in the Acquiring Fund's Prospectus, attached to this Proxy Statement and Prospectus as Exhibit B and incorporated herein by reference.
The Board of Trustees of the Trust, on behalf of the Acquiring Fund, has authorized the issuance of the Acquiring Fund Shares to Shareholders of the Acquired Fund in connection with the Reorganization.
The information concerning the Acquired Fund contained herein has been supplied by the Acquired Fund. The information concerning the Acquiring Fund contained herein has been supplied by the Trust.
The Reorganization
The Reorganization is being proposed because the Board has determined that the Reorganization is in the best interests of the Acquired Fund and its Shareholders. The Reorganization will allow Shareholders of the Acquired Fund to be invested in a fund that is managed according to similar investment objectives, strategies and restrictions and that is managed by the members of the same investment team. In addition, Shareholders of the Acquired Fund will experience a decrease in contractual management fees and Shareholders of the Acquired Fund and shareholders of the surviving combined fund (MSIFT Short Duration Income Portfolio) (the "Combined Fund") will experience lower total operating expenses as a result of proposed advisory fee reductions, advisory fee waivers and/or expense reimbursements instituted by Morgan Stanley Investment Management Inc. ("MSIM" or the "Adviser"), the Acquiring Fund's and Acquired Fund's investment adviser. The proposed fee waivers and/or expense reimbursements will continue for at least two years from the date of the Reorganization or until such time as the Trust's Board of Trustees acts to discontinue all or a portion of such waivers and/or reimbursements when it deems such action is appropriate. Moreover, the Reorganization will allow Shareholders of the Acquired Fund to be invested in a fund with the potential for broader distribution opportunities than the Acquired Fund. There is no assurance that the proposed advisory fee waivers and/or expense reimbursements will continue and therefore the total expense ratios of the Combined Fund may be higher in the future. See "The Reorganization—The Board's Considerations."
The Reorganization Agreement provides for the transfer of substantially all the assets and the liabilities of the Acquired Fund to the Acquiring Fund in exchange for Acquiring Fund Shares. The aggregate NAV of the Acquiring Fund Shares issued in the exchange will equal the aggregate value of the net assets of the Acquired Fund received by the Acquiring Fund. On or after the closing date scheduled for the Reorganization (the "Closing Date"), the
1
Acquired Fund will distribute the Acquiring Fund Shares received by the Acquired Fund to its Shareholders as of the Valuation Date (as defined below) in complete liquidation of the Acquired Fund and, without further notice, the outstanding shares of the Acquired Fund held by the Shareholders will then be redeemed and canceled as permitted by the organizational documents of the Acquired Fund and applicable law. The Acquired Fund thereafter will be deregistered as an investment company under the Investment Company Act of 1940, as amended (the "1940 Act"). As a result of the Reorganization, each Shareholder will receive that number of full and fractional Acquiring Fund Shares equal in value to such Shareholder's pro rata interest in the net assets of the Acquired Fund transferred to the Acquiring Fund. Pursuant to the Reorganization, Advisor Class Shareholders of the Acquired Fund will receive Class A shares of the Acquiring Fund and Class I Shareholders of the Acquired Fund will receive Class I shares of the Acquiring Fund. It is expected that the interests of the Shareholders will not be diluted as a result of the Reorganization. The "Valuation Date" is the business day immediately preceding the Closing Date and after the payment of any distributions or other amounts by Acquired Fund or at such time on such earlier or later date after such approval as may be mutually agreed upon in writing.
For the reasons set forth below under "The Reorganization—The Board's Considerations," the Board, including the Trustees who are not "interested persons" of the Acquired Fund ("Independent Board Members"), as that term is defined in the 1940 Act, has concluded that the Reorganization is advisable and in the best interests of the Acquired Fund and its Shareholders and recommends approval of the Reorganization.
Fee Tables
The following tables briefly describe the shareholder fees and annual Fund operating expenses that Shareholders of the Funds bear directly and indirectly from an investment in the Funds. Shareholder fees will not be charged on those Acquiring Fund Shares received in connection with the Reorganization. Each Fund pays expenses for management of its assets, distribution of its shares and other services, and those expenses are reflected in the NAV per share of each Fund. These expenses are deducted from each respective Fund's assets and are based on actual expenses incurred by each of the Acquiring Fund and Acquired Fund for its fiscal year ended September 30, 2015 and May 31, 2015, respectively. The tables also set forth pro forma fees for the Combined Fund reflecting what the fee schedule would have been on September 30, 2014, if the Reorganization had been consummated twelve (12) months prior to that date.
In connection with the Reorganization, the Board of Trustees of the Acquiring Fund approved removing the front-end sales charge on Class A shares effective upon consummation of the Reorganization. Currently, the Class A shares of the Acquiring Fund are subject to a sales charges. For purchases of Class A shares of the Acquiring Fund, you may qualify for a sales charge discount if the cumulative NAV of Class A shares of the Fund purchased in a single transaction, together with the NAV of all Class A shares of other Morgan Stanley Multi-Class Funds (as defined in the Prospectus for the Acquiring Fund) held in related accounts, amounts to $25,000 or more. More information about this combined purchase discount and other discounts is available from your authorized financial intermediary and in the section of this Proxy Statement and Prospectus entitled "Synopsis—Comparison of Acquired Fund and Acquiring Fund—Purchases, Exchanges and Redemptions—Advisor Class Shares of Acquired Fund/Class A Shares of Acquiring Fund—Sales Charges."
The Board of Trustees of the Acquiring Fund also approved changes to the Acquiring Fund's advisory fee and expense caps of each share class following the Reorganization. Specifically, MSIM has agreed to permanently reduce its advisory fee by 10 basis points to 0.20%. MSIM has agreed to further reduce its advisory fee and/or reimburse the Combined Fund so that Total Annual Fund Operating Expenses, excluding certain investment related expenses, taxes, interest and other extraordinary expenses (including litigation), will not exceed 0.55% for Class A and 0.30% for Class I.
2
Shareholder Fees
(fees paid directly from your investment)
MS Limited Duration U.S. Government Trust (Acquired Fund) | Advisor Class | Class I | |||||||||
Maximum sales charge (load) imposed on purchases (as a percentage of offering price) | None | None | |||||||||
Maximum deferred sales charge (load) (as a percentage based on the lesser of the offering price or NAV at redemption) | None | None | |||||||||
MSIFT Limited Duration (Acquiring Fund) | Class A | Class I | |||||||||
Maximum sales charge (load) imposed on purchases (as a percentage of offering price) | 4.25 | % | None | ||||||||
Maximum deferred sales charge (load) (as a percentage based on the lesser of the offering price or NAV at redemption) | None(1) | None | |||||||||
Pro Forma Combined Fund (MSIFT Short Duration Income Portfolio) | Class A | Class I | |||||||||
Maximum sales charge (load) imposed on purchases (as a percentage of offering price) | None | None | |||||||||
Maximum deferred sales charge (load) (as a percentage based on the lesser of the offering price or NAV at redemption) | None | None |
(1) Investments that are not subject to any sales charges at the time of purchase are subject to a contingent deferred sales charge ("CDSC") of 0.50% that will be imposed if you sell your shares within 18 months after the last day of the month of purchase, except for certain specific circumstances. See "Comparison of Acquired Fund and Acquiring Fund—Purchases, Exchanges and Redemptions" for further information about the CDSC waiver categories.
Annual Fund Operating Expenses
(expenses that are deducted from Fund assets)
MS Limited Duration U.S. Government Trust (Acquired Fund) | Advisor Class | Class I | |||||||||
Advisory Fee | 0.27 | % | 0.27 | % | |||||||
Shareholder Service Fee | 0.25 | % | None | ||||||||
Other Expenses | 0.45 | % | 0.83 | % | |||||||
Total Annual Fund Operating Expenses | 0.97 | % | 1.10 | % | |||||||
MSIFT Limited Duration (Acquiring Fund) | Class A | Class I | |||||||||
Advisory Fee | 0.30 | % | 0.30 | % | |||||||
Distribution and/or Shareholder Service (12b-1) Fee | 0.25 | % | None | ||||||||
Other Expenses | 0.55 | % | 0.48 | % | |||||||
Total Annual Fund Operating Expenses* | 1.10 | % | 0.78 | % | |||||||
Fee Waiver and/or Expense Reimbursement* | 0.22 | % | 0.25 | % | |||||||
Total Annual Fund Operating Expenses After Fee Waiver and/or Expense Reimbursement* | 0.88 | % | 0.53 | % |
3
Pro Forma Combined Fund (MSIFT Short Duration Income Portfolio) | Class A | Class I | |||||||||
Advisory Fee | 0.20 | % | 0.20 | % | |||||||
Distribution and/or Shareholder Service (12b-1) Fee | 0.25 | % | None | ||||||||
Other Expenses | 0.28 | % | 0.27 | % | |||||||
Total Annual Fund Operating Expenses** | 0.73 | % | 0.47 | % | |||||||
Fee Waiver and/or Expense Reimbursement** | 0.18 | % | 0.17 | % | |||||||
Total Annual Fund Operating Expenses After Fee Waiver and/or Expense Reimbursement** | 0.55 | % | 0.30 | % |
* MSIM has agreed to reduce its advisory fee and/or reimburse the Acquiring Fund so that Total Annual Fund Operating Expenses, excluding certain investment related expenses, taxes, interest and other extraordinary expenses (including litigation), will not exceed 0.88 for Class A and 0.53% for Class I. The fee waivers and/or expense reimbursements will continue for at least one year or until such time as the Trust's Board of Trustees acts to discontinue all or a portion of such waivers and/or reimbursements when it deems such action is appropriate.
** MSIM has agreed to reduce its advisory fee and/or reimburse the Combined Fund so that Total Annual Fund Operating Expenses, excluding certain investment related expenses, taxes, interest and other extraordinary expenses (including litigation), will not exceed 0.55% for Class A and 0.30% for Class I. The fee waivers and/or expense reimbursements will continue for at least two years from the date of the Reorganization or until such time as the Trust's Board of Trustees acts to discontinue all or a portion of such waivers and/or reimbursements when it deems such action is appropriate.
Example
To attempt to show the effect of these expenses on an investment over time, the hypothetical shown below has been created. The example assumes that an investor invests $10,000 in either the Acquired Fund or Acquiring Fund for the time periods indicated and that an investor then redeems all of his or her shares at the end of those periods. The example also assumes that the investment has a 5% return each year and that the operating expenses for each Fund remain the same. Although a Shareholder's actual costs may be higher or lower, the table below shows a Shareholder's costs at the end of each period based on these assumptions.
MS Limited Duration U.S. Government Trust (Acquired Fund) | 1 Year | 3 Years | 5 Years | 10 Years | |||||||||||||||
Advisor Class | $ | 99 | $ | 309 | $ | 536 | $ | 1,190 | |||||||||||
Class I | $ | 112 | $ | 350 | $ | 606 | $ | 1,340 | |||||||||||
MSIFT Limited Duration (Acquiring Fund) | |||||||||||||||||||
Class A | $ | 511 | $ | 694 | $ | 892 | $ | 1,463 | |||||||||||
Class I | $ | 54 | $ | 170 | $ | 296 | $ | 665 | |||||||||||
Pro Forma Combined Fund (MSIFT Short Duration Income Portfolio) | |||||||||||||||||||
Class A | $ | 56 | $ | 176 | $ | 307 | $ | 689 | |||||||||||
Class I | $ | 31 | $ | 97 | $ | 169 | $ | 381 |
Annual Fund Operating Expenses
The purpose of the foregoing fee tables is to assist Shareholders in understanding the various costs and expenses that a Shareholder in each Fund will bear directly or indirectly. For a more complete description of these costs and expenses, see "Comparison of Acquired Fund and Acquiring Fund—Investment Advisory Fees," "—Distribution Plan and Shareholder Services Plan Fees," "—Other Significant Fees" and "—Purchases, Exchanges and Redemptions" below.
4
Portfolio Turnover
Each Fund pays transaction costs, such as commissions, when it buys and sells securities (or "turns over" its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account. These costs, which are not reflected in Total Annual Fund Operating Expenses or in the Example, affect Fund performance. During the most recent fiscal year, the Acquiring Fund's portfolio turnover rate was 60% of the average value of its portfolio and the Acquired Fund's portfolio turnover rate was 229% of the average value of its portfolio.
Tax Consequences of the Reorganization
As a condition to the Reorganization, the Acquired Fund has requested an opinion of Dechert LLP to the effect that, based upon certain facts, assumptions and representations, the Reorganization will constitute a tax-free reorganization for federal income tax purposes, and no gain or loss will be recognized by the Acquired Fund, the Acquiring Fund or the Acquired Fund's Shareholders for federal income tax purposes as a result of the transactions included in the Reorganization. Receipt of such opinion is a condition to the Reorganization. For further information about the tax consequences of the Reorganization, see "The Reorganization—Tax Aspects of the Reorganization" below.
Comparison of Acquired Fund and Acquiring Fund
Investment Objectives. Principal Investment Policies and Benchmarks. The investment objective and principal investment policies of the Acquired Fund are similar to those of the Acquiring Fund and are set forth below. The Acquired Fund seeks to achieve its investment objective by investing substantially all of its net assets in securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities. The Acquiring Fund seeks to achieve its investment objective by investing at least 80% of its assets in fixed income securities, primarily in U.S. government securities, investment grade corporate bonds and mortgage- and asset-backed securities. Upon consummation of the Reorganization, it is anticipated that the Acquiring Fund will, in accordance with changes approved by its Board of Trustees, change its name to the Short Duration Income Portfolio, its investment policy and strategy will change to include a duration target of approximately one year or less from the current zero to three year range, and the Fund's portfolio will be concentrated in investment grade fixed income securities denominated in U.S. dollars. The Acquiring Fund will also change its benchmark to the Bank of America/Merrill Lynch 1-Year U.S. Treasury Note Index. Each of the Acquired Fund, the Acquiring Fund and the Combined Fund are diversified funds. The principal differences between the principal investment policies of the Acquired Fund, the Acquiring Fund and the Combined Fund are more fully described under "Comparison of Investment Objectives, Principal Policies and Restrictions" below. Each of the Acquired Fund's and Acquiring Fund's investment objective is a fundamental policy and may not be changed without shareholder approval of a majority of the respective Fund's outstanding voting securities, as defined in the 1940 Act, but no change is currently anticipated. The below table shows the investment objectives, principal investment policies and primary benchmarks of each of the Acquired Fund, the Acquiring Fund and the Combined Fund.
MS Limited Duration U.S. Government Trust (Acquired Fund) | MSIFT Limited Duration (Acquiring Fund) | MSIFT Short Duration Income Portfolio (Combined Fund) | |||||||||
Investment Objective | Investment Objective | Investment Objective | |||||||||
• Seeks current income, preservation of principal and liquidity | • Seeks above-average total return over a market cycle of three to five years | • Seeks above-average total return over a market cycle of three to five years |
5
MS Limited Duration U.S. Government Trust (Acquired Fund) | MSIFT Limited Duration (Acquiring Fund) | MSIFT Short Duration Income Portfolio (Combined Fund) | |||||||||
Principal Investment Policies | Principal Investment Policies | Principal Investment Policies | |||||||||
• Under normal market conditions, MSIM seeks to achieve the Acquired Fund's investment objective by investing substantially all of the Fund's net assets in securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities, including, but not limited to, U.S. Treasury securities and Treasury Inflation Protected Securities ("TIPS"), and zero coupon securities. | • Under normal market conditions, MSIM seeks to achieve the Acquiring Fund's investment objective by investing at least 80% of the Fund's assets in fixed income securities, primarily in U.S. government securities, investment grade corporate bonds and mortgage- and asset-backed securities. | • Under normal market conditions, MSIM seeks to achieve the Combined Fund's investment objective by investing substantially all of the Fund's assets in investment grade fixed income securities denominated in U.S. dollars. | |||||||||
• MSIM seeks to maintain an overall duration of the Acquired Fund's portfolio of three years or less. | • MSIM will ordinarily seek to maintain an average duration of the Acquiring Fund's portfolio similar to that of the Barclays 1-3 Year U.S. Government/Credit Index, which generally ranges between zero and three years. | • MSIM will ordinarily seek to maintain an average duration of the Combined Fund's portfolio of approximately one year or less. With respect to corporate issuers, the Combined Fund will not invest in securities with remaining maturities of more than 3.25 years. | |||||||||
• Non-investment grade securities are not held in the Acquired Fund's portfolio. | • As a matter of prospectus limitation, the Fund was approved to invest up to 20% of its respective assets in high yield securities (defined as securities rated below BBB/Baa3). Management maintains the following internal limits: up to 10% in high yield securities, at the time of investment, rated at least BB/Ba3 by one NRSRO, at the time of investment, or, if unrated, deemed to be of equivalent quality by Management and maintaining a maximum maturity of five years (as measured by weighted average life). | • Non-investment grade securities are not held in the Combined Fund's portfolio. | |||||||||
• A diversified fund | • A diversified fund | • A diversified fund | |||||||||
Primary Benchmark | Primary Benchmark | Primary Benchmark | |||||||||
• Barclays 1-3 Year U.S. Government Bond Index | • Barclays 1-3 Year U.S. Government/Credit Index | • Bank of America/Merrill Lynch 1-Year U.S. Treasury Note Index |
Fund Management. The Acquiring Fund and Acquired Fund are both managed within MSIM's Taxable Fixed Income team, and, if the Reorganization is approved, the Acquiring Fund is expected to continue to be managed within MSIM's Taxable Fixed Income team. Current members of the team jointly and primarily responsible for the day-to-day management of the Acquiring Fund are Neil Stone, Matthew Dunning and Eric Jesionowski. Current members of the team jointly and primarily responsible for the day-to-day management of the Acquired Fund are Jim Caron, Neil Stone and Matthew Dunning.
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Mr. Stone has been associated with the Adviser in an investment management capacity since 1995. Mr. Dunning re-joined the Adviser in July 2014. Prior to re-joining the Adviser, Mr. Dunning managed the municipal valuation rates group and was a senior taxable municipal bond analyst at Bloomberg L.P. from March 2010 to July 2014. Prior to March 2010, he worked in various trading and portfolio management roles for the Adviser. Mr. Jesionowski has been associated with the Adviser in an investment management capacity since 1997.
Members of the team collaborate to manage the assets of each Fund.
Additional information about the portfolio managers' compensation structure, other accounts managed by the portfolio managers and the portfolio managers' ownership of securities in the Funds is provided in each of the Trust's and Acquired Fund's Statements' of Additional Information.
Investment Advisory Fees. The Acquiring Fund and Acquired Fund currently obtain advisory services from MSIM. MSIM is a wholly-owned subsidiary of Morgan Stanley (NYSE: "MS") with its principal office located at 522 Fifth Avenue, New York, NY 10036. Morgan Stanley is a preeminent global financial services firm engaged in securities trading and brokerage activities, as well as providing investment banking, research and analysis, financing and financial advisory services.
The annual advisory fee (as a percentage of daily net assets) payable by the Funds is set forth below. The Acquiring Fund pays its advisory fee on a quarterly basis while the Acquired Fund pays its advisory fee on a monthly basis. The Combined Fund will pay its advisory fee on a quarterly basis.
MS Limited Duration U.S. Government Trust (Acquired Fund): | 0.27% of the daily net assets not exceeding $1 billion; and 0.25% of the portion of the daily net assets exceeding $1 billion | ||||||
MSIFT Limited Duration (Acquiring Fund): | 0.300% of daily net assets | ||||||
MSIFT Short Duration Income Portfolio (Combined Fund): | 0.200% of daily net assets |
The Combined Fund is expected to have a lower net total expense ratio for each class as a result of proposed advisory fee reductions, advisory fee waivers and/or expense reimbursements instituted by MSIM. Specifically, MSIM has agreed to permanently reduce its advisory fee by 10 basis points to 0.20%. MSIM has agreed to further reduce its advisory fee and/or reimburse the Combined Fund so that Total Annual Fund Operating Expenses, excluding certain investment related expenses, taxes, interest and other extraordinary expenses (including litigation), will not exceed 0.55% for Class A and 0.30% for Class I. The fee waivers and/or expense reimbursements will continue for at least two years from the date of the Reorganization or until such time as the Trust's Board of Trustees acts to discontinue all or a portion of such waivers and/or reimbursements when it deems such action is appropriate. There is no assurance that the proposed advisory fee waivers and/or expense reimbursements will continue and therefore the total expense ratios of the Combined Fund may be higher in the future. See "The Reorganization—The Board's Considerations."
Comparison of Other Service Providers. The Acquired Fund and Acquiring Fund have the same transfer agent, custodian, distributor, administrator and independent registered public accounting firm. For each Fund, the transfer agent is Boston Financial Data Services, Inc., the custodian is State Street Bank and Trust Company, the distributor is Morgan Stanley Distribution, Inc., the administrator is MSIM and the independent registered public accounting firm is Ernst & Young LLP.
Shareholder Services Plan Fees.
Descriptions of the Plans. The Acquired Fund has adopted a shareholder services plan (the "MS Service Plan") with respect to its Advisor Class shares, pursuant to Rule 12b-1 under the 1940 Act. The Acquiring Fund has adopted a shareholder services plan (the "MSIFT Service Plan") with respect to its Class A shares, pursuant to Rule 12b-1 under the 1940 Act. For a complete description of these arrangements with respect to the Acquired Fund, see the section of the Acquired Fund's Prospectus entitled "Shareholder Information—Share
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Class Arrangements" and the section of the Acquired Fund's statement of additional information entitled "Investment Advisory and Other Services—Shareholder Services Plan." For a complete description of these arrangements with respect to the Acquiring Fund, see the section of the Acquiring Fund's Prospectus entitled "Shareholder Information—Distribution of Portfolio Shares" and the section of the Trust's statement of additional information entitled "Distribution and Shareholder Services Plan."
Advisor Class Shares of Acquired Fund/Class A Shares of Acquiring Fund. Under the MS Service Plan, the Acquired Fund may pay a shareholder services fee of up to 0.25% of its Advisor Class shares' average daily net assets on an annualized basis. The Distributor may compensate other parties for providing distribution-related and/or shareholder support services to investors who purchase Advisor Class shares. For further information relating to shareholder services applicable to Advisor Class shares of the Acquired Fund, see the section entitled "Shareholder Information—Share Class Arrangements" in the Acquired Fund's Prospectus.
Under the MSIFT Service Plan, the Acquiring Fund may pay a shareholder services fee of up to 0.25% of its Class A shares' average daily net assets on an annualized basis. The Distributor may compensate other parties for providing distribution-related and/or shareholder support services to investors who purchase Class A shares. For further information relating to shareholder services applicable to Class A shares of the Acquiring Fund, see the section entitled "Shareholder Information—Distribution of Portfolio Shares" in the Acquiring Fund's Prospectus attached hereto as Exhibit B.
Class I Shares of Acquired Fund/Class I Shares of Acquiring Fund. Class I shares of the Acquired Fund are not subject to the MS Service Plan and Class I shares of the Acquiring Fund are not subject to the MSIFT Service Plan.
Other Significant Fees. Each of the Acquiring Fund and Acquired Fund pay additional fees in connection with their operations, including legal, auditing, transfer agent and custodial fees. See "Synopsis—Fee Tables" above for the percentage of average net assets represented by such "Other Expenses."
Purchases, Exchanges and Redemptions. The Trust's Board of Trustees has authorized the issuance of the Acquiring Fund Shares in connection with the Reorganization.
Advisor Class Shares of Acquired Fund/Class A Shares of Acquiring Fund
Minimum Investments. The minimum initial investment amount for Advisor Class shares of the Acquired Fund is $10,000 for regular accounts and $1,000 for purchase plans that allow you to transfer money automatically from your checking or savings account or from a Morgan Stanley Money Market Fund (as defined in the Acquired Fund Prospectus) on a semi-monthly, monthly or quarterly basis ("EasyInvest®") (provided a Shareholder's schedule of investments totals $10,000 in 12 months). The minimum subsequent investment amount for Advisor Class shares of the Acquired Fund is $100 for all account types, except for an account opened through EasyInvest®, which requires a Shareholder's schedule of investments to total $10,000 in 12 months.
The minimum initial investment for Class A shares of the Acquiring Fund generally is $1,000. If the value of an investor's account falls below the minimum initial investment amount for Class A shares as a result of share redemptions or if such investor no longer meets one of the waiver criteria, the investor's account may be subject to involuntary redemption. Shareholders will be notified prior to any such redemption. For further information relating to the minimum investment amounts for Class A shares of the Acquiring Fund, please see the section entitled "Shareholder Information—Minimum Investment Amounts" in the Acquiring Fund's Prospectus attached hereto as Exhibit B.
Sales Charges. Advisor Class shares of the Acquired Fund are not subject to an initial sales charge or CDSC.
In connection with the Reorganization, the Board of Trustees of the Acquiring Fund approved removing the front-end sales charge and CDSC on Class A shares effective upon consummation of the Reorganization. Currently, Class A shares of the Acquiring Fund are subject to an initial sales charge of up to 4.25%, calculated as a percentage of the offering price on a single transaction. For purchases of Class A shares of the Acquiring Fund, an investor may benefit from a reduced sales charge if the cumulative NAV of Class A shares purchased in a single transaction,
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together with the NAV of any Class A shares of the Acquiring Fund and any other Morgan Stanley Multi-Class Fund (including shares of Morgan Stanley Money Market Funds (as defined in the Prospectus for the Acquiring Fund) and Advisor Class shares of the Acquired Fund which an investor acquired in an exchange from Class A shares of the Acquiring Fund or Class A shares of another Morgan Stanley Multi-Class Fund) held in related accounts, amounts to $25,000 or more. In addition, an investor will have the benefit of a reduced sales charge by combining his or her purchase of Class A shares of the Acquiring Fund in a single transaction with his or her purchase of Class A shares of any other Morgan Stanley Multi-Class Fund for any related account. Investments of $1 million or more are not subject to an initial sales charge, but are generally subject to a CDSC of 0.50% on sales made within 18 months after the last day of the month of purchase. The CDSC on Class A shares of the Acquiring Fund may be waived under certain circumstances. For further information relating to the initial sales charge and CDSC for Class A shares of the Acquiring Fund, please see the section entitled "Shareholder Information—Sales Charges Applicable to Purchases of Class A Shares" and "—How To Redeem Portfolio Shares" in the Acquiring Fund's Prospectus attached hereto as Exhibit B.
There is no initial sales charge applicable to Class A shares acquired in the Reorganization. Any subsequent purchases of Class A shares of the Acquiring Fund after the Reorganization by the former Advisor Class and Class I Shareholders of the Acquired Fund will not be subject to an initial sales charge, as the Board approved removing the front-end sales charge on Class A shares of the Combined Fund effective upon consummation of the Reorganization. Furthermore, no CDSCs will be imposed on Advisor Class shares of the Acquired Fund that are exchanged for Class A shares of the Acquiring Fund in connection with the Reorganization. Finally, because there is no initial sales charge on the Combined Fund's Class A shares, such shares will no longer be counted for the purpose of utilizing a Letter of Intent, Combined Purchase, or Right of Accumulation with respect to other Morgan Stanley Funds.
Exchange Privileges. Class A shares of the Acquiring Fund may currently be exchanged for shares of the same class of any Morgan Stanley Multi-Class Fund, if available, or for shares of any Morgan Stanley Money Market Fund, for shares of Morgan Stanley California Tax-Free Daily Income Trust, Morgan Stanley Liquid Asset Fund Inc., Morgan Stanley New York Municipal Money Market Trust, Morgan Stanley Tax-Free Daily Income Trust and Morgan Stanley U.S. Government Money Market Trust (each, a "Morgan Stanley Money Market Fund" and, together with the Morgan Stanley Multi-Class Funds, the "Morgan Stanley Funds") or for Advisor Class shares of the Acquired Fund, if available, without the imposition of an exchange fee. Front-end sales charges (loads) are not imposed on exchanges of Class A shares of the Acquiring Fund.
Class A shares of the Combined Fund may be exchanged for shares of the same class of any Morgan Stanley Multi-Class Fund, if available, or for shares of any Morgan Stanley Money Market Fund, if available. Because purchases of the Combined Fund's Class A shares will not be subject to a sales charge, shareholders will be subject to the payment of a sales charge, at time of exchange into Class A shares of a Morgan Stanley Fund, based on the amount that they would have owed if they directly purchased Class A shares of that Morgan Stanley Fund.
Advisor Class shares of the Acquired Fund may be exchanged for shares of other Morgan Stanley Funds if the Advisor Class shares were acquired in an exchange from shares initially purchased in a Morgan Stanley Multi-Class Fund. In that case, the Advisor shares may be subsequently re-exchanged for shares of the same Class of any Morgan Stanley Multi-Class Fund, if available, as the initially purchased shares or for shares of a Morgan Stanley Money Market Fund, if available, without the imposition of an exchange fee. Class B shares of a Morgan Stanley Multi-Class Fund that are exchanged for Advisor Class shares may be subsequently re-exchanged for Class B shares of any Morgan Stanley Multi-Class Fund (even though Class B shares are closed to investors). To the extent you hold Advisor Class shares received in exchange for Class A or Class B shares of any Morgan Stanley Multi-Class Fund, and you sell such Advisor Class shares before the expiration of the CDSC "holding period," you will be charged the applicable CDSC rate.
There are special considerations when you exchange Class A shares of the Acquiring Fund that are subject to a CDSC. When determining the length of time you held the Class A shares, any period (starting at the end of the month) during which you held such shares will be counted. In addition, any period (starting at the end of the month) during which you held (i) Class A shares of other portfolios of the Trust; (ii) Class A shares of a Morgan Stanley
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Multi-Class Fund; (iii) shares of a Morgan Stanley Money Market Fund or; (iv) Advisor Class shares of Morgan Stanley Limited Duration U.S. Government Trust, any of which you acquired in an exchange from such Class A shares of a portfolio, will also be counted; however, if you sell shares of (i) such other portfolio of the Trust; (ii) the Morgan Stanley Multi-Class Fund; (iii) the Morgan Stanley Money Market Fund; or (iv) the Advisor Class shares of Morgan Stanley Limited Duration U.S. Government Trust, before the expiration of the CDSC "holding period," you will be charged the CDSC applicable to such shares.
Exchanges are effected based on the respective NAVs of the applicable Morgan Stanley Fund (subject to any applicable redemption fee). Upon consummation of the Reorganization your transaction will be treated the same as an initial purchase. You will be subject to the same minimum initial investment and account size as an initial purchase.
Each Fund provides telephone exchange privileges to its Shareholders. For greater details relating to exchange privileges applicable to the Acquiring Fund, see the section entitled "Shareholder Information—Exchange Privilege" in the Acquiring Fund's Prospectus attached hereto as Exhibit B.
Class I Shares of Acquired Fund/Class I Shares of Acquiring Fund
Minimum Investments. Class I shares of each of the Acquired Fund and the Acquiring Fund are offered only to investors meeting an initial investment minimum of $5,000,000. If the value of an investor's account falls below the minimum initial investment amount for Class I shares as a result of share redemptions or if such investor no longer meets one of the waiver criteria, the investor's account may be subject to involuntary conversion in the case of the Acquiring Fund (to another class of shares offered by the Acquiring Fund, (if an account meets the minimum investment amount for such class)) or involuntary redemption in the case of the Acquired Fund and Acquiring Fund, as applicable. Shareholders will be notified prior to any such conversion or redemption. For further information relating to minimum investment requirements for Class I shares of the Acquiring Fund, please see the section entitled "Shareholder Information—Minimum Investment Amounts" in the Acquiring Fund's Prospectus attached hereto as Exhibit B.
Sales Charges. Class I shares of each of the Acquired Fund and Acquiring Fund are not subject to either an initial sales charge or a CDSC.
Exchange Privileges. Class I shares of the Acquiring Fund may be exchanged for shares of the same class of any Morgan Stanley Multi-Class Fund, if available, or for shares of a Morgan Stanley Money Market Fund or for Advisor Class shares of the Acquired Fund, if available, without the imposition of an exchange fee.
Class I shares of the Acquired Fund may be exchanged for shares of the same class of any Morgan Stanley Multi-Class Fund, if available, or for shares of a Morgan Stanley Money Market Fund, if available, without the imposition of an exchange fee.
Exchanges are effected based on the respective NAVs of the applicable Morgan Stanley Fund (subject to any applicable redemption fee). Upon consummation of the Reorganization, the foregoing exchange privileges will apply to Shareholders of the Combined Fund; however, your transaction will be treated the same as an initial purchase. You will be subject to the same minimum initial investment and account size as an initial purchase.
Each Fund provides telephone exchange privileges to its Shareholders. For greater details relating to exchange privileges applicable to the Acquiring Fund, see the section entitled "Shareholder Information—Exchange Privilege" in the Acquiring Fund's Prospectus attached hereto as Exhibit B.
Dividends. Each Fund declares dividends separately for each of its classes. The Acquired Fund's policy is to declare income dividends on each day the New York Stock Exchange is open for business and distribute to shareholders monthly. The Acquiring Fund's policy is to declare dividends and distribute substantially all of its net investment income to shareholders monthly. Both the Acquired Fund and the Acquiring Fund normally distribute capital gains, if any, with the last distribution for the calendar year. Dividends and capital gains distributions are automatically reinvested in additional shares of the same class of shares of such Fund at NAV unless the shareholder instructs otherwise.
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PRINCIPAL RISK FACTORS
The principal risks of investing in the Acquiring Fund are similar to those of investing in the Acquired Fund. The value of an investment in each Fund is based on the market prices of the securities such Fund holds. These prices change daily due to economic and other events that affect markets generally, as well as those that affect particular regions, countries, industries, companies or governments.
Fixed Income Securities. Each of the Acquiring Fund and the Acquired Fund concentrate their investments in fixed income securities, although the Acquiring Fund concentrates its investments primarily in U.S. government securities, investment grade corporate bonds and mortgage- and asset-backed securities, whereas the Acquired Fund concentrates its investments primarily in securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities. Fixed income securities are subject to the risk of the issuer's inability to meet principal and interest payments on its obligations (i.e., credit risk) and are subject to price volatility resulting from, among other things, interest rate sensitivity, market perception of the creditworthiness of the issuer and general market liquidity (i.e., market risk). The historically low interest rate environment increases the risk associated with rising interest rates, including the potential for periods of volatility and increased redemptions. Each Fund may face a heightened level of interest rate risk, especially since the Federal Reserve Board has ended its quantitative easing program and may begin to raise rates. Securities with longer durations are likely to be more sensitive to changes in interest rates, generally making them more volatile than securities with shorter durations. Lower rated fixed income securities have greater volatility because there is less certainty that principal and interest payments will be made as scheduled. A portion of the Acquiring Fund's fixed income securities may be rated below investment grade, although, effective upon consummation of the Reorganization, the Combined Fund may not hold securities rated below investment grade in its portfolio.
Mortgage Securities. Investments in mortgage securities are subject to the risk that if interest rates decline, borrowers may pay off their mortgages sooner than expected which may adversely affect each Fund's return. Rising interest rates tend to discourage refinancings, with the result that the average life and volatility of mortgage securities will increase and market price will decrease. Rates of prepayment, faster or slower than expected by the Adviser, could reduce a Fund's yield, increase the volatility of a Fund and/or cause a decline in NAV. Certain mortgage-backed securities may be more volatile and less liquid than other traditional types of debt securities. In addition, an unexpectedly high rate of defaults on the mortgages held by a mortgage pool may adversely affect the value of a mortgage-backed security and could result in losses to a Fund. Investments in to-be-announced pass-through mortgage securities may give rise to a form of leverage and may cause a Fund's turnover rate to appear higher. Leverage may cause a Fund to be more volatile than if the Fund had not been leveraged.
Asset-Backed Securities. The Acquiring Fund may invest in asset-backed securities. Asset-backed securities involve the risk that various federal and state consumer laws and other legal and economic factors may result in the collateral backing the securities being insufficient to support payment on the securities. Some asset-backed securities also entail prepayment risk, which may vary depending on the type of asset.
Foreign and Emerging Market Securities. The Acquiring Fund may invest in foreign and emerging market securities. Investments in foreign markets entail special risks such as currency, political, economic and market risks. There also may be greater market volatility, less reliable financial information, higher transaction and custody costs, decreased market liquidity and less government and exchange regulation associated with investments in foreign markets. In addition, investments in certain foreign markets, which have historically been considered stable, may become more volatile and subject to increased risk due to ongoing developments and changing conditions in such markets. Moreover, the growing interconnectivity of global economies and financial markets has increased the probability that adverse developments and conditions in one country or region will affect the stability of economies and financial markets in other countries or regions. The risks of investing in emerging market countries are greater than risks associated with investments in foreign developed countries. In addition, the Acquiring Fund's investments in foreign issuers may be denominated in foreign currencies and therefore, to the extent unhedged, the value of the investment will fluctuate with the U.S. dollar exchange rates. To the extent hedged by the use of foreign currency forward exchange contracts, the precise matching of the foreign currency forward exchange contract amounts and the value of the securities involved will not generally be possible because the future value of such securities in
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foreign currencies will change as a consequence of market movements in the value of those securities between the date on which the contract is entered into and the date it matures. There is additional risk that such transactions reduce or preclude the opportunity for gain if the value of the currency should move in the direction opposite to the position taken and that foreign currency forward exchange contracts create exposure to currencies in which the Acquiring Fund's securities are not denominated. The use of foreign currency forward exchange contracts involves the risk of loss from the insolvency or bankruptcy of the counterparty to the contract or the failure of the counterparty to make payments or otherwise comply with the terms of the contract.
Liquidity. Each Fund's investments in illiquid securities, and additionally restricted securities for the Acquiring Fund, may entail greater risk than investments in publicly traded securities. These securities may be more difficult to sell, particularly in times of market turmoil. Additionally, the market for certain investments deemed liquid at the time of purchase may become illiquid under adverse market or economic conditions. Illiquid securities may be more difficult to value. If a Fund is forced to sell an illiquid security to fund redemptions or for other cash needs, it may be forced to sell the security at a loss.
Derivatives. A derivative instrument often has risks similar to its underlying asset and may have additional risks, including imperfect correlation between the value of the derivative and the underlying asset, risks of default by the counterparty to certain transactions, magnification of losses incurred due to changes in the market value of the securities, instruments, indices or interest rates to which they relate and risks that the transactions may not be liquid. Certain derivative transactions may give rise to a form of leverage. Leverage magnifies the potential for gain and the risk of loss.
The foregoing discussion is a summary of the principal risk factors. For a more complete discussion of the risks of the Acquiring Fund, see "Details of the Portfolios—Limited Duration Portfolio—Principal Risks," and "Additional Information About the Portfolios' Investment Strategies and Related Risks" in the Acquiring Fund's Prospectus attached hereto as Exhibit B. For a more complete discussion of the risks of the Acquired Fund, see "Fund Details—Additional Information about the Fund's Investment Objective, Strategies and Risks—Principal Risks" in the Acquired Fund's Prospectus, incorporated herein by reference.
VOTING INFORMATION
Record Date
The record date (the "Record Date") has been fixed as the close of business on August 24, 2015 for the determination of Shareholders of the Acquired Fund entitled to notice of, and to vote at, the Meeting. As of the Record Date, there were 5,733,375 shares of the Acquired Fund issued and outstanding.
Quorum
Shareholders of record as of the close of business on the Record Date are entitled to one vote per share and a fractional vote for a fractional share on each matter submitted to a vote at the Meeting. Shareholders of each class of the Acquired Fund will vote together as a single class in connection with the Reorganization Agreement. The holders of a majority of the shares issued and outstanding and entitled to vote of the Acquired Fund, represented in person or by proxy, will constitute a quorum at the Meeting.
In the event that the necessary quorum to transact business or the vote required to approve or reject the Reorganization is not obtained at the Meeting, the persons named as Proxies may propose one or more adjournments of the Meeting to permit further solicitation of Proxies. Any such adjournment will require the affirmative vote of the holders of a majority of shares of the Acquired Fund present in person or by Proxy at the Meeting. Where an adjournment is proposed because the necessary quorum to transact business is not obtained at the Meeting, the persons named as Proxies will vote in favor of such adjournment provided that such persons named as Proxies determine that such adjournment and additional solicitation is reasonable and in the interests of Shareholders based on all relevant factors, including the nature of the proposal, the percentage of Shareholders present, the nature of the proposed solicitation activities and the nature of the reasons for the further solicitation. Where an adjournment is proposed because the vote required to approve or reject the Reorganization is not obtained at the Meeting, the
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persons named as Proxies will vote in favor of such adjournment those Proxies which they are entitled to vote in favor of the Reorganization and will vote against any such adjournment those Proxies required to be voted against the Reorganization. Abstentions will not be voted either for or against any such adjournment.
Voting Procedures
The enclosed form of Proxy for the Acquired Fund, if properly executed and returned, will be voted in accordance with the choice specified thereon. The Proxy will be voted in favor of the Reorganization unless a choice is indicated to vote against or to abstain from voting on the Reorganization. If a Shareholder executes and returns a Proxy but fails to indicate how the votes should be cast, the Proxy will be voted in favor of the Reorganization. The Board knows of no business, other than that set forth in the Notice of Special Meeting of Shareholders, to be presented for consideration at the Meeting. However, the Proxy confers discretionary authority upon the persons named therein to vote as they determine on other business, not currently contemplated, which may come before the Meeting.
Proxies from Shareholders may be revoked at any time prior to the voting thereof by: (i) delivering written notice of revocation to the Secretary of Morgan Stanley Limited Duration U.S. Government Trust, 522 Fifth Avenue, New York, NY 10036; (ii) completing and returning a new Proxy (whether by mail or, as discussed below, by touchtone telephone or the Internet) (if returned and received in time to be voted); or (iii) attending the Meeting and voting in person. Attendance at the Meeting will not in and of itself revoke a Proxy; a Shareholder may attend the Meeting in person to revoke a previously provided Proxy and to authorize Proxies to vote their shares in accordance with their new instructions.
Shareholders will be able to vote their shares by touchtone telephone or by Internet by following the instructions on the Proxy Card or on the Voting Information Card accompanying this Proxy Statement and Prospectus. To vote by Internet or by telephone, Shareholders can access the website or call the toll-free number listed on the Proxy Card or noted in the enclosed voting instructions. To vote by touchtone telephone, Shareholders will need the number that appears on the Proxy Card. In certain instances, a proxy solicitor may call Shareholders to ask if they would be willing to have their votes recorded by telephone. The telephone voting procedure is designed to authenticate Shareholders' identities, to allow Shareholders to authorize the voting of their shares in accordance with their instructions and to confirm that their instructions have been recorded properly. No recommendation will be made as to how a Shareholder should vote on any proposal other than to refer to the recommendations of the Board. Shareholders voting by telephone in this manner will be asked for identifying information and will be given an opportunity to authorize Proxies to vote their shares in accordance with their instructions. To ensure that Shareholders' instructions have been recorded correctly they will receive a confirmation of their instructions in the mail. A special toll-free number set forth in the confirmation will be available in case the information contained in the confirmation is incorrect. Although a Shareholder's vote may be taken by telephone, each Shareholder will receive a copy of this Proxy Statement and Prospectus and may vote by mail using the enclosed Proxy Card or by touchtone telephone or the Internet as set forth above. The last proxy vote received in time to be voted, whether by Proxy Card, touchtone telephone or Internet, will be the vote that is counted and will revoke all previous votes by Shareholders.
Expenses of Solicitation
Proxies will be solicited primarily by mailing this Proxy Statement and Prospectus and its enclosures. In addition to the solicitation of Proxies by mail, employees of MSIM and its affiliates, without additional compensation, may solicit proxies in person or by telephone, facsimile or oral communication. The Acquired Fund may retain Computershare Fund Services, a professional proxy solicitation firm, to assist with any necessary solicitation of Proxies. The estimated cost of additional telephone solicitation by Computershare Fund Services is approximately $9,500. The expenses of the Reorganization, including the cost of printing, filing and proxy solicitation (including the aforementioned cost of additional telephone solicitation by Computershare Fund Services) and legal and accounting expenses, are expected to be approximately $180,000, all of which will be borne by the Acquired Fund, which is responsible for Reorganization expenses up to $706,600 (the expected amount of shareholder savings over a two-year period). MSIM will bear any Reorganization expenses beyond $706,600.
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Vote Required
Approval of the Reorganization by Shareholders requires the affirmative vote of the lesser of: (1) more than 50% of the outstanding shares of the Acquired Fund, or (2) 67% or more of the shares of the Acquired Fund represented at the Meeting if the holders of more than 50% of the outstanding shares of the Acquired Fund are present or represented by Proxy. Abstentions are not considered votes "FOR" the Reorganization at the Meeting. As a result, abstentions have the same effect as a vote against the Reorganization because approval of the Reorganization requires the affirmative vote of a percentage of the voting securities present or represented by proxy or a percentage of the outstanding voting securities.
If the Reorganization is not approved by Shareholders of the Acquired Fund, the Acquired Fund will continue in existence and the Board will consider alternative actions for such Fund.
PERFORMANCE INFORMATION
The bar chart and table below provide some indication of the risks of investing in the Acquiring Fund by showing the Acquiring Fund's Class I shares' performance from year-to-year and by showing how the Acquiring Fund's average annual returns for the past one, five and 10 year periods and since inception compare with those of a broad measure of market performance, as well as an index that represents a group of similar mutual funds, over time. The performance of the other Classes, which is shown in the table below, will differ because the Classes have different ongoing fees. The Acquiring Fund's returns in the table include the maximum applicable sales charge for Class A and assume you sold your shares at the end of each period (unless otherwise noted). The Acquiring Fund's past performance, before and after taxes, is not necessarily an indication of how the Acquiring Fund will perform in the future.
Annual Total Returns — Calendar Year
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During the periods shown in the bar chart, the highest return for a calendar quarter was 2.76% (quarter ended June 30, 2009) and the lowest return for a calendar quarter was -8.87% (quarter ended September 30, 2008).
Average Annual Total Returns (for the calendar periods ended December 31, 2014) | |||||||||||||||||||
Past One Year | Past Five Years | Past Ten Years | Since Inception | ||||||||||||||||
Class I (commenced operations on 3/31/92) | |||||||||||||||||||
Return before Taxes | 1.37 | % | 2.03 | % | 0.24 | % | 3.08 | % | |||||||||||
Return after Taxes on Distributions | 0.77 | % | 1.36 | % | -0.89 | % | 1.49 | % | |||||||||||
Return after Taxes on Distributions and Sale of Portfolio Shares | 0.77 | % | 1.30 | % | -0.20 | % | 1.77 | % | |||||||||||
Class A (commenced operations on 9/28/07) | |||||||||||||||||||
Return before Taxes | -3.40 | % | 0.88 | % | N/A | -1.78 | % | ||||||||||||
Class L (commenced operations on 4/27/12) | |||||||||||||||||||
Return before Taxes | 0.56 | % | N/A | N/A | 0.98 | % | |||||||||||||
Barclays 1-3 Year U.S. Government/Credit Index1 | 0.77 | % | 1.41 | % | 2.85 | % | 4.41 | %3 | |||||||||||
Lipper Short Investment Grade Debt Funds Index (reflects no deduction for taxes)2 | 0.99 | % | 2.33 | % | 2.77 | % | 4.13 | %3 |
1 The Barclays 1-3 Year U.S. Government/Credit Index tracks the securities in the 1-3 year maturity range of the Barclays U.S. Government/Credit Index which tracks investment-grade (BBB-/Baa3) or higher publicly traded fixed rate U.S. government, U.S. agency, and corporate issues. It is not possible to invest directly in an index.
2 The Lipper Short Investment Grade Debt Funds Index is an equally weighted performance index of the largest qualifying funds (based on net assets) in the Lipper Short Investment Grade Debt Funds classification. There are currently 30 funds represented in this Index.
3 Since Inception reflects the inception date of Class I.
The after-tax returns shown in the table above are calculated using the historical highest individual federal marginal income tax rates during the period shown and do not reflect the impact of state and local taxes. After-tax returns for the Acquiring Fund's other Classes will vary from Class I shares' returns. Actual after-tax returns depend on the investor's tax situation and may differ from those shown, and after-tax returns are not relevant to investors who hold their Acquiring Fund shares through tax deferred arrangements such as 401(k) plans or individual retirement accounts. After-tax returns may be higher than before-tax returns due to foreign tax credits and/or an assumed benefit from capital losses that would have been realized had Acquiring Fund shares been sold at the end of the relevant periods, as applicable.
THE REORGANIZATION
The Board's Considerations
The Board, including the Independent Board Members, unanimously declared advisable and approved the Reorganization on behalf of the Acquired Fund and determined to recommend that Shareholders of the Acquired Fund approve the Reorganization. In connection with the Board's review of the Reorganization, MSIM advised the Board about a variety of matters, including, but not limited to:
1. the similarities and certain differences in the investment objectives, policies and risks of the Acquiring Fund as compared to the Acquired Fund;
2. the continuity of the portfolio management teams;
3. the asset base of the Acquiring Fund as compared to the Acquired Fund;
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4. the current and future sales and asset growth potential of the Acquiring Fund as compared to the Acquired Fund;
5. the potential for broader distribution opportunities of the Acquiring Fund as compared to the Acquired Fund due to the larger asset base of the Combined Fund;
6. the Reorganization is expected to result in lower total operating expenses for Shareholders of the Acquired Fund and shareholders of the Combined Fund as a result of proposed advisory fee reductions, advisory fee waivers and/or expense reimbursements instituted by MSIM for at least two years from the date of the Reorganization or until such time as the Trust's Board of Trustees acts to discontinue all or a portion of such waivers and/or reimbursements when it deems such action is appropriate;
7. the terms and conditions of the Reorganization, which would affect the price of shares to be issued in the Reorganization;
8. that there is no assurance that the proposed advisory fee waivers and/or expense reimbursements will continue and therefore the total expense ratios of the Combined Fund may be higher in the future;
9. that there is expected to be up to approximately 60% portfolio turnover depending on, among other factors, market conditions, as a result of the Reorganization;
10. the estimated expenses of the Reorganization, such as the expenses of this solicitation, including the cost of preparing and mailing this Proxy Statement and Prospectus, are expected to be approximately $180,000, all of which will be borne by the Acquired Fund;
11. the expected tax-free nature of the Reorganization; and
12. that the ability to use any capital loss carry forwards would not be lost as a result of the Reorganization (although the annual amount of such carry forwards that may be used on an annual basis may be limited as a result of the Reorganization, as a result of which a portion of such carryforwards may expire unused).
The Board noted that the current investments of the Acquired Fund may be held by the Acquiring Fund in accordance with the investment guidelines of the Acquiring Fund. The Board and MSIM discussed the overlap among Morgan Stanley Fund offerings, and the goal of finding a cost effective solution to streamline the Morgan Stanley fund offerings, reducing costs to shareholders and broadening distribution with scalable investment strategies. The Board and MSIM discussed the exchangeability among funds within the Morgan Stanley fund family, the expense caps on the Acquiring Fund, applicable sales charges and the waiver of minimum investment amounts applicable to the Acquiring Fund for Shareholders of the Acquired Fund in connection with the Reorganization.
The Board noted that the Acquiring Fund's advisory fee rate will be lower than the Acquired Fund's advisory fee rate, the total annual operating expenses of the Combined Fund are projected to be lower than the total annual operating expenses of the Acquired Fund as a result of proposed advisory fee reductions, advisory fee waivers and/or expense reimbursements instituted by MSIM. Specifically, in order to ensure that shareholders of the Combined Fund are not adversely affected by the Reorganization, MSIM has agreed to permanently reduce its advisory fee by 10 basis points to 0.20%. MSIM has agreed to further reduce its advisory fee and/or reimburse the Combined Fund, so that total annual operating expenses, excluding certain investment related expenses, taxes, interest and other extraordinary expenses (including litigation), will not exceed 0.55% for Class A and 0.30% for Class I. The fee waivers and/or expense reimbursements will continue for at least two years from the date of the Reorganization or until such time as the Trust's Board of Trustees acts to discontinue all or a portion of such waivers and/or reimbursements when it deems such action is appropriate.
In its deliberations, the Board considered all information it received, as described above, as well as advice and analysis from its counsel. The Board considered the Reorganization and the impact of the Reorganization on the Acquired Fund and its Shareholders. The Board concluded, based on all of the information presented, that the Reorganization is advisable and in the best interest of the Acquired Fund's Shareholders, and decided to recommend that the Acquired Fund's Shareholders approve the Reorganization.
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If Shareholders of the Acquired Fund do not approve the Reorganization, the Board will consider other courses of action for the Acquired Fund.
The Reorganization Agreement
The terms and conditions under which the Reorganization would be consummated, as summarized below, are set forth in the Reorganization Agreement. This summary is qualified in its entirety by reference to the Agreement and Plan of Reorganization, a copy of which is attached as Exhibit A to this Proxy Statement and Prospectus.
The Reorganization Agreement provides that (i) the Acquired Fund will transfer substantially all of its assets, including portfolio securities, cash, cash equivalents, securities, commodity and dividend interests, loans and other instruments and dividends or interest or other rights or receivables that are owned by Acquired Fund, and any deferred or prepaid expenses shown as an asset on Acquired Fund's books on the Valuation Date, to the Acquiring Fund on the Closing Date in exchange for the assumption by the Acquiring Fund of all stated liabilities of the Acquired Fund, including, without limitation, all expenses, costs, charges and reserves, as reflected on an unaudited statement of assets and liabilities of Acquired Fund prepared by the Treasurer of the Acquired Fund as of the Valuation Date in accordance with generally accepted accounting principles applied consistently with those of Acquired Fund's most recent audited financial statements, and the delivery of the Acquiring Fund Shares; (ii) such Acquiring Fund Shares would be distributed to Shareholders on the Closing Date or as soon as practicable thereafter; (iii) the Acquired Fund would be liquidated and terminated; and (iv) the issued and outstanding shares of the Acquired Fund would be canceled.
The number of Acquiring Fund Shares to be delivered to the Acquired Fund will be determined by dividing the aggregate NAV of each class of shares of the Acquired Fund, acquired by the Acquiring Fund, by the NAV per share of the corresponding class of shares of the Acquiring Fund; these values will be calculated as of the Valuation Date. As an illustration, assume that on the Valuation Date, Class I shares of the Acquired Fund had an aggregate NAV of $100,000. If the NAV per Class I share of the Acquiring Fund were $10 per share at the close of business on the Valuation Date, the number of Class I shares of the Acquiring Fund to be issued would be 10,000 ($100,000 ÷ $10). These 10,000 Class I shares of the Acquiring Fund would be distributed to the former Class I Shareholders of the Acquired Fund. This example is given for illustration purposes only and does not bear any relationship to the dollar amounts or shares expected to be involved in the Reorganization.
On the Closing Date or as soon as practicable thereafter, the Acquired Fund will distribute pro rata to its Shareholders of record as of the close of business on the Valuation Date, the Acquiring Fund Shares it receives. The Acquiring Fund Shares will be distributed as follows: each of the Class I shares of the Acquiring Fund will be distributed to holders of the Class I shares of the Acquired Fund and each of the Class A shares of the Acquiring Fund will be distributed to holders of Advisor Class shares of the Acquired Fund. The Acquiring Fund will cause its transfer agent to credit and confirm an appropriate number of the Acquiring Fund Shares to each Shareholder.
The consummation of the Reorganization is contingent upon the approval of the Reorganization by the Shareholders and the receipt of the other opinions and certificates set forth in Sections 6, 7 and 8 of the Reorganization Agreement and the occurrence of the events described in those Sections, certain of which may be waived by a Fund. The Reorganization Agreement may be amended in any mutually agreeable manner.
The Reorganization Agreement may be terminated and the Reorganization abandoned at any time, before or after approval by Shareholders, by mutual consent of the Trust, on behalf of the Acquiring Fund, and the Acquired Fund. In addition, either party may terminate the Reorganization Agreement upon the occurrence of a material breach of the Reorganization Agreement by the other party or if, by June 10, 2016, any condition set forth in the Reorganization Agreement has not been fulfilled or waived by the party entitled to its benefits.
Under the Reorganization Agreement, within one year after the Closing Date, the Acquired Fund shall either pay or make provision for all of its liabilities to former Shareholders of the Acquired Fund that received Acquiring Fund Shares. The Acquired Fund shall be liquidated and terminated following the distribution of the Acquiring Fund Shares to Shareholders of record of the Acquired Fund, and without further notice the outstanding shares of the Acquired Fund will be redeemed and canceled.
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The effect of the Reorganization is that Shareholders who vote their shares in favor of the Reorganization Agreement are electing to sell their shares of the Acquired Fund and reinvest the proceeds in the Acquiring Fund Shares at NAV and without recognition of taxable gain or loss for federal income tax purposes. See "Tax Aspects of the Reorganization" below. As noted in "Tax Aspects of the Reorganization," if the Acquired Fund recognizes net gain from the sale of securities prior to the Closing Date, such gain, to the extent not offset by capital loss carry-forwards, will be distributed to Shareholders prior to the Closing Date and will be taxable to Shareholders.
Shareholders will continue to be able to redeem their shares of the Acquired Funds at NAV next determined after receipt of the redemption request until the close of business on the business day next preceding the Closing Date. Redemption requests received by the Acquired Fund thereafter will be treated as requests for redemption of shares of the Acquiring Fund.
Tax Aspects of the Reorganization
The following is a general summary of the material federal income tax consequences of the Reorganization and is based upon the current provisions of the Code, the existing U.S. Treasury Regulations thereunder, current administrative rulings of the Internal Revenue Service ("IRS") and published judicial decisions, all of which are subject to change. This discussion is limited to U.S. persons who hold shares of the Acquired Fund as capital assets for federal income tax purposes. This summary does not address all of the U.S. federal income tax consequences that may be relevant to a particular Shareholder or to Shareholders who may be subject to special treatment under federal income tax laws.
Tax Consequences of the Reorganization to Shareholders. The Reorganization is intended to qualify for federal income tax purposes as a tax-free reorganization under Section 368(a)(1) of the Code.
As a condition to the Reorganization, the Acquired Fund and the Acquiring Fund have requested an opinion of Dechert LLP substantially to the effect that, based on certain assumptions, facts, the terms of the Reorganization Agreement and representations set forth in the Reorganization Agreement or otherwise provided by the Acquired Fund and the Acquiring Fund:
1. The transfer of substantially all of the assets of the Acquired Fund in exchange solely for the Acquiring Fund Shares and the assumption by the Acquiring Fund of the liabilities of the Acquired Fund followed by the distribution by the Acquired Fund of the Acquiring Fund Shares to Shareholders in exchange for their Acquired Fund shares pursuant to and in accordance with the terms of the Reorganization Agreement will constitute a "reorganization" within the meaning of Section 368(a)(1) of the Code;
2. No gain or loss will be recognized by the Acquiring Fund upon the receipt of the assets of the Acquired Fund solely in exchange for the Acquiring Fund Shares and the assumption by the Acquiring Fund of the liabilities of the Acquired Fund;
3. No gain or loss will be recognized by the Acquired Fund upon the transfer of substantially all of the assets of the Acquired Fund to the Acquiring Fund solely in exchange for the Acquiring Fund Shares and the assumption by the Acquiring Fund of the liabilities or upon the distribution of the Acquiring Fund Shares to Shareholders in exchange for their Acquired Fund Shares, except that the Acquired Fund may be required to recognize gain or loss with respect to contracts described in Section 1256(b) of the Code or stock in a passive foreign investment company, as defined in Section 1297(a) of the Code;
4. No gain or loss will be recognized by Shareholders upon the exchange of the shares of the Acquired Fund solely for the Acquiring Fund Shares;
5. The aggregate tax basis for the Acquiring Fund Shares received by each Shareholder pursuant to the Reorganization will be the same as the aggregate tax basis for the Acquired Fund shares surrendered by each such Shareholder in exchange therefor;
6. The holding period of the Acquiring Fund Shares to be received by each Shareholder will include the period during which the Acquired Fund shares surrendered in exchange therefor were held (provided such shares in the Acquired Fund were held as capital assets on the date of the Reorganization);
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7. The tax basis of the assets of the Acquired Fund acquired by the Acquiring Fund will be the same as the tax basis of such assets of the Acquired Fund immediately prior to the Reorganization; and
8. The holding period of the assets of the Acquired Fund in the hands of the Acquiring Fund will include the period during which those assets were held by the Acquired Fund (except where the investment activities of the Acquiring Fund have the effect of reducing or eliminating such period with respect to an asset).
Prior to the closing of the Reorganization, the Acquired Fund will distribute to its Shareholders any undistributed income and gains to the extent required to avoid entity level tax or as otherwise deemed desirable. The advice of counsel is not binding on the IRS or the courts and neither the Acquired Fund nor the Acquiring Fund has sought a ruling with respect to the tax treatment of the Reorganization. The opinion of counsel, if delivered, will be based on the Code, regulations issued by the Treasury Department under the Code, court decisions, and administrative pronouncements issued by the IRS with respect to all of the foregoing, all as in effect on the date of the opinion, and all of which may be repealed, revoked or modified thereafter, possibly on a retroactive basis.
The Acquiring Fund's ability to carry forward and use pre-Reorganization capital losses of either the Acquiring Fund or the Acquired Fund may be limited under the loss limitation rules of Sections 382, 383 and 384 of the Code. First, under Section 384 of the Code, if the Acquiring Fund or the Acquired Fund has a net unrealized gain inherent in its assets at the time of the Reorganization, then, under certain circumstances, that gain, to the extent realized within five years following the Reorganization, may not be offset by a carryforward of losses realized prior to the Reorganization (other than a carryforward of that Fund's own losses) or, in certain cases, by a net unrealized loss inherent at the time of the Reorganization in the assets of the other Fund. Second, a portion of a Fund's pre-acquisition losses may become subject to an annual limitation on the amount that may be used to offset future gains. Third, any remaining pre-acquisition losses will offset capital gains realized after the Reorganization and this will reduce subsequent capital gain distributions to a broader group of shareholders than would have been the case absent such Reorganization. Therefore, in certain circumstances, former shareholders of a Fund may pay taxes sooner, or pay more taxes, than they would have had the Reorganization not occurred. The effect of these rules on the Funds and their shareholders will be determined based on the particular facts and circumstances at the time that the Reorganization takes place.
As of May 31, 2015, the Acquired Fund had approximately $11.7 million in capital loss carry forwards that will generally be available to the Acquiring Fund following the Reorganization to offset its capital gains. However, a portion of the amount of these loss carryforwards that may offset the Acquiring Fund's capital gains in any given year may be limited due to this Reorganization and a portion of such loss carryforwards may expire unused as a result of such limitation.
Shareholders should consult their tax advisors regarding the effect, if any, of the proposed Reorganization in light of their individual circumstances. Because the foregoing discussion only relates to the federal income tax consequences of the proposed Reorganization, Shareholders should also consult their tax advisors as to state and local tax consequences, if any, of the proposed Reorganization.
Description of Shares
The Acquiring Fund Shares to be issued pursuant to the Reorganization Agreement will, when issued in exchange for the consideration therefor, be fully paid and non-assessable by the Acquiring Fund and transferable without restrictions and will have no preemptive rights. For greater details regarding the Acquiring Fund Shares, see "Shareholder Information" in the Acquiring Fund's Prospectus attached hereto as Exhibit B.
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Capitalization Tables (unaudited)
The following tables set forth the capitalization of the Acquired Fund as of March 31, 2015 and the Acquiring Fund on a pro forma combined basis as if the Reorganization had occurred on that date:
MS Limited Duration U.S. Government Trust (Acquired Fund) | Advisor Class | Class I | Total | ||||||||||||
Net Assets | $ | 64,251,101 | $ | 929,226 | $ | 65,180,327 | |||||||||
Pro Forma Adjustments† | $ | (177,434 | ) | $ | (2,566 | ) | $ | (180,000 | ) | ||||||
Net Assets minus Pro Forma Adjustments | $ | 64,073,667 | $ | 926,660 | $ | 65,000,327 | |||||||||
Shares Outstanding | 7,155,520 | 103,438 | 7,258,958 | ||||||||||||
Net Asset Value Per Share | $ | 8.95 | $ | 8.96 | — | ||||||||||
MSIFT Limited Duration (Acquiring Fund) | Class A | Class I | Total | ||||||||||||
Net Assets | $ | 1,527,917 | $ | 107,584,396 | $ | 109,112,313 | |||||||||
Shares Outstanding | 195,957 | 13,823,179 | 14,019,136 | ||||||||||||
Net Asset Value Per Share | $ | 7.80 | $ | 7.78 | — | ||||||||||
Pro Forma Combined Fund (MSIFT Short Duration Income Portfolio) | Class A | Class I | Total | ||||||||||||
Net Assets | $ | 65,601,584 | $ | 108,511,056 | $ | 174,112,640 | |||||||||
Shares Outstanding | 8,410,530 | 13,942,287 | 22,352,817 | ||||||||||||
Net Asset Value Per Share | $ | 7.80 | $ | 7.78 | — |
† Reflects the charge for estimated Reorganization expenses of $177,434 and $2,566 by Advisor Class and Class I shares, respectively, of the Acquired Fund.
Appraisal Rights
Shareholders will have no appraisal rights in connection with the Reorganization.
COMPARISON OF INVESTMENT OBJECTIVES, PRINCIPAL POLICIES AND RESTRICTIONS
Investment Objectives and Policies
The investment objectives of the Acquired Fund, the Acquiring Fund and the Combined Fund are set forth in the table below:
MS Limited Duration U.S. Government Trust (Acquired Fund) | MSIFT Limited Duration (Acquiring Fund) | MSIFT Short Duration Income Portfolio (Combined Fund) | |||||||||||||
Investment Objective | • seeks current income, preservation of principal and liquidity | • seeks above-average total return over a market cycle of three to five years | • seeks above-average total return over a market cycle of three to five years |
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MS Limited Duration U.S. Government Trust (Acquired Fund) | MSIFT Limited Duration (Acquiring Fund) | MSIFT Short Duration Income Portfolio (Combined Fund) | |||||||||
• the Acquired Fund's investment objective is a fundamental policy and may not be changed without shareholder approval of a majority of the Acquired Fund's outstanding voting securities, as defined in the 1940 Act | • the Acquired Fund's investment objective is a fundamental policy and may not be changed without shareholder approval of a majority of the Acquired Fund's outstanding voting securities, as defined in the 1940 Act, but no change is anticipated | • the Combined Fund's investment objective is a fundamental policy and may not be changed without shareholder approval of a majority of the Acquired Fund's outstanding voting securities, as defined in the 1940 Act |
MS Limited Duration U.S. Government Trust (Acquired Fund)
Under normal market conditions, MSIM seeks to achieve the Acquired Fund's investment objective by investing substantially all of the Fund's net assets in securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities, including, but not limited to, U.S. Treasury securities and TIPS, and zero coupon securities. MSIM seeks to maintain an overall duration of the Acquired Fund's portfolio of three years or less. Non-investment grade securities are not held in the Acquired Fund's portfolio.
The Acquired Fund's investments in mortgage-backed securities may include collateralized mortgage obligations ("CMOs"), stripped mortgage-backed securities ("SMBS"), commercial mortgage-backed securities ("CMBS") and inverse floating rate obligations ("inverse floaters"). In addition, the Acquired Fund may invest in to-be-announced pass-through mortgage securities, which settle on a delayed delivery basis.
The Acquired Fund may, but is not required to, use derivative instruments for a variety of purposes, including hedging, risk management, portfolio management or to earn income. The Acquired Fund's use of derivatives may involve the purchase and sale of derivative instruments such as futures, options, swaps and other related instruments and techniques.
MSIFT Limited Duration (Acquiring Fund)
Under normal market conditions, MSIM seeks to achieve the Acquiring Fund's investment objective by investing at least 80% of the Fund's assets in fixed income securities, primarily in U.S. government securities, investment grade corporate bonds and mortgage- and asset-backed securities. MSIM will ordinarily seek to maintain an average duration of the Acquiring Fund's portfolio similar to that of the Barclays 1-3 Year U.S. Government/Credit Index, which generally ranges between zero and three years.
As a matter of prospectus limitation, the Fund was approved to invest up to 20% of its respective assets in high yield securities (defined as securities rated below BBB/Baa3). Management maintains the following internal limits: up to 10% in high yield securities, at the time of investment, rated at least BB/Ba3 by one NRSRO, at the time of investment, or, if unrated, deemed to be of equivalent quality by Management and maintaining a maximum maturity of five years (as measured by weighted average life).
The Adviser employs a value approach toward fixed income investing and makes securities and sector decisions based on the anticipated tradeoff between long-run expected return and risk. The Acquiring Fund seeks value in the fixed income market with only a limited sensitivity to changes in interest rates. The Adviser relies upon value measures such as the level of real interest rates, yield curve slopes and credit-adjusted spreads to guide its decisions regarding interest rate, country, sector and security exposure. A team of portfolio managers implements strategies based on these types of value measures. Certain team members focus on specific bonds within each sector. Others seek to ensure that the aggregate risk exposures to changes in the level of interest rates and yield spreads match the Acquiring Fund's objective.
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The Acquiring Fund's mortgage securities may include CMOs, SMBS and inverse floaters. In addition, the Acquiring Fund may invest in to-be-announced pass-through mortgage securities, which settle on a delayed delivery basis. The Acquiring Fund may also invest in asset-backed securities.
The Acquiring Fund may invest in securities of foreign issuers, including issuers located in emerging market or developing countries. The securities in which the Acquiring Fund may invest may be denominated in U.S. dollars or in currencies other than U.S. dollars. The Acquiring Fund may also invest in restricted and illiquid securities.
The Acquiring Fund may, but it is not required to, use derivative instruments for a variety of purposes, including hedging, risk management, portfolio management or to earn income. The Acquiring Fund's use of derivatives may involve the purchase and sale of derivative instruments such as futures, options, swaps and other related instruments and techniques. The Acquiring Fund may utilize foreign currency forward exchange contracts, which are also derivatives, in connection with its investments in foreign securities. Derivative instruments used by the Acquiring Fund will be counted towards the 80% policy discussed above to the extent they have economic characteristics similar to the securities included within that policy.
MSIFT Short Duration Income Portfolio (Combined Fund)
Under normal market conditions, MSIM seeks to achieve the Combined Fund's investment objective by investing substantially all of the Fund's assets in investment grade fixed income securities denominated in U.S. dollars, primarily in U.S. government securities, investment grade corporate bonds and mortgage- and asset-backed securities. MSIM will ordinarily seek to maintain an average duration of the Combined Fund's portfolio of approximately one year or less. With respect to corporate issuers, the Combined Fund will not invest in securities with remaining maturities of more than 3.25 years. The average duration of a portfolio of fixed income securities represents its exposure to changing interest rates. A portfolio with a lower average duration generally will experience less price volatility in response to changes in interest rates than a portfolio with a higher average duration.
The Adviser employs a value approach toward fixed income investing and makes securities and sector decisions based on the anticipated tradeoff between long-run expected return and risk. The Combined Fund seeks value in the fixed income market with only a limited sensitivity to changes in interest rates. The Adviser relies upon value measures such as the level of real interest rates, yield curve slopes and credit-adjusted spreads to guide its decisions regarding interest rate, country, sector and security exposure. A team of portfolio managers implements strategies based on these types of value measures. Certain team members focus on specific bonds within each sector. Others seek to ensure that the aggregate risk exposures to changes in the level of interest rates and yield spreads match the Combined Fund's objective.
The Combined Fund's mortgage securities may include CMOs. In addition, the Combined Fund may invest in to-be-announced pass-through mortgage securities, which settle on a delayed delivery basis. The Combined Fund may also invest in asset-backed securities.
The Combined Fund may invest in securities of foreign issuers, including issuers located in emerging market or developing countries. The Combined Fund will invest only in U.S. dollar denominated securities. The Combined Fund may also invest in restricted and illiquid securities.
The Combined Fund may, but it is not required to, use derivative instruments for a variety of purposes, including hedging, risk management, portfolio management or to earn income. The Combined Fund's use of derivatives may involve the purchase and sale of derivative instruments such as futures, options, swaps and other related instruments and techniques. Derivative instruments used by the Combined Fund will be counted towards the 80% policy discussed above to the extent they have economic characteristics similar to the securities included within that policy.
Investment Restrictions
The investment restrictions adopted by the Acquired Fund and Acquiring Fund as fundamental policies are similar. The Acquiring Fund's investment restrictions are summarized under the caption "Investment Limitations" in the Trust's statement of additional information dated January 30, 2015, as may be amended and supplemented from time to time. The Acquired Fund's investment restrictions are summarized under the caption "Description of
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the Fund and Its Investments and Risks—Fund Policies/Investment Restrictions" in the Acquired Fund's statement of additional information, dated September 30, 2015, as may be amended and supplemented from time to time.
A fundamental investment restriction cannot be changed without the vote of the majority of the outstanding voting securities of a Fund, which is defined by the 1940 Act as the lesser of (i) at least 67% of the voting securities of a fund or portfolio present at a meeting if the holders of more than 50% of the outstanding voting securities of a fund or portfolio are present or represented by proxy; or (ii) more than 50% of the outstanding voting securities of a fund or portfolio.
The differences in the investment restrictions adopted by the Funds as fundamental policies are discussed below:
1. The Acquired Fund will not underwrite the securities of other issuers or purchase restricted securities. The Acquiring Fund will not underwrite the securities of other issuers (except to the extent that the Fund may be deemed to be an underwriter within the meaning of the Securities Act of 1933 (the "1933 Act") in connection with the disposition of restricted securities); and
2. The Acquired Fund will not purchase or sell real estate or real estate investment trust securities. The Acquiring Fund will not purchase or sell real estate, although it may purchase and sell securities of companies which deal in real estate, other than real estate limited partnerships, and may purchase and sell marketable securities which are secured by interests in real estate.
3. The Acquiring Fund will not acquire any securities of companies within one industry, if, as a result of such acquisition, more than 25% of the value of the Fund's total assets would be invested in securities of companies within such industry; provided, however that (i) there shall be no limitation on the purchase of obligations issued or guaranteed by the U.S. Government, its agencies or instrumentalities; (ii) utility companies will be divided according to their services, for example, gas, gas transmission, electric and telephone will each be considered a separate industry; (iii) financial service companies will be classified according to the end users of their services, for example, automobile finance, bank finance and diversified finance will each be considered a separate industry; and (iv) asset-backed securities will be classified according to the underlying assets securing such securities. The Acquired Fund will not acquire any securities of companies within one industry, if, as a result of such acquisition, more than 25% of the value of the Fund's total assets would be invested in securities of companies within such industry.
The differences in the investment restrictions adopted by the Funds as non-fundamental policies are discussed below:
1. The Acquired Fund will not make short sales of securities, except short sales against the box. The Acquiring Fund will not sell short unless the Fund (i) by virtue of its ownership of other securities, has the right to obtain securities equivalent in kind and amount to the securities sold and, if the right is conditional, the sale is made upon the same conditions, or (ii) maintains in a segregated account on the books of the Fund's custodian an amount that, when combined with the amount of collateral deposited with the broker in connection with the short sale, equals the current market value of the security sold short or such other amount as the SEC or its staff may permit by rule, regulation, order or interpretation (transactions in futures contracts and options, however, are not deemed to constitute selling securities short).
2. The Acquired Fund will not invest its assets in the securities of any investment company except as may be permitted by (i) the Investment Company Act, as amended from time to time; (ii) the rules and regulations promulgated by the SEC under the Investment Company Act, as amended from time to time; or (iii) an exemption or other relief applicable to the Fund from the provisions of the Investment Company Act, as amended from time to time. The Acquiring Fund will not invest its assets in securities of any investment company, except as permitted by the 1940 Act or the rules, regulations, interpretations or orders of the SEC and its staff thereunder; provided that the Fund will not invest in other investment companies in reliance on Sections 12(d)(1)(F), 12(d)(1)(G) or 12(d)(1)(J) of the 1940 Act.
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The following non-fundamental investment restrictions apply only to the Acquiring Fund:
1. The Acquiring Fund will not purchase on margin, except for use of short-term credit as may be necessary for the clearance of purchases and sales of securities, provided that the Fund may make margin deposits in connection with transactions in options, futures, and options on futures;
2. The Acquiring Fund will not pledge, mortgage or hypothecate assets in an amount greater than 50% of its total assets, provided that the Fund may earmark or segregate assets without limit in order to comply with the requirements of Section 18(f) of the 1940 Act and applicable rules, regulations or interpretations of the SEC and its staff;
3. The Acquiring Fund will not invest more than an aggregate of 15% of the net assets of the Fund, determined at the time of investment, in illiquid securities provided that this limitation shall not apply to any investment in securities that are not registered under the 1933 Act but that can be sold to qualified institutional investors in accordance with Rule 144A under the 1933 Act and are determined to be liquid securities under guidelines or procedures adopted by the Board; and
4. The Acquiring Fund will not invest for the purpose of exercising control over management of any company.
ADDITIONAL INFORMATION ABOUT THE ACQUIRING FUND AND THE ACQUIRED FUND
General
For a discussion of the organization and operation of the Acquiring Fund, see "Portfolio Summary—Limited Duration Portfolio," "Details of the Portfolios—Limited Duration Portfolio" and "Fund Management" in the Acquiring Fund's Prospectus attached hereto as Exhibit B. For a discussion of the organization and operation of the Trust, see "General Information—Fund History" in the Trust's statement of additional information relating to the Acquiring Fund.
For a discussion of the organization and operation of the Acquired Fund, see "Fund Summary" and "Fund Management" in the applicable Acquired Fund Prospectus and "Fund History" in the applicable Acquired Fund's statement of additional information.
Rights of Acquired Fund Shareholders and Acquiring Fund Shareholders
The Acquiring Fund is organized as a separate portfolio of the Trust, a Pennsylvania Trust that is governed by its Declaration of Trust, as amended, Amended and Restated By-Laws, as may be amended from time to time, and Pennsylvania law. The Acquired Fund is organized as a Massachusetts business trust that is governed by its Declaration of Trust, as amended, Amended and Restated By-Laws, as may be amended, and Massachusetts law.
While Pennsylvania corporate law contains many provisions specifically applicable to management investment companies and Massachusetts statutory trust law is specifically drafted to accommodate some of the unique corporate governance needs of management investment companies, certain statutory differences do exist and the Trust's and Acquired Fund's organizational documents contain certain differences summarized below. Each Fund is also subject to federal securities laws, including the 1940 Act and the rules and regulations promulgated by the Commission thereunder.
Consistent with Pennsylvania law, the Trust has authorized the issuance of an unlimited number of shares. Consistent with Massachusetts law, the Acquired Fund is authorized to issue an unlimited number of shares. The Acquiring Fund's and the Trust's organizational documents allow the respective Board of Trustees to create one or more separate investment portfolios and to establish a separate series or classes of shares for each portfolio, and to further subdivide the shares of any series into one or more classes.
Under Massachusetts law, shareholders of a business trust may, under certain limited circumstances, be held personally liable as partners for the obligations of the Acquired Fund. However, the Declaration of Trust of the Acquired Fund contains an express disclaimer of shareholder liability for acts or obligations of the Acquired Fund,
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requires that notice of such Fund obligations include such disclaimer, and provides for indemnification out of the Fund's property for any shareholder held personally liable for the obligations of the Acquired Fund.
No Fund is required, and no Fund anticipates, holding annual meetings of its Shareholders. Each Fund has certain mechanics whereby shareholders can call a special meeting of their Fund. Shareholders generally have the right to approve investment advisory agreements, elect trustees/directors, change fundamental investment policies, ratify the selection of independent auditors and vote on other matters required by law or the organizational documents of the Trust or Acquired Fund, as applicable, or deemed desirable by the respective Board of Trustees.
The business of the Acquiring Fund and the Acquired Fund is supervised by the respective Boards of the Acquired Fund and the Trust. The Board of the Acquired Fund consists of the same members; and similarly, the Board of the Trust consists of the same members. The responsibilities, powers and fiduciary duties of trustees under Pennsylvania law are generally similar in certain respects to those for trustees under Massachusetts law, although significant differences do exist and shareholders should refer to the provisions of each Fund's applicable organizational documents and applicable law for a more thorough comparison. For the Acquiring Fund and the Acquired Fund, trustee vacancies may be filled by approval of a majority of the trustees then in office subject to provisions of the 1940 Act. A trustee's term lasts until the election of such person's successor or until such person's earlier resignation or removal. In addition, the Acquired Fund's Declaration of Trust specifies that a Trustee's term will terminate in the event of the death, bankruptcy, adjudicated incompetence or other incapacity to perform the duties of the office of a Trustee. Trustees of the Acquired Fund may be removed with or without cause by the action of two-thirds of the remaining Trustees.
The foregoing is only a summary of certain differences between the Acquiring Fund and the Acquired Fund under applicable law and their organizational documents. It is not intended to be a complete list of differences and shareholders should refer to the provisions of each Fund's applicable organizational documents for a more thorough comparison. Such documents are filed as part of each Fund's registration statements with the Commission, and shareholders may obtain copies of such documents as described herein.
Financial Information
For certain financial information about each Fund, see "Financial Highlights" with respect to such Fund in its respective prospectus.
Shareholder Proposals
The Funds are not required and do not intend to hold regular shareholder meetings unless shareholder action is required in accordance with the 1940 Act. Shareholders who would like to submit proposals for consideration at future shareholder meetings of the Acquired Fund (in the event the Reorganization is not completed) or the Acquiring Fund should send written proposals to Mary E. Mullin, Secretary, 522 Fifth Avenue, New York, NY 10036. To be considered for presentation at a shareholders' meeting, rules promulgated by the Commission require that, among other things, a shareholder's proposal must be received at the offices of the applicable Fund within a reasonable time before a solicitation is made. Timely submission of a proposal does not necessarily mean that such proposal will be included in the proxy materials for a meeting.
Management
For information about the Board of Trustees, MSIM and the Distributor of the Acquiring Fund, see "Fund Management" in the Acquiring Fund's Prospectus attached hereto as Exhibit B and "Management of the Fund" and "Investment Advisory and Other Services" in the Trust's statement of additional information.
For information about the Board of Trustees, MSIM and the distributor of the Acquired Fund, see "Fund Management" in the applicable Acquired Fund Prospectus and "Management of the Fund" and "Investment Advisory and Other Services" in the applicable Acquired Fund statement of additional information.
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Description of Shares and Shareholder Inquiries
For a description of the nature and most significant attributes of shares of the Acquiring Fund, and information regarding shareholder inquiries, see "General Information" in the Trust's statement of additional information as well as "Shareholder Information" and "Where to Find Additional Information" in the Acquiring Fund's Prospectus attached hereto as Exhibit B.
For a description of the nature and most significant attributes of shares of the Acquired Fund, and information regarding Shareholder inquiries, see "Capital Stock and Other Securities" in the Acquired Fund's statement of additional information as well as "Shareholder Information—Additional Information" in the Acquired Fund's Prospectus.
Dividends, Distributions and Taxes
For a discussion of the Acquiring Fund's policies with respect to dividends, distributions and taxes, see "Shareholder Information—Dividends and Distributions" and "—Taxes" in the Acquiring Fund's Prospectus attached hereto as Exhibit B, "General Information" and "Taxes" in the Trust's statement of additional information, and the discussions herein under "Synopsis—Comparison of the Acquired Fund and Acquiring Fund—Dividends," "Synopsis—Tax Consequences of the Reorganization" and "The Reorganization—Tax Aspects of the Reorganization."
For a discussion of the Acquired Fund's policies with respect to dividends, distributions and taxes, see "Shareholder Information—Distributions" and "—Tax Consequences" in the Acquired Fund's Prospectus, "Taxation of the Fund and Shareholders" in the Acquired Fund's statement of additional information, and the discussions herein under "Synopsis—Comparison of the Acquired Fund and Acquiring Fund—Dividends," "Synopsis—Tax Consequences of the Reorganization" and "The Reorganization—Tax Aspects of the Reorganization."
Purchases, Exchanges and Redemptions
For a discussion of how the Acquiring Fund's shares may be purchased, exchanged and redeemed, see "Shareholder Information—How To Purchase Portfolio Shares," "—Exchange Privilege" and "—How To Redeem Portfolio Shares" in the Acquiring Fund's Prospectus, "Purchase and Redemption of Shares" in the Trust's statement of additional information, and the discussion herein under "Synopsis—Comparison of Acquired Fund and Acquiring Fund—Purchases, Exchanges and Redemptions."
For a discussion of how the Acquired Fund's shares may be purchased, exchanged and redeemed, as applicable, see "Shareholder Information—How to Buy Shares," "—How to Exchange Shares" and "—How to Sell Shares" in the Acquired Fund's Prospectus and "Purchase, Redemption and Pricing of Shares" in the Acquired Fund's statement of additional information, and the discussion herein under "Synopsis—Comparison of Acquired Fund and Acquiring Fund—Purchases, Exchanges and Redemptions."
For a discussion of the Acquiring Fund's policies with respect to frequent purchases and redemptions, see 'Shareholder Information—Frequent Purchases and Redemptions of Shares" in the Acquiring Fund's Prospectus. For a discussion of the Acquired Fund's policies with respect to frequent purchases and redemptions, see "Shareholder Information—Frequent Purchases and Redemptions of Fund Shares" in the Acquired Fund's Prospectus.
PROPOSAL 2: APPROVAL OF ADJOURNMENT TO SOLICIT ADDITIONAL PROXIES
The purpose of this proposal is to allow the holder of Proxies solicited hereby to vote the shares represented by Proxies in favor of adjournment of the Meeting to a later time, in order to allow more time to solicit additional Proxies, as necessary, if there is no quorum present.
The approval of such adjournment will require the majority vote of the shares entitled to vote held by Shareholders present in person or by proxy at the Meeting. The Proxy will be voted in favor of adjournment unless a choice is indicated to vote against or to abstain from voting on adjournment under this proposal.
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Please see "Voting Information—Voting Procedures" for additional information regarding procedures for voting and revocation of Proxies.
SHARE INFORMATION
The following persons were known to own of record or beneficially 5% or more of the outstanding shares of a class of the Acquired Fund as of the Record Date:
Shareholder | Percentage of Outstanding Shares | ||||||
Advisor Class | |||||||
Morgan Stanley & Co. Harborside Financial Center 201 Plaza II 3rd Floor Jersey City, NJ 07311 | 90.33 | % | |||||
Class I | |||||||
Morgan Stanley & Co. Harborside Financial Center 201 Plaza II 3rd Floor Jersey City, NJ 07311 | 97.48 | % |
As of [ ], 2015, the Trustees and officers of the Trust, as a group, owned less than 1% of the outstanding shares of the Acquired Fund.
The following persons were known to own of record or beneficially 5% or more of the outstanding shares of a class of the Acquiring Fund as of the Record Date:
Shareholder | Percentage of Outstanding Shares | ||||||
Class I | |||||||
Morgan Stanley & Co. Harborside Financial Center 201 Plaza II 3rd Floor94 Jersey City, NJ 07311 | 94.97 | % | |||||
Class A | |||||||
Morgan Stanley & Co. Harborside Financial Center 201 Plaza II 3rd Floor Jersey City, NJ 07311 | 88.23 | % | |||||
National Financial Services LLC 499 Washington Blvd. Jersey City, NJ 07310 | 5.40 | % |
As of [ ], 2015, the Trustees and officers of the Trust, as a group, owned less than 1% of the outstanding shares of the Acquiring Fund.
FINANCIAL STATEMENTS AND EXPERTS
The financial statements of the Acquiring Fund, for the fiscal year ended September 30, 2014, and the Acquired Fund, for the fiscal year ended May 31, 2015, that are incorporated by reference in the Statement of Additional Information relating to the Registration Statement on Form N-14 of which this Proxy Statement and Prospectus forms a part, have been audited by Ernst & Young LLP, the Acquiring Fund's and Acquired Fund's independent
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registered public accounting firm. The financial statements for the Acquiring Fund, for the six-month period ended March 31, 2015, and the Acquired Fund, for the six-month period ended November 30, 2014, have not been audited and are also incorporated by reference in the Statement of Additional Information relating to the Registration Statement on Form N-14 of which this Proxy Statement and Prospectus forms a part. Each set of audited financial statements is incorporated herein by reference in reliance upon such reports given upon the authority of said independent registered public accounting firms as experts in accounting and auditing.
LEGAL MATTERS
Certain legal matters concerning the issuance of the Acquiring Fund Shares will be passed upon by Dechert LLP, New York, NY.
AVAILABLE INFORMATION
Additional information about each Fund is available, as applicable, in the following documents which are incorporated herein by reference: (i) the Acquiring Fund's Prospectus dated January 30, 2015, attached to this Proxy Statement and Prospectus as Exhibit B, which prospectus forms a part of Post-Effective Amendment No. 124 to the Trust's Registration Statement on Form N-1A (File Nos. 002-89729; 811-03980); (ii) the Acquired Fund's Prospectus dated September 30, 2015, which prospectus forms a part of Post-Effective Amendment No. 36 to the Acquired Fund's Registration Statement on Form N-1A (File Nos. 033-41187; 811-06330); (iii) the Acquiring Fund's Annual Report for its fiscal year ended September 30, 2014; (iv) the Acquired Fund's Annual Report for its fiscal year ended May 31, 2015; and (vii) the Acquiring Fund's Semi-Annual Report for the six-month period ended March 31, 2015.
Each Fund is subject to the informational requirements of the Securities Exchange Act of 1934, as amended, and in accordance therewith, files reports and other information with the Commission. Proxy materials, reports and other information about the Funds which are of public record can be viewed and copied at the Commission's Public Reference Room in Washington, D.C. Information about the Reference Room's operations may be obtained by calling the Commission at (202) 551-8090. Reports and other information about the Funds and the Trust are available on the EDGAR Database on the Commission's Internet site (www.sec.gov) and copies of this information may be obtained, after paying a duplicating fee, by electronic request at the following E-mail address: publicinfo@sec.gov, or by writing the Public Reference Branch, Office of Consumer Affairs and Information Services, Securities and Exchange Commission, Washington, D.C. 20549-1520.
OTHER BUSINESS
Management of the Acquired Fund knows of no business other than the matters specified above which will be presented at the Meeting. Since matters not known at the time of the solicitation may come before the Meeting, the Proxy as solicited confers discretionary authority with respect to such matters as properly come before the Meeting, including any adjournment or adjournments thereof, and it is the intention of the persons named as attorneys-in-fact in the Proxy to vote this Proxy in accordance with their judgment on such matters.
By Order of the Board of Trustees,
Mary E. Mullin
Secretary
[ ], 2015
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Exhibit A
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION ("Agreement") is made as of June 10, 2015, by and between MORGAN STANLEY INSTITUTIONAL FUND TRUST (the "Trust"), a Pennsylvania trust, on behalf of the Limited Duration Portfolio ("Acquiring Fund"), and Morgan Stanley Limited Duration U.S. Government Trust, a Massachusetts business trust ("Acquired Fund").
This Agreement is intended to be and is adopted as a "plan of reorganization" and the transactions described in this Agreement are intended to be governed by Sections 368 and/or 351 of the Internal Revenue Code of 1986, as amended (the "Code"). The reorganization ("Reorganization") will consist of the transfer to Acquiring Fund of substantially all of the assets of Acquired Fund in exchange for (i) the assumption by Acquiring Fund of all stated liabilities of Acquired Fund and (ii) the issuance by Acquiring Fund of shares of beneficial interest, without par value (the "Acquiring Fund Shares"), to be distributed, after the Closing Date hereinafter referred to, to the shareholders of Acquired Fund ("Acquired Fund Shareholders") in liquidation of Acquired Fund as provided herein, all upon the terms and conditions hereinafter set forth in this Agreement.
In consideration of the premises and of the covenants and agreements hereinafter set forth, the parties hereto covenant and agree as follows:
1. The Reorganization and Liquidation of Acquired Fund
1.1. Subject to the terms and conditions herein set forth and on the basis of the representations and warranties contained herein, Acquired Fund agrees to transfer the Acquired Fund Assets (as defined in paragraph 1.2) to Acquiring Fund, and the Trust, on behalf of Acquiring Fund, agrees in exchange therefor to assume all of Acquired Fund's stated liabilities on the Closing Date as set forth in paragraph 1.3 and to deliver to Acquired Fund the number of full and fractional Acquiring Fund Shares, determined in the manner set forth in paragraph 2.3. Such transactions shall take place at the closing provided for in paragraph 3.1 ("Closing").
1.2. (a) The "Acquired Fund Assets" shall consist of all property, including without limitation, all cash, cash equivalents, securities, commodity and dividend interests, loans and other instruments and dividends or interest or other rights or receivables that are owned by Acquired Fund, and any deferred or prepaid expenses shown as an asset on Acquired Fund's books on the Valuation Date (as defined in paragraph 2.1), prepared in accordance with generally accepted U.S. accounting principles ("GAAP") applied consistently with those of Acquired Fund's most recent audited financial statements.
(b) On or prior to the Valuation Date, Acquired Fund will provide Acquiring Fund with a list of all of Acquired Fund's assets to be transferred to Acquiring Fund and a list of the stated liabilities to be assumed by Acquiring Fund pursuant to this Agreement. Acquired Fund reserves the right to sell any of the securities on such list but will not, without the prior approval of the Trust, on behalf of Acquiring Fund, acquire any additional securities other than securities of the type in which Acquiring Fund is permitted to invest and in amounts agreed to in writing by the Trust, on behalf of Acquiring Fund. The Trust, on behalf of Acquiring Fund, will, within a reasonable time prior to the Valuation Date, furnish Acquired Fund with a statement of Acquiring Fund's investment objective, policies and restrictions and a list of the securities, if any, on the list referred to in the first sentence of this paragraph that do not conform to Acquiring Fund's investment objective, policies and restrictions. In the event that Acquired Fund holds any investments that Acquiring Fund is not permitted to hold, Acquired Fund will dispose of such securities on or prior to the Valuation Date. In addition, if it is determined that the portfolios of Acquired Fund and Acquiring Fund, when aggregated, would contain investments exceeding certain percentage limitations imposed upon Acquiring Fund with respect to such investments, Acquired Fund if requested by the Trust, on behalf of Acquiring Fund, will, on or prior to the Valuation Date, dispose of and/or reinvest a sufficient amount of such investments as may be necessary to avoid violating such limitations as of the Closing Date (as defined in paragraph 3.1).
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1.3. Acquired Fund will endeavor to discharge all of Acquired Fund's liabilities and obligations on or prior to the Valuation Date. The Trust, on behalf of Acquiring Fund, will assume all stated liabilities, which includes, without limitation, all expenses, costs, charges and reserves reflected on an unaudited Statement of Assets and Liabilities of Acquired Fund prepared by the Treasurer of Acquired Fund as of the Valuation Date in accordance with GAAP applied consistently with those of Acquired Fund's most recent audited financial statements.
1.4. In order for Acquired Fund to comply with Section 852(a)(1) of the Code and to avoid having any investment company taxable income or net capital gain (as defined in Sections 852(b)(2) and 1222(11) of the Code, respectively) in the short taxable year ending with its dissolution, Acquired Fund will on or before the Closing Date (a) declare a dividend in an amount large enough so that Acquired Fund will have declared dividends of all of its investment company taxable income and net capital gain, if any, for such taxable year (determined without regard to any deduction for dividends paid) and (b) distribute such dividends.
1.5. On the Closing Date or as soon as practicable thereafter, Acquired Fund will distribute Acquiring Fund Shares received by Acquired Fund pursuant to paragraph 1.1 pro rata to the Acquired Fund Shareholders. The Acquiring Fund Shares will be distributed as follows: each of the Class I shares of Acquiring Fund will be distributed to holders of Class I shares of Acquired Fund and each of the Class A shares of Acquiring Fund will be distributed to holders of Advisor Class shares of Acquired Fund. Such distribution will be accomplished by an instruction, signed by Acquired Fund's Secretary, to transfer Acquiring Fund Shares then credited to Acquired Fund's account on the books of Acquiring Fund to open accounts on the books of Acquiring Fund in the names of the Acquired Fund Shareholders and representing the respective pro rata number of Acquiring Fund Shares due such Acquired Fund shareholders. All issued and outstanding shares of Acquired Fund simultaneously will be canceled on Acquired Fund's books.
1.6. Ownership of Acquiring Fund Shares will be shown on the books of Acquiring Fund's transfer agent. Acquiring Fund Shares will be issued in the manner described in Acquiring Fund's current Prospectus, as supplemented, and the Trust's statement of additional information.
1.7. Any transfer taxes payable upon issuance of Acquiring Fund Shares in a name other than the registered holder of Acquiring Fund Shares on Acquired Fund's books as of the close of business on the Valuation Date shall, as a condition of such issuance and transfer, be paid by the person to whom Acquiring Fund Shares are to be issued and transferred.
1.8. Any reporting responsibility of Acquired Fund is and shall remain the responsibility of Acquired Fund up to and including the date on which Acquired Fund is liquidated and terminated pursuant to paragraph 1.9.
1.9. Within one year after the Closing Date, Acquired Fund shall pay or make provision for the payment of all Acquired Fund's liabilities and taxes. If and to the extent that any trust, escrow account, or other similar entity continues after the close of such one-year period in connection either with making provision for payment of liabilities or taxes or with distributions to shareholders of Acquired Fund, such entity shall either (i) qualify as a liquidating trust under Section 7701 of the Code (and applicable Treasury Regulations thereunder) or other entity which does not constitute a continuation of Acquired Fund for federal income tax purposes, or (ii) be subject to a waiver under Section 368(a)(2)(G)(ii) of the complete distribution requirement of Section 368(a)(2)(G)(i) of the Code. Acquired Fund shall be terminated following the making of all distributions pursuant to paragraph 1.5.
1.10. Copies of all books and records maintained on behalf of Acquired Fund in connection with its obligations under the Investment Company Act of 1940, as amended (the "1940 Act"), the Code, state blue sky laws or otherwise in connection with this Agreement will promptly be delivered after the Closing to officers of Acquiring Fund or their designee, and Acquiring Fund or its designee shall comply with applicable record retention requirements to which Acquired Fund is subject under the 1940 Act.
2. Valuation
2.1. The value of the Acquired Fund Assets shall be the value of such assets computed as of the close of regular trading on the New York Stock Exchange (normally, 4:00 p.m. Eastern time) on the business day immediately
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preceding the Closing Date and after the payment of any distributions or other amounts by Acquired Fund or at such time on such earlier or later date as may be mutually agreed upon in writing (such time and date being hereinafter called the "Valuation Date"), all in accordance with the valuation procedures that have been duly adopted by the Trust, as well as Acquiring Fund's then current Prospectus, as supplemented, and the Trust's statement of additional information, and customary procedures for determining the net asset value of a share of an open-end investment company that is registered under the 1940 Act.
2.2. The net asset value of an Acquiring Fund Share shall be determined by Acquiring Fund in the manner described in the Trust's valuation procedures as well as Acquiring Fund's then current Prospectus, as supplemented, and the Trust's statement of additional information.
2.3. The number of Acquiring Fund Shares (including fractional shares, if any) to be issued hereunder shall be determined, with respect to each class, by dividing the aggregate net asset value of each class of Acquired Fund shares (determined in accordance with paragraph 2.1) by the net asset value per share of the corresponding class of shares of Acquiring Fund (determined in accordance with paragraph 2.2).
2.4. All computations of value shall be made by Boston Financial Data Services, Inc. ("BFDS") in accordance with its regular practice in pricing Acquiring Fund. The Trust, on behalf of Acquiring Fund, shall cause BFDS to deliver a copy of Acquiring Fund's valuation report at the Closing.
3. Closing and Closing Date
3.1. The Closing shall take place on the Valuation Date or on the next business day following the Valuation Date (the "Closing Date"). The Closing shall be held as of 9:00 a.m. Eastern time, or at such other time as the parties may agree. The Closing shall be held in a location mutually agreeable to the parties hereto. All acts taking place at the Closing shall be deemed to take place simultaneously as of 9:00 a.m. Eastern time on the Closing Date unless otherwise provided.
3.2. Portfolio securities held by Acquired Fund and represented by a certificate or other written instrument shall be presented by it or on its behalf to State Street Bank and Trust Company (the "Custodian"), as custodian for Acquiring Fund, for examination no later than five business days preceding the Valuation Date. Such portfolio securities (together with any cash or other assets) shall be delivered by Acquired Fund to the Custodian for the account of Acquiring Fund on or before the Closing Date in conformity with applicable custody provisions under the 1940 Act and duly endorsed in proper form for transfer in such condition as to constitute good delivery thereof in accordance with the custom of brokers. The portfolio securities shall be accompanied by all necessary federal and state stock transfer stamps or a check for the appropriate purchase price of such stamps. Portfolio securities and instruments deposited with a securities depository (as defined in Rule 17f-4 under the 1940 Act) shall be delivered on or before the Closing Date by book-entry in accordance with customary practices of such depository and the Custodian. The cash delivered shall be in the form of a Federal Funds wire, payable to the order of "State Street Bank and Trust Company, Custodian for Morgan Stanley Institutional Fund Trust."
3.3. In the event that on the Valuation Date, (a) the New York Stock Exchange shall be closed to trading or trading thereon shall be restricted or (b) trading or the reporting of trading on such Exchange or elsewhere shall be disrupted so that, in the judgment of both the Trust, on behalf of Acquiring Fund, and Acquired Fund accurate appraisal of the value of the net assets of Acquiring Fund or the Acquired Fund Assets is impracticable, the Valuation Date shall be postponed until the first business day after the day when trading shall have been fully resumed without restriction or disruption and reporting shall have been restored.
3.4. If requested, Acquired Fund shall deliver to the Trust, on behalf of Acquiring Fund, or its designee (a) at the Closing, a list, certified by Acquired Fund's Secretary, of the names, addresses and taxpayer identification numbers of the Acquired Fund Shareholders and the number and percentage ownership of outstanding Acquired Fund shares owned by each such Acquired Fund Shareholder, all as of the Valuation Date, and (b) as soon as practicable after the Closing, all original documentation (including Internal Revenue Service forms, certificates, certifications and correspondence) relating to the Acquired Fund Shareholders' taxpayer identification numbers and their liability for or exemption from back-up withholding. The Trust, on behalf of Acquiring Fund, shall issue
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and deliver to such Secretary a confirmation evidencing delivery of Acquiring Fund Shares to be credited on the Closing Date to Acquired Fund or provide evidence satisfactory to Acquired Fund that such Acquiring Fund Shares have been credited to Acquired Fund's account on the books of Acquiring Fund. At the Closing, each party shall deliver to the other such bills of sale, checks, assignments, share certificates, if any, receipts or other documents as such other party or its counsel may reasonably request.
4. Covenants of Acquiring Fund and Acquired Fund
4.1. Except as otherwise expressly provided herein, Acquired Fund and the Trust, on behalf of Acquiring Fund, will operate in the ordinary course between the date hereof and the Closing Date, it being understood that such ordinary course of business will include customary dividends and other distributions.
4.2. The Trust will prepare and file with the Securities and Exchange Commission ("Commission") a registration statement on Form N-14 under the Securities Act of 1933, as amended ("1933 Act"), relating to Acquiring Fund Shares ("Registration Statement"). Acquired Fund, will provide the Proxy Materials as described in paragraph 4.3 below for inclusion in the Registration Statement. The Trust, on behalf of Acquiring Fund, and Acquired Fund agree that each of Acquired Fund and Acquiring Fund will further provide such other information and documents as are reasonably necessary for the preparation of the Registration Statement.
4.3. Acquired Fund will call a meeting of Acquired Fund Shareholders to consider and act upon this Agreement and to take all other action necessary to obtain approval of the transactions contemplated herein. Acquired Fund will prepare the notice of meeting, form of proxy and proxy statement (collectively, "Proxy Materials") to be used in connection with such meeting; provided that the Trust, on behalf of Acquiring Fund, will furnish Acquired Fund with its currently effective prospectus for inclusion in the Proxy Materials and with such other information relating to Acquiring Fund as is reasonably necessary for the preparation of the Proxy Materials.
4.4. Acquired Fund will assist Acquiring Fund in obtaining such information as Acquiring Fund reasonably requests concerning the beneficial ownership of Acquired Fund shares.
4.5. Subject to the provisions of this Agreement, the Trust, on behalf of Acquiring Fund, and Acquired Fund covenants that each respective Fund will take, or cause to be taken, all action, and do or cause to be done, all things reasonably necessary, proper or advisable to consummate and make effective the transactions contemplated by this Agreement.
4.6. Acquired Fund, shall furnish or cause to be furnished to Acquiring Fund within 30 days after the Closing Date a statement of Acquired Fund's assets and liabilities as of the Closing Date, which statement shall be certified by Acquired Fund's Treasurer and shall be in accordance with GAAP applied consistently with those of Acquired Fund's most recent audited financial statements. As promptly as practicable, but in any case within 60 days after the Closing Date, Acquired Fund shall furnish Acquiring Fund, in such form as is reasonably satisfactory to Acquiring Fund, a statement certified by Acquired Fund's Treasurer of Acquired Fund's earnings and profits for federal income tax purposes that will be carried over to Acquiring Fund pursuant to Section 381 of the Code.
4.7. As soon after the Closing Date as is reasonably practicable, the Trust (a) shall prepare and file all federal and other tax returns and reports of Acquired Fund required by law to be filed with respect to all periods ending on or before the Closing Date but not theretofore filed and (b) shall pay all federal and other taxes shown as due thereon and/or all federal and other taxes that were unpaid as of the Closing Date, including without limitation, all taxes for which the provision for payment was made as of the Closing Date (as represented in paragraph 5.2(k)).
4.8. The Trust agrees to use all reasonable efforts to obtain the approvals and authorizations required by the 1933 Act and the 1940 Act and to make such filings required by the state Blue Sky and securities laws as it may deem appropriate in order to continue Acquiring Fund's operations after the Closing Date.
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5. Representations and Warranties
5.1. The Trust, on behalf of Acquiring Fund, represents and warrants to Acquired Fund, as follows:
(a) Acquiring Fund is a series of the Trust, a validly existing Pennsylvania trust with full power to carry on its business as presently conducted;
(b) The Trust is a duly registered, open-end management investment company, and its registration with the Commission as an investment company under the 1940 Act and the registration of its shares under the 1933 Act are in full force and effect;
(c) All of the issued and outstanding shares of Acquiring Fund have been offered and sold in compliance in all material respects with applicable registration requirements of the 1933 Act and state securities laws. Shares of Acquiring Fund are registered in all jurisdictions in which they are required to be registered under state securities laws and other laws, and said registrations, including any periodic reports or supplemental filings, are complete and current, all fees required to be paid have been paid, and Acquiring Fund is not subject to any stop order and is fully qualified to sell its shares in each state in which its shares have been registered;
(d) The current Prospectus of Acquiring Fund and statement of additional information of the Trust conform in all material respects to the applicable requirements of the 1933 Act and the 1940 Act and the regulations thereunder and do not include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading;
(e) The Trust is not in, and the execution, delivery and performance of this Agreement will not result in a, material violation of any provision of its Declaration of Trust or By-Laws, each as amended, or of any agreement, indenture, instrument, contract, lease or other undertaking to which Acquiring Fund is a party or by which it is bound;
(f) No litigation or administrative proceeding or investigation of or before any court or governmental body is presently pending or, to its knowledge, threatened against the Trust, Acquiring Fund or any of their properties or assets which, if adversely determined, would materially and adversely affect Acquiring Fund's financial condition or the conduct of its business; and the Trust knows of no facts that might form the basis for the institution of such proceedings and is not a party to or subject to the provisions of any order, decree or judgment of any court or governmental body which materially and adversely affects, or is reasonably likely to materially and adversely affect, its business or its ability to consummate the transactions herein contemplated;
(g) The Statement of Assets and Liabilities, Statement of Operations, Statements of Changes in Net Assets and Financial Highlights for its last completed fiscal year, audited by Ernst & Young LLP (copies of which will be furnished to Acquired Fund), fairly present, in all material respects, Acquiring Fund's financial condition as of such date in accordance with GAAP, and its results of such operations, changes in its net assets and financial highlights for such period, and as of such date there will be no known liabilities of Acquiring Fund (contingent or otherwise) not disclosed therein that would be required in accordance with GAAP to be disclosed therein;
(h) All issued and outstanding Acquiring Fund Shares are, and at the Closing Date will be, duly and validly issued and outstanding, fully paid and non-assessable with no personal liability attaching to the ownership thereof. Acquiring Fund does not have outstanding any options, warrants or other rights to subscribe for or purchase any of its shares;
(i) The execution, delivery and performance of this Agreement have been duly authorized by all necessary action on the part of the Trust, and this Agreement constitutes a valid and binding obligation of Acquiring Fund enforceable in accordance with its terms, subject as to enforcement, to bankruptcy, insolvency, reorganization, moratorium and other laws relating to or affecting creditors' rights and to general equity principles. No other consents, authorizations or approvals are necessary in connection with Acquiring Fund's performance of this Agreement;
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(j) Acquiring Fund Shares to be issued and delivered to Acquired Fund, for the account of the Acquired Fund Shareholders, pursuant to the terms of this Agreement will at the Closing Date have been duly authorized and, when so issued and delivered, will be duly and validly issued Acquiring Fund Shares, and will be fully paid and non-assessable with no personal liability attaching to the ownership thereof;
(k) All material federal and other tax returns and reports of Acquiring Fund required by law to be filed on or before the Closing Date have been filed and are correct, and all federal and other taxes shown as due or required to be shown as due on said returns and reports have been paid or provision has been made for the payment thereof, and to the best of the Trust's knowledge, no such return is currently under audit and no assessment has been asserted with respect to any such return;
(l) For each taxable year since its inception, Acquiring Fund has met the requirements of Subchapter M of the Code for qualification and treatment as a "regulated investment company" and neither the execution or delivery of nor the performance of the Trust's obligations with respect to Acquiring Fund under this Agreement will adversely affect, and no other events are reasonably likely to occur which will adversely affect, the ability of Acquiring Fund to continue to meet the requirements of Subchapter M of the Code;
(m) Since September 30, 2014, there has been no change by the Trust in accounting methods, principles, or practices, including those required by GAAP;
(n) The information furnished or to be furnished by the Trust on behalf of Acquiring Fund for use in registration statements, proxy materials and other documents which may be necessary in connection with the transactions contemplated hereby shall be accurate and complete in all material respects and shall comply in all material respects with federal securities and other laws and regulations applicable thereto; and
(o) The Proxy Materials to be included in the Registration Statement (only insofar as they relate to Acquiring Fund) will, on the effective date of the Registration Statement and on the Closing Date, not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which such statements were made, not materially misleading.
5.2. Acquired Fund represents and warrants to the Trust, on behalf of Acquiring Fund as follows:
(a) Acquired Fund is a validly existing Massachusetts business trust with full power to carry on its business as presently conducted;
(b) Acquired Fund is a duly registered, open-end management investment company, and its registration with the Commission as an investment company under the 1940 Act and the registration of its shares under the 1933 Act are in full force and effect;
(c) All of the issued and outstanding shares of Acquired Fund have been offered and sold in compliance in all material respects with applicable requirements of the 1933 Act and state securities laws. Shares of Acquired Fund are registered in all jurisdictions in which they are required to be registered and said registrations, including any periodic reports or supplemental filings, are complete and current, all fees required to be paid have been paid, and Acquired Fund is not subject to any stop order and is fully qualified to sell its shares in each state in which its shares have been registered;
(d) The current Prospectus, as supplemented, of Acquired Fund and statement of additional information of Acquired Fund conform in all material respects to the applicable requirements of the 1933 Act and the 1940 Act and the regulations thereunder and do not include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading;
(e) Acquired Fund is not in, and the execution, delivery and performance of this Agreement will not result in a, material violation of any provision of its Declaration of Trust or By-Laws, as amended, or of any
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agreement, indenture, instrument, contract, lease or other undertaking to which Acquired Fund is a party or by which it is bound;
(f) No litigation or administrative proceeding or investigation of or before any court or governmental body is presently pending or, to its knowledge, threatened against Acquired Fund or any of its properties or assets which, if adversely determined, would materially and adversely affect Acquired Fund's financial condition or the conduct of its business; and Acquired Fund knows of no facts that might form the basis for the institution of such proceedings and is not a party to or subject to the provisions of any order, decree or judgment of any court or governmental body which materially and adversely affects, or is reasonably likely to materially and adversely affect, its business or its ability to consummate the transactions herein contemplated;
(g) The Statement of Assets and Liabilities, Statement of Operations, Statement of Changes in Net Assets and Financial Highlights of Acquired Fund for its last completed fiscal year, audited by Ernst & Young LLP (copies of which have been or will be furnished to Acquiring Fund) fairly present, in all material respects, Acquired Fund's financial condition as of such date, and its results of operations, changes in its net assets and financial highlights for such period in accordance with GAAP, and as of such date there were no known liabilities of Acquired Fund (contingent or otherwise) not disclosed therein that would be required in accordance with GAAP to be disclosed therein;
(h) Acquired Fund has no material contracts or other commitments (other than this Agreement) that will be terminated with liability to it prior to the Closing Date;
(i) All issued and outstanding shares of Acquired Fund are, and at the Closing Date will be, duly and validly issued and outstanding, fully paid and non-assessable with no personal liability attaching to the ownership thereof. Acquired Fund does not have outstanding any options, warrants or other rights to subscribe for or purchase any of its shares, nor is there outstanding any security convertible to any of its shares. All such shares will, at the time of Closing, be held by the persons and in the amounts set forth in the list of Acquired Fund Shareholders submitted to Acquiring Fund pursuant to paragraph 3.4;
(j) The execution, delivery and performance of this Agreement will have been duly authorized prior to the Closing Date by all necessary action on the part of Acquired Fund, and subject to the approval of Acquired Fund Shareholders, this Agreement constitutes a valid and binding obligation of Acquired Fund, enforceable in accordance with its terms, subject as to enforcement to bankruptcy, insolvency, reorganization, moratorium and other laws relating to or affecting creditors' rights and to general equity principles. No other consents, authorizations or approvals are necessary in connection with Acquired Fund's performance of this Agreement;
(k) All material federal and other tax returns and reports of Acquired Fund required by law to be filed on or before the Closing Date shall have been filed and are correct and all federal and other taxes shown as due or required to be shown as due on said returns and reports have been paid or provision has been made for the payment thereof, and to the best of Acquired Fund's knowledge, no such return is currently under audit and no assessment has been asserted with respect to any such return;
(l) For each taxable year since its inception, Acquired Fund has met all the requirements of Subchapter M of the Code for qualification and treatment as a "regulated investment company" and neither the execution or delivery of nor the performance of Acquired Fund's obligations under this Agreement will adversely affect, and no other events are reasonably likely to occur which will adversely affect, the ability of Acquired Fund to continue to meet the requirements of Subchapter M of the Code for its final taxable year ending on the Closing Date;
(m) At the Closing Date, Acquired Fund will have good and valid title to the Acquired Fund Assets, subject to no liens (other than the obligation, if any, to pay the purchase price of portfolio securities purchased by Acquired Fund which have not settled prior to the Closing Date), security interests or other encumbrances, and full right, power and authority to assign, deliver and otherwise transfer such assets hereunder, and upon delivery and
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payment for such assets, the Trust, on behalf of Acquiring Fund, will acquire good and marketable title thereto, subject to no restrictions on the full transfer thereof, including any restrictions as might arise under the 1933 Act;
(n) On the effective date of the Registration Statement, at the time of the meeting of Acquired Fund Shareholders and on the Closing Date, the Proxy Materials (exclusive of the currently effective Acquiring Fund Prospectus contained therein) will (i) comply in all material respects with the provisions of the 1933 Act, the Securities Exchange Act of 1934, as amended ("1934 Act"), and the 1940 Act and the regulations thereunder and (ii) not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. Any other information furnished by Acquired Fund for use in the Registration Statement or in any other manner that may be necessary in connection with the transactions contemplated hereby shall be accurate and complete and shall comply in all material respects with applicable federal securities and other laws and regulations thereunder;
(o) Acquired Fund will, on or prior to the Valuation Date, declare one or more dividends or other distributions to Acquired Fund Shareholders that, together with all previous dividends and other distributions to shareholders, shall have the effect of distributing to the shareholders all of its investment company taxable income and net capital gain, if any, through the Valuation Date (computed without regard to any deduction for dividends paid);
(p) Acquired Fund has maintained or has caused to be maintained on its behalf all books and accounts as required of a registered investment company in compliance with the requirements of Section 31 of the 1940 Act and the rules thereunder; and
(q) Acquired Fund is not acquiring Acquiring Fund Shares to be issued hereunder for the purpose of making any distribution thereof other than in accordance with the terms of this Agreement.
6. Conditions Precedent to Obligations of Acquired Fund
The obligations of Acquired Fund to consummate the transactions provided for herein shall be subject, at its election, to the performance by the Trust, on behalf of Acquiring Fund, of all the obligations to be performed by it hereunder on or before the Closing Date and, in addition thereto, the following conditions:
6.1. All representations and warranties of the Trust made on behalf of Acquiring Fund contained in this Agreement shall be true and correct in all material respects as of the date hereof and, except as they may be affected by the transactions contemplated by this Agreement, as of the Closing Date with the same force and effect as if made on and as of the Closing Date;
6.2. The Trust, on behalf of Acquiring Fund, shall have delivered to Acquired Fund a certificate of the Trust's President and Treasurer, in a form reasonably satisfactory to Acquired Fund and dated as of the Closing Date, to the effect that the representations and warranties of the Trust, on behalf of Acquiring Fund, made in this Agreement are true and correct at and as of the Closing Date, except as they may be affected by the transactions contemplated by this Agreement, and as to such other matters as Acquired Fund, shall reasonably request;
6.3. Acquired Fund, shall have received a favorable opinion from Dechert LLP, counsel to Acquiring Fund, dated as of the Closing Date, to the effect that:
(a) Acquiring Fund is a series of the Trust, a validly existing Pennsylvania business trust, and has the power to own all of its properties and assets and to carry on its business as presently conducted; (b) the Trust is a duly registered, open-end, management investment company, and its registration with the Commission as an investment company under the 1940 Act is in full force and effect; (c) this Agreement has been duly authorized, executed and delivered by the Trust and, assuming that the Registration Statement complies with the 1933 Act, the 1934 Act and the 1940 Act and regulations thereunder and assuming due authorization, execution and delivery of this Agreement by Acquired Fund, is a valid and binding obligation of Acquiring Fund enforceable against Acquiring Fund in accordance with its terms, subject as to enforcement, to bankruptcy, insolvency, reorganization, moratorium and other laws relating to or affecting creditors' rights and to general equity principles; (d) Acquiring Fund Shares to be issued to Acquired Fund shareholders as provided by this Agreement are duly authorized and upon such
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delivery will be validly issued, fully paid and non-assessable, and no shareholder of Acquiring Fund has any preemptive rights to subscription or purchase in respect thereof; (e) the execution and delivery of this Agreement did not, and the consummation of the transactions contemplated hereby will not, violate the Trust's Amended and Restated Agreement and Declaration of Trust or By-Laws, each as amended; and (f) to the knowledge of such counsel, no consent, approval, authorization or order of any court or governmental authority of the United States or any state is required for the consummation by Acquiring Fund of the transactions contemplated herein, except such as have been obtained under the 1933 Act, the 1934 Act and the 1940 Act and such as may be required under state securities laws; and
6.4. As of the Closing Date, there shall have been no material change in the investment objective, policies and restrictions of Acquiring Fund or any increase in the investment management fees or annual fees pursuant to Acquiring Fund's shareholder services plan from those described in Acquiring Fund's Prospectus dated January 30, 2015, as may be supplemented, and the Trust's statement of additional information dated January 30, 2015, as may be supplemented.
7. Conditions Precedent to Obligations of Acquiring Fund
The obligations of the Trust, on behalf of Acquiring Fund, to complete the transactions provided for herein shall be subject, at its election, to the performance by Acquired Fund, of all the obligations to be performed by it hereunder on or before the Closing Date and, in addition thereto, the following conditions:
7.1. All representations and warranties of Acquired Fund contained in this Agreement shall be true and correct in all material respects as of the date hereof and, except as they may be affected by the transactions contemplated by this Agreement, as of the Closing Date with the same force and effect as if made on and as of the Closing Date;
7.2. Acquired Fund shall have delivered to Acquiring Fund at the Closing a certificate of Acquired Fund's President and its Treasurer, in form and substance satisfactory to Acquiring Fund and dated as of the Closing Date, to the effect that the representations and warranties of Acquired Fund, made in this Agreement are true and correct at and as of the Closing Date, except as they may be affected by the transactions contemplated by this Agreement, and as to such other matters as the Trust, on behalf of Acquiring Fund, shall reasonably request;
7.3. Acquired Fund shall have delivered to Acquiring Fund a statement of the Acquired Fund Assets and its liabilities, together with a list of Acquired Fund's portfolio securities and other assets showing the respective adjusted bases and holding periods thereof for income tax purposes, as of the Closing Date, certified by the Treasurer of Acquired Fund;
7.4. The Trust, on behalf of Acquiring Fund, shall have received at the Closing a favorable opinion from Dechert LLP, counsel to Acquired Fund, dated as of the Closing Date to the effect that:
(a) Acquired Fund is a validly existing Massachusetts business trust, and has the power to own all of its properties and assets and to carry on its business as presently conducted; (b) Acquired Fund is a duly registered, open-end, management investment company under the 1940 Act, and its registration with the Commission as an investment company under the 1940 Act is in full force and effect; (c) this Agreement has been duly authorized, executed and delivered by Acquired Fund, and, assuming that the Registration Statement complies with the 1933 Act, the 1934 Act and the 1940 Act and the regulations thereunder and assuming due authorization, execution and delivery of this Agreement by the Trust, on behalf of Acquiring Fund, is a valid and binding agreement of Acquired Fund enforceable against Acquired Fund in accordance with its terms; (d) the execution and delivery of this Agreement did not, and the consummation of the transactions contemplated hereby will not, conflict with Acquired Fund's Declaration of Trust or By-Laws, each as amended; and (e) to the knowledge of such counsel, no consent, approval, authorization or order of any court or governmental authority of the United States or The Commonwealth of Massachusetts or State of New York is required for the consummation by Acquired Fund of the transactions contemplated herein, except such as have been obtained under the 1933 Act, the 1934 Act and the 1940 Act and such as may be required under state securities laws; and
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7.5. On the Closing Date, the Acquired Fund Assets shall include no assets that Acquiring Fund, by reason of limitations of the Trust's Declaration of Trust, as amended, or otherwise, may not properly acquire.
8. Further Conditions Precedent to Obligations of Acquiring Fund and Acquired Fund
The obligations of Acquired Fund and the Trust, on behalf of Acquiring Fund, hereunder are each subject to the further conditions that on or before the Closing Date:
8.1. This Agreement and the transactions contemplated herein shall have been approved by the requisite vote of the holders of the outstanding shares of Acquired Fund in accordance with the provisions of Acquired Fund's Declaration of Trust, as amended, and certified copies of the resolutions evidencing such approval shall have been delivered to Acquiring Fund;
8.2. On the Closing Date, no action, suit or other proceeding shall be pending before any court or governmental agency in which it is sought to restrain or prohibit, or obtain damages or other relief in connection with, this Agreement or the transactions contemplated herein;
8.3. All consents of other parties and all other consents, orders and permits of federal, state and local regulatory authorities (including those of the Commission and of state Blue Sky and securities authorities, including "no-action" positions of and exemptive orders from such federal and state authorities) deemed necessary by the Trust, on behalf of Acquiring Fund, or Acquired Fund to permit consummation, in all material respects, of the transactions contemplated herein shall have been obtained, except where failure to obtain any such consent, order or permit would not involve risk of a material adverse effect on the assets or properties of Acquiring Fund or Acquired Fund;
8.4. The Registration Statement shall have become effective under the 1933 Act, no stop orders suspending the effectiveness thereof shall have been issued and, to the best knowledge of the parties hereto, no investigation or proceeding for that purpose shall have been instituted or be pending, threatened or contemplated under the 1933 Act;
8.5. Acquired Fund, shall have declared and paid a dividend or dividends and/or other distribution or distributions that, together with all previous such dividends or distributions, shall have the effect of distributing to the Acquired Fund Shareholders all of Acquired Fund's investment company taxable income (computed without regard to any deduction for dividends paid) and all of its net capital gain (after reduction for any capital loss carry-forward and computed without regard to any deduction for dividends paid) for all taxable years ending on or before the Closing Date; and
8.6. The parties shall have received the opinion of the law firm of Dechert LLP (based on certain facts, assumptions and representations), addressed to Acquiring Fund and Acquired Fund, substantially to the effect that, for federal income tax purposes:
(a) The transfer of substantially all of Acquired Fund's assets in exchange solely for Acquiring Fund Shares and the assumption by Acquiring Fund of certain stated liabilities of Acquired Fund followed by the distribution by Acquired Fund of Acquiring Fund Shares to the Acquired Fund Shareholders in exchange for their Acquired Fund shares pursuant to and in accordance with the terms of the Reorganization Agreement will constitute a "reorganization" within the meaning of Section 368(a)(1) of the Code;
(b) No gain or loss will be recognized by Acquiring Fund upon the receipt of the assets of Acquired Fund solely in exchange for Acquiring Fund Shares and the assumption by Acquiring Fund of the stated liabilities of Acquired Fund;
(c) No gain or loss will be recognized by Acquired Fund upon the transfer of substantially all of the assets of Acquired Fund to Acquiring Fund in exchange solely for Acquiring Fund Shares and the assumption by Acquiring Fund of the stated liabilities or upon the distribution of Acquiring Fund Shares to the Acquired Fund Shareholders in exchange for their Acquired Fund shares, except that Acquired Fund may be required to recognize
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gain or loss with respect to contracts described in Section 1256(b) of the Code or stock in a passive foreign investment company, as defined in Section 1297(a) of the Code;
(d) No gain or loss will be recognized by the Acquired Fund Shareholders upon the exchange of the Acquired Fund shares for Acquiring Fund Shares;
(e) The aggregate tax basis for Acquiring Fund Shares received by each Acquired Fund Shareholder pursuant to the reorganization will be the same as the aggregate tax basis of the Acquired Fund shares held by each such Acquired Fund Shareholder immediately prior to the Reorganization;
(f) The holding period of Acquiring Fund Shares to be received by each Acquired Fund Shareholder will include the period during which the Acquired Fund shares surrendered in exchange therefor were held (provided such Acquired Fund shares were held as capital assets on the date of the Reorganization);
(g) The tax basis of the assets of Acquired Fund acquired by Acquiring Fund will be the same as the tax basis of such assets to Acquired Fund in exchange therefor; and
(h) The holding period of the assets of Acquired Fund in the hands of Acquiring Fund will include the period during which those assets were held by Acquired Fund (except where the investment activities of Acquiring Fund have the effect of reducing or eliminating such periods with respect to an asset).
Notwithstanding anything herein to the contrary, neither the Trust, on behalf of Acquiring Fund, nor Acquired Fund, may waive the conditions set forth in this paragraph 8.6.
9. Fees and Expenses
The Acquired Fund shall bear all the expenses incurred in connection with the entering into, and carrying out of, the provisions of this Agreement, including printing, filing and proxy solicitation expenses and legal and accounting expenses up to an amount equal to $706,600.
10. Entire Agreement; Survival of Warranties
10.1. This Agreement constitutes the entire agreement between the parties.
10.2. The representations, warranties and covenants contained in this Agreement or in any document delivered pursuant hereto or in connection herewith shall survive the consummation of the transactions contemplated herein, except that the representations, warranties and covenants of Acquired Fund hereunder shall not survive the dissolution and complete liquidation of Acquired Fund in accordance with paragraph 1.9.
11. Termination
11.1. This Agreement may be terminated and the transactions contemplated hereby may be abandoned at any time prior to the Closing:
(a) by the mutual written consent of Acquired Fund and the Trust, on behalf of Acquiring Fund;
(b) by either the Trust, on behalf of Acquiring Fund, or Acquired Fund, by notice to the other, without liability to the terminating party on account of such termination (providing the terminating party is not otherwise in material default or breach of this Agreement), if the Closing shall not have occurred on or before June 10, 2016; or
(c) by either the Trust, on behalf of Acquiring Fund, or Acquired Fund, in writing without liability to the terminating party on account of such termination (provided the terminating party is not otherwise in material default or breach of this Agreement), if (i) the other party shall fail to perform in any material respect its agreements contained herein required to be performed on or prior to the Closing Date, (ii) the other party materially breaches any of its representations, warranties or covenants contained herein, (iii) the Acquired Fund Shareholders fail to approve this Agreement at any meeting called for such purpose at which a quorum was present or (iv) any other condition herein expressed to be precedent to the obligations of the terminating party has not been met and it reasonably appears that it will not or cannot be met.
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11.2. (a) Termination of this Agreement pursuant to paragraphs 11.1(a) or (b) shall terminate all obligations of the parties hereunder and there shall be no liability for damages on the part of the Trust, Acquiring Fund or Acquired Fund, or the trustees or officers of the Trust, on behalf of Acquiring Fund, or the trustees or officers of Acquired Fund, to any other party or its directors, trustees or officers.
(b) Termination of this Agreement pursuant to paragraph 11.1(c) shall terminate all obligations of the parties hereunder and there shall be no liability for damages on the part of the Trust, Acquiring Fund or Acquired Fund, or the trustees or officers of the Trust, on behalf of Acquiring Fund, or the trustees or officers of Acquired Fund, except that any party in breach of this Agreement shall, upon demand, reimburse the non-breaching party for all reasonable out-of-pocket fees and expenses incurred in connection with the transactions contemplated by this Agreement, including legal, accounting and filing fees.
12. Amendments
This Agreement may be amended, modified or supplemented in such manner as may be mutually agreed upon in writing by the parties.
13. Miscellaneous
13.1. The article and paragraph headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement.
13.2. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original.
13.3. This Agreement shall be governed by and construed in accordance with the laws of the State of New York.
13.4. This Agreement shall bind and inure to the benefit of the parties hereto and their respective successors and assigns, but no assignment or transfer hereof or of any rights or obligations hereunder shall be made by any party without the written consent of the other party. Nothing herein expressed or implied is intended or shall be construed to confer upon or give any person, firm or corporation, other than the parties hereto and their respective successors and assigns, any rights or remedies hereunder or by reason of this Agreement.
13.5. The trustees of the Trust and the shareholders of each series of the Trust and the trustees of Acquired Fund and the shareholders of Acquired Fund shall not be liable for any obligations of the Trust or Acquiring Fund or of Acquired Fund, as appropriate, under this Agreement, and the parties hereto agree that, in asserting any rights or claims against the other parties under this Agreement, it shall look only to the assets and property of Acquiring Fund or of Acquired Fund, as appropriate, in settlement of such rights or claims, and not to the assets or property of the other series of the Trust or to the directors, trustees, officers or shareholders of the other parties.
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IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be executed by a duly authorized officer.
| MORGAN STANLEY INSTITUTIONAL FUND TRUST, on behalf of Acquiring Fund | ||||||
| By: /s/ John H. Gernon Name: John H. Gernon Title: President and Principal Executive Officer | ||||||
| MORGAN STANLEY LIMITED DURATION U.S. GOVERNMENT TRUST | ||||||
| By: /s/ John H. Gernon Name: John H. Gernon Title: President and Principal Executive Officer |
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Prospectus Supplement
March 16, 2015
Morgan Stanley Institutional Fund Trust
Supplement dated March 16, 2015 to the Morgan Stanley Institutional Fund Trust (the "Fund") Prospectuses dated January 30, 2015 for:
Core Fixed Income Portfolio
Core Plus Fixed Income Portfolio
Corporate Bond Portfolio
Global Strategist Portfolio
High Yield Portfolio
Limited Duration Portfolio
Mid Cap Growth Portfolio
(collectively, the "Portfolios")
Effective as of the close of business on April 30, 2015, the Fund is suspending the continuous offering of its Class L shares and thus, no further purchases of Class L shares of any of the Portfolios of the Fund may be made by investors. Existing Class L shareholders may continue to invest through reinvestment of dividends and distributions. Class L shares of each Portfolio may be exchanged (i) for Class L shares of other Morgan Stanley Multi-Class Funds (as defined in the section of the Prospectus entitled "Shareholder Information—Exchange Privilege") even though Class L shares are closed to investors, (ii) for shares of any Morgan Stanley Money Market Fund (as defined in the section of the Prospectus entitled "Shareholder Information—Exchange Privilege") or (iii) for Advisor Class shares of Morgan Stanley Limited Duration U.S. Government Trust, in each case if available, without the imposition of an exchange fee. Class L shares of a Portfolio that are exchanged for shares of a Morgan Stanley Money Market Fund or Advisor Class shares of Morgan Stanley Limited Duration U.S. Government Trust may be subsequently re-exchanged for Class L shares of any other Morgan Stanley Multi-Class Fund (even though Class L shares are closed to investors). Please see "Shareholder Information—Exchange Privilege" for further information.
Please retain this supplement for future reference.
MSIFTSPT-0415
Prospectus Supplement
May 27, 2015
Morgan Stanley Institutional Fund Trust
Supplement dated May 27, 2015 to the Morgan Stanley Institutional Fund Trust Prospectus dated January 30, 2015
Core Fixed Income Portfolio
Core Plus Fixed Income Portfolio
Corporate Bond Portfolio
Limited Duration Portfolio
Jim Caron and Gregory Finck have been added to the teams primarily responsible for the day-to-day management of the Core Fixed Income Portfolio and the Core Plus Fixed Income Portfolio. Mikhael Breiterman-Loader has been added to the team primarily responsible for the day-to-day management of the Corporate Bond Portfolio. Joseph Mehlman has been removed from and Eric Jesionowski has been added to the team primarily responsible for the day-to-day management of the Limited Duration Portfolio. Accordingly, effective immediately, the Prospectus is revised as follows:
The section of the Prospectus entitled "Portfolio Summary—Core Fixed Income Portfolio—Fund Management—Portfolio Managers" is hereby deleted and replaced with the following:
The Portfolio is managed by members of the Taxable Fixed Income team. Information about the members jointly and primarily responsible for the day-to-day management of the Portfolio is shown below:
Name | Title with Adviser | Date Began Managing Portfolio | |||||||||
Neil Stone | Managing Director | January 2011 | |||||||||
Matthew Dunning | Executive Director | October 2014 | |||||||||
Joseph Mehlman | Executive Director | April 2013 | |||||||||
Jim Caron | Managing Director | May 2015 | |||||||||
Gregory Finck | Managing Director | May 2015 |
The section of the Prospectus entitled "Portfolio Summary—Core Plus Fixed Income Portfolio—Fund Management—Portfolio Managers" is hereby deleted and replaced with the following:
The Portfolio is managed by members of the Taxable Fixed Income team. Information about the members jointly and primarily responsible for the day-to-day management of the Portfolio is shown below:
Name | Title with Adviser | Date Began Managing Portfolio | |||||||||
Neil Stone | Managing Director | January 2011 | |||||||||
Matthew Dunning | Executive Director | October 2014 | |||||||||
Joseph Mehlman | Executive Director | April 2013 | |||||||||
Jim Caron | Managing Director | May 2015 | |||||||||
Gregory Finck | Managing Director | May 2015 |
The section of the Prospectus entitled "Portfolio Summary—Corporate Bond Portfolio—Fund Management—Portfolio Managers" is hereby deleted and replaced with the following:
The Portfolio is managed by members of the Taxable Fixed Income team. Information about the members jointly and primarily responsible for the day-to-day management of the Portfolio is shown below:
Name | Title with Adviser | Date Began Managing Portfolio | |||||||||
Christian G. Roth | Managing Director | December 2011 | |||||||||
Joseph Mehlman | Executive Director | December 2011 | |||||||||
Mikhael Breiterman-Loader | Vice President | May 2015 |
The section of the Prospectus entitled "Portfolio Summary—Limited Duration Portfolio—Fund Management—Portfolio Managers" is hereby deleted and replaced with the following:
The Portfolio is managed by members of the Taxable Fixed Income team. Information about the members jointly and primarily responsible for the day-to-day management of the Portfolio is shown below:
Name | Title with Adviser | Date Began Managing Portfolio | |||||||||
Neil Stone | Managing Director | January 2011 | |||||||||
Matthew Dunning | Executive Director | October 2014 | |||||||||
Eric Jesionowski | Executive Director | May 2015 |
The section of the Prospectus entitled "Fund Management—Portfolio Management—Core Fixed Income Portfolio, Core Plus Fixed Income Portfolio and Limited Duration Portfolio" is hereby deleted and replaced with the following:
Core Fixed Income Portfolio and Core Plus Fixed Income Portfolio
Each Portfolio's assets are managed by members of the Taxable Fixed Income team. The team consists of portfolio managers and analysts. Current members of the team who are jointly and primarily responsible for the day-to-day management of each Portfolio are Neil Stone, Joseph Mehlman, Matthew Dunning, Jim Caron and Gregory Finck.
Mr. Stone has been associated with the Adviser in an investment management capacity since 1995. Mr. Mehlman has been associated with the Adviser in an investment management capacity since 2002. Mr. Dunning re-joined the Adviser in July 2014. Prior to re-joining the Adviser, Mr. Dunning managed the municipal valuation rates group and was a senior taxable municipal bond analyst at Bloomberg L.P. from March 2010 to July 2014. Prior to March 2010, he worked in various trading and portfolio management roles for the Adviser. Mr. Caron has been associated with Morgan Stanley since 2006 and with the Adviser in an investment management capacity since June 2012. Prior to June 2012, he was global head of interest rates, foreign exchange and emerging markets strategy for Morgan Stanley. Mr. Finck has been associated with the Adviser in an investment management capacity since January 2015. Prior to joining the Adviser, Mr. Finck was a managing director of the Fortress Private Equity Funds at Fortress Investment Group from 2011 to 2014. Prior to that role, Mr. Finck was a managing director at Logan Circle Partners from 2010 to 2011 and a managing director of the Fortress Credit Funds from 2008 to 2010.
The first and second paragraphs under the section of the Prospectus entitled "Fund Management—Portfolio Management—Corporate Bond Portfolio" are hereby deleted and replaced with the following:
The Portfolio's assets are managed by members of the Taxable Fixed Income team. The team consists of portfolio managers and analysts. Current members of the team who are jointly and primarily responsible for the day-to-day management of the Portfolio are Joseph Mehlman, Christian G. Roth and Mikhael Breiterman-Loader.
Mr. Mehlman has been associated with the Adviser in an investment management capacity since 2002. Mr. Roth has been associated with the Adviser in an investment management capacity since 1991. Mr. Breiterman-Loader has been associated with the Adviser in an investment management capacity since 2009.
The following is hereby added as a separate section after the section of the Prospectus entitled "Fund Management—Portfolio Management—Corporate Bond Portfolio":
Limited Duration Portfolio
Each Portfolio's assets are managed by members of the Taxable Fixed Income team. The team consists of portfolio managers and analysts. Current members of the team who are jointly and primarily responsible for the day-to-day management of each Portfolio are Neil Stone, Matthew Dunning and Eric Jesionowski.
Mr. Stone has been associated with the Adviser in an investment management capacity since 1995. Mr. Dunning re-joined the Adviser in July 2014. Prior to re-joining the Adviser, Mr. Dunning managed the municipal valuation rates group and was a senior taxable municipal bond analyst at Bloomberg L.P. from March 2010 to July 2014. Prior to March 2010, he worked in various trading and portfolio management roles for the Adviser. Mr. Jesionowski has been associated with the Adviser in an investment management capacity since 1997.
Please retain this supplement for future reference.
IFTFISPT-0515
Prospectus and Summary Prospectus Supplement
June 15, 2015
Morgan Stanley Institutional Fund Trust
Supplement dated June 15, 2015 to the Morgan Stanley Institutional Fund Trust Prospectus dated January 30, 2015 and Summary Prospectus dated February 3, 2015
Limited Duration Portfolio
(the "Portfolio")
Effective upon the consummation of a reorganization of Morgan Stanley Limited Duration U.S. Government Trust into the Portfolio or, if the reorganization is not consummated, on or about December 7, 2015 (the "Effective Date"), the Board of Trustees of Morgan Stanley Institutional Fund Trust, on behalf of the Portfolio, has approved various changes with respect to the Portfolio, including (i) changing the Portfolio's name to Short Duration Income Portfolio; (ii) changing the Portfolio's principal investment policy as detailed below; (iii) changing the Portfolio's primary benchmark index to the Bank of America/Merrill Lynch 1-Year U.S. Treasury Note Index; (iv) reducing the advisory fee to 0.20%; (v) removing the front-end sales load from the Portfolio's Class A shares; and (vi) decreasing the maximum expense ratios with respect to Class I, Class A and Class L shares of the Portfolio to 0.30%, 0.55% and 0.80%, respectively.
Currently, in seeking to achieve the Portfolio's investment objective of above-average total return over a market cycle of three to five years, the Portfolio normally invests at least 80% of its assets in fixed income securities, primarily in U.S. government securities, investment grade corporate bonds and mortgage- and asset-backed securities.
On the Effective Date, the Portfolio's principal investment policy will change such that the Portfolio will, under normal circumstances, seek to achieve its investment objective of above-average total return over a market cycle of three to five years by investing at least 80% of its assets in investment grade fixed income securities denominated in US dollars, while seeking to maintain an overall duration of its portfolio of approximately one year or less.
Please retain this supplement for future reference.
IFTFISPT-0615
Prospectus Supplement
July 2, 2015
Morgan Stanley Institutional Fund Trust
Supplement dated
July 2, 2015 to
the Morgan Stanley
Institutional Fund Trust
Prospectuses dated
January 30, 2015
Core Fixed Income Portfolio
Core Plus Fixed Income Portfolio
Corporate Bond Portfolio
Global Strategist Portfolio
High Yield Portfolio
Limited Duration Portfolio
Mid Cap Growth Portfolio
Strategic Income Portfolio
Supplement dated
June 2, 2015 to
the Morgan Stanley Institutional Fund Trust
Prospectus dated
March 4, 2015
Global Multi-Asset Income Portfolio
(each, a "Portfolio")
The following is hereby added as a separate section after the section of each Portfolio's Prospectus entitled "Shareholder Information—Sales Charges Applicable to Purchases of Class A Shares:"
Class A Conversion Feature
Class A shares held in certain fee-based advisory program ("Advisory Program") accounts may be converted to Class I shares if such Advisory Program had previously offered only Class A shares and now offers only Class I shares. In addition, a shareholder holding Class A shares through a brokerage account may also convert its Class A shares to Class I shares if such shareholder transfers its Class A shares to an account within an Advisory Program that offers only Class I shares. Such conversions will be on the basis of the relative net asset values per share, without requiring any investment minimum to be met and without the imposition of any redemption fee or other charge. If a CDSC is applicable to such Class A shares, then the conversion may not occur until after the shareholder has held the shares for an 18 month period.
Please retain this supplement for future reference.
MSIFTSPT-0715
Prospectus and Summary Prospectus Supplement
September 2, 2015
Morgan Stanley Institutional Fund Trust
Supplement dated September 2, 2015 to the Morgan Stanley Institutional Fund Trust Prospectus dated January 30, 2015 and Summary Prospectus dated February 3, 2015
Limited Duration Portfolio (the "Portfolio")
Effective upon the consummation of a reorganization of Morgan Stanley Limited Duration U.S. Government Trust into the Portfolio or, if the reorganization is not consummated, on or about December 7, 2015 (the "Effective Date"), the Board of Trustees of Morgan Stanley Institutional Fund Trust, on behalf of the Portfolio, has approved various changes with respect to the Portfolio, including (i) changing the Portfolio's name to Short Duration Income Portfolio; (ii) changing the Portfolio's principal investment policy as detailed below; (iii) changing the Portfolio's primary benchmark index to the Bank of America/Merrill Lynch 1-Year U.S. Treasury Note Index; (iv) reducing the advisory fee to 0.20% of the average daily net assets of the Portfolio; (v) removing the front-end sales load from the Portfolio's Class A shares; and (vi) decreasing the maximum expense ratios with respect to Class I, Class A and Class L shares of the Portfolio to 0.30%, 0.55% and 0.80%, respectively. In determining the actual amount of fee waiver and/or expense reimbursement for the Portfolio, if any, the Adviser to the Portfolio, Morgan Stanley Institutional Management Inc., excludes from total annual operating expenses certain investment related expenses, taxes, interest and other extraordinary expenses (including litigation).
Currently, in seeking to achieve the Portfolio's investment objective of above-average total return over a market cycle of three to five years, the Portfolio normally invests at least 80% of its assets in fixed income securities, primarily in U.S. government securities, investment grade corporate bonds and mortgage- and asset-backed securities.
On the Effective Date, the Portfolio's principal investment policy will change such that the Portfolio will, under normal circumstances, seek to achieve its investment objective of above-average total return over a market cycle of three to five years by investing substantially all of its assets in investment grade fixed income securities denominated in US dollars, while seeking to maintain an overall duration of its portfolio of approximately one year or less.
In addition, on the Effective Date, the Portfolio will no longer invest in stripped mortgage-backed securities or inverse floating rate obligations. Accordingly, all references to those investment types are hereby deleted from the Portfolio's Prospectus as of the Effective Date.
Please retain this supplement for future reference.
IFTFISPT-0915
INVESTMENT MANAGEMENT |
Morgan Stanley Institutional Fund Trust
Fixed Income Portfolios
Core Fixed Income Portfolio
Core Plus Fixed Income Portfolio
Corporate Bond Portfolio
High Yield Portfolio
Limited Duration Portfolio
Strategic Income Portfolio
Prospectus
January 30, 2015
Core Fixed Income Portfolio |
| Ticker |
Class I |
| MPSFX |
Class A |
| MDIAX |
Class L |
| MSXLX |
Core Plus Fixed Income Portfolio |
|
|
Class I |
| MPFIX |
Class A |
| MFXAX |
Class L |
| MSIOX |
Corporate Bond Portfolio |
|
|
Class I |
| MPFDX |
Class A |
| MIGAX |
Class L |
| MGILX |
High Yield Portfolio |
|
|
Class I |
| MSYIX |
Class A |
| MSYPX |
Class L |
| MSYLX |
Class IS |
| MSHYX |
Limited Duration Portfolio |
|
|
Class I |
| MPLDX |
Class A |
| MLDAX |
Class L |
| MSJLX |
Strategic Income Portfolio |
|
|
Class I |
| MSIDX |
Class A |
| MSADX |
Class L |
| MSLSX |
Class IS |
| MSTCX |
The Securities and Exchange Commission (“SEC”) has not approved or disapproved these securities or passed upon the adequacy of this Prospectus. Any representation to the contrary is a criminal offense.
Table of Contents
| Page |
Portfolio Summary |
|
Core Fixed Income Portfolio | 1 |
Core Plus Fixed Income Portfolio | 5 |
Corporate Bond Portfolio | 10 |
High Yield Portfolio | 14 |
Limited Duration Portfolio | 19 |
Strategic Income Portfolio | 23 |
|
|
Details of the Portfolios |
|
Core Fixed Income Portfolio | 28 |
Core Plus Fixed Income Portfolio | 31 |
Corporate Bond Portfolio | 35 |
High Yield Portfolio | 37 |
Limited Duration Portfolio | 41 |
Strategic Income Portfolio | 44 |
|
|
Additional Information about the Portfolios’ Investment Strategies and Related Risks | 49 |
|
|
Fund Management | 57 |
Shareholder Information | 59 |
Financial Highlights |
|
Core Fixed Income Portfolio | 68 |
Core Plus Fixed Income Portfolio | 71 |
Corporate Bond Portfolio | 74 |
High Yield Portfolio | 77 |
Limited Duration Portfolio | 81 |
Morgan Stanley Institutional Fund Trust Prospectus
Portfolio Summary
Core Fixed Income Portfolio
Objective
The Core Fixed Income Portfolio seeks above-average total return over a market cycle of three to five years.
Fees and Expenses
The table below describes the fees and expenses that you may pay if you buy and hold shares of the Portfolio. For purchases of Class A shares, you may qualify for a sales charge discount if the cumulative net asset value (“NAV”) of Class A shares of the Portfolio purchased in a single transaction, together with the NAV of all Class A shares of other portfolios of Morgan Stanley Institutional Fund Trust (the “Fund”) or Class A shares of other Morgan Stanley Multi-Class Funds (as defined in the section of this Prospectus entitled “Shareholder Information—Exchange Privilege”) held in Related Accounts (as defined in the section of this Prospectus entitled “Shareholder Information—Sales Charges Applicable to Purchases of Class A Shares”), amounts to $25,000 or more. More information about this combined purchase discount and other discounts is available from your financial intermediary and in the section of this Prospectus entitled “Shareholder Information—Sales Charges Applicable to Purchases of Class A Shares.”
Shareholder Fees (fees paid directly from your investment)
|
| Class I |
| Class A |
| Class L |
|
Maximum sales charge (load) imposed on purchases (as a percentage of offering price) |
| None |
| 4.25 | % | None |
|
Maximum deferred sales charge (load) (as a percentage based on the lesser of the offering price or NAV at redemption) |
| None |
| None | † | None |
|
Annual Portfolio Operating Expenses (expenses that you pay each year as a percentage of the value of your investment)
|
| Class I |
| Class A |
| Class L |
|
Advisory Fee |
| 0.375 | % | 0.375 | % | 0.375 | % |
Distribution and/or Shareholder Service (12b-1) Fee |
| None |
| 0.25 | % | 0.50 | % |
Other Expenses |
| 1.09 | % | 1.52 | % | 13.22 | % |
Total Annual Portfolio Operating Expenses* |
| 1.47 | % | 2.15 | % | 14.10 | % |
Fee Waiver and/or Expense Reimbursement* |
| 0.97 | % | 1.30 | % | 13.00 | % |
Total Annual Portfolio Operating Expenses After Fee Waiver and/or Expense Reimbursement* |
| 0.50 | % | 0.85 | % | 1.10 | % |
Example
The example below is intended to help you compare the cost of investing in the Portfolio with the cost of investing in other mutual funds.
The example assumes that you invest $10,000 in the Portfolio, your investment has a 5% return each year and that the Portfolio’s operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
|
| 1 Year |
| 3 Years |
| 5 Years |
| 10 Years |
| ||||
Class I |
| $ | 51 |
| $ | 160 |
| $ | 280 |
| $ | 628 |
|
Class A |
| $ | 508 |
| $ | 685 |
| $ | 876 |
| $ | 1,429 |
|
Class L |
| $ | 112 |
| $ | 350 |
| $ | 606 |
| $ | 1,340 |
|
† Investments that are not subject to any sales charges at the time of purchase are subject to a contingent deferred sales charge (“CDSC”) of 0.50% that will be imposed if you sell your shares within 18 months after the last day of the month of purchase, except for certain specific circumstances. See “Shareholder Information—How to Redeem Shares—CDSC on Class A Shares” for further information about the CDSC waiver categories.
* The Portfolio’s “Adviser,” Morgan Stanley Investment Management Inc., has agreed to reduce its advisory fee and/or reimburse the Portfolio so that Total Annual Portfolio Operating Expenses, excluding certain investment related expenses, taxes, interest and other extraordinary expenses (including litigation), will not exceed 0.50% for Class I, 0.85% for Class A and 1.10% for Class L. The fee waivers and/or expense reimbursements will continue for at least one year or until such time as the Fund’s Board of Trustees acts to discontinue all or a portion of such waivers and/or reimbursements when it deems such action is appropriate.
Portfolio Turnover
The Portfolio pays transaction costs when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Portfolio shares are held in a taxable account. These costs, which are not reflected in Total Annual Portfolio Operating Expenses or in the Example, affect the Portfolio’s performance. During the most recent fiscal year, the Portfolio’s portfolio turnover rate was 172% of the average value of its portfolio.
Principal Investment Strategies
Under normal circumstances, at least 80% of the Portfolio’s assets will be invested in fixed income securities. This policy may be changed without shareholder approval; however, you would be notified in writing of any changes. The Portfolio invests primarily in a diversified mix of U.S. dollar-denominated fixed income securities, particularly U.S. government, corporate, municipal and mortgage-backed securities and will ordinarily seek to maintain an average weighted maturity between five and ten years. The Portfolio invests in securities that carry an investment grade rating or, if unrated, are determined to be of a comparable quality by the Adviser at the time of purchase.
The Adviser employs a value approach toward fixed income investing and evaluates the relative attractiveness
among corporate, mortgage and U.S. government securities. The Adviser relies upon value measures to guide its decisions regarding sector and security selection, such as the relative attractiveness of the extra yield offered by securities other than those issued by the U.S. Treasury. The Adviser also measures various types of risk by monitoring interest rates, inflation, the shape of the yield curve, credit risk and prepayment risk.
The Portfolio’s mortgage securities may include collateralized mortgage obligations (“CMOs”), commercial mortgage-backed securities (“CMBS”), stripped mortgage-backed securities (“SMBS”) and inverse floating rate obligations (“inverse floaters”). In addition, the Portfolio may invest in to-be-announced pass-through mortgage securities, which settle on a delayed delivery basis (“TBAs”). The Portfolio may also invest in U.S. dollar-denominated securities of foreign issuers, including issuers located in emerging market or developing countries. The Portfolio may also invest in restricted and illiquid securities.
The Portfolio may, but it is not required to, use derivative instruments for a variety of purposes, including hedging, risk management, portfolio management or to earn income. The Portfolio’s use of derivatives may involve the purchase and sale of derivative instruments such as futures, options, swaps and other related instruments and techniques. Derivative instruments used by the Portfolio will be counted towards the 80% policy discussed above to the extent they have economic characteristics similar to the securities included within that policy.
Principal Risks
There is no assurance that the Portfolio will achieve its investment objective and you can lose money investing in this Portfolio. The principal risks of investing in the Portfolio include:
· Fixed Income Securities. Fixed income securities are subject to the risk of the issuer’s inability to meet principal and interest payments on its obligations (i.e., credit risk) and are subject to price volatility resulting from, among other things, interest rate sensitivity, market perception of the creditworthiness of the issuer and general market liquidity (i.e., market risk). The historically low interest rate environment increases the risk associated with rising interest rates, including the potential for periods of volatility and increased redemptions. The Portfolio may face a heightened level of interest rate risk, especially since the Federal Reserve Board has ended its quantitative easing program and may begin to raise rates. Securities with longer durations are likely to be more sensitive to changes in interest rates, generally making them more volatile than securities with shorter durations.
· Municipal Securities. Municipal obligations may be general obligations or revenue bonds. General obligation bonds are secured by the issuer’s full faith and credit as well as its taxing power for payment of principal or interest. Revenue bonds are payable solely from the revenues derived from a specified revenue source, and therefore involve the risk that the revenues so derived will not be sufficient to meet interest and or principal payment obligations. The value of municipal securities may be affected by political changes as well as uncertainties related to taxation, legislative developments and the rights of municipal security holders. Municipal securities and issuers of municipal securities may be more susceptible to downgrade, default and bankruptcy as a result of recent periods of economic stress. Municipal securities involve the risk that an issuer may call securities for redemption, which could force the Portfolio to reinvest the proceeds at a lower rate of interest.
· Mortgage Securities. Investments in mortgage securities are subject to the risk that if interest rates decline, borrowers may pay off their mortgages sooner than expected which may adversely affect the Portfolio’s return. Rising interest rates tend to discourage refinancings, with the result that the average life and volatility of mortgage securities will increase and market price will decrease. Rates of prepayment, faster or slower than expected by the Adviser, could reduce the Portfolio’s yield, increase the volatility of the Portfolio and/or cause a decline in NAV. Certain mortgage-backed securities may be more volatile and less liquid than other traditional types of debt securities. In addition, an unexpectedly high rate of defaults on the mortgages held by a mortgage pool may adversely affect the value of a mortgage-backed security and could result in losses to the Portfolio. Investments in TBAs may give rise to a form of leverage and may cause the Portfolio’s turnover rate to appear higher. Leverage may cause the Portfolio to be more volatile than if the Portfolio had not been leveraged.
· U.S. Government Securities. The U.S. government securities in which the Portfolio invests can be subject to two types of risk: credit risk and interest rate risk. When the general level of interest rates goes up, the prices of most fixed income securities go down. When the general level of interest rates goes down, the prices of most fixed income securities go up. While the credit risk associated with U.S. government securities generally is considered to be minimal, the interest rate risk can be substantial. With respect to U.S. government securities that are not backed by the full faith and credit of the U.S. Government, there is the risk that the U.S. Government will not provide financial support to such U.S. government agencies, instrumentalities or sponsored enterprises if it is not obligated to do so by law.
· Foreign and Emerging Market Securities. Investments in foreign markets entail special risks such as currency, political, economic and market risks. There also may be greater market volatility, less reliable financial information, higher transaction and custody costs, decreased market liquidity and less government and exchange regulation associated with investments in foreign markets. In addition, investments in certain foreign markets, which have historically been considered stable, may become more volatile and subject to increased risk due to ongoing developments and changing conditions in such markets. Moreover, the growing interconnectivity of global economies and financial markets has increased the probability that adverse developments and conditions in one country or region will affect the stability of economies and financial markets in other countries or regions. The risks of investing in emerging market countries are greater than risks associated with investments in foreign developed countries.
· Liquidity. The Portfolio’s investments in restricted and illiquid securities may entail greater risk than investments in publicly traded securities. These securities may be more difficult to sell, particularly in times of market turmoil. Additionally, the market for certain investments deemed liquid at the time of purchase may become illiquid under adverse market or economic conditions. Illiquid securities may be more difficult to value. If the Portfolio is forced to sell an illiquid security to fund redemptions or for other cash needs, it may be forced to sell the security at a loss.
· Derivatives. A derivative instrument often has risks similar to its underlying asset and may have additional risks, including imperfect correlation between the value of the derivative and the underlying asset, risks of default by the counterparty to certain transactions, magnification of losses incurred due to changes in the market value of the securities, instruments, indices or interest rates to which they relate and risks that the transactions may not be liquid. Certain derivative transactions may give rise to a form of leverage. Leverage magnifies the potential for gain and the risk of loss.
Shares of the Portfolio are not bank deposits and are not guaranteed or insured by the Federal Deposit Insurance Corporation or any other government agency.
Performance Information
The bar chart and table below provide some indication of the risks of investing in the Portfolio by showing changes in the Portfolio’s Class I shares’ performance from year-to-year and by showing how the Portfolio’s average annual returns for the past one, five and 10 year periods and since inception compare with those of a broad measure of market performance, as well as an index that represents a group of similar mutual funds, over time. The performance of the other Classes, which is shown in the table below, will differ because the Classes have different ongoing fees. The Portfolio’s returns in the table include the maximum applicable sales charge for Class A and assume you sold your shares at the end of each period (unless otherwise noted). The Portfolio’s past performance, before and after taxes, is not necessarily an indication of how the Portfolio will perform in the future. Updated performance information is available online at www.morganstanley.com/im.
Annual Total Returns—Calendar Years
High Quarter |
| 9/30/09 |
| 4.63 | % |
Low Quarter |
| 9/30/08 |
| -5.21 | % |
Average Annual Total Returns
(for periods ended December 31, 2014)
|
| Past |
| Past |
| Past |
| Since |
|
Class I (commenced operations on 9/29/87) |
|
|
|
|
|
|
|
|
|
Return before Taxes |
| 5.94 | % | 4.86 | % | 3.56 | % | 6.63 | % |
Return after Taxes on Distributions |
| 4.40 | % | 3.57 | % | 1.98 | % | 4.28 | % |
Return after Taxes on Distributions and Sale of Portfolio Shares |
| 3.35 | % | 3.24 | % | 2.13 | % | 4.30 | % |
Class A (commenced operations on 3/1/99) |
|
|
|
|
|
|
|
|
|
Return before Taxes |
| 1.08 | % | 3.66 | % | 2.85 | % | 4.03 | % |
Class L (commenced operations on 4/27/12) |
|
|
|
|
|
|
|
|
|
Return before Taxes |
| 5.24 | % | N/A |
| N/A |
| 2.47 | % |
Barclays U.S. Aggregate Index (reflects no deduction for fees, expenses or taxes)(1) |
| 5.97 | % | 4.45 | % | 4.71 | % | 6.99 | %(3) |
Lipper Core Bond Funds Index (reflects no deduction for taxes)(2) |
| 5.86 | % | 5.12 | % | 4.61 | % | N/A |
|
(1) The Barclays U.S. Aggregate Index tracks the performance of U.S. government agency and Treasury securities, investment-grade corporate debt securities, agency mortgage-backed securities, asset-backed securities and commercial mortgage-backed securities. It is not possible to invest directly in an index.
(2) The Lipper Core Bond Funds Index is an equally weighted performance index of the largest qualifying funds (based on net assets) in the Lipper Core Bond Funds classification. There are currently 30 funds represented in this Index.
(3) Since Inception reflects the inception date of Class I.
The after-tax returns shown in the table above are calculated using the historical highest individual federal marginal income tax rates during the period shown and do not reflect the impact of state and local taxes. After-tax returns for the Portfolio’s other Classes will vary from Class I shares’ returns. Actual after-tax returns depend on the investor’s tax situation and may differ from those shown, and after-tax returns are not relevant to investors who hold their Portfolio shares through tax deferred arrangements such as 401(k) plans or individual retirement accounts. After-tax returns may be higher than before-tax returns due to foreign tax credits and/or an assumed benefit from capital losses that would have been realized had Portfolio shares been sold at the end of the relevant periods, as applicable.
Fund Management
Adviser. Morgan Stanley Investment Management Inc.
Portfolio Managers. The Portfolio is managed by members of the Taxable Fixed Income team. Information about the members jointly and primarily responsible for the day-to-day management of the Portfolio is shown below:
Name |
| Title with Adviser |
| Date Began |
Neil Stone |
| Managing Director |
| January 2011 |
Matthew Dunning |
| Executive Director |
| October 2014 |
Joseph Mehlman |
| Executive Director |
| April 2013 |
Purchase and Sale of Portfolio Shares
The minimum initial investment generally is $5,000,000 for Class I shares and $1,000 for each of Class A and Class L shares of the Portfolio. The minimum initial investment may be waived for certain investments. For more information, please refer to the section of the Prospectus entitled “Shareholder Information—Minimum Investment Amounts.”
Class I, Class A and Class L shares may be purchased or sold on any day the New York Stock Exchange (“NYSE”) is open for business directly from the Fund by mail (c/o Boston Financial Data Services, Inc., P.O. Box 219804, Kansas City, MO 64121-9804), by telephone (1-800-548-7786) or by contacting an authorized third-party, such as a broker-dealer or other financial intermediary that has entered into a selling agreement with the Portfolio’s “Distributor,” Morgan Stanley Distribution, Inc. (each a “Financial Intermediary”). If you sell Class A shares, your net sale proceeds are reduced by the amount of any applicable CDSC. For more information, please refer to the sections of the Prospectus entitled “Shareholder Information—How to Purchase Portfolio Shares” and “—How to Redeem Portfolio Shares.”
Tax Information
The Portfolio intends to make distributions that may be taxed as ordinary income or capital gains, unless you are investing through a tax-deferred arrangement, such as a 401(k) plan or an individual retirement account.
Payments to Broker-Dealers and Other Financial Intermediaries
If you purchase the Portfolio through a Financial Intermediary (such as a bank), the Adviser and/or the Distributor may pay the Financial Intermediary for the sale of Portfolio shares and related services. These payments, which may be significant in amount, may create a conflict of interest by influencing the Financial Intermediary and your salesperson to recommend the Portfolio over another investment. Ask your salesperson or visit your Financial Intermediary’s web site for more information.
Morgan Stanley Institutional Fund Trust Prospectus
Portfolio Summary
Core Plus Fixed Income Portfolio
Objective
The Core Plus Fixed Income Portfolio seeks above-average total return over a market cycle of three to five years.
Fees and Expenses
The table below describes the fees and expenses that you may pay if you buy and hold shares of the Portfolio. For purchases of Class A shares, you may qualify for a sales charge discount if the cumulative net asset value (“NAV”) of Class A shares of the Portfolio purchased in a single transaction, together with the NAV of all Class A shares of other portfolios of Morgan Stanley Institutional Fund Trust (the “Fund”) or Class A shares of other Morgan Stanley Multi-Class Funds (as defined in the section of this Prospectus entitled “Shareholder Information—Exchange Privilege”) held in Related Accounts (as defined in the section of this Prospectus entitled “Shareholder Information—Sales Charges Applicable to Purchases of Class A Shares”), amounts to $25,000 or more. More information about this combined purchase discount and other discounts is available from your financial intermediary and in the section of this Prospectus entitled “Shareholder Information—Sales Charges Applicable to Purchases of Class A Shares.”
Shareholder Fees (fees paid directly from your investment)
|
| Class I |
| Class A |
| Class L |
|
Maximum sales charge (load) imposed on purchases (as a percentage of offering price) |
| None |
| 4.25 | % | None |
|
Maximum deferred sales charge (load) (as a percentage based on the lesser of the offering price or NAV at redemption) |
| None |
| None | † | None |
|
Annual Portfolio Operating Expenses (expenses that you pay each year as a percentage of the value of your investment)
|
| Class I |
| Class A |
| Class L |
|
Advisory Fee |
| 0.375 | % | 0.375 | % | 0.375 | % |
Distribution and/or Shareholder Service (12b-1) Fee |
| None |
| 0.25 | % | 0.50 | % |
Other Expenses |
| 0.43 | % | 0.48 | % | 2.22 | % |
Total Annual Portfolio Operating Expenses* |
| 0.81 | % | 1.11 | % | 3.10 | % |
Fee Waiver and/or Expense Reimbursement* |
| 0.29 | % | 0.24 | % | 1.98 | % |
Total Annual Portfolio Operating Expenses After Fee Waiver and/or Expense Reimbursement* |
| 0.52 | % | 0.87 | % | 1.12 | % |
Example
The example below is intended to help you compare the cost of investing in the Portfolio with the cost of investing in other mutual funds.
The example assumes that you invest $10,000 in the Portfolio, your investment has a 5% return each year and that the Portfolio’s operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
|
| 1 Year |
| 3 Years |
| 5 Years |
| 10 Years |
| ||||
Class I |
| $ | 53 |
| $ | 167 |
| $ | 291 |
| $ | 653 |
|
Class A |
| $ | 510 |
| $ | 691 |
| $ | 887 |
| $ | 1,452 |
|
Class L |
| $ | 114 |
| $ | 356 |
| $ | 617 |
| $ | 1,363 |
|
† Investments that are not subject to any sales charges at the time of purchase are subject to a contingent deferred sales charge (“CDSC”) of 0.50% that will be imposed if you sell your shares within 18 months after the last day of the month of purchase, except for certain specific circumstances. See “Shareholder Information—How to Redeem Shares—CDSC on Class A Shares” for further information about the CDSC waiver categories.
* The Portfolio’s “Adviser,” Morgan Stanley Investment Management Inc., has agreed to reduce its advisory fee and/or reimburse the Portfolio so that Total Annual Portfolio Operating Expenses, excluding certain investment related expenses, taxes, interest and other extraordinary expenses (including litigation), will not exceed 0.52% for Class I, 0.87% for Class A and 1.12% for Class L. The fee waivers and/or expense reimbursements will continue for at least one year or until such time as the Fund’s Board of Trustees acts to discontinue all or a portion of such waivers and/or reimbursements when it deems such action is appropriate.
Portfolio Turnover
The Portfolio pays transaction costs when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Portfolio shares are held in a taxable account. These costs, which are not reflected in Total Annual Portfolio Operating Expenses or in the Example, affect the Portfolio’s performance. During the most recent fiscal year, the Portfolio’s portfolio turnover rate was 296% of the average value of its portfolio.
Principal Investment Strategies
Under normal circumstances, at least 80% of the Portfolio’s assets will be invested in fixed income securities. This policy may be changed without shareholder approval; however, you would be notified in writing of any changes. The Portfolio invests primarily in a diversified mix of U.S. dollar-denominated investment grade fixed income securities, particularly U.S. government, corporate, municipal and mortgage-backed securities. The Portfolio will ordinarily seek to maintain an average weighted maturity between five and ten years.
The Adviser employs a value approach toward fixed income investing and evaluates the relative attractiveness among corporate, mortgage and U.S. government securities, and also may consider the relative attractiveness of non-dollar-denominated issues. The Adviser relies upon
value measures to guide its decisions regarding sector, security and country selection, such as the relative attractiveness of the extra yield offered by securities other than those issued by the U.S. Treasury. The Adviser also measures various types of risk by monitoring interest rates, inflation, the shape of the yield curve, credit risk, prepayment risk, country risk and currency valuations.
The Portfolio may invest opportunistically in fixed income securities that are rated below “investment grade” or are not rated, but are of equivalent quality. These fixed income securities are often referred to as “high yield securities” or “junk bonds.” High yield securities are fixed income securities rated below Baa3 by Moody’s Investors Service, Inc. (“Moody’s”) or below BBB- by Standard & Poor’s Rating Group, a division of The McGraw-Hill Companies, Inc. (“S&P”), or if unrated considered by the Adviser to be of equivalent quality. The Portfolio may also invest in public bank loans made by banks or other financial institutions. Public bank loans are privately negotiated loans that are not publicly traded for which information about the issuer has been made publicly available. These public bank loans may be rated investment grade or below investment grade. In addition, the Portfolio may invest in convertible securities.
The Portfolio’s mortgage securities may include collateralized mortgage obligations (“CMOs”), commercial mortgage-backed securities (“CMBS”), stripped mortgage-backed securities (“SMBS”) and inverse floating rate obligations (“inverse floaters”). In addition, the Portfolio may invest in to-be-announced pass-through mortgage securities, which settle on a delayed delivery basis (“TBAs”). The Portfolio may also invest in securities of foreign issuers, including issuers located in emerging market or developing countries. The securities in which the Portfolio may invest may be denominated in U.S. dollars or in currencies other than U.S. dollars. The Portfolio may also invest in restricted and illiquid securities.
The Portfolio may, but it is not required to, use derivative instruments for a variety of purposes, including hedging, risk management, portfolio management or to earn income. The Portfolio’s use of derivatives may involve the purchase and sale of derivative instruments such as futures, options, swaps and other related instruments and techniques. The Portfolio may utilize foreign currency forward exchange contracts, which are also derivatives, in connection with its investments in foreign securities. Derivative instruments used by the Portfolio will be counted towards the 80% policy discussed above to the extent they have economic characteristics similar to the securities included within that policy.
Principal Risks
There is no assurance that the Portfolio will achieve its investment objective and you can lose money investing in this Portfolio. The principal risks of investing in the Portfolio include:
· Fixed Income Securities. Fixed income securities are subject to the risk of the issuer’s inability to meet principal and interest payments on its obligations (i.e., credit risk) and are subject to price volatility resulting from, among other things, interest rate sensitivity, market perception of the creditworthiness of the issuer and general market liquidity (i.e., market risk). The historically low interest rate environment increases the risk associated with rising interest rates, including the potential for periods of volatility and increased redemptions. The Portfolio may face a heightened level of interest rate risk, especially since the Federal Reserve Board has ended its quantitative easing program and may begin to raise rates. Securities with longer durations are likely to be more sensitive to changes in interest rates, generally making them more volatile than securities with shorter durations. Lower rated fixed income securities have greater volatility because there is less certainty that principal and interest payments will be made as scheduled. A portion of the Portfolio’s fixed income securities may be rated below investment grade. To the extent that the Portfolio invests in convertible securities, and the convertible security’s investment value is greater than its conversion value, its price will be likely to increase when interest rates fall and decrease when interest rates rise. If the conversion value exceeds the investment value, the price of the convertible security will tend to fluctuate directly with the price of the underlying security.
· Municipal Securities. Municipal obligations may be general obligations or revenue bonds. General obligation bonds are secured by the issuer’s full faith and credit as well as its taxing power for payment of principal or interest. Revenue bonds are payable solely from the revenues derived from a specified revenue source, and therefore involve the risk that the revenues so derived will not be sufficient to meet interest and/or principal payment obligations. The value of municipal securities may be affected by political changes as well as uncertainties related to taxation, legislative developments and the rights of municipal security holders. Municipal securities and issuers of municipal securities may be more susceptible to downgrade, default and bankruptcy as a result of recent periods of economic stress. Municipal securities involve the risk that an issuer may call securities for redemption, which could force the Portfolio to reinvest the proceeds at a lower rate of interest.
· High Yield Securities (“Junk Bonds”). The Portfolio’s investments in high yield securities expose it to a substantial degree of credit risk. High yield securities may
be issued by companies that are restructuring, are smaller and less creditworthy or are more highly indebted than other companies, and therefore they may have more difficulty making scheduled payments of principal and interest. High yield securities are subject to greater risk of loss of income and principal than higher rated securities and may be considered speculative. High yield securities may experience reduced liquidity, and sudden and substantial decreases in price. An economic downturn affecting an issuer of high yield securities may result in an increased incidence of default. In the event of a default, the Portfolio may incur additional expenses to seek recovery.
· Public Bank Loans. Certain public bank loans are illiquid, meaning the Portfolio may not be able to sell them quickly at a fair price. To the extent a bank loan has been deemed illiquid, it will be subject to the Portfolio’s restrictions on investment in illiquid securities. The secondary market for bank loans may be subject to irregular trading activity, wide bid/ask spreads and extended trade settlement periods. Bank loans are subject to the risk of default in the payment of interest or principal on a loan, which will result in a reduction of income to the Portfolio, and a potential decrease in the Portfolio’s NAV. The risk of default will increase in the event of an economic downturn or a substantial increase in interest rates. Because public bank loans usually rank lower in priority of payment to senior loans, they present a greater degree of investment risk. These bank loans may exhibit greater price volatility as well.
· Mortgage Securities. Investments in mortgage securities are subject to the risk that if interest rates decline, borrowers may pay off their mortgages sooner than expected which may adversely affect the Portfolio’s return. Rising interest rates tend to discourage refinancings, with the result that the average life and volatility of mortgage securities will increase and market price will decrease. Rates of prepayment, faster or slower than expected by the Adviser, could reduce the Portfolio’s yield, increase the volatility of the Portfolio and/or cause a decline in NAV. Certain mortgage-backed securities may be more volatile and less liquid than other traditional types of debt securities. In addition, an unexpectedly high rate of defaults on the mortgages held by a mortgage pool may adversely affect the value of a mortgage-backed security and could result in losses to the Portfolio. Investments in TBAs may give rise to a form of leverage and may cause the Portfolio’s turnover rate to appear higher. Leverage may cause the Portfolio to be more volatile than if the Portfolio had not been leveraged.
· U.S. Government Securities. The U.S. government securities in which the Portfolio invests can be subject to two types of risk: credit risk and interest rate risk. When the general level of interest rates goes up, the prices of most fixed income securities go down. When the general level of interest rates goes down, the prices of most fixed income securities go up. While the credit risk associated with U.S. government securities generally is considered to be minimal, the interest rate risk can be substantial. With respect to U.S. government securities that are not backed by the full faith and credit of the U.S. Government, there is the risk that the U.S. Government will not provide financial support to such U.S. government agencies, instrumentalities or sponsored enterprises if it is not obligated to do so by law.
· Foreign and Emerging Market Securities. Investments in foreign markets entail special risks such as currency, political, economic and market risks. There also may be greater market volatility, less reliable financial information, higher transaction and custody costs, decreased market liquidity and less government and exchange regulation associated with investments in foreign markets. In addition, investments in certain foreign markets, which have historically been considered stable, may become more volatile and subject to increased risk due to ongoing developments and changing conditions in such markets. Moreover, the growing interconnectivity of global economies and financial markets has increased the probability that adverse developments and conditions in one country or region will affect the stability of economies and financial markets in other countries or regions. The risks of investing in emerging market countries are greater than risks associated with investments in foreign developed countries. In addition, the Portfolio’s investments in foreign issuers may be denominated in foreign currencies and therefore, to the extent unhedged, the value of the investment will fluctuate with the U.S. dollar exchange rates. To the extent hedged by the use of foreign currency forward exchange contracts, the precise matching of the foreign currency forward exchange contract amounts and the value of the securities involved will not generally be possible because the future value of such securities in foreign currencies will change as a consequence of market movements in the value of those securities between the date on which the contract is entered into and the date it matures. There is additional risk that such transactions reduce or preclude the opportunity for gain if the value of the currency should move in the direction opposite to the position taken and that foreign currency forward exchange contracts create exposure to currencies in which the Portfolio’s securities are not denominated. The use of foreign currency forward exchange contracts involves the risk of loss from the insolvency or bankruptcy of the counterparty to the contract or the failure of the counterparty to make payments or otherwise comply with the terms of the contract.
· Liquidity. The Portfolio’s investments in restricted and illiquid securities may entail greater risk than investments in publicly traded securities. These securities may be more difficult to sell, particularly in times of market turmoil. Additionally, the market for certain investments deemed liquid at the time of purchase may become illiquid under adverse market or economic conditions. Illiquid securities may be more difficult to value. If the Portfolio is forced to sell an illiquid security to fund redemptions or for other cash needs, it may be forced to sell the security at a loss.
· Derivatives. A derivative instrument often has risks similar to its underlying asset and may have additional risks, including imperfect correlation between the value of the derivative and the underlying asset, risks of default by the counterparty to certain transactions, magnification of losses incurred due to changes in the market value of the securities, instruments, indices or interest rates to which they relate and risks that the transactions may not be liquid. Certain derivative transactions may give rise to a form of leverage. Leverage magnifies the potential for gain and the risk of loss.
Shares of the Portfolio are not bank deposits and are not guaranteed or insured by the Federal Deposit Insurance Corporation or any other government agency.
Performance Information
The bar chart and table below provide some indication of the risks of investing in the Portfolio by showing changes in the Portfolio’s Class I shares’ performance from year-to-year and by showing how the Portfolio’s average annual returns for the past one, five and 10 year periods and since inception compare with those of a broad measure of market performance, as well as an index that represents a group of similar mutual funds, over time. The performance of the other Classes, which is shown in the table below, will differ because the Classes have different ongoing fees. The Portfolio’s returns in the table include the maximum applicable sales charge for Class A and assume you sold your shares at the end of each period (unless otherwise noted). The Portfolio’s past performance, before and after taxes, is not necessarily an indication of how the Portfolio will perform in the future. Updated performance information is available online at www.morganstanley.com/im.
Annual Total Returns—Calendar Years
High Quarter |
| 9/30/09 |
| 4.79 | % |
Low Quarter |
| 9/30/08 |
| -7.10 | % |
Average Annual Total Returns
(for periods ended December 31, 2014)
|
| Past |
| Past |
| Past |
| Since |
|
Class I (commenced operations on 11/14/84) |
|
|
|
|
|
|
|
|
|
Return before Taxes |
| 8.08 | % | 6.30 | % | 3.80 | % | 7.43 | % |
Return after Taxes on Distributions |
| 6.67 | % | 4.68 | % | 2.01 | % | 4.71 | % |
Return after Taxes on Distributions and Sale of Portfolio Shares |
| 4.55 | % | 4.23 | % | 2.21 | % | 4.74 | % |
Class A (commenced operations on 11/7/96) |
|
|
|
|
|
|
|
|
|
Return before Taxes |
| 3.10 | % | 5.09 | % | 3.08 | % | 4.55 | % |
Class L (commenced operations on 4/27/12) |
|
|
|
|
|
|
|
|
|
Return before Taxes |
| 7.56 | % | N/A |
| N/A |
| 4.50 | % |
Barclays U.S. Aggregate Index (reflects no deduction for fees, expenses or taxes)(1) |
| 5.97 | % | 4.45 | % | 4.71 | % | 7.50 | %(3) |
Lipper Core Plus Bond Funds Index (reflects no deduction for taxes)(2) |
| 5.62 | % | 5.62 | % | 5.34 | % | N/A |
|
(1) The Barclays U.S. Aggregate Index tracks the performance of U.S. government agency and Treasury securities, investment-grade corporate debt securities, agency mortgage-backed securities, asset-backed securities and commercial mortgage-backed securities. It is not possible to invest directly in an index.
(2) The Lipper Core Plus Bond Funds Index is an equally weighted performance index of the largest qualifying funds (based on net assets) in the Lipper Core Plus Bond Funds classification. There are currently 30 funds represented in this Index.
(3) Since Inception reflects the inception date of Class I.
The after-tax returns shown in the table above are calculated using the historical highest individual federal marginal income tax rates during the period shown and do not reflect the impact of state and local taxes. After-tax returns for the Portfolio’s other Classes will vary from Class I shares’ returns. Actual after-tax returns depend on the investor’s tax situation and may differ from those shown, and after-tax returns are not relevant to investors who hold their Portfolio shares through tax deferred arrangements such as 401(k) plans or individual retirement accounts. After-tax returns may be higher than before-tax returns due to foreign tax credits and/or an assumed benefit from capital losses that would have been realized had Portfolio shares been sold at the end of the relevant periods, as applicable.
Fund Management
Adviser. Morgan Stanley Investment Management Inc.
Portfolio Managers. The Portfolio is managed by members of the Taxable Fixed Income team. Information about the members jointly and primarily responsible for the day-to-day management of the Portfolio is shown below:
Name |
| Title with Adviser |
| Date Began |
Neil Stone |
| Managing Director |
| January 2011 |
Matthew Dunning |
| Executive Director |
| October 2014 |
Joseph Mehlman |
| Executive Director |
| April 2013 |
Purchase and Sale of Portfolio Shares
The minimum initial investment generally is $5,000,000 for Class I shares and $1,000 for each of Class A and Class L shares of the Portfolio. The minimum initial investment may be waived for certain investments. For more information, please refer to the section of the Prospectus entitled “Shareholder Information—Minimum Investment Amounts.”
Class I, Class A and Class L shares may be purchased or sold on any day the New York Stock Exchange (“NYSE”) is open for business directly from the Fund by mail (c/o Boston Financial Data Services, Inc., P.O. Box 219804, Kansas City, MO 64121-9804), by telephone (1-800-548-7786) or by contacting an authorized third-party, such as a broker-dealer or other financial intermediary that has entered into a selling agreement with the Portfolio’s “Distributor,” Morgan Stanley Distribution, Inc. (each a “Financial Intermediary”). If you sell Class A shares, your net sale proceeds are reduced by the amount of any applicable CDSC. For more information, please refer to the sections of the Prospectus entitled “Shareholder Information—How to Purchase Portfolio Shares” and “—How to Redeem Portfolio Shares.”
Tax Information
The Portfolio intends to make distributions that may be taxed as ordinary income or capital gains, unless you are investing through a tax-deferred arrangement, such as a 401(k) plan or an individual retirement account.
Payments to Broker-Dealers and Other Financial Intermediaries
If you purchase the Portfolio through a Financial Intermediary (such as a bank), the Adviser and/or the Distributor may pay the Financial Intermediary for the sale of Portfolio shares and related services. These payments, which may be significant in amount, may create a conflict of interest by influencing the Financial Intermediary and your salesperson to recommend the Portfolio over another investment. Ask your salesperson or visit your broker-dealer’s or other financial intermediary’s web site for more information.
Morgan Stanley Institutional Fund Trust Prospectus
Portfolio Summary
Corporate Bond Portfolio
Objective
The Corporate Bond Portfolio seeks above-average total return over a market cycle of three to five years.
Fees and Expenses
The table below describes the fees and expenses that you may pay if you buy and hold shares of the Portfolio. For purchases of Class A shares, you may qualify for a sales charge discount if the cumulative net asset value (“NAV”) of Class A shares of the Portfolio purchased in a single transaction, together with the NAV of all Class A shares of other portfolios of Morgan Stanley Institutional Fund Trust (the “Fund”) or Class A shares of other Morgan Stanley Multi-Class Funds (as defined in the section of this Prospectus entitled “Shareholder Information—Exchange Privilege”) held in Related Accounts (as defined in the section of this Prospectus entitled “Shareholder Information—Sales Charges Applicable to Purchases of Class A Shares”), amounts to $25,000 or more. More information about this combined purchase discount and other discounts is available from your financial intermediary and in the section of this Prospectus entitled “Shareholder Information—Sales Charges Applicable to Purchases of Class A Shares.”
Shareholder Fees (fees paid directly from your investment)
|
| Class I |
| Class A |
| Class L |
|
Maximum sales charge (load) imposed on purchases (as a percentage of offering price) |
| None |
| 4.25 | % | None |
|
Maximum deferred sales charge (load) (as a percentage based on the lesser of the offering price or NAV at redemption) |
| None |
| None | † | None |
|
Annual Portfolio Operating Expenses (expenses that you pay each year as a percentage of the value of your investment)
|
| Class I |
| Class A |
| Class L |
|
Advisory Fee |
| 0.375 | % | 0.375 | % | 0.375 | % |
Distribution and/or Shareholder Service (12b-1) Fee |
| None |
| 0.25 | % | 0.50 | % |
Other Expenses |
| 0.75 | % | 0.97 | % | 0.78 | % |
Total Annual Portfolio Operating Expenses* |
| 1.13 | % | 1.60 | %‡ | 1.66 | % |
Fee Waiver and/or Expense Reimbursement* |
| 0.43 | % | 0.55 | %‡ | 0.36 | % |
Total Annual Portfolio Operating Expenses After Fee Waiver and/or Expense Reimbursement* |
| 0.70 | % | 1.05 | %‡ | 1.30 | % |
Example
The example below is intended to help you compare the cost of investing in the Portfolio with the cost of investing in other mutual funds.
The example assumes that you invest $10,000 in the Portfolio, your investment has a 5% return each year and that the Portfolio’s operating expenses remain the same. Although your actual costs may be higher or lower based on these assumptions, your costs would be:
|
| 1 Year |
| 3 Years |
| 5 Years |
| 10 Years |
| ||||
Class I |
| $ | 72 |
| $ | 224 |
| $ | 390 |
| $ | 871 |
|
Class A |
| $ | 528 |
| $ | 745 |
| $ | 980 |
| $ | 1,653 |
|
Class L |
| $ | 132 |
| $ | 412 |
| $ | 713 |
| $ | 1,568 |
|
† Investments that are not subject to any sales charges at the time of purchase are subject to a contingent deferred sales charge (“CDSC”) of 0.50% that will be imposed if you sell your shares within 18 months after the last day of the month of purchase, except for certain specific circumstances. See “Shareholder Information—How to Redeem Shares—CDSC on Class A Shares” for further information about the CDSC waiver categories.
* The Portfolio’s “Adviser,” Morgan Stanley Investment Management Inc., has agreed to reduce its advisory fee and/or reimburse the Portfolio so that Total Annual Portfolio Operating Expenses, excluding certain investment related expenses, taxes, interest and other extraordinary expenses (including litigation), will not exceed 0.70% for Class I, 1.05% for Class A and 1.52% for Class L. The fee waivers and/or expense reimbursements will continue for at least one year or until such time as the Fund’s Board of Trustees acts to discontinue all or a portion of such waivers and/or reimbursements when it deems such action is appropriate.
‡ The Portfolio’s “Distributor,” Morgan Stanley Distribution, Inc., has agreed to waive the 12b-1 fee on Class A shares of the Portfolio to the extent it exceeds 0.15% of the average daily net assets of such shares on an annualized basis. This waiver will continue for at least one year or until such time as the Fund’s Board of Trustees acts to discontinue all or a portion of such waiver when it deems such action is appropriate.
Portfolio Turnover
The Portfolio pays transaction costs when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Portfolio shares are held in a taxable account. These costs, which are not reflected in Total Annual Portfolio Operating Expenses or in the Example, affect the Portfolio’s performance. During the most recent fiscal year, the Portfolio’s portfolio turnover rate was 50% of the average value of its portfolio.
Principal Investment Strategies
Under normal circumstances, at least 80% of the Portfolio’s assets will be invested in corporate bonds. This policy may be changed without shareholder approval; however, you would be notified in writing of any changes. The Portfolio invests primarily in a diversified mix of U.S. dollar-denominated corporate bonds and will ordinarily seek to maintain an average weighted maturity between five and ten years. The Portfolio invests primarily in U.S. corporate bonds that carry an investment grade rating (i.e., generally rated
Baa3 or higher by Moody’s Investors Service, Inc. (“Moody’s”) or BBB- or higher by Standard & Poor’s Ratings Group, a division of The McGraw-Hill Companies, Inc. (“S&P”)) or, if unrated, are determined to be of a comparable quality by the Portfolio’s “Adviser,” Morgan Stanley Investment Management Inc., at the time of purchase.
The Adviser employs a value approach toward fixed income investing and evaluates the relative attractiveness of corporate bonds. The Adviser relies upon value measures to guide its decisions regarding sector and security selection, such as the relative attractiveness of the extra yield offered by securities other than those issued by the U.S. Treasury. The Adviser also measures various types of risk by monitoring interest rates, inflation, the shape of the yield curve, credit risk and prepayment risk.
The Portfolio may also invest in restricted and illiquid securities.
The Portfolio may, but it is not required to, use derivative instruments for a variety of purposes, including hedging, risk management, portfolio management or to earn income. The Portfolio’s use of derivatives may involve the purchase and sale of derivative instruments such as futures, options, swaps and other related instruments and techniques. Derivative instruments used by the Portfolio will be counted towards the 80% policy discussed above to the extent they have economic characteristics similar to the securities included within that policy.
Principal Risks
There is no assurance that the Portfolio will achieve its investment objective and you can lose money investing in this Portfolio. The principal risks of investing in the Portfolio include:
· Fixed Income Securities. Fixed income securities are subject to the risk of the issuer’s inability to meet principal and interest payments on its obligations (i.e., credit risk) and are subject to price volatility resulting from, among other things, interest rate sensitivity, market perception of the creditworthiness of the issuer and general market liquidity (i.e., market risk). The historically low interest rate environment increases the risk associated with rising interest rates, including the potential for periods of volatility and increased redemptions. The Portfolio may face a heightened level of interest rate risk, especially since the Federal Reserve Board has ended its quantitative easing program and may begin to raise rates. Securities with longer durations are likely to be more sensitive to changes in interest rates, generally making them more volatile than securities with shorter durations.
· Liquidity. The Portfolio’s investments in restricted and illiquid securities may entail greater risk than investments in publicly traded securities. These securities may be more difficult to sell, particularly in times of market turmoil. Additionally, the market for certain investments deemed liquid at the time of purchase may become illiquid under adverse market or economic conditions. Illiquid securities may be more difficult to value. If the Portfolio is forced to sell an illiquid security to fund redemptions or for other cash needs, it may be forced to sell the security at a loss.
· Derivatives. A derivative instrument often has risks similar to its underlying asset and may have additional risks, including imperfect correlation between the value of the derivative and the underlying asset, risks of default by the counterparty to certain transactions, magnification of losses incurred due to changes in the market value of the securities, instruments, indices or interest rates to which they relate and risks that the transactions may not be liquid. Certain derivative transactions may give rise to a form of leverage. Leverage magnifies the potential for gain and the risk of loss.
Shares of the Portfolio are not bank deposits and are not guaranteed or insured by the Federal Deposit Insurance Corporation or any other government agency.
Performance Information
The bar chart and table below provide some indication of the risks of investing in the Portfolio by showing changes in the Portfolio’s Class I shares’ performance from year-to-year and by showing how the Portfolio’s average annual returns for the past one, five and 10 year periods and since inception compare with those of a broad measure of market performance, as well as an index that represents a group of similar mutual funds, over time. The performance of the other Classes, which is shown in the table below, will differ because the Classes have different ongoing fees. The Portfolio’s returns in the table include the maximum applicable sales charge for Class A and assume you sold your shares at the end of each period (unless otherwise noted). The Portfolio’s past performance, before and after taxes, is not necessarily an indication of how the Portfolio will perform in the future. Updated performance information is available online at www.morganstanley.com/im.
Annual Total Returns—Calendar Years
High Quarter |
| 9/30/12 |
| 4.29 | % |
Low Quarter |
| 9/30/08 |
| –4.37 | % |
Average Annual Total Returns
(for periods ended December 31, 2014)
|
| Past |
| Past |
| Past |
| Since |
|
|
| One Year |
| Five Years |
| Ten Years |
| Inception |
|
Class I (commenced operations on 8/31/90) |
|
|
|
|
|
|
|
|
|
Return before Taxes |
| 8.08 | % | 6.37 | % | 4.16 | % | 6.53 | % |
Return after Taxes on Distributions |
| 6.73 | % | 5.08 | % | 2.59 | % | 4.27 | % |
Return after Taxes on Distributions and Sale of Portfolio Shares |
| 4.56 | % | 4.41 | % | 2.58 | % | 4.21 | % |
Class A (commenced operations on 5/20/02) |
|
|
|
|
|
|
|
|
|
Return before Taxes |
| 3.15 | % | 5.27 | % | 3.54 | % | 3.96 | % |
Class L (commenced operations on 6/16/08) |
|
|
|
|
|
|
|
|
|
Return before Taxes |
| 7.42 | % | 5.82 | % | N/A |
| 4.87 | % |
Barclays U.S. Corporate Index (reflects no deduction for fees, expenses or taxes)(1) |
| 7.46 | % | 6.49 | % | 5.53 | % | 7.31 | %(3) |
Lipper Corporate Debt Funds BBB-Rated Index (reflects no deduction for taxes)(2) |
| 7.33 | % | 7.02 | % | 5.48 | % | 6.88 | %(3) |
(1) The Barclays U.S. Corporate Index is a broad-based benchmark that measures the investment grade, fixed-rate, taxable, corporate bond market. It is not possible to invest directly in an index.
(2) The Lipper Corporate Debt Funds BBB-Rated Index is an equally weighted performance index of the largest qualifying funds (based on net assets) in the Lipper Corporate Debt Funds BBB-Rated classification. There are currently 30 funds represented in this index.
(3) Since Inception reflects the inception date of Class I.
The after-tax returns shown in the table above are calculated using the historical highest individual federal marginal income tax rates during the period shown and do not reflect the impact of state and local taxes. After-tax returns for the Portfolio’s other Classes will vary from Class I shares’ returns. Actual after-tax returns depend on the investor’s tax situation and may differ from those shown, and after-tax returns are not relevant to investors who hold their Portfolio shares through tax deferred arrangements such as 401(k) plans or individual retirement accounts. After-tax returns may be higher than before-tax returns due to foreign tax credits and/or an assumed benefit from capital losses that would have been realized had Portfolio shares been sold at the end of the relevant periods, as applicable.
Fund Management
Adviser. Morgan Stanley Investment Management Inc.
Portfolio Managers. The Portfolio is managed by members of the Taxable Fixed Income team. Information about the members jointly and primarily responsible for the day-to-day management of the Portfolio is shown below:
Name |
| Title with Adviser |
| Date Began |
Christian G. Roth |
| Managing Director |
| December 2011 |
Joseph Mehlman |
| Executive Director |
| December 2011 |
Purchase and Sale of Portfolio Shares
The minimum initial investment generally is $5,000,000 for Class I shares and $1,000 for each of Class A and Class L shares of the Portfolio. The minimum initial investment may be waived for certain investments. For more information, please refer to the section of the Prospectus entitled “Shareholder Information—Minimum Investment Amounts.”
Class I, Class A and Class L shares may be purchased or sold on any day the New York Stock Exchange (“NYSE”) is open for business directly from the Fund by mail (c/o Boston Financial Data Services, Inc., P.O. Box 219804, Kansas City, MO 64121-9804), by telephone (1-800-548-7786) or by contacting your an authorized third-party, such as a broker-dealer or other financial intermediary that has entered into a selling agreement with the Portfolio’s Distributor (each a “Financial Intermediary”). If you sell Class A shares, your net sale proceeds are reduced by the amount of any applicable CDSC. For more information, please refer to the sections of the Prospectus entitled “Shareholder Information—How to Purchase Portfolio Shares” and “—How to Redeem Portfolio Shares.”
Tax Information
The Portfolio intends to make distributions that may be taxed as ordinary income or capital gains, unless you are investing through a tax-deferred arrangement, such as a 401(k) plan or an individual retirement account.
Payments to Broker-Dealers and Other Financial Intermediaries
If you purchase the Portfolio through a Financial Intermediary (such as a bank), the Adviser and/or the Distributor may pay the Financial Intermediary for the sale of Portfolio shares and related services. These payments, which may be significant in amount, may create a conflict of interest by influencing the Financial Intermediary and your salesperson to recommend the Portfolio over another investment. Ask your salesperson or visit your Financial Intermediary’s web site for more information.
Morgan Stanley Institutional Fund Trust Prospectus
Portfolio Summary
High Yield Portfolio
Objective
The High Yield Portfolio seeks total return.
Fees and Expenses
The table below describes the fees and expenses that you may pay if you buy and hold shares of the Portfolio. For purchases of Class A shares, you may qualify for a sales charge discount if the cumulative net asset value (“NAV”) of Class A shares of the Portfolio purchased in a single transaction, together with the NAV of all Class A shares of other portfolios of Morgan Stanley Institutional Fund Trust (the “Fund”) or Class A shares of other Morgan Stanley Multi-Class Funds (as defined in the section of this Prospectus entitled “Shareholder Information—Exchange Privilege”) held in Related Accounts (as defined in the section of this Prospectus entitled “Shareholder Information—Sales Charges Applicable to Purchases of Class A Shares”), amounts to $25,000 or more. More information about this combined purchase discount and other discounts is available from your financial intermediary and in the section of this Prospectus entitled “Shareholder Information—Sales Charges Applicable to Purchases of Class A Shares.”
Shareholder Fees (fees paid directly from your investment)
|
| Class I |
| Class A |
| Class L |
| Class IS |
|
Maximum sales charge (load) imposed on purchases (as a percentage of offering price) |
| None |
| 4.25 | % | None |
| None |
|
Maximum deferred sales charge (load) (as a percentage based on the lesser of the offering price or NAV at redemption) |
| None |
| None | † | None |
| None |
|
Annual Portfolio Operating Expenses (expenses that you pay each year as a percentage of the value of your investment)
|
| Class I |
| Class A |
| Class L |
| Class IS |
|
Advisory Fee |
| 0.60 | % | 0.60 | % | 0.60 | % | 0.60 | % |
Distribution and/or Shareholder Service (12b-1) Fee |
| None |
| 0.25 | % | 0.50 | % | None |
|
Other Expenses |
| 1.25 | % | 1.21 | % | 1.42 | % | 15.10 | % |
Total Annual Portfolio Operating Expenses* |
| 1.85 | % | 2.06 | % | 2.52 | % | 15.70 | % |
Fee Waiver and/or Expense Reimbursement* |
| 1.10 | % | 1.03 | % | 1.17 | % | 14.98 | % |
Total Annual Portfolio Operating Expenses After Fee Waiver and/or Expense Reimbursement* |
| 0.75 | % | 1.03 | % | 1.35 | % | 0.72 | % |
Example
The example below is intended to help you compare the cost of investing in the Portfolio with the cost of investing in other mutual funds.
The example assumes that you invest $10,000 in the Portfolio, your investment has a 5% return each year and that the Portfolio’s operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
|
| 1 Year |
| 3 Years |
| 5 Years |
| 10 Years |
| ||||
Class I |
| $ | 77 |
| $ | 240 |
| $ | 417 |
| $ | 930 |
|
Class A |
| $ | 526 |
| $ | 739 |
| $ | 969 |
| $ | 1,631 |
|
Class L |
| $ | 137 |
| $ | 428 |
| $ | 739 |
| $ | 1,624 |
|
Class IS |
| $ | 74 |
| $ | 230 |
| $ | 401 |
| $ | 894 |
|
† Investments that are not subject to any sales charges at the time of purchase are subject to a contingent deferred sales charge (“CDSC”) of 0.50% that will be imposed if you sell your shares within 18 months after the last day of the month of purchase, except for certain specific circumstances. See “Shareholder Information—How to Redeem Shares—CDSC on Class A Shares” for further information about the CDSC waiver categories.
* The Portfolio’s “Adviser,” Morgan Stanley Investment Management Inc., has agreed to reduce its advisory fee and/or reimburse the Portfolio so that Total Annual Portfolio Operating Expenses, excluding certain investment related expenses, taxes, interest and other extraordinary expenses (including litigation) will not exceed 0.75% for Class I, 1.10% for Class A, 1.35% for Class L and 0.72% for Class IS. The fee waivers and/or expense reimbursements will continue for at least one year or until such time as the Fund’s Board of Trustees acts to discontinue all or a portion of such waivers and/or reimbursements when it deems such action is appropriate.
Portfolio Turnover
The Portfolio pays transaction costs when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Portfolio shares are held in a taxable account. These costs, which are not reflected in Total Annual Portfolio Operating Expenses or in the Example, affect the Portfolio’s performance. During the most recent fiscal year, the Portfolio’s portfolio turnover rate was 96% of the average value of its portfolio.
Principal Investment Strategies
Under normal circumstances, at least 80% of the Portfolio’s assets will be invested in high yield securities (commonly referred to as “junk bonds”). This policy may be changed without shareholder approval; however, you would be notified in writing of any changes. The Portfolio seeks to achieve its investment objective by investing primarily in high yield securities which are fixed income securities rated below Baa3 by Moody’s Investors Service, Inc. (“Moody’s”) or below BBB- by Standard & Poor’s Rating Group, a division of The McGraw-Hill
Companies, Inc. (“S&P”) or Fitch, Inc. (“Fitch”), or, if unrated, considered by the Adviser to be of equivalent quality. The average maturity of the Portfolio’s investments varies, and there is no limit on the maturity or on the credit quality of any security held by the Portfolio. The Portfolio’s securities may include distressed and defaulted securities and mezzanine investments. The Portfolio also may invest in investment grade fixed income securities, including U.S. and foreign government securities, corporate bonds and collateralized bond obligations. The Portfolio may also invest in preferred securities, equity securities and convertible securities.
The Portfolio’s investment process starts with top-down macroeconomic analysis to assess the optimal positioning of the Portfolio. The team then applies a combination of quantitative and qualitative filters to identify securities that meet the team’s investment criteria in terms of competitive position, franchise value and management quality. The investment team’s credit analysis focuses on financial risk, business risk, management ability and intentions. Valuation analysis is used to narrow the screened investment universe to a pool of investment candidates who are then assessed in order to determine relative valuation. Finally, the Portfolio is constructed with sector allocation driven primarily from bottom-up security selection. Integral to the Portfolio construction process is the measurement and monitoring of market risk, duration and volatility and credit risk through the use of proprietary risk measures and models.
The Portfolio may invest in public bank loans made by banks or other financial institutions. Public bank loans are privately negotiated loans that are not publicly traded for which information about the issuer has been made publicly available. These public bank loans may be rated investment grade or below investment grade.The Portfolio may also invest in restricted and illiquid securities.
The Portfolio may, but it is not required to, use derivative instruments for a variety of purposes, including hedging, risk management, portfolio management or to earn income. The Portfolio’s use of derivatives may involve the purchase and sale of derivative instruments such as futures, options, swaps and other related instruments and techniques. The Portfolio may utilize foreign currency forward exchange contracts, which are also derivatives, in connection with its investments in foreign securities. Derivative instruments used by the Portfolio will be counted towards the 80% policy discussed above to the extent they have economic characteristics similar to the securities included within that policy.
Principal Risks
There is no assurance that the Portfolio will achieve its investment objective and you can lose money investing in this Portfolio. The principal risks of investing in the Portfolio include:
· Fixed Income Securities. Fixed income securities are subject to the risk of the issuer’s inability to meet principal and interest payments on its obligations (i.e., credit risk) and are subject to price volatility resulting from, among other things, interest rate sensitivity, market perception of the creditworthiness of the issuer and general market liquidity (i.e., market risk). The historically low interest rate environment increases the risk associated with rising interest rates, including the potential for periods of volatility and increased redemptions. The Portfolio may face a heightened level of interest rate risk, especially since the Federal Reserve Board has ended its quantitative easing program and may begin to raise rates. The Portfolio is not limited as to the maturities of the securities in which it may invest. Securities with longer durations are likely to be more sensitive to changes in interest rates, generally making them more volatile than securities with shorter durations. Lower rated fixed income securities have greater volatility because there is less certainty that principal and interest payments will be made as scheduled. A portion of the Portfolio’s fixed income securities may be rated below investment grade. To the extent that the Portfolio invests in convertible securities, and the convertible security’s investment value is greater than its conversion value, its price will be likely to increase when interest rates fall and decrease when interest rates rise. If the conversion value exceeds the investment value, the price of the convertible security will tend to fluctuate directly with the price of the underlying security.
· High Yield Securities (“Junk Bonds”). High yield securities offer a higher yield than other, higher rated securities, but they carry a greater degree of risk and are considered speculative by the major credit rating agencies. High yield securities may be issued by companies that are restructuring, are smaller and less creditworthy, or are more highly indebted than other companies. This means that they may have more difficulty making scheduled payments of principal and interest.
Changes in the value of high yield securities are influenced more by changes in the financial and business position of the issuing company than by changes in interest rates when compared to investment grade securities. Lower rated fixed income securities have greater volatility because there is less certainty that principal and interest payments will be made as scheduled. Prices of fixed income securities generally will move in correlation to changes in an issuer’s credit rating and inversely to movements in interest
rates. The Portfolio’s investments in high yield securities expose it to a substantial degree of credit risk. Prices of high yield securities will rise and fall primarily in response to actual or perceived changes in the issuer’s financial health, although changes in market interest rates also will affect prices. High yield securities may experience reduced liquidity and sudden and substantial decreases in price. An economic downturn affecting an issuer of high yield securities may result in an increased incidence of default. In the event of a default, the Portfolio may incur additional expenses to seek recovery.
· Foreign and Emerging Market Securities. Investments in foreign markets entail special risks such as currency, political, economic and market risks. There also may be greater market volatility, less reliable financial information, higher transaction and custody costs, decreased market liquidity and less government and exchange regulation associated with investments in foreign markets. In addition, investments in certain foreign markets, which have historically been considered stable, may become more volatile and subject to increased risk due to ongoing developments and changing conditions in such markets. Moreover, the growing interconnectivity of global economies and financial markets has increased the probability that adverse developments and conditions in one country or region will affect the stability of economies and financial markets in other countries or regions. The risks of investing in emerging market countries are greater than risks associated with investments in foreign developed countries. Certain emerging market or developing countries are among the largest debtors to commercial banks and foreign governments. The issuer or governmental authority that controls the repayment of sovereign debt may not be willing or able to repay the principal and/or pay interest when due in accordance with the terms of such obligations. In addition, the Portfolio’s investments in foreign issuers may be denominated in foreign currencies and therefore, to the extent unhedged, the value of the investment will fluctuate with the U.S. dollar exchange rates. To the extent hedged by the use of foreign currency forward exchange contracts, the precise matching of the foreign currency forward exchange contract amounts and the value of the securities involved will not generally be possible because the future value of such securities in foreign currencies will change as a consequence of market movements in the value of those securities between the date on which the contract is entered into and the date it matures. There is additional risk that such transactions reduce or preclude the opportunity for gain if the value of the currency should move in the direction opposite to the position taken and that foreign currency forward exchange contracts create exposure to currencies in which the Portfolio’s securities are not denominated. The use of foreign currency forward exchange contracts involves the risk of loss from the insolvency or bankruptcy of the counterparty to the contract or the failure of the counterparty to make payments or otherwise comply with the terms of the contract.
· Public Bank Loans. Certain public bank loans are illiquid, meaning the Portfolio may not be able to sell them quickly at a fair price. To the extent a bank loan has been deemed illiquid, it will be subject to the Portfolio’s restrictions on investment in illiquid securities. The secondary market for bank loans may be subject to irregular trading activity, wide bid/ask spreads and extended trade settlement periods. Bank loans are subject to the risk of default in the payment of interest or principal on a loan, which will result in a reduction of income to the Portfolio, and a potential decrease in the Portfolio’s NAV. The risk of default will increase in the event of an economic downturn or a substantial increase in interest rates. Because public bank loans usually rank lower in priority of payment to senior loans, they present a greater degree of investment risk. These bank loans may exhibit greater price volatility as well.
· Equity Securities. In general, prices of equity securities are more volatile than those of fixed income securities. The prices of equity securities fluctuate, and sometimes widely fluctuate, in response to activities specific to the issuer of the security as well as factors unrelated to the fundamental condition of the issuer, including general market, economic and political conditions.
· Preferred Securities. Preferred stock is issued with a fixed par value and pays dividends based on a percentage of that par value at a fixed rate. As with fixed income securities, which also make fixed payments, the market value of preferred stock is sensitive to changes in interest rates. Preferred stock generally decreases in value if interest rates rise and increases in value if interest rates fall.
· Mezzanine Investments. Mezzanine investments are subordinated debt securities that receive payments of interest and principal after other more senior security holders are paid. Mezzanine investments carry the risk that the issuer will not be able to meet its obligations and that the mezzanine investments may lose value.
· �� Distressed and Defaulted Securities. Distressed and defaulted securities are speculative and involve substantial risks in addition to the risks of investing in junk bonds. The Portfolio will generally not receive interest payments on the distressed securities and the principal may also be at risk. These securities may present a substantial risk of default or may be in
default at the time of investment, requiring the Portfolio to incur additional costs. The repayment of defaulted securities is also subject to significant uncertainties.
· Liquidity. The Portfolio’s investments in restricted and illiquid securities may entail greater risk than investments in publicly traded securities. These securities may be more difficult to sell, particularly in times of market turmoil. Additionally, the market for certain investments deemed liquid at the time of purchase may become illiquid under adverse market or economic conditions. Illiquid securities may be more difficult to value. If the Portfolio is forced to sell an illiquid security to fund redemptions or for other cash needs, it may be forced to sell the security at a loss.
· Derivatives. A derivative instrument often has risks similar to its underlying asset and may have additional risks, including imperfect correlation between the value of the derivative and the underlying asset, risks of default by the counterparty to certain transactions, magnification of losses incurred due to changes in the market value of the securities, instruments, indices or interest rates to which they relate and risks that the transactions may not be liquid. Certain derivative transactions may give rise to a form of leverage. Leverage magnifies the potential for gain and the risk of loss.
Shares of the Portfolio are not bank deposits and are not guaranteed or insured by the Federal Deposit Insurance Corporation or any other government agency.
Performance Information
The bar chart and table below provide some indication of the risks of investing in the Portfolio by showing the Portfolio’s Class I shares’ performance from year-to-year and by showing how the Portfolio’s average annual returns for the past one year period and since inception compare with those of a broad measure of market performance, as well as an index that represents a group of similar mutual funds, over time. The performance of the other Classes, which is shown in the table below, will differ because the Classes have different ongoing fees. The Portfolio’s returns in the table include the maximum applicable sales charge for Class A and assume you sold your shares at the end of each period (unless otherwise noted). The Portfolio’s past performance, before and after taxes, is not necessarily an indication of how the Portfolio will perform in the future. Updated performance information is available online at www.morganstanley.com/im.
Annual Total Returns—Calendar Years
High Quarter |
| 3/31/13 |
| 5.35 | % |
Low Quarter |
| 12/31/14 |
| –3.64 | % |
Average Annual Total Returns
(for periods ended December 31, 2014)
|
| Past |
| Since |
|
Class I (commenced operations on 2/7/12) |
|
|
|
|
|
Return before Taxes |
| 1.11 | % | 10.30 | % |
Returns after Taxes on Distributions |
| –1.91 | % | 6.14 | % |
Return after Taxes on Distributions and Sale of Portfolio Shares |
| 0.70 | % | 6.20 | % |
Class A (commenced operations on 2/7/12) |
|
|
|
|
|
Return before Taxes |
| –3.52 | % | 8.35 | % |
Class L (commenced operations on 2/7/12) |
|
|
|
|
|
Return before Taxes |
| 0.61 | % | 9.71 | % |
Class IS (commenced operations on 3/28/14)† |
|
|
|
|
|
Return before Taxes |
| N/A |
| N/A |
|
Barclays U.S. Corporate High Yield Index (reflects no deduction for fees, expenses or taxes)(1) |
| 2.45 | % | 7.34 | %(3) |
Lipper High Current Yield Bond Funds Index (reflects no deduction for taxes)(2) |
| 2.24 | % | 7.07 | %(3) |
† Class IS shares of the Portfolio had not completed a full calendar year of investment operations as of December 31, 2014. Upon completion of a full calendar year of investment operations by the Portfolio, this table will include Class IS shares’ average annual total returns (before taxes).
(1) The Barclays U.S. Corporate High Yield Index measures the market of USD-denominated, non-investment grade, fixed-rate, taxable corporate bonds. Securities are classified as high yield if the middle rating of Moody’s, Fitch, and S&P is Ba1/BB+/BB+ or below. The index excludes emerging market debt. It is not possible to invest directly in an index.
(2) The Lipper High Current Yield Bond Funds Index is an equally weighted performance index of the largest qualifying funds (based on net assets) in the Lipper High Current Yield Bond Funds classification. There are currently 30 funds represented in this Index.
(3) Since Inception reflects the inception date of Class I.
Fund Management
Adviser. Morgan Stanley Investment Management Inc.
Portfolio Managers. The Portfolio is managed by members of the High Yield team. Information about the members jointly and primarily responsible for the day-to-day management of the Portfolio is shown below:
Name |
| Title with Adviser |
| Date Began |
Richard Lindquist |
| Managing Director |
| February 2012 |
Christian Roth |
| Managing Director |
| February 2012 |
Purchase and Sale of Portfolio Shares
The minimum initial investment generally is $5,000,000 for Class I shares and $1,000 for each of Class A and Class L shares of the Portfolio. To purchase Class IS shares, an investor must meet a minimum initial investment of $10,000,000 or be a defined contribution, defined benefit or other employer sponsored employee benefit plan with minimum plan assets of $250,000,000, whether or not qualified under the Internal Revenue Code of 1986, as amended (the “Code”), in each case subject to the discretion of the Adviser. The minimum initial investment may be waived for certain investments. For more information, please refer to the section of the Prospectus entitled “Shareholder Information—Minimum Investment Amounts.”
Class I, Class A, Class L and Class IS shares may be purchased or sold on any day the New York Stock Exchange (“NYSE”) is open for business directly from the Fund by mail (c/o Boston Financial Data Services, Inc., P.O. Box 219804, Kansas City, MO 64121-9804), by telephone (1-800-548-7786) or by contacting an authorized third-party, such as a broker-dealer or other financial intermediary that has entered into a selling agreement with the Portfolio’s “Distributor,” Morgan Stanley Distribution, Inc. (each a “Financial Intermediary”). If you sell Class A shares, your net sale proceeds are reduced by the amount of any applicable CDSC. For more information, please refer to the sections of the Prospectus entitled “Shareholder Information—How to Purchase Portfolio Shares” and “—How to Redeem Portfolio Shares.”
Tax Information
The Portfolio intends to make distributions that may be taxed as ordinary income or capital gains, unless you are investing through a tax-deferred arrangement, such as a 401(k) plan or an individual retirement account.
Payments to Broker-Dealers and Other Financial Intermediaries
If you purchase Class I, Class A or Class L shares of the Portfolio through a Financial Intermediary (such as a bank), the Adviser and/or the Distributor may pay the Financial Intermediary for the sale of Portfolio shares and related services. These payments, which may be significant in amount, may create a conflict of interest by influencing the Financial Intermediary and your salesperson to recommend the Portfolio over another investment. Ask your salesperson or visit your other Financial Intermediary’s web site for more information.
Morgan Stanley Institutional Fund Trust Prospectus
Portfolio Summary
Limited Duration Portfolio
Objective
The Limited Duration Portfolio seeks above-average total return over a market cycle of three to five years.
Fees and Expenses
The table below describes the fees and expenses that you may pay if you buy and hold shares of the Portfolio. For purchases of Class A shares, you may qualify for a sales charge discount if the cumulative net asset value (“NAV”) of Class A shares of the Portfolio purchased in a single transaction, together with the NAV of all Class A shares of other portfolios of Morgan Stanley Institutional Fund Trust (the “Fund”) or Class A shares of other Morgan Stanley Multi-Class Funds (as defined in the section of this Prospectus entitled “Shareholder Information—Exchange Privilege”) held in Related Accounts (as defined in the section of this Prospectus entitled “Shareholder Information—Sales Charges Applicable to Purchases of Class A Shares”), amounts to $25,000 or more. More information about this combined purchase discount and other discounts is available from your financial intermediary and in the section of this Prospectus entitled “Shareholder Information—Sales Charges Applicable to Purchases of Class A Shares.”
Shareholder Fees (fees paid directly from your investment)
|
| Class I |
| Class A |
| Class L |
|
Maximum sales charge (load) imposed on purchases (as a percentage of offering price) |
| None |
| 4.25 | % | None |
|
Maximum deferred sales charge (load) (as a percentage based on the lesser of the offering price or NAV at redemption) |
| None |
| None | † | None |
|
Annual Portfolio Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
|
| Class I |
| Class A |
| Class L |
|
Advisory Fee |
| 0.30 | % | 0.30 | % | 0.30 | % |
Distribution and/or Shareholder Service (12b-1) Fee |
| None |
| 0.25 | % | 0.50 | % |
Other Expenses |
| 0.48 | % | 0.55 | % | 2.68 | % |
Total Annual Portfolio Operating Expenses* |
| 0.78 | % | 1.10 | % | 3.48 | % |
Fee Waiver and/or Expense Reimbursement* |
| 0.25 | % | 0.22 | % | 2.25 | % |
Total Annual Portfolio Operating Expenses After Fee Waiver and/or Expense Reimbursement* |
| 0.53 | % | 0.88 | % | 1.23 | % |
Example
The example below is intended to help you compare the cost of investing in the Portfolio with the cost of investing in other mutual funds.
The example assumes that you invest $10,000 in the Portfolio, your investment has a 5% return each year and that the Portfolio’s operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
|
| 1 Year |
| 3 Years |
| 5 Years |
| 10 Years |
| ||||
Class I |
| $ | 54 |
| $ | 170 |
| $ | 296 |
| $ | 665 |
|
Class A |
| $ | 511 |
| $ | 694 |
| $ | 892 |
| $ | 1,463 |
|
Class L |
| $ | 125 |
| $ | 390 |
| $ | 676 |
| $ | 1,489 |
|
† Investments that are not subject to any sales charges at the time of purchase are subject to a contingent deferred sales charge (“CDSC”) of 0.50% that will be imposed if you sell your shares within 18 months after the last day of the month of purchase, except for certain specific circumstances. See “Shareholder Information—How to Redeem Shares—CDSC on Class A Shares” for further information about the CDSC waiver categories.
* The Portfolio’s “Adviser,” Morgan Stanley Investment Management Inc., has agreed to reduce its advisory fee and/or reimburse the Portfolio so that Total Annual Portfolio Operating Expenses, excluding certain investment related expenses, taxes, interest and other extraordinary expenses (including litigation), will not exceed 0.53% for Class I, 0.88% for Class A and 1.23% for Class L. The fee waivers and/or expense reimbursements will continue for at least one year or until such time as the Fund’s Board of Trustees acts to discontinue all or a portion of such waivers and/or reimbursements when it deems such action is appropriate.
Portfolio Turnover
The Portfolio pays transaction costs when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Portfolio shares are held in a taxable account. These costs, which are not reflected in Total Annual Portfolio Operating Expenses or in the Example, affect the Portfolio’s performance. During the most recent fiscal year, the Portfolio’s portfolio turnover rate was 60% of the average value of its portfolio.
Principal Investment Strategies
Under normal circumstances, at least 80% of the Portfolio’s assets will be invested in fixed income securities. This policy may be changed without shareholder approval; however, you would be notified in writing of any changes. The Portfolio invests primarily in U.S. government securities, investment grade corporate bonds and mortgage- and asset-backed securities. The Portfolio will ordinarily seek to maintain an average duration similar to that of the Barclays 1-3 Year U.S. Government/Credit Index, which generally ranges between zero and three years.
The Adviser employs a value approach toward fixed income investing and makes securities and sector decisions based on the anticipated tradeoff between long-run expected return and risk. The Portfolio seeks value in the fixed income market with only a limited sensitivity to
changes in interest rates. The Adviser relies upon value measures such as the level of real interest rates, yield curve slopes and credit-adjusted spreads to guide its decisions regarding interest rate, country, sector and security exposure. A team of portfolio managers implements strategies based on these types of value measures. Certain team members focus on specific bonds within each sector. Others seek to ensure that the aggregate risk exposures to changes in the level of interest rates and yield spreads match the Portfolio’s objective.
The Portfolio’s mortgage securities may include collateralized mortgage obligations (“CMOs”), stripped mortgage-backed securities (“SMBS”) and inverse floating rate obligations (“inverse floaters”). In addition, the Portfolio may invest in to-be-announced pass-through mortgage securities, which settle on a delayed delivery basis (“TBAs”). The Portfolio may also invest in asset-backed securities.
The Portfolio may invest in securities of foreign issuers, including issuers located in emerging market or developing countries. The securities in which the Portfolio may invest may be denominated in U.S. dollars or in currencies other than U.S. dollars. The Portfolio may also invest in restricted and illiquid securities.
The Portfolio may, but it is not required to, use derivative instruments for a variety of purposes, including hedging, risk management, portfolio management or to earn income. The Portfolio’s use of derivatives may involve the purchase and sale of derivative instruments such as futures, options, swaps and other related instruments and techniques. The Portfolio may utilize foreign currency forward exchange contracts, which are also derivatives, in connection with its investments in foreign securities. Derivative instruments used by the Portfolio will be counted towards the 80% policy discussed above to the extent they have economic characteristics similar to the securities included within that policy.
Principal Risks
There is no assurance that the Portfolio will achieve its investment objective and you can lose money investing in this Portfolio. The principal risks of investing in the Portfolio include:
· Fixed Income Securities. Fixed income securities are subject to the risk of the issuer’s inability to meet principal and interest payments on its obligations (i.e., credit risk) and are subject to price volatility resulting from, among other things, interest rate sensitivity, market perception of the creditworthiness of the issuer and general market liquidity (i.e., market risk). The historically low interest rate environment increases the risk associated with rising interest rates, including the potential for periods of volatility and increased redemptions. The Portfolio may face a heightened level of interest rate risk, especially since the Federal Reserve Board has ended its quantitative easing program and may begin to raise rates. Securities with longer durations are likely to be more sensitive to changes in interest rates, generally making them more volatile than securities with shorter durations. Lower rated fixed income securities have greater volatility because there is less certainty that principal and interest payments will be made as scheduled. A portion of the Portfolio’s fixed income securities may be rated below investment grade.
· Mortgage Securities. Investments in mortgage securities are subject to the risk that if interest rates decline, borrowers may pay off their mortgages sooner than expected which may adversely affect the Portfolio’s return. Rising interest rates tend to discourage refinancings, with the result that the average life and volatility of mortgage securities will increase and market price will decrease. Rates of prepayment, faster or slower than expected by the Adviser, could reduce the Portfolio’s yield, increase the volatility of the Portfolio and/or cause a decline in NAV. Certain mortgage-backed securities may be more volatile and less liquid than other traditional types of debt securities. In addition, an unexpectedly high rate of defaults on the mortgages held by a mortgage pool may adversely affect the value of a mortgage-backed security and could result in losses to the Portfolio. Investments in TBAs may give rise to a form of leverage and may cause the Portfolio’s turnover rate to appear higher. Leverage may cause the Portfolio to be more volatile than if the Portfolio had not been leveraged.
· Asset-Backed Securities. Asset-backed securities involve the risk that various federal and state consumer laws and other legal and economic factors may result in the collateral backing the securities being insufficient to support payment on the securities. Some asset-backed securities also entail prepayment risk, which may vary depending on the type of asset.
· Foreign and Emerging Market Securities. Investments in foreign markets entail special risks such as currency, political, economic and market risks. There also may be greater market volatility, less reliable financial information, higher transaction and custody costs, decreased market liquidity and less government and exchange regulation associated with investments in foreign markets. In addition, investments in certain foreign markets, which have historically been considered stable, may become more volatile and subject to increased risk due to ongoing developments and changing conditions in such markets. Moreover, the growing interconnectivity of global economies and financial markets has increased the probability that adverse developments and conditions in one country or region will affect the stability of economies and financial markets in other countries or regions. The risks of investing in emerging market countries are greater than risks associated with investments in foreign developed countries. In addition,
the Portfolio’s investments in foreign issuers may be denominated in foreign currencies and therefore, to the extent unhedged, the value of the investment will fluctuate with the U.S. dollar exchange rates. To the extent hedged by the use of foreign currency forward exchange contracts, the precise matching of the foreign currency forward exchange contract amounts and the value of the securities involved will not generally be possible because the future value of such securities in foreign currencies will change as a consequence of market movements in the value of those securities between the date on which the contract is entered into and the date it matures. There is additional risk that such transactions reduce or preclude the opportunity for gain if the value of the currency should move in the direction opposite to the position taken and that foreign currency forward exchange contracts create exposure to currencies in which the Portfolio’s securities are not denominated. The use of foreign currency forward exchange contracts involves the risk of loss from the insolvency or bankruptcy of the counterparty to the contract or the failure of the counterparty to make payments or otherwise comply with the terms of the contract.
· Liquidity. The Portfolio’s investments in restricted and illiquid securities may entail greater risk than investments in publicly traded securities. These securities may be more difficult to sell, particularly in times of market turmoil. Additionally, the market for certain investments deemed liquid at the time of purchase may become illiquid under adverse market or economic conditions. Illiquid securities may be more difficult to value. If the Portfolio is forced to sell an illiquid security to fund redemptions or for other cash needs, it may be forced to sell the security at a loss.
· Derivatives. A derivative instrument often has risks similar to its underlying asset and may have additional risks, including imperfect correlation between the value of the derivative and the underlying asset, risks of default by the counterparty to certain transactions, magnification of losses incurred due to changes in the market value of the securities, instruments, indices or interest rates to which they relate and risks that the transactions may not be liquid. Certain derivative transactions may give rise to a form of leverage. Leverage magnifies the potential for gain and the risk of loss.
Shares of the Portfolio are not bank deposits and are not guaranteed or insured by the Federal Deposit Insurance Corporation or any other government agency.
Performance Information
The bar chart and table below provide some indication of the risks of investing in the Portfolio by showing changes in the Portfolio’s Class I shares’ performance from year-to-year and by showing how the Portfolio’s average annual returns for the past one, five and 10 year periods and since inception compare with those of a broad measure of market performance, as well as an index that represents a group of similar mutual funds, over time. The performance of the other Classes, which is shown in the table below, will differ because the Classes have different ongoing fees. The Portfolio’s returns in the table include the maximum applicable sales charge for Class A and assume you sold your shares at the end of each period (unless otherwise noted).The Portfolio’s past performance, before and after taxes, is not necessarily an indication of how the Portfolio will perform in the future. Updated performance information is available online at www.morganstanley.com/im.
Annual Total Returns—Calendar Years
High Quarter |
| 6/30/09 |
| 2.76 | % |
Low Quarter |
| 9/30/08 |
| -8.87 | % |
Average Annual Total Returns
(for periods ended December 31, 2014)
|
| Past |
| Past |
| Past |
| Since |
|
Class I (commenced operations on 3/31/92) |
|
|
|
|
|
|
|
|
|
Return before Taxes |
| 1.37 | % | 2.03 | % | 0.24 | % | 3.08 | % |
Return after Taxes on Distributions |
| 0.77 | % | 1.36 | % | -0.89 | % | 1.49 | % |
Return after Taxes on Distributions and Sale of Portfolio Shares |
| 0.77 | % | 1.30 | % | -0.20 | % | 1.77 | % |
Class A (commenced operations on 9/28/07) |
|
|
|
|
|
|
|
|
|
Return before Taxes |
| -3.40 | % | 0.88 | % | N/A |
| -1.78 | % |
Class L (commenced operations on 4/27/12) |
|
|
|
|
|
|
|
|
|
Return before Taxes |
| 0.56 | % | N/A |
| N/A |
| 0.98 | % |
Barclays 1-3 Year U.S. Government/Credit Index(1) |
| 0.77 | % | 1.41 | % | 2.85 | % | 4.41 | %(3) |
|
| Past |
| Past |
| Past |
| Since |
|
Lipper Short Investment Grade Debt Funds Index (reflects no deduction for taxes)(2) |
| 0.99 | % | 2.33 | % | 2.77 | % | 4.13 | %(3) |
(1) The Barclays 1-3 Year U.S. Government/Credit Index tracks the securities in the 1-3 year maturity range of the Barclays U.S. Government/Credit Index which tracks investment-grade (BBB-/Baa3) or higher publicly traded fixed rate U.S. government, U.S. agency, and corporate issues. It is not possible to invest directly in an index.
(2) The Lipper Short Investment Grade Debt Funds Index is an equally weighted performance index of the largest qualifying funds (based on net assets) in the Lipper Short Investment Grade Debt Funds classification. There are currently 30 funds represented in this Index.
(3) Since Inception reflects the inception date of Class I.
The after-tax returns shown in the table above are calculated using the historical highest individual federal marginal income tax rates during the period shown and do not reflect the impact of state and local taxes. After-tax returns for the Portfolio’s other Classes will vary from Class I shares’ returns. Actual after-tax returns depend on the investor’s tax situation and may differ from those shown, and after-tax returns are not relevant to investors who hold their Portfolio shares through tax deferred arrangements such as 401(k) plans or individual retirement accounts. After-tax returns may be higher than before-tax returns due to foreign tax credits and/or an assumed benefit from capital losses that would have been realized had Portfolio shares been sold at the end of the relevant periods, as applicable.
Fund Management
Adviser. Morgan Stanley Investment Management Inc.
Portfolio Managers. The Portfolio is managed by members of the Taxable Fixed Income team. Information about the members jointly and primarily responsible for the day-to-day management of the Portfolio is shown below:
Name |
| Title with Adviser |
| Date Began |
Neil Stone |
| Managing Director |
| January 2011 |
Matthew Dunning |
| Executive Director |
| October 2014 |
Joseph Mehlman |
| Executive Director |
| May 2008 |
Purchase and Sale of Portfolio Shares
The minimum initial investment generally is $5,000,000 for Class I shares and $1,000 for each of Class A and Class L shares of the Portfolio. The minimum initial investment may be waived for certain investments. For more information, please refer to the section of the Prospectus entitled “Shareholder Information—Minimum Investment Amounts.”
Class I, Class A and Class L shares may be purchased or sold on any day the New York Stock Exchange (“NYSE”) is open for business directly from the Fund by mail (c/o Boston Financial Data Services, Inc., P.O. Box 219804, Kansas City, MO 64121-9804), by telephone (1-800-548-7786) or by contacting an authorized third-party, such as a broker-dealer or other financial intermediary that has entered into a selling agreement with the Portfolio’s “Distributor,” Morgan Stanley Distribution, Inc. (each a “Financial Intermediary”). If you sell Class A shares, your net sale proceeds are reduced by the amount of any applicable CDSC. For more information, please refer to the sections of the Prospectus entitled “Shareholder Information—How to Purchase Portfolio Shares” and “—How to Redeem Portfolio Shares.”
Tax Information
The Portfolio intends to make distributions that may be taxed as ordinary income or capital gains, unless you are investing through a tax-deferred arrangement, such as a 401(k) plan or an individual retirement account.
Payments to Broker-Dealers and Other Financial Intermediaries
If you purchase the Portfolio through a Financial Intermediary (such as a bank), the Adviser and/or the Distributor may pay the Financial Intermediary for the sale of Portfolio shares and related services. These payments, which may be significant in amount, may create a conflict of interest by influencing the financial intermediary and your salesperson to recommend the Portfolio over another investment. Ask your salesperson or visit your Financial Intermediary’s web site for more information.
Morgan Stanley Institutional Fund Trust Prospectus
Portfolio Summary
Strategic Income Portfolio
Objective
The Strategic Income Portfolio seeks total return comprised of income and capital appreciation.
Fees and Expenses
The table below describes the fees and expenses that you may pay if you buy and hold shares of the Portfolio. For purchases of Class A shares, you may qualify for a sales charge discount if the cumulative net asset value (“NAV”) of Class A shares of the Portfolio purchased in a single transaction, together with the NAV of all Class A shares of other portfolios of Morgan Stanley Institutional Fund Trust (the “Fund”) or Class A shares of other Morgan Stanley Multi-Class Funds (as defined in the section of this Prospectus entitled “Shareholder Information—Exchange Privilege”) held in Related Accounts (as defined in the section of this Prospectus entitled “Shareholder Information—Sales Charges Applicable to Purchases of Class A Shares”), amounts to $25,000 or more. More information about this combined purchase discount and other discounts is available from your financial intermediary and in the section of this Prospectus entitled “Shareholder Information—Sales Charges Applicable to Purchases of Class A Shares.”
Shareholder Fees (fees paid directly from your investment)
|
| Class I |
| Class A |
| Class L |
| Class IS |
|
Maximum sales charge (load) imposed on purchases (as a percentage of offering price) |
| None |
| 4.25 | % | None |
| None |
|
Maximum deferred sales charge (load) (as a percentage based on the lesser of the offering price or NAV at redemption) |
| None |
| None | † | None |
| None |
|
Annual Portfolio Operating Expenses (expenses that you pay each year as a percentage of the value of your investment)
|
| Class I |
| Class A |
| Class L |
| Class IS |
|
Advisory Fee |
| 0.40 | % | 0.40 | % | 0.40 | % | 0.40 | % |
Distribution and/or Shareholder Service (12b-1) Fee |
| None |
| 0.25 | % | 0.50 | % | None |
|
Other Expenses‡ |
| 0.72 | % | 0.76 | % | 0.78 | % | 0.65 | % |
Total Annual Portfolio Operating Expenses* |
| 1.12 | % | 1.41 | % | 1.68 | % | 1.05 | % |
Fee Waiver and/or Expense Reimbursement* |
| 0.12 | % | 0.06 | % | 0.08 | % | 0.10 | % |
Total Annual Portfolio Operating Expenses After Fee Waiver and/or Expense Reimbursement* |
| 1.00 | % | 1.35 | % | 1.60 | % | 0.95 | % |
Example
The example below is intended to help you compare the cost of investing in the Portfolio with the cost of investing in other mutual funds.
The example assumes that you invest $10,000 in the Portfolio, your investment has a 5% return each year and that the Portfolio’s operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
|
| 1 Year |
| 3 Years |
| ||
Class I |
| $ | 102 |
| $ | 318 |
|
Class A |
| $ | 557 |
| $ | 834 |
|
Class L |
| $ | 163 |
| $ | 505 |
|
Class IS |
| $ | 97 |
| $ | 303 |
|
† Investments that are not subject to any sales charges at the time of purchase are subject to a contingent deferred sales charge (“CDSC”) of 0.50% that will be imposed if you sell your shares within 18 months after the last day of the month of purchase, except for certain specific circumstances. See “Shareholder Information—How to Redeem Shares—CDSC on Class A Shares” for further information about the CDSC waiver categories.
‡ Other expenses have been estimated for the current fiscal year.
* The Portfolio’s “Adviser,” Morgan Stanley Investment Management Inc., has agreed to reduce its advisory fee and/or reimburse the Portfolio so that Total Annual Portfolio Operating Expenses, excluding certain investment related expenses, taxes, interest and other extraordinary expenses (including litigation), will not exceed 1.00% for Class I, 1.35% for Class A, 1.60% for Class L and 0.95% for Class IS. The fee waivers and/or expense reimbursements will continue for at least one year or until such time as the Fund’s Board of Trustees acts to discontinue all or a portion of such waivers and/or reimbursements when it deems such action is appropriate.
Portfolio Turnover
The Portfolio pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Portfolio shares are held in a taxable account. These costs, which are not reflected in Total Annual Portfolio Operating Expenses or in the Example, affect the Portfolio’s performance. Because the Portfolio had not commenced operations as of the most recent fiscal year end, no portfolio turnover rate is available for the Portfolio.
Principal Investment Strategies
The Portfolio will primarily invest in fixed income securities which the Portfolio’s Adviser and/or “Sub-Adviser,” Morgan Stanley Investment Management Limited, will allocate among asset classes or market segments, which include: (1) corporate securities, (2) residential and commercial mortgage-backed
securities, (3) asset-backed securities, (4) foreign securities, including emerging market securities and (5) U.S. government securities and foreign sovereign debt. The Portfolio may also invest in currency and other derivatives.
The amount of the Portfolio’s assets committed to any one asset class or market segment will fluctuate. The Adviser and/or Sub-Adviser have the flexibility to select any combination of asset classes of the aforementioned groups depending upon market conditions and the current economic environment and, as a result, at any given time the Portfolio’s assets may be invested in certain groups and not others.
The Adviser and/or Sub-Adviser employ a value approach toward fixed income investing. The Adviser and/or Sub-Adviser rely upon value measures to guide their decisions regarding sector, security and country selection, such as the relative attractiveness of the extra yield offered by securities other than those issued by the U.S. Treasury. The Adviser and/or Sub-Adviser also measure various types of risk by monitoring interest rates, inflation, the shape of the yield curve, credit risk, prepayment risk, country risk and currency valuations. The Adviser and/or Sub-Adviser may sell securities or exit positions when they believe that expected risk-adjusted return is low compared to other investment opportunities.
The Portfolio may invest in fixed income securities issued or guaranteed by the U.S. Government, its agencies and instrumentalities or in fixed income securities issued or guaranteed by foreign governments or supranational organizations or any of their instrumentalities, including debt obligations of governmental issuers located in emerging market or developing countries and sovereign debt.
The Portfolio may invest in fixed income securities that are rated below “investment grade” or are not rated, but are of equivalent quality. These fixed income securities are often referred to as “high yield securities” or “junk bonds.” High yield securities are fixed income securities rated below Baa3 by Moody’s Investors Service, Inc. (“Moody’s”) or below BBB- by Standard & Poor’s Rating Group, a division of The McGraw-Hill Companies, Inc. (“S&P”), or if unrated considered by the Adviser and/or Sub-Adviser to be an appropriate investment for the Portfolio.
The corporate securities in which the Portfolio will invest may include fixed income securities issued by corporations located in or outside of the United States, certificates of deposit and bankers’ acceptances issued or guaranteed by, or time deposits maintained at, banks, commercial paper and convertibles securities.
The Portfolio’s mortgage securities may include collateralized mortgage obligations (“CMOs”), stripped mortgage-backed securities (“SMBS”), commercial mortgage-backed securities (“CMBS”) and inverse floating rate obligations (“inverse floaters”). In addition, the Portfolio may invest in to-be-announced pass-through mortgage securities, which settle on a delayed delivery basis (“TBAs”). The Portfolio may also invest in asset-backed securities.
The Portfolio may invest in securities of foreign issuers, including issuers located in emerging market or developing countries. The Portfolio may make global, regional and sector allocations to foreign and emerging markets. The securities in which the Portfolio may invest may be denominated in U.S. dollars or in currencies other than U.S. dollars. The Portfolio may also invest in restricted and illiquid securities.
The Portfolio may, but it is not required to, use derivative instruments for a variety of purposes, including hedging, risk management, portfolio management or to earn income. The Portfolio’s use of derivatives may involve the purchase and sale of derivative instruments such as futures, options, swaps and other related instruments and techniques. The Portfolio may utilize foreign currency forward exchange contracts, which are also derivatives, in connection with its investments in foreign securities. Derivative instruments used by the Portfolio will be counted towards the Portfolio’s exposure to the types of securities listed above to the extent they have economic characteristics similar to such securities.
Principal Risks
There is no assurance that the Portfolio will achieve its investment objective and you can lose money investing in this Portfolio. The principal risks of investing in the Portfolio include:
· Fixed Income Securities. Fixed income securities are subject to the risk of the issuer’s inability to meet principal and interest payments on its obligations (i.e., credit risk) and are subject to price volatility resulting from, among other things, interest rate sensitivity, market perception of the creditworthiness of the issuer and general market liquidity (i.e., market risk). The historically low interest rate environment increases the risk associated with rising interest rates, including the potential for periods of volatility and increased redemptions. The Portfolio may face a heightened level of interest rate risk, especially since the Federal Reserve Board has ended its quantitative easing program and may begin to raise rates. The Portfolio is not limited as to the maturities (when a debt security provides its final payment) or durations (measure of interest rate sensitivity) of the securities in which it may invest. Securities with longer durations are likely to be more sensitive to changes in interest rates, generally making them more volatile than securities with shorter durations. Lower rated
fixed income securities have greater volatility because there is less certainty that principal and interest payments will be made as scheduled. To the extent that the Portfolio invests in convertible securities, and the convertible security’s investment value is greater than its conversion value, its price will be likely to increase when interest rates fall and decrease when interest rates rise. If the conversion value exceeds the investment value, the price of the convertible security will tend to fluctuate directly with the price of the underlying security.
· High Yield Securities (“Junk Bonds”). The Portfolio’s investments in high yield securities expose it to a substantial degree of credit risk. High yield securities may be issued by companies that are restructuring, are smaller and less creditworthy or are more highly indebted than other companies, and therefore they may have more difficulty making scheduled payments of principal and interest. High yield securities may experience reduced liquidity, and sudden and substantial decreases in price. An economic downturn affecting an issuer of high yield securities may result in an increased incidence of default. In the event of a default, the Portfolio may incur additional expenses to seek recovery.
· Mortgage Securities. Investments in mortgage securities are subject to the risk that if interest rates decline, borrowers may pay off their mortgages sooner than expected which may adversely affect the Portfolio’s return. Rising interest rates tend to discourage refinancings, with the result that the average life and volatility of mortgage securities will increase and market price will decrease. Rates of prepayment, faster or slower than expected by the Adviser, could reduce the Portfolio’s yield, increase the volatility of the Portfolio and/or cause a decline in NAV. Certain mortgage-backed securities may be more volatile and less liquid than other traditional types of debt securities. In addition, an unexpectedly high rate of defaults on the mortgages held by a mortgage pool may adversely affect the value of a mortgage-backed security and could result in losses to the Portfolio. The risk of such defaults is generally higher in the case of mortgage pools that include subprime mortgages. Investments in TBAs may give rise to a form of leverage and may cause the Portfolio’s portfolio turnover rate to appear higher. Leverage may cause the Portfolio to be more volatile than if the Portfolio had not been leveraged.
· Asset-Backed Securities. Asset-backed securities involve the risk that various federal and state consumer laws and other legal and economic factors may result in the collateral backing the securities being insufficient to support payment on the securities. Some asset-backed securities also entail prepayment risk, which may vary depending on the type of asset.
· Foreign and Emerging Market Securities. Investments in foreign markets entail special risks such as currency, political, economic and market risks. There also may be greater market volatility, less reliable financial information, higher transaction and custody costs, decreased market liquidity and less government and exchange regulation associated with investments in foreign markets. In addition, investments in certain foreign markets, which have historically been considered stable, may become more volatile and subject to increased risk due to ongoing developments and changing conditions in such markets. Moreover, the growing interconnectivity of global economies and financial markets has increased the probability that adverse developments and conditions in one country or region will affect the stability of economies and financial markets in other countries or regions. The risks of investing in emerging market countries are greater than risks associated with investments in foreign developed countries. In addition, the Portfolio’s investments may be denominated in foreign currencies and therefore, to the extent unhedged, the value of the investment will fluctuate with the U.S. dollar exchange rates. To the extent hedged by the use of foreign currency forward exchange contracts, the precise matching of the foreign currency forward exchange contract amounts and the value of the securities involved will not generally be possible because the future value of such securities in foreign currencies will change as a consequence of market movements in the value of those securities between the date on which the contract is entered into and the date it matures. There is additional risk that such transactions reduce or preclude the opportunity for gain if the value of the currency should move in the direction opposite to the position taken and that foreign currency forward exchange contracts create exposure to currencies in which the Portfolio’s securities are not denominated. The use of foreign currency forward exchange contracts involves the risk of loss from the insolvency or bankruptcy of the counterparty to the contract or the failure of the counterparty to make payments or otherwise comply with the terms of the contract.
· U.S. Government Securities. The U.S. government securities in which the Portfolio invests can be subject to two types of risk: credit risk and interest rate risk. When the general level of interest rates goes up, the prices of most fixed income securities go down. When the general level of interest rates goes down, the prices of most fixed income securities go up. While the credit risk associated with U.S. government securities generally is considered to be minimal, the interest rate risk can be substantial.
With respect to U.S. government securities that are not backed by the full faith and credit of the U.S. Government, there is the risk that the U.S. Government will not provide financial support to such U.S. government agencies, instrumentalities or sponsored enterprises if it is not obligated to do so by law.
· Sovereign Debt Securities. Investing in sovereign debt securities will expose the Portfolio to the direct or indirect consequences of political, social or economic changes in the countries that issue the securities. The issuer or governmental authority that controls the repayment of sovereign debt may not be willing or able to repay the principal and/or pay interest when it becomes due, due to factors such as debt service burden, political constraints, cash flow problems and other national economic factors. In addition, foreign governments may default on their debt securities, which may require holders of such securities to participate in debt rescheduling or additional lending to defaulting governments. Moreover, there is no bankruptcy proceeding by which defaulted sovereign debt may be collected in whole or in part.
· Liquidity. The Portfolio’s investments in restricted and illiquid securities may entail greater risk than investments in publicly traded securities. These securities may be more difficult to sell, particularly in times of market turmoil. Illiquid securities may be more difficult to value. If the Portfolio is forced to sell an illiquid security to fund redemptions or for other cash needs, it may be forced to sell the security at a loss.
· Derivatives. A derivative instrument often has risks similar to its underlying asset and may have additional risks, including imperfect correlation between the value of the derivative and the underlying asset, risks of default by the counterparty to certain transactions, magnification of losses incurred due to changes in the market value of the securities, instruments, indices or interest rates to which they relate and risks that the transactions may not be liquid. Certain derivative transactions may give rise to a form of leverage. Leverage magnifies the potential for gain and the risk of loss.
Shares of the Portfolio are not bank deposits and are not guaranteed or insured by the Federal Deposit Insurance Corporation or any other government agency.
Performance Information
As of the date hereof, the Portfolio has not yet completed a full calendar year of investment operations. Upon the completion of a full calendar year of investment operations by the Portfolio, this section will include charts that show annual total returns, highest and lowest quarterly returns and average annual total returns (before and after taxes) compared to a benchmark index selected for the Portfolio. Performance information for the Portfolio will be available online at www.morganstanley.com/im.
Fund Management
Adviser. Morgan Stanley Investment Management Inc.
Sub-Adviser. Morgan Stanley Investment Management Limited.
Portfolio Managers. The Portfolio is managed by members of the Taxable Fixed Income team. Information about the members jointly and primarily responsible for the day-to-day management of the Portfolio is shown below:
Name |
| Title with Adviser/ |
| Date Began |
Jim Caron |
| Managing Director |
| December 2014 |
Richard Ford |
| Managing Director |
| December 2014 |
Michael Kushma |
| Managing Director |
| December 2014 |
Christian G. Roth |
| Managing Director |
| December 2014 |
Purchase and Sale of Portfolio Shares
Class L shares of the Portfolio are not being offered at this time. You do not currently have the option of purchasing Class L shares.
The minimum initial investment generally is $5,000,000 for Class I shares and $1,000 for each of Class A and Class L shares of the Portfolio. To purchase Class IS shares, an investor must meet a minimum initial investment of $10,000,000 or be a defined contribution, defined benefit or other employer sponsored employee benefit plan with minimum plan assets of $250,000,000, whether or not qualified under the Internal Revenue Code of 1986, as amended (the “Code”), in each case subject to the discretion of the Adviser. The minimum initial investment may be waived for certain investments. For more information, please refer to the section of the Prospectus entitled “Shareholder Information—Minimum Investment Amounts.”
Class I, Class A, Class L and Class IS shares may be purchased or sold on any day the New York Stock Exchange (“NYSE”) is open for business directly from the Fund by mail (c/o Boston Financial Data Services, Inc., P.O. Box 219804, Kansas City, MO 64121-9804), by telephone (1-800-548-7786) or by contacting an authorized third-party, such as a broker-dealer or other financial intermediary that has entered into a selling agreement with the Portfolio’s “Distributor,” Morgan Stanley Distribution, Inc. (each a “Financial
Intermediary”). If you sell Class A shares, your net sale proceeds are reduced by the amount of any applicable CDSC. For more information, please refer to the sections of the Prospectus entitled “Shareholder Information—How to Purchase Portfolio Shares” and “—How to Redeem Portfolio Shares.”
Tax Information
The Portfolio intends to make distributions that may be taxed as ordinary income or capital gains, unless you are investing through a tax-deferred arrangement, such as a 401(k) plan or an individual retirement account.
Payments to Broker-Dealers and Other Financial Intermediaries
If you purchase Class I, Class A or Class L shares of the Portfolio through a Financial Intermediary (such as a bank), the Adviser and/or the Distributor may pay the Financial Intermediary for the sale of Portfolio shares and related services. These payments, which may be significant in amount, may create a conflict of interest by influencing the Financial Intermediary and your salesperson to recommend the Portfolio over another investment. Ask your salesperson or visit your Financial Intermediary’s web site for more information.
Morgan Stanley Institutional Fund Trust Prospectus
Details of the Portfolios
Core Fixed Income Portfolio
Objective
The Core Fixed Income Portfolio seeks above-average total return over a market cycle of three to five years.
Approach
The Portfolio invests primarily in a diversified mix of U.S. dollar-denominated fixed income securities, particularly U.S. government, corporate, municipal, mortgage-backed securities. The Portfolio will ordinarily seek to maintain an average weighted maturity between five and ten years. Although there is no minimum or maximum maturity for any individual security, the Adviser actively manages the interest rate risk of the Portfolio within a range relative to its benchmark. The securities in which the Portfolio invests carry an investment grade rating or, if unrated, are determined to be of a comparable quality by the Adviser at the time of purchase.
The Portfolio’s mortgage securities may include CMOs, CMBS, SMBS, inverse floaters and those purchased on a “TBA” basis. The Portfolio may also invest in securities of foreign issuers, including issuers located in emerging market or developing countries. The securities in which the Portfolio may invest will be denominated in U.S. dollars.
The Portfolio may purchase certain non-publicly traded “restricted” securities. These securities may include “144A” securities which are exempt from registration and that may only be resold to qualified institutional buyers. The Portfolio may invest in illiquid securities, including restricted securities that are illiquid. The Portfolio may invest an unlimited amount in restricted securities that are considered by the Adviser to be liquid and otherwise meet the Portfolio’s investment policies.
The Portfolio may, but it is not required to, use derivative instruments for a variety of purposes, including hedging, risk management, portfolio management or to earn income. Derivatives are financial instruments whose value is based on the value of another underlying asset, interest rate, index or financial instrument. The Portfolio’s use of derivatives may involve the purchase and sale of derivative instruments such as futures, options, swaps and other related instruments and techniques.
Process
The Adviser employs a value approach toward fixed income investing. The Adviser’s research teams evaluate the relative attractiveness among corporate, mortgage and U.S. government securities. The Adviser relies upon value measures to guide its decisions regarding sector and security selection, such as the relative attractiveness of the extra yield offered by securities other than those issued by the U.S. Treasury. The Adviser also measures various types of risk by monitoring interest rates, inflation, the shape of the yield curve, credit risk and prepayment risk. The Adviser’s management team builds an investment portfolio designed to take advantage of its judgment on these factors, while seeking to balance the overall risk of the Portfolio. The Adviser may sell securities or exit positions when it believes that expected risk-adjusted return is low compared to other investment opportunities.
Under normal circumstances, at least 80% of the Portfolio’s assets will be invested in fixed income securities. This policy may be changed without shareholder approval; however, you would be notified in writing of any changes. Derivative instruments used by the Portfolio will be counted toward the 80% policy discussed above to the extent they have economic characteristics similar to the securities included within that policy.
Principal Risks
The Portfolio’s principal investment strategies are subject to the following principal risks:
The Portfolio is subject to various risks that could adversely affect its NAV and total return. It is possible for an investor to lose money by investing in the Portfolio.
The Portfolio is subject to the risks of investing in fixed income securities, which are subject to the risk of the issuer’s inability to meet principal and interest payments on its obligations (i.e., credit risk) and are subject to price volatility resulting from, among other things, interest rate sensitivity, market perception of the creditworthiness of the issuer and general market liquidity (i.e., market risk). The historically low interest rate environment increases the risk associated with rising interest rates, including the potential for periods of volatility and increased redemptions. The Portfolio may face a heightened level of interest rate risk, especially since the Federal Reserve Board has ended its quantitative easing program and may begin to raise rates. Securities with longer durations are likely to be more sensitive to changes in interest rates, generally making them more volatile than securities with shorter durations. Securities with greater spread durations are likely to be more sensitive to changes in spreads between U.S. Treasury and non-Treasury securities, generally making them more volatile than securities with lesser spread durations. Spread duration measures the change in the value of a security (or portfolio) for a given change in the interest rate spread (difference) between Treasury and non-Treasury securities. Prices of fixed income securities generally will move in correlation to
changes in an issuer’s credit rating and inversely to movements in interest rates.
The Portfolio may invest in municipal securities. Municipal securities are fixed income securities issued by local, state and regional governments that provide interest income which is exempt from federal income taxes. However, the Portfolio may purchase municipal securities that pay interest that is subject to the federal alternative minimum tax, and securities on which the interest payments are taxable. General obligation bonds are secured by the issuer’s faith and credit including its taxing power for payment of principal and interest. Revenue bonds, however, are generally payable from a specific revenue source. They are issued for a wide variety of projects such as financing public utilities, hospitals, housing, airports, highways and educational facilities. These bonds involve the risk that the revenues so derived will not be sufficient to meet interest and or principal payment obligations. Municipal notes are issued to meet the short-term funding requirements of local, regional and state governments. The value of municipal securities may be affected by political changes as well as uncertainties related to taxation, legislative developments and the rights of municipal security holders. Municipal securities and issuers of municipal securities may be more susceptible to downgrade, default and bankruptcy as a result of recent periods of economic stress. Municipal securities involve the risk that an issuer may call securities for redemption, which could force the Portfolio to reinvest the proceeds at a lower rate of interest.
Mortgage-backed securities entail prepayment risk, which generally increases during a period of falling interest rates. The Portfolio’s return may be reduced if prepayments occur and the Portfolio has to reinvest at lower interest rates. Prepayment rates can also shorten or extend the average life of the Portfolio’s mortgage securities. Rates of prepayment, faster or slower than anticipated by the Adviser, could result in reduced yields, increased volatility and/or reductions in NAV. Certain mortgage-backed securities may be more volatile and less liquid than other traditional types of debt securities. Mortgage-backed securities are also subject to the risk of delinquencies on mortgage loans underlying such securities and an unexpectedly high rate of defaults on the mortgages held by a mortgage pool may adversely affect the value of a mortgage-backed security and could result in losses to the Portfolio. The risk of such defaults is generally higher in the case of mortgage pools that include sub-prime mortgages. Investments in TBAs may give rise to a form of leverage. Leverage may cause the Portfolio to be more volatile than if the Portfolio had not been leveraged. Further, TBAs may cause the portfolio turnover rate to appear higher.
The U.S. government securities in which the Portfolio invests can be subject to two types of risk: credit risk and interest rate risk. Credit risk refers to the possibility that the issuer of a security will be unable to make interest payments and/or repay the principal on its debt. Interest rate risk refers to fluctuations in the value of a fixed income security resulting from changes in the general level of interest rates. When the general level of interest rates goes up, the prices of most fixed income securities go down. When the general level of interest rates goes down, the prices of most fixed income securities go up. While the credit risk associated with U.S. government securities generally is considered to be minimal, the interest rate risk can be substantial. Thus, a rise in the general level of interest rates may cause the price of the Portfolio’s securities to fall substantially. The Portfolio may purchase U.S. government securities that are not backed by the full faith and credit of the United States. With respect to these U.S. government securities, there is the risk that the U.S. Government will not provide financial support to such U.S. government agencies, instrumentalities or sponsored enterprises if it is not obligated to do so by law. The maximum potential liability of the issuers of some U.S. government securities held by the Portfolio may greatly exceed their current resources, including their legal right to support from the U.S. Treasury. It is possible that these issuers will not have the funds to meet their payment obligations in the future.
Investing in the securities of foreign issuers, particularly those located in emerging market or developing countries, entails the risk that news and events unique to a country or region will affect those markets and their issuers. The value of the Portfolio’s shares may vary widely in response to political and economic factors affecting companies in foreign countries. These same events will not necessarily have an effect on the U.S. economy or similar issuers located in the United States. In addition, investments in certain foreign markets, which have historically been considered stable, may become more volatile and subject to increased risk due to ongoing developments and changing conditions in such markets. Moreover, the growing interconnectivity of global economies and financial markets has increased the probability that adverse developments and conditions in one country or region will affect the stability of economies and financial markets in other countries or regions.
The Portfolio’s investments in restricted and illiquid securities may entail greater risk than investments in publicly traded securities. These securities may be more difficult to sell, particularly in times of market turmoil. Additionally, the market for certain investments deemed liquid at the time of purchase may become illiquid under adverse market or economic conditions. Illiquid securities may be more difficult to value. If the Portfolio is forced to sell an illiquid security to fund redemptions or for other cash needs, it may be forced to sell the security at a loss.
A derivative instrument often has risks similar to its underlying asset and may have additional risks, including imperfect correlation between the value of the derivative and the underlying asset, risks of default by the counterparty to certain transactions, magnification of losses incurred due to changes in the market value of the securities, instruments, indices or interest rates to which the derivative instrument relates, and risks that the transactions may not be liquid. Certain derivative transactions may give rise to a form of leverage. Leverage magnifies the potential for gain and the risk of loss.
Please see “Additional Information about the Portfolios’ Investment Strategies and Related Risks” for further information about these and other risks of investing in the Portfolio.
Morgan Stanley Institutional Fund Trust Prospectus
Details of the Portfolios
Core Plus Fixed Income Portfolio
Objective
The Core Plus Fixed Income Portfolio seeks above-average total return over a market cycle of three to five years.
Approach
The Portfolio invests primarily in a diversified mix of U.S. dollar-denominated investment grade fixed income securities, particularly U.S. government, corporate, municipal, mortgage-backed securities. The Portfolio ordinarily will seek to maintain an average weighted maturity between five and ten years. Although there is no minimum or maximum maturity for any individual security, the Adviser actively manages the interest rate risk of the Portfolio within a range relative to its benchmark.
The Portfolio may invest opportunistically in fixed income securities that are rated below “investment grade” or are not rated, but are of equivalent quality. These fixed income securities are often referred to as “high yield securities” or “junk bonds.” High yield securities are fixed income securities rated below Baa3 by Moody’s or below BBB- by S&P, or if unrated considered by the Adviser to be of equivalent quality. The Portfolio may invest in securities of foreign issuers, including issuers located in emerging market or developing countries. The securities in which the Portfolio may also invest may be denominated in currencies other than U.S. dollars.
The Portfolio may invest in public bank loans made by banks or other financial institutions. Public bank loans are privately negotiated loans that are not publicly traded for which information about the issuer has been made publicly available. These public bank loans may be rated investment grade or below investment grade. The Portfolio’s mortgage securities may include CMOs, CMBS, SMBS, inverse floaters and those purchased on a “TBA” basis. In addition, the Portfolio may invest in convertible securities.
The Portfolio may purchase certain non-publicly traded “restricted” securities. These securities may include “144A” securities which are exempt from registration and that may only be resold to qualified institutional buyers. The Portfolio may invest in illiquid securities, including restricted securities that are illiquid. The Portfolio may invest an unlimited amount in restricted securities that are considered by the Adviser to be liquid and otherwise meet the Portfolio’s investment policies.
The Portfolio may, but it is not required to, use derivative instruments for a variety of purposes, including hedging, risk management, portfolio management or to earn income. Derivatives are financial instruments whose value is based on the value of another underlying asset, interest rate, index or financial instrument. The Portfolio’s use of derivatives may involve the purchase and sale of derivative instruments such as futures, options, swaps and other related instruments and techniques. The Portfolio may utilize foreign currency forward exchange contracts, which are also derivatives, in connection with its investments in foreign securities.
Process
The Adviser employs a value approach toward fixed income investing. The Adviser’s research teams evaluate the relative attractiveness among corporate, mortgage and U.S. government securities, and also may consider the relative attractiveness of non-dollar-denominated issues. The Adviser relies upon value measures to guide its decisions regarding sector, security and country selection, such as the relative attractiveness of the extra yield offered by securities other than those issued by the U.S. Treasury. The Adviser also measures various types of risk by monitoring interest rates, inflation, the shape of the yield curve, credit risk, prepayment risk, country risk and currency valuations. The Adviser’s management team builds an investment portfolio designed to take advantage of its judgment on these factors, while seeking to balance the overall risk of the Portfolio. The Adviser may sell securities or exit positions when it believes that expected risk-adjusted return is low compared to other investment opportunities.
Under normal circumstances, at least 80% of the Portfolio’s assets will be invested in fixed income securities. This policy may be changed without shareholder approval; however, you would be notified in writing of any changes. Derivative instruments used by the Portfolio will be counted toward the 80% policy discussed above to the extent they have economic characteristics similar to the securities included within that policy.
Principal Risks
The Portfolio’s principal investment strategies are subject to the following principal risks:
The Portfolio is subject to various risks that could adversely affect its NAV and total return. It is possible for an investor to lose money by investing in the Portfolio.
The Portfolio is subject to the risks of investing in fixed income securities, which are subject to the risk of the issuer’s inability to meet principal and interest payments on its obligations (i.e., credit risk) and are subject to price volatility resulting from, among other things, interest rate sensitivity, market perception of the
creditworthiness of the issuer and general market liquidity (i.e., market risk). The historically low interest rate environment increases the risk associated with rising interest rates, including the potential for periods of volatility and increased redemptions. The Portfolio may face a heightened level of interest rate risk, especially since the Federal Reserve Board has ended its quantitative easing program and may begin to raise rates. Securities with longer durations are likely to be more sensitive to changes in interest rates, generally making them more volatile than securities with shorter durations. Securities with greater spread durations are likely to be more sensitive to changes in spreads between U.S. Treasury and non-Treasury securities, generally making them more volatile than securities with lesser spread durations. Spread duration measures the change in the value of a security (or portfolio) for a given change in the interest rate spread (difference) between Treasury and non-Treasury securities. Prices of fixed income securities generally will move in correlation to changes in an issuer’s credit rating and inversely to movements in interest rates. Lower rated fixed income securities have greater volatility because there is less certainty that principal and interest payments will be made as scheduled.
To the extent that the Portfolio invests in convertible securities, and the convertible security’s investment value is greater than its conversion value, its price will be likely to increase when interest rates fall and decrease when interest rates rise. If the conversion value exceeds the investment value, the price of the convertible security will tend to fluctuate directly with the price of the underlying security.
The Portfolio may invest in municipal securities. Municipal securities are fixed income securities issued by local, state and regional governments that provide interest income which is exempt from federal income taxes. However, the Portfolio may purchase municipal securities that pay interest that is subject to the federal alternative minimum tax, and securities on which the interest payments are taxable. General obligation bonds are secured by the issuer’s faith and credit including its taxing power for payment of principal and interest. Revenue bonds, however, are generally payable from a specific revenue source. They are issued for a wide variety of projects such as financing public utilities, hospitals, housing, airports, highways and educational facilities. These bonds involve the risk that the revenues so derived will not be sufficient to meet interest and or principal payment obligations. Municipal notes are issued to meet the short-term funding requirements of local, regional and state governments. The value of municipal securities may be affected by political changes as well as uncertainties related to taxation, legislative developments and the rights of municipal security holders. Municipal securities and issuers of municipal securities may be more susceptible to downgrade, default and bankruptcy as a result of recent periods of economic stress. Municipal securities involve the risk that an issuer may call securities for redemption, which could force the Portfolio to reinvest the proceeds at a lower rate of interest.
The Portfolio’s investments in high yield securities expose it to a substantial degree of credit risk. These investments are considered speculative under traditional investment standards. High yield securities range from those for which the prospect for repayment of principal and interest is predominantly speculative to those which are currently in default on principal or interest payments. High yield securities may be issued by companies that are restructuring, are smaller and less creditworthy or are more highly indebted than other companies. This means that they may have more difficulty making scheduled payments of principal and interest. Prices of high yield securities will rise and fall primarily in response to actual or perceived changes in the issuer’s financial health, although changes in market interest rates also will affect prices. High yield securities are subject to greater risk of loss of income and principal than higher rated securities and may be considered speculative. High yield securities may experience reduced liquidity, and sudden and substantial decreases in price. An economic downturn affecting an issuer of high yield securities may result in an increased incidence of default. In the event of a default, the Fund may incur additional expenses to seek recovery.
Certain public bank loans are illiquid, meaning the Portfolio may not be able to sell them quickly at a fair price. Illiquid securities are also difficult to value. To the extent a bank loan has been deemed illiquid, it will be subject to the Portfolio’s restrictions on investment in illiquid securities. The secondary market for bank loans may be subject to irregular trading activity, wide bid/ask spreads and extended trade settlement periods. Bank loans are subject to the risk of default in the payment of interest or principal on a loan, which will result in a reduction of income to the Portfolio, and a potential decrease in the Portfolio’s NAV. The risk of default will increase in the event of an economic downturn or a substantial increase in interest rates. Bank loans that are rated below investment grade share the same risks of other below investment grade securities. Because public
bank loans usually rank lower in priority of payment to senior loans, they present a greater degree of investment risk due to the fact that the cash flow or other property of the borrower securing the bank loan may be insufficient to meet scheduled payments after meeting the senior secured payment obligations of the borrower. These bank loans may exhibit greater price volatility as well.
Mortgage-backed securities entail prepayment risk, which generally increases during a period of falling interest rates. The Portfolio’s return may be reduced if prepayments occur and the Portfolio has to reinvest at lower interest rates. Prepayment rates can also shorten or extend the average life of the Portfolio’s mortgage securities. Rates of prepayment, faster or slower than anticipated by the Adviser, could result in reduced yields, increased volatility and/or reductions in NAV. Certain mortgage-backed securities may be more volatile and less liquid than other traditional types of debt securities. Mortgage-backed securities are also subject to the risk of delinquencies on mortgage loans underlying such securities and an unexpectedly high rate of defaults on the mortgages held by a mortgage pool may adversely affect the value of a mortgage-backed security and could result in losses to the Portfolio. The risk of such defaults is generally higher in the case of mortgage pools that include sub-prime mortgages. Investments in TBAs may give rise to a form of leverage. Leverage may cause the Portfolio to be more volatile than if the Portfolio had not been leveraged. Further, TBAs may cause the portfolio turnover rate to appear higher.
The U.S. government securities in which the Portfolio invests can be subject to two types of risk: credit risk and interest rate risk. Credit risk refers to the possibility that the issuer of a security will be unable to make interest payments and/or repay the principal on its debt. Interest rate risk refers to fluctuations in the value of a fixed income security resulting from changes in the general level of interest rates. When the general level of interest rates goes up, the prices of most fixed income securities go down. When the general level of interest rates goes down, the prices of most fixed income securities go up. While the credit risk associated with U.S. government securities generally is considered to be minimal, the interest rate risk can be substantial. Thus, a rise in the general level of interest rates may cause the price of the Portfolio’s securities to fall substantially. The Portfolio may purchase U.S. government securities that are not backed by the full faith and credit of the United States. With respect to these U.S. government securities, there is the risk that the U.S. Government will not provide financial support to such U.S. government agencies, instrumentalities or sponsored enterprises if it is not obligated to do so by law. The maximum potential liability of the issuers of some U.S. government securities held by the Portfolio may greatly exceed their current resources, including their legal right to support from the U.S. Treasury. It is possible that these issuers will not have the funds to meet their payment obligations in the future.
Investing in the securities of foreign issuers, particularly those located in emerging market or developing countries, entails the risk that news and events unique to a country or region will affect those markets and their issuers. The value of the Portfolio’s shares may vary widely in response to political and economic factors affecting companies in foreign countries. These same events will not necessarily have an effect on the U.S. economy or similar issuers located in the United States. In addition, investments in certain foreign markets, which have historically been considered stable, may become more volatile and subject to increased risk due to ongoing developments and changing conditions in such markets. Moreover, the growing interconnectivity of global economies and financial markets has increased the probability that adverse developments and conditions in one country or region will affect the stability of economies and financial markets in other countries or regions.
The Portfolio’s investments in foreign issuers may be denominated in foreign currencies and therefore, to the extent unhedged, the value of the investment will fluctuate with the U.S. dollar exchange rates. To the extent hedged by the use of foreign currency forward exchange contracts, the precise matching of the foreign currency forward exchange contract amounts and the value of the securities involved will not generally be possible because the future value of such securities in foreign currencies will change as a consequence of market movements in the value of those securities between the date on which the contract is entered into and the date it matures. Furthermore, such transactions reduce or preclude the opportunity for gain if the value of the currency should move in the direction opposite to the position taken. There is additional risk to the extent that foreign currency forward exchange contracts create exposure to currencies in which the Portfolio’s securities are not denominated. Unanticipated changes in currency prices may result in poorer overall performance for the Portfolio than if it had not entered into such contracts. The use of foreign currency forward exchange contracts involves the risk of loss from the insolvency or bankruptcy of the counterparty to the contract or the
failure of the counterparty to make payments or otherwise comply with the terms of the contract.
The Portfolio’s investments in restricted and illiquid securities may entail greater risk than investments in publicly traded securities. These securities may be more difficult to sell, particularly in times of market turmoil. Illiquid securities may be more difficult to value. If the Portfolio is forced to sell an illiquid security to fund redemptions or for other cash needs, it may be forced to sell the security at a loss.
A derivative instrument often has risks similar to its underlying asset and may have additional risks, including imperfect correlation between the value of the derivative and the underlying asset, risks of default by the counterparty to certain transactions, magnification of losses incurred due to changes in the market value of the securities, instruments, indices or interest rates to which they relate, and risks that the transactions may not be liquid. Certain derivative transactions may give rise to a form of leverage. Leverage magnifies the potential for gain and the risk of loss.
Please see “Additional Information about the Portfolios’ Investment Strategies and Related Risks” for further information about these and other risks of investing in the Portfolio.
Morgan Stanley Institutional Fund Trust Prospectus
Details of the Portfolios
Corporate Bond Portfolio
Objective
The Corporate Bond Portfolio seeks above-average total return over a market cycle of three to five years.
Approach
The Portfolio invests primarily in a diversified mix of U.S. dollar-denominated corporate bonds. The Portfolio will ordinarily seek to maintain an average weighted maturity between five and ten years. Although there is no minimum or maximum maturity for any individual security, the Adviser actively manages the interest rate risk of the Portfolio within a range relative to its benchmark. The Portfolio invests primarily in U.S. corporate bonds that carry an investment grade rating (i.e., generally rated Baa3 or higher by Moody’s or BBB- or higher by S&P) or, if unrated, are determined to be of a comparable quality by the Adviser, at the time of purchase. The securities in which the Portfolio may invest will be denominated in U.S. dollars.
The Portfolio may purchase certain non-publicly traded “restricted” securities. These securities may include “144A” securities which are exempt from registration and that may only be resold to qualified institutional buyers. The Portfolio may invest in illiquid securities, including restricted securities that are illiquid. The Portfolio may invest an unlimited amount in restricted securities that are considered by the Adviser to be liquid and otherwise meet the Portfolio’s investment policies.
The Portfolio may, but it is not required to, use derivative instruments for a variety of purposes, including hedging, risk management, portfolio management or to earn income. Derivatives are financial instruments whose value is based on the value of another underlying asset, interest rate, index or financial instrument. The Portfolio’s use of derivatives may involve the purchase and sale of derivative instruments such as futures, options, swaps and other related instruments and techniques.
Process
The Adviser employs a value approach toward fixed income investing. The Adviser’s research teams evaluate the relative attractiveness of corporate bonds. The Adviser relies upon value measures to guide its decisions regarding sector and security selection, such as the relative attractiveness of the extra yield offered by securities other than those issued by the U.S. Treasury. The Adviser also measures various types of risk by monitoring interest rates, inflation, the shape of the yield curve, credit risk and prepayment risk. The Adviser’s management team builds an investment portfolio designed to take advantage of its judgment on these factors, while seeking to balance the overall risk of the Portfolio. The Adviser may sell securities or exit positions when it believes that expected risk-adjusted return is low compared to other investment opportunities.
Under normal circumstances, at least 80% of the Portfolio’s assets will be invested in corporate bonds. This policy may be changed without shareholder approval; however, you would be notified in writing of any changes. Derivative instruments used by the Portfolio will be counted toward the 80% policy discussed above to the extent they have economic characteristics similar to the securities included within that policy.
Principal Risks
The Portfolio’s principal investment strategies are subject to the following principal risks:
The Portfolio is subject to various risks that could adversely affect its NAV and total return. It is possible for an investor to lose money by investing in the Portfolio.
The Portfolio is subject to the risks of investing in fixed income securities, which are subject to the risk of the issuer’s inability to meet principal and interest payments on its obligations (i.e., credit risk) and are subject to price volatility resulting from, among other things, interest rate sensitivity, market perception of the creditworthiness of the issuer and general market liquidity (i.e., market risk). The historically low interest rate environment increases the risk associated with rising interest rates, including the potential for periods of volatility and increased redemptions. The Portfolio may face a heightened level of interest rate risk, especially since the Federal Reserve Board has ended its quantitative easing program and may begin to raise rates. Securities with longer durations are likely to be more sensitive to changes in interest rates, generally making them more volatile than securities with shorter durations. Lower rated fixed income securities have greater volatility because there is less certainty that principal and interest payments will be made as scheduled. Securities with greater spread durations are likely to be more sensitive to changes in spreads between U.S. Treasury and non-Treasury securities, generally making them more volatile than securities with lesser spread durations. Spread duration measures the change in the value of a security (or portfolio) for a given change in the interest rate spread (difference) between U.S. Treasury and non-Treasury securities. Prices of fixed
income securities generally will move in correlation to changes in an issuer’s credit rating and inversely to movements in interest rates.
The Portfolio’s investments in restricted and illiquid securities may entail greater risk than investments in publicly traded securities. These securities may be more difficult to sell, particularly in times of market turmoil. Additionally, the market for certain investments deemed liquid at the time of purchase may become illiquid under adverse market or economic conditions. Illiquid securities may be more difficult to value. If the Portfolio is forced to sell an illiquid security to fund redemptions or for other cash needs, it may be forced to sell the security at a loss.
A derivative instrument often has risks similar to its underlying asset and may have additional risks, including imperfect correlation between the value of the derivative and the underlying asset, risks of default by the counterparty to certain transactions, magnification of losses incurred due to changes in the market value of the securities, instruments, indices or interest rates to which they relate, and risks that the transactions may not be liquid. Certain derivative transactions may give rise to a form of leverage. Leverage magnifies the potential for gain and the risk of loss.
Please see “Additional Information about the Portfolio’s Investment Strategies and Related Risks” for further information about these and other risks of investing in the Portfolio.
Morgan Stanley Institutional Fund Trust Prospectus
Details of the Portfolios
High Yield Portfolio
Objective
The High Yield Portfolio seeks total return.
The Portfolio’s investment objective may be changed by the Fund’s Board of Trustees without shareholder approval, but no change is anticipated. If the Portfolio’s investment objective changes, the Portfolio will notify shareholders and shareholders should consider whether the Portfolio remains an appropriate investment in light of the change.
Approach
The Portfolio seeks to achieve its investment objective by investing primarily in high yield securities (commonly referred to as “junk bonds”). High yield securities are fixed income securities rated below Baa3 by Moody’s or below BBB- by S&P or Fitch, or, if unrated, considered by the Adviser to be of equivalent quality. The average maturity of the Portfolio’s investments varies, and there is no limit on the maturity or on the credit quality of any security held by the Portfolio. The Portfolio’s securities may include distressed and defaulted securities and mezzanine investments. The Portfolio also may invest in investment grade fixed income securities, including U.S. and foreign government securities, corporate bonds and collateralized bond obligations. The Portfolio may also invest in preferred securities, equity securities and convertible securities.
The Portfolio may invest in public bank loans made by banks or other financial institutions. Public bank loans are privately negotiated loans that are not publicly traded for which information about the issuer has been made publicly available. These public bank loans may be rated investment grade or below investment grade.
The Portfolio may purchase certain non-publicly traded “restricted” securities. These securities may include “144A” securities which are exempt from registration and that may only be resold to qualified institutional buyers. The Portfolio may invest in illiquid securities, including restricted securities that are illiquid. The Portfolio may invest an unlimited amount in restricted securities that are considered by the Adviser to be liquid and otherwise meet the Portfolio’s investment policies.
The Portfolio may, but it is not required to, use derivative instruments for a variety of purposes, including hedging, risk management, portfolio management or to earn income. Derivatives are financial instruments whose value is based on the value of another underlying asset, interest rate, index or financial instrument. The Portfolio’s use of derivatives may involve the purchase and sale of derivative instruments such as futures, options, swaps and other related instruments and techniques. The Portfolio may utilize foreign currency forward exchange contracts, which are also derivatives, in connection with its investments in foreign securities.
Process
The Portfolio’s investment process starts with top-down macroeconomic analysis to assess the optimal positioning of the Portfolio. The team then applies a combination of quantitative and qualitative filters to identify securities that meet the team’s investment criteria in terms of competitive position, franchise value and management quality. The investment team’s credit analysis focuses on financial risk, business risk, management ability and intentions. Valuation analysis is used to narrow the screened investment universe to a pool of investment candidates who are then assessed in order to determine relative valuation. Finally, the Portfolio is constructed with sector allocation driven primarily from bottom-up security selection. Integral to the Portfolio construction process is the measurement and monitoring of market risk, duration and volatility and credit risk through the use of proprietary risk measures and models.
Under normal circumstances, at least 80% of the Portfolio’s assets will be invested in high yield securities. This policy may be changed without shareholder approval; however, you would be notified in writing of any changes. Derivative instruments used by the Portfolio will be counted toward the 80% policy discussed above to the extent they have economic characteristics similar to the securities included within that policy.
Principal Risks
The Portfolio’s principal investment strategies are subject to the following principal risks:
The Portfolio is subject to various risks that could adversely affect its NAV and total return. It is possible for an investor to lose money by investing in the Portfolio.
The Portfolio is subject to the risks of investing in fixed income securities, which are subject to the risk of the issuer’s inability to meet principal and interest payments on its obligations (i.e., credit risk) and are subject to price volatility resulting from, among other things, interest rate sensitivity, market perception of the creditworthiness of the issuer and general market liquidity (i.e., market risk). The historically low interest rate environment increases the risk associated with rising
interest rates, including the potential for periods of volatility and increased redemptions. The Portfolio may face a heightened level of interest rate risk, especially since the Federal Reserve Board has ended its quantitative easing program and may begin to raise rates. Securities with longer durations are likely to be more sensitive to changes in interest rates, generally making them more volatile than securities with shorter durations. Securities with greater spread durations are likely to be more sensitive to changes in spreads between U.S. Treasury and non-Treasury securities, generally making them more volatile than securities with lesser spread durations. Spread duration measures the change in the value of a security (or portfolio) for a given change in the interest rate spread (difference) between U.S. Treasury and non-Treasury securities. Prices of fixed income securities generally will move in correlation to changes in an issuer’s credit rating and inversely to movements in interest rates. To the extent that the Portfolio invests in convertible securities, and the convertible security’s investment value is greater than its conversion value, its price will be likely to increase when interest rates fall and decrease when interest rates rise. If the conversion value exceeds the investment value, the price of the convertible security will tend to fluctuate directly with the price of the underlying security.
Investing in the Portfolio may be appropriate for you if you are willing to accept the risks associated with high yield securities. High yield securities offer a higher yield than other, higher rated securities, but they carry a greater degree of risk and are considered speculative by the major credit rating agencies. High yield securities may be issued by companies that are restructuring, are smaller and less creditworthy, or are more highly indebted than other companies. This means that they may have more difficulty making scheduled payments of principal and interest.
Changes in the value of high yield securities are influenced more by changes in the financial and business position of the issuing company than by changes in interest rates when compared to investment grade securities. Lower rated fixed income securities have greater volatility because there is less certainty that principal and interest payments will be made as scheduled. Prices of fixed income securities generally will move in correlation to changes in an issuer’s credit rating and inversely to movements in interest rates. The Portfolio’s investments in high yield securities expose it to a substantial degree of credit risk. High yield securities range from those for which the prospect for repayment of principal and interest is predominantly speculative to those which are currently in default on principal or interest payments. Prices of high yield securities will rise and fall primarily in response to actual or perceived changes in the issuer’s financial health, although changes in market interest rates also will affect prices. High yield securities may experience reduced liquidity and sudden and substantial decreases in price. An economic downturn affecting an issuer of high yield securities may result in an increased incidence of default. In the event of a default, the Fund may incur additional expenses to seek recovery.
Distressed securities are speculative and involve substantial risks in addition to the risks of investing in junk bonds. The Portfolio will generally not receive interest payments on the distressed securities and the repayment of principal may also be at risk. These securities may present a substantial risk of default or may be in default at the time of investment. The repayment of defaulted securities is also subject to significant uncertainties. The Portfolio may incur substantial expenses in seeking recovery upon a default in the payment of principal of or interest on its portfolio holdings. If the portfolio company is forced to reorganize or liquidate, the Portfolio may lose its entire investment or may be required to accept cash or securities with a value less than its original investment. Distressed securities and any securities received in an exchange for such securities may be subject to restrictions on resale.
Certain public bank loans are illiquid, meaning the Portfolio may not be able to sell them quickly at a fair price. Illiquid securities are also difficult to value. To the extent a bank loan has been deemed illiquid, it will be subject to the Portfolio’s restrictions on investment in illiquid securities. The secondary market for bank loans may be subject to irregular trading activity, wide bid/ask spreads and extended trade settlement periods. Bank loans are subject to the risk of default in the payment of interest or principal on a loan, which will result in a reduction of income to the Portfolio, and a potential decrease in the Portfolio’s NAV. The risk of default will increase in the event of an economic downturn or a substantial increase in interest rates. Bank loans that are rated below investment grade share the same risks of other below investment grade securities. Because public bank loans usually rank lower in priority of payment to senior loans, they present a greater degree of investment risk due to the fact that the cash flow or other property of the borrower securing the bank loan may be insufficient to meet scheduled payments after meeting the senior secured payment obligations of the borrower.
These bank loans may exhibit greater price volatility as well.
Investing in the securities of foreign issuers, particularly those located in emerging market or developing countries, entails the risk that news and events unique to a country or region will affect those markets and their issuers. The value of the Portfolio’s shares may vary widely in response to political and economic factors affecting companies in foreign countries. These same events will not necessarily have an affect on the U.S. economy or similar issuers located in the United States. In addition, investments in certain foreign markets, which have historically been considered stable, may become more volatile and subject to increased risk due to ongoing developments and changing conditions in such markets. Moreover, the growing interconnectivity of global economies and financial markets has increased the probability that adverse developments and conditions in one country or region will affect the stability of economies and financial markets in other countries or regions. Certain emerging market or developing countries are among the largest debtors to commercial banks and foreign governments. The issuer or governmental authority that controls the repayment of sovereign debt may not be willing or able to repay the principal and/or pay interest when due in accordance with the terms of such obligations.
The Portfolio’s investments in foreign issuers may be denominated in foreign currencies and therefore, to the extent unhedged, the value of the investment will fluctuate with the U.S. dollar exchange rates. To the extent hedged by use of foreign currency forward exchange contracts, the precise matching of the foreign currency forward exchange contract amounts and the value of the securities involved will not generally be possible because the future value of such securities in foreign currencies will change as a consequence of market movements in the value of those securities between the date on which the contract is entered into and the date it matures. Furthermore, such transactions reduce or preclude the opportunity for gain if the value of the currency should move in the direction opposite to the position taken. There is additional risk to the extent that foreign currency forward exchange contracts create exposure to currencies in which the Portfolio’s securities are not denominated. Unanticipated changes in currency prices may result in poorer overall performance for the Portfolio than if it had not entered into such contracts. The use of foreign currency forward exchange contracts involves the risk of loss from the insolvency or bankruptcy of the counterparty to the contract or the failure of the counterparty to make payments or otherwise comply with the terms of the contract.
The Portfolio’s investments in restricted and illiquid securities may entail greater risk than investments in publicly traded securities. These securities may be more difficult to sell, particularly in times of market turmoil. Additionally, the market for certain investments deemed liquid at the time of purchase may become illiquid under adverse market or economic conditions. Illiquid securities may be more difficult to value. If the Portfolio is forced to sell an illiquid security to fund redemptions or for other cash needs, it may be forced to sell the security at a loss.
The prices of equity securities rise and fall in response to events that affect entire financial markets or industries, and to events that affect particular issuers.
Preferred securities are subject to risks applicable generally to equity securities. In addition, a company’s preferred securities generally pay dividends only after the company makes required payments to holders of its bonds and other debt, so the value of preferred securities will usually react more strongly than bonds and other debt to actual or perceived changes in the company’s financial condition or prospects. Preferred securities may pay fixed or adjustable rates of return. Like fixed income securities, preferred stock generally decreases in value if interest rates rise and increases in value if interest rates fall.
Mezzanine investments are subordinated debt securities that receive payments of interest and principal after other more senior security holders are paid. Mezzanine investments generally are rated below investment grade and frequently are unrated and present many of the same risks as senior loans and non-investment grade bonds. However, unlike senior loans, mezzanine investments are not a senior or secondary secured obligation of the related borrower. They typically are the most subordinated debt obligation in an issuer’s capital structure. Mezzanine investments also may often be unsecured. Mezzanine investments therefore are subject to the additional risk that the cash flow of the related borrower and the property securing the loan may be insufficient to repay as scheduled after giving effect to any senior obligations of the related borrower. Mezzanine investments are also expected to be a highly illiquid investment. Mezzanine investments will be subject to certain additional risks to the extent that such loans may not be protected by financial covenants or limitations upon additional indebtedness. Investment in mezzanine investments is a highly specialized investment
practice that depends more heavily on independent credit analysis than investments in other types of debt obligations.
A derivative instrument often has risks similar to its underlying asset and may have additional risks, including imperfect correlation between the value of the derivative and the underlying asset, risks of default by the counterparty to certain transactions, magnification of losses incurred due to changes in the market value of the securities, instruments, indices or interest rates to which they relate, and risks that the transactions may not be liquid. Certain derivative transactions may give rise to a form of leverage. Leverage magnifies the potential for gain and the risk of loss.
Please see “Additional Information about the Portfolios’ Investment Strategies and Related Risks” for further information about these and other risks of investing in the Portfolio.
Morgan Stanley Institutional Fund Trust Prospectus
Details of the Portfolios
Limited Duration Portfolio
Objective
The Limited Duration Portfolio seeks above-average total return over a market cycle of three to five years.
Approach
The Portfolio invests primarily in U.S. government securities, investment grade corporate bonds, mortgage and asset-backed securities. The Portfolio seeks value in the fixed income market with only a limited sensitivity to changes in interest rates. The Portfolio will ordinarily seek to maintain an average duration similar to that of the Barclays 1-3 Year U.S. Government/Credit Index, which generally ranges between zero and three years, although there is no minimum or maximum for any individual security. The Portfolio may also invest in securities of foreign issuers, including issuers located in emerging market or developing countries. The securities in which the Portfolio may invest may be denominated in U.S. dollars or in currencies other than U.S. dollars.
The Portfolio’s mortgage securities may include CMOs, CMBS, SMBS, inverse floaters and those purchased on a “TBA” basis. The Portfolio may also invest in asset-backed securities.
The Portfolio may purchase certain non-publicly traded “restricted” securities. These securities may include “144A” securities which are exempt from registration and that may only be resold to qualified institutional buyers. The Portfolio may invest in illiquid securities, including restricted securities that are illiquid. The Portfolio may invest an unlimited amount in restricted securities that are considered by the Adviser to be liquid and otherwise meet the Portfolio’s investment policies.
The Portfolio may, but it is not required to, use derivative instruments for a variety of purposes, including hedging, risk management, portfolio management or to earn income. Derivatives are financial instruments whose value is based on the value of another underlying asset, interest rate, index or financial instrument. The Portfolio’s use of derivatives may involve the purchase and sale of derivative instruments such as futures, options, swaps and other related instruments and techniques. The Portfolio may utilize foreign currency forward exchange contracts, which are also derivatives, in connection with its investments in foreign securities.
Process
The Adviser employs a value approach toward fixed income investing. The Adviser makes securities and sector decisions based on the anticipated tradeoff between long-run expected return and risk. The Adviser relies upon value measures such as the level of real interest rates, yield curve slopes and credit-adjusted spreads to guide its decisions regarding interest rate, country, sector and security exposure. A team of portfolio managers implements strategies based on these types of value measures. Certain team members focus on specific bonds within each sector. Others seek to ensure that the aggregate risk exposures to changes in the level of interest rates and yield spreads match the Portfolio’s objective. The Adviser may sell securities when it believes that expected risk-adjusted return is low compared to other investment opportunities.
Under normal circumstances, at least 80% of the Portfolio’s assets will be invested in fixed income securities. This policy may be changed without shareholder approval; however, you would be notified in writing of any changes. Derivative instruments used by the Portfolio will be counted toward the 80% policy discussed above to the extent they have economic characteristics similar to the securities included within that policy.
Principal Risks
The Portfolio’s principal investment strategies are subject to the following principal risks:
The Portfolio is subject to various risks that could adversely affect its NAV and total return. It is possible for an investor to lose money by investing in the Portfolio.
The Portfolio is subject to the risks of investing in fixed income securities, which are subject to the risk of the issuer’s inability to meet principal and interest payments on its obligations (i.e., credit risk) and are subject to price volatility resulting from, among other things, interest rate sensitivity, market perception of the creditworthiness of the issuer and general market liquidity (i.e., market risk). The historically low interest rate environment increases the risk associated with rising interest rates, including the potential for periods of volatility and increased redemptions. The Portfolio may face a heightened level of interest rate risk, especially since the Federal Reserve Board has ended its quantitative easing program and may begin to raise rates. Securities with longer durations are likely to be more sensitive to changes in interest rates, generally making them more volatile than securities with shorter durations. Lower rated fixed income securities have
greater volatility because there is less certainty that principal and interest payments will be made as scheduled. Securities with greater spread durations are likely to be more sensitive to changes in spreads between U.S. Treasury and non-U.S. Treasury securities, generally making them more volatile than securities with lesser spread durations. Spread duration measures the change in the value of a security (or portfolio) for a given change in the interest rate spread (difference) between Treasury and non-Treasury securities. Prices of fixed income securities generally will move in correlation to changes in an issuer’s credit rating and inversely to movements in interest rates.
Mortgage-backed securities entail prepayment risk, which generally increases during a period of falling interest rates. The Portfolio’s return may be reduced if prepayments occur and the Portfolio has to reinvest at lower interest rates. Prepayment rates can also shorten or extend the average life of the Portfolio’s mortgage securities. Rates of prepayment, faster or slower than anticipated by the Adviser, could result in reduced yields, increased volatility and/or reductions in NAV. Certain mortgage-backed securities may be more volatile and less liquid than other traditional types of debt securities. Mortgage-backed securities are also subject to the risk of delinquencies on mortgage loans underlying such securities and an unexpectedly high rate of defaults on the mortgages held by a mortgage pool may adversely affect the value of a mortgage-backed security and could result in losses to the Portfolio. The risk of such defaults is generally higher in the case of mortgage pools that include sub-prime mortgages. Investments in TBAs may give rise to a form of leverage. Leverage may cause the Portfolio to be more volatile than if the Portfolio had not been leveraged. Further, TBAs may cause the portfolio turnover rate to appear higher.
Asset-backed securities are subject to the risk that consumer laws, legal factors or economic and market factors may result in the collateral backing the securities being insufficient to support payment on the securities. Some asset-backed securities also entail prepayment risk, which may vary depending on the type of asset. Securities subject to prepayment risk generally offer less potential for gains when interest rates decline, and a greater potential for loss when interest rates rise. In addition, rising interest rates may cause prepayments to occur at a slower than expected rate, thereby effectively lengthening the maturity of the security and making the security more sensitive to interest rate changes.
Investing in the securities of foreign issuers, particularly those located in emerging market or developing countries, entails the risk that news and events unique to a country or region will affect those markets and their issuers. The value of the Portfolio’s shares may vary widely in response to political and economic factors affecting companies in foreign countries. These same events will not necessarily have an effect on the U.S. economy or similar issuers located in the United States. In addition, investments in certain foreign markets, which have historically been considered stable, may become more volatile and subject to increased risk due to ongoing developments and changing conditions in such markets. Moreover, the growing interconnectivity of global economies and financial markets has increased the probability that adverse developments and conditions in one country or region will affect the stability of economies and financial markets in other countries or regions.
The Portfolio’s investments in foreign issuers may be denominated in foreign currencies and therefore, to the extent unhedged, the value of the investment will fluctuate with the U.S. dollar exchange rates. To the extent hedged by the use of foreign currency forward exchange contracts, the precise matching of the foreign currency forward exchange contract amounts and the value of the securities involved will not generally be possible because the future value of such securities in foreign currencies will change as a consequence of market movements in the value of those securities between the date on which the contract is entered into and the date it matures. Furthermore, such transactions reduce or preclude the opportunity for gain if the value of the currency should move in the direction opposite to the position taken. There is additional risk to the extent that foreign currency forward exchange contracts create exposure to currencies in which the Portfolio’s securities are not denominated. Unanticipated changes in currency prices may result in poorer overall performance for the Portfolio than if it had not entered into such contracts. The use of foreign currency forward exchange contracts involves the risk of loss from the insolvency or bankruptcy of the counterparty to the contract or the failure of the counterparty to make payments or otherwise comply with the terms of the contract.
The Portfolio’s investments in restricted and illiquid securities may entail greater risk than investments in publicly traded securities. These securities may be more difficult to sell, particularly in times of market turmoil. Illiquid securities may be more difficult to value. If the Portfolio is forced to sell an illiquid security to fund redemptions or for other cash needs, it may be forced to sell the security at a loss.
A derivative instrument often has risks similar to its underlying asset and may have additional risks, including imperfect correlation between the value of the derivative and the underlying asset, risks of default by the counterparty to certain transactions, magnification of losses incurred due to changes in the market value of the securities, instruments, indices or interest rates to which they relate, and risks that the transactions may not be liquid. Certain derivative transactions may give rise to a form of leverage. Leverage magnifies the potential for gain and the risk of loss.
Please see “Additional Information about the Portfolios’ Investment Strategies and Related Risks” for further information about these and other risks of investing in the Portfolio.
Morgan Stanley Institutional Fund Trust Prospectus
Details of the Portfolios
Strategic Income Portfolio
Objective
The Strategic Income Portfolio seeks total return comprised of income and capital appreciation.
Approach
The Portfolio will invest primarily in fixed income securities which the Portfolio’s Adviser and/or Sub-Adviser will allocate among asset classes or market segments, which include: (1) corporate securities, (2) residential and commercial mortgage-backed securities, (3) asset-backed securities, (4) foreign securities, including emerging market securities and (5) U.S. government securities and foreign sovereign debt. The Portfolio may also invest in currency and other derivatives.
The amount of the Portfolio’s assets committed to any one asset class or market segment will fluctuate. The Adviser and/or Sub-Adviser have the flexibility to select any combination of asset classes of the aforementioned groups depending upon market conditions and the current economic environment and, as a result, at any given time the Portfolio’s assets may be invested in certain groups and not others.
The Portfolio may invest in fixed income securities issued or guaranteed by the U.S. Government, its agencies and instrumentalities or in fixed income securities issued or guaranteed by foreign governments or supranational organizations or any of their instrumentalities, including debt obligations of governmental issuers located in emerging market or developing countries and sovereign debt.
The Portfolio may invest in fixed income securities that are rated below “investment grade” or are not rated, but are of equivalent quality. These fixed income securities are often referred to as “high yield securities” or “junk bonds.” High yield securities are fixed income securities rated below Baa3 by Moody’s or below BBB- by S&P, or if unrated considered by the Adviser and/or Sub-Adviser to be an appropriate investment for the Portfolio.
The corporate securities in which the Portfolio will invest may include fixed income securities issued by corporations located in or outside of the United States, certificates of deposit and bankers’ acceptances issued or guaranteed by, or time deposits maintained at, banks, commercial paper and convertibles securities.
The Portfolio’s mortgage securities may include CMOs, SMBS, CMBS, inverse floaters and those purchased on a “TBA” basis. The Portfolio may also invest in asset-backed securities.
The Portfolio may invest in securities of foreign issuers, including issuers located in emerging market or developing countries. The Portfolio may make global, regional and sector allocations to foreign and emerging markets. The securities in which the Portfolio may invest may be denominated in U.S. dollars or in currencies other than U.S. dollars.
The Portfolio may also invest in equity securities that the Adviser and/or Sub-Adviser believe will produce income. The equity securities in which the Portfolio may invest include common stock, preferred stock, convertible securities, depositary receipts, rights and warrants.
The Portfolio may purchase certain non-publicly traded “restricted” securities. These securities may include “144A” securities which are exempt from registration and that may only be resold to qualified institutional buyers. The Portfolio may invest in illiquid securities, including restricted securities that are illiquid. The Portfolio may invest an unlimited amount in restricted securities that are considered by the Adviser and/or Sub-Adviser to be liquid and otherwise meet the Portfolio’s investment policies.
The Portfolio may, but it is not required to, use derivative instruments for a variety of purposes, including hedging, risk management, portfolio management or to earn income. Derivatives are financial instruments whose value is based on the value of an underlying asset, interest rate, index or financial instrument. The Portfolio’s use of derivatives may involve the purchase and sale of derivative instruments such as futures, options, swaps and other related instruments and techniques. The Portfolio may utilize foreign currency forward exchange contracts, which are also derivatives, in connection with its investments in foreign securities. Derivative instruments used by the Portfolio will be counted towards the Portfolio’s exposure to the types of securities listed above to the extent they have economic characteristics similar to such securities.
Process
The Adviser and/or Sub-Adviser employ a value approach toward fixed income investing. The Adviser’s and/or Sub-Adviser’s research teams evaluate the relative attractiveness among corporate, mortgage and U.S. government securities, and also may consider the relative attractiveness of non-dollar-denominated issues. The Adviser and/or Sub-Adviser rely upon value measures to guide their decisions regarding sector, security and country selection, such as the relative attractiveness of the extra yield offered by securities other than those issued by the U.S. Treasury. The Adviser and/or Sub-Adviser also measure various types of risk by monitoring interest rates, inflation, the shape of the yield curve, credit risk, prepayment risk, country risk and currency valuations. The Adviser’s and/or Sub-Adviser’s management team builds an investment portfolio designed to take advantage of its judgment on these factors, while seeking to
balance the overall risk of the Portfolio. The Adviser and/or Sub-Adviser may sell securities or exit positions when they believe that expected risk-adjusted return is low compared to other investment opportunities.
Principal Risks
The Portfolio’s principal investment strategies are subject to the following principal risks:
The Portfolio is subject to various risks that could adversely affect its NAV, yield and total return. It is possible for an investor to lose money by investing in the Portfolio.
The Portfolio is subject to the risks of investing in fixed income securities, which are subject to the risk of the issuer’s inability to meet principal and interest payments on its obligations (i.e., credit risk) and are subject to price volatility resulting from, among other things, interest rate sensitivity, market perception of the creditworthiness of the issuer and general market liquidity (i.e., market risk). The historically low interest rate environment increases the risk associated with rising interest rates, including the potential for periods of volatility and increased redemptions. The Portfolio may face a heightened level of interest rate risk, especially since the Federal Reserve Board has ended its quantitative easing program and may begin to raise rates. The Portfolio is not limited as to the maturities (when a debt security provides its final payment) or durations (measure of interest rate sensitivity) of the securities in which it may invest. Securities with longer durations are likely to be more sensitive to changes in interest rates, generally making them more volatile than securities with shorter durations. Securities with greater spread durations are likely to be more sensitive to changes in spreads between U.S. Treasury and non-Treasury securities, generally making them more volatile than securities with lesser spread durations. Spread duration measures the change in the value of a security (or portfolio) for a given change in the interest rate spread (difference) between Treasury and non-Treasury securities. Prices of fixed income securities generally will move in correlation to changes in an issuer’s credit rating and inversely to movements in interest rates. Lower rated fixed income securities have greater volatility because there is less certainty that principal and interest payments will be made as scheduled. To the extent that the Portfolio invests in convertible securities, and the convertible security’s investment value is greater than its conversion value, its price will be likely to increase when interest rates fall and decrease when interest rates rise. If the conversion value exceeds the investment value, the price of the convertible security will tend to fluctuate directly with the price of the underlying security.
The Portfolio’s investments in high yield securities expose it to a substantial degree of credit risk. These investments are considered speculative under traditional investment standards. High yield securities range from those for which the prospect for repayment of principal and interest is predominantly speculative to those which are currently in default on principal or interest payments. High yield securities may be issued by companies that are restructuring, are smaller and less creditworthy or are more highly indebted than other companies. This means that they may have more difficulty making scheduled payments of principal and interest. Prices of high yield securities will rise and fall primarily in response to actual or perceived changes in the issuer’s financial health, although changes in market interest rates also will affect prices. High yield securities may experience reduced liquidity and sudden and substantial decreases in price. An economic downturn affecting an issuer of high yield securities may result in an increased incidence of default. In the event of a default, the Fund may incur additional expenses to seek recovery.
Mortgage-backed securities entail prepayment risk, which generally increases during a period of falling interest rates. The Portfolio’s return may be reduced if prepayments occur and the Portfolio has to reinvest at lower interest rates. Prepayment rates can also shorten or extend the average life of the Portfolio’s mortgage securities. Rates of prepayment, faster or slower than anticipated by the Adviser and/or Sub-Adviser, could result in reduced yields, increased volatility and/or reductions in NAV. Certain mortgage-backed securities may be more volatile and less liquid than other traditional types of debt securities. Mortgage-backed securities are also subject to the risk of delinquencies on mortgage loans underlying such securities and an unexpectedly high rate of defaults on the mortgages held by a mortgage pool may adversely affect the value of a mortgage-backed security and could result in losses to the Portfolio. The risk of such defaults is generally higher in the case of mortgage pools that include subprime mortgages. Investments in TBAs may give rise to a form of leverage and may cause the Portfolio’s portfolio turnover rate to appear higher. Leverage may cause the Portfolio to be more volatile than if the Portfolio had not been leveraged.
Asset-backed securities are subject to the risk that consumer laws, legal factors or economic and market factors may result in the collateral backing the securities being insufficient to support payment on the securities. Some asset-backed securities also entail prepayment risk, which may vary depending on the type of asset. Securities subject to prepayment risk generally offer less potential for gains when interest rates decline, and a greater potential for loss when interest rates rise. In addition, rising interest rates may cause prepayments to occur at a slower than expected rate, thereby effectively
lengthening the maturity of the security and making the security more sensitive to interest rate changes.
Investing in the securities of foreign issuers, particularly those located in emerging market or developing countries, entails the risk that news and events unique to a country or region will affect those markets and their issuers. The value of the Portfolio’s shares may vary widely in response to political and economic factors affecting companies in foreign countries. These same events will not necessarily have an effect on the U.S. economy or similar issuers located in the United States. In addition, investments in certain foreign markets, which have historically been considered stable, may become more volatile and subject to increased risk due to ongoing developments and changing conditions in such markets. Moreover, the growing interconnectivity of global economies and financial markets has increased the probability that adverse developments and conditions in one country or region will affect the stability of economies and financial markets in other countries or regions.
The Portfolio’s investments in foreign issuers may be denominated in foreign currencies and therefore, to the extent unhedged, the value of the investment will fluctuate with the U.S. dollar exchange rates. To the extent hedged by the use of foreign currency forward exchange contracts, the precise matching of the foreign currency forward exchange contract amounts and the value of the securities involved will not generally be possible because the future value of such securities in foreign currencies will change as a consequence of market movements in the value of those securities between the date on which the contract is entered into and the date it matures. Furthermore, such transactions reduce or preclude the opportunity for gain if the value of the currency should move in the direction opposite to the position taken. There is additional risk to the extent that foreign currency forward exchange contracts create exposure to currencies in which the Portfolio’s securities are not denominated. Unanticipated changes in currency prices may result in poorer overall performance for the Portfolio than if it had not entered into such contracts. The use of foreign currency forward exchange contracts involves the risk of loss from the insolvency or bankruptcy of the counterparty to the contract or the failure of the counterparty to make payments or otherwise comply with the terms of the contract.
The U.S. government securities in which the Portfolio invests can be subject to two types of risk: credit risk and interest rate risk. Credit risk refers to the possibility that the issuer of a security will be unable to make interest payments and/or repay the principal on its debt. Interest rate risk refers to fluctuations in the value of a fixed income security resulting from changes in the general level of interest rates. When the general level of interest rates goes up, the prices of most fixed income securities go down. When the general level of interest rates goes down, the prices of most fixed income securities go up. While the credit risk associated with U.S. government securities generally is considered to be minimal, the interest rate risk can be substantial. Thus, a rise in the general level of interest rates may cause the price of the Portfolio’s securities to fall substantially. The Portfolio may purchase U.S. government securities that are not backed by the full faith and credit of the United States. With respect to these U.S. government securities, there is the risk that the U.S. Government will not provide financial support to such U.S. government agencies, instrumentalities or sponsored enterprises if it is not obligated to do so by law. The maximum potential liability of the issuers of some U.S. government securities held by the Portfolio may greatly exceed their current resources, including their legal right to support from the U.S. Treasury. It is possible that these issuers will not have the funds to meet their payment obligations in the future.
Investing in sovereign debt securities will expose the Portfolio to the direct or indirect consequences of political, social or economic changes in the countries that issue the securities. The ability of a foreign sovereign obligor to make timely payments on its external debt obligations will also be strongly influenced by the obligor’s balance of payments, including export performance, its access to international credits and investments, fluctuations in interest rates and the extent of its foreign reserves. Countries such as those in which the Portfolio may invest have historically experienced, and may continue to experience, high rates of inflation, high interest rates, exchange rate or trade difficulties and extreme poverty and unemployment. Many of these countries are also characterized by political uncertainty or instability. The issuer or governmental authority that controls the repayment of sovereign debt may not be willing or able to repay the principal and/or pay interest when it becomes due, due to factors such as debt service burden, political constraints, cash flow problems and other national economic factors. In addition, foreign governments may default on their debt securities, which may require holders of such securities to participate in debt rescheduling or additional lending to defaulting governments. Moreover, there is no bankruptcy proceeding by which defaulted sovereign debt may be collected in whole or in part.
The Portfolio’s investments in restricted and illiquid securities may entail greater risk than investments in publicly traded securities. These securities may be more difficult to sell, particularly in times of market turmoil. Illiquid securities may be more difficult to value. If the Portfolio is forced to sell an illiquid security to fund redemptions or for other cash needs, it may be forced to sell the security at a loss.
A derivative instrument often has risks similar to its underlying asset and may have additional risks, including imperfect correlation between the value of the derivative and the underlying asset, risks of default by the counterparty to certain transactions, magnification of losses incurred due to changes in the market value of the securities, instruments, indices or interest rates to which they relate, and risks that the transactions may not be liquid. Certain derivative transactions may give rise to a form of leverage. Leverage magnifies the potential for gain and the risk of loss.
Please see “Additional Information about the Portfolio’s Investment Strategies and Related Risks” for further information about these and other risks of investing in the Portfolio.
This section discusses additional information relating to the Portfolios’ investment strategies, other types of investments that the Portfolios may make and related risk factors. The Portfolios’ investment practices and limitations are also described in more detail in the Statement of Additional Information (“SAI”), which is incorporated by reference and legally is a part of this Prospectus. For details on how to obtain a copy of the SAI and other reports and information, see the back cover of this Prospectus.
Price Volatility
The value of your investment in a Portfolio is based on the market prices of the securities the Portfolio holds. These prices change daily due to economic and other events that affect markets generally, as well as those that affect particular regions, countries, industries, companies or governments. These price movements, sometimes called volatility, may be greater or less depending on the types of securities the Portfolio owns and the markets in which the securities trade. Over time, equity securities have generally shown gains superior to fixed income securities, although they have tended to be more volatile in the short term. Fixed income securities, regardless of credit quality, also experience price volatility, especially in response to interest rate changes. As a result of price volatility, there is a risk that you may lose money by investing in a Portfolio.
Fixed Income Securities
Fixed income securities are securities that pay a fixed or a variable rate of interest until a stated maturity date. Fixed income securities include U.S. government securities, securities issued by federal or federally sponsored agencies and instrumentalities (“agencies”), corporate bonds and notes, asset-backed securities, mortgage securities, high yield securities (commonly referred to as “junk bonds” or high risk securities), municipal bonds, loan participations and assignments, zero coupon bonds, convertible securities, Eurobonds, Brady Bonds, Yankee Bonds, securities issued or guaranteed by foreign governments or supranational organizations or any of their instrumentalities, repurchase agreements, commercial paper and cash equivalents.
Fixed income securities are subject to the risk of the issuer’s inability to meet principal and interest payments on its obligations (i.e., credit risk) and are subject to price volatility resulting from, among other things, interest rate sensitivity, market perception of the creditworthiness of the issuer and general market liquidity (i.e., market risk). The historically low interest rate environment increases the risk associated with rising interest rates, including the potential for periods of volatility and increased redemptions. A Portfolio may face a heightened level of interest rate risk, especially since the Federal Reserve Board has ended its quantitative easing program and may begin to raise rates. Securities with longer durations are likely to be more sensitive to changes in interest rates, generally making them more volatile than securities with shorter durations. Lower rated fixed income securities have greater volatility because there is less certainty that principal and interest payments will be made as scheduled. Fixed income securities may be called (i.e., redeemed by the issuer) prior to final maturity. If a callable security is called, a Portfolio may have to reinvest the proceeds at a lower rate of interest.
A convertible security is a bond, debenture, note, preferred stock, right, warrant or other security that may be converted into or exchanged for a prescribed amount of common stock or other security of the same or a different issuer or into cash within a particular period of time at a specified price or formula. A convertible security generally entitles the holder to receive interest paid or accrued on debt securities or the dividend paid on preferred stock until the convertible security matures or is redeemed, converted or exchanged. Before conversion, convertible securities generally have characteristics similar to both debt and equity securities. The value of convertible securities tends to decline as interest rates rise and, because of the conversion feature, tends to vary with fluctuations in the market value of the underlying securities. Convertible securities ordinarily provide a stream of income with generally higher yields than those of common stock of the same or similar issuers. Convertible securities generally rank senior to common stock in a corporation’s capital structure but are usually subordinated to comparable nonconvertible securities. Convertible securities generally do not participate directly in any dividend increases or decreases of the underlying securities although the market prices of convertible securities may be affected by any dividend changes or other changes in the underlying securities.
Duration
The average duration of a portfolio of fixed income securities represents its exposure to changing interest rates. A portfolio with a lower average duration generally will experience less price volatility in response to changes in interest rates than a portfolio with a higher average duration.
Municipal Securities
Certain Portfolios may invest in municipal securities. Municipal securities are fixed income securities issued by local, state and regional governments that provide interest income which is exempt from federal income taxes. However, the Portfolios may purchase municipal securities that pay interest that is subject to the federal alternative minimum tax, and securities on which the interest payments are taxable. General obligation bonds are secured by the issuer’s faith and credit including its taxing power for payment of principal and interest.
Additional Information about the Portfolios’ Investment Strategies and Related Risks
Revenue bonds, however, are generally payable from a specific revenue source. They are issued for a wide variety of projects such as financing public utilities, hospitals, housing, airports, highways and educational facilities. These bonds involve the risk that the revenues so derived will not be sufficient to meet interest and or principal payment obligations. Municipal notes are issued to meet the short-term funding requirements of local, regional and state governments. The value of municipal securities may be affected by political changes as well as uncertainties related to taxation, legislative developments and the rights of municipal security holders. Municipal securities involve the risk that an issuer may call securities for redemption, which could force a Portfolio to reinvest the proceeds at a lower rate of interest.
High Yield Securities
Fixed income securities that are not investment grade are commonly referred to as “junk bonds” or high yield, high risk securities. These securities offer a higher yield than other higher rated securities, but they carry a greater degree of risk. High yield securities are subject to greater risk of loss of income and principal than higher rated securities and may be considered speculative by the major credit rating agencies. High yield securities may be issued by companies that are restructuring, are smaller and less creditworthy or are more highly indebted than other companies. This means that they may have more difficulty making scheduled payments of principal and interest. Changes in the value of high yield securities are influenced more by changes in the financial and business position of the issuing company than by changes in interest rates when compared to investment grade securities.
Mortgage Securities
Mortgage securities are fixed income securities representing an interest in a pool of underlying mortgage loans. They are sensitive to changes in interest rates, but may respond to these changes differently from other fixed income securities due to the possibility of prepayment of the underlying mortgage loans. As a result, it may not be possible to determine in advance the actual maturity date or average life of a mortgage security. Rising interest rates tend to discourage refinancings, with the result that the average life and volatility of the security will increase and its market price will decrease. When interest rates fall, however, mortgage securities may not gain as much in market value because additional mortgage prepayments must be reinvested at lower interest rates. Prepayment risk may make it difficult to calculate the average maturity of a portfolio of mortgage securities and, therefore, to assess the volatility risk of that portfolio.
Certain Portfolios may invest in mortgage securities that are issued or guaranteed by the U.S. government, its agencies or instrumentalities. These securities are either direct obligations of the U.S. government or the issuing agency or instrumentality has the right to borrow from the U.S. Treasury to meet its obligations although it is not legally required to extend credit to the agency or instrumentality. Certain of these mortgage securities purchased by a Portfolio, such as those issued by the Government National Mortgage Association and the Federal Housing Administration, are backed by the full faith and credit of the United States. Other of these mortgage securities purchased by a Portfolio, such as those issued by the Federal National Mortgage Association (“Fannie Mae”) and Federal Home Loan Mortgage Corporation (“Freddie Mac”), are not backed by the full faith and credit of the United States and there is a risk that the U.S. Government will not provide financial support to these agencies if it is not obligated to do so by law. In September 2008, the U.S. Treasury Department announced that the U.S. Government would be taking over Fannie Mae and Freddie Mac and placing the companies into a conservatorship. In addition, the U.S. Treasury announced additional steps that it intended to take with respect to the debt and mortgage-backed securities issued by Fannie Mae and Freddie Mac in order to support the conservatorship. Fannie Mae and Freddie Mac are continuing to operate as going concerns while in conservatorship and each remains liable for all of its respective obligations, including its guaranty obligations, associated with its mortgage-backed securities. No assurance can be given that these initiatives will be successful. The maximum potential liability of the issuers of some of the mortgage securities held by the Portfolio may greatly exceed their current resources, including their legal right to support from the U.S. Treasury. It is possible that these issuers will not have the funds to meet their payment obligations in the future.
To the extent a Portfolio invests in mortgage securities offered by non-governmental issuers, such as commercial banks, savings and loan institutions, private mortgage insurance companies, mortgage bankers and other secondary market issuers, the Portfolio may be subject to additional risks. Pools created by such non-governmental issuers generally offer a higher rate of interest than government and government-related pools because there are no direct or indirect government or agency guarantees of payments in such pools. However, timely
payment of interest and principal of these pools may be supported by various forms of private insurance or guarantees, including individual loan, title, pool and hazard insurance and letters of intent. The insurance and guarantees are issued by governmental entities, private insurers and the mortgage poolers. There can be no assurance that the private insurers or guarantors can meet their obligations under the insurance policies or guarantee arrangements. Mortgage pools underlying mortgage securities offered by non-governmental issuers more frequently include second mortgages, high loan-to-value ratio mortgages and manufactured housing loans, in addition to commercial mortgages and other types of mortgages where a government or government-sponsored entity guarantee is not available. An unexpectedly high rate of defaults on the mortgages held by a mortgage pool may adversely affect the value of a mortgage-backed security and could result in losses to a Portfolio. The risk of such defaults is generally higher in the case of mortgage pools that include subprime mortgages. Subprime mortgages refer to loans made to borrowers with weakened credit histories or with a lower capacity to make timely payments on their mortgages. For these reasons, the loans underlying these securities have had in many cases higher default rates than those loans that meet government underwriting requirements. The risk of non-payment is greater for mortgage-related securities that are backed by loans that were originated under weak underwriting standards, including loans made to borrowers with limited means to make repayment. A level of risk exists for all loans, although, historically, the poorest performing loans have been those classified as subprime. Other types of privately issued mortgage-related securities, such as those classified as pay-option adjustable rate or Alt-A, have also performed poorly. Even loans classified as prime have experienced higher levels of delinquencies and defaults.
Collateralized mortgage obligations (“CMOs”) are debt obligations collateralized by mortgage loans or mortgage pass-through securities (collectively “Mortgage Assets”). Payments of principal and interest on the Mortgage Assets and any reinvestment income are used to make payments on the CMOs. CMOs are issued in multiple classes. Each class has a fixed or floating rate and a stated maturity or final distribution date. The principal and interest on the Mortgage Assets may be allocated among the classes in a number of different ways. Certain classes will, as a result of the allocation, have more predictable cash flows than others. As a general matter, the more predictable the cash flow, the lower the yield relative to other Mortgage Assets. The less predictable the cash flow, the higher the yield and the greater the risk. A Portfolio may invest in any class of CMO, including classes that vary inversely with interest rates and may be more volatile and sensitive to prepayment rates.
The principal and interest on the Mortgage Assets comprising a CMO may be allocated among the several classes of a CMO in many ways. The general goal in allocating cash flows on Mortgage Assets to the various classes of a CMO is to create certain tranches on which the expected cash flows have a higher degree of predictability than do the underlying Mortgage Assets. As a general matter, the more predictable the cash flow is on a particular CMO tranche, the lower the anticipated yield on that tranche at the time of issue will be relative to the prevailing market yields on the Mortgage Assets. As part of the process of creating more predictable cash flows on certain tranches of a CMO, one or more tranches generally must be created that absorb most of the changes in the cash flows on the underlying Mortgage Assets. The yields on these tranches are generally higher than prevailing market yields on other mortgage related securities with similar average lives. Principal prepayments on the underlying Mortgage Assets may cause the CMOs to be retired substantially earlier than their stated maturities or final distribution dates. Because of the uncertainty of the cash flows on these tranches, the market prices and yields of these tranches are more volatile and may increase or decrease in value substantially with changes in interest rates and/or the rates of prepayment. Due to the possibility that prepayments (on home mortgages and other collateral) will alter the cash flow on CMOs, it is not possible to determine in advance the final maturity date or average life. Faster prepayment will shorten the average life and slower prepayments will lengthen it. In addition, if the collateral securing CMOs or any third-party guarantees are insufficient to make payments, a Portfolio could sustain a loss.
Stripped mortgage-backed securities (“SMBS”) are derivative multi-class mortgage securities. SMBS may be issued by agencies or instrumentalities of the U.S. government, or by private originators. A common type of SMBS will have one class receiving some of the interest and most of the principal from the mortgage assets, while the other class receives most of the interest and the remainder of the principal. In the most extreme case, one class will receive all of the interest (the interest-only or “IO” class), while the other class will receive all of the principal (the principal-only or “PO” class). Investments in each class of SMBS are extremely sensitive to changes in interest rates. IOs tend to decrease in value substantially if interest rates decline
and prepayment rates become more rapid. POs tend to decrease in value substantially if interest rates increase and the rate of prepayment decreases. If a Portfolio invests in SMBS and interest rates move in a manner not anticipated by management, it is possible that a Portfolio could lose all or substantially all of its investment.
CMBS are generally multi-class or pass-through securities backed by a mortgage loan or a pool of mortgage loans secured by commercial property, such as industrial and warehouse properties, office buildings, retail space and shopping malls, multifamily properties and cooperative apartments. The commercial mortgage loans that underlie CMBS are generally not amortizing or not fully amortizing. That is, at their maturity date, repayment of their remaining principal balance or “balloon” is due and is repaid through the attainment of an additional loan or sale of the property. An extension of a final payment on commercial mortgages will increase the average life of the CMBS, generally resulting in lower yield for discount bonds and a higher yield for premium bonds.
CMBS are subject to credit risk and prepayment risk. Although prepayment risk is present, it is of a lesser degree in the CMBS market than in the residential mortgage market; commercial real estate property loans often contain provisions which substantially reduce the likelihood that such securities will be prepaid (e.g., significant prepayment penalties on loans and, in some cases, prohibition on principal payments for several years following origination).
Inverse floating rate obligations are obligations which pay interest at rates that vary inversely with changes in market rates of interest. Because the interest rate paid to holders of such obligations is generally determined by subtracting a variable or floating rate from a predetermined amount, the interest rate paid to holders of such obligations will decrease as such variable or floating rate increases and increase as such variable or floating rate decreases.
Like most other fixed income securities, the value of inverse floaters will decrease as interest rates increase. They are more volatile, however, than most other fixed-income securities because the coupon rate on an inverse floater typically changes at a multiple of the change in the relevant index rate. Thus, any rise in the index rate (as a consequence of an increase in interest rates) causes a correspondingly greater drop in the coupon rate of an inverse floater while a drop in the index rate causes a correspondingly greater increase in the coupon of an inverse floater. Some inverse floaters may also increase or decrease substantially because of changes in the rate of prepayments.
Asset-Backed Securities
The Portfolios may invest in asset-backed securities. Asset-backed securities apply the securitization techniques used to develop mortgage-backed securities to a broad range of other assets. Various types of assets, primarily automobile and credit card receivables and home equity loans, are pooled and securitized in pass-through structures similar to pass-through structures developed with respect to mortgage securitizations. Asset-backed securities have risk characteristics similar to mortgage-backed securities. Like mortgage-backed securities, they generally decrease in value as a result of interest rate increases, but may benefit less than other fixed income securities from declining interest rates, principally because of prepayments. Also, as in the case of mortgage-backed securities, prepayments generally increase during a period of declining interest rates, although other factors, such as changes in credit use and payment patterns, may also influence prepayment rates. Asset-backed securities also involve the risk that various federal and state consumer laws and other legal and economic factors may result in the collateral backing the securities being insufficient to support payment on the securities.
Foreign Securities
Foreign issuers generally are subject to different accounting, auditing and financial reporting standards than U.S. issuers. There may be less information available to the public about foreign issuers. Securities of foreign issuers can be less liquid and experience greater price movements. In addition, the prices of such securities may be susceptible to influence by large traders, due to the limited size of many foreign securities markets. Moreover, investments in certain foreign markets, which have historically been considered stable, may become more volatile and subject to increased risk due to ongoing developments and changing conditions in such markets. Also, the growing interconnectivity of global economies and financial markets has increased the probability that adverse developments and conditions in one country or region will affect the stability of economies and financial markets in other countries or regions. In some foreign countries, there is also the risk of government expropriation, excessive taxation, political or social instability, the imposition of currency controls or diplomatic developments that could affect a Portfolio’s investment. There also can be difficulty obtaining and enforcing judgments against issuers in foreign countries. Foreign stock exchanges, broker-dealers, and listed issuers
may be subject to less government regulation and oversight. The cost of investing in foreign securities, including brokerage commissions and custodial expenses, can be higher than in the United States.
Certain foreign markets may rely heavily on particular industries or foreign capital and are more vulnerable to diplomatic developments, the imposition of economic sanctions against a particular country or countries, organizations, entities and/or individuals, changes in international trading patterns, trade barriers, and other protectionist or retaliatory measures. Economic sanctions could, among other things, effectively restrict or eliminate a Portfolio’s ability to purchase or sell securities or groups of securities for a substantial period of time, and may make the Portfolio’s investments in such securities harder to value. International trade barriers or economic sanctions against foreign countries, organizations, entities and/or individuals, may adversely affect aPortfolio’s foreign holdings or exposures. Investments in foreign markets may also be adversely affected by governmental actions such as the imposition of capital controls, nationalization of companies or industries, expropriation of assets, or the imposition of punitive taxes. Governmental actions can have a significant effect on the economic conditions in foreign countries, which also may adversely affect the value and liquidity of a Portfolio’s investments. For example, the governments of certain countries may prohibit or impose substantial restrictions on foreign investing in their capital markets or in certain sectors or industries. In addition, a foreign government may limit or cause delay in the convertibility or repatriation of its currency which would adversely affect the U.S. dollar value and/or liquidity of investments denominated in that currency. Any of these actions could severely affect security prices, impair a Portfolio’s ability to purchase or sell foreign securities or transfer the Portfolio’s assets back into the U.S., or otherwise adversely affect the Portfolio’s operations. Certain foreign investments may become less liquid in response to market developments or adverse investor perceptions, or become illiquid after purchase by a Portfolio, particularly during periods of market turmoil. Certain foreign investments may become illiquid when, for instance, there are few, if any, interested buyers and sellers or when dealers are unwilling to make a market for certain securities. When a Portfolio holds illiquid investments, its portfolio may be harder to value.
Certain Portfolios may invest in debt obligations known as “sovereign debt,” which are obligations of governmental issuers in emerging market or developing countries and industrialized countries. Certain emerging market or developing countries are among the largest debtors to commercial banks and foreign governments. The issuer or governmental authority that controls the repayment of sovereign debt may not be willing or able to repay the principal and/or pay interest when due in accordance with the terms of such obligations. Additional factors that may influence the ability or willingness to service debt include, but are not limited to, a country’s cash flow situation, the availability of sufficient foreign exchange on the date a payment is due, the relative size of its debt service burden to the economy as a whole and its government’s policy towards the International Monetary Fund, the World Bank and other multilateral agencies. A country whose exports are concentrated in a few commodities or whose economy depends on certain strategic imports could be vulnerable to fluctuations in international prices of these commodities or imports. If a foreign sovereign obligor cannot generate sufficient earnings from foreign trade to service its external debt, it may need to depend on continuing loans and aid from foreign governments, commercial banks and multilateral organizations, and inflows of foreign investment. The commitment on the part of these foreign governments, multilateral organizations and others to make such disbursements may be conditioned on the government’s implementation of economic reforms and/or economic performance and the timely service of its obligations. Failure to implement such reforms, achieve such levels of economic performance or repay principal or interest when due may result in the cancellation of such third-parties’ commitments to lend funds, which may further impair the foreign sovereign obligor’s ability or willingness to timely service its debts. In addition, there is no legal process for collecting on a sovereign debt that a government does not pay or bankruptcy proceeding by which all or part of the sovereign debt that a government entity has not repaid may be collected.
In connection with their investments in foreign securities, certain Portfolios also may enter into contracts with banks, brokers or dealers to purchase or sell securities or foreign currencies at a future date. A foreign currency forward exchange contract is a negotiated agreement between the contracting parties to exchange a specified amount of currency at a specified future time at a specified rate. The rate can be higher or lower than the spot rate between the currencies that are the subject of the contract. Foreign currency forward exchange contracts may be used to protect against uncertainty in the level of future foreign currency exchange rates or to gain or modify exposure to a particular currency. In
addition, a Portfolio may use cross currency hedging or proxy hedging with respect to currencies in which the Portfolio has or expects to have portfolio or currency exposure. Cross currency hedges involve the sale of one currency against the positive exposure to a different currency and may be used for hedging purposes or to establish an active exposure to the exchange rate between any two currencies.
Foreign Currency
Certain Portfolios’ investments may be denominated in foreign currencies. The value of foreign currencies may fluctuate relative to the value of the U.S. dollar. Since certain Portfolios may invest in such non-U.S. dollar-denominated securities and therefore may convert the value of such securities into U.S. dollars, changes in currency exchange rates can increase or decrease the U.S. dollar value of the Portfolios’ assets. The Adviser and/or the Sub-Adviser may use derivatives to reduce this risk. The Adviser and/or the Sub-Adviser may in their discretion choose not to hedge against currency risk. In addition, certain market conditions may make it impossible or uneconomical to hedge against currency risk.
Emerging Market Securities
Certain Portfolios may invest in emerging market or developing countries, which are countries that major international financial institutions, such as the World Bank, generally consider to be less economically mature than developed nations, such as the United States or most nations in Western Europe. Emerging market or developing countries may be more likely to experience political turmoil or rapid changes in economic conditions than more developed countries, and the financial condition of issuers in emerging market or developing countries may be more precarious than in other countries. In addition, emerging market securities generally are less liquid and subject to wider price and currency fluctuations than securities issued in more developed countries. These characteristics result in greater risk of price volatility in emerging market or developing countries, which may be heightened by currency fluctuations relative to the U.S. dollar.
Public Bank Loans
Public bank loans are privately negotiated loans for which information about the issuer has been made publicly available. Public bank loans are not registered under the Securities Act of 1933 and are not publicly traded. Bank loans are usually second lien loans, which are lower in priority to senior loans, but have seniority in a company’s capital structure to other liabilities, so that the company is required to pay down these second lien loans prior to other lower-ranked claims on their assets. Bank loans normally pay interest at floating rates, and as a result, may protect investors from increases in interest rates.
Certain public bank loans are illiquid, meaning the Portfolio may not be able to sell them quickly at a fair price. Illiquid securities are also difficult to value. To the extent a bank loan has been deemed illiquid, it will be subject to the Portfolio’s restrictions on investment in illiquid securities. The secondary market for bank loans may be subject to irregular trading activity, wide bid/ask spreads and extended trade settlement periods. Bank loans are subject to the risk of default in the payment of interest or principal on a loan, which will result in a reduction of income to the Portfolio, and a potential decrease in the Portfolio’s NAV. The risk of default will increase in the event of an economic downturn or a substantial increase in interest rates. Bank loans that are rated below investment grade share the same risks of other below investment grade securities. Because public bank loans usually rank lower in priority of payment to senior loans, they present a greater degree of investment risk due to the fact that the cash flow or other property of the borrower securing the bank loan may be insufficient to meet scheduled payments after meeting the senior secured payment obligations of the borrower. These bank loans may exhibit greater price volatility as well.
Equity Securities
Certain Portfolios may invest in equity securities, including preferred stocks, depositary receipts, convertible securities, rights and warrants to purchase equity securities and shares of investment companies. Certain Portfolios may invest in equity securities that are publicly traded on securities exchanges or over-the-counter (“OTC”) or in equity securities that are not publicly traded. Securities that are not publicly traded may be more difficult to sell and their value may fluctuate more dramatically than other securities.
Depositary receipts involve many of the same risks as those associated with direct investment in foreign securities. In addition, the underlying issuers of certain depositary receipts, particularly unsponsored or unregistered depositary receipts, are under no obligation to distribute shareholder communications to the holders of such receipts, or to pass through to them any voting rights with respect to the deposited securities.
Derivatives
The Portfolios may, but are not required to, use derivative instruments for a variety of purposes, including hedging, risk management, portfolio management or to earn income. Derivatives are financial instruments whose value is based, in part, on the value of an underlying asset, interest rate, index or financial instrument. Prevailing interest rates and volatility levels, among other things, also affect the value of derivative instruments. A derivative instrument often has risks similar to its underlying asset and may have additional risks, including imperfect correlation between the value of the derivative and the underlying asset, risks of default by the counterparty to certain transactions, magnification of losses incurred due to changes in the market value of the securities, instruments, indices or interest rates to which the derivative instrument relates, risks that the transactions may not be liquid and risks arising from margin requirements. The use of derivatives involves risks that are different from, and possibly greater than, the risks associated with other portfolio investments. Derivatives may involve the use of highly specialized instruments that require investment techniques and risk analyses different from those associated with other portfolio investments.
Certain derivative transactions may give rise to a form of leverage. Leverage magnifies the potential for gain and the risk of loss. Leverage associated with derivative transactions may cause a Portfolio to liquidate portfolio positions when it may not be advantageous to do so to satisfy its obligations or to meet earmarking or segregation requirements, pursuant to applicable SEC rules and regulations, or may cause a Portfolio to be more volatile than if the Portfolio had not been leveraged. Although the Adviser and/or the Sub-Adviser seek to use derivatives to further a Portfolio’s investment objectives, there is no assurance that the use of derivatives will achieve this result.
The derivative instruments and techniques that certain Portfolios may use include:
Futures. A futures contract is a standardized, exchange-traded agreement to buy or sell a specific quantity of an underlying asset, reference rate or index at a specific price at a specific future time. The value of a futures contract tends to increase and decrease in tandem with the value of the underlying instrument. Depending on the terms of the particular contract, futures contracts are settled through either physical delivery of the underlying instrument on the settlement date or by payment of a cash settlement amount on the settlement date. A decision as to whether, when and how to use futures contracts involves the exercise of skill and judgment and even a well-conceived futures transaction may be unsuccessful because of market behavior or unexpected events. In addition to the derivatives risks discussed above, the prices of futures contracts can be highly volatile, using futures contracts can lower total return, and the potential loss from futures contracts can exceed a Portfolio’s initial investment in such contracts. No assurance can be given that a liquid market will exist for any particular futures contract at any particular time. There is also the risk of loss by a Portfolio of margin deposits in the event of bankruptcy of a broker with which the Portfolio has open positions in the futures contract.
Options. If a Portfolio buys an option, it buys a legal contract giving it the right to buy or sell a specific amount of the underlying instrument or futures contract on the underlying instrument at an agreed-upon price typically in exchange for a premium paid by the Portfolio. If a Portfolio sells an option, it sells to another person the right to buy from or sell to the Portfolio a specific amount of the underlying instrument or futures contract on the underlying instrument at an agreed-upon price typically in exchange for a premium received by the Portfolio. When options are purchased OTC, a Portfolio bears the risk that the counterparty that wrote the option will be unable or unwilling to perform its obligations under the option contract. Options may also be illiquid and a Portfolio may have difficulty closing out its position. A decision as to whether, when and how to use options involves the exercise of skill and judgment and even a well conceived option transaction may be unsuccessful because of market behavior or unexpected events. The prices of options can be highly volatile and the use of options can lower total returns.
Swaps. A Portfolio may enter into OTC swap contracts or cleared swap transactions. An OTC swap contract is an agreement between two parties pursuant to which the parties exchange payments at specified dates on the basis of a specified notional amount, with the payments calculated by reference to specified securities, indices, reference rates, currencies or other instruments. Typically swap agreements provide that when the period payment dates for both parties are the same, the payments are made on a net basis (i.e., the two payment streams are netted out, with only the net amount paid by one party to the other). A Portfolio’s obligations or rights under a swap contract entered into on a net basis
will generally be equal only to the net amount to be paid or received under the agreement, based on the relative values of the positions held by each party. Cleared swap transactions may help reduce counterparty credit risk. In a cleared swap, a Portfolio’s ultimate counterparty is a clearinghouse rather than a swap dealer, bank or other financial institution. OTC swap agreements are not entered into or traded on exchanges and often there is no central clearing or guaranty function for swaps. These OTC swaps are often subject to credit risk or the risk of default or non-performance by the counterparty. Both OTC and cleared swaps could result in losses if interest rate or foreign currency exchange rates or credit quality changes are not correctly anticipated by a Portfolio or if the reference index, security or investments do not perform as expected. A Portfolio’s use of swaps may include those based on the credit of an underlying security, commonly referred to as “credit default swaps.” Where a Portfolio is the buyer of a credit default swap contract, it would typically be entitled to receive the par (or other agreed-upon) value of a referenced debt obligation from the counterparty to the contract only in the event of a default or similar event by the issuer of the debt obligation. If no default occurs, such Portfolio would have paid to the counterparty a periodic stream of payments over the term of the contract and received no benefit from the contract. When a Portfolio is the seller of a credit default swap contract, it typically receives the stream of payments but is obligated to pay an amount equal to the par (or other agreed-upon) value of referenced debt obligation upon the default or similar event of the issuer of the referenced debt obligation. The Dodd-Frank Wall Street Reform and Consumer Protection Act and related regulatory developments require the clearing and exchange-trading of certain standardized swap transactions. Mandatory exchange-trading and clearing is occurring on a phased-in basis.
Temporary Defensive Investments
When the Adviser and/or the Sub-Adviser believe that changes in market, economic, political or other conditions warrant, each Portfolio may invest without limit in cash, cash equivalents or other fixed income securities for temporary defensive purposes that may be inconsistent with the Portfolio’s principal investment strategies. If the Adviser and/or the Sub-Adviser incorrectly predict the effects of these changes, such defensive investments may adversely affect the Portfolio’s performance and the Portfolio may not meet its investment objective.
Portfolio Turnover
Consistent with their investment policies, the Core Fixed Income Portfolio, the Core Plus Fixed Income Portfolio, the High Yield Portfolio and the Strategic Income Portfolio will purchase and sell securities without regard to the effect on portfolio turnover. Higher portfolio turnover (e.g., over 100% per year) will cause the Core Fixed Income Portfolio, the Core Plus Fixed Income Portfolio, the High Yield Portfolio and the Strategic Income Portfolio to incur additional transaction costs and may result in taxable gains being passed through to shareholders. The Core Fixed Income Portfolio, the Core Plus Fixed Income Portfolio, the High Yield Portfolio and the Strategic Income Portfolio may engage in frequent trading of securities to achieve their investment objectives.
Adviser
Morgan Stanley Investment Management Inc., with principal offices at 522 Fifth Avenue, New York, NY 10036, conducts a worldwide portfolio management business and provides a broad range of portfolio management services to customers in the United States and abroad. Morgan Stanley (NYSE: “MS”) is the direct parent of the Adviser and the indirect parent of the Distributor. Morgan Stanley is a preeminent global financial services firm engaged in securities trading and brokerage activities, as well as providing investment banking, research and analysis, financing and financial advisory services. As of December 31, 2014, the Adviser, together with its affiliated asset management companies, had approximately $403 billion in assets under management or supervision.
A discussion regarding the basis for the Board of Trustees’ approval of the investment advisory agreement for each Portfolio (except the Strategic Income Portfolio) is available in each Portfolio’s Annual Report to Shareholders for the fiscal year ended September 30, 2014. A discussion regarding the basis for the Board of Trustees’ approval of the Investment Advisory Agreement and Sub-Advisory Agreement for the Strategic Income Portfolio will be available in the Portfolio’s Semi-Annual Report to Shareholders for the period ended March 31, 2015.
Sub-Adviser
The Adviser has entered into a Sub-Advisory Agreement with Morgan Stanley Investment Management Limited , located at 25 Cabot Square, Canary Wharf, London, E14 4QA, England (with respect to the Strategic Income Portfolio). The Sub-Adviser is a wholly owned subsidiary of Morgan Stanley. The Sub-Adviser provides the Portfolio with investment advisory services subject to the overall supervision of the Adviser and the Fund’s officers and Trustees. The Adviser pays the Sub-Adviser on a monthly basis a portion of the net advisory fees the Adviser receives from the Portfolio.
Advisory Fees
For the fiscal year ended September 30, 2014, the Adviser received from each Portfolio the advisory fee (net of fee waivers and/or affiliated rebates, if applicable) set forth in the table below.
Adviser’s Rates of Compensation |
|
|
|
Core Fixed Income Portfolio |
| 0.00 | % |
Core Plus Fixed Income Portfolio |
| 0.28 | % |
Corporate Bond Portfolio |
| 0.01 | % |
High Yield Portfolio |
| 0.00 | % |
Limited Duration Portfolio |
| 0.16 | % |
Strategic Income Portfolio |
| 0.00 | %* |
* Not operational for the period.
The Adviser has agreed to reduce its advisory fee and/or reimburse each Portfolio, if necessary, if such fees would cause the total annual operating expenses of such Portfolios to exceed the percentage of average daily net assets set forth in the table below. In determining the actual amount of fee waiver and/or expense reimbursement for each Portfolio, if any, the Adviser excludes from total annual operating expenses certain investment related expenses, taxes, interest and other extraordinary expenses (including litigation). The fee waivers and/or expense reimbursements for each Portfolio will continue for at least one year or until such time as the Fund’s Board of Trustees acts to discontinue all or a portion of such waivers and/or reimbursements when it deems such action is appropriate.
|
| Expense Cap |
| Expense Cap |
| Expense Cap |
| Expense Cap |
|
Core Fixed Income Portfolio |
| 0.50 | % | 0.85 | % | 1.10 | % | — |
|
Core Plus Fixed Income Portfolio |
| 0.52 | % | 0.87 | % | 1.12 | % | — |
|
Corporate Bond Portfolio |
| 0.70 | % | 1.05 | % | 1.52 | % | — |
|
High Yield Portfolio |
| 0.75 | % | 1.10 | % | 1.35 | % | 0.72 | % |
Limited Duration Portfolio |
| 0.53 | % | 0.88 | % | 1.23 | % | — |
|
Strategic Income Portfolio |
| 1.00 | % | 1.35 | % | 1.60 | % | 0.95 | % |
Morgan Stanley Institutional Fund Trust Prospectus
Fund Management
Portfolio Management
Core Fixed Income Portfolio, Core Plus Fixed Income Portfolio and Limited Duration Portfolio
Each Portfolio’s assets are managed by members of the Taxable Fixed Income team. The team consists of portfolio managers and analysts. Current members of the team who are jointly and primarily responsible for the day-to-day management of each Portfolio are Neil Stone, Joseph Mehlman and Matthew Dunning.
Mr. Stone has been associated with the Adviser in an investment management capacity since 1995. Mr. Mehlman has been associated with the Adviser in an investment management capacity since 2002. Mr. Dunning re-joined the Adviser in July 2014. Prior to re-joining the Adviser, Mr. Dunning managed the municipal valuation rates group and was a senior taxable municipal bond analyst at Bloomberg L.P. from March 2010 to July 2014. Prior to March 2010, he worked in various trading and portfolio management roles for the Adviser.
Corporate Bond Portfolio
The Portfolio’s assets are managed by members of the Taxable Fixed Income team. The team consists of portfolio managers and analysts. Current members of the team who are jointly and primarily responsible for the day-to-day management of the Portfolio are Joseph Mehlman and Christian G. Roth.
Mr. Mehlman has been associated with the Adviser in an investment management capacity since 2002. Mr. Roth has been associated with the Adviser in an investment management capacity since 1991.
All team members are responsible for the execution of the overall strategy of the Portfolio.
High Yield Portfolio
The Portfolio’s assets are managed by members of the High Yield team. The team consists of portfolio managers. Current members of the team who are jointly and primarily responsible for the day-to-day management of the Portfolio are Richard Lindquist and Christian Roth.
Mr. Lindquist has been associated with the Adviser in an investment management capacity since November 2011. Mr. Lindquist was a Managing Director and Co-head of U.S. High Yield at Guggenheim Partners from April 2009 to November 2011. Prior to April 2009, he was the Head of U.S. and Global High Yield Fixed Income at HSBC Halbis Partners/HSBC Global Asset Management. Mr. Roth has been associated with the Adviser or its investment management affiliates in an investment management capacity since 1991.
Strategic Income Portfolio
The Portfolio is managed by members of the Taxable Fixed Income team. The team consists of portfolio managers and analysts. Current members of the team who are jointly and primarily responsible for the day-today management of the Portfolio are Jim Caron, Richard Ford, Michael Kushma and Christian G. Roth.
Mr. Caron has been associated with Morgan Stanley since 2006 and with the Adviser in an investment management capacity since June 2012. Prior to June 2012, he was global head of interest rates, foreign exchange and emerging markets strategy for Morgan Stanley. Mr. Ford is the head of European Fixed Income and has been associated with Morgan Stanley since 1991 and with the Sub-Adviser in an investment management capacity since 2002. Mr. Kushma is Chief Investment Officer of Global Fixed Income for the Adviser. He joined Morgan Stanley in 1987 and the Adviser in 1994. He has 26 years of investment experience. From 1987 to 1994, he was a global fixed income strategist for Morgan Stanley’s Fixed Income Division. Prior to joining Morgan Stanley, he was a senior lecturer of economics at Columbia University. Mr. Kushma received an A.B. in economics from Princeton University, an M.Sc. in economics from the London School of Economics and an M.Phil. in economics from Columbia University. Mr. Roth has been associated with the Adviser or its investment management affiliates in an investment management capacity since 1991.
Additional Information
The Portfolios’ SAI provides additional information about the portfolio managers’ compensation structure, other accounts managed by the portfolio managers and the portfolio managers’ ownership of securities in the Portfolios.
The composition of each team may change from time to time.
Share Class Arrangements
Class L shares of the Strategic Income Portfolio are not being offered at this time. You do not currently have the option of purchasing Class L shares of the Strategic Income Portfolio.
This Prospectus offers Class I, Class A and Class L shares of each Portfolio, and Class IS shares of the High Yield Portfolio and the Strategic Income Portfolio. Neither Class I, Class L nor Class IS shares are subject to a sales charge, and Class I and Class IS shares are not subject to a distribution and/or shareholder service (12b-1) fee. In addition, no sub-accounting or other similar fees, or any finder’s fee payments are charged or paid on Class IS shares. Class I and Class IS shares generally require investments in minimum amounts that are substantially higher than Class A and Class L shares.
Minimum Investment Amounts
Class I, Class A and Class L Shares
The minimum initial investment generally is $5,000,000 for Class I shares and $1,000 for each of Class A and Class L shares of the Portfolios. The minimum initial investment may be waived for the following categories: (1) sales through banks, broker-dealers and other financial institutions (including registered investment advisers and financial planners) purchasing shares on behalf of their clients in (i) discretionary and non-discretionary advisory programs, (ii) fund supermarkets, (iii) asset allocation programs, (iv) other programs in which the client pays an asset-based fee for advice or for executing transactions in Portfolio shares or for otherwise participating in the program or (v) certain other investment programs that do not charge an asset-based fee; (2) qualified state tuition plans described in Section 529 of the Code, and donor-advised charitable gift funds (subject to all applicable terms and conditions); (3) defined contribution, defined benefit and other employer-sponsored employee benefit plans, whether or not qualified under the Code; (4) certain retirement and deferred compensation programs established by Morgan Stanley Investment Management or its affiliates for their employees or the Fund’s Trustees; (5) current or retired directors, officers and employees of Morgan Stanley and any of its subsidiaries, such persons’ spouses, and children under the age of 21, and trust accounts for which any of such persons is a beneficiary; (6) current or retired Directors or Trustees of the Morgan Stanley Funds, such persons’ spouses, and children under the age of 21, and trust accounts for which any of such persons is a beneficiary; (7) certain other registered open-end investment companies, whose shares are distributed by the Distributor; (8) with respect to holders of Class I shares, clients who owned such Portfolio shares as of December 31, 2007, as applicable; (9) investments made in connection with certain mergers and/or reorganizations as approved by the Adviser; (10) the reinvestment of dividends in additional Portfolio shares; or (11) certain other institutional investors based on assets under management or other considerations at the discretion of the Adviser.
Class IS Shares
Class IS shares are offered only to eligible investors meeting certain minimum investment requirements. To purchase Class IS shares, an investor must meet a minimum initial investment of $10,000,000 or be a defined contribution, defined benefit or other employer sponsored employee benefit plan with minimum plan assets of $250,000,000, whether or not qualified under the Code, in each case subject to the discretion of the Adviser. Initial omnibus trades of $10,000,000 or more shall be accepted from certain platforms, including (i) banks and trust companies; (ii) insurance companies; and (iii) registered investment advisory firms. The $10,000,000 minimum initial investment amount may be waived for Portfolio shares purchased by or through: (1) certain registered open-end investment companies whose shares are distributed by the Distributor; or (2) investments made in connection with certain mergers and/or reorganizations as approved by the Adviser.
If the value of your account falls below the minimum initial investment amount for Class I shares, Class A shares, Class L shares or Class IS shares as a result of share redemptions, or you no longer meet one of the waiver criteria set forth above, as applicable, your account may be subject to involuntary conversion or involuntary redemption, as applicable. You will be notified prior to any such conversions or redemptions. No CDSC will be imposed on any involuntary conversion or involuntary redemption.
Distribution of Portfolio Shares
Morgan Stanley Distribution, Inc. is the exclusive Distributor of Class I, Class A, Class L and Class IS shares of the Portfolios. The Distributor receives no compensation from the Fund for distributing Class I and Class IS shares of a Portfolio. The Fund has adopted a Shareholder Services Plan with respect to the Class A shares of each Portfolio and a Distribution and Shareholder Services Plan with respect to the Class L shares of each Portfolio (the “Plans”) pursuant to Rule 12b-1 under the Investment Company Act of 1940, as amended (the “1940 Act”). Under the Plans,
Shareholder Information
each Portfolio pays the Distributor a shareholder services fee of up to 0.25% of the average daily net assets of each of the Class A shares and Class L shares on an annualized basis and a distribution fee of up to 0.25% of the average daily net assets of Class L shares on an annualized basis. The Distributor may compensate other parties for providing distribution-related and/or shareholder support services to investors who purchase Class A and Class L shares. Such fees relate solely to the Class A and Class L shares and will reduce the net investment income and total return of the Class A and Class L shares, respectively.
The Adviser and/or Distributor may pay compensation to certain authorized third-parties, such as brokers, dealers or other financial intermediaries that have entered into a selling agreement with the Distributor (each a “Financial Intermediary”) in connection with the sale, distribution, marketing and retention of a Portfolio’s Class I, Class A and Class L shares and/or shareholder servicing. Such compensation may be significant in amount and the prospect of receiving any such additional compensation may provide affiliated or unaffiliated Financial Intermediaries with an incentive to favor sales of Class I, Class A and Class L shares of a Portfolio over other investment options. Any such payments will not change the NAV or the price of a Portfolio’s Class I, Class A and Class L shares. For more information, please see the Portfolios’ SAI.
About Net Asset Value
The NAV per share of a class of shares of each Portfolio is determined by dividing the total of the value of the Portfolio’s investments and other assets attributable to the class, less any liabilities attributable to the class, by the total number of outstanding shares of that class of the Portfolio. In making this calculation, a Portfolio values its securities at market value. When no market quotations are readily available for securities, including circumstances under which the Adviser determines that a security’s market price is not accurate, we will determine the value for those securities in good faith at fair value using methods approved by the Fund’s Board of Trustees.
In addition, with respect to securities that primarily are listed on foreign exchanges, when an event occurs after the close of such exchanges that is likely to have changed the value of the securities (e.g., a percentage change in value of one or more U.S. securities indices in excess of specified thresholds), such securities will be valued at their fair value, as determined under procedures established by the Fund’s Board of Trustees. Securities also may be fair valued in the event of a significant development affecting a country or region or an issuer-specific development which is likely to have changed the value of the security. In these cases, a Portfolio’s NAV will reflect certain portfolio securities’ fair value rather than their market price. To the extent a Portfolio invests in open-end management companies that are registered under the 1940 Act, the Portfolio’s NAV is calculated based upon the NAV of such funds. The prospectuses for such funds explain the circumstances under which they will use fair value pricing and its effects.
Fair value pricing involves subjective judgment and it is possible that the fair value determined for a security is materially different than the value that could be realized upon the sale of that security. With respect to securities that are primarily listed on foreign exchanges, the values of a Portfolio’s investment securities may change on days when you will not be able to purchase or sell your shares.
Pricing of Portfolio Shares
You may buy or sell (redeem) Class I, Class A, Class L and Class IS shares of a Portfolio at the NAV next determined for the class after receipt of your order. The Fund determines the NAV per share for a Portfolio as of the close of the NYSE (normally 4:00 p.m. Eastern Time) on each day the NYSE is open for business (the “Pricing Time”). Shares will generally not be priced on days that the NYSE is closed, although Portfolio shares may be priced on such days if the Securities Industry and Financial Markets Association (“SIFMA”) recommends that the bond markets remain open for all or part of the day. On any business day when SIFMA recommends that the bond markets close early, a Portfolio reserves the right to close at or prior to the SIFMA recommended closing time. If a Portfolio does so, it will cease granting same day credit for purchase and redemption orders received after the Portfolio’s closing time and credit will be given on the next business day.
A Portfolio may also elect to remain open and price its shares on days when the NYSE is closed but the primary securities markets on which the Portfolio’s securities trade remain open. Trading of securities that are primarily listed on foreign exchanges may take place on weekends and other days when a Portfolio does not price its shares. Therefore, to the extent, if any, that a Portfolio invests in securities primarily listed on foreign exchanges, the value of the Portfolio’s portfolio securities may change on days when you will not be able to purchase or sell your shares.
Portfolio Holdings
A description of the policies and procedures of the Fund with respect to the disclosure of a Portfolio’s securities is available in the Portfolios’ SAI.
How To Purchase Portfolio Shares
Class L shares of the Strategic Income Portfolio are not being offered at this time. You do not currently have the option of purchasing Class L shares of the Strategic Income Portfolio.
You may purchase Class I, Class A, Class L and Class IS shares of a Portfolio on each day that the Portfolio is open for business by contacting your Financial Intermediary or directly from the Fund.
Purchasing Shares Through a Financial Intermediary
You may open a new account and purchase Class I, Class A, Class L and Class IS shares of a Portfolio through a Financial Intermediary. The Financial Intermediary will assist you with the procedures to invest in Class I, Class A, Class L and Class IS shares of a Portfolio. Investors purchasing or selling Class I, Class A, Class L and Class IS shares through a Financial Intermediary may be charged transaction-based or other fees by the Financial Intermediary for its services. If you are purchasing Class I, Class A, Class L or Class IS shares through a Financial Intermediary, please consult your Financial Intermediary for more information regarding any such fees and for purchase instructions.
Purchasing Shares Directly From the Fund
Initial Purchase by Mail
You may open a new account, subject to acceptance by the Fund, and purchase Class I, Class A, Class L and Class IS shares by completing and signing a New Account Application provided by Boston Financial Data Services, Inc. (“BFDS”), the Fund’s transfer agent, which you can obtain by calling BFDS at 1-800-548-7786 and mailing it to Morgan Stanley Institutional Fund Trust, c/o Boston Financial Data Services, Inc., P.O. Box 219804, Kansas City, MO 64121-9804 together with a check payable to Morgan Stanley Institutional Fund Trust.
Please note that payments to investors who redeem Class I, Class A, Class L and Class IS shares purchased by check will not be made until payment of the purchase has been collected, which may take up to 15 calendar days after purchase. You can avoid this delay by purchasing Class I, Class A, Class L and Class IS shares by wire.
Initial Purchase by Wire
You may purchase Class I, Class A, Class L and Class IS shares of each Portfolio by wiring Federal Funds (monies credited by a Federal Reserve Bank) to State Street Bank and Trust Company (the “Custodian”). You must forward a completed New Account Application to BFDS in advance of the wire by following the instructions under “Initial Purchase by Mail.” You should instruct your bank to send a Federal Funds wire in a specified amount to the Custodian using the following wire instructions:
State Street Bank and Trust Company
One Lincoln Street
Boston, MA 02111-2101
ABA #011000028
DDA #00575373
Attn: Morgan Stanley Institutional Fund Trust
Subscription Account
Ref: (Portfolio Name, Account Number, Account Name)
Additional Investments
You may purchase additional Class I, Class A, Class L and Class IS shares for your account at any time by contacting your Financial Intermediary or by contacting the Fund directly. For additional purchases directly from the Fund, you should write a “letter of instruction” that includes your account name, account number, the Portfolio name and the class selected, signed by the account owner(s), to assure proper crediting to your account. The letter must be mailed along with a check in accordance with the instructions under “Initial Purchase by Mail.” You may also purchase additional Class I, Class A, Class L and Class IS shares by wire by following the instructions under “Initial Purchase by Wire.”
Sales Charges Applicable to Purchases of Class A Shares
Class A shares are subject to a sales charge equal to a maximum of 4.25% calculated as a percentage of the offering price on a single transaction as shown in the table below. For Class A shares sold by the Distributor, the Distributor will receive the sales charge imposed on purchases of Class A shares (or any CDSC paid on redemption) and will retain the full amount of such sales charge. As shown below, the sales charge is reduced for purchases of $25,000 and over.
|
| Front End Sales Charge |
| ||||
Amount of Single Transaction |
| Percentage of |
| Approximate Percentage |
| Dealer Commission as a |
|
Less than $25,000 |
| 4.25 | % | 4.44 | % | 4.00 | % |
$25,000 but less than $50,000 |
| 4.00 | % | 4.17 | % | 3.75 | % |
$50,000 but less than $100,000 |
| 3.50 | % | 3.63 | % | 3.25 | % |
$100,000 but less than $250,000 |
| 2.75 | % | 2.83 | % | 2.50 | % |
$250,000 but less than $500,000 |
| 2.25 | % | 2.30 | % | 2.00 | % |
$500,000 but less than $1 million |
| 1.75 | % | 1.78 | % | 1.50 | % |
$1 million and over* |
| 0.00 | % | 0.00 | % | 0.00 | % |
* The Distributor may pay a commission of up to 0.50% to a Financial Intermediary for purchase amounts of $1 million or more.
You may benefit from a reduced sales charge schedule (i.e., breakpoint discount) for purchases of Class A shares of a Portfolio, as applicable, by combining, in a single transaction, your purchase with purchases of Class A shares of the Portfolio by the following related accounts (“Related Accounts”):
· A single account (including an individual, a joint account, a trust or fiduciary account).
· A family member account (limited to spouse, and children under the age of 21, but include trust accounts established solely for the benefit of a spouse, or children under the age of 21).
· An UGMA/UTMA account.
· An individual retirement account.
Investments made through employer-sponsored retirement plan accounts will not be aggregated with individual accounts.
Investments of $1 million or more are not subject to an initial sales charge, but are generally subject to a CDSC of 0.50% on sales made within 18 months after the last day of the month of purchase. The CDSC is assessed on an amount equal to the lesser of the then market value of the shares or the historical cost of the shares (which is the amount actually paid for the shares at the time of original purchase) being redeemed. Accordingly, no sales charge is imposed on increases in NAV above the initial purchase price. In determining whether a CDSC applies to a redemption, it is assumed that the shares being redeemed first are any shares in the shareholder’s account that are not subject to a CDSC, followed by shares held the longest in the shareholder’s account.
In addition to investments of $1 million or more, purchases of Class A shares are not subject to a front-end sales charge if your account qualifies under one of the following categories:
· Sales through banks, broker-dealers and other financial institutions (including registered investment advisers and financial planners) purchasing shares on behalf of their clients in (i) discretionary and non-discretionary advisory programs, (ii) asset allocation programs, (iii) other programs in which the client pays an asset-based fee for advice or for executing transactions in Portfolio shares or for otherwise participating in the program or (iv) certain other investment programs that do not charge an asset-based fee, as outlined in an agreement between the Distributor and such financial institution.
· Sales through Financial Intermediaries who have entered into an agreement with the Distributor to offer Portfolio shares to self-directed investment brokerage accounts, which may or may not charge a transaction fee.
· Qualified state tuition plans described in Section 529 of the Code (subject to all applicable terms and conditions).
· Defined contribution, defined benefit and other employer-sponsored employee benefit plans, whether or not qualified under the Code, where such plans purchase Class A shares through a plan-level or omnibus account sponsored or serviced by a Financial Intermediary that has an agreement with the Fund, the Distributor and/or the Adviser pursuant to which Class A shares are available to such plans without an initial sales charge.
· Certain retirement and deferred compensation programs established by Morgan Stanley Investment Management or its affiliates for their employees or the Fund’s Trustees.
· Current or retired Directors or Trustees of the Morgan Stanley Funds, such persons’ spouses, and children under the age of 21, and trust accounts for which any of such persons is a beneficiary.
· Current or retired directors, officers and employees of Morgan Stanley and any of its subsidiaries, such persons’ spouses, and children under the age of 21, and trust accounts for which any of such persons is a beneficiary.
· Certain other registered open-end investment companies, whose shares are distributed by the Distributor.
· Investments made in connection with certain mergers and/or reorganizations as approved by the Adviser.
· The reinvestment of dividends from Class A shares of a Portfolio in additional Class A shares of the same Portfolio.
Certain waivers may not be available depending on the policies at certain Financial Intermediaries. Please consult your Financial Intermediary for more information.
Combined Purchase Privilege
You will have the benefit of a reduced sales charge by combining your purchase of Class A shares of a Portfolio in a single transaction with your purchase of Class A shares of any other Morgan Stanley Multi-Class Fund (as defined herein) for any Related Account.
Right of Accumulation
You may benefit from a reduced sales charge if the cumulative NAV of Class A shares of a Portfolio purchased in a single transaction, together with the NAV of any Class A shares of the Portfolio and any other Morgan Stanley Multi-Class Fund (including shares of Morgan Stanley Money Market Funds (as defined herein) and Advisor Class shares of Morgan Stanley Limited Duration U.S. Government Trust which you acquired in an exchange from Class A shares of the Portfolio or Class A shares of another Morgan Stanley Multi-Class Fund) held in Related Accounts, amounts to $25,000 or more.
Notification
You must notify your Financial Intermediary at the time a purchase order is placed, that the purchase qualifies for a reduced sales charge under any of the privileges discussed above. The reduced sales charge will not be granted if: (i) notification is not furnished at the time of the order; or (ii) a review of the records of your Financial Intermediary or the Fund’s transfer agent, BFDS, does not confirm your represented holdings. Certain waivers may not be available depending on the policies at certain Financial Intermediaries. Please consult your Financial Intermediary for more information.
In order to obtain a reduced sales charge for Class A shares of a Portfolio under any of the privileges discussed above, it may be necessary at the time of purchase for you to inform your Financial Intermediary of the existence of any Related Accounts in which there are holdings eligible to be aggregated to meet the sales load breakpoint and/or right of accumulation threshold. In order to verify your eligibility, you may be required to provide account statements and/or confirmations regarding your purchases and/or holdings of any Class A shares of a Portfolio or any other Morgan Stanley Multi-Class Fund (including shares of Morgan Stanley Money Market Funds and Advisor Class shares of Morgan Stanley Limited Duration U.S. Government Trust which you acquired in an exchange from Class A shares of a Portfolio or any other Morgan Stanley Multi-Class Fund) held in all Related Accounts at your Financial Intermediary, in order to determine whether you have met the sales load breakpoint and/or right of accumulation threshold.
Letter of Intent
The above schedule of reduced sales charges for larger purchases also will be available to you if you enter into a written “Letter of Intent.” A Letter of Intent provides for the purchase of Class A shares of a Portfolio and Class A shares of other Morgan Stanley Multi-Class Funds within a 13-month period. The initial purchase of Class A shares of a Portfolio under a Letter of Intent must be at least 5% of the stated investment goal. The Letter of Intent does not preclude a Portfolio (or any other Morgan Stanley Multi-Class Fund) from discontinuing sales of its shares. To determine the applicable sales charge reduction, you may also include (1) the cost of Class A shares of the Fund or any other Morgan Stanley Multi-Class Fund which were previously purchased at a price including a front-end sales charge during the 90-day period prior to the Distributor receiving the Letter of Intent and (2) the historical cost of shares of any Morgan Stanley Money Market Fund or Advisor Class shares of Morgan Stanley Limited Duration U.S. Government Trust which you acquired in an exchange from Class A shares of the Fund or any other Morgan Stanley Multi-Class Fund purchased during that period at a price including a front-end sales charge. You may also combine purchases and exchanges by any Related Accounts during such 90-day period. You should retain any records necessary to substantiate historical costs because the Fund, BFDS and your Financial Intermediary may not maintain this information. You can obtain a Letter of Intent by contacting your Financial Intermediary. If you do not achieve the stated investment goal within the 13-month period, you are required to pay the difference between the sales charges otherwise applicable and sales charges actually paid, which may be deducted from your investment. Shares acquired through reinvestment of distributions are not aggregated to achieve the stated investment goal.
General
Class I, Class A, Class L and Class IS shares may, in the Fund’s discretion, be purchased with investment securities (in lieu of or, in conjunction with, cash) acceptable to the Fund. The securities would be accepted by the Fund at their market value in return for Portfolio shares of equal value, taking into account any applicable sales charge.
To help the U.S. Government fight the funding of terrorism and money laundering activities, federal law requires all financial institutions to obtain, verify and record information that identifies each person who opens an account. What this means to you is that when you open an account, we will ask your name, address, date of birth and other information that will allow us to identify you. If we are unable to verify your identity, we reserve the right to restrict additional transactions and/or liquidate your account at the next calculated NAV after your account is closed (less any applicable sales/account charges and/or tax penalties) or take any other action required by law. In accordance with federal law requirements, the Fund has implemented an anti-money laundering compliance program, which includes the designation of an anti-money laundering compliance officer.
When you buy Class I, Class A, Class L and Class IS shares, the shares (plus any applicable sales charge) will be purchased at the next share price calculated after we receive your purchase order. Your payment is due on the third business day after you place your purchase order. We reserve the right to reject any order for the purchase of Portfolio shares for any reason.
The Fund may suspend the offering of shares, or any class of shares, of any Portfolio or reject any purchase orders when we think it is in the best interest of the Portfolio.
Certain patterns of past exchanges and/or purchase or sale transactions involving a Portfolio may result in the Fund rejecting, limiting or prohibiting, at its sole discretion and without prior notice additional purchases and/or exchanges and may result in a shareholder’s account being closed. Determinations in this regard may be made based on the frequency or dollar amount of the previous exchanges or purchase or sale transactions. For more information, please refer to the section of this Prospectus entitled “Frequent Purchases and Redemptions of Shares.”
How To Redeem Portfolio Shares
You may process a redemption request by contacting your Financial Intermediary. Otherwise, you may redeem Class I, Class A, Class L and Class IS shares of a Portfolio by mail or, if authorized, by telephone, at no charge other than as described below. The value of shares redeemed may be more or less than the purchase price, depending on the NAV at the time of redemption. Class I, Class A, Class L and Class IS shares of a Portfolio will be redeemed at the NAV next determined after we receive your redemption request in good order.
Redemptions by Letter
Requests should be addressed to Morgan Stanley Institutional Fund Trust, c/o Boston Financial Data Services, Inc., P.O. Box 219804, Kansas City, MO 64121-9804.
To be in good order, redemption requests must include the following documentation:
(a) A letter of instruction, if required, or a stock assignment specifying the account name, the account number, the name of the Portfolio and the number of shares or dollar amount to be redeemed, signed by all registered owners of the shares in the exact names in which the shares are registered, and whether you wish to receive the redemption proceeds by check or by wire to the bank account we have on file for you;
(b) The share certificates, if issued;
(c) Any required signature guarantees if you are requesting payment to anyone other than the registered owner(s) or that payment be sent to any address other than the address of the registered owner(s) or pre-designated bank account; and
(d) Other supporting legal documents, if required, in the case of estates, trusts, guardianships, custodianship, corporations, pension and profit sharing plans and other organizations.
Redemptions by Telephone
You automatically have telephone redemption and exchange privileges unless you indicate otherwise by checking the applicable box on the New Account Application or calling BFDS to opt out of such privileges. You may request a redemption of Class I, Class A, Class L and Class IS shares by calling the Fund at 1-800-548-7786 and requesting that the redemption proceeds be mailed or wired to you. You cannot redeem Class I, Class A Class L, Class IS shares by telephone if you hold share certificates for those shares. For your
protection when calling the Fund, we will employ reasonable procedures to confirm that instructions communicated over the telephone are genuine. These procedures may include requiring various forms of personal identification (such as name, mailing address, social security number or other tax identification number), tape-recording telephone communications and providing written confirmation of instructions communicated by telephone. If reasonable procedures are employed, none of Morgan Stanley, BFDS or the Fund will be liable for following telephone instructions which it reasonably believes to be genuine. Telephone redemptions and exchanges may not be available if you cannot reach BFDS by telephone, whether because all telephone lines are busy or for any other reason; in such case, a shareholder would have to use the Fund’s other redemption and exchange procedures described in this section. Telephone instructions will be accepted if received by BFDS between 9:00 a.m. and 4:00 p.m. Eastern time on any day the NYSE is open for business. During periods of drastic economic or market changes, it is possible that the telephone privileges may be difficult to implement, although this has not been the case with the Fund in the past. To opt out of telephone privileges, please contact BFDS at 1-800-548-7786.
CDSC on Class A Shares
The CDSC on Class A shares will be waived in connection with sales of Class A shares for which no commission or transaction fee was paid by the Distributor or Financial Intermediary at the time of purchase of such shares. In addition, a CDSC, if otherwise applicable, will be waived in the case of:
· Sales of shares held at the time you die or become disabled (within the definition in Section 72(m)(7) of the Code, which relates to the ability to engage in gainful employment), if the shares are: (i) registered either in your individual name or in the names of you and your spouse as joint tenants with right of survivorship; (ii) registered in the name of a trust of which (a) you are the settlor and that is revocable by you (i.e., a “living trust”) or (b) you and your spouse are the settlors and that is revocable by you or your spouse (i.e., a “joint living trust”); or (iii) held in a qualified corporate or self-employed retirement plan, IRA or 403(b) Custodial Account; provided in each case that the sale is requested within one year after your death or initial determination of disability.
· Sales in connection with the following retirement plan “distributions”: (i) lump-sum or other distributions from a qualified corporate or self-employed retirement plan following retirement (or, in the case of a “key employee” of a “top heavy” plan, following attainment of age 591/2); (ii) required minimum distributions and certain other distributions (such as those following attainment of age 591/2) from an IRA or 403(b) Custodial Account; or (iii) a tax-free return of an excess IRA contribution (a “distribution” does not include a direct transfer of IRA, 403(b) Custodial Account or retirement plan assets to a successor custodian or trustee).
The Distributor may require confirmation of your entitlement before granting a CDSC waiver. If you believe you are eligible for a CDSC waiver, please contact your Financial Intermediary or call toll-free 1-800-548-7786.
Redemption Proceeds
The Fund will ordinarily distribute redemption proceeds in cash within one business day of your redemption request, but it may take up to seven days. However, if you purchased Class I, Class A, Class L or Class IS shares by check, the Fund will not distribute redemption proceeds until it has collected your purchase payment, which may take up to 15 calendar days.
If we determine that it is in the best interest of the Fund or a Portfolio not to pay redemption proceeds in cash, we may distribute to you securities held by a Portfolio. If requested, we will pay a portion of your redemption(s) in cash (during any 90 day period) up to the lesser of $250,000 or 1% of the net assets of a Portfolio at the beginning of such period. If the Fund redeems your shares in-kind, you will bear any market risks associated with the securities paid as redemption proceeds. Such in-kind securities may be illiquid and difficult or impossible for a shareholder to sell at a time and at a price that a shareholder would like. Redemptions paid in such securities generally will give rise to income, gain or loss for income tax purposes in the same manner as redemptions paid in cash. In addition, you may incur brokerage costs and a further gain or loss for income tax purposes when you ultimately sell the securities.
Exchange Privilege
You may exchange shares of any class of a Portfolio for the same class of shares of other portfolios of the Fund and portfolios of Morgan Stanley Institutional Fund, Inc. (“MSIF Inc.”), if available, without the imposition of an exchange fee. In addition, you may exchange shares of any class of a Portfolio for the same class of shares of Morgan Stanley European Equity Fund Inc., Morgan Stanley Global Fixed Income Opportunities Fund, Morgan Stanley Global Infrastructure Fund,
Morgan Stanley Limited Duration U.S. Government Trust, Morgan Stanley Mortgage Securities Trust, Morgan Stanley Multi Cap Growth Trust and Morgan Stanley U.S. Government Securities Trust, (each, a “Morgan Stanley Retail Fund” and, together with the Fund and MSIF Inc., the “Morgan Stanley Multi-Class Funds”), if available, without the imposition of an exchange fee. Front-end sales charges (loads) are not imposed on exchanges of Class A shares. In addition, you may exchange Class I, Class A, Class L and Class IS shares of a Portfolio for shares of Morgan Stanley California Tax-Free Daily Income Trust, Morgan Stanley Liquid Asset Fund Inc., Morgan Stanley New York Municipal Money Market Trust, Morgan Stanley Tax-Free Daily Income Trust and Morgan Stanley U.S. Government Money Market Trust (each, a “Morgan Stanley Money Market Fund” and, together with the Morgan Stanley Multi-Class Funds, the “Morgan Stanley Funds”) or for Advisor Class shares of Morgan Stanley Limited Duration U.S. Government Trust, if available, without the imposition of an exchange fee. Exchanges are effected based on the respective NAVs of the applicable Morgan Stanley Fund (subject to any applicable redemption fee). To obtain a prospectus for another Morgan Stanley Fund, contact your Financial Intermediary or call the Fund at 1-800-548-7786. Prospectuses are also available on our internet site at www.morganstanley.com/im. If you purchased Portfolio shares through a Financial Intermediary, certain Morgan Stanley Funds may be unavailable for exchange. Contact your Financial Intermediary to determine which Morgan Stanley Funds are available for exchange.
The current prospectus for each Morgan Stanley Fund describes its investment objective(s), policies and investment minimums, and should be read before investment. Since exchanges are available only into continuously offered Morgan Stanley Funds, exchanges are not available into Morgan Stanley Funds or classes of Morgan Stanley Funds that are not currently being offered for purchase.
You can process your exchange by contacting your Financial Intermediary. You may also send exchange requests to the Fund’s transfer agent, BFDS, by mail to Morgan Stanley Institutional Fund Trust, c/o Boston Financial Data Services, Inc., P.O. Box 219804, Kansas City, MO 64121-9804 or by calling 1-800-548-7786.
There are special considerations when you exchange Class A shares of a Portfolio that are subject to a CDSC. When determining the length of time you held the Class A shares, any period (starting at the end of the month) during which you held such shares will be counted. In addition, any period (starting at the end of the month) during which you held (i) Class A shares of other portfolios of the Fund; (ii) Class A shares of a Morgan Stanley Multi-Class Fund; (iii) shares of a Morgan Stanley Money Market Fund; or (iv) Advisor Class shares of Morgan Stanley Limited Duration U.S. Government Trust, any of which you acquired in an exchange from such Class A shares of the applicable Portfolio, will also be counted; however, if you sell shares of (i) such other portfolio of the Fund; (ii) the Morgan Stanley Multi-Class Fund; (iii) the Morgan Stanley Money Market Fund; or (iv) the Advisor Class shares of Morgan Stanley Limited Duration U.S. Government Trust, before the expiration of the CDSC “holding period,” you will be charged the CDSC applicable to such shares.
When you exchange for shares of another Morgan Stanley Fund, your transaction will be treated the same as an initial purchase. You will be subject to the same minimum initial investment and account size as an initial purchase. Your exchange price will be the price calculated at the next Pricing Time after the Morgan Stanley Fund receives your exchange order. The Morgan Stanley Fund, in its sole discretion, may waive the minimum initial investment amount in certain cases. The Fund may terminate or revise the exchange privilege upon required notice or in certain cases without notice. The Fund reserves the right to reject an exchange order for any reason.
If you exchange shares of a Portfolio for shares of another Morgan Stanley Fund, there are important tax considerations. For tax purposes, the exchange out of a Portfolio is considered a sale of Portfolio shares and the exchange into the other fund is considered a purchase. As a result, you may realize a capital gain or loss. You should review the “Taxes” section and consult your own tax professional about the tax consequences of an exchange.
Frequent Purchases and Redemptions of Shares
Frequent purchases and redemptions of shares by Portfolio shareholders are referred to as “market-timing” or “short-term trading” and may present risks for other shareholders of a Portfolio, which may include, among other things, diluting the value of the Portfolio’s shares held by long-term shareholders, interfering with the efficient management of the Portfolio, increasing brokerage and administrative costs, incurring unwanted taxable gains and forcing the Portfolio to hold excess levels of cash.
In addition, a Portfolio is subject to the risk that market-timers and/or short-term traders may take advantage of time zone differences between the foreign markets on which the Portfolio’s securities trade and the time the Portfolio’s NAV is calculated (“time-zone arbitrage”). For example, a market-timer may purchase shares of a Portfolio based on events occurring after foreign market closing prices are established, but before the Portfolio’s NAV calculation, that are likely to result in higher prices in foreign markets the following day. The market-timer would redeem the Portfolio’s shares the next day when the Portfolio’s share price would reflect the increased prices in foreign markets for a quick profit at the expense of long-term Portfolio shareholders.
Investments in other types of securities also may be susceptible to short-term trading strategies. These investments include securities that are, among other things, thinly traded, traded infrequently or relatively illiquid, which have the risk that the current market price for the securities may not accurately reflect current market values. A shareholder may seek to engage in short-term trading to take advantage of these pricing differences (referred to as “price arbitrage”). Investments in certain fixed income securities may be adversely affected by price arbitrage trading strategies.
The Fund discourages and does not accommodate frequent purchases and redemptions of Portfolio shares by Portfolio shareholders and the Fund’s Board of Trustees has adopted policies and procedures with respect to such frequent purchases and redemptions.
The Fund’s policies with respect to purchases and redemptions of Portfolio shares are described in the “Shareholder Information—How To Purchase Portfolio Shares,” “Shareholder Information—Sales Charges Applicable to Purchases of Class A Shares,” “Shareholder Information—General” and “Shareholder Information—How To Redeem Portfolio Shares” sections of this Prospectus. Except as described in each of these sections, and with respect to trades that occur through omnibus accounts at Financial Intermediaries, as described below, the Fund’s policies regarding frequent trading of Portfolio shares are applied uniformly to all shareholders. With respect to trades that occur through omnibus accounts at Financial Intermediaries, such as investment advisers, broker-dealers, transfer agents and third-party administrators, the Fund (i) has requested assurance that such Financial Intermediaries currently selling Portfolio shares have in place internal policies and procedures reasonably designed to address market-timing concerns and has instructed such Financial Intermediaries to notify the Fund immediately if they are unable to comply with such policies and procedures and (ii) requires all prospective Financial Intermediaries to agree to cooperate in enforcing the Fund’s policies (or, upon prior written approval only, a Financial Intermediary’s own policies) with respect to frequent purchases, redemptions and exchanges of Portfolio shares.
With respect to trades that occur through omnibus accounts at Financial Intermediaries, to some extent, the Fund relies on the Financial Intermediary to monitor frequent short-term trading within a Portfolio by the Financial Intermediary’s customers. However, the Fund has entered into agreements with Financial Intermediaries whereby Financial Intermediaries are required to provide certain customer identification and transaction information upon the Fund’s request. The Fund may use this information to help identify and prevent market-timing activity in the Fund. There can be no assurance that the Fund will be able to identify or prevent all market-timing activities.
Taxes
As with any investment, you should consider how your Portfolio investment will be taxed. The tax information in this Prospectus is provided as general information. You should consult your own tax professional about the tax consequences of an investment in a Portfolio. Unless your investment in a Portfolio is through a tax-deferred retirement account, such as a 401(k) plan or IRA, you need to be aware of the possible tax consequences when the Portfolio makes distributions and when you sell shares, including an exchange to another Morgan Stanley Fund.
Taxation of Distributions. Your distributions normally are subject to federal and state income tax when they are paid, whether you take them in cash or reinvest them in Portfolio shares. A distribution also may be subject to local income tax. Any income dividend distributions and any short-term capital gain distributions are taxable to you as ordinary income. Any long-term capital gain distributions are taxable as long-term capital gains, no matter how long you have owned shares in the Portfolio. It is not anticipated that any portion of the distributions by a Portfolio would qualify for a lower tax rate as qualified dividend income. Further, such distributions are not anticipated to be eligible for a dividends-received deduction for corporate shareholders.
Investment income received by the Portfolios from sources within foreign countries may be subject to foreign income taxes.
You will be sent a statement (Internal Revenue Service (“IRS”) Form 1099-DIV) by February of each year showing the taxable distributions paid to you in the previous year. The statement provides information on your dividends and any capital gains for tax purposes.
Taxation of Sales. Your sale of Portfolio shares normally is subject to federal and state income tax and may result in a taxable gain or loss to you. A sale also may be subject to local income tax. Your exchange of Portfolio shares for shares of another Morgan Stanley Fund is treated for tax purposes like a sale of your original shares and a purchase of your new shares. Thus, the exchange may, like a sale, result in a taxable gain or loss to you and will give you a new tax basis for your shares.
The Portfolios (or their administrative agents) are required to report to the IRS and furnish to Portfolio shareholders the cost basis information for sale transactions of shares purchased on or after January 1, 2012. Shareholders may elect to have one of several cost basis methods applied to their account when calculating the cost basis of shares sold, including average cost, FIFO (“first-in, first-out”) or some other specific identification method. Unless you instruct otherwise, the Fund will use average cost as its default cost basis method, and will treat sales as first coming from shares purchased prior to January 1, 2012. If average cost is used for the first sale of Portfolio shares covered by these new rules, the shareholder may only use an alternative cost basis method for shares purchased prospectively. Portfolio shareholders should consult with their tax advisors to determine the best cost basis method for their tax situation.
An additional 3.8% Medicare tax is imposed on certain net investment income (including ordinary dividends and capital gain distributions received from a Portfolio and net gains from redemptions or other taxable dispositions of Portfolio shares) of U.S. individuals, estates and trusts to the extent that such person’s “modified adjusted gross income” (in the case of an individual) or “adjusted gross income” (in the case of an estate or trust) exceeds certain threshold amounts.
When you open your account, you should provide your social security or tax identification number on your investment application. By providing this information, you will avoid being subject to federal backup withholding at a rate of 28% on taxable distributions and redemption proceeds. Any withheld amount would be sent to the IRS as an advance payment of your taxes due on your income for such year.
Dividends paid by a Portfolio to a foreign shareholder will generally be subject to U.S. withholding tax at a rate of 30% (or such lower treaty rate as may be applicable).
Effective July 1, 2014, a Portfolio is required to withhold U.S. tax (at a 30% rate) on payments of taxable dividends and, effective January 1, 2017, redemption proceeds and certain capital gain dividends made to certain non-U.S. entities that fail to comply (or be deemed compliant) with extensive new reporting and withholding requirements designed to inform the U.S. Department of the Treasury of U.S.-owned foreign investment accounts. Shareholders may be requested to provide additional information to a Portfolio to enable the Portfolio to determine whether withholding is required.
Because each investor’s tax circumstances are unique and the tax laws may change, you should consult your tax advisor about your investment.
Dividends and Distributions
The Portfolios normally declare dividends and distribute substantially all of their net investment income to shareholders as follows:
Portfolio |
| Monthly |
| Quarterly |
|
Core Fixed Income |
|
|
| · |
|
Core Plus Fixed Income |
|
|
| · |
|
Corporate Bond |
|
|
| · |
|
High Yield |
| · |
|
|
|
Limited Duration |
| · |
|
|
|
Strategic Income |
|
|
| · |
|
If any net gains are realized from the sale of underlying securities, the Portfolios normally distribute the gains with the last distributions for the calendar year. All dividends and distributions are automatically paid in additional shares of the Portfolio unless you elect otherwise. If you want to change how your dividends are paid, you must notify the Fund in writing.
Morgan Stanley Institutional Fund Trust Prospectus
Financial Highlights
The financial highlights tables that follow are intended to help you understand the financial performance of the Class I, Class A, Class L and Class IS shares of each Portfolio (except the Strategic Income Portfolio), as applicable, for the past five years or since inception if less than five years. No financial information is provided for the Strategic Income Portfolio because it had not commenced operations as of the most recent fiscal year end. Certain information reflects financial results for a single Portfolio share. The total returns in the tables represent the rate that an investor would have earned (or lost) on an investment in each Portfolio (assuming reinvestment of all dividends and distributions).
The ratio of expenses to average net assets listed in the tables below for each class of shares of a Portfolio are based on the average net assets of the Portfolio for each of the periods listed in the tables. To the extent that a Portfolio’s average net assets decrease over the Portfolio’s next fiscal year, such expense ratios can be expected to increase, potentially significantly, because certain fixed costs will be spread over a smaller amount of assets.
The information below has been audited by Ernst & Young LLP, the Fund’s independent registered public accounting firm. Ernst & Young LLP’s reports, along with each Portfolio’s financial statements, are incorporated by reference into the Portfolios’ SAI. The Annual Reports to Shareholders and each Portfolio’s financial statements, as well as the SAI, are available at no cost from the Fund at the toll-free number noted on the back cover to this Prospectus.
Core Fixed Income Portfolio
|
| Class I |
| |||||||||||||
|
| Year Ended September 30, |
| |||||||||||||
Selected Per Share Data and Ratios |
| 2014 |
| 2013 |
| 2012 |
| 2011 |
| 2010 |
| |||||
Net Asset Value, Beginning of Period |
| $ | 10.02 |
| $ | 10.50 |
| $ | 10.08 |
| $ | 9.96 |
| $ | 9.49 |
|
Income (Loss) from Investment Operations: |
|
|
|
|
|
|
|
|
|
|
| |||||
Net Investment Income† |
| 0.28 |
| 0.26 |
| 0.29 |
| 0.34 |
| 0.34 |
| |||||
Net Realized and Unrealized Gain (Loss) |
| 0.21 |
| (0.42 | ) | 0.48 |
| 0.08 |
| 0.45 |
| |||||
Total from Investment Operations |
| 0.49 |
| (0.16 | ) | 0.77 |
| 0.42 |
| 0.79 |
| |||||
Distributions from and/or in Excess of: |
|
|
|
|
|
|
|
|
|
|
| |||||
Net Investment Income |
| (0.31 | ) | (0.32 | ) | (0.35 | ) | (0.30 | ) | (0.32 | ) | |||||
Net Asset Value, End of Period |
| $ | 10.20 |
| $ | 10.02 |
| $ | 10.50 |
| $ | 10.08 |
| $ | 9.96 |
|
Total Return++ |
| 4.97 | % | (1.57 | )% | 7.83 | % | 4.34 | % | 8.57 | % | |||||
Ratios and Supplemental Data: |
|
|
|
|
|
|
|
|
|
|
| |||||
Net Assets, End of Period (Thousands) |
| $ | 14,350 |
| $ | 48,620 |
| $ | 57,013 |
| $ | 63,866 |
| $ | 75,651 |
|
Ratio of Expenses to Average Net Assets (1) |
| 0.49 | %+†† | 0.49 | %+ | 0.49 | %+ | 0.50 | %+†† | 0.50 | %+†† | |||||
Ratio of Net Investment Income to Average Net Assets (1) |
| 2.81 | %+†† | 2.57 | %+ | 2.80 | %+ | 3.43 | %+†† | 3.58 | %+†† | |||||
Ratio of Rebate from Morgan Stanley Affiliates to Average Net Assets |
| 0.01 | % | 0.01 | % | 0.01 | % | 0.00 | %§ | 0.00 | %§ | |||||
Portfolio Turnover Rate |
| 172 | % | 187 | % | 216 | % | 234 | % | 261 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Supplemental Information on the Ratios to Average Net Assets: |
|
|
|
|
|
|
| |||||||||
Ratios Before Expense Limitation: |
|
|
|
|
|
|
|
|
|
|
| |||||
Expenses to Average Net Assets |
| 1.47 | %†† | 1.16 | % | 0.97 | % | 0.99 | %†† | 0.67 | %+†† | |||||
Net Investment Income to Average Net Assets |
| 1.83 | %†† | 1.90 | % | 2.32 | % | 2.94 | %†† | 3.41 | %+†† |
† Per share amount is based on average shares outstanding.
++ Calculated based on the net asset value as of the last business day of the period.
+ The Ratios of Expenses and Net Investment Income reflect the rebate of certain Portfolio expenses in connection with the investments in Morgan Stanley affiliates during the period. The effect of the rebate on the ratios is disclosed in the above table as “Ratio of Rebate from Morgan Stanley Affiliates to Average Net Assets.”
†† Reflects overall Portfolio ratios for investment income and non-class specific expenses.
§ Amount is less than 0.005%.
|
| Class A* |
| |||||||||||||
|
| Year Ended September 30, |
| |||||||||||||
Selected Per Share Data and Ratios |
| 2014 |
| 2013 |
| 2012 |
| 2011 |
| 2010 |
| |||||
Net Asset Value, Beginning of Period |
| $ | 10.07 |
| $ | 10.56 |
| $ | 10.14 |
| $ | 10.01 |
| $ | 9.53 |
|
Income (Loss) from Investment Operations: |
|
|
|
|
|
|
|
|
|
|
| |||||
Net Investment Income† |
| 0.25 |
| 0.24 |
| 0.23 |
| 0.31 |
| 0.32 |
| |||||
Net Realized and Unrealized Gain (Loss) |
| 0.21 |
| (0.43 | ) | 0.52 |
| 0.09 |
| 0.46 |
| |||||
Total from Investment Operations |
| 0.46 |
| (0.19 | ) | 0.75 |
| 0.40 |
| 0.78 |
| |||||
Distributions from and/or in Excess of: |
|
|
|
|
|
|
|
|
|
|
| |||||
Net Investment Income |
| (0.26 | ) | (0.30 | ) | (0.33 | ) | (0.27 | ) | (0.30 | ) | |||||
Net Asset Value, End of Period |
| $ | 10.27 |
| $ | 10.07 |
| $ | 10.56 |
| $ | 10.14 |
| $ | 10.01 |
|
Total Return++ |
| 4.61 | % | (1.89 | )% | 7.55 | % | 4.11 | % | 8.47 | % | |||||
Ratios and Supplemental Data: |
|
|
|
|
|
|
|
|
|
|
| |||||
Net Assets, End of Period (Thousands) |
| $ | 143 |
| $ | 518 |
| $ | 330 |
| $ | 44 |
| $ | 209 |
|
Ratio of Expenses to Average Net Assets (1) |
| 0.84 | %+†† | 0.75 | %+^ | 0.74 | %+ | 0.75 | %+†† | 0.75 | %+†† | |||||
Ratio of Net Investment Income to Average Net Assets (1) |
| 2.46 | %+†† | 2.32 | %+^ | 2.25 | %+ | 3.18 | %+†† | 3.33 | %+†† | |||||
Ratio of Rebate from Morgan Stanley Affiliates to Average Net Assets |
| 0.01 | % | 0.01 | % | 0.01 | % | 0.00 | %§ | 0.00 | %§ | |||||
Portfolio Turnover Rate |
| 172 | % | 187 | % | 216 | % | 234 | % | 261 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Supplemental Information on the Ratios to Average Net Assets: |
|
|
|
|
|
|
| |||||||||
Ratios Before Expense Limitation: |
|
|
|
|
|
|
|
|
|
|
| |||||
Expenses to Average Net Assets |
| 2.15 | %†† | 1.44 | % | 1.33 | % | 1.24 | %†† | 0.92 | %+†† | |||||
Net Investment Income to Average Net Assets |
| 1.15 | %†† | 1.63 | % | 1.66 | % | 2.69 | %†† | 3.16 | %+†† |
* Effective September 9, 2013, Class P and Class H shares were renamed Class A shares.
† Per share amount is based on average shares outstanding.
++ Calculated based on the net asset value, which does not reflect sales charges, if applicable, as of the last business day of the period.
+ The Ratios of Expenses and Net Investment Income reflect the rebate of certain Portfolio expenses in connection with the investments in Morgan Stanley affiliates during the period. The effect of the rebate on the ratios is disclosed in the above table as “Ratio of Rebate from Morgan Stanley Affiliates to Average Net Assets.”
†† Reflects overall Portfolio ratios for investment income and non-class specific expenses.
§ Amount is less than 0.005%.
^ Effective September 16, 2013, the Adviser has agreed to limit the ratio of expenses to average net assets to the maximum ratio of 0.85% for Class A shares. Prior to September 16, 2013, the maximum ratio was 0.75% for Class A shares.
|
| Class L |
| |||||||
|
| Year Ended September 30, |
| Period from |
| |||||
Selected Per Share Data and Ratios |
| 2014 |
| 2013 |
| September 30, 2012 |
| |||
Net Asset Value, Beginning of Period |
| $ | 10.07 |
| $ | 10.55 |
| $ | 10.29 |
|
Income (Loss) from Investment Operations: |
|
|
|
|
|
|
| |||
Net Investment Income† |
| 0.22 |
| 0.27 |
| 0.06 |
| |||
Net Realized and Unrealized Gain (Loss) |
| 0.21 |
| (0.48 | ) | 0.27 |
| |||
Total from Investment Operations |
| 0.43 |
| (0.21 | ) | 0.33 |
| |||
Distributions from and/or in Excess of: |
|
|
|
|
|
|
| |||
Net Investment Income |
| (0.26 | ) | (0.27 | ) | (0.07 | ) | |||
Net Asset Value, End of Period |
| $ | 10.24 |
| $ | 10.07 |
| $ | 10.55 |
|
Total Return++ |
| 4.34 | % | (2.05 | )% | 3.23 | %# | |||
Ratios and Supplemental Data: |
|
|
|
|
|
|
| |||
Net Assets, End of Period (Thousands) |
| $ | 10 |
| $ | 10 |
| $ | 10 |
|
Ratio of Expenses to Average Net Assets (1) |
| 1.09 | %+†† | 1.00 | %+^^ | 0.99 | %+* | |||
Ratio of Net Investment Income to Average Net Assets (1) |
| 2.21 | %+†† | 2.41 | %+^^ | 1.45 | %+* | |||
Ratio of Rebate from Morgan Stanley Affiliates to Average Net Assets |
| 0.01 | % | 0.01 | % | 0.01 | %* | |||
Portfolio Turnover Rate |
| 172 | % | 187 | % | 216 | %# |
|
|
|
|
|
|
|
|
|
|
|
(1) Supplemental Information on the Ratios to Average Net Assets: |
|
|
|
| ||||||
Ratios Before Expense Limitation: |
|
|
|
|
|
|
| |||
Expenses to Average Net Assets |
| 14.10 | %†† | 2.21 | % | 1.58 | %* | |||
Net Investment Income (Loss) to Average Net Assets |
| (10.80 | )%†† | 1.20 | % | 0.86 | %* |
^ Commencement of Operations.
† Per share amount is based on average shares outstanding.
++ Calculated based on the net asset value as of the last business day of the period.
+ The Ratios of Expenses and Net Investment Income reflect the rebate of certain Portfolio expenses in connection with the investments in Morgan Stanley affiliates during the period. The effect of the rebate on the ratios is disclosed in the above table as “Ratio of Rebate from Morgan Stanley Affiliates to Average Net Assets.”
†† Reflects overall Portfolio ratios for investment income and non-class specific expenses.
^^ Effective September 16, 2013, the Adviser has agreed to limit the ratio of expenses to average net assets to the maximum ratio of 1.10% for Class L shares. Prior to September 16, 2013, the maximum ratio was 1.00% for Class L shares.
# Not Annualized.
* Annualized.
Morgan Stanley Institutional Fund Trust Prospectus
Financial Highlights
Core Plus Fixed Income Portfolio
|
| Class I |
| |||||||||||||
|
| Year Ended September 30, |
| |||||||||||||
Selected Per Share Data and Ratios |
| 2014 |
| 2013 |
| 2012 |
| 2011 |
| 2010 |
| |||||
Net Asset Value, Beginning of Period |
| $ | 9.91 |
| $ | 10.48 |
| $ | 9.92 |
| $ | 9.96 |
| $ | 9.41 |
|
Income (Loss) from Investment Operations: |
|
|
|
|
|
|
|
|
|
|
| |||||
Net Investment Income† |
| 0.31 |
| 0.32 |
| 0.39 |
| 0.38 |
| 0.34 |
| |||||
Net Realized and Unrealized Gain (Loss) |
| 0.45 |
| (0.36 | ) | 0.63 |
| (0.02 | ) | 0.57 |
| |||||
Total from Investment Operations |
| 0.76 |
| (0.04 | ) | 1.02 |
| 0.36 |
| 0.91 |
| |||||
Distributions from and/or in Excess of: |
|
|
|
|
|
|
|
|
|
|
| |||||
Net Investment Income |
| (0.31 | ) | (0.53 | ) | (0.46 | ) | (0.40 | ) | (0.36 | ) | |||||
Net Asset Value, End of Period |
| $ | 10.36 |
| $ | 9.91 |
| $ | 10.48 |
| $ | 9.92 |
| $ | 9.96 |
|
Total Return++ |
| 7.82 | % | (0.42 | )% | 10.62 | % | 3.74 | % | 10.02 | % | |||||
Ratios and Supplemental Data: |
|
|
|
|
|
|
|
|
|
|
| |||||
Net Assets, End of Period (Thousands) |
| $ | 192,868 |
| $ | 187,014 |
| $ | 227,331 |
| $ | 295,226 |
| $ | 434,657 |
|
Ratio of Expenses to Average Net Assets (1) |
| 0.61 | %+†† | 0.71 | %+^ | 0.62 | %+ | 0.66 | %+†† | 0.51 | %+†† | |||||
Ratio of Net Investment Income to Average Net Assets (1) |
| 3.02 | %+†† | 3.14 | %+^ | 3.88 | %+ | 3.88 | %+†† | 3.53 | %+†† | |||||
Ratio of Rebate from Morgan Stanley Affiliates to Average Net Assets |
| 0.01 | % | 0.01 | % | 0.01 | % | 0.00 | %§ | 0.01 | % | |||||
Portfolio Turnover Rate |
| 296 | % | 226 | % | 189 | % | 225 | % | 270 | % |
(1) Supplemental Information on the Ratios to Average Net Assets: |
|
|
|
|
| |||||||||||
Ratios Before Expense Limitation: |
|
|
|
|
|
|
|
|
|
|
| |||||
Expenses to Average Net Assets |
| 0.81 | %†† | 0.73 | % | N/A |
| N/A |
| N/A |
| |||||
Net Investment Income to Average Net Assets |
| 2.82 | %†† | 3.12 | % | N/A |
| N/A |
| N/A |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
† Per share amount is based on average shares outstanding.
++ Calculated based on the net asset value as of the last business day of the period.
+ The Ratios of Expenses and Net Investment Income reflect the rebate of certain Portfolio expenses in connection with the investments in Morgan Stanley affiliates during the period. The effect of the rebate on the ratios is disclosed in the above table as “Ratio of Rebate from Morgan Stanley Affiliates to Average Net Assets.”
†† Reflects overall Portfolio ratios for investment income and non-class specific expenses.
§ Amount is less than 0.005%.
^ Effective September 16, 2013, the Adviser has agreed to limit the ratio of expenses to average net assets to the maximum ratio of 0.62% for Class I shares.
|
| Class A* |
| |||||||||||||
|
| Year Ended September 30, |
| |||||||||||||
Selected Per Share Data and Ratios |
| 2014 |
| 2013 |
| 2012 |
| 2011 |
| 2010 |
| |||||
Net Asset Value, Beginning of Period |
| $ | 9.93 |
| $ | 10.50 |
| $ | 9.94 |
| $ | 9.97 |
| $ | 9.40 |
|
Income (Loss) from Investment Operations: |
|
|
|
|
|
|
|
|
|
|
| |||||
Net Investment Income† |
| 0.27 |
| 0.29 |
| 0.37 |
| 0.36 |
| 0.31 |
| |||||
Net Realized and Unrealized Gain (Loss) |
| 0.45 |
| (0.36 | ) | 0.62 |
| (0.02 | ) | 0.57 |
| |||||
Total from Investment Operations |
| 0.72 |
| (0.07 | ) | 0.99 |
| 0.34 |
| 0.88 |
| |||||
Distributions from and/or in Excess of: |
|
|
|
|
|
|
|
|
|
|
| |||||
Net Investment Income |
| (0.28 | ) | (0.50 | ) | (0.43 | ) | (0.37 | ) | (0.31 | ) | |||||
Net Asset Value, End of Period |
| $ | 10.37 |
| $ | 9.93 |
| $ | 10.50 |
| $ | 9.94 |
| $ | 9.97 |
|
Total Return++ |
| 7.35 | % | (0.68 | )% | 10.31 | % | 3.57 | % | 9.73 | % | |||||
Ratios and Supplemental Data: |
|
|
|
|
|
|
|
|
|
|
| |||||
Net Assets, End of Period (Thousands) |
| $ | 2,941 |
| $ | 3,152 |
| $ | 3,673 |
| $ | 4,654 |
| $ | 5,732 |
|
Ratio of Expenses to Average Net Assets (1) |
| 0.96 | %+†† | 0.96 | %+^ | 0.87 | %+ | 0.91 | %+†† | 0.76 | %+†† | |||||
Ratio of Net Investment Income to Average Net Assets (1) |
| 2.67 | %+†† | 2.89 | %+^ | 3.63 | %+ | 3.63 | %+†† | 3.28 | %+†† | |||||
Ratio of Rebate from Morgan Stanley Affiliates to Average Net Assets |
| 0.01 | % | 0.01 | % | 0.01 | % | 0.00 | %§ | 0.01 | % | |||||
Portfolio Turnover Rate |
| 296 | % | 226 | % | 189 | % | 225 | % | 270 | % |
(1) Supplemental Information on the Ratios to Average Net Assets: |
|
|
|
|
| |||||||||||
Ratios Before Expense Limitation: |
|
|
|
|
|
|
|
|
|
|
| |||||
Expenses to Average Net Assets |
| 1.11 | %†† | 0.98 | % | N/A |
| N/A |
| N/A |
| |||||
Net Investment Income to Average Net Assets |
| 2.52 | %†† | 2.87 | % | N/A |
| N/A |
| N/A |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* Effective September 9, 2013, Class P and Class H shares were renamed Class A shares.
† Per share amount is based on average shares outstanding.
++ Calculated based on the net asset value, which does not reflect sales charges, if applicable, as of the last business day of the period.
+ The Ratios of Expenses and Net Investment Income reflect the rebate of certain Portfolio expenses in connection with the investments in Morgan Stanley affiliates during the period. The effect of the rebate on the ratios is disclosed in the above table as “Ratio of Rebate from Morgan Stanley Affiliates to Average Net Assets.”
†† Reflects overall Portfolio ratios for investment income and non-class specific expenses.
§ Amount is less than 0.005%.
^ Effective September 16, 2013, the Adviser has agreed to limit the ratio of expenses to average net assets to the maximum ratio of 0.97% for Class A shares.
|
| Class L |
| |||||||
|
| Year Ended September 30, |
| Period from |
| |||||
Selected Per Share Data and Ratios |
| 2014 |
| 2013 |
| September 30, 2012 |
| |||
Net Asset Value, Beginning of Period |
| $ | 9.92 |
| $ | 10.49 |
| $ | 10.14 |
|
Income (Loss) from Investment Operations: |
|
|
|
|
|
|
| |||
Net Investment Income† |
| 0.25 |
| 0.27 |
| 0.11 |
| |||
Net Realized and Unrealized Gain (Loss) |
| 0.45 |
| (0.36 | ) | 0.35 |
| |||
Total from Investment Operations |
| 0.70 |
| (0.09 | ) | 0.46 |
| |||
Distributions from and/or in Excess of: |
|
|
|
|
|
|
| |||
Net Investment Income |
| (0.25 | ) | (0.48 | ) | (0.11 | ) | |||
Net Asset Value, End of Period |
| $ | 10.37 |
| $ | 9.92 |
| $ | 10.49 |
|
Total Return++ |
| 7.19 | % | (0.95 | )% | 4.59 | %# | |||
Ratios and Supplemental Data: |
|
|
|
|
|
|
| |||
Net Assets, End of Period (Thousands) |
| $ | 108 |
| $ | 88 |
| $ | 130 |
|
Ratio of Expenses to Average Net Assets (1) |
| 1.21 | %+†† | 1.21 | %+^^ | 1.16 | %+* | |||
Ratio of Net Investment Income to Average Net Assets (1) |
| 2.42 | %+†† | 2.64 | %+^^ | 2.60 | %+* | |||
Ratio of Rebate from Morgan Stanley Affiliates to Average Net Assets |
| 0.01 | % | 0.01 | % | 0.01 | %* | |||
Portfolio Turnover Rate |
| 296 | % | 226 | % | 189 | %# |
(1) Supplemental Information on the Ratios to Average Net Assets: |
|
|
|
|
| |||||
Ratios Before Expense Limitation: |
|
|
|
|
|
|
| |||
Expenses to Average Net Assets |
| 3.10 | %†† | 1.27 | % | N/A |
| |||
Net Investment Income to Average Net Assets |
| 0.53 | %†† | 2.58 | % | N/A |
| |||
|
|
|
|
|
|
|
|
|
|
|
^ Commencement of Operations.
† Per share amount is based on average shares outstanding.
++ Calculated based on the net asset value as of the last business day of the period.
+ The Ratios of Expenses and Net Investment Income reflect the rebate of certain Portfolio expenses in connection with the investments in Morgan Stanley affiliates during the period. The effect of the rebate on the ratios is disclosed in the above table as “Ratio of Rebate from Morgan Stanley Affiliates to Average Net Assets.”
†† Reflects overall Portfolio ratios for investment income and non-class specific expenses.
^^ Effective September 16, 2013, the Adviser has agreed to limit the ratio of expenses to average net assets to the maximum ratio of 1.22% for Class L shares.
# Not Annualized.
* Annualized.
Morgan Stanley Institutional Fund Trust Prospectus
Financial Highlights
Corporate Bond Portfolio
|
| Class I |
| |||||||||||||
|
| Year Ended September 30, |
| |||||||||||||
Selected Per Share Data and Ratios |
| 2014 |
| 2013 |
| 2012 |
| 2011 |
| 2010 |
| |||||
Net Asset Value, Beginning of Period |
| $ | 10.53 |
| $ | 10.93 |
| $ | 10.27 |
| $ | 10.17 |
| $ | 9.75 |
|
Income (Loss) from Investment Operations: |
|
|
|
|
|
|
|
|
|
|
| |||||
Net Investment Income† |
| 0.38 |
| 0.32 |
| 0.36 |
| 0.33 |
| 0.33 |
| |||||
Net Realized and Unrealized Gain (Loss) |
| 0.53 |
| (0.40 | ) | 0.73 |
| 0.07 |
| 0.49 |
| |||||
Total from Investment Operations |
| 0.91 |
| (0.08 | ) | 1.09 |
| 0.40 |
| 0.82 |
| |||||
Distributions from and/or in Excess of: |
|
|
|
|
|
|
|
|
|
|
| |||||
Net Investment Income |
| (0.32 | ) | (0.32 | ) | (0.43 | ) | (0.30 | ) | (0.40 | ) | |||||
Net Asset Value, End of Period |
| $ | 11.12 |
| $ | 10.53 |
| $ | 10.93 |
| $ | 10.27 |
| $ | 10.17 |
|
Total Return++ |
| 8.79 | % | (0.77 | )% | 10.94 | % | 4.05 | % | 8.65 | % | |||||
Ratios and Supplemental Data: |
|
| �� |
|
|
|
|
|
|
|
| |||||
Net Assets, End of Period (Thousands) |
| $ | 36,598 |
| $ | 36,186 |
| $ | 44,779 |
| $ | 62,410 |
| $ | 79,337 |
|
Ratio of Expenses to Average Net Assets (1) |
| 0.70 | %+†† | 1.18 | %+^ | 1.00 | %+†† | 0.80 | %+†† | 0.76 | %+†† | |||||
Ratio of Net Investment Income to Average Net Assets (1) |
| 3.47 | %+†† | 2.91 | %+^ | 3.41 | %+†† | 3.27 | %+†† | 3.36 | %+†† | |||||
Ratio of Rebate from Morgan Stanley Affiliates to Average Net Assets |
| 0.00 | %§ | 0.00 | %§ | 0.00 | %§ | 0.00 | %§ | 0.00 | %§ | |||||
Portfolio Turnover Rate |
| 50 | % | 63 | % | 129 | % | 224 | % | 277 | % |
(1) Supplemental Information on the Ratios to Average Net Assets: |
|
|
|
|
|
| ||||||||||
Ratios Before Expense Limitation: |
|
|
|
|
|
|
|
|
|
|
| |||||
Expenses to Average Net Assets |
| 1.13 | %†† | 1.21 | % | N/A |
| N/A |
| N/A |
| |||||
Net Investment Income to Average Net Assets |
| 3.04 | %†† | 2.88 | % | N/A |
| N/A |
| N/A |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
† Per share amount is based on average shares outstanding.
++ Calculated based on the net asset value as of the last business day of the period.
+ The Ratios of Expenses and Net Investment Income reflect the rebate of certain Portfolio expenses in connection with the investments in Morgan Stanley affiliates during the period. The effect of the rebate on the ratios is disclosed in the above table as “Ratio of Rebate from Morgan Stanley Affiliates to Average Net Assets.”
†† Reflects overall Portfolio ratios for investment income and non-class specific expenses.
§ Amount is less than 0.005%.
^ Effective September 16, 2013, the Adviser has agreed to limit the ratio of expenses to average net assets to the maximum ratio of 0.70% for Class I shares.
|
| Class A* |
| |||||||||||||
|
| Year Ended September 30, |
| |||||||||||||
Selected Per Share Data and Ratios |
| 2014 |
| 2013 |
| 2012 |
| 2011 |
| 2010 |
| |||||
Net Asset Value, Beginning of Period |
| $ | 10.53 |
| $ | 10.92 |
| $ | 10.27 |
| $ | 10.16 |
| $ | 9.74 |
|
Income (Loss) from Investment Operations: |
|
|
|
|
|
|
|
|
|
|
| |||||
Net Investment Income† |
| 0.34 |
| 0.30 |
| 0.34 |
| 0.31 |
| 0.31 |
| |||||
Net Realized and Unrealized Gain (Loss) |
| 0.53 |
| (0.39 | ) | 0.73 |
| 0.08 |
| 0.49 |
| |||||
Total from Investment Operations |
| 0.87 |
| (0.09 | ) | 1.07 |
| 0.39 |
| 0.80 |
| |||||
Distributions from and/or in Excess of: |
|
|
|
|
|
|
|
|
|
|
| |||||
Net Investment Income |
| (0.28 | ) | (0.30 | ) | (0.42 | ) | (0.28 | ) | (0.38 | ) | |||||
Net Asset Value, End of Period |
| $ | 11.12 |
| $ | 10.53 |
| $ | 10.92 |
| $ | 10.27 |
| $ | 10.16 |
|
Total Return++ |
| 8.43 | % | (0.83 | )% | 10.69 | % | 3.99 | % | 8.50 | % | |||||
Ratios and Supplemental Data: |
|
|
|
|
|
|
|
|
|
|
| |||||
Net Assets, End of Period (Thousands) |
| $ | 405 |
| $ | 1,194 |
| $ | 961 |
| $ | 408 |
| $ | 590 |
|
Ratio of Expenses to Average Net Assets (1) |
| 1.05 | %+†† | 1.34 | %+^ | 1.15 | %+†† | 0.95 | %+†† | 0.91 | %+†† | |||||
Ratio of Net Investment Income to Average Net Assets (1) |
| 3.12 | %+†† | 2.76 | %+^ | 3.26 | %+†† | 3.12 | %+†† | 3.21 | %+†† | |||||
Ratio of Rebate from Morgan Stanley Affiliates to Average Net Assets |
| 0.00 | %§ | 0.00 | %§ | 0.00 | %§ | 0.00 | %§ | 0.00 | %§ | |||||
Portfolio Turnover Rate |
| 50 | % | 63 | % | 129 | % | 224 | % | 277 | % |
(1) Supplemental Information on the Ratios to Average Net Assets: |
|
|
|
|
| |||||||||||
Ratios Before Expense Limitation: |
|
|
|
|
|
|
|
|
|
|
| |||||
Expenses to Average Net Assets |
| 1.60 | %†† | 1.47 | % | 1.25 | %†† | 1.05 | %†† | 1.01 | %+†† | |||||
Net Investment Income to Average Net Assets |
| 2.57 | %†† | 2.63 | % | 3.16 | %†† | 3.02 | %†† | 3.11 | %+†† | |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* Effective September 9, 2013, Class P and Class H shares were renamed Class A shares.
† Per share amount is based on average shares outstanding.
++ Calculated based on the net asset value, which does not reflect sales charges, if applicable, as of the last business day of the period.
+ The Ratios of Expenses and Net Investment Income reflect the rebate of certain Portfolio expenses in connection with the investments in Morgan Stanley affiliates during the period. The effect of the rebate on the ratios is disclosed in the above table as “Ratio of Rebate from Morgan Stanley Affiliates to Average Net Assets.”
†† Reflects overall Portfolio ratios for investment income and non-class specific expenses.
§ Amount is less than 0.005%.
^ Effective September 16, 2013, the Adviser has agreed to limit the ratio of expenses to average net assets to the maximum ratio of 1.05% for Class A shares.
|
| Class L |
| |||||||||||||
|
| Year Ended September 30, |
| |||||||||||||
Selected Per Share Data and Ratios |
| 2014 |
| 2013 |
| 2012 |
| 2011 |
| 2010 |
| |||||
Net Asset Value, Beginning of Period |
| $ | 10.52 |
| $ | 10.92 |
| $ | 10.26 |
| $ | 10.15 |
| $ | 9.74 |
|
Income (Loss) from Investment Operations: |
|
|
|
|
|
|
|
|
|
|
| |||||
Net Investment Income† |
| 0.31 |
| 0.26 |
| 0.30 |
| 0.28 |
| 0.28 |
| |||||
Net Realized and Unrealized Gain (Loss) |
| 0.54 |
| (0.40 | ) | 0.74 |
| 0.08 |
| 0.48 |
| |||||
Total from Investment Operations |
| 0.85 |
| (0.14 | ) | 1.04 |
| 0.36 |
| 0.76 |
| |||||
Distributions from and/or in Excess of: |
|
|
|
|
|
|
|
|
|
|
| |||||
Net Investment Income |
| (0.26 | ) | (0.26 | ) | (0.38 | ) | (0.25 | ) | (0.35 | ) | |||||
Net Asset Value, End of Period |
| $ | 11.11 |
| $ | 10.52 |
| $ | 10.92 |
| $ | 10.26 |
| $ | 10.15 |
|
Total Return++ |
| 8.15 | % | (1.28 | )% | 10.38 | % | 3.51 | % | 8.15 | % | |||||
Ratios and Supplemental Data: |
|
|
|
|
|
|
|
|
|
|
| |||||
Net Assets, End of Period (Thousands) |
| $ | 2,405 |
| $ | 2,649 |
| $ | 3,149 |
| $ | 4,080 |
| $ | 5,508 |
|
Ratio of Expenses to Average Net Assets (1) |
| 1.30 | %+†† | 1.69 | %+^ | 1.50 | %+†† | 1.30 | %+†† | 1.26 | %+†† | |||||
Ratio of Net Investment Income to Average Net Assets (1) |
| 2.87 | %+†† | 2.40 | %+^ | 2.91 | %+†† | 2.77 | %+†† | 2.86 | %+†† | |||||
Ratio of Rebate from Morgan Stanley Affiliates to Average Net Assets |
| 0.00 | %§ | 0.00 | %§ | 0.00 | %§ | 0.00 | %§ | 0.00 | %§ | |||||
Portfolio Turnover Rate |
| 50 | % | 63 | % | 129 | % | 224 | % | 277 | % | |||||
| ||||||||||||||||
(1) Supplemental Information on the Ratios to Average Net Assets: |
|
|
|
|
|
| ||||||||||
Ratios Before Expense Limitation: |
|
|
|
|
|
|
|
|
|
|
| |||||
Expenses to Average Net Assets |
| 1.66 | %†† | 1.70 | % | N/A |
| N/A |
| N/A |
| |||||
Net Investment Income to Average Net Assets |
| 2.51 | %†† | 2.39 | % | N/A |
| N/A |
| N/A |
|
† Per share amount is based on average shares outstanding.
++ Calculated based on the net asset value as of the last business day of the period.
+ The Ratios of Expenses and Net Investment Income reflect the rebate of certain Portfolio expenses in connection with the investments in Morgan Stanley affiliates during the period. The effect of the rebate on the ratios is disclosed in the above table as “Ratio of Rebate from Morgan Stanley Affiliates to Average Net Assets.”
†† Reflects overall Portfolio ratios for investment income and non-class specific expenses.
§ Amount is less than 0.005%.
^ Effective September 16, 2013, the Adviser has agreed to limit the ratio of expenses to average net assets to the maximum ratio of 1.52% for Class L shares.
Morgan Stanley Institutional Fund Trust Prospectus
Financial Highlights
High Yield Portfolio
|
| Class I |
| ||||||||
|
| Year Ended September 30, |
| Period from |
| ||||||
Selected Per Share Data and Ratios |
| 2014 |
| 2013 |
| September 30, 2012 |
| ||||
Net Asset Value, Beginning of Period |
| $ | 11.00 |
| $ | 10.71 |
| $ | 10.00 |
| |
Income from Investment Operations: |
|
|
|
|
|
|
| ||||
Net Investment Income† |
| 0.75 |
| 0.81 |
| 0.50 |
| ||||
Net Realized and Unrealized Gain |
| 0.25 |
| 0.55 |
| 0.59 |
| ||||
Total from Investment Operations |
| 1.00 |
| 1.36 |
| 1.09 |
| ||||
Distributions from and/or in Excess of: |
|
|
|
|
|
|
| ||||
Net Investment Income |
| (0.77 | ) | (0.81 | ) | (0.38 | ) | ||||
Net Realized Gain |
| (0.50 | ) | (0.26 | ) | — |
| ||||
Total Distributions |
| (1.27 | ) | (1.07 | ) | (0.38 | ) | ||||
Net Asset Value, End of Period |
| $ | 10.73 |
| $ | 11.00 |
| $ | 10.71 |
| |
Total Return++ |
| 9.48 | % | 13.38 | % | 11.07 | %# | ||||
Ratios and Supplemental Data: |
|
|
|
|
|
|
| ||||
Net Assets, End of Period (Thousands) |
| $ | 13,300 |
| $ | 12,678 |
| $ | 10,975 |
| |
Ratio of Expenses to Average Net Assets (1) |
| 0.75 | %+ | 0.75 | %+ | 0.74 | %+*†† | ||||
Ratio of Net Investment Income to Average Net Assets (1) |
| 6.89 | %+ | 7.42 | %+ | 7.53 | %+*†† | ||||
Ratio of Rebate from Morgan Stanley Affiliates to Average Net Assets |
| 0.00 | %§ | 0.00 | %§ | 0.01 | %* | ||||
Portfolio Turnover Rate |
| 96 | % | 227 | % | 192 | %# | ||||
| |||||||||||
(1) Supplemental Information on the Ratios to Average Net Assets: |
|
|
|
|
|
|
| ||||
Ratios Before Expense Limitation: |
|
|
|
|
|
|
| ||||
Expenses to Average Net Assets |
| 1.85 | % | 3.16 | % | 3.17 | %*†† | ||||
Net Investment Income to Average Net Assets |
| 5.79 | % | 5.01 | % | 5.10 | %*†† | ||||
^ Commencement of Operations.
† Per share amount is based on average shares outstanding.
++ Calculated based on the net asset value as of the last business day of the period.
+ The Ratios of Expenses and Net Investment Income reflect the rebate of certain Portfolio expenses in connection with the investments in Morgan Stanley affiliates during the period. The effect of the rebate on the ratios is disclosed in the above table as “Ratio of Rebate from Morgan Stanley Affiliates to Average Net Assets.”
†† Reflects overall Portfolio ratios for investment income and non-class specific expenses.
§ Amount is less than 0.005%.
# Not Annualized.
* Annualized.
|
| Class A** |
| |||||||
|
| Year Ended September 30, |
| Period from |
| |||||
Selected Per Share Data and Ratios |
| 2014 |
| 2013 |
| September 30, 2012 |
| |||
Net Asset Value, Beginning of Period |
| $ | 10.99 |
| $ | 10.71 |
| $ | 10.00 |
|
Income from Investment Operations: |
|
|
|
|
|
|
| |||
Net Investment Income† |
| 0.65 |
| 0.77 |
| 0.48 |
| |||
Net Realized and Unrealized Gain |
| 0.31 |
| 0.55 |
| 0.59 |
| |||
Total from Investment Operations |
| 0.96 |
| 1.32 |
| 1.07 |
| |||
Distributions from and/or in Excess of: |
|
|
|
|
|
|
| |||
Net Investment Income |
| (0.73 | ) | (0.78 | ) | (0.36 | ) | |||
Net Realized Gain |
| (0.50 | ) | (0.26 | ) | — |
| |||
Total Distributions |
| (1.23 | ) | (1.04 | ) | (0.36 | ) | |||
Net Asset Value, End of Period |
| $ | 10.72 |
| $ | 10.99 |
| $ | 10.71 |
|
Total Return++ |
| 9.15 | % | 13.01 | % | 10.92 | %# | |||
Ratios and Supplemental Data: |
|
|
|
|
|
|
| |||
Net Assets, End of Period (Thousands) |
| $ | 40,157 |
| $ | 1,092 |
| $ | 107 |
|
Ratio of Expenses to Average Net Assets (1) |
| 1.02 | %+ | 1.01 | %+^^ | 0.99 | %+*†† | |||
Ratio of Net Investment Income to Average Net Assets (1) |
| 5.99 | %+ | 7.04 | %+^^ | 7.28 | %+*†† | |||
Ratio of Rebate from Morgan Stanley Affiliates to Average Net Assets |
| 0.01 | % | 0.00 | %§ | 0.01 | %* | |||
Portfolio Turnover Rate |
| 96 | % | 227 | % | 192 | %# | |||
| ||||||||||
(1) Supplemental Information on the Ratios to Average Net Assets: |
|
|
| |||||||
Ratios Before Expense Limitation: |
|
|
|
|
|
|
| |||
Expenses to Average Net Assets |
| 2.06 | % | 4.22 | % | 3.42 | %*†† | |||
Net Investment Income to Average Net Assets |
| 4.95 | % | 3.83 | % | 4.85 | %*†† |
** Effective September 9, 2013, Class P and Class H shares were renamed Class A shares.
^ Commencement of Operations.
† Per share amount is based on average shares outstanding.
++ Calculated based on the net asset value, which does not reflect sales charges, if applicable, as of the last business day of the period.
+ The Ratios of Expenses and Net Investment Income reflect the rebate of certain Portfolio expenses in connection with the investments in Morgan Stanley affiliates during the period. The effect of the rebate on the ratios is disclosed in the above table as “Ratio of Rebate from Morgan Stanley Affiliates to Average Net Assets.”
†† Reflects overall Portfolio ratios for investment income and non-class specific expenses.
^^ Effective September 16, 2013, the Adviser has agreed to limit the ratio of expenses to average net assets to the maximum ratio of 1.10% for Class A shares. Prior to September 16, 2013, the maximum ratio was 1.00% for Class A shares.
§ Amount is less than 0.005%.
# Not Annualized.
* Annualized.
|
| Class L |
| |||||||
|
| Year Ended September 30, |
| Period from |
| |||||
Selected Per Share Data and Ratios |
| 2014 |
| 2013 |
| September 30, 2012 |
| |||
Net Asset Value, Beginning of Period |
| $ | 10.99 |
| $ | 10.70 |
| $ | 10.00 |
|
Income from Investment Operations: |
|
|
|
|
|
|
| |||
Net Investment Income† |
| 0.67 |
| 0.75 |
| 0.46 |
| |||
Net Realized and Unrealized Gain |
| 0.27 |
| 0.56 |
| 0.59 |
| |||
Total from Investment Operations |
| 0.94 |
| 1.31 |
| 1.05 |
| |||
Distributions from and/or in Excess of: |
|
|
|
|
|
|
| |||
Net Investment Income |
| (0.71 | ) | (0.76 | ) | (0.35 | ) | |||
Net Realized Gain |
| (0.50 | ) | (0.26 | ) | — |
| |||
Total Distributions |
| (1.21 | ) | (1.02 | ) | (0.35 | ) | |||
Net Asset Value, End of Period |
| $ | 10.72 |
| $ | 10.99 |
| $ | 10.70 |
|
Total Return++ |
| 8.88 | % | 12.82 | % | 10.66 | %# | |||
Ratios and Supplemental Data: |
|
|
|
|
|
|
| |||
Net Assets, End of Period (Thousands) |
| $ | 1,519 |
| $ | 326 |
| $ | 107 |
|
Ratio of Expenses to Average Net Assets (1) |
| 1.35 | %+ | 1.26 | %+^^ | 1.24 | %+*†† | |||
Ratio of Net Investment Income to Average Net Assets (1) |
| 6.14 | %+ | 6.90 | %+^^ | 7.03 | %+*†† | |||
Ratio of Rebate from Morgan Stanley Affiliates to Average Net Assets |
| 0.00 | %§ | 0.00 | %§ | 0.01 | %* | |||
Portfolio Turnover Rate |
| 96 | % | 227 | % | 192 | %# | |||
| ||||||||||
(1) Supplemental Information on the Ratios to Average Net Assets: |
|
|
|
|
| |||||
Ratios Before Expense Limitation: |
|
|
|
|
|
|
| |||
Expenses to Average Net Assets |
| 2.52 | % | 4.11 | % | 3.67 | %*†† | |||
Net Investment Income to Average Net Assets |
| 4.97 | % | 4.05 | % | 4.60 | %*†† |
^ Commencement of Operations.
† Per share amount is based on average shares outstanding.
++ Calculated based on the net asset value as of the last business day of the period.
+ The Ratios of Expenses and Net Investment Income reflect the rebate of certain Portfolio expenses in connection with the investments in Morgan Stanley affiliates during the period. The effect of the rebate on the ratios is disclosed in the above table as “Ratio of Rebate from Morgan Stanley Affiliates to Average Net Assets.”
†† Reflects overall Portfolio ratios for investment income and non-class specific expenses.
^^ Effective September 16, 2013, the Adviser has agreed to limit the ratio of expenses to average net assets to the maximum ratio of 1.35% for Class L shares. Prior to September 16, 2013, the maximum ratio was 1.25% for Class L shares.
§ Amount is less than 0.005%.
# Not Annualized.
* Annualized.
|
| Class IS |
| |
Selected Per Share Data and Ratios |
| Period from |
| |
Net Asset Value, Beginning of Period |
| $ | 10.98 |
|
Income (Loss) from Investment Operations: |
|
|
| |
Net Investment Income† |
| 0.37 |
| |
Net Realized and Unrealized Loss |
| (0.27 | ) | |
Total from Investment Operations |
| 0.10 |
| |
Distributions from and/or in Excess of: |
|
|
| |
Net Investment Income |
| (0.34 | ) | |
Net Asset Value, End of Period |
| $ | 10.74 |
|
Total Return++ |
| 0.89 | %# | |
Ratios and Supplemental Data: |
|
|
| |
Net Assets, End of Period, in (Thousands) |
| $ | 10 |
|
Ratio of Expenses to Average Net Assets (1) |
| 0.72 | %+* | |
Ratio of Net Investment Income to Average Net Assets (1) |
| 6.66 | %+* | |
Ratio of Rebate from Morgan Stanley Affiliates to Average Net Assets |
| 0.00 | %§* | |
Portfolio Turnover Rate |
| 96 | %# |
(1) Supplemental Information on the Ratios to Average Net Assets: |
|
|
|
Ratios Before Expense Limitation: |
|
|
|
Expenses to Average Net Assets |
| 15.70 | %* |
Net Investment Loss to Average Net Assets |
| (8.32 | )%* |
^ Commencement of Operations.
† Per share amount is based on average shares outstanding.
++ Calculated based on the net asset value as of the last business day of the period.
+ The Ratios of Expenses and Net Investment Income reflect the rebate of certain Portfolio expenses in connection with the investments in Morgan Stanley affiliates during the period. The effect of the rebate on the ratios is disclosed in the above table as “Ratio of Rebate from Morgan Stanley Affiliates to Average Net Assets.”
§ Amount is less than 0.005%.
# Not Annualized.
* Annualized.
Morgan Stanley Institutional Fund Trust Prospectus
Financial Highlights
Limited Duration Portfolio
|
| Class I |
| |||||||||||||
|
| Year Ended September 30, |
| |||||||||||||
Selected Per Share Data and Ratios |
| 2014 |
| 2013 |
| 2012 |
| 2011 |
| 2010 |
| |||||
Net Asset Value, Beginning of Period |
| $ | 7.76 |
| $ | 7.80 |
| $ | 7.71 |
| $ | 7.79 |
| $ | 7.68 |
|
Income (Loss) from Investment Operations: |
|
|
|
|
|
|
|
|
|
|
| |||||
Net Investment Income† |
| 0.12 |
| 0.11 |
| 0.15 |
| 0.16 |
| 0.18 |
| |||||
Net Realized and Unrealized Gain (Loss) |
| 0.04 |
| (0.03 | ) | 0.11 |
| (0.10 | ) | 0.10 |
| |||||
Total from Investment Operations |
| 0.16 |
| 0.08 |
| 0.26 |
| 0.06 |
| 0.28 |
| |||||
Distributions from and/or in Excess of: |
|
|
|
|
|
|
|
|
|
|
| |||||
Net Investment Income |
| (0.11 | ) | (0.12 | ) | (0.17 | ) | (0.14 | ) | (0.16 | ) | |||||
Paid-in-Capital |
| — |
| — |
| — |
| — |
| (0.01 | ) | |||||
Total Distributions |
| (0.11 | ) | (0.12 | ) | (0.17 | ) | (0.14 | ) | (0.17 | ) | |||||
Net Asset Value, End of Period |
| $ | 7.81 |
| $ | 7.76 |
| $ | 7.80 |
| $ | 7.71 |
| $ | 7.79 |
|
Total Return++ |
| 2.06 | % | 1.09 | % | 3.35 | % | 0.71 | % | 3.74 | % | |||||
Ratios and Supplemental Data: |
|
|
|
|
|
|
|
|
|
|
| |||||
Net Assets, End of Period (Thousands) |
| $ | 119,059 |
| $ | 122,958 |
| $ | 145,387 |
| $ | 167,811 |
| $ | 208,608 |
|
Ratio of Expenses to Average Net Assets (1) |
| 0.53 | %+†† | 0.71 | %+^ | 0.63 | %+ | 0.59 | %+†† | 0.55 | %+†† | |||||
Ratio of Net Investment Income to Average Net Assets (1) |
| 1.49 | %+†† | 1.45 | %+^ | 1.92 | %+ | 2.12 | %+†† | 2.39 | %+†† | |||||
Ratio of Rebate from Morgan Stanley Affiliates to Average Net Assets |
| 0.00 | %§ | 0.00 | %§ | 0.00 | %§ | 0.00 | %§ | 0.00 | %§ | |||||
Portfolio Turnover Rate |
| 60 | % | 66 | % | 51 | % | 35 | % | 95 | % | |||||
| ||||||||||||||||
(1) Supplemental Information on the Ratios to Average Net Assets: |
|
|
|
|
| |||||||||||
Ratios Before Expense Limitation: |
|
|
|
|
|
|
|
|
|
|
| |||||
Expenses to Average Net Assets |
| 0.78 | %†† | 0.72 | % | N/A |
| N/A |
| N/A |
| |||||
Net Investment Income to Average Net Assets |
| 1.24 | %†† | 1.44 | % | N/A |
| N/A |
| N/A |
|
† Per share amount is based on average shares outstanding.
++ Calculated based on the net asset value as of the last business day of the period.
+ The Ratios of Expenses and Net Investment Income reflect the rebate of certain Portfolio expenses in connection with the investments in Morgan Stanley affiliates during the period. The effect of the rebate on the ratios is disclosed in the above table as “Ratio of Rebate from Morgan Stanley Affiliates to Average Net Assets.”
†† Reflects overall Portfolio ratios for investment income and non-class specific expenses.
§ Amount is less than 0.005%.
^ Effective September 16, 2013, the Adviser has agreed to limit the ratio of expenses to average net assets to the maximum ratio of 0.53% for Class I shares.
|
| Class A* |
| |||||||||||||
|
| Year Ended September 30, |
| |||||||||||||
Selected Per Share Data and Ratios |
| 2014 |
| 2013 |
| 2012 |
| 2011 |
| 2010 |
| |||||
Net Asset Value, Beginning of Period |
| $ | 7.77 |
| $ | 7.80 |
| $ | 7.71 |
| $ | 7.79 |
| $ | 7.68 |
|
Income (Loss) from Investment Operations: |
|
|
|
|
|
|
|
|
|
|
| |||||
Net Investment Income† |
| 0.09 |
| 0.09 |
| 0.13 |
| 0.15 |
| 0.17 |
| |||||
Net Realized and Unrealized Gain (Loss) |
| 0.05 |
| (0.01 | ) | 0.11 |
| (0.12 | ) | 0.09 |
| |||||
Total from Investment Operations |
| 0.14 |
| 0.08 |
| 0.24 |
| 0.03 |
| 0.26 |
| |||||
Distributions from and/or in Excess of: |
|
|
|
|
|
|
|
|
|
|
| |||||
Net Investment Income |
| (0.08 | ) | (0.11 | ) | (0.15 | ) | (0.11 | ) | (0.15 | ) | |||||
Paid-in-Capital |
| — |
| — |
| — |
| — |
| (0.00 | )‡ | |||||
Total Distributions |
| (0.08 | ) | (0.11 | ) | (0.15 | ) | (0.11 | ) | (0.15 | ) | |||||
Net Asset Value, End of Period |
| $ | 7.83 |
| $ | 7.77 |
| $ | 7.80 |
| $ | 7.71 |
| $ | 7.79 |
|
Total Return++ |
| 1.78 | % | 0.84 | % | 3.22 | % | 0.45 | % | 3.48 | % | |||||
Ratios and Supplemental Data: |
|
|
|
|
|
|
|
|
|
|
| |||||
Net Assets, End of Period (Thousands) |
| $ | 940 |
| $ | 749 |
| $ | 145 |
| $ | 194 |
| $ | 52 |
|
Ratio of Expenses to Average Net Assets (1) |
| 0.88 | %+†† | 0.97 | %+^ | 0.88 | %+ | 0.84 | %+†† | 0.80 | %+†† | |||||
Ratio of Net Investment Income to Average Net Assets (1) |
| 1.14 | %+†† | 1.15 | %+^ | 1.70 | %+ | 1.87 | %+†† | 2.14 | %+†† | |||||
Ratio of Rebate from Morgan Stanley Affiliates to Average Net Assets |
| 0.00 | %§ | 0.00 | %§ | 0.00 | %§ | 0.00 | %§ | 0.00 | %§ | |||||
Portfolio Turnover Rate |
| 60 | % | 66 | % | 51 | % | 35 | % | 95 | % |
(1) Supplemental Information on the Ratios to Average Net Assets: |
|
|
|
|
|
|
| |||||||||
Ratios Before Expense Limitation: |
|
|
|
|
|
|
|
|
|
|
| |||||
Expenses to Average Net Assets |
| 1.10 | %†† | 1.00 | % | N/A |
| N/A |
| N/A |
| |||||
Net Investment Income to Average Net Assets |
| 0.92 | %†† | 1.12 | % | N/A |
| N/A |
| N/A |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* Effective September 9, 2013, Class P and Class H shares were renamed Class A shares.
† Per share amount is based on average shares outstanding.
‡ Amount is less than $0.005 per share.
++ Calculated based on the net asset value, which does not reflect sales charges, if applicable, as of the last business day of the period.
+ The Ratios of Expenses and Net Investment Income reflect the rebate of certain Portfolio expenses in connection with the investments in Morgan Stanley affiliates during the period. The effect of the rebate on the ratios is disclosed in the above table as “Ratio of Rebate from Morgan Stanley Affiliates to Average Net Assets.”
†† Reflects overall Portfolio ratios for investment income and non-class specific expenses.
§ Amount is less than 0.005%.
^ Effective September 16, 2013, the Adviser has agreed to limit the ratio of expenses to average net assets to the maximum ratio of 0.88% for Class A shares.
|
| Class L |
| |||||||
|
| Year Ended September 30, |
| Period from |
| |||||
Selected Per Share Data and Ratios |
| 2014 |
| 2013 |
| September 30, 2012 |
| |||
Net Asset Value, Beginning of Period |
| $ | 7.75 |
| $ | 7.80 |
| $ | 7.76 |
|
Income (Loss) from Investment Operations: |
|
|
|
|
|
|
| |||
Net Investment Income† |
| 0.06 |
| 0.07 |
| 0.04 |
| |||
Net Realized and Unrealized Gain (Loss) |
| 0.05 |
| (0.03 | ) | 0.04 |
| |||
Total from Investment Operations |
| 0.11 |
| 0.04 |
| 0.08 |
| |||
Distributions from and/or in Excess of: |
|
|
|
|
|
|
| |||
Net Investment Income |
| (0.06 | ) | (0.09 | ) | (0.04 | ) | |||
Net Asset Value, End of Period |
| $ | 7.80 |
| $ | 7.75 |
| $ | 7.80 |
|
Total Return++ |
| 1.38 | % | 0.48 | % | 1.06 | %# | |||
Ratios and Supplemental Data: |
|
|
|
|
|
|
| |||
Net Assets, End of Period (Thousands) |
| $ | 200 |
| $ | 95 |
| $ | 10 |
|
Ratio of Expenses to Average Net Assets (1) |
| 1.23 | %+†† | 1.24 | %+^^ | 1.21 | %+* | |||
Ratio of Net Investment Income to Average Net Assets (1) |
| 0.79 | %+†† | 0.85 | %+^^ | 1.14 | %+* | |||
Ratio of Rebate from Morgan Stanley Affiliates to Average Net Assets |
| 0.00 | %§ | 0.00 | %§ | 0.00 | %*§ | |||
Portfolio Turnover Rate |
| 60 | % | 66 | % | 51 | %# |
(1) Supplemental Information on the Ratios to Average Net Assets: |
|
|
|
|
| |||||
Ratios Before Expense Limitation: |
|
|
|
|
|
|
| |||
Expenses to Average Net Assets |
| 3.48 | %†† | 1.34 | % | N/A |
| |||
Net Investment Income (Loss) to Average Net Assets |
| (1.46 | )%†† | 0.75 | % | N/A |
| |||
|
|
|
|
|
|
|
|
|
|
|
^ Commencement of Operations.
† Per share amount is based on average shares outstanding.
++ Calculated based on the net asset value as of the last business day of the period.
+ The Ratios of Expenses and Net Investment Income reflect the rebate of certain Portfolio expenses in connection with the investments in Morgan Stanley affiliates during the period. The effect of the rebate on the ratios is disclosed in the above table as “Ratio of Rebate from Morgan Stanley Affiliates to Average Net Assets.”
†† Reflects overall Portfolio ratios for investment income and non-class specific expenses.
§ Amount is less than 0.005%.
^^ Effective September 16, 2013, the Adviser has agreed to limit the ratio of expenses to average net assets to the maximum ratio of 1.23% for Class L shares.
# Not Annualized.
* Annualized.
Additional Information
Where to Find Additional Information
In addition to this Prospectus, the Portfolios have a Statement of Additional Information, dated January 30, 2015, which contains additional, more detailed information about the Fund and the Portfolios. The Statement of Additional Information is incorporated by reference into this Prospectus and, therefore, legally forms a part of this Prospectus.
Shareholder Reports
The Fund publishes Annual and Semiannual Reports to Shareholders (“Shareholder Reports”) that contain additional information about the respective Portfolio’s investments. In each Portfolio’s Annual Report to Shareholders, you will find a discussion of the market conditions and the investment strategies that significantly affected such Portfolio’s performance during the last fiscal year. For additional Fund information, including information regarding the investments comprising each of the Portfolios, please call the toll-free number below.
You may obtain the Statement of Additional Information and Shareholder Reports without charge by contacting the Fund at the toll-free number below or on our internet site at: www.morganstanley.com/im. If you purchased shares through a Financial Intermediary, you may also obtain these documents, without charge, by contacting your Financial Intermediary.
Information about the Fund (including the Statement of Additional Information and Shareholder Reports) can be reviewed and copied at the SEC’s Public Reference Room in Washington D.C. Information on the operation of the Public Reference Room may be obtained by calling the SEC at (202) 551-8090. Shareholder Reports and other information about the Fund are available on the EDGAR Database on the SEC’s Internet site at http://www.sec.gov, and copies of this information may be obtained, after paying a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov, or by writing the SEC’s Public Reference Section, Washington, D.C. 20549-1520.
Morgan Stanley Institutional Fund Trust
c/o Boston Financial Data Services, Inc.
P.O. Box 219804
Kansas City, MO 64121-9804
For Shareholder Inquiries,
call toll-free 1-800-548-7786.
Prices and Investment Results are available at
www.morganstanley.com/im.
The Fund’s Investment Company Act registration number is 811-03980.
| IFTFIPRO 01/15 |
INVESTMENT MANAGEMENT
Morgan Stanley Institutional Fund Trust
Limited Duration Portfolio
Annual Report
September 30, 2014
Morgan Stanley Institutional Fund Trust
Annual Report — September 30, 2014
Table of Contents
Shareholders' Letter | 2 | ||||||
Expense Example | 3 | ||||||
Investment Advisory Agreement Approval | 4 | ||||||
Investment Overview | 6 | ||||||
Portfolio of Investments | 9 | ||||||
Statement of Assets and Liabilities | 15 | ||||||
Statement of Operations | 17 | ||||||
Statements of Changes in Net Assets | 18 | ||||||
Financial Highlights | 19 | ||||||
Notes to Financial Statements | 22 | ||||||
Report of Independent Registered Public Accounting Firm | 30 | ||||||
U.S. Privacy Policy | 31 | ||||||
Trustee and Officer Information | 34 |
This report is authorized for distribution only when preceded or accompanied by prospectuses of the Morgan Stanley Institutional Fund Trust. To receive a prospectus and/or statement of additional information (SAI), which contains more complete information such as investment objectives, charges, expenses, policies for voting proxies, risk considerations, and describes in detail each of the Portfolio's investment policies to the prospective investor, please call toll free 1 (800) 548-7786. Please read the prospectuses carefully before you invest or send money.
Additionally, you can access portfolio information including performance, characteristics, and investment team commentary through Morgan Stanley Investment Management's website: www.morganstanley.com/im.
Market forecasts provided in this report may not necessarily come to pass. 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 Portfolio in the future. There is no assurance that a Portfolio will achieve its investment objective. Portfolios are subject to market risk, which is the possibility that market values of securities owned by the Portfolio will decline and, therefore, the value of the Portfolio's shares may be less than what you paid for them. Accordingly, you can lose money investing in this Portfolio. Please see the prospectus for more complete information on investment risks.
1
Morgan Stanley Institutional Fund Trust
Annual Report — September 30, 2014
Shareholders' Letter (unaudited)
Dear Shareholders,
We are pleased to provide this Annual report, in which you will learn how your investment in Limited Duration Portfolio (the "Portfolio") performed during the latest twelve-month period.
Morgan Stanley Investment Management is a client-centric, investor-led organization. Our global presence, intellectual capital, and breadth of products and services enable us to partner with investors to meet the evolving challenges of today's financial markets. We aim to deliver superior investment service and to empower our clients to make the informed decisions that help them reach their investment goals.
As always, we thank you for selecting Morgan Stanley Investment Management, and look forward to working with you in the months and years ahead.
Sincerely,
John H. Gernon
President and Principal Executive Officer
October 2014
2
Morgan Stanley Institutional Fund Trust
Annual Report — September 30, 2014
Expense Example (unaudited)
Limited Duration Portfolio
As a shareholder of the Portfolio, you may incur two types of costs: (1) transactional costs, including sales charge (loads) on purchase payments; and (2) ongoing costs, including advisory fees, administration fees, distribution and shareholder services fees; and other Portfolio expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Portfolio and to compare these costs with the ongoing costs of investing in other mutual funds.
This example is based on an investment of $1,000 invested at the beginning of the six-month period ended September 30, 2014 and held for the entire six-month period.
Actual Expenses
The table below provides information about actual account values and actual expenses. You may use the information in this table, 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 table under the heading entitled "Actual Expenses Paid During Period" to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The table below provides information about hypothetical account values and hypothetical expenses based on the Portfolio's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Portfolio'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 costs of investing in the Portfolio 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, if applicable). Therefore, the information for each class in the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Beginning Account Value 4/1/14 | Actual Ending Account Value 9/30/14 | Hypothetical Ending Account Value | Actual Expenses Paid During Period* | Hypothetical Expenses Paid During Period* | Net Expense Ratio During Period** | ||||||||||||||||||||||
Limited Duration Portfolio Class I | $ | 1,000.00 | $ | 1,005.40 | $ | 1,022.41 | $ | 2.66 | $ | 2.69 | 0.53 | % | |||||||||||||||
Limited Duration Portfolio Class A | 1,000.00 | 1,004.30 | 1,020.66 | 4.42 | 4.46 | 0.88 | |||||||||||||||||||||
Limited Duration Portfolio Class L | 1,000.00 | 1,002.20 | 1,018.90 | 6.17 | 6.23 | 1.23 |
* Expenses are calculated using each Portfolio Class' annualized net expense ratio (as disclosed), multiplied by the average account value over the period, and multiplied by 183/365 (to reflect the most recent one-half year period).
** Annualized.
3
Morgan Stanley Institutional Fund Trust
Annual Report — September 30, 2014
Investment Advisory Agreement Approval (unaudited)
Nature, Extent and Quality of Services
The Board reviewed and considered the nature and extent of the investment advisory services provided by the Adviser (as defined herein) under the advisory agreement, including portfolio management, investment research and equity and fixed income securities trading. The Board also reviewed and considered the nature and extent of the non-advisory, administrative services provided by the Adviser under the administration agreement, including accounting, clerical, bookkeeping, compliance, business management and planning, and the provision of supplies, office space and utilities at the Adviser's expense. (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 Portfolio. 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 Portfolio and supported its decision to approve the Management Agreement.
Performance, Fees and Expenses of the Portfolio
The Board reviewed the performance, fees and expenses of the Portfolio 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 Portfolio. 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, 2013, or since inception, 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 Portfolio's performance was better than its peer group average for the one- and three-year periods but below its peer group average for the five-year period. The Board discussed with the Adviser the level of the advisory and administration fees (together, the "management fee") for this Portfolio relative to comparable funds and/or other accounts advised by the Adviser and/or compared to its peers as determined by Lipper. In addition to the management fee, the Board also reviewed the Portfolio's total expense ratio. When a fund's management fee and/or its total expense ratio are higher than its peers, the Board and the Adviser discuss the reasons for this and, where appropriate, they discuss possible waivers and/or caps. The Board noted that the Portfolio's management fee and total expense ratio were higher than its peer group average. After discussion, the Board concluded that the Portfolio's (i) performance was competitive with its peer group average; and (ii) management fee and total expense ratio were acceptable.
Economies of Scale
The Board considered the size and growth prospects of the Portfolio and how that relates to the Portfolio's total expense ratio and particularly the Portfolio's management fee rate, which does not include 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 Portfolio 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 Portfolio supports 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 Portfolio 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.
4
Morgan Stanley Institutional Fund Trust
Annual Report — September 30, 2014
Investment Advisory Agreement Approval (unaudited) (cont'd)
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, research received by the Adviser generated from commission dollars spent on funds' portfolio trading, and fees for trading, distribution and/or shareholder servicing. The Board reviewed with the Adviser each of these arrangements and the reasonableness of the Adviser's 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 Portfolio 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 Portfolio and the Adviser, including the organizational structure of the Adviser, the policies and procedures formulated and adopted by the Adviser for managing the Portfolio's operations and the 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 Portfolio 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 Portfolio 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.
5
Morgan Stanley Institutional Fund Trust
Annual Report — September 30, 2014
Investment Overview (unaudited)
Limited Duration Portfolio
The Limited Duration Portfolio seeks above-average total return over a market cycle of three to five years.
Performance
For the fiscal year ended September 30, 2014, the Portfolio's Class I shares had a total return based on net asset value and reinvestment of distributions per share of 2.06%, net of fees. The Portfolio's Class I shares outperformed against the Portfolio's benchmark, Barclays Capital 1-3 Year Government/Credit Index (the "Index"), which returned 0.77%.
Factors Affecting Performance
• After rallying for most of the period, risky assets paused late in the period as investors took stock of the changing fundamental backdrop and re-evaluated whether market risk premia are sufficient to compensate for these risks. In the U.S., investors increased their focus on when the Federal Reserve (Fed) will raise rates, potentially increasing the volatility in financial markets. In contrast, investors in Europe focused on the weakening fundamental backdrop, as economic growth continued to decelerate and inflation expectations continued their downward path, thereby putting pressure on the European Central Bank (ECB) to take additional unconventional action. On a global basis, expectations for growth continued to fall, and this has been reflected in weaker commodity prices and the strengthening U.S. dollar. These concerns, combined with the growing geopolitical tension in Syria and Iraq, contributed to an uncertain backdrop for investing.
• In the U.S., the Fed has maintained a view that rates will remain low for a "considerable time." The ECB eased policy rates and announced outright asset purchases of asset-backed securities (ABS) and covered bonds. The Bank of Japan continued to contemplate ways to ease financial conditions. Both Australian and New Zealand central banks have also turned slightly more dovish, meaning that they are more favorable toward maintaining low interest rates to foster economic growth. As long as the inflation backdrop remains steady, the risk of a sharp rise in interest rates appears minimal.
• The Fed is expected to complete the tapering of its mortgage-backed security (MBS) purchase program by October of this year. During the first half of 2014, the Fed purchased as much as 75% of net MBS issuance.(i) The Fed's share declined to 30% to
50% in the third quarter, as MBS gross issuance increased in the summer months and the Fed continued to reduce the size of its purchases. Even after the bond buying program ends, the Fed will likely continue to reinvest MBS paydowns, which is expected to reduce its share of net issuance to 25% to 30%.
• The mortgage primary rate rose slightly from the 2014 lows set in June, ending September at 4.20%.(ii) Despite the low mortgage rate environment, refinancing activity remained at historically low levels and has contributed to relatively tight spreads. Other housing indicators pointed to slower growth in housing trends as new construction remained weak and existing homes sales began to fall at the end of the period. We believe home price growth could continue, albeit at a slower pace. The fundamentals in the housing market are very positive, supported by good housing affordability, near all-time low household debt service ratios and an improving labor market.
• Commercial mortgage-backed security (CMBS) bond spreads tightened and new issue supply was absorbed by the market. Overall, issuance is projected to exceed last year's volumes and rely on a reasonably active forward calendar. Delinquency trends have remained stable.
• Corporate credit performed well during the period. On a sector basis, financials continued to outperform industrials, supported by the financials sector's lower net issuance and continued secular de-risking. Credit spreads decompressed, with higher rated issuers outperforming those with lower-quality credit profiles. The high yield segment weakened in the latter part of the period, reflecting both the spread decompression witnessed in the investment grade market and less favorable supply demand characteristics. High yield supply has been high both in Europe and the U.S., while fund flows were negative, particularly in the U.S., as investors reduced positions ahead of a potential rate-raising cycle.
• The Treasury yield curve flattened during the period, with two- and five-year yields rising between 20 and 30 basis points, and 10- and 30-year yields falling between 20 and 60 basis points.
(i) Fed MBS data from J.P. Morgan Global Structured Finance Research and the Federal Reserve.
(ii) Data from Bloomberg.
6
Morgan Stanley Institutional Fund Trust
Annual Report — September 30, 2014
Investment Overview (unaudited) (cont'd)
Limited Duration Portfolio
• The Portfolio's positioning in the corporate sector was one of the main drivers of outperformance. In particular, an overweight in financials and a small allocation to high yield securities contributed significantly to returns.
• The Portfolio also benefited from an allocation to ABS, as the bonds provided an attractive yield advantage during the period.
• An interest rate sensitivity that was lower than that of the Index added to returns overall, but detracted slightly during periods of falling rates.
Management Strategies
• Throughout the period, the Portfolio was positioned with an overweight to investment-grade credit, particularly in financials, as we believe valuations relative to fundamentals have been attractive.
• The Portfolio has also been positioned with an allocation to short-maturity, high-quality ABS. This position is primarily in credit card, auto, and business and construction equipment securities.
• The Portfolio has allocations to riskier segments of the market, such as BB-rated high-yield corporates and non-agency mortgage securities.
• We continue being overweight spread product (non-government bonds) in the Portfolio, as we believe the yield advantage could provide a large part of returns over the near term.
* Minimum Investment
In accordance with SEC regulations, the Portfolio's performance shown assumes that all recurring fees (including management fees) were deducted and all dividends and distributions were reinvested. The performance of Class A and Class L shares will vary from the performance of Class I shares based upon their different inception dates and will be negatively impacted by additional fees assessed to those classes.
7
Morgan Stanley Institutional Fund Trust
Annual Report — September 30, 2014
Investment Overview (unaudited) (cont'd)
Limited Duration Portfolio
Performance Compared to the Barclays Capital 1-3 Year U.S. Government/Credit Index(1) and the Lipper Short Investment Grade Debt Funds Index(2)
Period Ended September 30, 2014 Total Returns(3) | |||||||||||||||||||
Average Annual | |||||||||||||||||||
One Year | Five Years | Ten Years | Since Inception(7) | ||||||||||||||||
Portfolio — Class I Shares w/o sales charges(4) | 2.06 | % | 2.18 | % | 0.26 | % | 3.12 | % | |||||||||||
Barclays Capital 1-3 Year U.S. Government/Credit Index | 0.77 | 1.45 | 2.85 | 4.45 | |||||||||||||||
Lipper Short Investment Grade Debt Funds Index | 1.51 | 2.65 | 2.81 | 4.18 | |||||||||||||||
Portfolio — Class A Shares w/o sales charges(5) | 1.78 | 1.95 | — | -1.19 | |||||||||||||||
Portfolio — Class A Shares with maximum 4.25% sales charges(5) | -2.48 | 1.07 | — | -1.80 | |||||||||||||||
Barclays Capital 1-3 Year U.S. Government/Credit Index | 0.77 | 1.45 | — | 2.54 | |||||||||||||||
Lipper Short Investment Grade Debt Funds Index | 1.51 | 2.65 | — | 2.57 | |||||||||||||||
Portfolio — Class L Shares w/o sales charges(6) | 1.38 | — | — | 1.20 | |||||||||||||||
Barclays Capital 1-3 Year U.S. Government/Credit Index | 0.77 | — | — | 0.81 | |||||||||||||||
Lipper Short Investment Grade Debt Funds Index | 1.51 | — | — | 1.60 |
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. Performance assumes that all dividends and distributions, if any, were reinvested. For the most recent month-end performance figures, please visit www.morganstanley.com/im. Investment returns and principal value will fluctuate so that Portfolio shares, when redeemed, may be worth more or less than their original cost. Total returns do not reflect the deduction of taxes that a shareholder would pay on Portfolio distributions or the redemption of Portfolio shares. Performance of share classes will vary due to differences in sales charges and expenses.
(1) The Barclays Capital 1-3 Year U.S. Government/Credit Index tracks the securities in the 1-3 year maturity range of the Barclays Capital U.S. Government/Credit Index which tracks investment-grade (BBB-/Baa3) or higher publicly traded fixed rate U.S. government, U.S. agency, and corporate issues. 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 Short Investment Grade Debt Funds Index is an equally weighted performance index of the largest qualifying funds (based on net assets) in the Lipper Short Investment Grade Debt 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. As of the date of this report, the Portfolio was in the Lipper Short Investment Grade Debt Funds classification.
(3) Total returns for the Portfolio reflect expenses waived and/or reimbursed, if applicable, by the Adviser. Without such waivers and/or reimbursements, total returns would have been lower. The fee waivers and/or expense reimbursements will continue for at least one year or until such time as the Fund's Board of Trustees acts to discontinue all or a portion of such waivers and/or reimbursements when it deems such action is appropriate.
(4) Commenced operations on March 31, 1992.
(5) Commenced operations on September 28, 2007.
(6) Commenced operations on April 27, 2012.
(7) For comparative purposes, average annual since inception returns listed for the Indexes refer to the inception date or initial offering of the share class of the Portfolio, not the inception of the Indexes.
8
Morgan Stanley Institutional Fund Trust
Annual Report — September 30, 2014
Portfolio of Investments
Limited Duration Portfolio
Face Amount (000) | Value (000) | ||||||||||
Fixed Income Securities (98.4%) | |||||||||||
Agency Adjustable Rate Mortgages (3.9%) | |||||||||||
Federal Home Loan Mortgage Corporation, Conventional Pools: | |||||||||||
2.31%, 6/1/36 | $ | 487 | $ | 522 | |||||||
2.32%, 7/1/38 | 420 | 447 | |||||||||
2.34%, 7/1/36 | 457 | 489 | |||||||||
2.42%, 7/1/38 | 1,002 | 1,079 | |||||||||
2.47%, 9/1/35 | 626 | 672 | |||||||||
2.68%, 1/1/38 | 124 | 133 | |||||||||
Federal National Mortgage Association, Conventional Pools: | |||||||||||
2.33%, 5/1/35 - 5/1/39 | 1,037 | 1,108 | |||||||||
Government National Mortgage Association, Various Pool: | |||||||||||
2.00%, 2/20/40 | 161 | 168 | |||||||||
4,618 | |||||||||||
Agency Fixed Rate Mortgages (0.4%) | |||||||||||
Federal Home Loan Mortgage Corporation, Gold Pools: | |||||||||||
6.50%, 9/1/19 - 4/1/24 | 5 | 5 | |||||||||
7.50%, 11/1/19 | 1 | 1 | |||||||||
Federal National Mortgage Association, Conventional Pools: | |||||||||||
6.50%, 2/1/28 - 10/1/32 | 386 | 436 | |||||||||
7.00%, 7/1/29 - 12/1/33 | 59 | 63 | |||||||||
Government National Mortgage Association, Various Pools: | |||||||||||
9.00%, 11/15/16 - 12/15/16 | 20 | 21 | |||||||||
526 | |||||||||||
Asset-Backed Securities (17.5%) | |||||||||||
Ally Auto Receivables Trust | |||||||||||
0.62%, 3/15/17 | 562 | 563 | |||||||||
American Homes 4 Rent 2014-SFR1 | |||||||||||
1.25%, 6/17/31 (a)(b) | 273 | 272 | |||||||||
American Residential Properties 2014-SFR1 Trust | |||||||||||
1.25%, 9/17/31 (a)(b) | 401 | 401 | |||||||||
AWAS Aviation Capital Ltd. | |||||||||||
7.00%, 10/17/16 (b) | 332 | 339 | |||||||||
CarMax Auto Owner Trust | |||||||||||
0.52%, 7/17/17 | 373 | 374 | |||||||||
Chase Issuance Trust, | |||||||||||
0.54%, 10/16/17 | 1,125 | 1,125 | |||||||||
0.59%, 8/15/17 | 1,608 | 1,610 | |||||||||
Citibank Credit Card Issuance Trust | |||||||||||
2.88%, 1/23/23 | 450 | 458 | |||||||||
Colony American Homes 2014-1 | |||||||||||
1.40%, 5/17/31 (a)(b) | 424 | 425 | |||||||||
Colony American Homes Single-Family Rental Pass-Through Certificates | |||||||||||
1.10%, 7/17/31 (a)(b) | 338 | 336 | |||||||||
Discover Card Execution Note Trust, | |||||||||||
0.58%, 7/15/21 (a) | 670 | 672 | |||||||||
1.22%, 10/15/19 | 465 | 464 |
Face Amount (000) | Value (000) | ||||||||||
Enterprise Fleet Financing LLC | |||||||||||
1.05%, 3/20/20 (b) | $ | 836 | $ | 836 | |||||||
Fifth Third Auto Trust | |||||||||||
0.88%, 10/16/17 | 506 | 508 | |||||||||
Ford Credit Auto Owner Trust | |||||||||||
2.26%, 11/15/25 (b) | 1,165 | 1,165 | |||||||||
Ford Credit Floorplan Master Owner Trust | |||||||||||
4.20%, 2/15/17 (b) | 1,150 | 1,166 | |||||||||
GE Dealer Floorplan Master Note Trust | |||||||||||
0.64%, 6/20/17 (a) | 750 | 751 | |||||||||
GE Equipment Transportation LLC | |||||||||||
0.62%, 7/25/16 | 343 | 343 | |||||||||
GM Financial Leasing Trust | |||||||||||
0.73%, 2/20/17 (b) | 580 | 580 | |||||||||
Hertz Fleet Lease Funding LP | |||||||||||
0.70%, 12/10/27 (a)(b) | 575 | 576 | |||||||||
Hyundai Auto Receivables Trust, | |||||||||||
0.90%, 12/17/18 | 941 | 942 | |||||||||
1.01%, 2/15/18 | 427 | 429 | |||||||||
Invitation Homes 2013-SFR1 Trust | |||||||||||
1.40%, 12/17/30 (a)(b) | 609 | 611 | |||||||||
Invitation Homes 2014-SFR1 Trust | |||||||||||
1.15%, 6/17/31 (a)(b) | 429 | 427 | |||||||||
John Deere Owner Trust | |||||||||||
0.60%, 3/15/17 | 1,325 | 1,327 | |||||||||
Nationstar Agency Advance Funding Trust | |||||||||||
1.89%, 2/18/48 (b) | 100 | 97 | |||||||||
North Carolina State Education Assistance Authority | |||||||||||
1.03%, 7/25/25 (a) | 625 | 628 | |||||||||
Panhandle-Plains Higher Education Authority, Inc. | |||||||||||
1.19%, 7/1/24 (a) | 254 | 258 | |||||||||
PFS Tax Lien Trust 2014-1 | |||||||||||
1.44%, 5/15/29 (b) | 471 | 471 | |||||||||
Toyota Auto Receivables Owner Trust | |||||||||||
0.89%, 7/17/17 | 595 | 597 | |||||||||
Volkswagen Credit Auto Master Trust | |||||||||||
1.40%, 7/22/19 (b) | 398 | 397 | |||||||||
VOLT XXIV LLC | |||||||||||
3.25%, 11/25/53 (b) | 727 | 730 | |||||||||
Volvo Financial Equipment LLC | |||||||||||
0.74%, 3/15/17 (b) | 650 | 651 | |||||||||
Wheels SPV LLC | |||||||||||
0.84%, 3/20/23 (b) | 203 | 202 | |||||||||
World Omni Automobile Lease Securitization Trust, | |||||||||||
0.93%, 11/16/15 | 19 | 19 | |||||||||
1.10%, 12/15/16 | 321 | 323 | |||||||||
21,073 | |||||||||||
Collateralized Mortgage Obligations — Agency Collateral Series (3.6%) | |||||||||||
Federal Home Loan Mortgage Corporation, | |||||||||||
1.43%, 8/25/17 | 688 | 691 | |||||||||
1.56%, 10/25/18 | 219 | 221 |
The accompanying notes are an integral part of the financial statements.
9
Morgan Stanley Institutional Fund Trust
Annual Report — September 30, 2014
Portfolio of Investments (cont'd)
Limited Duration Portfolio
Face Amount (000) | Value (000) | ||||||||||
Collateralized Mortgage Obligations — Agency Collateral Series (cont'd) | |||||||||||
REMIC | |||||||||||
7.50%, 9/15/29 | $ | 1,081 | $ | 1,240 | |||||||
Federal National Mortgage Association, | |||||||||||
0.59%, 8/25/15 | 497 | 497 | |||||||||
0.95%, 11/25/15 | 276 | 277 | |||||||||
1.08%, 2/25/16 | 585 | 588 | |||||||||
2.17%, 9/25/19 (a) | 783 | 780 | |||||||||
4,294 | |||||||||||
Commercial Mortgage-Backed Securities (0.9%) | |||||||||||
Citigroup Commercial Mortgage Trust | |||||||||||
2.11%, 1/12/30 (b) | 174 | 175 | |||||||||
Hilton USA Trust | |||||||||||
1.16%, 11/5/30 (a)(b) | 170 | 170 | |||||||||
JP Morgan Chase Commercial Mortgage Securities Trust, | |||||||||||
1.13%, 7/15/31 (a)(b) | 285 | 286 | |||||||||
5.46%, 12/12/43 | 400 | 418 | |||||||||
1,049 | |||||||||||
Corporate Bonds (64.2%) | |||||||||||
Finance (29.1%) | |||||||||||
Abbey National Treasury Services PLC | |||||||||||
3.05%, 8/23/18 | 370 | 384 | |||||||||
ABN Amro Bank N.V. | |||||||||||
2.50%, 10/30/18 (b) | 630 | 637 | |||||||||
AerCap Ireland Capital Ltd./AerCap Global Aviation Trust | |||||||||||
3.75%, 5/15/19 (b) | 345 | 335 | |||||||||
American Express Credit Corp. | |||||||||||
2.25%, 8/15/19 | 675 | 671 | |||||||||
Australia & New Zealand Banking Group Ltd. | |||||||||||
1.45%, 5/15/18 | 575 | 566 | |||||||||
Bank of America Corp. | |||||||||||
2.60%, 1/15/19 | 900 | 899 | |||||||||
BB&T Corp. | |||||||||||
2.25%, 2/1/19 | 580 | 581 | |||||||||
Berkshire Hathaway Finance Corp. | |||||||||||
2.90%, 10/15/20 | 600 | 611 | |||||||||
BioMed Realty LP | |||||||||||
2.63%, 5/1/19 | 310 | 308 | |||||||||
BNP Paribas SA, MTN | |||||||||||
2.70%, 8/20/18 | 610 | 622 | |||||||||
BNZ International Funding Ltd. | |||||||||||
2.35%, 3/4/19 (b) | 650 | 648 | |||||||||
BPCE SA | |||||||||||
2.50%, 7/15/19 | 625 | 621 | |||||||||
Canadian Imperial Bank of Commerce | |||||||||||
1.55%, 1/23/18 | 310 | 310 | |||||||||
Capital One Financial Corp. | |||||||||||
2.45%, 4/24/19 | 1,005 | 1,002 | |||||||||
CIT Group, Inc. | |||||||||||
5.00%, 5/15/17 | 500 | 514 |
Face Amount (000) | Value (000) | ||||||||||
Citigroup, Inc. | |||||||||||
8.50%, 5/22/19 | $ | 950 | $ | 1,189 | |||||||
Commonwealth Bank of Australia | |||||||||||
2.50%, 9/20/18 | 600 | 612 | |||||||||
Cooperatieve Centrale Raiffeisen-Boerenleenbank BA | |||||||||||
3.38%, 1/19/17 | 330 | 346 | |||||||||
Credit Agricole SA | |||||||||||
2.13%, 4/17/18 (b) | 775 | 774 | |||||||||
Credit Suisse | |||||||||||
2.30%, 5/28/19 | 650 | 644 | |||||||||
DBS Group Holdings Ltd. | |||||||||||
2.25%, 7/16/19 (b) | 650 | 644 | |||||||||
Discover Bank | |||||||||||
2.00%, 2/21/18 | 665 | 662 | |||||||||
DNB Bank ASA | |||||||||||
3.20%, 4/3/17 (b) | 610 | 637 | |||||||||
ERP Operating LP | |||||||||||
2.38%, 7/1/19 | 550 | 547 | |||||||||
General Electric Capital Corp. | |||||||||||
1.63%, 4/2/18 | 1,220 | 1,219 | |||||||||
General Motors Financial Co., Inc. | |||||||||||
2.75%, 5/15/16 | 325 | 328 | |||||||||
Goldman Sachs Group, Inc. (The) | |||||||||||
2.38%, 1/22/18 | 880 | 890 | |||||||||
HSBC USA, Inc. | |||||||||||
2.25%, 6/23/19 | 659 | 657 | |||||||||
Icahn Enterprises LP/Icahn Enterprises Finance Corp., Series WI | |||||||||||
4.88%, 3/15/19 | 375 | 370 | |||||||||
ING Bank N.V. | |||||||||||
3.75%, 3/7/17 (b) | 600 | 632 | |||||||||
Intesa Sanpaolo SpA | |||||||||||
3.88%, 1/16/18 | 355 | 370 | |||||||||
JPMorgan Chase & Co. | |||||||||||
1.63%, 5/15/18 | 900 | 888 | |||||||||
Lloyds Bank PLC | |||||||||||
2.30%, 11/27/18 | 400 | 401 | |||||||||
Macquarie Bank Ltd. | |||||||||||
2.60%, 6/24/19 (b) | 605 | 605 | |||||||||
Mastercard, Inc. | |||||||||||
2.00%, 4/1/19 | 325 | 323 | |||||||||
Metropolitan Life Global Funding I | |||||||||||
1.50%, 1/10/18 (b) | 775 | 769 | |||||||||
Mizuho Corporate Bank Ltd. | |||||||||||
1.85%, 3/21/18 (b) | 645 | 645 | |||||||||
National Australia Bank Ltd. | |||||||||||
1.25%, 3/17/17 (b) | 400 | 400 | |||||||||
Nationwide Building Society | |||||||||||
4.65%, 2/25/15 (b) | 840 | 854 | |||||||||
Nordea Bank AB | |||||||||||
0.88%, 5/13/16 (b) | 695 | 695 | |||||||||
Principal Financial Group, Inc. | |||||||||||
1.85%, 11/15/17 | 725 | 726 |
The accompanying notes are an integral part of the financial statements.
10
Morgan Stanley Institutional Fund Trust
Annual Report — September 30, 2014
Portfolio of Investments (cont'd)
Limited Duration Portfolio
Face Amount (000) | Value (000) | ||||||||||
Finance (cont'd) | |||||||||||
Prudential Financial, Inc., MTN | |||||||||||
4.75%, 9/17/15 | $ | 930 | $ | 967 | |||||||
QBE Insurance Group Ltd. | |||||||||||
2.40%, 5/1/18 (b) | 200 | 200 | |||||||||
Royal Bank of Scotland Group PLC | |||||||||||
2.55%, 9/18/15 | 495 | 502 | |||||||||
Skandinaviska Enskilda Banken AB | |||||||||||
1.75%, 3/19/18 (b) | 380 | 379 | |||||||||
Standard Chartered PLC | |||||||||||
1.50%, 9/8/17 (b) | 900 | 898 | |||||||||
Sumitomo Mitsui Banking Corp. | |||||||||||
2.45%, 1/10/19 | 630 | 637 | |||||||||
Swedbank AB | |||||||||||
1.75%, 3/12/18 (b) | 305 | 304 | |||||||||
Synchrony Financial | |||||||||||
3.00%, 8/15/19 | 800 | 803 | |||||||||
Toronto-Dominion Bank (The), MTN | |||||||||||
2.63%, 9/10/18 | 650 | 665 | |||||||||
UBS AG | |||||||||||
2.38%, 8/14/19 | 925 | 918 | |||||||||
WEA Finance LLC / Westfield UK & Europe Finance PLC | |||||||||||
2.70%, 9/17/19 (b) | 600 | 602 | |||||||||
WellPoint, Inc. | |||||||||||
1.88%, 1/15/18 | 705 | 705 | |||||||||
Wells Fargo & Co., | |||||||||||
1.40%, 9/8/17 | 575 | 574 | |||||||||
2.15%, 1/15/19 | 360 | 361 | |||||||||
Westpac Banking Corp. | |||||||||||
1.38%, 5/30/18 (b) | 970 | 958 | |||||||||
35,009 | |||||||||||
Industrials (30.1%) | |||||||||||
ABB Treasury Center USA, Inc. | |||||||||||
2.50%, 6/15/16 (b) | 745 | 764 | |||||||||
AbbVie, Inc. | |||||||||||
1.75%, 11/6/17 | 715 | 713 | |||||||||
Altera Corp. | |||||||||||
2.50%, 11/15/18 | 300 | 303 | |||||||||
Altria Group, Inc. | |||||||||||
4.13%, 9/11/15 | 750 | 774 | |||||||||
American Honda Finance Corp. | |||||||||||
1.60%, 2/16/18 (b) | 545 | 543 | |||||||||
Amgen, Inc. | |||||||||||
2.50%, 11/15/16 | 425 | 437 | |||||||||
Apple, Inc. | |||||||||||
2.10%, 5/6/19 | 625 | 626 | |||||||||
Applied Materials, Inc. | |||||||||||
2.65%, 6/15/16 | 455 | 468 | |||||||||
ArcelorMittal, | |||||||||||
5.00%, 2/25/17 | 375 | 389 | |||||||||
9.50%, 2/15/15 | 10 | 10 |
Face Amount (000) | Value (000) | ||||||||||
AT&T, Inc., | |||||||||||
1.70%, 6/1/17 | $ | 1,075 | $ | 1,085 | |||||||
2.38%, 11/27/18 | 825 | 834 | |||||||||
Baidu, Inc. | |||||||||||
3.25%, 8/6/18 | 225 | 232 | |||||||||
BAT International Finance PLC | |||||||||||
1.40%, 6/5/15 (b) | 600 | 603 | |||||||||
Baxter International, Inc. | |||||||||||
1.85%, 6/15/18 | 795 | 792 | |||||||||
Bombardier, Inc. | |||||||||||
4.25%, 1/15/16 (b) | 250 | 255 | |||||||||
BW Group Ltd. | |||||||||||
6.63%, 6/28/17 (b) | 325 | 341 | |||||||||
CBS Corp. | |||||||||||
2.30%, 8/15/19 | 625 | 617 | |||||||||
Chesapeake Energy Corp. | |||||||||||
6.50%, 8/15/17 | 350 | 382 | |||||||||
CNH Capital LLC | |||||||||||
6.25%, 11/1/16 | 355 | 375 | |||||||||
Comcast Corp. | |||||||||||
5.70%, 5/15/18 | 520 | 591 | |||||||||
Compass Bank | |||||||||||
1.85%, 9/29/17 | 600 | 600 | |||||||||
Covidien International Finance SA | |||||||||||
1.35%, 5/29/15 | 265 | 266 | |||||||||
CVS Caremark Corp. | |||||||||||
2.25%, 12/5/18 | 580 | 583 | |||||||||
Daimler Finance North America LLC | |||||||||||
2.38%, 8/1/18 (b) | 750 | 760 | |||||||||
DISH DBS Corp. | |||||||||||
4.63%, 7/15/17 | 375 | 383 | |||||||||
Eaton Corp. | |||||||||||
1.50%, 11/2/17 | 630 | 628 | |||||||||
eBay, Inc. | |||||||||||
2.20%, 8/1/19 | 600 | 593 | |||||||||
Ecolab, Inc. | |||||||||||
3.00%, 12/8/16 | 320 | 332 | |||||||||
EMC Corp. | |||||||||||
1.88%, 6/1/18 | 750 | 746 | |||||||||
Experian Finance PLC | |||||||||||
2.38%, 6/15/17 (b) | 600 | 611 | |||||||||
Ford Motor Credit Co., LLC | |||||||||||
5.00%, 5/15/18 | 825 | 902 | |||||||||
Glencore Funding LLC | |||||||||||
1.70%, 5/27/16 (b) | 650 | 655 | |||||||||
Goldcorp, Inc. | |||||||||||
2.13%, 3/15/18 | 520 | 519 | |||||||||
Heathrow Funding Ltd. | |||||||||||
2.50%, 6/25/15 (b) | 400 | 405 | |||||||||
Hewlett-Packard Co. | |||||||||||
3.30%, 12/9/16 | 315 | 329 | |||||||||
Home Depot, Inc. | |||||||||||
2.00%, 6/15/19 | 600 | 597 |
The accompanying notes are an integral part of the financial statements.
11
Morgan Stanley Institutional Fund Trust
Annual Report — September 30, 2014
Portfolio of Investments (cont'd)
Limited Duration Portfolio
Face Amount (000) | Value (000) | ||||||||||
Industrials (cont'd) | |||||||||||
Hyundai Capital America | |||||||||||
1.63%, 10/2/15 (b) | $ | 395 | $ | 398 | |||||||
Ingersoll-Rand Global Holding Co., Ltd. | |||||||||||
2.88%, 1/15/19 | 335 | 343 | |||||||||
John Deere Capital Corp. | |||||||||||
1.95%, 12/13/18 | 510 | 509 | |||||||||
Kraft Foods Group, Inc. | |||||||||||
2.25%, 6/5/17 | 425 | 433 | |||||||||
L-3 Communications Corp. | |||||||||||
1.50%, 5/28/17 | 275 | 273 | |||||||||
LVMH Moet Hennessy Louis Vuitton SA | |||||||||||
1.63%, 6/29/17 (b) | 525 | 528 | |||||||||
Marathon Petroleum Corp. | |||||||||||
3.50%, 3/1/16 | 595 | 616 | |||||||||
McKesson Corp. | |||||||||||
3.25%, 3/1/16 | 1,070 | 1,105 | |||||||||
Nissan Motor Acceptance Corp. | |||||||||||
2.65%, 9/26/18 (b) | 720 | 734 | |||||||||
Oracle Corp. | |||||||||||
2.25%, 10/8/19 | 600 | 598 | |||||||||
Orange SA | |||||||||||
2.75%, 2/6/19 | 625 | 633 | |||||||||
Origin Energy Finance Ltd. | |||||||||||
3.50%, 10/9/18 (b) | 200 | 205 | |||||||||
Rio Tinto Finance USA PLC | |||||||||||
1.38%, 6/17/16 | 325 | 327 | |||||||||
RR Donnelley & Sons Co. | |||||||||||
6.13%, 1/15/17 | 300 | 310 | |||||||||
STATS ChipPAC Ltd. | |||||||||||
5.38%, 3/31/16 (b) | 300 | 305 | |||||||||
T-Mobile USA, Inc. | |||||||||||
5.25%, 9/1/18 | 500 | 517 | |||||||||
Target Corp. | |||||||||||
2.30%, 6/26/19 | 600 | 602 | |||||||||
Thomson Reuters Corp. | |||||||||||
1.30%, 2/23/17 | 325 | 325 | |||||||||
1.65%, 9/29/17 | 150 | 150 | |||||||||
Time Warner Cable, Inc. | |||||||||||
6.75%, 7/1/18 | 400 | 465 | |||||||||
TSMC Global Ltd. | |||||||||||
1.63%, 4/3/18 (b) | 800 | 791 | |||||||||
Tyson Foods, Inc. | |||||||||||
2.65%, 8/15/19 | 600 | 602 | |||||||||
Ventas Realty LP | |||||||||||
1.55%, 9/26/16 | 250 | 252 | |||||||||
Verizon Communications, Inc. | |||||||||||
2.55%, 6/17/19 | 1,250 | 1,255 | |||||||||
Viacom, Inc. | |||||||||||
2.50%, 9/1/18 | 625 | 633 | |||||||||
Vodafone Group PLC | |||||||||||
1.25%, 9/26/17 | 775 | 765 |
Face Amount (000) | Value (000) | ||||||||||
Volkswagen International Finance N.V. | |||||||||||
1.13%, 11/18/16 (b) | $ | 740 | $ | 741 | |||||||
Waste Management, Inc. | |||||||||||
2.60%, 9/1/16 | 725 | 746 | |||||||||
Wesfarmers Ltd. | |||||||||||
2.98%, 5/18/16 (b) | 395 | 408 | |||||||||
Wm Wrigley Jr Co. | |||||||||||
1.40%, 10/21/16 (b) | 600 | 603 | |||||||||
36,215 | |||||||||||
Utilities (5.0%) | |||||||||||
AES Corp. | |||||||||||
8.00%, 10/15/17 | 40 | 45 | |||||||||
DCP Midstream Operating LP | |||||||||||
2.70%, 4/1/19 | 650 | 652 | |||||||||
Dominion Resources, Inc. | |||||||||||
1.25%, 3/15/17 | 350 | 350 | |||||||||
Enbridge, Inc. | |||||||||||
0.68%, 6/2/17 (a) | 175 | 176 | |||||||||
Enel Finance International N.V. | |||||||||||
3.88%, 10/7/14 (b) | 1,115 | 1,115 | |||||||||
EnLink Midstream Partners LP | |||||||||||
2.70%, 4/1/19 | 525 | 529 | |||||||||
Enterprise Products Operating LLC | |||||||||||
1.25%, 8/13/15 | 315 | 317 | |||||||||
GDF Suez | |||||||||||
1.63%, 10/10/17 (b) | 650 | 653 | |||||||||
Northeast Utilities | |||||||||||
1.45%, 5/1/18 | 525 | 517 | |||||||||
NRG Energy, Inc. | |||||||||||
7.63%, 1/15/18 | 275 | 303 | |||||||||
PSEG Power LLC | |||||||||||
5.50%, 12/1/15 | 570 | 600 | |||||||||
Southern Co. (The) | |||||||||||
2.15%, 9/1/19 | 725 | 719 | |||||||||
5,976 | |||||||||||
77,200 | |||||||||||
Mortgages — Other (3.5%) | |||||||||||
Alternative Loan Trust, | |||||||||||
0.55%, 2/25/35 (a) | 114 | 106 | |||||||||
5.50%, 10/25/35 - 11/25/35 | 1,033 | 985 | |||||||||
FDIC Guaranteed Notes Trust | |||||||||||
0.71%, 2/25/48 (a)(b) | 197 | 197 | |||||||||
Freddie Mac Structured Agency Credit Risk Debt Notes | |||||||||||
1.16%, 2/25/24 (a) | 238 | 236 | |||||||||
Harborview Mortgage Loan Trust | |||||||||||
0.34%, 1/19/38 (a) | 434 | 373 | |||||||||
JP Morgan Alternative Loan Trust | |||||||||||
6.00%, 12/25/35 | 142 | 130 | |||||||||
Lehman Mortgage Trust | |||||||||||
6.50%, 9/25/37 | 58 | 52 | |||||||||
Opteum Mortgage Acceptance Corp. Trust | |||||||||||
0.45%, 4/25/36 (a) | 470 | 409 |
The accompanying notes are an integral part of the financial statements.
12
Morgan Stanley Institutional Fund Trust
Annual Report — September 30, 2014
Portfolio of Investments (cont'd)
Limited Duration Portfolio
Face Amount (000) | Value (000) | ||||||||||
Mortgages — Other (cont'd) | |||||||||||
RALI Trust, | |||||||||||
0.33%, 12/25/36 (a) | $ | 332 | $ | 250 | |||||||
0.34%, 12/25/36 (a) | 598 | 451 | |||||||||
6.00%, 11/25/36 | 176 | 141 | |||||||||
Sequoia Mortgage Trust | |||||||||||
0.77%, 8/20/34 (a) | 603 | 578 | |||||||||
Washington Mutual Mortgage Pass-Through Certificates Trust, | |||||||||||
1.08%, 8/25/46 (a) | 343 | 239 | |||||||||
1.11%, 6/25/46 (a) | 68 | 50 | |||||||||
4,197 | |||||||||||
Sovereign (1.4%) | |||||||||||
Korea Development Bank (The) | |||||||||||
1.50%, 1/22/18 | 690 | 680 | |||||||||
Qatar Government International Bond | |||||||||||
4.00%, 1/20/15 (b) | 500 | 505 | |||||||||
Spain Government International Bond | |||||||||||
4.00%, 3/6/18 (b) | 500 | 534 | |||||||||
1,719 | |||||||||||
U.S. Treasury Security (3.0%) | |||||||||||
U.S. Treasury Note | |||||||||||
0.63%, 5/31/17 | 3,650 | 3,619 | |||||||||
Total Fixed Income Securities (Cost $117,395) | 118,295 | ||||||||||
Shares | |||||||||||
Short-Term Investments (1.5%) | |||||||||||
Investment Company (0.8%) | |||||||||||
Morgan Stanley Institutional Liquidity Funds — Money Market Portfolio — Institutional Class (See Note G) (Cost $936) | 936,251 | 936 |
Face Amount (000) | Value (000) | ||||||||||
U.S. Treasury Securities (0.7%) | |||||||||||
U.S. Treasury Bills, | |||||||||||
0.03%, 2/12/15 (c)(d) | $ | 125 | $ | 125 | |||||||
0.04%, 2/12/15 (c)(d) | 115 | 115 | |||||||||
0.05%, 2/12/15 (c)(d) | 578 | 578 | |||||||||
Total U.S. Treasury Securities (Cost $818) | 818 | ||||||||||
Total Short-Term Investments (Cost $1,754) | 1,754 | ||||||||||
Total Investments (99.9%) (Cost $119,149) (e) | 120,049 | ||||||||||
Other Assets in Excess of Liabilities (0.1%) | 150 | ||||||||||
Net Assets (100.0%) | $ | 120,199 |
(a) Variable/Floating Rate Security — Interest rate changes on these instruments are based on changes in a designated base rate. The rates shown are those in effect on September 30, 2014.
(b) 144A security — Certain conditions for public sale may exist. Unless otherwise noted, these securities are deemed to be liquid.
(c) Rate shown is the yield to maturity at September 30, 2014.
(d) All or a portion of the security was pledged to cover margin requirements for futures contracts and swap agreements.
(e) Securities are available for collateral in connection with open futures contracts and swap agreements.
FDIC Federal Deposit Insurance Corporation.
MTN Medium Term Note.
REMIC Real Estate Mortgage Investment Conduit.
Futures Contracts:
The Portfolio had the following futures contracts open at September 30, 2014:
Number of Contracts | Value (000) | Expiration Date | Unrealized Appreciation (Depreciation) (000) | ||||||||||||||||
Long: | |||||||||||||||||||
U.S. Treasury 2 yr. Note | 390 | $ | 85,349 | Dec-14 | $ | (29 | ) | ||||||||||||
U.S. Treasury Long Bond | 8 | 1,103 | Dec-14 | (15 | ) | ||||||||||||||
Short: | |||||||||||||||||||
U.S. Treasury 5 yr. Note | 361 | (42,691 | ) | Dec-14 | 146 | ||||||||||||||
U.S. Treasury 10 yr. Note | 19 | (2,368 | ) | Dec-14 | 12 | ||||||||||||||
$ | 114 |
The accompanying notes are an integral part of the financial statements.
13
Morgan Stanley Institutional Fund Trust
Annual Report — September 30, 2014
Portfolio of Investments (cont'd)
Limited Duration Portfolio
Credit Default Swap Agreements:
The Portfolio had the following credit default swap agreements open at September 30, 2014:
Swap Counterparty and Reference Obligation | Buy/Sell Protection | Notional Amount (000) | Pay/Receive Fixed Rate | Termination Date | Upfront Payment Paid (Received) (000) | Unrealized Appreciation (Depreciation) (000) | Value (000) | Credit Rating of Reference Obligation† (Unaudited) | |||||||||||||||||||||||||||
Barclays Bank PLC Quest Diagnostics, Inc. | Buy | $ | 645 | 1.00 | % | 3/20/19 | $ | 13 | $ | (12 | ) | $ | 1 | BBB+ | |||||||||||||||||||||
Barclays Bank PLC Yum! Brands, Inc. | Buy | 625 | 1.00 | 12/20/18 | (11 | ) | (3 | ) | (14 | ) | BBB | ||||||||||||||||||||||||
Morgan Stanley & Co., LLC* CDX.NA.IG.22 | Buy | 1,200 | 1.00 | 6/20/19 | (24 | ) | 5 | (19 | ) | NR | |||||||||||||||||||||||||
$ | 2,470 | $ | (22 | ) | $ | (10 | ) | $ | (32 | ) |
Interest Rate Swap Agreements:
The Portfolio had the following interest rate swap agreements open at September 30, 2014:
Swap Counterparty | Floating Rate Index | Pay/Receive Floating Rate | Fixed Rate | Termination Date | Notional Amount (000) | Unrealized Appreciation (000) | |||||||||||||||||||||
Morgan Stanley & Co., LLC* | 3 Month LIBOR | Receive | 1.14 | % | 7/23/17 | $ | 6,188 | $ | 4 | ||||||||||||||||||
Morgan Stanley & Co., LLC* | 3 Month LIBOR | Receive | 1.18 | 9/4/17 | 4,400 | 9 | |||||||||||||||||||||
Morgan Stanley & Co., LLC* | 3 Month LIBOR | Receive | 1.17 | 9/5/17 | 7,300 | 15 | |||||||||||||||||||||
Morgan Stanley & Co., LLC* | 3 Month LIBOR | Receive | 1.19 | 9/10/17 | 16,200 | 33 | |||||||||||||||||||||
Morgan Stanley & Co., LLC* | 3 Month LIBOR | Receive | 1.81 | 9/4/19 | 1,300 | 6 | |||||||||||||||||||||
Morgan Stanley & Co., LLC* | 3 Month LIBOR | Receive | 1.80 | 9/5/19 | 2,197 | 11 | |||||||||||||||||||||
Morgan Stanley & Co., LLC* | 3 Month LIBOR | Receive | 1.85 | 9/10/19 | 4,698 | 15 | |||||||||||||||||||||
$ | 93 |
† Credit Rating as issued by Standard & Poor's.
* Cleared swap agreement, the broker for which is Morgan Stanley & Co., LLC.
LIBOR London Interbank Offered Rate.
NR Not Rated.
Portfolio Composition
Classification | Percentage of Total Investments | ||||||
Industrials | 30.2 | % | |||||
Finance | 29.2 | ||||||
Asset-Backed Securities | 17.5 | ||||||
Other+ | 18.1 | ||||||
Utilities | 5.0 | ||||||
Total Investments | 100.0 | %++ |
+ Industries and/or investment types representing less than 5% of total investments.
++ Does not include open long/short futures contracts with an underlying face amount of approximately $131,511,000 with net unrealized appreciation of approximately $114,000. Does not include open swap agreements with net unrealized appreciation of approximately $83,000.
The accompanying notes are an integral part of the financial statements.
14
Morgan Stanley Institutional Fund Trust
Annual Report — September 30, 2014
Limited Duration Portfolio
Statement of Assets and Liabilities | September 30, 2014 (000) | ||||||
Assets: | |||||||
Investments in Securities of Unaffiliated Issuers, at Value (Cost $118,213) | $ | 119,113 | |||||
Investment in Security of Affiliated Issuer, at Value (Cost $936) | 936 | ||||||
Total Investments in Securities, at Value (Cost $119,149) | 120,049 | ||||||
Interest Receivable | 641 | ||||||
Receivable for Portfolio Shares Sold | 43 | ||||||
Premium Paid on Open Swap Agreements | 13 | ||||||
Receivable for Variation Margin on Swap Agreements | 8 | ||||||
Receivable for Variation Margin on Futures Contracts | 4 | ||||||
Tax Reclaim Receivable | — | @ | |||||
Receivable from Affiliate | — | @ | |||||
Other Assets | 32 | ||||||
Total Assets | 120,790 | ||||||
Liabilities: | |||||||
Payable for Portfolio Shares Redeemed | 271 | ||||||
Payable for Sub Transfer Agency Fees — Class I | 105 | ||||||
Payable for Sub Transfer Agency Fees — Class A | 1 | ||||||
Payable for Sub Transfer Agency Fees — Class L | — | @ | |||||
Payable for Advisory Fees | 101 | ||||||
Payable for Professional Fees | 23 | ||||||
Unrealized Depreciation on Swap Agreements | 15 | ||||||
Premium Received on Open Swap Agreements | 11 | ||||||
Payable for Administration Fees | 8 | ||||||
Payable for Trustees' Fees and Expenses | 7 | ||||||
Payable for Custodian Fees | 5 | ||||||
Payable for Transfer Agent Fees — Class I | 1 | ||||||
Payable for Transfer Agent Fees — Class A | — | @ | |||||
Payable for Transfer Agent Fees — Class L | 1 | ||||||
Payable for Shareholder Services Fees — Class A | — | @ | |||||
Payable for Distribution and Shareholder Services Fees — Class L | — | @ | |||||
Other Liabilities | 42 | ||||||
Total Liabilities | 591 | ||||||
Net Assets | $ | 120,199 | |||||
Net Assets Consist of: | |||||||
Paid-in-Capital | $ | 360,612 | |||||
Accumulated Undistributed Net Investment Income | 268 | ||||||
Accumulated Net Realized Loss | (241,778 | ) | |||||
Unrealized Appreciation (Depreciation) on: | |||||||
Investments | 900 | ||||||
Futures Contracts | 114 | ||||||
Swap Agreements | 83 | ||||||
Net Assets | $ | 120,199 |
The accompanying notes are an integral part of the financial statements.
15
Morgan Stanley Institutional Fund Trust
Annual Report — September 30, 2014
Limited Duration Portfolio
Statement of Assets and Liabilities (cont'd) | September 30, 2014 (000) | ||||||
CLASS I: | |||||||
Net Assets | $ | 119,059 | |||||
Shares Outstanding (unlimited number of shares authorized, no par value) (not in 000's) | 15,242,039 | ||||||
Net Asset Value, Offering and Redemption Price Per Share | $ | 7.81 | |||||
CLASS A: | |||||||
Net Assets | $ | 940 | |||||
Shares Outstanding (unlimited number of shares authorized, no par value) (not in 000's) | 120,144 | ||||||
Net Asset Value, Redemption Price Per Share | $ | 7.83 | |||||
Maximum Sales Load | 4.25 | % | |||||
Maximum Sales Charge | $ | 0.35 | |||||
Maximum Offering Price Per Share | $ | 8.18 | |||||
CLASS L: | |||||||
Net Assets | $ | 200 | |||||
Shares Outstanding (unlimited number of shares authorized, no par value) (not in 000's) | 25,650 | ||||||
Net Asset Value, Offering and Redemption Price Per Share | $ | 7.80 |
@ Amount is less than $500.
The accompanying notes are an integral part of the financial statements.
16
Morgan Stanley Institutional Fund Trust
Annual Report — September 30, 2014
Limited Duration Portfolio
Statement of Operations | Year Ended September 30, 2014 (000) | ||||||
Investment Income: | |||||||
Interest from Securities of Unaffiliated Issuers | $ | 2,478 | |||||
Dividends from Security of Affiliated Issuer (Note G) | 1 | ||||||
Total Investment Income | 2,479 | ||||||
Expenses: | |||||||
Advisory Fees (Note B) | 368 | ||||||
Sub Transfer Agency Fees | 5 | ||||||
Sub Transfer Agency Fees — Class I | 132 | ||||||
Sub Transfer Agency Fees — Class A | 1 | ||||||
Sub Transfer Agency Fees — Class L | — | @ | |||||
Professional Fees | 125 | ||||||
Shareholder Reporting Fees | 99 | ||||||
Administration Fees (Note C) | 98 | ||||||
Registration Fees | 41 | ||||||
Custodian Fees (Note F) | 31 | ||||||
Pricing Fees | 27 | ||||||
Transfer Agency Fees (Note E) | 2 | ||||||
Transfer Agency Fees — Class I (Note E) | 5 | ||||||
Transfer Agency Fees — Class A (Note E) | 2 | ||||||
Transfer Agency Fees — Class L (Note E) | 3 | ||||||
Shareholder Services Fees — Class A (Note D) | 4 | ||||||
Distribution and Shareholder Services Fees — Class L (Note D) | 1 | ||||||
Trustees' Fees and Expenses | 4 | ||||||
Other Expenses | 19 | ||||||
Total Expenses | 967 | ||||||
Waiver of Advisory Fees (Note B) | (170 | ) | |||||
Reimbursement of Class Specific Expenses — Class I (Note B) | (137 | ) | |||||
Reimbursement of Class Specific Expenses — Class A (Note B) | (1 | ) | |||||
Reimbursement of Class Specific Expenses — Class L (Note B) | (3 | ) | |||||
Rebate from Morgan Stanley Affiliate (Note G) | (2 | ) | |||||
Net Expenses | 654 | ||||||
Net Investment Income | 1,825 | ||||||
Realized Gain (Loss): | |||||||
Investments Sold | 1,252 | ||||||
Futures Contracts | (174 | ) | |||||
Swap Agreements | (37 | ) | |||||
Net Realized Gain | 1,041 | ||||||
Change in Unrealized Appreciation (Depreciation): | |||||||
Investments | (298 | ) | |||||
Futures Contracts | 267 | ||||||
Swap Agreements | (251 | ) | |||||
Net Change in Unrealized Appreciation (Depreciation) | (282 | ) | |||||
Net Realized Gain and Change in Unrealized Appreciation (Depreciation) | 759 | ||||||
Net Increase in Net Assets Resulting from Operations | $ | 2,584 |
@ Amount is less than $500.
The accompanying notes are an integral part of the financial statements.
17
Morgan Stanley Institutional Fund Trust
Annual Report — September 30, 2014
Limited Duration Portfolio
Statements of Changes in Net Assets | Year Ended September 30, 2014 (000) | Year Ended September 30, 2013 (000) | |||||||||
Increase (Decrease) in Net Assets: | |||||||||||
Operations: | |||||||||||
Net Investment Income | $ | 1,825 | $ | 1,934 | |||||||
Net Realized Gain | 1,041 | 1,551 | |||||||||
Net Change in Unrealized Appreciation (Depreciation) | (282 | ) | (2,083 | ) | |||||||
Net Increase in Net Assets Resulting from Operations | 2,584 | 1,402 | |||||||||
Distributions from and/or in Excess of: | |||||||||||
Class I: | |||||||||||
Net Investment Income | (1,684 | ) | (2,132 | ) | |||||||
Class A*: | |||||||||||
Net Investment Income | (18 | ) | (3 | ) | |||||||
Class H*: | |||||||||||
Net Investment Income | — | (2 | )** | ||||||||
Class L: | |||||||||||
Net Investment Income | (1 | ) | (1 | ) | |||||||
Total Distributions | (1,703 | ) | (2,138 | ) | |||||||
Capital Share Transactions:(1) | |||||||||||
Class I: | |||||||||||
Subscribed | 14,035 | 5,024 | |||||||||
Distributions Reinvested | 1,682 | 2,130 | |||||||||
Redeemed | (20,486 | ) | (28,846 | ) | |||||||
Class A*: | |||||||||||
Subscribed | 2,964 | 486 | |||||||||
Distributions Reinvested | 18 | 3 | |||||||||
Conversion from Class H | — | 243 | |||||||||
Redeemed | (2,802 | ) | (129 | ) | |||||||
Class H*: | |||||||||||
Subscribed | — | 270 | ** | ||||||||
Distributions Reinvested | — | 1 | ** | ||||||||
Conversion to Class A | — | (243 | )** | ||||||||
Redeemed | — | (38 | )** | ||||||||
Class L: | |||||||||||
Subscribed | 110 | 93 | |||||||||
Distributions Reinvested | 1 | — | @ | ||||||||
Redeemed | (6 | ) | (8 | ) | |||||||
Net Decrease in Net Assets Resulting from Capital Share Transactions | (4,484 | ) | (21,014 | ) | |||||||
Total Decrease in Net Assets | (3,603 | ) | (21,750 | ) | |||||||
Net Assets: | |||||||||||
Beginning of Period | 123,802 | 145,552 | |||||||||
End of Period (Including Accumulated Undistributed Net Investment Income of $268 and $262) | $ | 120,199 | $ | 123,802 | |||||||
(1) Capital Share Transactions: | |||||||||||
Class I: | |||||||||||
Shares Subscribed | 1,797 | 646 | |||||||||
Shares Issued on Distributions Reinvested | 216 | 274 | |||||||||
Shares Redeemed | (2,624 | ) | (3,706 | ) | |||||||
Net Decrease in Class I Shares Outstanding | (611 | ) | (2,786 | ) | |||||||
Class A*: | |||||||||||
Shares Subscribed | 379 | 63 | |||||||||
Shares Issued on Distributions Reinvested | 2 | — | @@ | ||||||||
Conversion from Class H | — | 31 | |||||||||
Shares Redeemed | (357 | ) | (17 | ) | |||||||
Net Increase in Class A Shares Outstanding | 24 | 77 | |||||||||
Class H*: | |||||||||||
Shares Subscribed | — | 35 | ** | ||||||||
Shares Issued on Distributions Reinvested | — | — | @@** | ||||||||
Conversion to Class A | — | (31 | )** | ||||||||
Shares Redeemed | — | (5 | )** | ||||||||
Net Increase (Decrease) in Class H Shares Outstanding | — | (1 | ) | ||||||||
Class L: | |||||||||||
Shares Subscribed | 14 | 12 | |||||||||
Shares Issued on Distributions Reinvested | — | @@ | — | @@ | |||||||
Shares Redeemed | (1 | ) | (1 | ) | |||||||
Net Increase in Class L Shares Outstanding | 13 | 11 |
@ Amount is less than $500.
@@ Amount is less than 500 shares.
* Effective September 9, 2013, Class P and Class H shares were renamed Class A shares.
** For the period October 1, 2012 through September 6, 2013.
The accompanying notes are an integral part of the financial statements.
18
Morgan Stanley Institutional Fund Trust
Annual Report — September 30, 2014
Financial Highlights
Limited Duration Portfolio
Class I | |||||||||||||||||||||||
Year Ended September 30, | |||||||||||||||||||||||
Selected Per Share Data and Ratios | 2014 | 2013 | 2012 | 2011 | 2010 | ||||||||||||||||||
Net Asset Value, Beginning of Period | $ | 7.76 | $ | 7.80 | $ | 7.71 | $ | 7.79 | $ | 7.68 | |||||||||||||
Income (Loss) from Investment Operations: | |||||||||||||||||||||||
Net Investment Income† | 0.12 | 0.11 | 0.15 | 0.16 | 0.18 | ||||||||||||||||||
Net Realized and Unrealized Gain (Loss) | 0.04 | (0.03 | ) | 0.11 | (0.10 | ) | 0.10 | ||||||||||||||||
Total from Investment Operations | 0.16 | 0.08 | 0.26 | 0.06 | 0.28 | ||||||||||||||||||
Distributions from and/or in Excess of: | |||||||||||||||||||||||
Net Investment Income | (0.11 | ) | (0.12 | ) | (0.17 | ) | (0.14 | ) | (0.16 | ) | |||||||||||||
Paid-in-Capital | — | — | — | — | (0.01 | ) | |||||||||||||||||
Total Distributions | (0.11 | ) | (0.12 | ) | (0.17 | ) | (0.14 | ) | (0.17 | ) | |||||||||||||
Net Asset Value, End of Period | $ | 7.81 | $ | 7.76 | $ | 7.80 | $ | 7.71 | $ | 7.79 | |||||||||||||
Total Return++ | 2.06 | % | 1.09 | % | 3.35 | % | 0.71 | % | 3.74 | % | |||||||||||||
Ratios and Supplemental Data: | |||||||||||||||||||||||
Net Assets, End of Period (Thousands) | $ | 119,059 | $ | 122,958 | $ | 145,387 | $ | 167,811 | $ | 208,608 | |||||||||||||
Ratio of Expenses to Average Net Assets (1) | 0.53 | %+†† | 0.71 | %+^ | 0.63 | %+ | 0.59 | %+†† | 0.55 | %+†† | |||||||||||||
Ratio of Net Investment Income to Average Net Assets (1) | 1.49 | %+†† | 1.45 | %+^ | 1.92 | %+ | 2.12 | %+†† | 2.39 | %+†† | |||||||||||||
Ratio of Rebate from Morgan Stanley Affiliates to Average Net Assets | 0.00 | %§ | 0.00 | %§ | 0.00 | %§ | 0.00 | %§ | 0.00 | %§ | |||||||||||||
Portfolio Turnover Rate | 60 | % | 66 | % | 51 | % | 35 | % | 95 | % | |||||||||||||
(1) Supplemental Information on the Ratios to Average Net Assets: | |||||||||||||||||||||||
Ratios Before Expense Limitation: | |||||||||||||||||||||||
Expenses to Average Net Assets | 0.78 | %†† | 0.72 | % | N/A | N/A | N/A | ||||||||||||||||
Net Investment Income to Average Net Assets | 1.24 | %†† | 1.44 | % | N/A | N/A | N/A |
† Per share amount is based on average shares outstanding.
++ Calculated based on the net asset value as of the last business day of the period.
+ The Ratios of Expenses and Net Investment Income reflect the rebate of certain Portfolio expenses in connection with the investments in Morgan Stanley affiliates during the period. The effect of the rebate on the ratios is disclosed in the above table as "Ratio of Rebate from Morgan Stanley Affiliates to Average Net Assets."
†† Reflects overall Portfolio ratios for investment income and non-class specific expenses.
§ Amount is less than 0.005%.
^ Effective September 16, 2013, the Adviser has agreed to limit the ratio of expenses to average net assets to the maximum ratio of 0.53% for Class I shares.
The accompanying notes are an integral part of the financial statements.
19
Morgan Stanley Institutional Fund Trust
Annual Report — September 30, 2014
Financial Highlights
Limited Duration Portfolio
Class A* | |||||||||||||||||||||||
Year Ended September 30, | |||||||||||||||||||||||
Selected Per Share Data and Ratios | 2014 | 2013 | 2012 | 2011 | 2010 | ||||||||||||||||||
Net Asset Value, Beginning of Period | $ | 7.77 | $ | 7.80 | $ | 7.71 | $ | 7.79 | $ | 7.68 | |||||||||||||
Income (Loss) from Investment Operations: | |||||||||||||||||||||||
Net Investment Income† | 0.09 | 0.09 | 0.13 | 0.15 | 0.17 | ||||||||||||||||||
Net Realized and Unrealized Gain (Loss) | 0.05 | (0.01 | ) | 0.11 | (0.12 | ) | 0.09 | ||||||||||||||||
Total from Investment Operations | 0.14 | 0.08 | 0.24 | 0.03 | 0.26 | ||||||||||||||||||
Distributions from and/or in Excess of: | |||||||||||||||||||||||
Net Investment Income | (0.08 | ) | (0.11 | ) | (0.15 | ) | (0.11 | ) | (0.15 | ) | |||||||||||||
Paid-in-Capital | — | — | — | — | (0.00 | )‡ | |||||||||||||||||
Total Distributions | (0.08 | ) | (0.11 | ) | (0.15 | ) | (0.11 | ) | (0.15 | ) | |||||||||||||
Net Asset Value, End of Period | $ | 7.83 | $ | 7.77 | $ | 7.80 | $ | 7.71 | $ | 7.79 | |||||||||||||
Total Return++ | 1.78 | % | 0.84 | % | 3.22 | % | 0.45 | % | 3.48 | % | |||||||||||||
Ratios and Supplemental Data: | |||||||||||||||||||||||
Net Assets, End of Period (Thousands) | $ | 940 | $ | 749 | $ | 145 | $ | 194 | $ | 52 | |||||||||||||
Ratio of Expenses to Average Net Assets (1) | 0.88 | %+†† | 0.97 | %+^ | 0.88 | %+ | 0.84 | %+†† | 0.80 | %+†† | |||||||||||||
Ratio of Net Investment Income to Average Net Assets (1) | 1.14 | %+†† | 1.15 | %+^ | 1.70 | %+ | 1.87 | %+†† | 2.14 | %+†† | |||||||||||||
Ratio of Rebate from Morgan Stanley Affiliates to Average Net Assets | 0.00 | %§ | 0.00 | %§ | 0.00 | %§ | 0.00 | %§ | 0.00 | %§ | |||||||||||||
Portfolio Turnover Rate | 60 | % | 66 | % | 51 | % | 35 | % | 95 | % | |||||||||||||
(1) Supplemental Information on the Ratios to Average Net Assets: | |||||||||||||||||||||||
Ratios Before Expense Limitation: | |||||||||||||||||||||||
Expenses to Average Net Assets | 1.10 | %†† | 1.00 | % | N/A | N/A | N/A | ||||||||||||||||
Net Investment Income to Average Net Assets | 0.92 | %†† | 1.12 | % | N/A | N/A | N/A |
* Effective September 9, 2013, Class P and Class H shares were renamed Class A shares.
† Per share amount is based on average shares outstanding.
‡ Amount is less than $0.005 per share.
++ Calculated based on the net asset value, which does not reflect sales charges, if applicable, as of the last business day of the period.
+ The Ratios of Expenses and Net Investment Income reflect the rebate of certain Portfolio expenses in connection with the investments in Morgan Stanley affiliates during the period. The effect of the rebate on the ratios is disclosed in the above table as "Ratio of Rebate from Morgan Stanley Affiliates to Average Net Assets."
†† Reflects overall Portfolio ratios for investment income and non-class specific expenses.
§ Amount is less than 0.005%.
^ Effective September 16, 2013, the Adviser has agreed to limit the ratio of expenses to average net assets to the maximum ratio of 0.88% for Class A shares.
The accompanying notes are an integral part of the financial statements.
20
Morgan Stanley Institutional Fund Trust
Annual Report — September 30, 2014
Financial Highlights
Limited Duration Portfolio
Class L | |||||||||||||||
Year Ended September 30, | Period from April 27, 2012^ to | ||||||||||||||
Selected Per Share Data and Ratios | 2014 | 2013 | September 30, 2012 | ||||||||||||
Net Asset Value, Beginning of Period | $ | 7.75 | $ | 7.80 | $ | 7.76 | |||||||||
Income (Loss) from Investment Operations: | |||||||||||||||
Net Investment Income† | 0.06 | 0.07 | 0.04 | ||||||||||||
Net Realized and Unrealized Gain (Loss) | 0.05 | (0.03 | ) | 0.04 | |||||||||||
Total from Investment Operations | 0.11 | 0.04 | 0.08 | ||||||||||||
Distributions from and/or in Excess of: | |||||||||||||||
Net Investment Income | (0.06 | ) | (0.09 | ) | (0.04 | ) | |||||||||
Net Asset Value, End of Period | $ | 7.80 | $ | 7.75 | $ | 7.80 | |||||||||
Total Return++ | 1.38 | % | 0.48 | % | 1.06 | %# | |||||||||
Ratios and Supplemental Data: | |||||||||||||||
Net Assets, End of Period (Thousands) | $ | 200 | $ | 95 | $ | 10 | |||||||||
Ratio of Expenses to Average Net Assets (1) | 1.23 | %+†† | 1.24 | %+^^ | 1.21 | %+* | |||||||||
Ratio of Net Investment Income to Average Net Assets (1) | 0.79 | %+†† | 0.85 | %+^^ | 1.14 | %+* | |||||||||
Ratio of Rebate from Morgan Stanley Affiliates to Average Net Assets | 0.00 | %§ | 0.00 | %§ | 0.00 | %*§ | |||||||||
Portfolio Turnover Rate | 60 | % | 66 | % | 51 | %# | |||||||||
(1) Supplemental Information on the Ratios to Average Net Assets: | |||||||||||||||
Ratios Before Expense Limitation: | |||||||||||||||
Expenses to Average Net Assets | 3.48 | %†† | 1.34 | % | N/A | ||||||||||
Net Investment Income (Loss) to Average Net Assets | (1.46 | )%†† | 0.75 | % | N/A |
^ Commencement of Operations.
† Per share amount is based on average shares outstanding.
++ Calculated based on the net asset value as of the last business day of the period.
+ The Ratios of Expenses and Net Investment Income reflect the rebate of certain Portfolio expenses in connection with the investments in Morgan Stanley affiliates during the period. The effect of the rebate on the ratios is disclosed in the above table as "Ratio of Rebate from Morgan Stanley Affiliates to Average Net Assets."
†† Reflects overall Portfolio ratios for investment income and non-class specific expenses.
§ Amount is less than 0.005%.
^^ Effective September 16, 2013, the Adviser has agreed to limit the ratio of expenses to average net assets to the maximum ratio of 1.23% for Class L shares.
# Not Annualized.
* Annualized.
The accompanying notes are an integral part of the financial statements.
21
Morgan Stanley Institutional Fund Trust
Annual Report — September 30, 2014
Notes to Financial Statements
Morgan Stanley Institutional Fund Trust ("MSIFT" or the "Fund") is registered under the Investment Company Act of 1940, as amended (the "Act"), as an open-end management investment company. The Fund is comprised of seven separate, active portfolios (individually referred to as a "Portfolio", collectively as the "Portfolios"). The Fund applies investment company accounting and reporting guidance. All Portfolios are considered diversified for purposes of the Act.
The accompanying financial statements relate to the Limited Duration Portfolio. The Portfolio seeks above-average total return over a market cycle of three to five years. The Portfolio offers three classes of shares — Class I, Class A and Class L.
Effective September 9, 2013, Class P and Class H shares were renamed Class A shares.
A. Significant Accounting Policies: The following significant accounting policies are in conformity with U.S. generally accepted accounting principles ("GAAP"). Such policies are consistently followed by the Fund in the preparation of its financial statements. GAAP may require management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results may differ from those estimates.
1. Security Valuation: (1) Certain portfolio securities may be valued by an outside pricing service approved by the Fund's Board of Trustees (the "Trustees"). The pricing service may utilize a matrix system or other model incorporating attributes such as security quality, maturity and coupon as the evaluation model parameters, and/or research evaluations by its staff, including review of broker-dealer market price quotations in determining what it believes is the fair valuation of the portfolios securities valued by such pricing service; (2) futures are valued at the latest price published by the commodities exchange on which they trade; (3) swaps are marked-to-market daily based upon quotations from market makers; (4) when market quotations are not readily available, including circumstances under which Morgan Stanley Investment Management Inc. (the "Adviser") determines that the closing price, last sale price or the mean between the last reported bid and asked prices are not reflective of 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 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 of the New York Stock Exchange ("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 Trustees or by the Adviser using a pricing service and/or procedures approved by the Trustees; (5) investments in mutual funds, including the Morgan Stanley Institutional Liquidity Funds, are valued at the net asset value as of the close of each business day; and (6) short-term taxable debt securities with remaining maturities of 60 days or less at the time of purchase may be valued at amortized cost, unless the Adviser determines such price does not reflect the securities' market value, in which case these securities will be valued at their fair market value determined by the Adviser. Other taxable short-term debt securities with maturities of more than 60 days will be valued on a mark-to-market basis until such time as they reach a maturity of 60 days, whereupon they will be valued at amortized cost using their value on the 61st day unless the Adviser determines such price does not reflect the securities' fair value, in which case these securities will be valued at their fair market value as determined by the Adviser.
Under procedures approved by the Trustees, the Fund's Adviser has formed a Valuation Committee. The Valuation Committee provides administration and oversight of the Fund's valuation policies and procedures, which are reviewed at least annually by the Trustees. These procedures allow the Fund to utilize independent pricing services, quotations from securities and financial instrument dealers, and other market sources to determine fair value.
The Fund has procedures to determine the fair value of securities and other financial instruments for which market prices are not readily available. Under these procedures, the Valuation Committee convenes on a regular and ad hoc basis to review such securities and considers a number of factors, including valuation methodologies and significant unobservable valuation inputs, when arriving at fair value. The Valuation Committee may employ a market-based approach which may use related or comparable assets or liabilities, recent transactions, market multiples, book values, and other relevant
22
Morgan Stanley Institutional Fund Trust
Annual Report — September 30, 2014
Notes to Financial Statements (cont'd)
information for the investment to determine the fair value of the investment. An income-based valuation approach may also be used in which the anticipated future cash flows of the investment are discounted to calculate fair value. Discounts may also be applied due to the nature or duration of any restrictions on the disposition of the investments. Due to the inherent uncertainty of valuations of such investments, the fair values may differ significantly from the values that would have been used had an active market existed. The Valuation Committee employs various methods for calibrating these valuation approaches including a regular review of valuation methodologies, key inputs and assumptions, transactional back-testing or disposition analysis, and reviews of any related market activity.
2. Fair Value Measurement: Financial Accounting Standards Board ("FASB") Accounting Standards CodificationTM ("ASC") 820, "Fair Value Measurement" ("ASC 820"), defines fair value as the value 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. ASC 820 establishes a three-tier hierarchy to distinguish between (1) inputs that reflect the assumptions market participants would use in valuing 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 valuing 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. Factors considered in making this determination may include, but are not limited to, information obtained by contacting the issuer, analysts, or the appropriate stock exchange (for exchange-traded securities), analysis of the issuer's financial statements or other available documents and, if necessary, available information concerning other securities in similar circumstances
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.
The following is a summary of the inputs used to value the Portfolio's investments as of September 30, 2014.
Investment Type | Level 1 Unadjusted quoted prices (000) | Level 2 Other significant observable inputs (000) | Level 3 Significant unobservable inputs (000) | Total (000) | |||||||||||||||
Assets: | |||||||||||||||||||
Fixed Income Securities | |||||||||||||||||||
Agency Adjustable Rate Mortgages | $ | — | $ | 4,618 | $ | — | $ | 4,618 | |||||||||||
Agency Fixed Rate Mortgages | — | 526 | — | 526 | |||||||||||||||
Asset-Backed Securities | — | 21,073 | — | 21,073 | |||||||||||||||
Collateralized Mortgage Obligations — Agency Collateral Series | — | 4,294 | — | 4,294 | |||||||||||||||
Commercial Mortgage- Backed Securities | — | 1,049 | — | 1,049 | |||||||||||||||
Corporate Bonds | — | 77,200 | — | 77,200 | |||||||||||||||
Mortgages — Other | — | 4,197 | — | 4,197 | |||||||||||||||
Sovereign | — | 1,719 | — | 1,719 | |||||||||||||||
U.S. Treasury Security | — | 3,619 | — | 3,619 | |||||||||||||||
Total Fixed Income Securities | — | 118,295 | — | 118,295 | |||||||||||||||
Short-Term Investments | |||||||||||||||||||
Investment Company | 936 | — | — | 936 | |||||||||||||||
U.S. Treasury Securities | — | 818 | — | 818 | |||||||||||||||
Total Short-Term Investments | 936 | 818 | — | 1,754 | |||||||||||||||
Futures Contracts | 158 | — | — | 158 | |||||||||||||||
Credit Default Swap Agreement | — | 5 | — | 5 | |||||||||||||||
Interest Rate Swap Agreements | — | 93 | — | 93 | |||||||||||||||
Total Assets | $ | 1,094 | $ | 119,211 | $ | — | $ | 120,305 |
23
Morgan Stanley Institutional Fund Trust
Annual Report — September 30, 2014
Notes to Financial Statements (cont'd)
Investment Type | Level 1 Unadjusted quoted prices (000) | Level 2 Other significant observable inputs (000) | Level 3 Significant unobservable inputs (000) | Total (000) | |||||||||||||||
Liabilities: | |||||||||||||||||||
Futures Contracts | $ | (44 | ) | $ | — | $ | — | $ | (44 | ) | |||||||||
Credit Default Swap Agreements | — | (15 | ) | — | (15 | ) | |||||||||||||
Total Liabilities | (44 | ) | (15 | ) | — | (59 | ) | ||||||||||||
Total | $ | 1,050 | $ | 119,196 | $ | — | $ | 120,246 |
Transfers between investment levels may occur as the markets fluctuate and/or the availability of data used in an investment's valuation changes. The Portfolio recognizes transfers between the levels as of the end of the period. As of September 30, 2014, the Portfolio did not have any investments transfer between investment levels.
3. Derivatives: The Portfolio may, but is not required to, use derivative instruments for a variety of purposes, including hedging, risk management, portfolio management or to earn income. Derivatives are financial instruments whose value is based, in part, on the value of an underlying asset, interest rate, index or financial instrument. Prevailing interest rates and volatility levels, among other things, also affect the value of derivative instruments. A derivative instrument often has risks similar to its underlying asset and may have additional risks, including imperfect correlation between the value of the derivative and the underlying asset, risks of default by the counterparty to certain transactions, magnification of losses incurred due to changes in the market value of the securities, instruments, indices or interest rates to which the derivative instrument relates, risks that the transactions may not be liquid and risks arising from margin requirements. The use of derivatives involves risks that are different from, and possibly greater than, the risks associated with other portfolio investments. Derivatives may involve the use of highly specialized instruments that require investment techniques and risk analyses different from those associated with other portfolio investments. All of the Portfolio's holdings, including derivative instruments, are marked-to-market each day with the change in value reflected in unrealized appreciation (depreciation). Upon disposition, a realized gain or loss is recognized.
Certain derivative transactions may give rise to a form of leverage. Leverage magnifies the potential for gain and the risk of loss. Leverage associated with derivative transactions may cause the Portfolio to liquidate portfo-
lio positions when it may not be advantageous to do so to satisfy its obligations or to meet earmarking or segregation requirements, pursuant to applicable Securities and Exchange Commission rules and regulations, or may cause the Portfolio to be more volatile than if the Portfolio had not been leveraged. Although the Adviser seeks to use derivatives to further the Portfolio's investment objectives, there is no assurance that the use of derivatives will achieve this result.
Following is a description of the derivative instruments and techniques that the Portfolio used during the period and their associated risks:
Futures: A futures contract is a standardized, exchange-traded agreement to buy or sell a specific quantity of an underlying asset, reference rate or index at a specific price at a specific future time. The value of a futures contract tends to increase and decrease in tandem with the value of the underlying instrument. Depending on the terms of the particular contract, futures contracts are settled through either physical delivery of the underlying instrument on the settlement date or by payment of a cash settlement amount on the settlement date. During the period the futures contract is open, payments are received from or made to the broker based upon changes in the value of the contract (the variation margin). A decision as to whether, when and how to use futures contracts involves the exercise of skill and judgment and even a well-conceived futures transaction may be unsuccessful because of market behavior or unexpected events. In addition to the derivatives risks discussed above, the prices of futures contracts can be highly volatile, using futures contracts can lower total return, and the potential loss from futures contracts can exceed the Portfolio's initial investment in such contracts. No assurance can be given that a liquid market will exist for any particular futures contract at any particular time. There is also the risk of loss by the Portfolio of margin deposits in the event of bankruptcy of a broker with whom the Portfolio has open positions in the futures contract.
Swaps: The Portfolio may enter into over-the-counter ("OTC") swap contracts or cleared swap transactions. A swap contract is an agreement between two parties pursuant to which the parties exchange payments at specified dates on the basis of a specified notional amount, with the payments calculated by reference to specified securities, indices, reference rates, currencies or other
24
Morgan Stanley Institutional Fund Trust
Annual Report — September 30, 2014
Notes to Financial Statements (cont'd)
instruments. Typically swap agreements provide that when the period payment dates for both parties are the same, the payments are made on a net basis (i.e., the two payment streams are netted out, with only the net amount paid by one party to the other). The Portfolio's obligations or rights under a swap contract entered into on a net basis will generally be equal only to the net amount to be paid or received under the agreement, based on the relative values of the positions held by each party. Cleared swap transactions may help reduce counterparty credit risk. In a cleared swap, the Portfolio's ultimate counterparty is a clearinghouse rather than a bank, dealer or other financial institution. OTC swap agreements are not entered into or traded on exchanges and often there is no central clearing or guaranty function for OTC swaps. These OTC swaps are often subject to credit risk or the risk of default or non-performance by the counterparty. Both OTC and cleared swaps could result in losses if interest rates, foreign currency exchange rates or other factors are not correctly anticipated by the Portfolio or if the reference index, security or investments do not perform as expected. During the period swap agreements are open, payments are received from or made to the clearinghouse or counterparty based upon changes in the value of the contract (variation margin). The Dodd-Frank Wall Street Reform and Consumer Protection Act and related regulatory developments require the clearing and exchange-trading of certain standardized swap transactions. Mandatory exchange-trading and clearing is occurring on a phased-in basis.
The Portfolio's use of swaps during the period included those based on the credit of an underlying security commonly referred to as "credit default swaps". The Portfolio may be either the buyer or seller in a credit default swap. Where the Portfolio is the buyer of a credit default swap contract, it would typically be entitled to receive the par (or other agreed-upon) value of a referenced debt obligation from the counterparty to the contract only in the event of a default or similar event by the issuer of the debt obligation. If no default occurs, the Portfolio would have paid to the counterparty a periodic stream of payments over the term of the contract and received no benefit from the contract. When the Portfolio is the seller of a credit default swap contract, it typically receives the stream of payments but is obligated
to pay an amount equal to the par (or other agreed-upon) value of a referenced debt obligation upon the default or similar event by the issuer of the referenced debt obligation. The use of credit default swaps could result in losses to the Portfolio if the Adviser fails to correctly evaluate the creditworthiness of the issuer of the referenced debt obligation.
The current credit rating of each individual issuer is listed in the table following the Portfolio of Investments and serves as an indicator of the current status of the payment/performance risk of the credit derivative. Alternatively, for credit default swaps on an index of credits, the quoted market prices and current values serve as an indicator of the current status of the payment/performance risk of the credit derivative. Generally, lower credit ratings and increasing market values, in absolute terms, represent a deterioration of the credit and a greater likelihood of an adverse credit event of the issuer.
When the Portfolio has an unrealized loss on a swap agreement, the Portfolio has instructed the custodian to pledge cash or liquid securities as collateral with a value approximately equal to the amount of the unrealized loss. Collateral pledges are monitored and subsequently adjusted if and when the swap valuations fluctuate. If applicable, cash collateral is included with "Due from (to) Broker" in the Statement of Assets and Liabilities.
Upfront payments received or paid by the Portfolio will be reflected as an asset or liability, respectively, in the Statement of Assets and Liabilities.
FASB ASC 815, "Derivatives and Hedging" ("ASC 815"), is intended to improve financial reporting about derivative instruments by requiring enhanced disclosures to enable investors to better understand how and why the Portfolio uses derivative instruments, how these derivative instruments are accounted for and their effects on the Portfolio's financial position and results of operations.
The following tables set forth the fair value of the Portfolio's derivative contracts by primary risk exposure as of September 30, 2014.
25
Morgan Stanley Institutional Fund Trust
Annual Report — September 30, 2014
Notes to Financial Statements (cont'd)
Asset Derivatives Statement of Assets and Liabilities Location | Primary Risk Exposure | Value (000) | |||||||||||||
Futures Contracts | Variation Margin on Futures Contracts | Interest Rate Risk | $ | 158 | (a) | ||||||||||
Swap Agreements | Variation Margin on Swap Agreements | Credit Risk | 5 | (a) | |||||||||||
Swap Agreements | Variation Margin on Swap Agreements | Interest Rate Risk | 93 | (a) | |||||||||||
Total | $ | 256 | |||||||||||||
Liability Derivatives Statement of Assets and Liabilities Location | Primary Risk Exposure | Value (000) | |||||||||||||
Futures Contracts | Variation Margin on Futures Contracts | Interest Rate Risk | $ | (44 | )(a) | ||||||||||
Swap Agreements | Unrealized Depreciation on Swap Agreements | Credit Risk | (15 | ) | |||||||||||
Total | $ | (59 | ) |
(a) This amount represents the cumulative appreciation (depreciation) as reported in the Portfolio of Investments. The Statement of Assets and Liabilities only reflects the current day's net variation margin.
The following tables set forth by primary risk exposure the Portfolio's realized gains (losses) and change in unrealized appreciation (depreciation) by type of derivative contract for the year ended September 30, 2014 in accordance with ASC 815.
Realized Gain (Loss) | |||||||||||
Primary Risk Exposure | Derivative Type | Value (000) | |||||||||
Interest Rate Risk | Futures Contracts | $ | (174 | ) | |||||||
Credit Risk | Swap Agreements | (41 | ) | ||||||||
Interest Rate Risk | Swap Agreements | 4 | |||||||||
Total | $ | (211 | ) | ||||||||
Change in Unrealized Appreciation (Depreciation) | |||||||||||
Primary Risk Exposure | Derivative Type | Value (000) | |||||||||
Interest Rate Risk | Futures Contracts | $ | 267 | ||||||||
Credit Risk | Swap Agreements | 13 | |||||||||
Interest Rate Risk | Swap Agreements | (264 | ) | ||||||||
Total | $ | 16 |
At September 30, 2014, the Portfolio's derivative assets and liabilities are as follows:
Gross Amounts of Assets and Liabilities Presented in the Statement of Assets and Liabilities | |||||||||||
Derivatives(b) | Assets(c) (000) | Liabilities(c) (000) | |||||||||
Swap Agreements | $ | — | $ | (15 | ) |
(b) Excludes exchange traded derivatives.
(c) Absent an event of default or early termination, OTC derivative assets and liabilities are presented gross and not offset in the Statement of Assets and Liabilities.
The Portfolio typically enters into International Swaps and Derivatives Association, Inc. Master Agreements ("ISDA Master Agreements") or similar master agreements (collectively, "Master Agreements") with its contract counterparties for certain OTC derivatives in order to, among
other things, reduce its credit risk to counterparties. ISDA Master Agreements include provisions for general obligations, representations, collateral and events of default or termination. Under an ISDA Master Agreement, the Portfolio typically may offset with the counterparty certain OTC derivative financial instruments' payables and/or receivables with collateral held and/or posted and create one single net payment (close-out netting) in the event of default, termination and/or potential deterioration in the credit quality of the counterparty. Various Master Agreements govern the terms of certain transactions with counterparties, including transactions such as swap, forward, repurchase and reverse repurchase agreements. These Master Agreements typically attempt to reduce the counterparty risk associated with such transactions by specifying credit protection mechanisms and providing standardization that improves legal certainty. Cross-termination provisions under Master Agreements typically provide that a default in connection with one transaction between the Portfolio and a counterparty gives the non-defaulting party the right to terminate any other transactions in place with the defaulting party to create one single net payment due to/due from the defaulting party and may be a feature in certain Master Agreements. In the event the Portfolio exercises its right to terminate a Master Agreement after a counterparty experiences a termination event as defined in the Master Agreement, the return of collateral with market value in excess of the Portfolio's net liability may be delayed or denied.
The following table presents derivative financial instruments that are subject to enforceable netting arrangements as of September 30, 2014.
Gross Amounts Not Offset in the Statement of Assets and Liabilities | |||||||||||||||||||
Counterparty | Gross Liability Derivatives Presented in Statement of Assets and Liabilities (000) | Financial Instrument (000) | Collateral Pledged (000) | Net Amount (not less than $0) (000) | |||||||||||||||
Barclays Bank PLC | $ | 15 | $ | — | $ | — | $ | 15 |
For the year ended September 30, 2014, the approximate average monthly amount outstanding for each derivative type is as follows:
Futures Contracts: | |||||||
Average monthly original value | $ | 109,175,000 | |||||
Swap Agreements: | |||||||
Average monthly notional amount | $ | 19,802,000 |
26
Morgan Stanley Institutional Fund Trust
Annual Report — September 30, 2014
Notes to Financial Statements (cont'd)
4. Indemnifications: The Fund enters into contracts that contain a variety of indemnifications. The Fund's maximum exposure under these arrangements is unknown. However, the Fund has not had prior claims or losses pursuant to these contracts and expects the risk of loss to be remote.
5. Dividends and Distributions to Shareholders: Dividend income and distributions to shareholders are recorded on the ex-dividend date. Dividends from net investment income, if any, are declared and paid monthly. Net realized capital gains, if any, are distributed at least annually.
6. Security Transactions, Income and Expenses: Security transactions are accounted for on the trade date (date the order to buy or sell is executed). Realized gains and losses on the sale of investment securities are determined on the specific identified cost method. Dividend income and other distributions are recorded on the ex-dividend date (except for certain foreign dividends which may be recorded as soon as the Portfolio is informed of such dividends) net of applicable withholding taxes. Interest income is recognized on the accrual basis except where collection is in doubt. Discounts are accreted and premiums are amortized over the life of the respective securities. Most expenses of the Fund can be directly attributed to a particular Portfolio. Expenses which cannot be directly attributed are apportioned among the Portfolios based upon relative net assets or other appropriate methods. Income, expenses (other than class specific expenses -distribution, transfer agency and sub transfer agency fees) and realized and unrealized gains or losses are allocated to each class of shares based upon their relative net assets.
B. Advisory Fees: The Adviser, a wholly-owned subsidiary of Morgan Stanley, provides the Portfolio with advisory services under the terms of an Investment Advisory Agreement, paid quarterly, at an annual rate of 0.30% of the average daily net assets of the Portfolio.
The Adviser has agreed to reduce its advisory fee and/or reimburse the Portfolio so that total annual portfolio operating expenses, excluding certain investment related expenses, taxes, interest and other extraordinary expenses (including litigation), will not exceed 0.53% for Class I shares, 0.88% for Class A shares and 1.23% for Class L shares. The fee waivers and/or expense reimbursements will continue for at least one year or until such time that the Trustees act to discontinue all or a
portion of such waivers and/or reimbursements when they deem such action is appropriate. For the year ended September 30, 2014, approximately $170,000 of advisory fees were waived and approximately $141,000 of other expenses were reimbursed by the Adviser pursuant to this arrangement.
C. Administration Fees: The Adviser also serves as Administrator to the Fund and provides administrative services pursuant to an Administration Agreement for an annual fee, accrued daily and paid monthly, of 0.08% of the Portfolio's average daily net assets. Under a Sub-Administration 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 Portfolio.
D. Distribution and Shareholder Services Fees: Morgan Stanley Distribution, Inc. ("MSDI" or the "Distributor"), a wholly-owned subsidiary of the Adviser, and an indirect subsidiary of Morgan Stanley, serves as the Fund's Distributor of Portfolio shares pursuant to a Distribution Agreement. The Fund has adopted a Shareholder Services Plan with respect to Class A shares pursuant to Rule 12b-1 under the Act. Under the Shareholder Services Plan, the Portfolio pays the Distributor a shareholder services fee, accrued daily and paid monthly, at an annual rate of 0.25% of the Portfolio's average daily net assets attributable to Class A shares.
The Fund has adopted a Distribution and Shareholder Services Plan with respect to Class L shares pursuant to Rule 12b-1 under the Act. Under the Distribution and Shareholder Services Plan, the Portfolio pays the Distributor a distribution fee, accrued daily and paid monthly, at an annual rate of 0.25% and a shareholder services fee, accrued daily and paid monthly, at an annual rate of 0.25% of the Portfolio's average daily net assets attributable to Class L shares.
The distribution and shareholder services fees are used to support the expenses associated with servicing and maintaining accounts. The Distributor may compensate other parties for providing shareholder support services to investors who purchase Class A and Class L shares.
E. Dividend Disbursing and Transfer Agent: The Fund's dividend disbursing and transfer agent is Boston Financial Data Services, Inc. ("BFDS"). Pursuant to a Transfer Agency Agreement, the Fund pays BFDS a fee based on the number of classes, accounts and transactions relating to the Portfolios of the Fund.
27
Morgan Stanley Institutional Fund Trust
Annual Report — September 30, 2014
Notes to Financial Statements (cont'd)
F. Custodian Fees: State Street (the "Custodian") serves as Custodian for the Fund in accordance with a Custodian Agreement. The Custodian holds cash, securities, and other assets of the Fund as required by the Act. Custody fees are payable monthly based on assets held in custody, investment purchases and sales activity and account maintenance fees, plus reimbursement for certain out-of-pocket expenses.
G. Security Transactions and Transactions with Affiliates: For the year ended September 30, 2014, purchases and sales of investment securities for the Portfolio, other than long-term U.S. Government securities and short-term investments, were approximately $51,356,000 and $44,613,000, respectively. For the year ended September 30, 2014, purchases and sales of long-term U.S. Government securities were approximately $21,045,000 and $28,527,000, respectively.
The Portfolio invests in the Institutional Class of the Morgan Stanley Institutional Liquidity Funds — Money Market Portfolio (the "Liquidity Funds"), an open-end management investment company managed by the Adviser. Advisory fees paid by the Portfolio are reduced by an amount equal to its pro-rata share of the advisory and administration fees paid by the Portfolio due to its investment in the Liquidity Funds. For the year ended September 30, 2014, advisory fees paid were reduced by approximately $2,000 relating to the Portfolio's investment in the Liquidity Funds.
A summary of the Portfolio's transactions in shares of the Liquidity Funds during the year ended September 30, 2014 is as follows:
Value September 30, 2013 (000) | Purchases at Cost (000) | Sales (000) | Dividend Income (000) | Value September 30, 2014 (000) | |||||||||||||||
$ | 1,114 | $ | 46,591 | $ | 46,769 | $ | 1 | $ | 936 |
The Portfolio 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 Portfolio.
H. Federal Income Taxes: It is the Portfolio's intention to continue to qualify as a regulated investment company and distribute all of its taxable and tax-exempt income. Accordingly, no provision for Federal income taxes is required in the financial statements.
The Portfolio may be subject to taxes imposed by countries in which it invests. Such taxes are generally based on income and/or capital gains earned or repatriated. Taxes are accrued based on net investment income, net realized gains and net unrealized appreciation as such income and/or gains are earned. Taxes may also be based on transactions in foreign currency and are accrued based on the value of investments denominated in such currency.
FASB ASC 740-10, Income Taxes — Overall, 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. Management has concluded there are no significant uncertain tax positions that would require recognition in the financial statements. If applicable, the Portfolio recognizes interest accrued related to unrecognized tax benefits in "Interest Expense" and penalties in "Other Expenses" in the Statement of Operations. The Portfolio files tax returns with the U.S. Internal Revenue Service, New York and various states. Each of the tax years in the four-year period ended September 30, 2014 remains subject to examination by taxing authorities.
The tax character of distributions paid may differ from the character of distributions shown in the Statements of Changes in Net Assets due to short-term capital gains being treated as ordinary income for tax purposes. The tax character of distributions paid during fiscal years 2014 and 2013 was as follows:
2014 Distributions Paid From: Ordinary Income (000) | 2013 Distributions Paid From: Ordinary Income (000) | ||||||
$ | 1,703 | $ | 2,138 |
The amount and character of income and gains to be distributed are determined in accordance with income tax regulations which may differ from GAAP. These book/tax differences are either considered temporary or permanent in nature.
Temporary differences are attributable to differing book and tax treatments for the timing of the recognition of gains (losses) on certain investment transactions and the timing of the deductibility of certain expenses.
Permanent differences, primarily due to basis adjustments for swap transactions, paydown adjustments and an expired capital
28
Morgan Stanley Institutional Fund Trust
Annual Report — September 30, 2014
Notes to Financial Statements (cont'd)
loss carryforward, resulted in the following reclassifications among the components of net assets at September 30, 2014:
Accumulated Undistributed Net Investment Income (000) | Accumulated Net Realized Loss (000) | Paid-in- Capital (000) | |||||||||
$ | (116 | ) | $ | 6,966 | $ | (6,850 | ) |
At September 30, 2014, the components of distributable earnings for the Portfolio on a tax basis were as follows:
Undistributed Ordinary Income (000) | Undistributed Long-Term Capital Gain (000) | ||||||
$ | 261 | $ | — |
At September 30, 2014, the aggregate cost for Federal income tax purposes is approximately $119,149,000. The aggregate gross unrealized appreciation is approximately $1,170,000 and the aggregate gross unrealized depreciation is approximately $270,000 resulting in net unrealized appreciation of approximately $900,000.
At September 30, 2014, the Portfolio had available for Federal income tax purposes unused capital losses, which will expire on the indicated dates:
Amount (000) | Expiration | ||||||
$ | 7,068 | September 30, 2015 | |||||
265 | September 30, 2016 | ||||||
200,864 | September 30, 2017 | ||||||
33,504 | September 30, 2018 |
Capital loss carryforwards of approximately $6,850,000 expired during the year ended September 30, 2014.
To the extent that capital loss carryforwards are used to offset any future capital gains realized during the carryover period as provided by U.S. Federal income tax regulations, no capital gains tax liability will be incurred by the Portfolio for gains realized and not distributed. To the extent that capital gains are offset, such gains will not be distributed to the shareholders. During the year ended September 30, 2014, the Portfolio utilized capital loss carryforwards for U.S. Federal income tax purposes of approximately $1,379,000.
29
Morgan Stanley Institutional Fund Trust
Annual Report — September 30, 2014
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Trustees of
Morgan Stanley Institutional Fund Trust —
Limited Duration Portfolio
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of Limited Duration Portfolio (one of the portfolios constituting Morgan Stanley Institutional Fund Trust) (the "Portfolio") as of September 30, 2014, 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 years or periods indicated therein. These financial statements and financial highlights are the responsibility of the Portfolio'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. We were not engaged to perform an audit of the Portfolio's 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 Portfolio'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 and financial highlights, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of September 30, 2014, by correspondence with the custodian and others or by other appropriate auditing procedures where replies from others were not obtained. 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 Limited Duration Portfolio (one of the portfolios constituting Morgan Stanley Institutional Fund Trust) at September 30, 2014, 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 years or periods indicated therein, in conformity with U.S. generally accepted accounting principles.
Boston, Massachusetts
November 26, 2014
30
Morgan Stanley Institutional Fund Trust
Annual Report — September 30, 2014
U.S. Privacy Policy (unaudited)
AN IMPORTANT NOTICE CONCERNING OUR U.S. PRIVACY POLICY
This privacy notice describes the U.S. privacy policy of Morgan Stanley Distribution, Inc., and the Morgan Stanley family of mutual funds ("us", "our", "we").
We are required by federal law to provide you with notice of our U.S. privacy policy ("Policy"). This Policy applies to both our current and former clients unless we state otherwise and is intended for individual clients who purchase products or receive services from us for personal, family or household purposes. This 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.
This notice sets out our business practices to protect your privacy; how we collect and share personal information about you; and how you can limit our sharing or certain uses by others of this information. We may amend this Policy at any time, and will inform you of any changes to our 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 your information. We strive to safeguard the information our clients entrust to us. Protecting the confidentiality and security of client information is an important part of how we conduct our business.
This notice describes what personal information we collect about you, how we collect it, when we may share it with others, and how certain others may use it. It discusses the steps you may take to limit our sharing of certain information about you with our affiliated companies, including, but not limited to our affiliated banking businesses, brokerage firms and credit service affiliates. It also discloses how you may limit our affiliates' use of shared information for marketing purposes.
Throughout this Policy, we refer to the nonpublic information that personally identifies you as "personal information." We also use the term "affiliated company" in this notice. An affiliated company is a company in our family of companies and includes companies with the Morgan Stanley name. These affiliated companies are financial institutions such as broker-dealers, banks, investment advisers and credit card issuers. We refer to any company that is not an affiliated company as a nonaffiliated third party. For purposes of Section 5 of this notice, and your ability to limit certain uses of personal information by our affiliates, this notice applies to the use of personal information by our affiliated companies.
1. WHAT PERSONAL INFORMATION DO WE COLLECT FROM YOU?
We may collect the following types of information about you: (i) information provided by you, including information from applications and other forms we receive from you, (ii) information about your transactions with us or our affiliates, (iii) information about your transactions with nonaffiliated third parties, (iv) information from consumer reporting agencies, (v) information obtained from our websites, and (vi) information obtained from other sources. For example:
• We collect information such as your name, address, e-mail address, telephone/fax numbers, assets, income and investment objectives through applications and other forms you submit to us.
• 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?
We may disclose personal information we collect about you in each of the categories listed above to affiliated and nonaffiliated third parties.
31
Morgan Stanley Institutional Fund Trust
Annual Report — September 30, 2014
U.S. Privacy Policy (unaudited) (cont'd)
a. Information We Disclose to Affiliated Companies.
We may disclose personal information that we collect about you to our affiliated companies to manage your account(s) effectively, to service and process your transactions, and to let you know about products and services offered by us and affiliated companies, to manage our business, and as otherwise required or permitted by law. Offers for products and services from affiliated companies are developed under conditions designed to safeguard your personal information.
b. Information We Disclose to Third Parties.
We may disclose personal information that we collect about you to nonaffiliated third parties to provide marketing services on our behalf or to other financial institutions with whom we have joint marketing agreements. We may also disclose all of the information we collect to other nonaffiliated third parties for our everyday business purposes, such as to process transactions, maintain account(s), respond to court orders and legal investigations, report to credit bureaus, offer our own products and services, protect against fraud, for institutional risk control, to perform services on our behalf, and as otherwise required or permitted by law.
When we share personal information about you with a nonaffiliated third party, they are required to limit their use of personal information about you to the particular purpose for which it was shared and they are not allowed to share personal information about you with others except to fulfill that limited purpose or as may be permitted or required by law.
3. HOW DO WE PROTECT THE SECURITY AND CONFIDENTIALITY OF PERSONAL INFORMATION WE COLLECT ABOUT YOU?
We maintain physical, electronic and procedural security measures that comply with applicable law and regulations to help safeguard the personal information we collect about you. We have internal policies governing the proper handling of client information by employees. Third parties that provide support or marketing services on our behalf may also receive personal information about you, and we require them to adhere to appropriate security standards with respect to such information.
4. HOW CAN YOU LIMIT OUR SHARING CERTAIN PERSONAL INFORMATION ABOUT YOU WITH OUR AFFILIATED COMPANIES FOR ELIGIBILITY DETERMINATION?
By following the opt-out procedures in Section 6 below, you may limit the extent to which we share with our affiliated companies, personal information that was collected to determine your eligibility for products and services such as your credit reports and other information that you have provided to us or that we may obtain from third parties ("eligibility information"). Eligibility information does not include your identification information or personal information pertaining to our transactions or experiences with you. Please note that, even if you direct us not to share eligibility information with our affiliated companies, we may still share your personal information, including eligibility information, with our affiliated companies under circumstances that are permitted under applicable law, such as to process transactions or to service your account.
5. HOW CAN YOU LIMIT THE USE OF CERTAIN PERSONAL INFORMATION ABOUT YOU BY OUR AFFILIATED COMPANIES FOR MARKETING?
By following the opt-out instructions in Section 6 below, you may limit our affiliated companies from marketing their products or services to you based on personal information we disclose to them. This information may include, for example, your income and account history with us. Please note that, even if you choose to limit our affiliated companies from using personal information about you that we may share with them for marketing their products and services to you, our affiliated companies may use your personal information that they obtain from us to market to you in circumstances permitted by law, such as if the affiliated party has its own relationship with you.
32
Morgan Stanley Institutional Fund Trust
Annual Report — September 30, 2014
U.S. Privacy Policy (unaudited) (cont'd)
6. HOW CAN YOU SEND US AN OPT-OUT INSTRUCTION?
If you wish to limit our sharing of eligibility information about you with our affiliated companies, or our affiliated companies' use of personal information for marketing purposes, as described in this notice, you may do so by:
• Calling us at (800) 548-7786
Monday–Friday between 8a.m. and 6p.m. (EST)
• Writing to us at the following address:
Boston Financial Data Services, Inc.
c/o Privacy Coordinator
P.O. Box 219804
Kansas City, Missouri 64121
If you choose to write to us, your request should include: your name, address, telephone number and account number(s) to which the opt-out applies and whether you are opting out with respect to sharing of eligibility information (Section 4 above), or information used for marketing (Section 5 above), or both. Written opt-out requests 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. Once you have informed us about your privacy preferences, your opt-out preference will remain in effect with respect to this Policy (as it may be amended) until you notify us otherwise. If you are a joint account owner, we will accept instructions from any one of you and apply those instructions to the entire account.
Please understand that if you limit our sharing or our affiliated companies' use of personal information, you and any joint account holder(s) may not receive information about our affiliated companies' products and services, including products or services that could help you manage your financial resources and achieve your investment objectives.
If you have more than one account or relationship with us, please specify the accounts to which you would like us to apply your privacy choices. If you have accounts or relationships with our affiliates, you may receive multiple privacy policies from them, and will need to separately notify those companies of your privacy choices for those accounts or relationships.
7. WHAT IF AN AFFILIATED COMPANY BECOMES A NONAFFILIATED THIRD PARTY?
If, at any time in the future, an affiliated company becomes a nonaffiliated third party, further disclosures of personal information made to the former affiliated company will be limited to those described in Section 2(b) above relating to nonaffiliated third parties. If you elected under Section 6 to limit disclosures we make to affiliated companies, or use of personal information by affiliated companies, your election will not apply to use by any former affiliated company of your personal information in their possession once it becomes a nonaffiliated third party.
SPECIAL NOTICE TO RESIDENTS OF VERMONT
The following section supplements our Policy with respect to our individual clients who have a Vermont address and supersedes anything to the contrary in the above 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 nonaffiliated third parties, or eligibility information with affiliated companies, other than in certain limited circumstances. Except as permitted by law, we will not share personal information we collect about you with nonaffiliated third parties or eligibility information with affiliated companies, unless you provide us with your written consent to share such information.
SPECIAL NOTICE TO RESIDENTS OF CALIFORNIA
The following section supplements our Policy with respect to our individual clients who have a California address and supersedes anything to the contrary in the above Policy with respect to those clients only.
In response to a California law, if your account has a California home address, your personal information will not be disclosed to nonaffiliated third parties except as permitted by applicable California law, and we will limit sharing such personal information with our affiliates to comply with California privacy laws that apply to us.
33
Morgan Stanley Institutional Fund Trust
Annual Report — September 30, 2014
Trustee and Officer Information (unaudited)
Independent Trustees:
Name, Age and Address of Independent Trustee | Position(s) Held with Registrant | Length of Time Served* | Principal Occupation(s) During Past 5 Years | Number of Portfolios in Fund Complex Overseen by Independent Trustee** | Other Directorships Held by Independent Trustee*** | ||||||||||||||||||
Frank L. Bowman (69) 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 Morgan Stanley 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) (February 2005-November 2008); retired as Admiral, U.S. Navy after serving over 38 years on active duty including 8 years as Director of the Naval Nuclear Propulsion Program in the Department of the Navy and the U.S. Department of Energy (1996-2004); served as Chief of Naval Personnel (July 1994-September 1996); and on the Joint Staff as Director of Political Military Affairs (June 1992-July 1994); knighted as Honorary Knight Commander of the Most Excellent Order of the British Empire; awarded the Officier de l'Orde National du Mérite by the French Government; elected to the National Academy of Engineering (2009). | 98 | Director of BP p.l.c.; Director of Naval and Nuclear Technologies LLP; Director of the Armed Services YMCA of the USA and the U.S. Naval Submarine League; Director of the American Shipbuilding Suppliers Association; Member of the National Security Advisory Council of the Center for U.S. Global Engagement and a member of the CNA Military Advisory Board; Chairman of the Charity, J Street Cup Golf Charity, Director Fairhaven United Methodist Church. | ||||||||||||||||||
Michael Bozic (73) 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 and a member of the advisory board of American Road Group LLC (retail) (since June 2000); Chairperson of the Compliance and Insurance Committee (since October 2006); Director or Trustee of various Morgan Stanley Funds (since April 1994); 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. | 100 | Trustee and member of the Hillsdale College Board of Trustees. | ||||||||||||||||||
Kathleen A. Dennis (61) 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 Morgan Stanley Funds (since August 2006); formerly, Senior Managing Director of Victory Capital Management (1993-2006). | 98 | Director of various non-profit organizations. | ||||||||||||||||||
Dr. Manuel H. Johnson (65) c/o Johnson Smick International, Inc. 220 I Street, N.E. Suite 200 Washington, D.C. 20002 | 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 various Morgan Stanley Funds (since July 1991); 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. | 100 | Director of NVR, Inc. (home construction). |
34
Morgan Stanley Institutional Fund Trust
Annual Report — September 30, 2014
Trustee and Officer Information (unaudited) (cont'd)
Independent Trustees: (cont'd)
Name, Age and Address of Independent Trustee | Position(s) Held with Registrant | Length of Time Served* | Principal Occupation(s) During Past 5 Years | Number of Portfolios in Fund Complex Overseen by Independent Trustee** | Other Directorships Held by Independent Trustee*** | ||||||||||||||||||
Joseph J. Kearns (72) c/o Kearns & Associates LLC 23823 Malibu Road S-50-440 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 various Morgan Stanley Funds (since August 1994); formerly, Deputy Chairperson of the Audit Committee (July 2003-September 2006) and Chairperson of the Audit Committee of various Morgan Stanley Funds (since August 1994); CFO of the J. Paul Getty Trust. | 101 | Director of Electro Rent Corporation (equipment leasing). Prior to December 31, 2013, Director of The Ford Family Foundation. | ||||||||||||||||||
Michael F. Klein (55) 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); and Co-Chief Executive Officer of Aetos Capital LLC (since August 2013); Chairperson of the Fixed Income Sub-Committee of the Investment Committee (since October 2006) and Director or Trustee of various Morgan Stanley Funds (since August 2006); formerly, Managing Director, Morgan Stanley & Co. Inc. and Morgan Stanley Dean Witter Investment Management, President, various Morgan Stanley Funds (June 1998-March 2000) and Principal, Morgan Stanley & Co. Inc. and Morgan Stanley Dean Witter Investment Management (August 1997-December 1999). | 98 | 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 (78) 522 Fifth Avenue New York, NY 10036 | Chairperson of the Board and Trustee | Chairperson of the Boards since July 2006 and Trustee since July 1991 | Chairperson of the Boards of various Morgan Stanley Funds (since July 2006); Chairperson of the Closed-End Fund Committee (since June 2012) and Director or Trustee of various Morgan Stanley Funds (since July 1991); formerly, Chairperson of the Insurance Committee (until July 2006), General Partner, Triumph Capital, L.P. (private investment partnership) (1988-2013). | 100 | None. | ||||||||||||||||||
W. Allen Reed (67) 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 Morgan Stanley 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). | 98 | Director of Temple-Inland Industries (packaging and forest products); Director of Legg Mason, Inc. and Director of the Auburn University Foundation. | ||||||||||||||||||
Fergus Reid (82) c/o Joe Pietryka, Inc. 85 Charles Colman Blvd. Pawling, NY 12564 | Trustee | Since June 1992 | Chairman, Joe Pietryka, Inc.; Chairperson of the Governance Committee and Director or Trustee of various Morgan Stanley Funds (since June 1992). | 101 | Through December 31, 2012, Trustee and Director of certain investment companies in the JP Morgan Fund Complex managed by JP Morgan Investment Management Inc. |
35
Morgan Stanley Institutional Fund Trust
Annual Report — September 30, 2014
Trustee and Officer Information (unaudited) (cont'd)
Interested Trustee:
Name, Age and Address of Interested Trustee | Position(s) Held with Registrant | Length of Time Served* | Principal Occupation(s) During Past 5 Years | Number of Portfolios in Fund Complex Overseen by Interested Trustee** | Other Directorships Held by Interested Trustee*** | ||||||||||||||||||
James F. Higgins (66) One New York Plaza, New York, NY 10004 | Trustee | Since June 2000 | Director or Trustee of various Morgan Stanley Funds (since June 2000); Senior Advisor of Morgan Stanley (since August 2000). | 99 | Formerly, Director of AXA Financial, Inc. and AXA Equitable Life Insurance Company (2002-2011) and Director of AXA MONY Life Insurance Company and AXA MONY Life Insurance Company of America (2004-2011). |
* This is the earliest date the Trustee serving the Morgan Stanley Funds. Each Trustee serves an indefinite term, until his or her successor is elected.
** The Fund Complex includes (as of December 31, 2013) all open-end and closed-end funds (including all of their portfolios) advised by Morgan Stanley Investment Management Inc. (the "Adviser") and any funds that have an adviser that is an affiliated person of the Adviser (including, but not limited to, Morgan Stanley AIP GP LP).
*** This includes any directorships at public companies and registered investment companies held by the Trustee at any time during the past five years.
36
Morgan Stanley Institutional Fund Trust
Annual Report — September 30, 2014
Trustee and Officer Information (unaudited) (cont'd)
Executive Officers:
Name, Age and Address of Executive Officer | Position(s) Held with Registrant | Length of Time Served* | Principal Occupation(s) During Past 5 Years | ||||||||||||
John H. Gernon (51) 522 Fifth Avenue New York, NY 10036 | President and Principal Executive Officer | Since September 2013 | President and Principal Executive Officer of the Equity and Fixed Income Funds and the Morgan Stanley AIP Funds (since September 2013) and various money market funds (since May 2014) in the Fund Complex, Managing Director of the Adviser; Head of Product (since 2006) and Global Portfolio Analysis and Reporting (since 2012) For MSIM's Long Only business. | ||||||||||||
Stefanie V. Chang Yu (47) 522 Fifth Avenue New York, NY 10036 | Chief Compliance Officer | Since December 1997 | Managing Director of the Adviser and various entities affiliated with the Adviser; Chief Compliance Officer of various Morgan Stanley Funds and the Adviser (since January 2014); formerly Vice President of various Morgan Stanley Funds (December 1997-January 2014). | ||||||||||||
Joseph C. Benedetti (49) 522 Fifth Avenue New York, NY 10036 | Vice President | Since January 2014 | Managing Director of the Adviser and various entities affiliated with the Adviser; Vice President of various Morgan Stanley Funds (since January 2014); formerly, Assistant Secretary of various Morgan Stanley Funds (October 2004-January 2014). | ||||||||||||
Francis J. Smith (49) 522 Fifth Avenue New York, NY 10036 | Treasurer and Principal Financial Officer | Treasurer since July 2003 and Principal Financial Officer since September 2002 | Executive Director of the Adviser and various entities affiliated with the Adviser; Treasurer (since July 2003) and Principal Financial Officer of various Morgan Stanley Funds (since September 2002). | ||||||||||||
Mary E. Mullin (47) 522 Fifth Avenue New York, NY 10036 | Secretary | Since June 1999 | Executive Director of the Adviser and various entities affiliated with the Adviser; Secretary of various Morgan Stanley Funds (since June 1999). |
* This is the earliest date the officer began serving the Morgan Stanley Funds. Each officer serves an indefinite term, until his or her successor is elected.
37
Morgan Stanley Institutional Fund Trust
Annual Report — September 30, 2014
Adviser and Administrator
Morgan Stanley Investment Management Inc.
522 Fifth Avenue
New York, New York 10036
Distributor
Morgan Stanley Distribution, Inc.
522 Fifth Avenue
New York, New York 10036
Dividend Disbursing and Transfer Agent
Boston Financial Data Services, Inc.
2000 Crown Colony Drive
Quincy, Massachusetts 02169
Custodian
State Street Bank and Trust Company
One Lincoln Street
Boston, Massachusetts 02111
Legal Counsel
Dechert LLP
1095 Avenue of the Americas
New York, New York 10036
Counsel to the Independent Trustees
Kramer Levin Naftalis & Frankel LLP
1177 Avenue of the Americas
New York, New York 10036
Independent Registered Public Accounting Firm
Ernst & Young LLP
200 Clarendon Street
Boston, Massachusetts 02116
Reporting to Shareholders
Each Morgan Stanley fund provides a complete schedule of portfolio holdings in its semi-annual and annual reports within 60 days of the end of the fund's second and fourth fiscal quarters by filing the schedule electronically with the Securities and Exchange Commission (SEC). The semi-annual reports are filed on Form N-CSRS and the annual reports are filed on Form N-CSR. Morgan Stanley also delivers the semi-annual and annual reports to fund shareholders and makes these reports available on its public website, www.morganstanley.com/im. Each Morgan Stanley fund also files a complete schedule of portfolio holdings 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 website. 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 website, 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 toll free at 1 (800) SEC-0330. You can also request copies of these materials, upon payment of a duplicating fee, by electronic request at the SEC's email address (publicinfo@sec.gov) or by writing the Public Reference Room of the SEC, Washington, DC 20549-0102.
Proxy Voting Policies and Procedures and Proxy Voting Record
You may obtain a copy of the Fund's Proxy Voting Policy and Procedures and information regarding how the Fund voted proxies relating to portfolio securities during the most recent twelve-month period ended June 30, without charge, upon request, by calling toll free 1 (800) 548-7786 or by visiting our website at www.morganstanley.com/im. This information is also available on the SEC's website at www.sec.gov.
This report is authorized for distribution only when preceded or accompanied by a prospectus of the Morgan Stanley Institutional Fund Trust, which describes in detail each Portfolio's investment policies, risks, fees and expenses. Please read the prospectus carefully before you invest or send money. For additional information, including information regarding the investments comprising the Portfolio, please visit our website at www.morganstanley.com/im or call toll free 1 (800) 548-7786.
38
Printed in U.S.A.
This Report has been prepared for shareholders and may be distributed to others only if preceded or accompanied by a current prospectus.
Morgan Stanley Investment Management Inc.
522 Fifth Avenue
New York, New York 10036
© 2014 Morgan Stanley. Morgan Stanley Distribution, Inc.
IFTLDANN
1043234 EXP 11.28.15
INVESTMENT MANAGEMENT
Morgan Stanley Institutional Fund Trust
Limited Duration Portfolio
Semi-Annual Report
March 31, 2015
Morgan Stanley Institutional Fund Trust
Semi-Annual Report — March 31, 2015
Table of Contents
Shareholders' Letter | 2 | ||||||
Expense Example | 3 | ||||||
Portfolio of Investments | 4 | ||||||
Statement of Assets and Liabilities | 10 | ||||||
Statement of Operations | 12 | ||||||
Statements of Changes in Net Assets | 13 | ||||||
Financial Highlights | 14 | ||||||
Notes to Financial Statements | 17 | ||||||
U.S. Privacy Policy | 26 | ||||||
Trustee and Officer Information | 29 |
This report is authorized for distribution only when preceded or accompanied by prospectuses of the Morgan Stanley Institutional Fund Trust. To receive a prospectus and/or statement of additional information (SAI), which contains more complete information such as investment objectives, charges, expenses, policies for voting proxies, risk considerations, and describes in detail each of the Portfolio's investment policies to the prospective investor, please call toll free 1 (800) 548-7786. Please read the prospectuses carefully before you invest or send money.
Additionally, you can access portfolio information including performance, characteristics, and investment team commentary through Morgan Stanley Investment Management's website: www.morganstanley.com/im.
There is no assurance that a Portfolio will achieve its investment objective. Portfolios are subject to market risk, which is the possibility that market values of securities owned by the Portfolio will decline and, therefore, the value of the Portfolio's shares may be less than what you paid for them. Accordingly, you can lose money investing in this Portfolio. Please see the prospectus for more complete information on investment risks.
1
Morgan Stanley Institutional Fund Trust
Semi-Annual Report — March 31, 2015
Shareholders' Letter (unaudited)
Dear Shareholders,
We are pleased to provide this Semi-Annual report, in which you will learn how your investment in Limited Duration Portfolio (the "Portfolio") performed during the latest six-month period.
Morgan Stanley Investment Management is a client-centric, investor-led organization. Our global presence, intellectual capital, and breadth of products and services enable us to partner with investors to meet the evolving challenges of today's financial markets. We aim to deliver superior investment service and to empower our clients to make the informed decisions that help them reach their investment goals.
As always, we thank you for selecting Morgan Stanley Investment Management, and look forward to working with you in the months and years ahead.
Sincerely,
John H. Gernon
President and Principal Executive Officer
April 2015
2
Morgan Stanley Institutional Fund Trust
Semi-Annual Report — March 31, 2015
Expense Example (unaudited)
Limited Duration Portfolio
As a shareholder of the Portfolio, you may incur two types of costs: (1) transactional costs, including sales charge (loads) on purchase payments; and (2) ongoing costs, including advisory fees, administration fees, distribution and shareholder services fees; and other Portfolio expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Portfolio and to compare these costs with the ongoing costs of investing in other mutual funds.
This example is based on an investment of $1,000 invested at the beginning of the six-month period ended March 31, 2015 and held for the entire six-month period.
Actual Expenses
The table below provides information about actual account values and actual expenses. You may use the information in this table, 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 table under the heading entitled "Actual Expenses Paid During Period" to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The table below provides information about hypothetical account values and hypothetical expenses based on the Portfolio's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Portfolio'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 costs of investing in the Portfolio 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, if applicable). Therefore, the information for each class in the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Beginning Account Value 10/1/14 | Actual Ending Account Value 3/31/15 | Hypothetical Ending Account Value | Actual Expenses Paid During Period* | Hypothetical Expenses Paid During Period* | Net Expense Ratio During Period** | ||||||||||||||||||||||
Limited Duration Portfolio Class I | $ | 1,000.00 | $ | 1,002.90 | $ | 1,022.29 | $ | 2.65 | $ | 2.67 | 0.53 | % | |||||||||||||||
Limited Duration Portfolio Class A | 1,000.00 | 1,001.20 | 1,020.54 | 4.39 | 4.43 | 0.88 | |||||||||||||||||||||
Limited Duration Portfolio Class L | 1,000.00 | 1,000.20 | 1,018.80 | 6.13 | 6.19 | 1.23 |
* Expenses are calculated using each Portfolio Class' annualized net expense ratio (as disclosed), multiplied by the average account value over the period, and multiplied by 182/365 (to reflect the most recent one-half year period).
** Annualized.
3
Morgan Stanley Institutional Fund Trust
Semi-Annual Report — March 31, 2015 (unaudited)
Portfolio of Investments
Limited Duration Portfolio
Face Amount (000) | Value (000) | ||||||||||
Fixed Income Securities (98.2%) | |||||||||||
Agency Adjustable Rate Mortgages (3.9%) | |||||||||||
Federal Home Loan Mortgage Corporation, | |||||||||||
Conventional Pools: | |||||||||||
2.30%, 7/1/36 - 7/1/38 | $ | 816 | $ | 867 | |||||||
2.33%, 6/1/36 | 459 | 491 | |||||||||
2.40%, 9/1/35 | 589 | 629 | |||||||||
2.43%, 7/1/38 | 935 | 1,002 | |||||||||
2.66%, 1/1/38 | 112 | 120 | |||||||||
Federal National Mortgage Association, | |||||||||||
Conventional Pools: | |||||||||||
2.31%, 5/1/39 | 480 | 511 | |||||||||
2.33%, 5/1/35 | 470 | 502 | |||||||||
Government National Mortgage Association, | |||||||||||
Various Pool: | |||||||||||
2.00%, 2/20/40 | 151 | 158 | |||||||||
4,280 | |||||||||||
Agency Fixed Rate Mortgages (0.5%) | |||||||||||
Federal Home Loan Mortgage Corporation, | |||||||||||
Gold Pools: | |||||||||||
6.50%, 9/1/19 - 4/1/24 | 4 | 5 | |||||||||
7.50%, 11/1/19 | 1 | 1 | |||||||||
Federal National Mortgage Association, | |||||||||||
Conventional Pools: | |||||||||||
6.50%, 2/1/28 - 10/1/32 | 358 | 419 | |||||||||
7.00%, 7/1/29 - 12/1/33 | 59 | 61 | |||||||||
Government National Mortgage Association, | |||||||||||
Various Pools: | |||||||||||
9.00%, 11/15/16 - 12/15/16 | 15 | 15 | |||||||||
501 | |||||||||||
Asset-Backed Securities (16.9%) | |||||||||||
Ally Auto Receivables Trust | |||||||||||
0.62%, 3/15/17 | 284 | 284 | |||||||||
American Homes 4 Rent | |||||||||||
1.25%, 6/17/31 (a)(b) | 270 | 268 | |||||||||
American Residential Properties Trust | |||||||||||
1.28%, 9/17/31 (a)(b) | 401 | 398 | |||||||||
AWAS Aviation Capital Ltd. | |||||||||||
7.00%, 10/17/16 (b) | 308 | 316 | |||||||||
Chase Issuance Trust, | |||||||||||
0.54%, 10/16/17 | 1,125 | 1,125 | |||||||||
0.59%, 8/15/17 | 1,608 | 1,609 | |||||||||
Citibank Credit Card Issuance Trust | |||||||||||
2.88%, 1/23/23 | 450 | 469 | |||||||||
Colony American Homes | |||||||||||
1.33%, 5/17/31 (a)(b) | 419 | 417 | |||||||||
Colony American Homes Single-Family Rental Pass-Through Certificates | |||||||||||
1.13%, 7/17/31 (a)(b) | 338 | 333 | |||||||||
Discover Card Execution Note Trust, | |||||||||||
0.60%, 7/15/21 (a) | 670 | 672 | |||||||||
1.22%, 10/15/19 | 465 | 467 |
Face Amount (000) | Value (000) | ||||||||||
Enterprise Fleet Financing LLC | |||||||||||
1.05%, 3/20/20 (b) | $ | 836 | $ | 836 | |||||||
Ford Credit Auto Owner Trust | |||||||||||
2.26%, 11/15/25 (b) | 1,165 | 1,188 | |||||||||
GE Dealer Floorplan Master Note Trust | |||||||||||
0.67%, 6/20/17 (a) | 750 | 750 | |||||||||
GE Equipment Transportation LLC | |||||||||||
0.62%, 7/25/16 | 99 | 99 | |||||||||
GM Financial Automobile Leasing Trust | |||||||||||
0.73%, 2/20/17 (b) | 552 | 552 | |||||||||
Hertz Fleet Lease Funding LP | |||||||||||
0.73%, 12/10/27 (a)(b) | 491 | 492 | |||||||||
Hyundai Auto Receivables Trust, | |||||||||||
0.90%, 12/17/18 | 941 | 942 | |||||||||
1.01%, 2/15/18 | 427 | 428 | |||||||||
Invitation Homes Trust, | |||||||||||
1.18%, 6/17/31 (a)(b) | 429 | 425 | |||||||||
1.40%, 12/17/30 (a)(b) | 604 | 603 | |||||||||
1.53%, 6/17/32 (a)(b) | 400 | 400 | |||||||||
John Deere Owner Trust | |||||||||||
0.60%, 3/15/17 | 878 | 879 | |||||||||
Nationstar Agency Advance Funding Trust | |||||||||||
1.89%, 2/18/48 (b) | 100 | 98 | |||||||||
North Carolina State Education Assistance Authority | |||||||||||
1.06%, 7/25/25 (a) | 625 | 627 | |||||||||
Panhandle-Plains Higher Education Authority, Inc. | |||||||||||
1.22%, 7/1/24 (a) | 221 | 223 | |||||||||
PFS Tax Lien Trust | |||||||||||
1.44%, 4/15/16 (b) | 405 | 406 | |||||||||
Sunset Mortgage Loan Co., LLC | |||||||||||
3.72%, 11/16/44 (b) | 310 | 308 | |||||||||
Volkswagen Credit Auto Master Trust | |||||||||||
1.40%, 7/22/19 (b) | 398 | 400 | |||||||||
VOLT NPL X LLC | |||||||||||
4.75%, 10/26/54 (b) | 282 | 277 | |||||||||
VOLT XIX LLC | |||||||||||
5.00%, 4/25/55 (b) | 200 | 196 | |||||||||
VOLT XXII LLC | |||||||||||
4.25%, 2/25/55 (b) | 200 | 197 | |||||||||
VOLT XXX LLC | |||||||||||
4.75%, 10/25/57 (b) | 200 | 197 | |||||||||
VOLT XXXI LLC | |||||||||||
4.50%, 2/25/55 (b) | 200 | 197 | |||||||||
VOLT XXXIII LLC | |||||||||||
4.25%, 3/25/55 (b) | 350 | 345 | |||||||||
Volvo Financial Equipment LLC | |||||||||||
0.74%, 3/15/17 (b) | 520 | 520 | |||||||||
Wheels SPV LLC | |||||||||||
0.84%, 3/20/23 (b) | 199 | 199 | |||||||||
World Omni Automobile Lease Securitization Trust | |||||||||||
1.10%, 12/15/16 | 321 | 322 | |||||||||
18,464 |
The accompanying notes are an integral part of the financial statements.
4
Morgan Stanley Institutional Fund Trust
Semi-Annual Report — March 31, 2015 (unaudited)
Portfolio of Investments (cont'd)
Limited Duration Portfolio
Face Amount (000) | Value (000) | ||||||||||
Collateralized Mortgage Obligations — Agency Collateral Series (3.5%) | |||||||||||
Federal Home Loan Mortgage Corporation, | |||||||||||
1.43%, 8/25/17 | $ | 688 | $ | 695 | |||||||
1.56%, 10/25/18 | 196 | 198 | |||||||||
REMIC | |||||||||||
7.50%, 9/15/29 | 977 | 1,143 | |||||||||
Federal National Mortgage Association, | |||||||||||
0.59%, 8/25/15 | 220 | 220 | |||||||||
0.95%, 11/25/15 | 157 | 157 | |||||||||
1.08%, 2/25/16 | 373 | 374 | |||||||||
2.17%, 9/25/19 (a) | 783 | 802 | |||||||||
Government National Mortgage Association, | |||||||||||
IO | |||||||||||
6.05%, 3/20/43 (a) | 729 | 113 | |||||||||
6.32%, 5/20/40 (a) | 870 | 143 | |||||||||
3,845 | |||||||||||
Commercial Mortgage-Backed Securities (2.0%) | |||||||||||
BLCP Hotel Trust | |||||||||||
1.13%, 8/15/29 (a)(b) | 605 | 604 | |||||||||
CDGJ Commercial Mortgage Trust | |||||||||||
1.57%, 12/15/27 (a)(b) | 575 | 577 | |||||||||
Citigroup Commercial Mortgage Trust | |||||||||||
2.11%, 1/12/30 (b) | 171 | 173 | |||||||||
Hilton USA Trust | |||||||||||
1.17%, 11/5/30 (a)(b) | 168 | 168 | |||||||||
JP Morgan Chase Commercial Mortgage Securities Trust, | |||||||||||
1.15%, 7/15/31 (a)(b) | 285 | 284 | |||||||||
5.46%, 12/12/43 | 400 | 413 | |||||||||
2,219 | |||||||||||
Corporate Bonds (66.0%) | |||||||||||
Finance (27.7%) | |||||||||||
Abbey National Treasury Services PLC | |||||||||||
3.05%, 8/23/18 | 370 | 386 | |||||||||
ABN Amro Bank N.V. | |||||||||||
2.50%, 10/30/18 (b) | 630 | 644 | |||||||||
AerCap Ireland Capital Ltd./AerCap Global Aviation Trust | |||||||||||
3.75%, 5/15/19 (b) | 345 | 347 | |||||||||
Ally Financial, Inc. | |||||||||||
3.25%, 2/13/18 | 265 | 263 | |||||||||
American Express Credit Corp. | |||||||||||
2.25%, 8/15/19 | 675 | 685 | |||||||||
Anthem, Inc. | |||||||||||
1.88%, 1/15/18 | 705 | 709 | |||||||||
Bank of America Corp. | |||||||||||
2.60%, 1/15/19 | 900 | 916 | |||||||||
Bayer US Finance LLC | |||||||||||
2.38%, 10/8/19 (b) | 600 | 611 | |||||||||
BB&T Corp. | |||||||||||
2.25%, 2/1/19 | 580 | 589 | |||||||||
BioMed Realty LP | |||||||||||
2.63%, 5/1/19 | 310 | 313 |
Face Amount (000) | Value (000) | ||||||||||
BNP Paribas SA, | |||||||||||
MTN | |||||||||||
2.70%, 8/20/18 | $ | 610 | $ | 629 | |||||||
BNZ International Funding Ltd. | |||||||||||
2.35%, 3/4/19 (b) | 650 | 657 | |||||||||
BPCE SA, | |||||||||||
MTN | |||||||||||
2.25%, 1/27/20 | 600 | 604 | |||||||||
Canadian Imperial Bank of Commerce | |||||||||||
1.55%, 1/23/18 | 310 | 311 | |||||||||
Capital One Financial Corp. | |||||||||||
2.45%, 4/24/19 | 1,005 | 1,018 | |||||||||
CIT Group, Inc. | |||||||||||
3.88%, 2/19/19 | 550 | 546 | |||||||||
Citigroup, Inc. | |||||||||||
8.50%, 5/22/19 | 950 | 1,184 | |||||||||
Commonwealth Bank of Australia | |||||||||||
2.50%, 9/20/18 | 600 | 618 | |||||||||
Cooperatieve Centrale Raiffeisen- Boerenleenbank BA | |||||||||||
3.38%, 1/19/17 | 330 | 344 | |||||||||
Credit Agricole SA | |||||||||||
2.13%, 4/17/18 (b) | 775 | 785 | |||||||||
Credit Suisse | |||||||||||
2.30%, 5/28/19 | 650 | 657 | |||||||||
DBS Group Holdings Ltd. | |||||||||||
2.25%, 7/16/19 (b) | 650 | 659 | |||||||||
Discover Bank | |||||||||||
2.00%, 2/21/18 | 665 | 666 | |||||||||
DNB Bank ASA | |||||||||||
3.20%, 4/3/17 (b) | 610 | 632 | |||||||||
ERP Operating LP | |||||||||||
2.38%, 7/1/19 | 550 | 558 | |||||||||
Goldman Sachs Group, Inc. (The) | |||||||||||
2.38%, 1/22/18 | 880 | 898 | |||||||||
HSBC USA, Inc. | |||||||||||
2.25%, 6/23/19 | 659 | 665 | |||||||||
Icahn Enterprises LP/Icahn Enterprises Finance Corp., | |||||||||||
Series WI | |||||||||||
4.88%, 3/15/19 | 375 | 383 | |||||||||
ING Bank N.V. | |||||||||||
3.75%, 3/7/17 (b) | 600 | 628 | |||||||||
Intesa Sanpaolo SpA | |||||||||||
3.88%, 1/16/18 | 355 | 373 | |||||||||
JPMorgan Chase & Co. | |||||||||||
2.20%, 10/22/19 | 325 | 326 | |||||||||
Lloyds Bank PLC | |||||||||||
2.30%, 11/27/18 | 400 | 407 | |||||||||
Macquarie Bank Ltd. | |||||||||||
2.60%, 6/24/19 (b) | 605 | 614 | |||||||||
Manufacturers & Traders Trust Co. | |||||||||||
2.10%, 2/6/20 | 560 | 561 |
The accompanying notes are an integral part of the financial statements.
5
Morgan Stanley Institutional Fund Trust
Semi-Annual Report — March 31, 2015 (unaudited)
Portfolio of Investments (cont'd)
Limited Duration Portfolio
Face Amount (000) | Value (000) | ||||||||||
Finance (cont'd) | |||||||||||
Metropolitan Life Global Funding I | |||||||||||
1.50%, 1/10/18 (b) | $ | 775 | $ | 779 | |||||||
Mizuho Corporate Bank Ltd. | |||||||||||
1.85%, 3/21/18 (b) | 645 | 647 | |||||||||
National Australia Bank Ltd. | |||||||||||
1.25%, 3/17/17 (b) | 400 | 402 | |||||||||
Nordea Bank AB | |||||||||||
0.88%, 5/13/16 (b) | 695 | 696 | |||||||||
Principal Financial Group, Inc. | |||||||||||
1.85%, 11/15/17 | 725 | 732 | |||||||||
QBE Insurance Group Ltd. | |||||||||||
2.40%, 5/1/18 (b) | 200 | 202 | |||||||||
Royal Bank of Scotland Group PLC | |||||||||||
2.55%, 9/18/15 | 495 | 499 | |||||||||
Santander Bank NA | |||||||||||
2.00%, 1/12/18 | 525 | 528 | |||||||||
Skandinaviska Enskilda Banken AB | |||||||||||
1.75%, 3/19/18 (b) | 380 | 382 | |||||||||
Standard Chartered PLC | |||||||||||
1.50%, 9/8/17 (b) | 900 | 900 | |||||||||
Sumitomo Mitsui Banking Corp. | |||||||||||
2.45%, 1/10/19 | 630 | 641 | |||||||||
Swedbank AB | |||||||||||
1.75%, 3/12/18 (b) | 305 | 306 | |||||||||
Synchrony Financial | |||||||||||
3.00%, 8/15/19 | 800 | 818 | |||||||||
Toronto-Dominion Bank (The), | |||||||||||
MTN | |||||||||||
2.63%, 9/10/18 | 650 | 672 | |||||||||
UBS AG | |||||||||||
2.38%, 8/14/19 | 925 | 933 | |||||||||
WEA Finance LLC/Westfield UK & Europe Finance PLC | |||||||||||
2.70%, 9/17/19 (b) | 600 | 608 | |||||||||
Wells Fargo & Co. | |||||||||||
2.15%, 1/15/19 | 360 | 366 | |||||||||
30,297 | |||||||||||
Industrials (33.2%) | |||||||||||
ABB Treasury Center USA, Inc. | |||||||||||
2.50%, 6/15/16 (b) | 745 | 760 | |||||||||
AbbVie, Inc. | |||||||||||
1.75%, 11/6/17 | 715 | 718 | |||||||||
Actavis Funding SCS | |||||||||||
3.00%, 3/12/20 | 835 | 855 | |||||||||
Air Canada | |||||||||||
6.75%, 10/1/19 (b) | 250 | 268 | |||||||||
Altera Corp. | |||||||||||
2.50%, 11/15/18 | 300 | 308 | |||||||||
Altice Financing SA | |||||||||||
7.88%, 12/15/19 (b) | 250 | 266 | |||||||||
Altria Group, Inc. | |||||||||||
4.13%, 9/11/15 | 250 | 254 |
Face Amount (000) | Value (000) | ||||||||||
Amazon.com, Inc. | |||||||||||
2.60%, 12/5/19 | $ | 525 | $ | 538 | |||||||
American Honda Finance Corp. | |||||||||||
1.60%, 2/16/18 (b) | 545 | 550 | |||||||||
Amgen, Inc. | |||||||||||
2.50%, 11/15/16 | 425 | 435 | |||||||||
Anadarko Petroleum Corp. | |||||||||||
5.95%, 9/15/16 | 575 | 614 | |||||||||
Applied Materials, Inc. | |||||||||||
2.65%, 6/15/16 | 455 | 465 | |||||||||
ArcelorMittal | |||||||||||
5.25%, 2/25/17 | 375 | 391 | |||||||||
AT&T, Inc. | |||||||||||
1.70%, 6/1/17 | 1,075 | 1,079 | |||||||||
Baidu, Inc. | |||||||||||
3.25%, 8/6/18 | 225 | 233 | |||||||||
BAT International Finance PLC | |||||||||||
1.40%, 6/5/15 (b) | 600 | 601 | |||||||||
Becton Dickinson and Co. | |||||||||||
2.68%, 12/15/19 | 300 | 307 | |||||||||
Bombardier, Inc. | |||||||||||
4.75%, 4/15/19 (b) | 300 | 296 | |||||||||
BW Group Ltd. | |||||||||||
6.63%, 6/28/17 (b) | 325 | 340 | |||||||||
CBS Corp. | |||||||||||
2.30%, 8/15/19 | 625 | 626 | |||||||||
Chesapeake Energy Corp. | |||||||||||
6.50%, 8/15/17 | 350 | 370 | |||||||||
CNH Capital LLC | |||||||||||
6.25%, 11/1/16 | 355 | 375 | |||||||||
Comcast Corp. | |||||||||||
5.70%, 5/15/18 | 520 | 587 | |||||||||
Compass Bank | |||||||||||
1.85%, 9/29/17 | 600 | 605 | |||||||||
Covidien International Finance SA | |||||||||||
1.35%, 5/29/15 | 265 | 265 | |||||||||
Daimler Finance North America LLC | |||||||||||
2.38%, 8/1/18 (b) | 750 | 769 | |||||||||
DISH DBS Corp. | |||||||||||
4.63%, 7/15/17 | 375 | 386 | |||||||||
Eaton Corp. | |||||||||||
1.50%, 11/2/17 | 630 | 633 | |||||||||
Ecolab, Inc. | |||||||||||
3.00%, 12/8/16 | 320 | 330 | |||||||||
EMD Finance LLC | |||||||||||
2.40%, 3/19/20 (b) | 575 | 582 | |||||||||
Enterprise Products Operating LLC | |||||||||||
2.55%, 10/15/19 | 325 | 330 | |||||||||
Experian Finance PLC | |||||||||||
2.38%, 6/15/17 (b) | 600 | 607 | |||||||||
Ford Motor Credit Co., LLC | |||||||||||
5.00%, 5/15/18 | 825 | 900 |
The accompanying notes are an integral part of the financial statements.
6
Morgan Stanley Institutional Fund Trust
Semi-Annual Report — March 31, 2015 (unaudited)
Portfolio of Investments (cont'd)
Limited Duration Portfolio
Face Amount (000) | Value (000) | ||||||||||
Industrials (cont'd) | |||||||||||
General Motors Financial Co., Inc. | |||||||||||
3.15%, 1/15/20 | $ | 600 | $ | 608 | |||||||
Gilead Sciences, Inc. | |||||||||||
2.35%, 2/1/20 | 175 | 180 | |||||||||
Glencore Funding LLC | |||||||||||
1.70%, 5/27/16 (b) | 650 | 653 | |||||||||
Goldcorp, Inc. | |||||||||||
2.13%, 3/15/18 | 520 | 524 | |||||||||
Harley-Davidson Financial Services, Inc., | |||||||||||
1.55%, 11/17/17 (b) | 258 | 260 | |||||||||
2.15%, 2/26/20 (b) | 350 | 352 | |||||||||
Heathrow Funding Ltd. | |||||||||||
2.50%, 6/25/15 (b) | 400 | 401 | |||||||||
Hutchison Whampoa International 14 Ltd. | |||||||||||
1.63%, 10/31/17 (b) | 240 | 239 | |||||||||
Hyundai Capital America | |||||||||||
2.60%, 3/19/20 (b) | 325 | 329 | |||||||||
Ingersoll-Rand Global Holding Co., Ltd. | |||||||||||
2.88%, 1/15/19 | 335 | 344 | |||||||||
JM Smucker Co. (The) | |||||||||||
2.50%, 3/15/20 (b) | 225 | 228 | |||||||||
Kinder Morgan, Inc. | |||||||||||
3.05%, 12/1/19 | 650 | 657 | |||||||||
L-3 Communications Corp. | |||||||||||
1.50%, 5/28/17 | 275 | 273 | |||||||||
LVMH Moet Hennessy Louis Vuitton SE | |||||||||||
1.63%, 6/29/17 (b) | 525 | 531 | |||||||||
Marathon Petroleum Corp. | |||||||||||
3.50%, 3/1/16 | 595 | 608 | |||||||||
McKesson Corp. | |||||||||||
3.25%, 3/1/16 | 1,070 | 1,092 | |||||||||
Medtronic, Inc. | |||||||||||
2.50%, 3/15/20 (b) | 550 | 563 | |||||||||
Nissan Motor Acceptance Corp. | |||||||||||
2.65%, 9/26/18 (b) | 720 | 742 | |||||||||
Orange SA | |||||||||||
2.75%, 2/6/19 | 625 | 648 | |||||||||
Origin Energy Finance Ltd. | |||||||||||
3.50%, 10/9/18 (b) | 200 | 205 | |||||||||
Quest Diagnostics, Inc. | |||||||||||
2.70%, 4/1/19 | 675 | 687 | |||||||||
Rio Tinto Finance USA PLC | |||||||||||
1.38%, 6/17/16 | 325 | 327 | |||||||||
RR Donnelley & Sons Co. | |||||||||||
6.13%, 1/15/17 | 300 | 318 | |||||||||
Ryder System, Inc., | |||||||||||
MTN | |||||||||||
2.65%, 3/2/20 | 125 | 127 | |||||||||
Scripps Networks Interactive, Inc. | |||||||||||
2.75%, 11/15/19 | 575 | 581 | |||||||||
Southwest Airlines Co. | |||||||||||
2.75%, 11/6/19 | 600 | 614 |
Face Amount (000) | Value (000) | ||||||||||
STATS ChipPAC Ltd. | |||||||||||
5.38%, 3/31/16 (b) | $ | 300 | $ | 303 | |||||||
T-Mobile USA, Inc. | |||||||||||
5.25%, 9/1/18 | 500 | 518 | |||||||||
Thomson Reuters Corp., | |||||||||||
1.30%, 2/23/17 | 325 | 326 | |||||||||
1.65%, 9/29/17 | 150 | 150 | |||||||||
Time Warner Cable, Inc. | |||||||||||
6.75%, 7/1/18 | 400 | 460 | |||||||||
Transocean, Inc. | |||||||||||
2.50%, 10/15/17 | 350 | 322 | |||||||||
TSMC Global Ltd. | |||||||||||
1.63%, 4/3/18 (b) | 800 | 794 | |||||||||
Tyson Foods, Inc. | |||||||||||
2.65%, 8/15/19 | 600 | 615 | |||||||||
Verizon Communications, Inc. | |||||||||||
2.55%, 6/17/19 | 1,250 | 1,281 | |||||||||
Viacom, Inc. | |||||||||||
2.50%, 9/1/18 | 625 | 636 | |||||||||
Waste Management, Inc. | |||||||||||
2.60%, 9/1/16 | 725 | 739 | |||||||||
Wesfarmers Ltd. | |||||||||||
2.98%, 5/18/16 (b) | 395 | 404 | |||||||||
Wm. Wrigley Jr. Co. | |||||||||||
1.40%, 10/21/16 (b) | 600 | 602 | |||||||||
Yum! Brands, Inc. | |||||||||||
3.88%, 11/1/20 | 450 | 480 | |||||||||
36,364 | |||||||||||
Utilities (5.1%) | |||||||||||
AES Corp. | |||||||||||
8.00%, 10/15/17 | 40 | 46 | |||||||||
DCP Midstream Operating LP | |||||||||||
2.70%, 4/1/19 | 650 | 594 | |||||||||
Dominion Gas Holdings LLC | |||||||||||
2.50%, 12/15/19 | 825 | 842 | |||||||||
Enbridge, Inc. | |||||||||||
0.71%, 6/2/17 (a) | 175 | 173 | |||||||||
EnLink Midstream Partners LP | |||||||||||
2.70%, 4/1/19 | 525 | 525 | |||||||||
Eversource Energy | |||||||||||
1.45%, 5/1/18 | 525 | 522 | |||||||||
GDF Suez | |||||||||||
1.63%, 10/10/17 (b) | 650 | 654 | |||||||||
NRG Energy, Inc. | |||||||||||
7.63%, 1/15/18 | 275 | 304 | |||||||||
PSEG Power LLC | |||||||||||
5.50%, 12/1/15 | 570 | 587 | |||||||||
Sempra Energy | |||||||||||
2.40%, 3/15/20 | 600 | 607 | |||||||||
Southern Co. (The) | |||||||||||
2.15%, 9/1/19 | 725 | 730 | |||||||||
5,584 | |||||||||||
72,245 |
The accompanying notes are an integral part of the financial statements.
7
Morgan Stanley Institutional Fund Trust
Semi-Annual Report — March 31, 2015 (unaudited)
Portfolio of Investments (cont'd)
Limited Duration Portfolio
Face Amount (000) | Value (000) | ||||||||||
Mortgages — Other (3.8%) | |||||||||||
Alternative Loan Trust, | |||||||||||
5.50%, 10/25/35 - 11/25/35 | $ | 969 | $ | 932 | |||||||
CHL Mortgage Pass-Through Trust | |||||||||||
5.50%, 5/25/34 | 394 | 406 | |||||||||
FDIC Guaranteed Notes Trust | |||||||||||
0.72%, 2/25/48 (a)(b) | 147 | 147 | |||||||||
Freddie Mac Structured Agency Credit Risk Debt Notes | |||||||||||
1.17%, 2/25/24 (a) | 227 | 227 | |||||||||
HarborView Mortgage Loan Trust | |||||||||||
0.37%, 1/19/38 (a) | 416 | 355 | |||||||||
JP Morgan Alternative Loan Trust | |||||||||||
6.00%, 12/25/35 | 131 | 123 | |||||||||
Lehman Mortgage Trust | |||||||||||
6.50%, 9/25/37 | 51 | 44 | |||||||||
Opteum Mortgage Acceptance Corp. Trust | |||||||||||
0.47%, 4/25/36 (a) | 470 | 406 | |||||||||
RALI Trust, | |||||||||||
0.36%, 12/25/36 (a) | 571 | 444 | |||||||||
6.00%, 11/25/36 | 165 | 129 | |||||||||
Sequoia Mortgage Trust | |||||||||||
0.80%, 8/20/34 (a) | 555 | 529 | |||||||||
Washington Mutual Mortgage Pass-Through Certificates Trust, | |||||||||||
1.09%, 8/25/46 (a) | 506 | 357 | |||||||||
1.12%, 6/25/46 (a) | 64 | 46 | |||||||||
4,145 | |||||||||||
Sovereign (1.6%) | |||||||||||
EUROFIMA, | |||||||||||
MTN | |||||||||||
6.25%, 12/28/18 | AUD | 630 | 545 | ||||||||
Korea Development Bank (The) | |||||||||||
1.50%, 1/22/18 | $ | 690 | 687 | ||||||||
Spain Government International Bond | |||||||||||
4.00%, 3/6/18 (b) | 500 | 536 | |||||||||
1,768 | |||||||||||
Total Fixed Income Securities (Cost $106,071) | 107,467 |
Shares | Value (000) | ||||||||||
Short-Term Investments (2.0%) | |||||||||||
Investment Company (1.2%) | |||||||||||
Morgan Stanley Institutional Liquidity Funds — Money Market Portfolio — Institutional Class (See Note G) (Cost $1,304) | 1,303,736 | $ | 1,304 | ||||||||
Face Amount (000) | |||||||||||
U.S. Treasury Security (0.8%) | |||||||||||
U.S. Treasury Bill | |||||||||||
0.07%, 6/18/15 (c)(d) (Cost $864) | $ | 864 | 864 | ||||||||
Total Short-Term Investments (Cost $2,168) | 2,168 | ||||||||||
Total Investments (100.2%) (Cost $108,239) (e) | 109,635 | ||||||||||
Liabilities in Excess of Other Assets (-0.2%) | (205 | ) | |||||||||
Net Assets (100.0%) | $ | 109,430 |
(a) Variable/Floating Rate Security — Interest rate changes on these instruments are based on changes in a designated base rate. The rates shown are those in effect on March 31, 2015.
(b) 144A security — Certain conditions for public sale may exist. Unless otherwise noted, these securities are deemed to be liquid.
(c) Rate shown is the yield to maturity at March 31, 2015.
(d) All or a portion of the security was pledged to cover margin requirements for futures contracts and swap agreements.
(e) Securities are available for collateral in connection with an open foreign currency forward exchange contract, futures contracts and swap agreements.
FDIC Federal Deposit Insurance Corporation.
IO Interest Only.
MTN Medium Term Note.
REMIC Real Estate Mortgage Investment Conduit.
Foreign Currency Forward Exchange Contract:
The Portfolio had the following foreign currency forward exchange contract open at March 31, 2015:
Counterparty | Currency to Deliver (000) | Value (000) | Settlement Date | In Exchange For (000) | Value (000) | Unrealized Appreciation (000) | |||||||||||||||||||||
UBS AG | AUD | 720 | $ | 548 | 4/7/15 | USD | 562 | $ | 562 | $ | 14 |
The accompanying notes are an integral part of the financial statements.
8
Morgan Stanley Institutional Fund Trust
Semi-Annual Report — March 31, 2015 (unaudited)
Portfolio of Investments (cont'd)
Limited Duration Portfolio
Futures Contracts:
The Portfolio had the following futures contracts open at March 31, 2015:
Number of Contracts | Value (000) | Expiration Date | Unrealized Appreciation (Depreciation) (000) | ||||||||||||||||
Long: | |||||||||||||||||||
U.S. Treasury 2 yr. Note | 168 | $ | 36,818 | Jun-15 | $ | 79 | |||||||||||||
U.S. Treasury 10 yr. Note | 23 | 2,965 | Jun-15 | 19 | |||||||||||||||
U.S. Treasury Long Bond | 1 | 164 | Jun-15 | 2 | |||||||||||||||
Short: | |||||||||||||||||||
U.S. Treasury 5 yr. Note | 171 | (20,556 | ) | Jun-15 | (138 | ) | |||||||||||||
$ | (38 | ) |
Credit Default Swap Agreements:
The Portfolio had the following credit default swap agreements open at March 31, 2015:
Swap Counterparty and Reference Obligation | Buy/Sell Protection | Notional Amount (000) | Pay/Receive Fixed Rate | Termination Date | Upfront Payment Paid (Received) (000) | Unrealized Appreciation (Depreciation) (000) | Value (000) | Credit Rating of Reference Obligation† | |||||||||||||||||||||||||||
Barclays Bank PLC Quest Diagnostics, Inc. | Buy | $ | 645 | 1.00 | % | 3/20/19 | $ | 13 | $ | (25 | ) | $ | (12 | ) | BBB+ | ||||||||||||||||||||
Barclays Bank PLC Yum! Brands, Inc. | Buy | 625 | 1.00 | 12/20/18 | (11 | ) | (5 | ) | (16 | ) | BBB | ||||||||||||||||||||||||
Morgan Stanley & Co., LLC* CDX.IG.24 | Buy | 1,200 | 1.00 | 6/20/20 | (23 | ) | 1 | (22 | ) | NR | |||||||||||||||||||||||||
$ | 2,470 | $ | (21 | ) | $ | (29 | ) | $ | (50 | ) |
Interest Rate Swap Agreements:
The Portfolio had the following interest rate swap agreements open at March 31, 2015:
Swap Counterparty | Floating Rate Index | Pay/Receive Floating Rate | Fixed Rate | Termination Date | Notional Amount (000) | Unrealized Depreciation (000) | |||||||||||||||||||||
Morgan Stanley & Co., LLC* | 3 Month LIBOR | Receive | 1.17 | % | 3/24/18 | $ | 22,500 | $ | (45 | ) | |||||||||||||||||
Morgan Stanley & Co., LLC* | 3 Month LIBOR | Receive | 1.58 | 3/24/20 | 8,300 | (22 | ) | ||||||||||||||||||||
$ | (67 | ) |
† Credit rating as issued by Standard & Poor's.
* Cleared swap agreement, the broker is Morgan Stanley & Co., LLC.
LIBOR London Interbank Offered Rate.
NR Not Rated.
AUD — Australian Dollar
USD — United States Dollar
Portfolio Composition
Classification | Percentage of Total Investments | ||||||
Industrials | 33.2 | % | |||||
Finance | 27.6 | ||||||
Other** | 17.3 | ||||||
Asset-Backed Securities | 16.8 | ||||||
Utilities | 5.1 | ||||||
Total Investments | 100.0 | %*** |
** Industries and/or investment types representing less than 5% of total investments.
*** Does not include open long/short futures contracts with an underlying face amount of approximately $60,503,000 with net unrealized depreciation of approximately $38,000. Does not include an open foreign currency forward exchange contract with unrealized appreciation of approximately $14,000 and does not include open swap agreements with net unrealized depreciation of approximately $96,000.
The accompanying notes are an integral part of the financial statements.
9
Morgan Stanley Institutional Fund Trust
Semi-Annual Report — March 31, 2015 (unaudited)
Limited Duration Portfolio
Statement of Assets and Liabilities | March 31, 2015 (000) | ||||||
Assets: | |||||||
Investments in Securities of Unaffiliated Issuers, at Value (Cost $106,935) | $ | 108,331 | |||||
Investment in Security of Affiliated Issuer, at Value (Cost $1,304) | 1,304 | ||||||
Total Investments in Securities, at Value (Cost $108,239) | 109,635 | ||||||
Cash | 6 | ||||||
Interest Receivable | 592 | ||||||
Receivable for Portfolio Shares Sold | 68 | ||||||
Unrealized Appreciation on Foreign Currency Forward Exchange Contracts | 14 | ||||||
Premium Paid on Open Swap Agreements | 13 | ||||||
Receivable from Affiliate | — | @ | |||||
Other Assets | 34 | ||||||
Total Assets | 110,362 | ||||||
Liabilities: | |||||||
Payable for Investments Purchased | 400 | ||||||
Payable for Portfolio Shares Redeemed | 161 | ||||||
Payable for Sub Transfer Agency Fees — Class I | 126 | ||||||
Payable for Sub Transfer Agency Fees — Class A | 1 | ||||||
Payable for Sub Transfer Agency Fees — Class L | — | @ | |||||
Payable for Advisory Fees | 46 | ||||||
Payable for Professional Fees | 46 | ||||||
Payable for Variation Margin on Swap Agreements | 36 | ||||||
Unrealized Depreciation on Swap Agreements | 30 | ||||||
Premium Received on Open Swap Agreements | 11 | ||||||
Payable for Administration Fees | 7 | ||||||
Payable for Trustees' Fees and Expenses | 7 | ||||||
Payable for Variation Margin on Futures Contracts | 6 | ||||||
Payable for Custodian Fees | 2 | ||||||
Payable for Transfer Agency Fees — Class I | 1 | ||||||
Payable for Transfer Agency Fees — Class A | — | @ | |||||
Payable for Transfer Agency Fees — Class L | 1 | ||||||
Payable for Shareholder Services Fees — Class A | — | @ | |||||
Payable for Distribution and Shareholder Services Fees — Class L | — | @ | |||||
Other Liabilities | 51 | ||||||
Total Liabilities | 932 | ||||||
Net Assets | $ | 109,430 | |||||
Net Assets Consist Of: | |||||||
Paid-in-Capital | $ | 350,274 | |||||
Accumulated Undistributed Net Investment Income | 427 | ||||||
Accumulated Net Realized Loss | (242,547 | ) | |||||
Unrealized Appreciation (Depreciation) on: | |||||||
Investments | 1,396 | ||||||
Futures Contracts | (38 | ) | |||||
Swap Agreements | (96 | ) | |||||
Foreign Currency Forward Exchange Contracts | 14 | ||||||
Foreign Currency Translations | (— | @) | |||||
Net Assets | $ | 109,430 |
The accompanying notes are an integral part of the financial statements.
10
Morgan Stanley Institutional Fund Trust
Semi-Annual Report — March 31, 2015 (unaudited)
Limited Duration Portfolio
Statement of Assets and Liabilities (cont'd) | March 31, 2015 (000) | ||||||
CLASS I: | |||||||
Net Assets | $ | 107,584 | |||||
Shares Outstanding (unlimited number of shares authorized, no par value) (not in 000's) | 13,823,179 | ||||||
Net Asset Value, Offering and Redemption Price Per Share | $ | 7.78 | |||||
CLASS A: | |||||||
Net Assets | $ | 1,528 | |||||
Shares Outstanding (unlimited number of shares authorized, no par value) (not in 000's) | 195,957 | ||||||
Net Asset Value, Redemption Price Per Share | $ | 7.80 | |||||
Maximum Sales Load | 4.25 | % | |||||
Maximum Sales Charge | $ | 0.35 | |||||
Maximum Offering Price Per Share | $ | 8.15 | |||||
CLASS L: | |||||||
Net Assets | $ | 318 | |||||
Shares Outstanding (unlimited number of shares authorized, no par value) (not in 000's) | 40,896 | ||||||
Net Asset Value, Offering and Redemption Price Per Share | $ | 7.78 |
@ Amount is less than $500.
The accompanying notes are an integral part of the financial statements.
11
Morgan Stanley Institutional Fund Trust
Semi-Annual Report — March 31, 2015 (unaudited)
Limited Duration Portfolio
Statement of Operations | Six Months Ended March 31, 2015 (000) | ||||||
Investment Income: | |||||||
Interest from Securities of Unaffiliated Issuers | $ | 1,222 | |||||
Dividends from Security of Affiliated Issuer (Note G) | 1 | ||||||
Total Investment Income | 1,223 | ||||||
Expenses: | |||||||
Advisory Fees (Note B) | 169 | ||||||
Professional Fees | 50 | ||||||
Administration Fees (Note C) | 45 | ||||||
Shareholder Reporting Fees | 26 | ||||||
Sub Transfer Agency Fees — Class I | 23 | ||||||
Sub Transfer Agency Fees — Class A | — | @ | |||||
Sub Transfer Agency Fees — Class L | — | @ | |||||
Registration Fees | 21 | ||||||
Custodian Fees (Note F) | 15 | ||||||
Pricing Fees | 14 | ||||||
Transfer Agency Fees — Class I (Note E) | 2 | ||||||
Transfer Agency Fees — Class A (Note E) | 1 | ||||||
Transfer Agency Fees — Class L (Note E) | 1 | ||||||
Shareholder Services Fees — Class A (Note D) | 2 | ||||||
Distribution and Shareholder Services Fees — Class L (Note D) | — | @ | |||||
Trustees' Fees and Expenses | 2 | ||||||
Other Expenses | 8 | ||||||
Total Expenses | 379 | ||||||
Waiver of Advisory Fees (Note B) | (52 | ) | |||||
Reimbursement of Class Specific Expenses — Class I (Note B) | (26 | ) | |||||
Reimbursement of Class Specific Expenses — Class A (Note B) | (1 | ) | |||||
Reimbursement of Class Specific Expenses — Class L (Note B) | (1 | ) | |||||
Rebate from Morgan Stanley Affiliate (Note G) | (1 | ) | |||||
Net Expenses | 298 | ||||||
Net Investment Income | 925 | ||||||
Realized Gain (Loss): | |||||||
Investments Sold | 198 | ||||||
Foreign Currency Forward Exchange Contracts | (1 | ) | |||||
Foreign Currency Transactions | (4 | ) | |||||
Futures Contracts | (415 | ) | |||||
Swap Agreements | (547 | ) | |||||
Net Realized Loss | (769 | ) | |||||
Change in Unrealized Appreciation (Depreciation): | |||||||
Investments | 496 | ||||||
Foreign Currency Forward Exchange Contracts | 14 | ||||||
Foreign Currency Translations | (— | @) | |||||
Futures Contracts | (152 | ) | |||||
Swap Agreements | (179 | ) | |||||
Net Change in Unrealized Appreciation (Depreciation) | 179 | ||||||
Net Realized Loss and Change in Unrealized Appreciation (Depreciation) | (590 | ) | |||||
Net Increase in Net Assets Resulting from Operations | $ | 335 |
@ Amount is less than $500.
The accompanying notes are an integral part of the financial statements.
12
Morgan Stanley Institutional Fund Trust
Semi-Annual Report — March 31, 2015
Limited Duration Portfolio
Statements of Changes in Net Assets | Six Months Ended March 31, 2015 (unaudited) (000) | Year Ended September 30, 2014 (000) | |||||||||
Increase (Decrease) in Net Assets: | |||||||||||
Operations: | |||||||||||
Net Investment Income | $ | 925 | $ | 1,825 | |||||||
Net Realized Gain (Loss) | (769 | ) | 1,041 | ||||||||
Net Change in Unrealized Appreciation (Depreciation) | 179 | (282 | ) | ||||||||
Net Increase in Net Assets Resulting from Operations | 335 | 2,584 | |||||||||
Distributions from and/or in Excess of: | |||||||||||
Class I: | |||||||||||
Net Investment Income | (759 | ) | (1,684 | ) | |||||||
Class A: | |||||||||||
Net Investment Income | (6 | ) | (18 | ) | |||||||
Class L: | |||||||||||
Net Investment Income | (1 | ) | (1 | ) | |||||||
Total Distributions | (766 | ) | (1,703 | ) | |||||||
Capital Share Transactions:(1) | |||||||||||
Class I: | |||||||||||
Subscribed | 1,821 | 14,035 | |||||||||
Distributions Reinvested | 759 | 1,682 | |||||||||
Redeemed | (13,627 | ) | (20,486 | ) | |||||||
Class A: | |||||||||||
Subscribed | 1,382 | 2,964 | |||||||||
Distributions Reinvested | 6 | 18 | |||||||||
Redeemed | (797 | ) | (2,802 | ) | |||||||
Class L: | |||||||||||
Subscribed | 242 | 110 | |||||||||
Distributions Reinvested | — | @ | 1 | ||||||||
Redeemed | (124 | ) | (6 | ) | |||||||
Net Decrease in Net Assets Resulting from Capital Share Transactions | (10,338 | ) | (4,484 | ) | |||||||
Total Decrease in Net Assets | (10,769 | ) | (3,603 | ) | |||||||
Net Assets: | |||||||||||
Beginning of Period | 120,199 | 123,802 | |||||||||
End of Period (Including Accumulated Undistributed Net Investment Income of $427 and $268) | $ | 109,430 | $ | 120,199 | |||||||
(1) Capital Share Transactions: | |||||||||||
Class I: | |||||||||||
Shares Subscribed | 234 | 1,797 | |||||||||
Shares Issued on Distributions Reinvested | 98 | 216 | |||||||||
Shares Redeemed | (1,751 | ) | (2,624 | ) | |||||||
Net Decrease in Class I Shares Outstanding | (1,419 | ) | (611 | ) | |||||||
Class A: | |||||||||||
Shares Subscribed | 177 | 379 | |||||||||
Shares Issued on Distributions Reinvested | 1 | 2 | |||||||||
Shares Redeemed | (102 | ) | (357 | ) | |||||||
Net Increase in Class A Shares Outstanding | 76 | 24 | |||||||||
Class L: | |||||||||||
Shares Subscribed | 31 | 14 | |||||||||
Shares Issued on Distributions Reinvested | — | @@ | — | @@ | |||||||
Shares Redeemed | (16 | ) | (1 | ) | |||||||
Net Increase in Class L Shares Outstanding | 15 | 13 |
@ Amount is less than $500.
@@ Amount is less than 500 shares.
The accompanying notes are an integral part of the financial statements.
13
Morgan Stanley Institutional Fund Trust
Semi-Annual Report — March 31, 2015
Financial Highlights
Limited Duration Portfolio
Class I | |||||||||||||||||||||||||||
Six Months Ended March 31, 2015 | Year Ended September 30, | ||||||||||||||||||||||||||
Selected Per Share Data and Ratios | (unaudited) | 2014 | 2013 | 2012 | 2011 | 2010 | |||||||||||||||||||||
Net Asset Value, Beginning of Period | $ | 7.81 | $ | 7.76 | $ | 7.80 | $ | 7.71 | $ | 7.79 | $ | 7.68 | |||||||||||||||
Income (Loss) from Investment Operations: | |||||||||||||||||||||||||||
Net Investment Income† | 0.06 | 0.12 | 0.11 | 0.15 | 0.16 | 0.18 | |||||||||||||||||||||
Net Realized and Unrealized Gain (Loss) | (0.04 | ) | 0.04 | (0.03 | ) | 0.11 | (0.10 | ) | 0.10 | ||||||||||||||||||
Total from Investment Operations | 0.02 | 0.16 | 0.08 | 0.26 | 0.06 | 0.28 | |||||||||||||||||||||
Distributions from and/or in Excess of: | |||||||||||||||||||||||||||
Net Investment Income | (0.05 | ) | (0.11 | ) | (0.12 | ) | (0.17 | ) | (0.14 | ) | (0.16 | ) | |||||||||||||||
Paid-in-Capital | — | — | — | — | — | (0.01 | ) | ||||||||||||||||||||
Total Distributions | (0.05 | ) | (0.11 | ) | (0.12 | ) | (0.17 | ) | (0.14 | ) | (0.17 | ) | |||||||||||||||
Net Asset Value, End of Period | $ | 7.78 | $ | 7.81 | $ | 7.76 | $ | 7.80 | $ | 7.71 | $ | 7.79 | |||||||||||||||
Total Return++ | 0.29 | %# | 2.06 | % | 1.09 | % | 3.35 | % | 0.71 | % | 3.74 | % | |||||||||||||||
Ratios and Supplemental Data: | |||||||||||||||||||||||||||
Net Assets, End of Period (Thousands) | $ | 107,584 | $ | 119,059 | $ | 122,958 | $ | 145,387 | $ | 167,811 | $ | 208,608 | |||||||||||||||
Ratio of Expenses to Average Net Assets (1) | 0.53 | %+* | 0.53 | %+ | 0.71 | %+^ | 0.63 | %+ | 0.59 | %+ | 0.55 | %+ | |||||||||||||||
Ratio of Net Investment Income to Average Net Assets (1) | 1.64 | %+* | 1.49 | %+ | 1.45 | %+^ | 1.92 | %+ | 2.12 | %+ | 2.39 | %+ | |||||||||||||||
Ratio of Rebate from Morgan Stanley Affiliates to Average Net Assets | 0.00 | %§* | 0.00 | %§ | 0.00 | %§ | 0.00 | %§ | 0.00 | %§ | 0.00 | %§ | |||||||||||||||
Portfolio Turnover Rate | 19 | %# | 60 | % | 66 | % | 51 | % | 35 | % | 95 | % | |||||||||||||||
(1) Supplemental Information on the Ratios to Average Net Assets: | |||||||||||||||||||||||||||
Ratios Before Expense Limitation: | |||||||||||||||||||||||||||
Expenses to Average Net Assets | 0.67 | %* | 0.78 | % | 0.72 | % | N/A | N/A | N/A | ||||||||||||||||||
Net Investment Income to Average Net Assets | 1.50 | %* | 1.24 | % | 1.44 | % | N/A | N/A | N/A |
† Per share amount is based on average shares outstanding.
++ Calculated based on the net asset value as of the last business day of the period.
+ The Ratios of Expenses and Net Investment Income reflect the rebate of certain Portfolio expenses in connection with the investments in Morgan Stanley affiliates during the period. The effect of the rebate on the ratios is disclosed in the above table as "Ratio of Rebate from Morgan Stanley Affiliates to Average Net Assets."
§ Amount is less than 0.005%.
# Not Annualized.
* Annualized.
^ Effective September 16, 2013, the Adviser has agreed to limit the ratio of expenses to average net assets to the maximum ratio of 0.53% for Class I shares.
The accompanying notes are an integral part of the financial statements.
14
Morgan Stanley Institutional Fund Trust
Semi-Annual Report — March 31, 2015
Financial Highlights
Limited Duration Portfolio
Class A | |||||||||||||||||||||||||||
Six Months Ended March 31, 2015 | Year Ended September 30, | ||||||||||||||||||||||||||
Selected Per Share Data and Ratios | (unaudited) | 2014 | 2013 | 2012 | 2011 | 2010 | |||||||||||||||||||||
Net Asset Value, Beginning of Period | $ | 7.83 | $ | 7.77 | $ | 7.80 | $ | 7.71 | $ | 7.79 | $ | 7.68 | |||||||||||||||
Income (Loss) from Investment Operations: | |||||||||||||||||||||||||||
Net Investment Income† | 0.05 | 0.09 | 0.09 | 0.13 | 0.15 | 0.17 | |||||||||||||||||||||
Net Realized and Unrealized Gain (Loss) | (0.04 | ) | 0.05 | (0.01 | ) | 0.11 | (0.12 | ) | 0.09 | ||||||||||||||||||
Total from Investment Operations | 0.01 | 0.14 | 0.08 | 0.24 | 0.03 | 0.26 | |||||||||||||||||||||
Distributions from and/or in Excess of: | |||||||||||||||||||||||||||
Net Investment Income | (0.04 | ) | (0.08 | ) | (0.11 | ) | (0.15 | ) | (0.11 | ) | (0.15 | ) | |||||||||||||||
Paid-in-Capital | — | — | — | — | — | (0.00 | )‡ | ||||||||||||||||||||
Total Distributions | (0.04 | ) | (0.08 | ) | (0.11 | ) | (0.15 | ) | (0.11 | ) | (0.15 | ) | |||||||||||||||
Net Asset Value, End of Period | $ | 7.80 | $ | 7.83 | $ | 7.77 | $ | 7.80 | $ | 7.71 | $ | 7.79 | |||||||||||||||
Total Return++ | 0.12 | %# | 1.78 | % | 0.84 | % | 3.22 | % | 0.45 | % | 3.48 | % | |||||||||||||||
Ratios and Supplemental Data: | |||||||||||||||||||||||||||
Net Assets, End of Period (Thousands) | $ | 1,528 | $ | 940 | $ | 749 | $ | 145 | $ | 194 | $ | 52 | |||||||||||||||
Ratio of Expenses to Average Net Assets (1) | 0.88 | %+* | 0.88 | %+ | 0.97 | %+^ | 0.88 | %+ | 0.84 | %+ | 0.80 | %+ | |||||||||||||||
Ratio of Net Investment Income to Average Net Assets (1) | 1.30 | %+* | 1.14 | %+ | 1.15 | %+^ | 1.70 | %+ | 1.87 | %+ | 2.14 | %+ | |||||||||||||||
Ratio of Rebate from Morgan Stanley Affiliates to Average Net Assets | 0.00 | %§* | 0.00 | %§ | 0.00 | %§ | 0.00 | %§ | 0.00 | %§ | 0.00 | %§ | |||||||||||||||
Portfolio Turnover Rate | 19 | %# | 60 | % | 66 | % | 51 | % | 35 | % | 95 | % | |||||||||||||||
(1) Supplemental Information on the Ratios to Average Net Assets: | |||||||||||||||||||||||||||
Ratios Before Expense Limitation: | |||||||||||||||||||||||||||
Expenses to Average Net Assets | 1.07 | %* | 1.10 | % | 1.00 | % | N/A | N/A | N/A | ||||||||||||||||||
Net Investment Income to Average Net Assets | 1.11 | %* | 0.92 | % | 1.12 | % | N/A | N/A | N/A |
† Per share amount is based on average shares outstanding.
‡ Amount is less than $0.005 per share.
++ Calculated based on the net asset value which does not reflect sales charges, if applicable, as of the last business day of the period.
# Not Annualized.
+ The Ratios of Expenses and Net Investment Income reflect the rebate of certain Portfolio expenses in connection with the investments in Morgan Stanley affiliates during the period. The effect of the rebate on the ratios is disclosed in the above table as "Ratio of Rebate from Morgan Stanley Affiliates to Average Net Assets."
^ Effective September 16, 2013, the Adviser has agreed to limit the ratio of expenses to average net assets to the maximum ratio of 0.88% for Class A shares.
* Annualized.
§ Amount is less than 0.005%.
The accompanying notes are an integral part of the financial statements.
15
Morgan Stanley Institutional Fund Trust
Semi-Annual Report — March 31, 2015
Financial Highlights
Limited Duration Portfolio
Class L | |||||||||||||||||||
Six Months Ended March 31, 2015 | Year Ended September 30, | Period from April 27, 2012^ to | |||||||||||||||||
Selected Per Share Data and Ratios | (unaudited) | 2014 | 2013 | September 30, 2012 | |||||||||||||||
Net Asset Value, Beginning of Period | $ | 7.80 | $ | 7.75 | $ | 7.80 | $ | 7.76 | |||||||||||
Income (Loss) from Investment Operations: | |||||||||||||||||||
Net Investment Income† | 0.04 | 0.06 | 0.07 | 0.04 | |||||||||||||||
Net Realized and Unrealized Gain (Loss) | (0.04 | ) | 0.05 | (0.03 | ) | 0.04 | |||||||||||||
Total from Investment Operations | — | 0.11 | 0.04 | 0.08 | |||||||||||||||
Distributions from and/or in Excess of: | |||||||||||||||||||
Net Investment Income | (0.02 | ) | (0.06 | ) | (0.09 | ) | (0.04 | ) | |||||||||||
Net Asset Value, End of Period | $ | 7.78 | $ | 7.80 | $ | 7.75 | $ | 7.80 | |||||||||||
Total Return++ | 0.02 | %# | 1.38 | % | 0.48 | % | 1.06 | %# | |||||||||||
Ratios and Supplemental Data: | |||||||||||||||||||
Net Assets, End of Period (Thousands) | $ | 318 | $ | 200 | $ | 95 | $ | 10 | |||||||||||
Ratio of Expenses to Average Net Assets (1) | 1.23 | %+* | 1.23 | %+ | 1.24 | %+^^ | 1.21 | %+* | |||||||||||
Ratio of Net Investment Income to Average Net Assets (1) | 0.93 | %+* | 0.79 | %+ | 0.85 | %+^^ | 1.14 | %+* | |||||||||||
Ratio of Rebate from Morgan Stanley Affiliates to Average Net Assets | 0.00 | %§* | 0.00 | %§ | 0.00 | %§ | 0.00 | %*§ | |||||||||||
Portfolio Turnover Rate | 19 | %# | 60 | % | 66 | % | 51 | %# | |||||||||||
(1) Supplemental Information on the Ratios to Average Net Assets: | |||||||||||||||||||
Ratios Before Expense Limitation: | |||||||||||||||||||
Expenses to Average Net Assets | 2.67 | %* | 3.48 | % | 1.34 | % | N/A | ||||||||||||
Net Investment Income (Loss) to Average Net Assets | (0.51 | )%* | (1.46 | )% | 0.75 | % | N/A |
^ Commencement of Operations.
† Per share amount is based on average shares outstanding.
++ Calculated based on the net asset value as of the last business day of the period.
# Not Annualized.
+ The Ratios of Expenses and Net Investment Income reflect the rebate of certain Portfolio expenses in connection with the investments in Morgan Stanley affiliates during the period. The effect of the rebate on the ratios is disclosed in the above table as "Ratio of Rebate from Morgan Stanley Affiliates to Average Net Assets."
* Annualized.
^^ Effective September 16, 2013, the Adviser has agreed to limit the ratio of expenses to average net assets to the maximum ratio of 1.23% for Class L shares.
§ Amount is less than 0.005%.
The accompanying notes are an integral part of the financial statements.
16
Morgan Stanley Institutional Fund Trust
Semi-Annual Report — March 31, 2015
Notes to Financial Statements (unaudited)
Morgan Stanley Institutional Fund Trust ("MSIFT'' or the "Fund'') is registered under the Investment Company Act of 1940, as amended (the "Act''), as an open-end management investment company. The Fund is comprised of eight separate, active portfolios (individually referred to as a "Portfolio", collectively as the "Portfolios"). The Fund applies investment company accounting and reporting guidance. All Portfolios are considered diversified for purposes of the Act.
The accompanying financial statements relate to the Limited Duration Portfolio. The Portfolio seeks above-average total return over a market cycle of three to five years. The Portfolio offers three classes of shares — Class I, Class A and Class L.
A. Significant Accounting Policies: The following significant accounting policies are in conformity with U.S. generally accepted accounting principles ("GAAP"). Such policies are consistently followed by the Fund in the preparation of its financial statements. GAAP may require management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results may differ from those estimates.
1. Security Valuation: (1) Certain portfolio securities may be valued by an outside pricing service approved by the Fund's Board of Trustees (the "Trustees"). The pricing service may utilize a matrix system or other model incorporating attributes such as security quality, maturity and coupon as the evaluation model parameters, and/or research evaluations by its staff, including review of broker-dealer market price quotations in determining what it believes is the fair valuation of the portfolios securities valued by such pricing service; (2) futures are valued at the latest price published by the commodities exchange on which they trade; (3) swaps are marked-to-market daily based upon quotations from market makers; (4) when market quotations are not readily available, including circumstances under which Morgan Stanley Investment Management Inc. (the "Adviser") determines that the closing price, last sale price or the mean between the last reported bid and asked prices are not reflective of 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 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 of the New York
Stock Exchange ("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 Trustees or by the Adviser using a pricing service and/or procedures approved by the Trustees; (5) investments in mutual funds, including the Morgan Stanley Institutional Liquidity Funds, are valued at the net asset value as of the close of each business day; and (6) short-term taxable debt securities with remaining maturities of 60 days or less at the time of purchase may be valued at amortized cost, unless the Adviser determines such price does not reflect the securities' market value, in which case these securities will be valued at their fair market value determined by the Adviser. Other taxable short-term debt securities with maturities of more than 60 days will be valued on a mark-to-market basis until such time as they reach a maturity of 60 days, whereupon they will be valued at amortized cost using their value on the 61st day unless the Adviser determines such price does not reflect the securities' fair value, in which case these securities will be valued at their fair market value as determined by the Adviser.
The Trustees have the ultimate responsibility of determining the fair value of the investments. Under procedures approved by the Trustees, the Fund's Adviser has formed a Valuation Committee whose members are approved by the Trustees. The Valuation Committee provides administration and oversight of the Fund's valuation policies and procedures, which are reviewed at least annually by the Trustees. These procedures allow the Fund to utilize independent pricing services, quotations from securities and financial instrument dealers, and other market sources to determine fair value.
The Fund has procedures to determine the fair value of securities and other financial instruments for which market prices are not readily available. Under these procedures, the Valuation Committee convenes on a regular and ad hoc basis to review such securities and considers a number of factors, including valuation methodologies and significant unobservable valuation inputs, when arriving at fair value. The Valuation Committee may employ a market-based approach which may use related or comparable assets or liabilities, recent transactions, market multiples, book values, and other relevant information for the investment to determine the fair value of the
17
Morgan Stanley Institutional Fund Trust
Semi-Annual Report — March 31, 2015
Notes to Financial Statements (unaudited) (cont'd)
investment. An income-based valuation approach may also be used in which the anticipated future cash flows of the investment are discounted to calculate fair value. Discounts may also be applied due to the nature or duration of any restrictions on the disposition of the investments. Due to the inherent uncertainty of valuations of such investments, the fair values may differ significantly from the values that would have been used had an active market existed. The Valuation Committee employs various methods for calibrating these valuation approaches including a regular review of valuation methodologies, key inputs and assumptions, transactional back-testing or disposition analysis, and reviews of any related market activity.
2. Fair Value Measurement: Financial Accounting Standards Board ("FASB") Accounting Standards CodificationTM ("ASC") 820, "Fair Value Measurement" ("ASC 820"), defines fair value as the value 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. ASC 820 establishes a three-tier hierarchy to distinguish between (1) inputs that reflect the assumptions market participants would use in valuing 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 valuing 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. Factors considered in making this determination may include, but are not limited to, information obtained by contacting the issuer, analysts, or the appropriate stock exchange (for exchange-traded securities), analysis of the issuer's financial statements or other available documents and, if necessary, available information concerning other securities in similar circumstances
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.
The following is a summary of the inputs used to value the Portfolio's investments as of March 31, 2015.
Investment Type | Level 1 Unadjusted quoted prices (000) | Level 2 Other significant observable inputs (000) | Level 3 Significant unobservable inputs (000) | Total (000) | |||||||||||||||
Assets: | |||||||||||||||||||
Fixed Income Securities | |||||||||||||||||||
Agency Adjustable Rate Mortgages | $ | — | $ | 4,280 | $ | — | $ | 4,280 | |||||||||||
Agency Fixed Rate Mortgages | — | 501 | — | 501 | |||||||||||||||
Asset-Backed Securities | — | 18,464 | — | 18,464 | |||||||||||||||
Collateralized Mortgage Obligations — Agency Collateral Series | — | 3,845 | — | 3,845 | |||||||||||||||
Commercial Mortgage- Backed Securities | — | 2,219 | — | 2,219 | |||||||||||||||
Corporate Bonds | — | 72,245 | — | 72,245 | |||||||||||||||
Mortgages — Other | — | 4,145 | — | 4,145 | |||||||||||||||
Sovereign | — | 1,768 | — | 1,768 | |||||||||||||||
Total Fixed Income Securities | — | 107,467 | — | 107,467 | |||||||||||||||
Short-Term Investments | |||||||||||||||||||
Investment Company | 1,304 | — | — | 1,304 | |||||||||||||||
U.S. Treasury Security | — | 864 | — | 864 | |||||||||||||||
Total Short-Term Investments | 1,304 | 864 | — | 2,168 | |||||||||||||||
Futures Contracts | 100 | — | — | 100 | |||||||||||||||
Credit Default Swap Agreement | — | 1 | — | 1 | |||||||||||||||
Foreign Currency Forward Exchange Contract | — | 14 | — | 14 | |||||||||||||||
Total Assets | 1,404 | 108,346 | — | 109,750 |
18
Morgan Stanley Institutional Fund Trust
Semi-Annual Report — March 31, 2015
Notes to Financial Statements (unaudited) (cont'd)
Investment Type | Level 1 Unadjusted quoted prices (000) | Level 2 Other significant observable inputs (000) | Level 3 Significant unobservable inputs (000) | Total (000) | |||||||||||||||
Liabilities: | |||||||||||||||||||
Futures Contract | $ | (138 | ) | $ | — | $ | — | $ | (138 | ) | |||||||||
Credit Default Swap Agreements | — | (30 | ) | — | (30 | ) | |||||||||||||
Interest Rate Swap Agreements | — | (67 | ) | — | (67 | ) | |||||||||||||
Total Liabilities | (138 | ) | (97 | ) | — | (235 | ) | ||||||||||||
Total | $ | 1,266 | $ | 108,249 | $ | — | $ | 109,515 |
Transfers between investment levels may occur as the markets fluctuate and/or the availability of data used in an investment's valuation changes. The Portfolio recognizes transfers between the levels as of the end of the period. As of March 31, 2015, the Portfolio did not have any investments transfer between investment levels.
3. Foreign Currency Translation and Foreign Investments: The books and records of the Portfolio are maintained in U.S. dollars. Foreign currency amounts are translated into U.S. dollars as follows:
– investments, other assets and liabilities at the prevailing rate of exchange on the valuation date;
– investment transactions and investment income at the prevailing rates of exchange on the dates of such transactions.
Although the net assets of the Portfolio are presented at the foreign exchange rates and market values at the close of the period, the Portfolio does not isolate that portion of the results of operations arising as a result of changes in the foreign exchange rates from the fluctuations arising from changes in the market prices of securities held at period end. Similarly, the Portfolio does not isolate the effect of changes in foreign exchange rates from the fluctuations arising from changes in the market prices of securities sold during the period. Accordingly, realized and unrealized foreign currency gains (losses) on investments in securities are included in the reported net realized and unrealized gains (losses) on investment transactions and balances. However, pursuant to U.S. Federal income tax regulations, gains and losses from certain foreign currency transactions and the foreign currency portion of gains and losses realized on sales and maturities of foreign denominated debt securities are treated as ordinary income for U.S. Federal income tax purposes.
Net realized gains (losses) on foreign currency transactions represent net foreign exchange gains (losses) from currency gains (losses) realized between the trade and settlement dates on securities transactions, and the difference between the amount of investment income and foreign withholding taxes recorded on the Portfolio's books and the U.S. dollar equivalent amounts actually received or paid. Net unrealized currency gains (losses) from valuing foreign currency denominated assets and liabilities at period end exchange rates are reflected as a component of unrealized appreciation (depreciation) in the Statement of Assets and Liabilities. The change in unrealized currency gains (losses) on foreign currency translations for the period is reflected in the Statement of Operations.
Foreign security and currency transactions may involve certain considerations and risks not typically associated with those of U.S. dollar denominated transactions as a result of, among other factors, fluctuations of exchange rates in relation to the U.S. dollar, the possibility of lower levels of governmental supervision and regulation of foreign securities markets and the possibility of political or economic instability.
Governmental approval for foreign investments may be required in advance of making an investment under certain circumstances in some countries, and the extent of foreign investments in domestic companies may be subject to limitation in other countries. Foreign ownership limitations also may be imposed by the charters of individual companies to prevent, among other concerns, violations of foreign investment limitations. As a result, an additional class of shares (identified as "Foreign" in the Portfolio of Investments) may be created and offered for investment. The "local" and "foreign shares" market values may differ. In the absence of trading of the foreign shares in such markets, the Portfolio values the foreign shares at the closing exchange price of the local shares.
4. Derivatives: The Portfolio may, but is not required to, use derivative instruments for a variety of purposes, including hedging, risk management, portfolio management or to earn income. Derivatives are financial instruments whose value is based, in part, on the value of an underlying asset, interest rate, index or financial instrument. Prevailing interest rates and volatility levels, among other things, also affect the value of derivative instruments. A
19
Morgan Stanley Institutional Fund Trust
Semi-Annual Report — March 31, 2015
Notes to Financial Statements (unaudited) (cont'd)
derivative instrument often has risks similar to its underlying asset and may have additional risks, including imperfect correlation between the value of the derivative and the underlying asset, risks of default by the counterparty to certain transactions, magnification of losses incurred due to changes in the market value of the securities, instruments, indices or interest rates to which the derivative instrument relates, risks that the transactions may not be liquid and risks arising from margin requirements. The use of derivatives involves risks that are different from, and possibly greater than, the risks associated with other portfolio investments. Derivatives may involve the use of highly specialized instruments that require investment techniques and risk analyses different from those associated with other portfolio investments. All of the Portfolio's holdings, including derivative instruments, are marked-to-market each day with the change in value reflected in unrealized appreciation (depreciation). Upon disposition, a realized gain or loss is recognized.
Certain derivative transactions may give rise to a form of leverage. Leverage magnifies the potential for gain and the risk of loss. Leverage associated with derivative transactions may cause the Portfolio to liquidate portfolio positions when it may not be advantageous to do so to satisfy its obligations or to meet earmarking or segregation requirements, pursuant to applicable Securities and Exchange Commission rules and regulations, or may cause the Portfolio to be more volatile than if the Portfolio had not been leveraged. Although the Adviser seeks to use derivatives to further the Portfolio's investment objectives, there is no assurance that the use of derivatives will achieve this result.
Following is a description of the derivative instruments and techniques that the Portfolio used during the period and their associated risks:
Foreign Currency Forward Exchange Contracts: In connection with its investments in foreign securities, the Portfolio also entered into contracts with banks, brokers or dealers to purchase or sell securities or foreign currencies at a future date. A foreign currency forward exchange contract ("currency contract") is a negotiated agreement between the contracting parties to exchange a specified amount of currency at a specified future time at a specified rate. The rate can be higher or lower than the spot rate between the currencies that are the subject
of the contract. Currency contracts may be used to protect against uncertainty in the level of future foreign currency exchange rates or to gain or modify exposure to a particular currency. To the extent hedged by the use of currency contracts, the precise matching of the currency contract amounts and the value of the securities involved will not generally be possible because the future value of such securities in foreign currencies will change as a consequence of market movements in the value of those securities between the date on which the contract is entered into and the date it matures. Furthermore, such transactions may reduce or preclude the opportunity for gain if the value of the currency should move in the direction opposite to the position taken. There is additional risk to the extent that currency contracts create exposure to currencies in which the Portfolio's securities are not denominated. Unanticipated changes in currency prices may result in poorer overall performance for the Portfolio than if it had not entered into such contracts. The use of currency contracts involves the risk of loss from the insolvency or bankruptcy of the counterparty to the contract or the failure of the counterparty to make payments or otherwise comply with the terms of the contract. A currency contract is marked-to-market daily and the change in market value is recorded by the Portfolio as unrealized gain or loss. The Portfolio records realized gains (losses) when the currency contract is closed equal to the difference between the value of the currency contract at the time it was opened and the value at the time it was closed.
Futures: A futures contract is a standardized, exchange-traded agreement to buy or sell a specific quantity of an underlying asset, reference rate or index at a specific price at a specific future time. The value of a futures contract tends to increase and decrease in tandem with the value of the underlying instrument. Depending on the terms of the particular contract, futures contracts are settled through either physical delivery of the underlying instrument on the settlement date or by payment of a cash settlement amount on the settlement date. During the period the futures contract is open, payments are received from or made to the broker based upon changes in the value of the contract (the variation margin). A decision as to whether, when and how to use futures contracts involves the exercise of skill and judgment and even a well-conceived futures transaction may
20
Morgan Stanley Institutional Fund Trust
Semi-Annual Report — March 31, 2015
Notes to Financial Statements (unaudited) (cont'd)
be unsuccessful because of market behavior or unexpected events. In addition to the derivatives risks discussed above, the prices of futures contracts can be highly volatile, using futures contracts can lower total return, and the potential loss from futures contracts can exceed the Portfolio's initial investment in such contracts. No assurance can be given that a liquid market will exist for any particular futures contract at any particular time. There is also the risk of loss by the Portfolio of margin deposits in the event of bankruptcy of a broker with which the Portfolio has open positions in the futures contract.
Swaps: The Portfolio may enter into over-the-counter ("OTC") swap contracts or cleared swap transactions. A swap contract is an agreement between two parties pursuant to which the parties exchange payments at specified dates on the basis of a specified notional amount, with the payments calculated by reference to specified securities, indices, reference rates, currencies or other instruments. Typically swap agreements provide that when the period payment dates for both parties are the same, the payments are made on a net basis (i.e., the two payment streams are netted out, with only the net amount paid by one party to the other). The Portfolio's obligations or rights under a swap contract entered into on a net basis will generally be equal only to the net amount to be paid or received under the agreement, based on the relative values of the positions held by each party. Cleared swap transactions may help reduce counterparty credit risk. In a cleared swap, the Portfolio's ultimate counterparty is a clearinghouse rather than a swap dealer, bank or other financial institution. OTC swap agreements are not entered into or traded on exchanges and often there is no central clearing or guaranty function for OTC swaps. These OTC swaps are often subject to credit risk or the risk of default or non-performance by the counterparty. Both OTC and cleared swaps could result in losses if interest rates, foreign currency exchange rates or other factors are not correctly anticipated by the Portfolio or if the reference index, security or investments do not perform as expected. During the period swap agreements are open, payments are received from or made to the clearinghouse or counterparty based upon changes in the value of the contract (variation margin). The Dodd-Frank Wall Street Reform and Consumer Protection Act and related regulatory developments
require the clearing and exchange-trading of certain standardized swap transactions. Mandatory exchange-trading and clearing is occurring on a phased-in basis.
The Portfolio's use of swaps during the period included those based on the credit of an underlying security commonly referred to as "credit default swaps." The Portfolio may be either the buyer or seller in a credit default swap. Where the Portfolio is the buyer of a credit default swap contract, it would typically be entitled to receive the par (or other agreed-upon) value of a referenced debt obligation from the counterparty to the contract only in the event of a default or similar event by the issuer of the debt obligation. If no default occurs, the Portfolio would have paid to the counterparty a periodic stream of payments over the term of the contract and received no benefit from the contract. When the Portfolio is the seller of a credit default swap contract, it typically receives the stream of payments but is obligated to pay an amount equal to the par (or other agreed-upon) value of a referenced debt obligation upon the default or similar event by the issuer of the referenced debt obligation. The use of credit default swaps could result in losses to the Portfolio if the Adviser fails to correctly evaluate the creditworthiness of the issuer of the referenced debt obligation.
The current credit rating of each individual issuer is listed in the table following the Portfolio of Investments and serves as an indicator of the current status of the payment/performance risk of the credit derivative. Alternatively, for credit default swaps on an index of credits, the quoted market prices and current values serve as an indicator of the current status of the payment/performance risk of the credit derivative. Generally, lower credit ratings and increasing market values, in absolute terms, represent a deterioration of the credit and a greater likelihood of an adverse credit event of the issuer.
When the Portfolio has an unrealized loss on a swap agreement, the Portfolio has instructed the custodian to pledge cash or liquid securities as collateral with a value approximately equal to the amount of the unrealized loss. Collateral pledges are monitored and subsequently adjusted if and when the swap valuations fluctuate. If applicable, cash collateral is included with "Due from (to) Broker" in the Statement of Assets and Liabilities.
21
Morgan Stanley Institutional Fund Trust
Semi-Annual Report — March 31, 2015
Notes to Financial Statements (unaudited) (cont'd)
Upfront payments received or paid by the Portfolio will be reflected as an asset or liability, respectively, in the Statement of Assets and Liabilities.
FASB ASC 815, "Derivatives and Hedging" ("ASC 815"), is intended to improve financial reporting about derivative instruments by requiring enhanced disclosures to enable investors to better understand how and why the Portfolio uses derivative instruments, how these derivative instruments are accounted for and their effects on the Portfolio's financial position and results of operations.
The following tables set forth the fair value of the Portfolio's derivative contracts by primary risk exposure as of March 31, 2015.
Asset Derivatives | Primary Risk | Value | |||||||||||||
Foreign Currency | Unrealized Appreciation on |
| $14 | ||||||||||||
Futures Contracts | Variation Margin on |
|
| ||||||||||||
Swap Agreement | Variation Margin on |
|
| ||||||||||||
Total | $115 | ||||||||||||||
Liability Derivatives | Primary Risk | Value | |||||||||||||
Futures Contract | Variation Margin on |
| $(138)(a) | ||||||||||||
Swap Agreements | Unrealized Depreciation on |
|
| ||||||||||||
Swap Agreements | Variation Margin on |
|
| ||||||||||||
Total | $(235) |
(a) This amount represents the cumulative appreciation (depreciation) as reported in the Portfolio of Investments. The Statement of Assets and Liabilities only reflects the current day's net variation margin.
The following tables set forth by primary risk exposure the Portfolio's realized gains (losses) and change in unrealized appreciation (depreciation) by type of derivative contract for the six months ended March 31, 2015 in accordance with ASC 815.
Realized Gain (Loss) | |||||||||||
Primary Risk Exposure | Derivative Type | Value (000) | |||||||||
Currency Risk | Foreign Currency Forward Exchange Contracts | $ | (1 | ) | |||||||
Interest Rate Risk | Futures Contracts | (415 | ) | ||||||||
Credit Risk | Swap Agreements | (11 | ) | ||||||||
Interest Rate Risk | Swap Agreements | (536 | ) | ||||||||
Total |
| $ | (963 | ) |
Change in Unrealized Appreciation (Depreciation) | |||||||||||
Primary Risk Exposure | Derivative Type | Value (000) | |||||||||
Currency Risk | Foreign Currency Forward Exchange Contracts | $ | 14 | ||||||||
Interest Rate Risk | Futures Contracts | (152 | ) | ||||||||
Credit Risk | Swap Agreements | (19 | ) | ||||||||
Interest Rate Risk | Swap Agreements | (160 | ) | ||||||||
Total |
| $ | (317 | ) |
At March 31, 2015, the Portfolio's derivative assets and liabilities are as follows:
Gross Amounts of Assets and Liabilities Presented in the Statement of Assets and Liabilities | |||||||||||
Derivatives(b) | Assets(c) (000) | Liabilities(c) (000) | |||||||||
Foreign Currency Forward Exchange Contract | $ | 14 | $ | — | |||||||
Swap Agreements | — | (30 | ) | ||||||||
Total | $ | 14 | $ | (30 | ) |
(b) Excludes exchange traded derivatives.
(c) Absent an event of default or early termination, OTC derivative assets and liabilities are presented gross and not offset in the Statement of Assets and Liabilities.
The Portfolio typically enters into International Swaps and Derivatives Association, Inc. Master Agreements ("ISDA Master Agreements") or similar master agreements (collectively, "Master Agreements") with its contract counterparties for certain OTC derivatives in order to, among other things, reduce its credit risk to counterparties. ISDA Master Agreements include provisions for general obligations, representations, collateral and events of default or termination. Under an ISDA Master Agreement, the Portfolio typically may offset with the counterparty certain OTC derivative financial instruments' payables and/or receivables with collateral held and/or posted and create one single net payment (close-out netting) in the event of default, termination and/or potential deterioration in the credit quality of the counterparty. Various Master Agreements govern the terms of certain transactions with counterparties, including transactions such as swap, forward, repurchase and reverse repurchase agreements. These Master Agreements typically attempt to reduce the counterparty risk associated with such transactions by specifying credit protection mechanisms and providing standardization that improves legal certainty. Cross-termination provisions under Master Agreements typically provide that a default in connection with one transaction between the Portfolio and a counterparty gives the non-defaulting party the right to terminate any other transactions in place with the defaulting party to create one single net payment due to/due from the defaulting party and may be a feature
22
Morgan Stanley Institutional Fund Trust
Semi-Annual Report — March 31, 2015
Notes to Financial Statements (unaudited) (cont'd)
in certain Master Agreements. In the event the Portfolio exercises its right to terminate a Master Agreement after a counterparty experiences a termination event as defined in the Master Agreement, the return of collateral with market value in excess of the Portfolio's net liability may be delayed or denied.
The following tables present derivative financial instruments that are subject to enforceable netting arrangements as of March 31, 2015.
Gross Amounts Not Offset in the Statement of Assets and Liabilities | |||||||||||||||||||
Counterparty | Gross Asset Derivatives Presented in Statement of Assets and Liabilities (000) | Financial Instrument (000) | Collateral Received (000) | Net Amount (not less than $0) (000) | |||||||||||||||
UBS AG | $ | 14 | $ | — | $ | — | $ | 14 | |||||||||||
Gross Amounts Not Offset in the Statement of Assets and Liabilities | |||||||||||||||||||
Counterparty | Gross Liability Derivatives Presented in Statement of Assets and Liabilities (000) | Financial Instrument (000) | Collateral Pledged (000) | Net Amount (not less than $0) (000) | |||||||||||||||
Barclays Bank PLC | $ | 30 | $ | — | $ | — | $ | 30 |
For the six months ended March 31, 2015, the approximate average monthly amount outstanding for each derivative type is as follows:
Foreign Currency Forward Exchange Contracts: | |||||||
Average monthly principal amount | $ | 375,000 | |||||
Futures Contracts: | |||||||
Average monthly original value | $ | 123,678,000 | |||||
Swap Agreements: | |||||||
Average monthly notional amount | $ | 42,840,000 |
5. Indemnifications: The Fund enters into contracts that contain a variety of indemnifications. The Fund's maximum exposure under these arrangements is unknown. However, the Fund has not had prior claims or losses pursuant to these contracts and expects the risk of loss to be remote.
6. Dividends and Distributions to Shareholders: Dividend income and distributions to shareholders are recorded on the ex-dividend date. Dividends from net investment income, if any, are declared and paid monthly. Net realized capital gains, if any, are distributed at least annually.
7. Security Transactions, Income and Expenses: Security transactions are accounted for on the trade date (date the order to buy or sell is executed). Realized gains
and losses on the sale of investment securities are determined on the specific identified cost method. Dividend income and other distributions are recorded on the ex-dividend date (except for certain foreign dividends which may be recorded as soon as the Portfolio is informed of such dividends) net of applicable withholding taxes. Interest income is recognized on the accrual basis except where collection is in doubt. Discounts are accreted and premiums are amortized over the life of the respective securities. Most expenses of the Fund can be directly attributed to a particular Portfolio. Expenses which cannot be directly attributed are apportioned among the Portfolios based upon relative net assets or other appropriate methods. Income, expenses (other than class specific expenses — distribution, transfer agency and sub transfer agency fees) and realized and unrealized gains or losses are allocated to each class of shares based upon their relative net assets.
B. Advisory Fees: The Adviser, a wholly-owned subsidiary of Morgan Stanley, provides the Portfolio with advisory services under the terms of an Investment Advisory Agreement, paid quarterly, at an annual rate of 0.30% of the average daily net assets of the Portfolio.
The Adviser has agreed to reduce its advisory fee and/or reimburse the Portfolio so that total annual portfolio operating expenses, excluding certain investment related expenses, taxes, interest and other extraordinary expenses (including litigation), will not exceed 0.53% for Class I shares, 0.88% for Class A shares and 1.23% for Class L shares. The fee waivers and/or expense reimbursements will continue for at least one year from the date of the Portfolio's prospectus or until such time that the Trustees act to discontinue all or a portion of such waivers and/or reimbursements when they deem such action is appropriate. For the six months ended March 31, 2015, approximately $52,000 of advisory fees were waived and approximately $28,000 of other expenses were reimbursed by the Adviser pursuant to this arrangement.
C. Administration Fees: The Adviser also serves as Administrator to the Fund and provides administrative services pursuant to an Administration Agreement for an annual fee, accrued daily and paid monthly, of 0.08% of the Portfolio's average daily net assets. Under a Sub-Administration 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 Portfolio.
23
Morgan Stanley Institutional Fund Trust
Semi-Annual Report — March 31, 2015
Notes to Financial Statements (unaudited) (cont'd)
D. Distribution and Shareholder Services Fees: Morgan Stanley Distribution, Inc. ("MSDI" or the "Distributor"), a wholly-owned subsidiary of the Adviser, and an indirect subsidiary of Morgan Stanley, serves as the Fund's Distributor of Portfolio shares pursuant to a Distribution Agreement. The Fund has adopted a Shareholder Services Plan with respect to Class A shares pursuant to Rule 12b-1 under the Act. Under the Shareholder Services Plan, the Portfolio pays the Distributor a shareholder services fee, accrued daily and paid monthly, at an annual rate of 0.25% of the Portfolio's average daily net assets attributable to Class A shares.
The Fund has adopted a Distribution and Shareholder Services Plan with respect to Class L shares pursuant to Rule 12b-1 under the Act. Under the Distribution and Shareholder Services Plan, the Portfolio pays the Distributor a distribution fee, accrued daily and paid monthly, at an annual rate of 0.25% and a shareholder services fee, accrued daily and paid monthly, at an annual rate of 0.25% of the Portfolio's average daily net assets attributable to Class L shares.
The distribution and shareholder services fees are used to support the expenses associated with servicing and maintaining accounts. The Distributor may compensate other parties for providing shareholder support services to investors who purchase Class A and Class L shares.
E. Dividend Disbursing and Transfer Agent: The Fund's dividend disbursing and transfer agent is Boston Financial Data Services, Inc. ("BFDS"). Pursuant to a Transfer Agency Agreement, the Fund pays BFDS a fee based on the number of classes, accounts and transactions relating to the Portfolios of the Fund.
F. Custodian Fees: State Street (the "Custodian") serves as Custodian for the Fund in accordance with a Custodian Agreement. The Custodian holds cash, securities, and other assets of the Fund as required by the Act. Custody fees are payable monthly based on assets held in custody, investment purchases and sales activity and account maintenance fees, plus reimbursement for certain out-of-pocket expenses.
G. Security Transactions and Transactions with Affiliates: For the six months ended March 31, 2015, purchases and sales of investment securities for the Portfolio, other than long-term U.S. Government securities and short-term investments, were approximately $21,130,000 and $27,543,000, respectively. For the six months ended March 31, 2015, there were no purchases of long-term U.S. Government securities
and sales of long-term U.S. Government securities were approximately $4,707,000.
The Portfolio invests in the Institutional Class of the Morgan Stanley Institutional Liquidity Funds — Money Market Portfolio (the "Liquidity Funds"), an open-end management investment company managed by the Adviser. Advisory fees paid by the Portfolio are reduced by an amount equal to its pro-rata share of the advisory and administration fees paid by the Portfolio due to its investment in the Liquidity Funds. For the six months ended March 31, 2015, advisory fees paid were reduced by approximately $1,000 relating to the Portfolio's investment in the Liquidity Funds.
A summary of the Portfolio's transactions in shares of the Liquidity Funds during the six months ended March 31, 2015 is as follows:
Value September 30, 2014 (000) | Purchases at Cost (000) | Sales (000) | Dividend Income (000) | Value March 31, 2015 (000) | |||||||||||||||
$ | 936 | $ | 18,677 | $ | 18,309 | $ | 1 | $ | 1,304 |
The Portfolio 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 Portfolio.
H. Federal Income Taxes: It is the Portfolio's intention to continue to qualify as a regulated investment company and distribute all of its taxable and tax-exempt income. Accordingly, no provision for Federal income taxes is required in the financial statements.
The Portfolio may be subject to taxes imposed by countries in which it invests. Such taxes are generally based on income and/or capital gains earned or repatriated. Taxes are accrued based on net investment income, net realized gains and net unrealized appreciation as such income and/or gains are earned. Taxes may also be based on transactions in foreign currency and are accrued based on the value of investments denominated in such currency.
24
Morgan Stanley Institutional Fund Trust
Semi-Annual Report — March 31, 2015
Notes to Financial Statements (unaudited) (cont'd)
FASB ASC 740-10, Income Taxes — Overall, 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. Management has concluded there are no significant uncertain tax positions that would require recognition in the financial statements. If applicable, the Portfolio recognizes interest accrued related to unrecognized tax benefits in "Interest Expense" and penalties in "Other Expenses" in the Statement of Operations. The Portfolio files tax returns with the U.S. Internal Revenue Service, New York and various states. Each of the tax years in the four-year period ended September 30, 2014 remains subject to examination by taxing authorities.
The tax character of distributions paid may differ from the character of distributions shown in the Statements of Changes in Net Assets due to short-term capital gains being treated as ordinary income for tax purposes. The tax character of distributions paid during fiscal years 2014 and 2013 was as follows:
2014 Distributions Paid From: Ordinary Income (000) | 2013 Distributions Paid From: Ordinary Income (000) | ||||||
$ | 1,703 | $ | 2,138 |
The amount and character of income and gains to be distributed are determined in accordance with income tax regulations which may differ from GAAP. These book/tax differences are either considered temporary or permanent in nature.
Temporary differences are attributable to differing book and tax treatments for the timing of the recognition of gains (losses) on certain investment transactions and the timing of the deductibility of certain expenses.
Permanent differences, primarily due to basis adjustments for swap transactions, paydown adjustments and an expired capital loss carryforward, resulted in the following reclassifications among the components of net assets at September 30, 2014:
Accumulated Undistributed Net Investment Income (000) | Accumulated Net Realized Loss (000) | Paid-in- Capital (000) | |||||||||
$ | (116 | ) | $ | 6,966 | $ | (6,850 | ) |
At September 30, 2014, the components of distributable earnings for the Portfolio on a tax basis were as follows:
Undistributed Ordinary Income (000) | Undistributed Long-Term Capital Gain (000) | ||||||
$ | 261 | $ | — |
At March 31, 2015, the aggregate cost for Federal income tax purposes approximates the aggregate cost for book purposes. The aggregate gross unrealized appreciation is approximately $1,571,000 and the aggregate gross unrealized depreciation is approximately $175,000 resulting in net unrealized appreciation of approximately $1,396,000.
At September 30, 2014, the Portfolio had available for Federal income tax purposes unused capital losses, which will expire on the indicated dates:
Amount (000) | Expiration | ||||||
$ | 7,068 | September 30, 2015 | |||||
265 | September 30, 2016 | ||||||
200,864 | September 30, 2017 | ||||||
33,504 | September 30, 2018 |
Capital loss carryforwards of approximately $6,850,000 expired during the year ended September 30, 2014.
To the extent that capital loss carryforwards are used to offset any future capital gains realized during the carryover period as provided by U.S. Federal income tax regulations, no capital gains tax liability will be incurred by the Portfolio for gains realized and not distributed. To the extent that capital gains are offset, such gains will not be distributed to the shareholders. During the year ended September 30, 2014, the Portfolio utilized capital loss carryforwards for U.S. Federal income tax purposes of approximately $1,379,000.
25
Morgan Stanley Institutional Fund Trust
Semi-Annual Report — March 31, 2015
U.S. Privacy Policy (unaudited)
AN IMPORTANT NOTICE CONCERNING OUR U.S. PRIVACY POLICY
This privacy notice describes the U.S. privacy policy of Morgan Stanley Distribution, Inc., and the Morgan Stanley family of mutual funds ("us", "our", "we").
We are required by federal law to provide you with notice of our U.S. privacy policy ("Policy"). This Policy applies to both our current and former clients unless we state otherwise and is intended for individual clients who purchase products or receive services from us for personal, family or household purposes. This 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.
This notice sets out our business practices to protect your privacy; how we collect and share personal information about you; and how you can limit our sharing or certain uses by others of this information. We may amend this Policy at any time, and will inform you of any changes to our 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 your information. We strive to safeguard the information our clients entrust to us. Protecting the confidentiality and security of client information is an important part of how we conduct our business.
This notice describes what personal information we collect about you, how we collect it, when we may share it with others, and how certain others may use it. It discusses the steps you may take to limit our sharing of certain information about you with our affiliated companies, including, but not limited to our affiliated banking businesses, brokerage firms and credit service affiliates. It also discloses how you may limit our affiliates' use of shared information for marketing purposes.
Throughout this Policy, we refer to the nonpublic information that personally identifies you as "personal information." We also use the term "affiliated company" in this notice. An affiliated company is a company in our family of companies and includes companies with the Morgan Stanley name. These affiliated companies are financial institutions such as broker-dealers, banks, investment advisers and credit card issuers. We refer to any company that is not an affiliated company as a nonaffiliated third party. For purposes of Section 5 of this notice, and your ability to limit certain uses of personal information by our affiliates, this notice applies to the use of personal information by our affiliated companies.
1. WHAT PERSONAL INFORMATION DO WE COLLECT FROM YOU?
We may collect the following types of information about you: (i) information provided by you, including information from applications and other forms we receive from you, (ii) information about your transactions with us or our affiliates, (iii) information about your transactions with nonaffiliated third parties, (iv) information from consumer reporting agencies, (v) information obtained from our websites, and (vi) information obtained from other sources. For example:
• We collect information such as your name, address, e-mail address, telephone/fax numbers, assets, income and investment objectives through applications and other forms you submit to us.
• 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?
We may disclose personal information we collect about you in each of the categories listed above to affiliated and nonaffiliated third parties.
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Morgan Stanley Institutional Fund Trust
Semi-Annual Report — March 31, 2015
U.S. Privacy Policy (unaudited) (cont'd)
a. Information We Disclose to Affiliated Companies.
We may disclose personal information that we collect about you to our affiliated companies to manage your account(s) effectively, to service and process your transactions, and to let you know about products and services offered by us and affiliated companies, to manage our business, and as otherwise required or permitted by law. Offers for products and services from affiliated companies are developed under conditions designed to safeguard your personal information.
b. Information We Disclose to Third Parties.
We may disclose personal information that we collect about you to nonaffiliated third parties to provide marketing services on our behalf or to other financial institutions with whom we have joint marketing agreements. We may also disclose all of the information we collect to other nonaffiliated third parties for our everyday business purposes, such as to process transactions, maintain account(s), respond to court orders and legal investigations, report to credit bureaus, offer our own products and services, protect against fraud, for institutional risk control, to perform services on our behalf, and as otherwise required or permitted by law.
When we share personal information about you with a nonaffiliated third party, they are required to limit their use of personal information about you to the particular purpose for which it was shared and they are not allowed to share personal information about you with others except to fulfill that limited purpose or as may be permitted or required by law.
3. HOW DO WE PROTECT THE SECURITY AND CONFIDENTIALITY OF PERSONAL INFORMATION WE COLLECT ABOUT YOU?
We maintain physical, electronic and procedural security measures that comply with applicable law and regulations to help safeguard the personal information we collect about you. We have internal policies governing the proper handling of client information by employees. Third parties that provide support or marketing services on our behalf may also receive personal information about you, and we require them to adhere to appropriate security standards with respect to such information.
4. HOW CAN YOU LIMIT OUR SHARING CERTAIN PERSONAL INFORMATION ABOUT YOU WITH OUR AFFILIATED COMPANIES FOR ELIGIBILITY DETERMINATION?
By following the opt-out procedures in Section 6 below, you may limit the extent to which we share with our affiliated companies, personal information that was collected to determine your eligibility for products and services such as your credit reports and other information that you have provided to us or that we may obtain from third parties ("eligibility information"). Eligibility information does not include your identification information or personal information pertaining to our transactions or experiences with you. Please note that, even if you direct us not to share eligibility information with our affiliated companies, we may still share your personal information, including eligibility information, with our affiliated companies under circumstances that are permitted under applicable law, such as to process transactions or to service your account.
5. HOW CAN YOU LIMIT THE USE OF CERTAIN PERSONAL INFORMATION ABOUT YOU BY OUR AFFILIATED COMPANIES FOR MARKETING?
By following the opt-out instructions in Section 6 below, you may limit our affiliated companies from marketing their products or services to you based on personal information we disclose to them. This information may include, for example, your income and account history with us. Please note that, even if you choose to limit our affiliated companies from using personal information about you that we may share with them for marketing their products and services to you, our affiliated companies may use your personal information that they obtain from us to market to you in circumstances permitted by law, such as if the affiliated party has its own relationship with you.
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Morgan Stanley Institutional Fund Trust
Semi-Annual Report — March 31, 2015
U.S. Privacy Policy (unaudited) (cont'd)
6. HOW CAN YOU SEND US AN OPT-OUT INSTRUCTION?
If you wish to limit our sharing of eligibility information about you with our affiliated companies, or our affiliated companies' use of personal information for marketing purposes, as described in this notice, you may do so by:
• Calling us at (800) 548-7786
Monday–Friday between 8a.m. and 6p.m. (EST)
• Writing to us at the following address:
Boston Financial Data Services, Inc.
c/o Privacy Coordinator
P.O. Box 219804
Kansas City, Missouri 64121
If you choose to write to us, your request should include: your name, address, telephone number and account number(s) to which the opt-out applies and whether you are opting out with respect to sharing of eligibility information (Section 4 above), or information used for marketing (Section 5 above), or both. Written opt-out requests 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. Once you have informed us about your privacy preferences, your opt-out preference will remain in effect with respect to this Policy (as it may be amended) until you notify us otherwise. If you are a joint account owner, we will accept instructions from any one of you and apply those instructions to the entire account.
Please understand that if you limit our sharing or our affiliated companies' use of personal information, you and any joint account holder(s) may not receive information about our affiliated companies' products and services, including products or services that could help you manage your financial resources and achieve your investment objectives.
If you have more than one account or relationship with us, please specify the accounts to which you would like us to apply your privacy choices. If you have accounts or relationships with our affiliates, you may receive multiple privacy policies from them, and will need to separately notify those companies of your privacy choices for those accounts or relationships.
7. WHAT IF AN AFFILIATED COMPANY BECOMES A NONAFFILIATED THIRD PARTY?
If, at any time in the future, an affiliated company becomes a nonaffiliated third party, further disclosures of personal information made to the former affiliated company will be limited to those described in Section 2(b) above relating to nonaffiliated third parties. If you elected under Section 6 to limit disclosures we make to affiliated companies, or use of personal information by affiliated companies, your election will not apply to use by any former affiliated company of your personal information in their possession once it becomes a nonaffiliated third party.
SPECIAL NOTICE TO RESIDENTS OF VERMONT
The following section supplements our Policy with respect to our individual clients who have a Vermont address and supersedes anything to the contrary in the above 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 nonaffiliated third parties, or eligibility information with affiliated companies, other than in certain limited circumstances. Except as permitted by law, we will not share personal information we collect about you with nonaffiliated third parties or eligibility information with affiliated companies, unless you provide us with your written consent to share such information.
SPECIAL NOTICE TO RESIDENTS OF CALIFORNIA
The following section supplements our Policy with respect to our individual clients who have a California address and supersedes anything to the contrary in the above Policy with respect to those clients only.
In response to a California law, if your account has a California home address, your personal information will not be disclosed to nonaffiliated third parties except as permitted by applicable California law, and we will limit sharing such personal information with our affiliates to comply with California privacy laws that apply to us.
28
Morgan Stanley Institutional Fund Trust
Semi-Annual Report — March 31, 2015
Trustee and Officer Information (unaudited)
Trustees
Frank L. Bowman
Michael Bozic
Kathleen A. Dennis
Nancy C. Everett
Jakki L. Haussler
James F. Higgins
Dr. Manuel H. Johnson
Joseph J. Kearns
Michael F. Klein
Michael E. Nugent
W. Allen Reed
Fergus Reid
Officers
Michael E. Nugent
Chairperson of the Board and Trustee
John H. Gernon
President and Principal Executive Officer
Stefanie V. Chang Yu
Chief Compliance Officer
Joseph C. Benedetti
Vice President
Mary E. Mullin
Secretary
Francis J. Smith
Treasurer and Principal Financial Officer
Adviser and Administrator
Morgan Stanley Investment Management Inc.
522 Fifth Avenue
New York, New York 10036
Distributor
Morgan Stanley Distribution, Inc.
522 Fifth Avenue
New York, New York 10036
Dividend Disbursing and Transfer Agent
Boston Financial Data Services, Inc.
2000 Crown Colony Drive
Quincy, Massachusetts 02169
Custodian
State Street Bank and Trust Company
One Lincoln Street
Boston, Massachusetts 02111
Legal Counsel
Dechert LLP
1095 Avenue of the Americas
New York, New York 10036
Counsel to the Independent Trustees
Kramer Levin Naftalis & Frankel LLP
1177 Avenue of the Americas
New York, New York 10036
Independent Registered Public Accounting Firm
Ernst & Young LLP
200 Clarendon Street
Boston, Massachusetts 02116
Reporting to Shareholders
Each Morgan Stanley fund provides a complete schedule of portfolio holdings in its semi-annual and annual reports within 60 days of the end of the fund's second and fourth fiscal quarters. The semi-annual 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 semi-annual and annual reports to fund shareholders and makes these reports available on its public website, www.morganstanley.com/im. Each Morgan Stanley fund also files a complete schedule of portfolio holdings 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 website. 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 website, 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 toll free at 1 (800) SEC-0330. You can also request copies of these materials, upon payment of a duplicating fee, by electronic request at the SEC's email address (publicinfo@sec.gov) or by writing the Public Reference Room of the SEC, Washington, DC 20549-0102.
Proxy Voting Policies and Procedures and Proxy Voting Record
You may obtain a copy of the Fund's Proxy Voting Policy and Procedures and information regarding how the Fund voted proxies relating to portfolio securities during the most recent twelve-month period ended June 30, without charge, upon request, by calling toll free 1 (800) 548-7786 or by visiting our website at www.morganstanley.com/im. This information is also available on the SEC's website at www.sec.gov.
This report is authorized for distribution only when preceded or accompanied by a prospectus of the Morgan Stanley Institutional Fund Trust, which describes in detail each Portfolio's investment policies, risks, fees and expenses. Please read the prospectus carefully before you invest or send money. For additional information, including information regarding the investments comprising the Portfolio, please visit our website at www.morganstanley.com/im or call toll free 1 (800) 548-7786.
29
Printed in U.S.A.
This Report has been prepared for shareholders and may be distributed to others only if preceded or accompanied by a current prospectus.
Morgan Stanley Investment Management Inc.
522 Fifth Avenue
New York, New York 10036
© 2015 Morgan Stanley. Morgan Stanley Distribution, Inc.
IFTLDSAN
1182626 EXP 05.31.16
INVESTMENT MANAGEMENT
Morgan Stanley
Limited Duration
U.S. Government Trust
Prospectus
September 30, 2015
A mutual fund that seeks current income, preservation of principal and liquidity.
Share Class | Ticker Symbol | ||||||
Advisor Class | LDTRX | ||||||
Class I | MLDUX |
The Securities and Exchange Commission ("SEC") has not approved or disapproved these securities or passed upon the adequacy of this Prospectus. Any representation to the contrary is a criminal offense.
Contents
Fund Summary
Investment Objective | 1 | ||||||
Fees and Expenses | 1 | ||||||
Portfolio Turnover | 1 | ||||||
Principal Investment Strategies | 1 | ||||||
Principal Risks | 2 | ||||||
Past Performance | 4 | ||||||
Fund Management | 5 | ||||||
Purchase and Sale of Fund Shares | 5 | ||||||
Tax Information | 5 | ||||||
Payments to Broker-Dealers and Other Financial Intermediaries | 5 |
Fund Details
Additional Information about the Fund's Investment Objective, Strategies and Risks | 6 | ||||||
Portfolio Holdings | 13 | ||||||
Fund Management | 14 |
Shareholder Information
Pricing Fund Shares | 15 | ||||||
How to Buy Shares | 16 | ||||||
How to Exchange Shares | 18 | ||||||
How to Sell Shares | 20 | ||||||
Distributions | 23 | ||||||
Frequent Purchases and Redemptions of Fund Shares | 24 | ||||||
Tax Consequences | 25 | ||||||
Share Class Arrangements | 26 | ||||||
Additional Information | 27 | ||||||
Financial Highlights | 28 |
This Prospectus contains important information about the Fund. Please read it carefully and keep it for future reference.
Fund Summary
Investment Objective
Morgan Stanley Limited Duration U.S. Government Trust (the "Fund") seeks current income, preservation of principal and liquidity.
Fees and Expenses
The table below describes the fees and expenses that you may pay if you buy and hold shares of the Fund. The Fund does not impose an initial or deferred sales charge and does not charge account or exchange fees.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Advisor Class | Class I | ||||||||||
Advisory Fee | 0.27 | % | 0.27 | % | |||||||
Shareholder Service Fee | 0.25 | % | None | ||||||||
Other Expenses | 0.45 | % | 0.83 | % | |||||||
Total Annual Fund Operating Expenses | 0.97 | % | 1.10 | % |
Example
The example below is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds.
The example assumes that you invest $10,000 in the Fund, your investment has a 5% return each year, and the Fund's operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
Expenses Over Time:
1 Year | 3 Years | 5 Years | 10 Years | ||||||||||||||||
Advisor Class | $ | 99 | $ | 309 | $ | 536 | $ | 1,190 | |||||||||||
Class I | $ | 112 | $ | 350 | $ | 606 | $ | 1,340 |
Portfolio Turnover
The Fund pays transaction costs, such as commissions, when it buys and sells securities (or "turns over" its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account. These costs, which are not reflected in Total Annual Fund Operating Expenses or in the Example, affect the Fund's performance. During the most recent fiscal year, the Fund's portfolio turnover rate was 229% of the average value of its portfolio.
Principal Investment Strategies
The Fund's Board of Trustees (the "Board") approved an Agreement and Plan of Reorganization by and between the Fund and Morgan Stanley Institutional Fund Trust, on behalf of its series Limited Duration Portfolio ("MSIFT Limited Duration"), pursuant to which substantially all of the assets and liabilities of the Fund would be transferred to MSIFT Limited Duration and shareholders of the Fund would become shareholders of MSIFT Limited Duration, receiving shares of beneficial interest of MSIFT Limited Duration equal to the value of their holdings in the Fund (the "Reorganization"). Class I shareholders of the Fund would receive Class I Shares of MSIFT Limited Duration and Advisor Class shareholders of the Fund would receive Class A Shares of MSIFT Limited Duration. The Reorganization is subject to the approval of shareholders of the Fund at a special meeting of shareholders scheduled to be held on or about November 10, 2015. A proxy statement formally detailing the proposal, the reasons for the Reorganization and information concerning MSIFT Limited Duration will be distributed to shareholders of the Fund.
The Fund invests substantially all of its net assets in securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities, including, but not limited to, U.S. Treasury securities and Treasury Inflation Protected Securities ("TIPS"), and zero coupon securities. The Fund's "Adviser," Morgan
1
Stanley Investment Management Inc., seeks to maintain an overall duration of the Fund's portfolio of three years or less.
U.S. Treasury securities are direct obligations of the U.S. Government and can take the form of bonds, notes or bills. A zero coupon Treasury security pays no interest to its holder during its life, but is purchased at a discount from its face amount, giving the purchaser the right to receive its full value at maturity. TIPS are U.S. Treasury securities whose principal and interest payments are adjusted in response to the rate of inflation.
The mortgage-backed securities in which the Fund may invest include collateralized mortgage obligations ("CMOs"), stripped mortgage-backed securities ("SMBS"), commercial mortgage-backed securities ("CMBS") and inverse floating rate obligations ("inverse floaters"). In addition, the Fund may invest in to-be-announced pass-through mortgage securities, which settle on a delayed delivery basis ("TBAs").
CMOs are debt obligations collateralized by mortgage loans or mortgage pass-through securities (collectively "Mortgage Assets"). Payments of principal and interest on the Mortgage Assets and any reinvestment income are used to make payments on the CMOs. CMOs are issued in multiple classes and each class has a fixed or floating rate and a stated maturity or final distribution date. Certain classes will have more predictable cash flows than others. The Fund may invest in any class of CMO.
SMBS are derivative multi-class mortgage securities. A common type of SMBS will have one class receiving some of the interest and most of the principal from the Mortgage Assets, while the other class receives most of the interest and the remainder of the principal. In the most extreme case, one class will receive all of the interest (the interest-only or "IO" class), while the other class will receive all of the principal (the principal-only or "PO" class).
CMBS are generally multi-class or pass-through securities backed by a mortgage loan or a pool of mortgage loans secured by commercial property, such as industrial and warehouse properties, office buildings, retail space and shopping malls, multifamily properties and cooperative apartments.
Inverse floaters are obligations which pay interest at rates that vary inversely with changes in market rates of interest. Because the interest rate paid to holders of such obligations is generally
determined by subtracting a variable or floating rate from a predetermined amount, the interest rate paid to holders of such obligations will decrease as such variable or floating rate increases and increase as such variable or floating rate decreases.
The Fund may, but is not required to, use derivative instruments for a variety of purposes, including hedging, risk management, portfolio management or to earn income. The Fund's use of derivatives may involve the purchase and sale of derivative instruments such as futures, options, swaps and other related instruments and techniques.
Principal Risks
There is no assurance that the Fund will achieve its investment objective and you can lose money investing in this Fund. The principal risks of investing in the Fund include:
• U.S. Government Securities. The U.S. government securities in which the Fund invests can be subject to two types of risk: credit risk and interest rate risk. When the general level of interest rates goes up, the prices of most fixed-income securities go down. When the general level of interest rates goes down, the prices of most fixed-income securities go up. While the credit risk associated with U.S. government securities generally is considered to be minimal, the interest rate risk can be substantial. The historically low interest rate environment increases the risks associated with rising interest rates, including the potential for periods of volatility and increased redemptions. The Fund may face a heightened level of risk, especially since the Federal Reserve Board has ended its quantitative easing program and may begin to raise rates. In addition, while TIPS may provide investors with a hedge against inflation, in the event of deflation, in which prices decline over time, the principal and income of inflation-protected bonds would likely decline in price, resulting in losses to the Fund. With respect to U.S. government securities that are not backed by the full faith and credit of the United States, there is the risk that the U.S. Government will not provide financial support to such U.S. government agencies, instrumentalities or sponsored enterprises if it is not obligated to do so by law.
• Zero Coupon Securities. The interest earned on zero coupon securities is, implicitly, automatically compounded and paid out at maturity. While such compounding at a
2
constant rate eliminates the risk of receiving lower yields upon reinvestment of interest if prevailing interest rates decline, the owner of a zero coupon security will be unable to participate in higher yields upon reinvestment of interest received on interest-paying securities if prevailing interest rates rise. A zero coupon security pays no interest to its holder during its life. Therefore, to the extent the Fund invests in zero coupon securities, it will not receive current cash available for distribution to shareholders. In addition, zero coupon securities are subject to substantially greater price fluctuations during periods of changing prevailing interest rates than are comparable securities which pay interest on a current basis.
• Mortgage-Backed Securities. Mortgage-backed securities entail prepayment risk, which generally increases during a period of falling interest rates. Rising interest rates tend to discourage refinancings, with the result that the average life and volatility of mortgage securities will increase and market price will decrease. Rates of prepayment, faster or slower than expected by the Adviser, could reduce the Fund's yield, increase the volatility of the Fund and/or cause a decline in net asset value ("NAV"). Certain mortgage-backed securities may be more volatile and less liquid than other traditional types of debt securities. In addition, an unexpectedly high rate of defaults on the mortgages held by a mortgage pool may adversely affect the value of a mortgage-backed security and could result in losses to the Fund. The risk of such defaults is generally higher in the case of mortgage pools that include subprime mortgages. Investments in TBAs may give rise to a form of leverage and may cause the Fund's portfolio turnover rate to appear higher. Leverage may cause the Fund to be more volatile than if the Fund had not been leveraged.
• CMOs. CMOs are comprised of various tranches, the expected cash flows of which have varying degrees of predictability as compared with the underlying Mortgage Assets. The less predictable the cash flow, the higher the yield and the greater the risk. In addition, if the collateral securing CMOs or any third-party guarantees are insufficient to make payments, the Fund could sustain a loss.
• SMBS. Investments in each class of SMBS are extremely sensitive to changes in interest rates. IOs tend to decrease in value substantially if interest rates decline and prepayment
rates become more rapid. POs tend to decrease in value substantially if interest rates increase and the rate of prepayment decreases. If the Fund invests in SMBS and interest rates move in a manner not anticipated by Fund management, it is possible that the Fund could lose all or substantially all of its investment.
• CMBS. CMBS are subject to credit risk and prepayment risk. Although prepayment risk is present, it is of a lesser degree in CMBS than in the residential mortgage market; commercial real estate property loans often contain provisions which substantially reduce the likelihood that such securities will be prepaid (e.g., significant prepayment penalties on loans and, in some cases, prohibition on principal payments for several years following origination).
• Inverse Floaters. Like most other fixed-income securities, the value of inverse floaters will decrease as interest rates increase. They are more volatile, however, than most other fixed-income securities because the coupon rate on an inverse floater typically changes at a multiple of the change in the relevant index rate. Thus, any rise in the index rate (as a consequence of an increase in interest rates) causes a correspondingly greater drop in the coupon rate of an inverse floater while a drop in the index rate causes a correspondingly greater increase in the coupon rate of an inverse floater. Some inverse floaters may also increase or decrease substantially because of changes in the rate of prepayments.
• Derivatives. A derivative instrument often has risks similar to its underlying asset and may have additional risks, including imperfect correlation between the value of the derivative and the underlying asset, risks of default by the counterparty to certain transactions, magnification of losses incurred due to changes in the market value of the securities, instruments, indices or interest rates to which the derivative instrument relates, and risks that the transactions may not be liquid. Certain derivative transactions may give rise to a form of leverage. Leverage magnifies the potential for gain and the risk of loss.
Shares of the Fund are not bank deposits and are not guaranteed or insured by the Federal Deposit Insurance Corporation or any other government agency.
3
Past Performance
The bar chart and table below provide some indication of the risks of investing in the Fund by showing changes in the Fund's Advisor Class shares' performance from year-to-year and by showing how the Fund's average annual returns for the one, five and 10 year periods and since inception compare with those of a broad measure of market performance, as well as an index that represents a group of similar mutual funds, over time. The Fund's returns assume you sold your shares at the end of each period (unless otherwise noted). The performance of the Class I shares will differ because the Class I shares have different ongoing fees. The Fund's past performance (before and after taxes) is not necessarily an indication of how the Fund will perform in the future. Updated performance information is available online at www.morganstanley.com/im or by calling toll-free (800) 548-7786.
Annual Total Returns—Calendar Years
The year-to-date total return as of June 30, 2015 was 0.25%.
High Quarter | 3/31/08 | 2.86 | % | ||||||||
Low Quarter | 6/30/13 | –0.62 | % |
Average Annual Total Returns For the Periods Ended December 31, 2014
Past 1 Year | Past 5 Years | Past 10 Years | Since Inception | ||||||||||||||||
Advisor Class1: | |||||||||||||||||||
Return Before Taxes | 0.04 | % | 0.79 | % | 2.15 | % | 3.53 | % | |||||||||||
Return After Taxes on Distributions2 | –0.50 | % | 0.21 | % | 1.27 | % | 2.03 | % | |||||||||||
Return After Taxes on Distributions and Sale of Fund Shares | 0.02 | % | 0.38 | % | 1.34 | % | 2.12 | % |
Past 1 Year | Past 5 Years | Past 10 Years | Since Inception | ||||||||||||||||
Class I1: | |||||||||||||||||||
Return Before Taxes | 0.03 | % | N/A | N/A | –0.12 | % | |||||||||||||
Barclays 1-3 Year U.S. Government Bond Index (reflects no deduction for fees, expenses or taxes)3 | 0.64 | % | 1.09 | % | 2.62 | % | 4.35 | %5 | |||||||||||
Lipper Short U.S. Government Funds Index (reflects no deduction for taxes)4 | 0.84 | % | 1.19 | % | 2.41 | % | 3.98 | %5 |
(1) Advisor Class inception date is August 13, 1991 and Class I inception date is May 29, 2013.
(2) These returns do not reflect any tax consequences from a sale of your shares at the end of each period.
(3) The Barclays 1-3 Year U.S. Government Bond Index is a sub-index of the Barclays U.S. Government Bond Index and is comprised of Agency and Treasury securities with maturities of one to three years. It is not possible to invest directly in an index.
(4) The Lipper Short U.S. Government Funds Index is an equally weighted performance index of the largest qualifying funds (based on net assets) in the Lipper Short U.S. Government 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 10 funds represented in this Index. It is not possible to invest directly in an index.
(5) Since Inception reflects the inception date of Advisor Class.
The after-tax returns shown in the table above are calculated using the historical highest individual federal marginal income tax rates during the period shown and do not reflect the impact of state and local taxes. After-tax returns for the Fund's Class I shares will vary from the Advisor Class shares' returns. Actual after-tax returns depend on an investor's tax situation and may differ from those shown, and after-tax returns are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. After-tax returns may be higher than before-tax returns due to an assumed benefit from capital losses that would have been realized had Fund shares been sold at the end of the relevant periods, as applicable.
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Fund Management
Adviser. Morgan Stanley Investment Management Inc.
Portfolio Managers. The Fund is managed by members of the Taxable Fixed Income team. Information about the members jointly and primarily responsible for the day-to-day management of the Fund's portfolio is shown below:
Name | Title with Adviser | Date Began Managing Fund | |||||||||
Jim Caron | Managing Director | May 2013 | |||||||||
Neil Stone | Managing Director | January 2012 | |||||||||
Matthew Dunning | Executive Director | September 2014 |
Purchase and Sale of Fund Shares
The minimum initial investment generally is $10,000 for Advisor Class shares and $5 million for Class I shares of the Fund. The minimum investment requirements may be waived for certain investments. For more information, please refer to the section of this Prospectus entitled "Shareholder Information—How to Buy Shares—Minimum Investment Amounts."
You can purchase or sell Fund shares on any day the New York Stock Exchange ("NYSE") is open for business directly from the Fund by mail (c/o Boston Financial Data Services, Inc., P.O. Box 219804, Kansas City, MO 64121-9804), by telephone ((800) 548-7786) or by contacting an authorized third-party, such as a broker, dealer or other financial intermediary that has entered into a selling agreement with the Fund's Distributor (each, a "Financial Intermediary"). In addition, you can sell Fund shares at any time by enrolling in a systematic withdrawal plan or through the check-writing option. Your shares will be sold at the next price calculated after we receive your order to redeem. For more information, please refer to the sections of this Prospectus entitled "Shareholder Information—How to Buy Shares" and "—How to Sell Shares."
To contact a Morgan Stanley Financial Advisor, call toll-free 1-866-MORGAN8 for the telephone number of the Morgan Stanley office nearest you or access our office locator at www.morganstanley.com.
Tax Information
The Fund intends to make distributions that may be taxed as ordinary income or capital gains, unless you are investing through a tax-deferred arrangement, such as a 401(k) plan or an individual retirement account.
Payments to Broker-Dealers and Other Financial Intermediaries
If you purchase Fund shares through a Financial Intermediary (such as a bank), the Adviser and/or the Distributor may pay the Financial Intermediary for the sale of Fund shares and related services. These payments, which may be significant in amount, may create a conflict of interest by influencing the Financial Intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your Financial Intermediary's web site for more information.
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Fund Details
Additional Information about the Fund's Investment Objective, Strategies and Risks
Investment Objective
Morgan Stanley Limited Duration U.S. Government Trust seeks current income, preservation of principal and liquidity.
Income
An investment objective having the goal of selecting securities to pay out income rather than rise in price.
Principal Investment Strategies
The Fund's Board approved an Agreement and Plan of Reorganization by and between the Fund and Morgan Stanley Institutional Fund Trust, on behalf of MSIFT Limited Duration, pursuant to which substantially all of the assets and liabilities of the Fund would be transferred to MSIFT Limited Duration and shareholders of the Fund would become shareholders of MSIFT Limited Duration, receiving shares of beneficial interest of MSIFT Limited Duration equal to the value of their holdings in the Fund. Class I shareholders of the Fund would receive Class I Shares of MSIFT Limited Duration and Advisor Class shareholders of the Fund would receive Class A Shares of MSIFT Limited Duration. The Reorganization is subject to the approval of shareholders of the Fund at a special meeting of shareholders scheduled to be held on or about November 10, 2015. A proxy statement formally detailing the proposal, the reasons for the Reorganization and information concerning MSIFT Limited Duration will be distributed to shareholders of the Fund.
The Fund invests substantially all of its net assets in securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities, including, but not limited to, U.S. Treasury securities and TIPS, and zero coupon securities. The Fund may also use derivative instruments as described below. The Adviser seeks to maintain an overall duration of the Fund's portfolio of three years or less.
U.S. Treasury Securities. U.S. Treasury securities are direct obligations of the U.S. Government and can take the form of bonds, notes or bills. The U.S. Government borrows money from the investor who buys the security. U.S. Treasury securities generally pay interest at regular intervals until they mature, at which point investors get their principal back. U.S. Treasury securities are backed by the "full faith and credit" of the United States.
Zero Coupon Treasury Securities. A portion of the U.S. Treasury securities purchased by the Fund may be "zero coupon" Treasury securities. These are U.S. Treasury notes and bonds that have been
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stripped of their unmatured interest coupons and receipts or which are certificates representing interests in such stripped debt obligations and coupons. Such securities are purchased at a discount from their face amount, giving the purchaser the right to receive their full value at maturity. A zero coupon security pays no interest to its holder during its life. Its value to an investor consists of the difference between its face value at the time of maturity and the price for which it was acquired, which is generally an amount significantly less than its face value (sometimes referred to as a "deep discount" price).
Treasury Inflation Protected Securities. The Fund may purchase TIPS, which are U.S. Treasury securities whose principal and interest payments are adjusted in response to the rate of inflation. The inflation adjustment, which is typically applied to the principal of the security on a monthly basis, follows a designated inflation index, such as the Consumer Price Index. A fixed coupon rate is applied to the inflation-adjusted principal so that as inflation rises, both the principal value and the interest payments increase. Because of this inflation adjustment feature, inflation-protected bonds typically have lower yields than conventional fixed-income securities.
Collateralized Mortgage Obligations. CMOs are debt obligations collateralized by Mortgage Assets. Payments of principal and interest on the Mortgage Assets and any reinvestment income are used to make payments on the CMOs. CMOs are issued in multiple classes. Each class has a fixed or floating coupon rate and a stated maturity or final distribution date. The principal and interest on the Mortgage Assets may be allocated among the classes in a number of different ways. Certain classes will, as a result of the allocation, have more predictable cash flows than others. As a general matter, the more predictable the cash flow, the lower the yield relative to other Mortgage Assets. The less predictable the cash flow, the higher the yield and the greater the risk. The Fund may invest in any class of CMOs.
Stripped Mortgage-Backed Securities. SMBS are derivative multi-class mortgage securities. SMBS may be issued by agencies or instrumentalities of the U.S. Government, or by private originators. A common type of SMBS will have one class receiving some of the interest and most of the principal from the Mortgage Assets, while the other class receives most of the interest and the remainder of the principal. In the most extreme case, one class will receive all of the interest (the interest-only or "IO" class), while the other class will receive all of the principal (the principal-only or "PO" class).
Commercial Mortgage-Backed Securities. CMBS are generally multi-class or pass-through securities backed by a mortgage loan or a pool of mortgage loans secured by commercial property, such as industrial and warehouse properties, office buildings, retail space and shopping malls, multifamily properties and cooperative apartments. The commercial mortgage loans that underlie CMBS are generally not amortizing or not fully amortizing. That is, at their maturity date, repayment of their remaining principal balance or "balloon" is due and is repaid through the attainment of an additional loan or sale of the property. An extension of a final payment on commercial mortgages will increase the average life of the CMBS, generally resulting in a lower yield for discount bonds and a higher yield for premium bonds.
Inverse Floaters. Inverse floating rate obligations are obligations which pay interest at rates that vary inversely with changes in market rates of interest. Because the interest rate paid to holders of such obligations is generally determined by subtracting a variable or floating rate from a predetermined amount, the interest rate paid to holders of such obligations will decrease as such variable or floating rate increases and increase as such variable or floating rate decreases.
Derivatives. The Fund may, but it is not required to, use derivative instruments for a variety of purposes, including hedging, risk management, portfolio management or to earn income. Derivatives are financial instruments whose value is based, in part, on the value of an underlying asset, interest rate, index or financial instrument. Prevailing interest rates
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and volatility levels, among other things, also affect the value of derivative instruments. The Fund's use of derivatives may involve the purchase and sale of derivative instruments such as futures, options, swaps and other related instruments and techniques.
Additional Investment Strategy Information
This section provides additional information relating to the Fund's investment strategies.
Defensive Investing. The Fund may take temporary "defensive" positions in attempting to respond to adverse market, economic, political or other conditions. When the Fund is in a "defensive" position, it may invest any amount of its assets in cash, cash equivalents or other fixed-income securities in a defensive posture that may be inconsistent with the Fund's principal investment strategies when the Adviser believes it is advisable to do so.
Although taking a defensive posture is designed to protect the Fund from an anticipated market downturn, it could have the effect of reducing the benefit from any upswing in the market. When the Fund takes a defensive position, it may not achieve its investment objective.
Portfolio Turnover. The Fund may engage in active and frequent trading of its portfolio securities. The Financial Highlights Table at the end of this Prospectus shows the Fund's portfolio turnover rates during recent fiscal years. A portfolio turnover rate of 200%, for example, is equivalent to the Fund buying and selling all of its securities two times during the course of the year. A high portfolio turnover rate (over 100%) could result in high brokerage costs and an increase in distributions of short-term capital gains to the shareholders. See the sections of this Prospectus entitled "Shareholder Information—Distributions" and "—Tax Consequences."
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The percentage limitations relating to the composition of the Fund's portfolio apply at the time the Fund acquires an investment. Subsequent percentage changes that result from market fluctuations generally will not require the Fund to sell any portfolio security. However, the Fund may be required to reduce its borrowings, if any, in response to fluctuations in the value of such holdings. The Fund may change its principal investment strategies without shareholder approval; however, you would be notified of any changes.
Principal Risks
There is no assurance that the Fund will achieve its investment objective. The Fund's share price and yield will fluctuate with changes in the market value and/or yield of the Fund's portfolio securities. Neither the value nor the yield of the U.S. government securities in which the Fund invests (or the value or yield of the Fund's shares) is guaranteed by the U.S. Government. When you sell Fund shares, they may be worth less than what you paid for them and, accordingly, you can lose money investing in this Fund.
U.S. Government Securities. The U.S. government securities in which the Fund invests can be subject to two types of risk: credit risk and interest rate risk. Credit risk refers to the possibility that the issuer of a security will be unable to make interest payments and/or repay the principal on its debt. Interest rate risk refers to fluctuations in the value of a fixed-income security resulting from changes in the general level of interest rates. When the general level of
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interest rates goes up, the prices of most fixed-income securities go down. When the general level of interest rates goes down, the prices of most fixed-income securities go up. While the credit risk associated with U.S. government securities generally is considered to be minimal, the interest rate risk can be substantial. The historically low interest rate environment increases the risks associated with rising interest rates, including the potential for periods of volatility and increased redemptions. The Fund may face a heightened level of risk, especially since the Federal Reserve Board has ended its quantitative easing program and may begin to raise rates. In addition, while TIPS may provide investors with a hedge against inflation, in the event of deflation, in which prices decline over time, the principal and income of inflation-protected bonds would likely decline in price, resulting in losses to the Fund.
The U.S. government securities that the Fund may purchase include U.S. Treasury bills, notes and bonds, all of which are direct obligations of the U.S. Government. In addition, the Fund may purchase securities issued by agencies and instrumentalities of the U.S. Government which are backed by the full faith and credit of the United States. Among the agencies and instrumentalities issuing these obligations are the Government National Mortgage Association ("Ginnie Mae") and the Federal Housing Administration. The Fund may also purchase securities issued by agencies and instrumentalities which are not backed by the full faith and credit of the United States, but whose issuing agency or instrumentality has the right to borrow, to meet its obligations, from the U.S. Treasury. Among these agencies and instrumentalities are the Federal National Mortgage Association ("Fannie Mae"), the Federal Home Loan Mortgage Corporation ("Freddie Mac") and the Federal Home Loan Banks. In September 2008, the U.S. Treasury Department announced that the U.S. Government would be taking over Freddie Mac and Fannie Mae and placing the companies into a conservatorship. In addition, the U.S. Treasury announced additional steps that it intended to take with respect to the debt and mortgage-backed securities issued by Fannie Mae and Freddie Mac in order to support the conservatorship. Fannie Mae and Freddie Mac are continuing to operate as going concerns while in conservatorship and each remains liable for all of its respective obligations, including its guaranty obligations, associated with its mortgage-backed securities. No assurance can be given that these initiatives will be successful. Further, the Fund may purchase securities issued by agencies and instrumentalities, which are backed solely by the credit of the issuing agency or instrumentality. Among these agencies and instrumentalities is the Federal Farm Credit System. Because these securities are not backed by the full faith and credit of the United States, there is a risk that the U.S. Government will not provide financial support to these agencies if it is not obligated to do so by law. The maximum potential liability of the issuers of some U.S. government securities held by the Fund may greatly exceed their current resources, including their legal right to support from the U.S. Treasury. It is possible that these issuers will not have the funds to meet their payment obligations in the future. The interest from U.S. government securities generally is not subject to state and local taxation.
Zero Coupon Securities. A portion of the U.S. government securities purchased by the Fund may be zero coupon securities. Such securities are purchased at a discount from their face amount, giving the purchaser the right to receive their full value at maturity. The interest earned on such securities is, implicitly, automatically compounded and paid out at maturity. While such compounding at a constant rate eliminates the risk of receiving lower yields upon reinvestment of interest if prevailing interest rates decline, the owner of a zero coupon security will be unable to participate in higher yields upon reinvestment of interest received on interest-paying securities if prevailing interest rates rise.
A zero coupon security pays no interest to its holder during its life. Therefore, to the extent the Fund invests in zero coupon securities, it will not receive current cash available for distribution to shareholders. In addition, zero coupon securities are subject to substantially greater price fluctuations during periods of changing prevailing interest rates than are comparable securities which pay interest on a current basis. Current federal tax law requires that a holder (such as the
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Fund) of a zero coupon security accrue a portion of the discount at which the security was purchased as income each year even though the Fund receives no interest payments in cash on the security during the year.
Mortgage-Backed Securities. Mortgage-backed securities in which the Fund may invest have different risk characteristics than traditional debt securities. Although, generally, the value of fixed-income securities increases during periods of falling interest rates and decreases during periods of rising interest rates, this is not always the case with mortgage-backed securities. This is due to the fact that principal on underlying mortgages may be prepaid at any time as well as other factors. Generally, prepayments will increase during a period of falling interest rates and decrease during a period of rising interest rates. The rate of prepayments also may be influenced by economic and other factors. Prepayment risk includes the possibility that, as interest rates fall, securities with stated interest rates may have the principal prepaid earlier than expected, requiring the Fund to invest the proceeds at generally lower interest rates.
Investments in mortgage-backed securities are made based upon, among other things, expectations regarding the rate of prepayments on underlying mortgage pools. Rates of prepayment, faster or slower than expected by the Adviser, could reduce the Fund's yield, increase the volatility of the Fund and/or cause a decline in NAV. Certain mortgage-backed securities may be more volatile and less liquid than other traditional types of debt securities.
To the extent the Fund invests in mortgage securities offered by non-governmental issuers, such as commercial banks, savings and loan institutions, private mortgage insurance companies, mortgage bankers and other secondary market issuers, the Fund may be subject to additional risks. Pools created by such non-governmental issuers generally offer a higher rate of interest than government and government-related pools because there are no direct or indirect government or agency guarantees of payments in such pools. However, timely payment of interest and principal of these pools may be supported by various forms of private insurance or guarantees, including individual loan, title, pool and hazard insurance and letters of intent. The insurance and guarantees are issued by governmental entities, private insurers and the mortgage poolers. There can be no assurance that the private insurers can meet their obligations under the insurance policies or guarantee arrangements.
Mortgage pools underlying mortgage securities offered by non-governmental issuers more frequently include second mortgages, high loan-to-value ratio mortgages and manufactured housing loans, in addition to commercial mortgages and other types of mortgages where a government or government-sponsored entity guarantee is not available. An unexpectedly high rate of defaults on the mortgages held by a mortgage pool may adversely affect the value of a mortgage-backed security and could result in losses to the Fund. The risk of such defaults is generally higher in the case of mortgage pools that include subprime mortgages. Subprime mortgages refer to loans made to borrowers with weakened credit histories or with a lower capacity to make timely payments on their mortgages. For these reasons, the loans underlying these securities have had in many cases higher default rates than those loans that meet government underwriting requirements. The risk of non-payment is greater for mortgage-related securities that are backed by loans that were originated under weak underwriting standards, including loans made to borrowers with limited means to make repayment. A level of risk exists for all loans, although, historically, the poorest performing loans have been those classified as subprime. Other types of privately issued mortgage-related securities, such as those classified as pay-option adjustable rate or Alt-A, have also performed poorly. Even loans classified as prime have experienced higher levels of delinquencies and defaults.
In addition, the Fund may invest in TBAs. Investments in TBAs may give rise to a form of leverage. Leverage may cause the Fund to be more volatile than if the Fund had not been leveraged. Further, TBAs may cause the Fund's portfolio turnover rate to appear higher.
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Collateralized Mortgage Obligations. The principal and interest on the Mortgage Assets comprising a CMO may be allocated among the several classes of a CMO in many ways, including "interest-only" and "inverse interest-only" tranches. The general goal in allocating cash flows on Mortgage Assets to the various classes of a CMO is to create certain tranches on which the expected cash flows have a higher degree of predictability than do the underlying Mortgage Assets. As a general matter, the more predictable the cash flow is on a particular CMO tranche, the lower the anticipated yield on that tranche at the time of issue will be relative to the prevailing market yields on the Mortgage Assets. As part of the process of creating more predictable cash flows on certain tranches of a CMO, one or more tranches generally must be created that absorb most of the changes in the cash flows on the underlying Mortgage Assets. The yields on these tranches are generally higher than prevailing market yields on other mortgage-related securities with similar average lives. Principal prepayments on the underlying Mortgage Assets may cause the CMOs to be retired substantially earlier than their stated maturities or final distribution dates. Because of the uncertainty of the cash flows on these tranches, the market prices and yields of these tranches are more volatile and may increase or decrease in value substantially with changes in interest rates and/or the rates of prepayment. Due to the possibility that prepayments (on home mortgages and other collateral) will alter the cash flow on CMOs, it is not possible to determine in advance the final maturity date or average life. Faster prepayment will shorten the average life and slower prepayments will lengthen it. In addition, if the collateral securing CMOs or any third-party guarantees is insufficient to make payments, the Fund could sustain a loss.
Stripped Mortgage-Backed Securities. Investments in each class of SMBS are extremely sensitive to changes in interest rates. IOs tend to decrease in value substantially if interest rates decline and prepayment rates become more rapid. POs tend to decrease in value substantially if interest rates increase and the rate of prepayment decreases. If the Fund invests in SMBS and interest rates move in a manner not anticipated by Fund management, it is possible that the Fund could lose all or substantially all of its investment.
Commercial Mortgage-Backed Securities. CMBS are subject to credit risk and prepayment risk. Although prepayment risk is present, it is of a lesser degree in the CMBS market than in the residential mortgage market; commercial real estate property loans often contain provisions which substantially reduce the likelihood that such securities will be prepaid (e.g., significant prepayment penalties on loans and, in some cases, prohibition on principal payments for several years following origination).
Inverse Floaters. Like most other fixed-income securities, the value of inverse floaters will decrease as interest rates increase. They are more volatile, however, than most other fixed-income securities because the coupon rate on an inverse floater typically changes at a multiple of the change in the relevant index rate. Thus, any rise in the index rate (as a consequence of an increase in interest rates) causes a correspondingly greater drop in the coupon rate of an inverse floater while a drop in the index rate causes a correspondingly greater increase in the coupon rate of an inverse floater. Some inverse floaters may also increase or decrease substantially because of changes in the rate of prepayments.
Derivatives. A derivative instrument often has risks similar to its underlying asset and may have additional risks, including imperfect correlation between the value of the derivative and the underlying asset, risks of default by the counterparty to certain transactions, magnification of losses incurred due to changes in the market value of the securities, instruments, indices or interest rates to which the derivative instrument relates, risks that the transactions may not be liquid and risks arising from margin requirements. The use of derivatives involves risks that are different from, and possibly greater than, the risks associated with other portfolio investments. Derivatives may involve the use of highly
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specialized instruments that require investment techniques and risk analyses different from those associated with other portfolio investments.
Certain derivative transactions may give rise to a form of leverage. Leverage magnifies the potential for gain and the risk of loss. Leverage associated with derivative transactions may cause the Fund to liquidate portfolio positions when it may not be advantageous to do so to satisfy its obligations or to meet earmarking or segregation requirements, pursuant to applicable SEC rules and regulations, or may cause the Fund to be more volatile than if the Fund had not been leveraged. Although the Adviser seeks to use derivatives to further the Fund's investment objective, there is no assurance that the use of derivatives will achieve this result.
The derivative instruments and techniques that the Fund may use include:
Futures. A futures contract is a standardized, exchange-traded agreement to buy or sell a specific quantity of an underlying asset, reference rate or index at a specific price at a specific future time. The value of a futures contract tends to increase and decrease in tandem with the value of the underlying instrument. Depending on the terms of the particular contract, futures contracts are settled through either physical delivery of the underlying instrument on the settlement date or by payment of a cash settlement amount on the settlement date. A decision as to whether, when and how to use futures contracts involves the exercise of skill and judgment and even a well-conceived futures transaction may be unsuccessful because of market behavior or unexpected events. In addition to the derivatives risks discussed above, the prices of futures contracts can be highly volatile, using futures contracts can lower total return, and the potential loss from futures contracts can exceed the Fund's initial investment in such contracts. No assurance can be given that a liquid market will exist for any particular futures contract at any particular time. There is also the risk of loss by the Fund of margin deposits in the event of bankruptcy of a broker with which the Fund has open positions in the futures contract.
Options. If the Fund buys an option, it buys a legal contract giving it the right to buy or sell a specific amount of the underlying instrument or futures contract on the underlying instrument at an agreed-upon price typically in exchange for a premium paid by the Fund. If the Fund sells an option, it sells to another person the right to buy from or sell to the Fund a specific amount of the underlying instrument or futures contract on the underlying instrument at an agreed-upon price typically in exchange for a premium received by the Fund. When options are purchased over-the-counter ("OTC"), the Fund bears the risk that the counterparty that wrote the option will be unable or unwilling to perform its obligations under the option contract. Options may also be illiquid and the Fund may have difficulty closing out its position. A decision as to whether, when and how to use options involves the exercise of skill and judgment and even a well-conceived option transaction may be unsuccessful because of market behavior or unexpected events. The prices of options can be highly volatile and the use of options can lower total returns.
Swaps. The Fund may enter into OTC swap contracts or cleared swap transactions. An OTC swap contract is an agreement between two parties pursuant to which the parties exchange payments at specified dates on the basis of a specified notional amount, with the payments calculated by reference to specified securities, indices, reference rates, currencies or other instruments. Typically swap agreements provide that when the period payment dates for both parties are the same, the payments are made on a net basis (i.e., the two payment streams are netted out, with only the net amount paid by one party to the other). The Fund's obligations or rights under a swap contract entered into on a net basis will generally be equal only to the net amount to be paid or received under the agreement, based on the relative values of the positions held by each party. Cleared swap transactions may help reduce counterparty credit risk. In a cleared swap, the Fund's ultimate counterparty is a clearinghouse rather than a swap dealer, bank or financial institution.
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OTC swap agreements are not entered into or traded on exchanges and often there is no central clearing or guaranty function for swaps. These OTC swaps are generally subject to credit risk or the risk of default or non-performance by the counterparty. Both OTC and cleared swaps could result in losses if interest rates, foreign currency exchange rates or other factors are not correctly anticipated by the Fund or if the reference index, security or investments do not perform as expected. The Dodd-Frank Wall Street Reform and Consumer Protection Act and related regulatory developments require the clearing and exchange-trading of certain standardized swap transactions. Mandatory exchange-trading and clearing is occurring on a phased-in basis.
Maturity and Duration. Traditionally, a debt security's term-to-maturity has been used as an indicator for the sensitivity of the security's price to changes in interest rates (which is the interest rate risk or volatility of the security). However, term-to-maturity measures only the time until a debt security provides its final payment, taking no account of the pattern of the security's payments prior to maturity.
Duration is a measure of the expected life of a fixed income security that was developed as a more precise measure of interest rate sensitivity than term-to-maturity. A portfolio with a lower average duration generally should experience less price volatility in response to changes in interest rates than a portfolio with a higher average duration. Duration incorporates a bond's yield, coupon interest payments, final maturity and call features into one measure. Duration is one of the fundamental tools used by the Adviser in the selection of fixed-income securities.
Duration takes the length of the time intervals between the present time and the time that the interest and principal payments are scheduled or, in the case of a callable bond, expected to be received, and weights them by the present values of the cash to be received at each future point in time. For any fixed-income security with interest payments occurring prior to the payment of principal, duration is always less than maturity.
There are some situations where even the standard duration calculation does not properly reflect the interest rate exposure of a security. For example, floating and variable rate securities often have final maturities of ten or more years; however, their interest rate exposure corresponds to the frequency of the coupon reset. In these and other similar situations, the Adviser will use analytical techniques that incorporate the economic life of a security into the determination of its interest rate exposure.
The performance of the Fund also will depend on whether or not the Adviser is successful in applying the Fund's investment strategies.
Portfolio Holdings
A description of the Fund's policies and procedures with respect to the disclosure of the Fund's portfolio securities is available in the Fund's Statement of Additional Information ("SAI").
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Morgan Stanley Investment Management Inc.
The Adviser, together with its affiliated asset management companies, had approximately $403.1 billion in assets under management or supervision as of June 30, 2015.
Fund Management
The Fund has retained the Adviser—Morgan Stanley Investment Management Inc.—to provide investment advisory services. The Adviser is a wholly-owned subsidiary of Morgan Stanley (NYSE: "MS"), a preeminent global financial services firm engaged in securities trading and brokerage activities, as well as providing investment banking, research and analysis, financing and financial advisory services. The Adviser's address is 522 Fifth Avenue, New York, NY 10036.
The Fund is managed by members of the Taxable Fixed Income team. The team consists of portfolio managers and analysts. Current members of the team jointly and primarily responsible for the day-to-day management of the Fund's portfolio are Jim Caron, Neil Stone and Matthew Dunning.
Mr. Caron has been associated with Morgan Stanley since 2006 and with the Adviser in an investment management capacity since June 2012. Prior to June 2012, he was global head of interest rates, foreign exchange and emerging markets strategy for Morgan Stanley. Mr. Stone has been associated with the Adviser in an investment management capacity since 1995. Mr. Dunning re-joined the Adviser in July 2014. Prior to re-joining the Adviser, Mr. Dunning managed the municipal valuation rates group and was a senior taxable municipal bond analyst at Bloomberg L.P. from March 2010 to July 2014. Prior to March 2010, he worked in various trading and portfolio management roles for the Adviser.
All team members are responsible for the execution of the overall strategy of the Fund.
The Fund's SAI provides additional information about the portfolio managers' compensation structure, other accounts managed by the portfolio managers and the portfolio managers' ownership of securities in the Fund.
The composition of the team may change from time to time.
The Fund pays the Adviser a monthly advisory fee as full compensation for the services and facilities furnished to the Fund, and for Fund expenses assumed by the Adviser. The fee is based on the Fund's average daily net assets. For the fiscal year ended May 31, 2015, the Fund paid total investment advisory compensation (net of affiliated rebates, if applicable) amounting to 0.27% of the Fund's average daily net assets.
A discussion regarding the Board's approval of the investment advisory agreement will be available in the Fund's Semi-Annual Report to Shareholders for the period ended November 30, 2015.
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Shareholder Information
Pricing Fund Shares
The price of Fund shares, called NAV, is based on the value of the Fund's portfolio securities. While the assets of each Class are invested in a single portfolio of securities, the NAV of each Class will differ because the Classes have different ongoing fees.
The NAV per share of the Fund is determined once daily on each business day as of the close of regular trading on the NYSE (normally 4:00 p.m. Eastern time) or such other times as the NYSE may officially close. Shares generally will not be priced on any day that the NYSE is closed, although Fund shares may be priced on such days if the Securities Industry and Financial Markets Association ("SIFMA") recommends that the bond markets remain open for all or part of the day. On any business day when SIFMA recommends that the bond markets close early, the Fund reserves the right to close at or prior to the SIFMA recommended closing time. If the Fund does so, it will cease granting same day credit for purchase and redemption orders received after the Fund's closing time and credit will be given on the next business day.
The value of the Fund's portfolio securities is based on the securities' market price when available. When a market price is not readily available, including circumstances under which the Adviser determines that a security's market price is not accurate, a portfolio security is valued at its fair value, as determined under procedures established by the Fund's Board.
In these cases, the Fund's NAV will reflect certain portfolio securities' fair value rather than their market price. Fair value pricing involves subjective judgment and it is possible that the fair value determined for a security is materially different than the value that could be realized upon the sale of that security.
To the extent the Fund invests in open-end management companies (other than exchange-traded funds) that are registered under the Investment Company Act of 1940, as amended ("Investment Company Act"), the Fund's NAV is calculated based upon the NAV of such funds. The prospectuses for such funds explain the circumstances under which they will use fair value pricing and its effects.
An exception to the Fund's general policy of using market prices concerns its short-term debt portfolio securities. Debt securities with remaining maturities of 60 days or less at the time of purchase are valued at amortized cost. However, if the cost does not reflect the securities' market value, these securities will be valued at their fair market value as determined by the Adviser.
Contacting a Morgan Stanley Financial Advisor
If you are new to the Morgan Stanley Funds and would like to contact a Morgan Stanley Financial Advisor, call toll-free 1-866-MORGAN8 for the telephone number of the Morgan Stanley office nearest you. You may also access our office locator on our Internet site at: www.morganstanley.com
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How to Buy Shares
The Fund reserves the right to close the Fund to new investments prior to the Reorganization, which is subject to the approval of shareholders of the Fund. You will be notified by the Fund prior to any such closure.
Because every investor has different immediate financial needs and long-term investment goals, the Fund offers two Classes of shares: Advisor Class and Class I. Class I shares are only offered to a limited group of investors. Both Classes of shares offer distinct fee structures and investment minimums. Your Financial Intermediary can help you decide which Class may be most appropriate for you. When purchasing Fund shares, you must specify which Class of shares you wish to purchase.
EasyInvest®
A purchase plan that allows you to transfer money automatically from your checking or savings account or from a Morgan Stanley Money Market Fund on a semi-monthly, monthly or quarterly basis. Contact your Morgan Stanley Financial Advisor for further information about this service.
Minimum Investment Amounts. The minimum investment amounts for Advisor Class shares are as follows:
Minimum Investment | |||||||||||
Investment Options | Initial | Additional | |||||||||
Regular Account | $ | 10,000 | $ | 100 | |||||||
EasyInvest® (Automatically from your checking or savings account or Morgan Stanley Money Market Fund) | $ | 1,000 | * | $ | 100 | * |
* Provided your schedule of investments totals $10,000 in 12 months.
The minimum initial investment amount is generally $5 million for Class I shares and $100 for additional investments. To be eligible to purchase Class I shares, you must qualify under one of the investor categories specified in the "Shareholder Information—Share Class Arrangements" section of this Prospectus.
The minimum initial and additional investment amounts may be waived for the following categories: (1) sales through banks, broker-dealers and other financial institutions (including registered investment advisers and financial planners) purchasing shares on behalf of their clients in (i) discretionary and non-discretionary advisory programs, (ii) fund supermarkets, (iii) asset allocation programs, (iv) other programs in which the client pays an asset-based fee for advice or for executing transactions in Fund shares or for otherwise participating in the program or (v) certain other investment programs that do not charge an asset-based fee; (2) qualified state tuition plans described in Section 529 of the Internal Revenue Code of 1986, as amended (the "Code"); and donor-advised charitable gift funds (subject to all applicable terms and conditions); (3) defined contribution, defined benefit and other employer-sponsored employee benefit plans, whether or not
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qualified under the Code; (4) certain retirement and deferred compensation programs established by Morgan Stanley Investment Management or its affiliates for their employees or the Fund's Trustees; (5) current or retired directors, officers and employees of Morgan Stanley and any of its subsidiaries, such persons' spouses, and children under the age of 21, and trust accounts for which any of such persons is a beneficiary; (6) current or retired Directors or Trustees of the Morgan Stanley Funds, such persons' spouses, and children under the age of 21, and trust accounts for which any of such persons is a beneficiary; (7) certain other registered open-end investment companies whose shares are distributed by the Distributor; (8) investments made in connection with certain mergers and/or reorganizations as approved by the Adviser; (9) the reinvestment of dividends in additional Fund shares; or (10) certain other institutional investors based on assets under management or other considerations at the discretion of the Adviser.
Purchasing Shares Through a Financial Intermediary. You may open a new account and purchase Fund shares through your Financial Intermediary. Your Financial Intermediary will assist you with the procedures to invest in shares of the Fund. Your Financial Intermediary may charge transaction-based or other fees in connection with the purchase or sale of Fund shares. Please consult your Financial Intermediary for more information regarding any such fees and for purchase instructions.
Purchasing Shares Directly from the Fund.
Initial Purchase by Mail. You may open a new account, subject to acceptance by the Fund, and purchase Fund shares by completing and signing a New Account Application provided by Boston Financial Data Services, Inc. (the "Transfer Agent"), which you can obtain by calling the Transfer Agent at (800) 548-7786 (our automated telephone system (which is generally accessible 24 hours a day, seven days a week)) and mailing it to Morgan Stanley Limited Duration U.S. Government Trust, c/o Boston Financial Data Services, Inc., P.O. Box 219804, Kansas City, MO 64121-9804 together with a check payable to Morgan Stanley Limited Duration U.S. Government Trust.
Please note that payments to investors who redeem Fund shares purchased by check will not be made until payment of the purchase has been collected, which may take up to 15 calendar days after purchase. You can avoid this delay by purchasing shares by wire.
Initial Purchase by Wire. You may purchase shares of the Fund by wiring Federal Funds (monies credited by a Federal Reserve Bank) to State Street Bank and Trust Company (the "Custodian"). You must forward a completed New Account Application to the Transfer Agent in advance of the wire by following the instructions under "Initial Purchase by Mail." You should instruct your bank to send a Federal Funds wire in a specified amount to the Custodian using the following wire instructions:
State Street Bank and Trust Company
One Lincoln Street
Boston, MA 02111-2101
ABA #011000028
DDA #99060238
Attn: Morgan Stanley Funds Subscription Account
Ref: (Fund Name, Account Number, Account Name)
Additional Investments. You may purchase additional Fund shares for your account at any time by contacting your Financial Intermediary, or by contacting the Fund directly. For additional Fund share purchases directly from the Fund,
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you should write a "letter of instruction" that includes your account name, account number, the Fund name and the Class selected, signed by the account owner(s), to assure proper crediting to your account. The letter must be mailed along with a check in accordance with the instructions under "Initial Purchase by Mail." Instead of a letter you may mail a check along with the payment stub attached to the bottom portion of your account statement. You may also purchase additional Fund shares by wire by following the instructions under "Initial Purchase by Wire."
General. To help the U.S. Government fight the funding of terrorism and money laundering activities, federal law requires all financial institutions to obtain, verify and record information that identifies each person who opens an account. What this means to you: when you open an account, we will ask your name, address, date of birth and other information that will allow us to identify you. If we are unable to verify your identity, we reserve the right to restrict additional transactions and/or liquidate your account at the next calculated NAV after your account is closed (less any applicable sales/account charges and/or tax penalties) or take any other action required by law. In accordance with federal law requirements, the Fund has implemented an anti-money laundering compliance program, which includes the designation of an anti-money laundering compliance officer.
When you buy Fund shares, the shares will be purchased at the next share price calculated after we receive your purchase order. Your payment is due on the third business day after you place your purchase order. We reserve the right to reject any order for the purchase of Fund shares for any reason.
How to Exchange Shares
Permissible Fund Exchanges. You may exchange Class I shares of the Fund for Class I shares of any mutual fund (excluding money market funds) sponsored and advised by the Adviser (each, a "Morgan Stanley Multi-Class Fund"), if available, without the imposition of an exchange fee. In addition, you may exchange Class I shares of the Fund for shares of Morgan Stanley California Tax-Free Daily Income Trust, Morgan Stanley Liquid Asset Fund Inc., Morgan Stanley New York Municipal Money Market Trust, Morgan Stanley Tax-Free Daily Income Trust and Morgan Stanley U.S. Government Money Market Trust (each, a "Morgan Stanley Money Market Fund" and, together with the Morgan Stanley Multi-Class Funds, the "Morgan Stanley Funds"), if available, without the imposition of an exchange fee. If you purchased Class I shares through a Financial Intermediary, certain Morgan Stanley Funds may be unavailable for exchange. Contact your Financial Intermediary to determine which Morgan Stanley Funds are available for exchange.
You may only exchange Advisor Class shares of the Fund for shares of other Morgan Stanley Funds if the Advisor Class shares were acquired in an exchange from shares initially purchased in a Morgan Stanley Multi-Class Fund. In that case, the Advisor shares may be subsequently re-exchanged for shares of the same Class of any Morgan Stanley Multi-Class Fund, if available, as the initially purchased shares or for shares of a Morgan Stanley Money Market Fund, if available, without the imposition of an exchange fee. Class B shares of a Morgan Stanley Multi-Class Fund that are exchanged for Advisor Class shares may be subsequently re-exchanged for Class B shares of any Morgan Stanley Multi-Class Fund (even though Class B shares are closed to investors). To the extent you hold Advisor Class shares received in exchange for Class A or Class B shares of any Morgan Stanley Multi-Class Fund, and you sell such Advisor Class shares before the expiration of the contingent deferred sales charge ("CDSC") "holding period," you will be charged the applicable CDSC rate. If you acquired Advisor Class shares through a Financial Intermediary, certain Morgan Stanley Funds may be unavailable for exchange. Contact your Financial Intermediary to determine which Morgan Stanley Funds are available for exchange.
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The current prospectus for each Morgan Stanley Fund describes its investment objective(s), policies and investment minimums, and should be read before investment. Since exchanges are available only into continuously offered Morgan Stanley Funds, exchanges are not available into Class I shares of Morgan Stanley Funds that are not currently being offered for purchase.
Exchange Procedures. You can process an exchange by contacting your Financial Intermediary. You may also write the Transfer Agent or call toll-free (800) 548-7786 to place an exchange order.
Exchange requests received on a business day prior to the time shares of the funds involved in the request are priced will be processed on the date of receipt. "Processing" a request means that shares of the Fund which you are exchanging will be redeemed and shares of the Morgan Stanley Fund that you are purchasing will be purchased at the NAV per share next determined on the date of receipt. Exchange requests received on a business day after the time that shares of the funds involved in the request are priced will be processed on the next business day in the manner described herein.
The Fund may terminate or revise the exchange privilege upon required notice or in certain cases without notice. See "Limitations on Exchanges." The check writing privilege is not available for Morgan Stanley Money Market Fund shares you acquire in an exchange.
Telephone Exchanges. Morgan Stanley and its subsidiaries, the Transfer Agent, and the Fund employ procedures considered by them to be reasonable to confirm that instructions communicated by telephone are genuine. Such procedures may include requiring certain personal identification information prior to acting upon telephone instructions, tape-recording telephone communications and providing written confirmation of instructions communicated by telephone. If reasonable procedures are employed, none of Morgan Stanley, the Transfer Agent or the Fund will be liable for following telephone instructions which it reasonably believes to be genuine. Telephone exchanges may not be available if you cannot reach the Transfer Agent by telephone, whether because all telephone lines are busy or for any other reason; in such case, a shareholder would have to use the Fund's other exchange procedures described in this section.
Telephone instructions will be accepted if received by the Transfer Agent between 9:00 a.m. and 4:00 p.m. Eastern time on any day the NYSE is open for business. On any business day that the NYSE closes early, or when SIFMA recommends that the securities markets close early, the Fund may close early and purchase orders received after such earlier closing times will be processed the following business day. During periods of drastic economic or market changes, it is possible that the telephone exchange procedures may be difficult to implement, although this has not been the case with the Fund in the past.
You automatically have the telephone exchange privilege unless you indicate otherwise by checking the applicable box on the New Account Application. You may also opt out of telephone privileges at any time by contacting the Transfer Agent at (800) 548-7786. If you hold share certificates, no exchanges may be processed until we have received all applicable share certificates.
Margin Accounts. If you have pledged your Fund shares in a margin account, contact your Financial Intermediary regarding restrictions on the exchange of such shares.
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Tax Considerations of Exchanges. If you exchange Class I shares of the Fund for shares of another Morgan Stanley Fund, there are important tax considerations. For tax purposes, the exchange out of the Fund is considered a sale of Fund shares and the exchange into the other fund is considered a purchase. As a result, you may realize a capital gain or loss.
You should review the "Shareholder Information—Tax Consequences" section and consult your own tax professional about the tax consequences of an exchange.
Limitations on Exchanges. Certain patterns of past exchanges and/or purchase or sale transactions involving the Fund or other Morgan Stanley Funds may result in the Fund rejecting, limiting or prohibiting, at its sole discretion, and without prior notice, additional purchases and/or exchanges and may result in a shareholder's account being closed. Determinations in this regard may be based on the frequency or dollar amount of previous exchanges or purchase or sale transactions. The Fund reserves the right to reject an exchange request for any reason.
For further information regarding exchange privileges, you should contact your Financial Intermediary or call toll-free (800) 548-7786.
How to Sell Shares
You can sell some or all of your Fund shares at any time. Your shares will be sold at the next price calculated after we receive your order to sell as described below.
Options | Procedures | ||||||
Contact Your Morgan Stanley Financial Advisor/Financial Intermediary | To sell your shares, simply call your Financial Intermediary. Payment will be sent to the address to which the account is registered or deposited in your brokerage account. Your Financial Intermediary may charge transaction-based or other fees in connection with the purchase or sale of the Fund's shares. Please contact your Financial Intermediary for more information regarding any such fees. | ||||||
Check-writing Option | You may order a supply of blank checks by requesting them by contacting your Financial Intermediary or calling toll-free (800) 548-7786. Checks may be written in any amount not less than $500. You must sign checks exactly as your shares are registered. If the account is a joint account, the check may contain one signature unless the joint owners have specified on an investment application that all owners are required to sign checks. Only accounts in which no share certificates have been issued are eligible for the check-writing privilege. Payment of check proceeds normally will be made on the next business day after we receive your check in proper form. Shares purchased by check (including a certified or bank cashier's check) are not normally available to cover redemption checks until 15 calendar days after the Transfer Agent receives the check used for investment. A check will not be honored in an amount exceeding the value of the account at the time the check is presented for payment. |
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Options | Procedures | ||||||
Contact the Fund By Telephone | You can also sell your Fund shares by telephone and have the proceeds sent to the address of record or wired to your bank account on record. You automatically have the telephone redemption privilege unless you indicate otherwise by checking the applicable box on the New Account Application. You may also opt out of telephone privileges at any time by contacting the Transfer Agent at (800) 548-7786. Before processing a telephone redemption, keep the following information in mind: n You can establish this option at the time you open the account by completing the New Account Application or subsequently by calling toll-free (800) 548-7786. n Call toll-free (800) 548-7786 to process a telephone redemption using our automated telephone system which is generally accessible 24 hours a day, seven days a week. n Your request must be received prior to market close, generally 4:00 p.m. Eastern time. n If your account has multiple owners, the Transfer Agent may rely on the instructions of any one owner. n Proceeds must be made payable to the name(s) and address in which the account is registered. n You may redeem amounts of $50,000 or less daily if the proceeds are to be paid by check or by Automated Clearing House. n This privilege is not available if the address on your account has changed within 15 calendar days prior to your telephone redemption request. n Telephone redemption is available for most accounts other than accounts with shares represented by certificates. If you request to sell shares that were recently purchased by check, the proceeds of that sale may not be sent to you until it has been verified that the check has cleared, which may take up to 15 calendar days from the date of purchase. Morgan Stanley and its subsidiaries, the Transfer Agent and the Fund employ procedures considered by them to be reasonable to confirm that instructions communicated by telephone are genuine. Such procedures may include requiring certain personal identification information prior to acting upon telephone instructions, tape-recording telephone communications and providing written confirmation of instructions communicated by telephone. If reasonable procedures are employed, none of Morgan Stanley, the Transfer Agent or the Fund will be liable for following telephone instructions which it reasonably believes to be genuine. Telephone redemptions may not be available if a shareholder cannot reach the Transfer Agent by telephone, whether because all telephone lines are busy or for any other reason; in such case, a shareholder would have to use the Fund's other redemption procedures described in this section. |
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Options | Procedures | ||||||
Contact the Fund By Letter | You can also sell your Fund shares by writing a "letter of instruction" that includes: n the name on your account and account number; n the name of the Fund; n the dollar amount or the number of shares you wish to sell; n the Class of shares you wish to sell; n the signature of each owner as it appears on the account; and n whether you wish to receive the redemption proceeds by check or by wire to the bank account we have on file for you. If you are requesting payment to anyone other than the registered owner(s) or that payment be sent to any address other than the address of the registered owner(s) or pre-designated bank account, you will need a signature guarantee. You can obtain a signature guarantee from an eligible guarantor acceptable to the Transfer Agent. (You should contact the Transfer Agent toll-free at (800) 548-7786 for a determination as to whether a particular institution is an eligible guarantor.) A notary public cannot provide a signature guarantee. Additional documentation may be required for shares held by a corporation, partnership, trustee or executor. Mail the letter to Boston Financial Data Services, Inc. at P.O. Box 219804, Kansas City, MO 64121-9804. If you hold share certificates, you must return the certificates, along with the letter and any required additional documentation. A check or wire will be sent according to your instructions. | ||||||
Systematic Withdrawal Plan | If your investment in all of the Morgan Stanley Funds has a total market value of at least $10,000, you may elect to withdraw amounts of $25 or more, or in any whole percentage of a fund's balance (provided the amount is at least $25), on a monthly, quarterly, semi-annual or annual basis, from any fund with a balance of at least $1,000. Each time you add a fund to the plan, you must meet the plan requirements. To sign up for the systematic withdrawal plan, contact your Morgan Stanley Financial Advisor or call toll-free (800) 548-7786. You may terminate or suspend your plan at any time. Please remember that withdrawals from the plan are sales of shares, not Fund "distributions," and ultimately may exhaust your account balance. The Fund may terminate or revise the plan at any time. |
Payment for Sold Shares. After we receive your complete instructions to sell as described above, a check will be mailed to you or a wire will be sent to your bank within seven days, although we will attempt to make payment within one business day. Payment may also be sent to your brokerage account.
Payment may be postponed or the right to sell your shares suspended under unusual circumstances. If you request to sell shares that were recently purchased by check, the proceeds of the sale may not be sent to you until it has been verified that the check has cleared, which may take up to 15 calendar days from the date of purchase.
Payments-in-Kind. If we determine that it is in the best interest of the Fund not to pay redemption proceeds in cash, we may pay you partly or entirely by distributing to you securities held by the Fund. If the Fund redeems your shares
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in-kind, you will bear any market risks associated with the securities paid as redemption proceeds. Such in-kind securities may be illiquid and difficult or impossible for a shareholder to sell at a time and at a price that a shareholder would like. Redemptions paid in such securities generally will give rise to income, gain or loss for income tax purposes in the same manner as redemptions paid in cash. In addition, you may incur brokerage costs and a further gain or loss for income tax purposes when you ultimately sell the securities.
Tax Considerations. Normally, your sale of Fund shares is subject to federal and state income tax. You should review the "Shareholder Information—Tax Consequences" section of this Prospectus and consult your own tax professional about the tax consequences of a sale.
Involuntary Sales. The Fund reserves the right, on 60 days' notice, to sell the shares of any shareholder (other than shares held in an individual retirement account ("IRA") or 403(b) Custodial Account) whose shares, due to sales by the shareholder, have a value below $1,000, or in the case of an account opened through EasyInvest®, if after 12 months the shareholder has invested less than $10,000 in the account. However, before the Fund sells your shares in this manner, we will notify you and allow you 60 days to make an additional investment in an amount that will increase the value of your account to at least the required amount before the sale is processed.
Margin Accounts. If you have pledged your Fund shares in a margin account, contact your Financial Intermediary regarding restrictions on the sale of such shares.
Targeted
DividendsSM
You may select to have your Fund distributions automatically invested in another Morgan Stanley Fund that you own. Contact your Morgan Stanley Financial Advisor for further information about this service.
Distributions
The Fund passes substantially all of its earnings from income and capital gains along to its investors as "distributions." The Fund earns interest from fixed-income investments. Also, any zero coupon security investments under federal law accrue a portion of the discount at which the security was purchased as income even though the Fund receives no interest payments in cash. These amounts are passed along to Fund shareholders as "income dividend distributions." The Fund realizes capital gains whenever it sells securities for a higher price than it paid for them. These amounts may be passed along as "capital gain distributions."
The Fund declares income dividends separately for each Class. Distributions paid on Class I shares usually will be higher than for Advisor Class shares because Advisor Class shares pay shareholder service fees. Normally, income dividends are declared on each day the NYSE is open for business, and are distributed to shareholders monthly. Capital gains, if any, are usually distributed in December. The Fund, however, may retain and reinvest any long-term capital gains. The Fund may at times make payments from sources other than income or capital gains that represent a return of a portion of your investment. These payments would generally not be taxable to you as a shareholder, but would have the effect of reducing your basis in the Fund.
Distributions are reinvested automatically in additional shares of the Fund and automatically credited to your account, unless you request in writing that all distributions be paid in cash. If you elect the
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cash option, processing of your dividend checks begins immediately following the monthly payment date, and the Fund will mail a monthly dividend check to you normally during the first seven days of the month. No interest will accrue on uncashed checks. If you wish to change how your distributions are paid, your request should be received by the Transfer Agent at least five business days prior to the record date of the distributions.
Frequent Purchases and Redemptions of Fund Shares
Frequent purchases and redemptions of Fund shares by Fund shareholders are referred to as "market-timing" or "short-term trading" and may present risks for other shareholders of the Fund, which may include, among other things, dilution in the value of Fund shares held by long-term shareholders, interference with the efficient management of the Fund's portfolio, increased brokerage and administrative costs, incurring unwanted taxable gains and forcing the Fund to hold excess levels of cash.
In addition, the Fund is subject to the risk that market-timers and/or short-term traders may take advantage of time zone differences between the foreign markets on which the Fund's portfolio securities trade and the time as of which the Fund's NAV is calculated ("time-zone arbitrage"). For example, a market-timer may purchase shares of the Fund based on events occurring after foreign market closing prices are established, but before the Fund's NAV calculation, that are likely to result in higher prices in foreign markets the following day. The market-timer would redeem the Fund's shares the next day when the Fund's share price would reflect the increased prices in foreign markets, for a quick profit at the expense of long-term Fund shareholders.
The Fund's policies with respect to valuing portfolio securities are described in "Shareholder Information—Pricing Fund Shares."
The Fund discourages and does not accommodate frequent purchases and redemptions of Fund shares by Fund shareholders and the Fund's Board has adopted policies and procedures with respect to such frequent purchases and redemptions. The Fund's policies with respect to purchases, redemptions and exchanges of Fund shares are described in the "Shareholder Information—How to Buy Shares," "—How to Exchange Shares" and "—How to Sell Shares" sections of this Prospectus. Except as described in each of these sections, and with respect to trades that occur through omnibus accounts at intermediaries, as described below, the Fund's policies regarding frequent trading of Fund shares are applied uniformly to all shareholders. With respect to trades that occur through omnibus accounts at intermediaries, such as investment managers, broker-dealers, transfer agents and third-party administrators, the Fund (i) requests assurance that such intermediaries currently selling Fund shares have in place internal policies and procedures reasonably designed to address market-timing concerns and has instructed such intermediaries to notify the Fund immediately if they are unable to comply with such policies and procedures and (ii) requires all prospective intermediaries to agree to cooperate in enforcing the Fund's policies (or, upon prior written approval only, an intermediary's own policies) with respect to frequent purchases, redemptions and exchanges of Fund shares.
Omnibus accounts generally do not identify customers' trading activity to the Fund on an individual ongoing basis. Therefore, with respect to trades that occur through omnibus accounts at Financial Intermediaries, to some extent, the Fund relies on the Financial Intermediary to monitor frequent short-term trading within the Fund by the Financial Intermediary's customers. However, the Fund or the Distributor has entered into agreements with Financial
24
Intermediaries whereby Financial Intermediaries are required to provide certain customer identification and transaction information upon the Fund's request. The Fund may use this information to help identify and prevent market-timing activity in the Fund. There can be no assurance that the Fund will be able to identify or prevent all market-timing activities.
Tax Consequences
As with any investment, you should consider how your Fund investment will be taxed. The tax information in this Prospectus is provided as general information. You should consult your own tax professional about the tax consequences of an investment in the Fund.
Unless your investment in the Fund is through a tax-deferred retirement account, such as a 401(k) plan or IRA, you need to be aware of the possible tax consequences when:
n The Fund makes distributions; and
n You sell Fund shares, including an exchange to another Morgan Stanley Fund.
Taxes on Distributions
Your distributions are normally subject to federal income tax when they are paid, whether you take them in cash or reinvest them in Fund shares. A distribution also may be subject to state and local income tax. Depending on your state's rules, however, dividends attributable to interest earned on direct obligations of the U.S. Government may be exempt from state and local income taxes. Any income dividend distributions and any short-term capital gain distributions are taxable to you as ordinary income. Any long-term capital gain distributions are taxable to you as long-term capital gains, no matter how long you have owned shares in the Fund.
You will be sent a statement (U.S. Internal Revenue Service ("IRS") Form 1099-DIV) by February of each year showing the taxable distributions paid to you in the previous year. The statement provides information on your dividends and any capital gains for tax purposes.
Taxes on Sales. Your sale of Fund shares normally is subject to federal and state income tax and may result in a taxable gain or loss to you. A sale also may be subject to local income tax. Your exchange of Fund shares for shares of another Morgan Stanley Fund is treated for tax purposes like a sale of your original shares and a purchase of your new shares. Thus, the exchange may, like a sale, result in a taxable gain or loss to you and will give you a new tax basis for your new shares.
An additional 3.8% Medicare tax is imposed on certain net investment income (including ordinary dividends and capital gain distributions received from the Fund and net gains from redemptions or other taxable dispositions of Fund shares) of U.S. individuals, estates and trusts to the extent that such person's "modified adjusted gross income" (in the case of an individual) or "adjusted gross income" (in the case of an estate or trust) exceeds certain threshold amounts.
Shareholders who are not citizens or residents of the United States and certain foreign entities will generally be subject to withholding of U.S. tax of 30% on distributions made by the Fund of investment income and short-term capital gains.
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The Fund (or its administrative agent) is required to report to the IRS and furnish to Fund shareholders the cost basis information for sale transactions of shares purchased on or after January 1, 2012. Shareholders may elect to have one of several cost basis methods applied to their account when calculating the cost basis of shares sold, including average cost, FIFO ("first-in, first-out") or some other specific identification method. Unless you instruct otherwise, the Fund will use average cost as its default cost basis method, and will treat sales as first coming from shares purchased prior to January 1, 2012. If average cost is used for the first sale of Fund shares covered by these new rules, the shareholder may only use an alternative cost basis method for shares purchased prospectively. Fund shareholders should consult with their tax advisors to determine the best cost basis method for their tax situation.
When you open your Fund account, you should provide your social security or tax identification number on your investment application. By providing this information, you will avoid being subject to federal backup withholding tax on taxable distributions and redemption proceeds at a rate of 28%. Any withheld amount would be sent to the IRS as an advance payment of your taxes due on your income.
Share Class Arrangements
The Fund offers two Classes of shares designed to provide you with different purchase options according to your investment needs. Your Financial Intermediary can help you decide which Class may be appropriate for you.
The general public is offered the Advisor Class shares. Class I shares are offered only to a limited number of investors.
ADVISOR CLASS SHARESAdvisor Class shares are sold at NAV with no sales charges.
Shareholder Services Fee. Advisor Class shares are subject to an annual shareholder services fee of 0.25% of the average daily net assets of that Class.
CLASS I SHARESClass I shares are sold at NAV without any sales charge on purchases or sales and without any shareholder services (12b-1) fee. Class I shares are offered only to investors meeting an initial investment minimum of $5 million and the following categories:
n Sales through banks, broker-dealers and other financial institutions (including registered investment advisers and financial planners) purchasing shares on behalf of their clients in (i) discretionary and non-discretionary advisory programs, (ii) fund supermarkets, (iii) asset allocation programs, (iv) other programs in which the client pays an asset-based fee for advice or for executing transactions in Fund shares or for otherwise participating in the program or (v) certain other investment programs that do not charge an asset-based fee.
n Qualified state tuition plans described in Section 529 of the Code and donor-advised charitable gift funds (subject to all applicable terms and conditions).
n Defined contribution, defined benefit and other employer-sponsored employee benefit plans, whether or not qualified under the Code.
n Certain other registered open-end investment companies whose shares are distributed by the Distributor.
n Investors who were shareholders of the Dean Witter Retirement Series on September 11, 1998 for additional purchases for their former Dean Witter Retirement Series accounts.
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n Certain retirement and deferred compensation programs established by Morgan Stanley Investment Management or its affiliates for their employees or the Fund's Trustees.
n Current or retired directors, officers and employees of Morgan Stanley and any of its subsidiaries, such persons' spouses, and children under the age of 21, and trust accounts for which any of such persons is a beneficiary.
n Current or retired Directors or Trustees of the Morgan Stanley Funds, such persons' spouses, and children under the age of 21, and trust accounts for which any of such persons is a beneficiary.
n Investments made in connection with certain mergers and/or reorganizations as approved by the Adviser.
n The reinvestment of dividends from Class I shares in additional Class I shares of the Fund.
Class I shares are not offered for investments made through insurance company separate accounts (regardless of the size of the investment).
Meeting Class I Eligibility Minimums. To meet the $5 million initial investment to qualify to purchase Class I shares you may combine: (1) purchases in a single transaction of Class I shares of the Fund and other Morgan Stanley Multi-Class Funds; and/or (2) previous purchases of Class A and Class I shares of Morgan Stanley Multi-Class Funds you currently own, along with shares of Morgan Stanley Funds you currently own that you acquired in exchange for those shares. Shareholders cannot combine purchases made by family members or a shareholder's other related accounts in a single transaction for purposes of meeting the $5 million initial investment minimum requirement to qualify to purchase Class I shares.
SHAREHOLDER SERVICES PLAN The Fund has adopted a Shareholder Services Plan with respect to the Advisor Class shares. The Plan allows the Fund to pay shareholder servicing fees for Advisor Class shares of up to an annual rate of 0.25% of the average daily net assets of that class.
Additional Information
The Adviser and/or Distributor may pay compensation (out of their own funds and not as an expense to the Fund) to Morgan Stanley Smith Barney LLC or other Financial Intermediaries or service providers in connection with the sale, distribution, marketing or retention of Fund shares and/or shareholder servicing. Such compensation may be significant in amount and the prospect of receiving any such additional compensation may provide Morgan Stanley Smith Barney LLC or such other Financial Intermediary with an incentive to favor sales of shares of the Fund over other investment options. Any such payments will not change the NAV or the price of the Fund's shares. For more information, please see the Fund's SAI.
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Financial Highlights
The financial highlights tables are intended to help you understand the Fund's financial performance for the periods indicated. Certain information reflects financial results for a single Fund share throughout each period. The total returns in the table represent the rate an investor would have earned or lost on an investment in the Fund (assuming reinvestment of all dividends and distributions). The ratio of expenses to average net assets listed in the tables below for each class of shares of the Fund are based on the average net assets of the Fund for each of the periods listed in the tables. To the extent that the Fund's average net assets decrease over the Fund's next fiscal year, such expense ratios can be expected to increase, potentially significantly, because certain fixed costs will be spread over a smaller amount of assets.
This information below has been audited by Ernst & Young LLP, an independent registered public accounting firm, whose report, along with the Fund's financial statements, is incorporated by reference in the SAI from the Fund's annual report, which is available upon request.
ADVISOR CLASS SHARES
For the Year Ended May 31, | 2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||||
Selected Per Share Data: | |||||||||||||||||||||||
Net asset value, beginning of period | $ | 9.07 | $ | 9.19 | $ | 9.33 | $ | 9.36 | $ | 9.36 | |||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||
Net investment income | 0.05 | 0.01 | 0.03 | 0.09 | 0.09 | ||||||||||||||||||
Net realized and unrealized gain (loss) | (0.03 | ) | (0.01 | ) | (0.04 | ) | 0.04 | 0.07 | |||||||||||||||
Total income (loss) from investment operations | 0.02 | 0.00 | (1) | (0.01 | ) | 0.13 | 0.16 | ||||||||||||||||
Less dividends from net investment income | (0.12 | ) | (0.12 | ) | (0.13 | ) | (0.16 | ) | (0.16 | ) | |||||||||||||
Net asset value, end of period | $ | 8.97 | $ | 9.07 | $ | 9.19 | $ | 9.33 | $ | 9.36 | |||||||||||||
Total Return(2) | 0.09 | % | 0.01 | % | (0.07 | )% | 1.44 | % | 1.75 | % | |||||||||||||
Ratios to Average Net Assets: | |||||||||||||||||||||||
Net expenses | 0.97 | %(3) | 0.90 | %(3) | 0.72 | %(3) | 0.74 | %(3) | 0.71 | %(3) | |||||||||||||
Net investment income | 0.61 | %(3) | 0.44 | %(3) | 0.49 | %(3) | 0.97 | %(3) | 1.15 | %(3) | |||||||||||||
Rebate from Morgan Stanley affiliate | 0.00 | %(4) | 0.00 | %(4) | 0.01 | % | 0.01 | % | 0.00 | %(4) | |||||||||||||
Supplemental Data: | |||||||||||||||||||||||
Net assets, end of period, in thousands | $ | 61,234 | $ | 99,521 | $ | 177,153 | $ | 205,096 | $ | 217,528 | |||||||||||||
Portfolio turnover rate | 229 | % | 120 | % | 171 | % | 182 | % | 99 | % |
(1) Amount is less than $0.005.
(2) Calculated based on the net asset value as of the last business day of the period.
(3) 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."
(4) Amount is less than 0.005%.
28
CLASS I SHARES
For the Year Ended May 31, | 2015 | 2014 | For the Period May 29, 2013** through May 31, 2013 | ||||||||||||
Selected Per Share Data: | |||||||||||||||
Net asset value, beginning of period | $ | 9.07 | $ | 9.19 | $ | 9.20 | |||||||||
Income (loss) from investment operations: | |||||||||||||||
Net investment income | 0.04 | 0.02 | 0.00 | (1) | |||||||||||
Net realized and unrealized loss | (0.04 | ) | (0.01 | ) | (0.01 | ) | |||||||||
Total income (loss) from investment operations | 0.00 | (1) | 0.01 | (0.01 | ) | ||||||||||
Less dividends from net investment income | (0.10 | ) | (0.13 | ) | (0.00 | )(1) | |||||||||
Net asset value, end of period | $ | 8.97 | $ | 9.07 | $ | 9.19 | |||||||||
Total Return(2) | 0.05 | % | 0.12 | % | (0.10 | )%(6) | |||||||||
Ratios to Average Net Assets: | |||||||||||||||
Net expenses | 1.10 | %(3) | 0.80 | %(3) | 0.44 | %(3)(7) | |||||||||
Net investment income | 0.49 | %(3) | 0.54 | %(3) | 1.00 | %(3)(7) | |||||||||
Rebate from Morgan Stanley affiliate | 0.00 | %(4) | 0.00 | %(4) | 0.01 | %(7) | |||||||||
Supplemental Data: | |||||||||||||||
Net assets, end of period, in thousands | $ | 684 | $ | 821 | $ | 10 | |||||||||
Portfolio turnover rate | 229 | % | 120 | % | 171 | %(7) |
** Commencement of Operations.
(1) Amount is less than $0.005.
(2) Calculated based on the net asset value as of the last business day of the period.
(3) 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."
(4) Amount is less than 0.005%.
(6) Not annualized.
(7) Annualized.
29
Additional information about the Fund's investments is available in the Fund's Annual and Semi-Annual Reports to Shareholders. In the Fund's Annual Report, you will find a discussion of the market conditions and investment strategies that significantly affected the Fund's performance during its last fiscal year.
The Fund's Statement of Additional Information, dated September 30, 2015 (as may be supplemented from time to time), also provides additional information about the Fund. The Statement of Additional Information is incorporated herein by reference (legally is part of this Prospectus). For a free copy of the Fund's Annual Report, Semi-Annual Report or Statement of Additional Information, to request other information about the Fund or to make shareholder inquiries, please call toll-free (800) 548-7786. Free copies of these documents are also available from our Internet site at: www.morganstanley.com/im.
You also may obtain information about the Fund by calling your Financial Intermediary or by visiting our Internet site.
Information about the Fund (including the Statement of Additional Information) can be reviewed and copied at the SEC's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling the SEC at (202) 551-8090. Shareholder reports and other information about the Fund are available on the EDGAR Database on the SEC's Internet site at: http://www.sec.gov, and copies of this information may be obtained, after paying a duplicating fee, by electronic request at the following E-mail address: publicinfo@sec.gov, or by writing to the SEC's Public Reference Section, Washington, D.C. 20549-1520.
(THE FUND'S INVESTMENT COMPANY ACT FILE NO.
IS 811-6330)
Morgan Stanley Distribution, Inc., member FINRA.
© 2015 Morgan Stanley
INVESTMENT MANAGEMENT
Morgan Stanley
Limited Duration
U.S. Government Trust
Prospectus
September 30, 2015
LDTPRO-00
Trustees
Frank L. Bowman
Michael Bozic
Kathleen A. Dennis
Nancy C. Everett
Jakki L. Haussler
James F. Higgins
Dr. Manuel H. Johnson
Joseph J. Kearns
Michael F. Klein
Michael E. Nugent
W. Allen Reed
Fergus Reid
Officers
Michael E. Nugent
Chairperson of the Board
John H. Gernon
President and Principal Executive Officer
Stefanie V. Chang Yu
Chief Compliance Officer
Joseph C. Benedetti
Vice President
Francis J. Smith
Treasurer and Principal Financial Officer
Mary E. Mullin
Secretary
Transfer Agent
Boston Financial Data Services, Inc.
2000 Crown Colony Drive
Quincy, Massachusetts 02169
Custodian
State Street Bank and Trust Company
One Lincoln Street
Boston, Massachusetts 02111
Independent Registered Public Accounting Firm
Ernst & Young LLP
200 Clarendon Street
Boston, Massachusetts 02116
Legal Counsel
Dechert LLP
1095 Avenue of the Americas
New York, New York 10036
Counsel to the Independent Trustees
Kramer Levin Naftalis & Frankel LLP
1177 Avenue of the Americas
New York, New York 10036
Adviser
Morgan Stanley Investment Management Inc.
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) 548-7786.
This report is not authorized for distribution to prospective investors in the Fund unless preceded or accompanied by an effective Prospectus. Please read the Prospectus carefully before investing.
Morgan Stanley Distribution, Inc., member FINRA.
© 2015 Morgan Stanley
INVESTMENT MANAGEMENT
Morgan Stanley Limited Duration U.S. Government Trust
Annual Report
May 31, 2015
MSLANN
1233375 Exp. 07.31.16
Morgan Stanley Limited Duration U.S. Government Trust
Table of Contents
Welcome Shareholder | 3 | ||||||
Fund Report | 4 | ||||||
Performance Summary | 8 | ||||||
Expense Example | 10 | ||||||
Portfolio of Investments | 11 | ||||||
Statement of Assets and Liabilities | 16 | ||||||
Statement of Operations | 17 | ||||||
Statements of Changes in Net Assets | 18 | ||||||
Notes to Financial Statements | 19 | ||||||
Financial Highlights | 31 | ||||||
Report of Independent Registered Public Accounting Firm | 33 | ||||||
U.S. Privacy Policy | 34 | ||||||
Trustee and Officer Information | 39 |
2
Welcome Shareholder,
We are pleased to provide this annual report, in which you will learn how your investment in Morgan Stanley Limited Duration U.S. Government Trust (the "Fund") performed during the latest twelve-month period. It includes an overview of the market conditions and discusses some of the factors that affected performance during the reporting period. In addition, the report contains financial statements and a list of portfolio holdings.
Morgan Stanley Investment Management is a client-centric, investor-led organization. Our global presence, intellectual capital, and breadth of products and services enable us to partner with investors to meet the evolving challenges of today's financial markets. We aim to deliver superior investment service and to empower our clients to make the informed decisions that help them reach their investment goals.
As always, we thank you for selecting Morgan Stanley Investment Management, and look forward to working with you in the months and years ahead.
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.
3
Fund Report (unaudited)
For the year ended May 31, 2015
Total Return for the 12 Months Ended May 31, 2015 | |||||||||||||||
Advisor Class | Class I | Barclays 1-3 Year U.S. Government Bond Index1 | Lipper Short U.S. Government Funds Index2 | ||||||||||||
0.09 | % | 0.05 | % | 0.84 | % | 0.77 | % |
The performance of the Fund's two share classes varies because each has different expenses. The Fund's total returns assume the reinvestment of all distributions. See Performance Summary for standardized performance and benchmark information.
Market Conditions
The main themes dominating global markets over the 12-month reporting period continued to be central banks' low interest rate policy and investor focus on the readiness of the European Central Bank (ECB) to use "unconventional" measures to fight deflationary pressures in the euro area. In this environment, bond markets were fairly turbulent. By the end of the period, yields were lower and the U.S. dollar had strengthened against most developed market currencies.
U.S. home prices continue to appreciate, rising 5.0% (as measured by the S&P Case-Shiller 20-City Home Price Index) over the past year ended March 2015, which is at the higher end of the range of most forecasts.(i) The housing market appears to be well supported by above-average affordability, low mortgage rates, rising home demand, and limited supply. Roughly 2.2 million
homes were available for sale in April 2015, representing 5.3 months of supply based on current sales volumes.(ii) Historically, balanced housing markets have averaged between 6 months and 6.5 months of supply.(iii)
Agency mortgage-backed securities (MBS) spreads remained historically tight due to the reduced volatility of the MBS market and the Federal Reserve's (Fed) MBS purchases over the past five years. However, prepayment volatility also remained historically mild and prepayment rates seemed to remain range-bound, limiting much of the extension concern. Agency MBS still offer moderately attractive risk-adjusted yield advantages, in our view, and the supply-demand dynamics have remained positive. Money managers, foreign buyers and real estate investment trusts (REITs) have been underweight MBS in aggregate versus their historical levels, according to The Yield Book, a bond market data provider. With the Fed maintaining its balance sheet position and buying the majority of new mortgage origination — and the rest of the investment community already underweight MBS — we believe a steady level of demand appears to exist to support any material weakening of agency MBS.
Performance Analysis
All share classes of Morgan Stanley Limited Duration U.S. Government Trust underperformed the Barclays 1-3 Year U.S. Government Bond Index (the "Index") and the
(i) S&P Dow Jones Indices
(ii) National Association of Realtors
(iii) Credit Suisse
4
Lipper Short U.S. Government Funds Index for the 12 months ended May 31, 2015.
The portfolio's underweight to U.S. Treasuries and a slightly lower duration (or interest rate sensitivity), which was managed with Treasury futures, detracted from relative performance during the period as Treasury yields fell. However, the portfolio's allocations to agency commercial mortgage-backed securities (CMBS) and agency residential MBS benefited performance, as a result of the favorable yields and spread tightening offered by these sectors relative to U.S. Treasuries.
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.
PORTFOLIO COMPOSITION+ as of 05/31/15 | |||||||
Agency Fixed Rate Mortgages | 36.4 | % | |||||
Agency Adjustable Rate Mortgages | 21.8 | ||||||
Collateralized Mortgage Obligations — Agency Collateral Series | 19.3 | ||||||
Short-Term Investments | 12.1 | ||||||
Agency Bonds — Sovereign (U.S. Government Guaranteed) | 3.8 | ||||||
U.S. Agency Security | 3.3 | ||||||
Agency Bond — Banking (FDIC Guaranteed) | 1.3 | ||||||
Agency Bond — Consumer Discretionary (U.S. Government Guaranteed) | 1.1 | ||||||
Asset-Backed Security | 0.9 |
LONG-TERM CREDIT ANALYSIS as of 05/31/15 | |||||||
AA | 100.0 | % |
+ Does not include open long/short futures contracts with an underlylng face amount of $44,877,500 with net unrealized appreciation of $7,486. Does not include open swap agreements with total unrealized depreciation of $36,859.
Subject to change daily. Provided for informational purposes only and should not be deemed as a recommendation to buy or sell the types of securities mentioned above. All percentages for portfolio composition are as a percentage of total investments and all percentages for long-term credit analysis are as a percentage of total long-term investments.
Security ratings disclosed with the exception for those labeled "not rated" have been rated by at least one Nationally Recognized Statistical Rating Organization ("NRSRO"). These ratings are obtained from Standard & Poor's Ratings Group ("S&P"), Moody's Investors Services, Inc. ("Moody's") or Fitch Ratings ("Fitch"). If two or more NRSROs have assigned a rating to a security, the highest rating is used and if securities are not rated, Morgan Stanley Investment Management Inc. (the "Adviser") has deemed them to be of comparable quality. Ratings from Moody's or Fitch, when used, are converted into their equivalent S&P rating.
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.
5
Investment Strategy
The Fund invests substantially all of its net assets in securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities, including, but not limited to, U.S. Treasury securities and Treasury Inflation Protected Securities ("TIPS"), and zero coupon securities. The Fund's "Adviser," Morgan Stanley Investment Management Inc., seeks to maintain an overall duration of the Fund's portfolio of three years or less.
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/im. Each Morgan Stanley fund also files a complete schedule of portfolio holdings 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 20549-1520.
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) 548-7786, 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.
6
(This page has been left blank intentionally.)
Performance Summary (unaudited)
Performance of $10,000 Investment—Advisor Class
Over 10 Years
8
Average Annual Total Returns—Period Ended May 31, 2015 (unaudited) | |||||||||||
Symbol | Advisor Class Shares (since 08/13/91) LDTRX | Class I Shares (since 05/29/13) MLDUX | |||||||||
1 Year | 0.09 | %3 | 0.05 | %3 | |||||||
5 Years | 0.64 3 | — | |||||||||
10 Years | 2.11 3 | — | |||||||||
Since Inception | 3.48 3 | 0.04 3 |
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 the Advisor Class and Class I shares will vary due to differences in expenses. See the Fund's current prospectus for complete details on fees.
(1) The Barclays 1-3 Year U.S. Government Bond Index is a sub-index of the Barclays U.S. Government Bond Index and is comprised of Agency and Treasury securities with maturities of one to three years. 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 Short U.S. Government Funds Index is an equally weighted performance index of the largest qualifying funds (based on net assets) in the Lipper Short U.S. Government 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 10 funds represented in this Index. The Fund was in the Lipper Short U.S. Government Funds classification as of the date of this report.
(3) Figure shown assumes reinvestment of all distributions. There are no sales charges.
‡ Ending value assuming a complete redemption on May 31, 2015.
9
Expense Example (unaudited)
As a shareholder of the Fund, you incur ongoing costs, including advisory fees, administration fees, shareholder services (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.
This example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period 12/01/14 – 05/31/15.
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. 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 that have transactional costs, such as sales charges (loads).
Beginning Account Value | Ending Account Value | Expenses Paid During Period@ | |||||||||||||
12/01/14 | 05/31/15 | 12/01/14 – 05/31/15 | |||||||||||||
Advisor Class | |||||||||||||||
Actual (0.15% return) | $ | 1,000.00 | $ | 1,001.50 | $ | 4.99 | |||||||||
Hypothetical (5% annual return before expenses) | $ | 1,000.00 | $ | 1,019.95 | $ | 5.04 | |||||||||
Class I | |||||||||||||||
Actual (0.14% return) | $ | 1,000.00 | $ | 1,001.40 | $ | 6.09 | |||||||||
Hypothetical (5% annual return before expenses) | $ | 1,000.00 | $ | 1,018.85 | $ | 6.14 |
@ Expenses are equal to the Fund's annualized expense ratios of 1.00% and 1.22% for Advisor Class and Class I shares, respectively, multiplied by the average account value over the period, multiplied by 182/365 (to reflect the one-half year period).
10
Morgan Stanley Limited Duration U.S. Government Trust
Portfolio of Investments n May 31, 2015
PRINCIPAL AMOUNT (000) | COUPON RATE | MATURITY DATE | VALUE | ||||||||||||||||
Agency Adjustable Rate Mortgages (24.5%) | |||||||||||||||||||
Federal Home Loan Mortgage Corporation, Conventional Pools: | |||||||||||||||||||
$ | 359 | 2.299 | % | 07/01/36 | $ | 380,982 | |||||||||||||
570 | 2.321 | 07/01/38 | 605,282 | ||||||||||||||||
751 | 2.334 | 05/01/40 | 806,297 | ||||||||||||||||
652 | 2.396 | 06/01/38 | 696,755 | ||||||||||||||||
765 | 2.404 | 09/01/35 | 816,653 | ||||||||||||||||
243 | 2.413 | 06/01/37 | 259,888 | ||||||||||||||||
1,566 | 2.43 | 08/01/35 - 03/01/37 | 1,674,534 | ||||||||||||||||
767 | 2.451 | 07/01/38 | 820,327 | ||||||||||||||||
786 | 2.474 | 01/01/36 | 840,406 | ||||||||||||||||
408 | 3.218 | 09/01/40 | 434,441 | ||||||||||||||||
Federal National Mortgage Association, Conventional Pools: | |||||||||||||||||||
907 | 1.848 | 09/01/37 | 952,988 | ||||||||||||||||
856 | 2.238 | 10/01/39 | 911,738 | ||||||||||||||||
751 | 2.248 | 09/01/38 | 797,932 | ||||||||||||||||
933 | 2.255 | 10/01/35 | 994,926 | ||||||||||||||||
366 | 2.257 | 09/01/38 | 389,246 | ||||||||||||||||
619 | 2.325 | 05/01/39 | 658,769 | ||||||||||||||||
558 | 2.351 | 05/01/35 | 596,008 | ||||||||||||||||
300 | 2.373 | 09/01/39 | 322,884 | ||||||||||||||||
360 | 2.392 | 07/01/39 | 384,313 | ||||||||||||||||
933 | 2.416 | 10/01/37 | 999,694 | ||||||||||||||||
Government National Mortgage Association, Various Pools: | |||||||||||||||||||
188 | 1.625 | 11/20/39 | 195,298 | ||||||||||||||||
621 | 1.75 | 02/20/40 - 02/20/41 | 645,595 | ||||||||||||||||
Total Agency Adjustable Rate Mortgages (Cost $15,178,471) | 15,184,956 | ||||||||||||||||||
Agency Bond - Banking (FDIC Guaranteed) (1.4%) | |||||||||||||||||||
880 | NCUA Guaranteed Notes (Cost $878,777) | 1.40 | 06/12/15 | 880,290 | |||||||||||||||
Agency Bond - Consumer Discretionary (U.S. Government Guaranteed) (1.2%) | |||||||||||||||||||
738 | Safina Ltd. (Cost $737,961) | 2.00 | 12/30/23 | 739,310 | |||||||||||||||
Agency Bonds - Sovereign (U.S. Government Guaranteed) (4.3%) | |||||||||||||||||||
1,705 | Hashemite Kingdom of Jordan Government AID Bond | 2.503 | 10/30/20 | 1,775,966 |
See Notes to Financial Statements
11
Morgan Stanley Limited Duration U.S. Government Trust
Portfolio of Investments n May 31, 2015 continued
PRINCIPAL AMOUNT (000) | COUPON RATE | MATURITY DATE | VALUE | ||||||||||||||||
$ | 885 | Tunisia Government AID Bonds | 1.686 | % | 07/16/19 | $ | 896,593 | ||||||||||||
Total Agency Bonds - Sovereign (U.S. Government Guaranteed) (Cost $2,590,000) | 2,672,559 | ||||||||||||||||||
Agency Fixed Rate Mortgages (40.9%) | |||||||||||||||||||
Federal Home Loan Mortgage Corporation, Gold Pools: | |||||||||||||||||||
1,120 | 4.00 | 11/01/41 | 1,198,076 | ||||||||||||||||
916 | 4.50 | 12/01/24 | 984,600 | ||||||||||||||||
51 | 7.50 | 05/01/35 | 61,919 | ||||||||||||||||
30 | 8.00 | 08/01/32 | 37,443 | ||||||||||||||||
30 | 8.50 | 08/01/31 | 36,941 | ||||||||||||||||
June TBA: | |||||||||||||||||||
2,160 | (a) | 3.50 | 06/01/45 | 2,247,388 | |||||||||||||||
Federal National Mortgage Association, Conventional Pools: | |||||||||||||||||||
1,261 | 4.00 | 06/01/24 - 11/01/41 | 1,342,268 | ||||||||||||||||
3,261 | 4.50 | 06/01/24 - 01/01/44 | 3,559,653 | ||||||||||||||||
4,709 | 5.00 | 12/01/23 - 03/01/41 | 5,213,133 | ||||||||||||||||
2,349 | 5.50 | 05/01/41 | 2,670,832 | ||||||||||||||||
676 | 6.00 | 02/01/37 - 09/01/37 | 772,945 | ||||||||||||||||
395 | 7.00 | 04/01/32 - 03/01/37 | 472,045 | ||||||||||||||||
70 | 7.50 | 08/01/37 | 86,492 | ||||||||||||||||
119 | 8.00 | 04/01/33 | 148,480 | ||||||||||||||||
52 | 8.50 | 10/01/32 | 66,705 | ||||||||||||||||
June TBA: | |||||||||||||||||||
2,060 | (a) | 3.00 | 06/01/30 | 2,152,459 | |||||||||||||||
1,790 | (a) | 3.50 | 06/01/30 | 1,898,659 | |||||||||||||||
Government National Mortgage Association, June TBA: | |||||||||||||||||||
1,340 | (a) | 4.00 | 06/20/45 | 1,426,864 | |||||||||||||||
Various Pools: | |||||||||||||||||||
268 | 6.00 | 11/15/38 | 307,684 | ||||||||||||||||
354 | 7.50 | 11/15/32 | 416,061 | ||||||||||||||||
184 | 8.50 | 07/15/30 | 212,306 | ||||||||||||||||
Total Agency Fixed Rate Mortgages (Cost $24,757,946) | 25,312,953 | ||||||||||||||||||
Asset-Backed Security (1.1%) | |||||||||||||||||||
660 | United States Small Business Administration (Cost $659,844) | 2.245 | 09/10/22 | 659,798 |
See Notes to Financial Statements
12
Morgan Stanley Limited Duration U.S. Government Trust
Portfolio of Investments n May 31, 2015 continued
PRINCIPAL AMOUNT (000) | COUPON RATE | MATURITY DATE | VALUE | ||||||||||||||||
Collateralized Mortgage Obligations - Agency Collateral Series (21.7%) | |||||||||||||||||||
Federal Home Loan Mortgage Corporation | |||||||||||||||||||
$ | 1,025 | 1.426 | % | 08/25/17 | $ | 1,033,647 | |||||||||||||
683 | 1.437 | 01/25/19 | 687,299 | ||||||||||||||||
253 | 1.56 | 10/25/18 | 254,290 | ||||||||||||||||
598 | 1.615 | 09/25/18 | 603,250 | ||||||||||||||||
2,450 | 1.655 | 11/25/16 | 2,475,919 | ||||||||||||||||
849 | 1.691 | 06/25/18 | 857,999 | ||||||||||||||||
304 | 1.776 | 04/25/18 | 306,397 | ||||||||||||||||
612 | 1.781 | 10/25/20 | 618,633 | ||||||||||||||||
72 | 1.873 | 01/25/18 | 71,925 | ||||||||||||||||
843 | 1.883 | 05/25/19 | 854,432 | ||||||||||||||||
670 | 2.061 | 10/25/20 | 681,172 | ||||||||||||||||
265 | 2.086 | 03/25/19 | 270,899 | ||||||||||||||||
528 | 2.257 | 10/25/20 | 540,200 | ||||||||||||||||
320 | 2.303 | 09/25/18 | 329,785 | ||||||||||||||||
285 | 2.323 | 10/25/18 | 293,923 | ||||||||||||||||
483 | 3.034 | (b) | 10/25/20 | 511,177 | |||||||||||||||
Federal National Mortgage Association | |||||||||||||||||||
256 | 0.398 | (b) | 06/25/18 | 256,036 | |||||||||||||||
67 | 0.595 | 08/25/15 | 66,911 | ||||||||||||||||
164 | 0.953 | 11/25/15 | 163,964 | ||||||||||||||||
498 | 1.083 | 02/25/16 | 499,826 | ||||||||||||||||
250 | 1.55 | 04/25/18 | 252,314 | ||||||||||||||||
300 | 1.626 | 02/25/18 | 302,826 | ||||||||||||||||
587 | 2.171 | (b) | 09/25/19 | 599,002 | |||||||||||||||
Government National Mortgage Association, IO | |||||||||||||||||||
1,461 | 5.00 | 11/20/38 | 126,499 | ||||||||||||||||
433 | 6.046 | (b) | 03/20/43 | 77,113 | |||||||||||||||
529 | 6.316 | (b) | 05/20/40 | 99,470 | |||||||||||||||
1,192 | 6.317 | (b) | 08/16/39 | 121,086 | |||||||||||||||
865 | 6.417 | (b) | 01/16/40 | 155,239 | |||||||||||||||
1,342 | 6.617 | (b) | 08/16/36 | 304,112 | |||||||||||||||
Total Collateralized Mortgage Obligations - Agency Collateral Series (Cost $13,114,485) | 13,415,345 | ||||||||||||||||||
U.S. Agency Security (3.7%) | |||||||||||||||||||
2,300 | Private Export Funding Corp. (Cost $2,304,784) | 1.45 | 08/15/19 | 2,283,350 |
See Notes to Financial Statements
13
Morgan Stanley Limited Duration U.S. Government Trust
Portfolio of Investments n May 31, 2015 continued
PRINCIPAL AMOUNT (000) | COUPON RATE | MATURITY DATE | VALUE | ||||||||||||||||
Short-Term Investments (13.6%) | |||||||||||||||||||
U.S. Treasury Securities (12.7%) | |||||||||||||||||||
$ | 486 | U.S. Treasury Bill (c)(d) | 0.089 | % | 12/10/15 | $ | 485,844 | ||||||||||||
U.S. Treasury Notes | |||||||||||||||||||
2,600 | 0.25 | 08/15/15 | 2,601,118 | ||||||||||||||||
4,800 | 0.375 | 08/31/15 | 4,803,749 | ||||||||||||||||
Total U.S. Treasury Securities (Cost $7,896,926) | 7,890,711 | ||||||||||||||||||
NUMBER OF SHARES (000) | |||||||||||||||||||
Investment Company (0.9%) | |||||||||||||||||||
562 | Morgan Stanley Institutional Liquidity Funds - Government Portfolio - Institutional Class (See Note 7) (Cost $562,161) | 562,161 | |||||||||||||||||
Total Short-Term Investments (Cost $8,459,087) | 8,452,872 | ||||||||||||||||||
Total Investments (Cost $68,681,355) (e) | 112.4 | % | 69,601,433 | ||||||||||||||||
Liabilities in Excess of Other Assets | (12.4 | ) | (7,683,024 | ) | |||||||||||||||
Net Assets | 100.0 | % | $ | 61,918,409 |
AID Agency for International Development.
FDIC Federal Deposit Insurance Corporation.
IO Interest Only.
NCUA National Credit Union Administration.
TBA To Be Announced.
(a) Security is subject to delayed delivery.
(b) Variable/Floating Rate Security — Interest rate changes on these instruments are based on changes in a designated base rate. The rates shown are those in effect on May 31, 2015.
(c) Rate shown is the yield to maturity at May 31, 2015.
(d) All or a portion of the security was pledged to cover margin requirements for futures contracts and swap agreements.
(e) Securities are available for collateral in connection with securities purchased on a forward commitment basis, open futures contracts and swap agreements.
See Notes to Financial Statements
14
Morgan Stanley Limited Duration U.S. Government Trust
Portfolio of Investments n May 31, 2015 continued
Futures Contracts Open at May 31, 2015:
NUMBER OF CONTRACTS | LONG/SHORT | DESCRIPTION, DELIVERY MONTH AND YEAR | UNDERLYING FACE AMOUNT AT VALUE | UNREALIZED APPRECIATION (DEPRECIATION) | |||||||||||||||
147 | Long | U.S. Treasury 2 yr. Note, Sep-15 | $ | 32,172,328 | $ | 36,750 | |||||||||||||
4 | Short | U.S. Treasury Long Bond, Sep-15 | (622,500 | ) | (3,719 | ) | |||||||||||||
28 | Short | U.S. Treasury 10 yr. Note, Sep-15 | (3,575,250 | ) | (11,375 | ) | |||||||||||||
46 | Short | U.S. Treasury 5 yr. Note, Sep-15 | (5,507,422 | ) | (14,170 | ) | |||||||||||||
Net Unrealized Appreciation | $ | 7,486 |
Interest Rate Swap Agreements Open at May 31, 2015:
SWAP COUNTERPARTY | NOTIONAL AMOUNT (000) | FLOATING RATE INDEX | PAY/RECEIVE FLOATING RATE | FIXED RATE | TERMINATION DATE | UNREALIZED DEPRECIATION | |||||||||||||||||||||
Morgan Stanley & Co., LLC* | $ | 7,000 | 3 Month LIBOR | Receive | 1.17 | % | 03/24/18 | $ | (24,021 | ) | |||||||||||||||||
Morgan Stanley & Co., LLC* | 5,000 | 3 Month LIBOR | Receive | 1.58 | 03/24/20 | (12,838 | ) | ||||||||||||||||||||
Total Unrealized Depreciation | $ | (36,859 | ) |
* Cleared swap agreement, the broker is Morgan Stanley & Co., LLC.
LIBOR London Interbank Offered Rate.
See Notes to Financial Statements
15
Morgan Stanley Limited Duration U.S. Government Trust
Financial Statements
Statement of Assets and Liabilities May 31, 2015
Assets: | |||||||
Investments in securities, at value (cost $68,119,194) | $ | 69,039,272 | |||||
Investment in affiliate, at value (cost $562,161) | 562,161 | ||||||
Total investments in securities, at value (cost $68,681,355) | 69,601,433 | ||||||
Receivable for: | |||||||
Interest and paydowns | 277,769 | ||||||
Dividends from affiliate | 16 | ||||||
Prepaid expenses and other assets | 31,724 | ||||||
Total Assets | 69,910,942 | ||||||
Liabilities: | |||||||
Payable for: | |||||||
Investments purchased | 7,717,252 | ||||||
Transfer and sub transfer agent fee | 51,134 | ||||||
Advisory fee | 14,470 | ||||||
Shareholder services fee | 13,272 | ||||||
Variation margin on open swap agreements | 11,217 | ||||||
Shares of beneficial interest redeemed | 7,087 | ||||||
Variation margin on open futures contracts | 6,766 | ||||||
Administration fee | 4,295 | ||||||
Dividends to shareholders | 3,729 | ||||||
Accrued expenses and other payables | 163,311 | ||||||
Total Liabilities | 7,992,533 | ||||||
Net Assets | $ | 61,918,409 | |||||
Composition of Net Assets: | |||||||
Paid-in-capital | $ | 72,703,320 | |||||
Net unrealized appreciation | 890,705 | ||||||
Accumulated undistributed net investment income | 85,620 | ||||||
Accumulated net realized loss | (11,761,236 | ) | |||||
Net Assets | $ | 61,918,409 | |||||
Advisor Class Shares: | |||||||
Net Assets | $ | 61,233,946 | |||||
Shares Outstanding (unlimited shares authorized, $0.01 par value) | 6,829,932 | ||||||
Net Asset Value Per Share | $ | 8.97 | |||||
Class I Shares: | |||||||
Net Assets | $ | 684,463 | |||||
Shares Outstanding (unlimited shares authorized, $0.01 par value) | 76,319 | ||||||
Net Asset Value Per Share | $ | 8.97 |
See Notes to Financial Statements
16
Morgan Stanley Limited Duration U.S. Government Trust
Financial Statements continued
Statement of Operations For the year ended May 31, 2015
Net Investment Income: Income | |||||||
Interest | $ | 1,264,221 | |||||
Dividends from affiliate (Note 7) | 876 | ||||||
Total Income | 1,265,097 | ||||||
Expenses | |||||||
Advisory fee (Note 4) | 216,989 | ||||||
Shareholder services fee (Advisor Class shares) (Note 5) | 198,505 | ||||||
Professional fees | 131,627 | ||||||
Administration fee (Note 4) | 64,293 | ||||||
Registration fees | 42,378 | ||||||
Sub transfer agent fees and expenses (Advisor Class shares) | 33,393 | ||||||
Sub transfer agent fees and expenses (Class I shares) | 225 | ||||||
Shareholder reports and notices | 27,424 | ||||||
Custodian fees | 20,064 | ||||||
Transfer agent fees and expenses (Advisor Class shares) (Note 6) | 9,694 | ||||||
Transfer agent fees and expenses (Class I shares) (Note 6) | 3,990 | ||||||
Trustees' fees and expenses | 8,803 | ||||||
Other | 21,131 | ||||||
Total Expenses | 778,516 | ||||||
Less: rebate from Morgan Stanley affiliated cash sweep (Note 7) | (1,245 | ) | |||||
Net Expenses | 777,271 | ||||||
Net Investment Income | 487,826 | ||||||
Realized and Unrealized Gain (Loss): Realized Gain (Loss) on: | |||||||
Investments | 65,121 | ||||||
Futures contracts | (535,388 | ) | |||||
Swap agreements | (63,495 | ) | |||||
Net Realized Loss | (533,762 | ) | |||||
Change in Unrealized Appreciation (Depreciation) on: | |||||||
Investments | 261,183 | ||||||
Futures contracts | (45,769 | ) | |||||
Swap agreements | (36,859 | ) | |||||
Net Change in Unrealized Appreciation (Depreciation) | 178,555 | ||||||
Net Loss | (355,207 | ) | |||||
Net Increase | $ | 132,619 |
See Notes to Financial Statements
17
Morgan Stanley Limited Duration U.S. Government Trust
Financial Statements continued
Statements of Changes in Net Assets
FOR THE YEAR ENDED MAY 31, 2015 | FOR THE YEAR ENDED MAY 31, 2014 | ||||||||||
Increase (Decrease) in Net Assets: Operations: | |||||||||||
Net investment income | $ | 487,826 | $ | 595,886 | |||||||
Net realized loss | (533,762 | ) | (1,190,086 | ) | |||||||
Net change in unrealized appreciation (depreciation) | 178,555 | 382,681 | |||||||||
Net Increase (Decrease) | 132,619 | (211,519 | ) | ||||||||
Dividends to Shareholders from Net Investment Income: | |||||||||||
Advisor Class shares | (1,025,905 | ) | (1,776,322 | ) | |||||||
Class I shares | (11,243 | ) | (8,908 | ) | |||||||
Total Dividends | (1,037,148 | ) | (1,785,230 | ) | |||||||
Net decrease from transactions in shares of beneficial interest | (37,518,706 | ) | (74,824,144 | ) | |||||||
Net Decrease | (38,423,235 | ) | (76,820,893 | ) | |||||||
Net Assets: | |||||||||||
Beginning of period | 100,341,644 | 177,162,537 | |||||||||
End of Period (Including accumulated undistributed net investment income of $85,620 and $82,235, respectively) | $ | 61,918,409 | $ | 100,341,644 |
See Notes to Financial Statements
18
Morgan Stanley Limited Duration U.S. Government Trust
Notes to Financial Statements n May 31, 2015
1. Organization and Accounting Policies
Morgan Stanley Limited Duration U.S. Government Trust (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 applies investment company accounting and reporting guidance. The Fund's investment objective is to seek current income, preservation of principal and liquidity. The Fund was organized as a Massachusetts business trust on June 4, 1991 and the Fund commenced operations on August 13, 1991.
The Fund offers two classes of shares, Advisor Class shares and Class I shares. Advisor Class shares are offered to the general public and Class I shares are offered only to a limited group of investors. Additionally, Advisor Class shares incur shareholder services fees.
The following is a summary of significant accounting policies:
A. Valuation of Investments — (1) Certain portfolio securities may be valued by an outside pricing service approved by the Fund's Board of Trustees (the "Trustees"). The pricing service may utilize a matrix system or other model incorporating attributes such as security quality, maturity and coupon as the evaluation model parameters, and/or research evaluations by its staff, including review of broker-dealer market price quotations in determining what it believes is the fair valuation of the portfolio securities valued by such pricing service; (2) when market quotations are not readily available, including circumstances under which Morgan Stanley Investment Management Inc. (the "Adviser"), a wholly owned subsidiary of Morgan Stanley, determines that the closing price, last sale price or the mean between the last reported bid and asked prices are not reflective of 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 Trustees; (3) futures are valued at the latest price published by the commodities exchange on which they trade; (4) swaps are marked-to-market daily based upon quotations from market makers; (5) investments in mutual funds, including the Morgan Stanley Institutional Liquidity Funds, are valued at the net asset value ("NAV") as of the close of each business day; and (6) short-term taxable debt securities with remaining maturities of 60 days or less at the time of purchase may be valued at amortized cost, unless the Adviser determines such price does not reflect the securities' market value, in which case these securities will be valued at their fair market value determined by the Adviser. Other taxable short-term debt securities with maturities of more than 60 days will be valued on a mark-to-market basis until such time as they reach a maturity of 60 days, whereupon they will be valued at amortized cost using their value on the 61st day unless the Adviser determines such price does not reflect the securities' fair value, in which case these securities will be valued at their fair market value as determined by the Adviser.
The Trustees have responsibility for determining in good faith the fair value of the investments, and the Trustees may appoint others, such as the Fund's Adviser or a valuation committee, to assist the Trustees in determining fair value and to make the actual calculations pursuant to the fair valuation methodologies previously approved by the Trustees. Under procedures approved by the Trustees, the
19
Morgan Stanley Limited Duration U.S. Government Trust
Notes to Financial Statements n May 31, 2015 continued
Fund's Adviser has formed a Valuation Committee whose members are approved by the Trustees. The Valuation Committee provides administration and oversight of the Fund's valuation policies and procedures, which are reviewed at least annually by the Trustees. These procedures allow the Fund to utilize independent pricing services, quotations from securities and financial instrument dealers, and other market sources to determine fair value.
The Fund has procedures to determine the fair value of securities and other financial instruments for which market prices are not readily available. Under these procedures, the Valuation Committee convenes on a regular and ad hoc basis to review such securities and considers a number of factors, including valuation methodologies and significant unobservable valuation inputs, when arriving at fair value. The Valuation Committee may employ a market-based approach which may use related or comparable assets or liabilities, recent transactions, market multiples, book values, and other relevant information for the investment to determine the fair value of the investment. An income-based valuation approach may also be used in which the anticipated future cash flows of the investment are discounted to calculate fair value. Discounts may also be applied due to the nature or duration of any restrictions on the disposition of the investments. Due to the inherent uncertainty of valuations of such investments, the fair values may differ significantly from the values that would have been used had an active market existed. The Valuation Committee employs various methods for calibrating these valuation approaches including a regular review of valuation methodologies, key inputs and assumptions, transactional back-testing or disposition analysis, and reviews of any related market activity.
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, realized and unrealized gain (loss), and non-class specific expenses are allocated daily based upon the proportion of net assets of each class. Class specific expenses are borne by the respective share classes and include Distribution, Transfer Agent and Sub Transfer Agent fees.
D. Dividends and Distributions to Shareholders — Dividends and distributions to shareholders are recorded on the ex-dividend date. Dividends from net investment income, if any, are declared daily and paid monthly. Net realized capital gains, if any, are distributed at least annually.
E. When-Issued/Delayed Delivery Securities — The Fund may purchase or sell when-issued and delayed delivery securities. Securities purchased on a when-issued or delayed delivery basis are purchased for delivery beyond the normal settlement date at a stated price, and no income accrues to the Fund on such securities prior to delivery date. Payment and delivery for when-issued and delayed
20
Morgan Stanley Limited Duration U.S. Government Trust
Notes to Financial Statements n May 31, 2015 continued
delivery securities can take place a month or more after the date of the transaction. When the Fund enters into a purchase transaction on a when-issued or delayed delivery basis, securities are available for collateral in an amount at least equal in value to the Fund's commitments to purchase such securities. Purchasing securities on a when-issued or delayed delivery basis may involve a risk that the market price at the time of delivery may be lower than the agreed upon purchase price, in which case there could be an unrealized loss at the time of delivery. Purchasing investments on a when-issued or delayed delivery basis may be considered a form of leverage which may increase the impact that gains (losses) may have on the Fund.
F. Use of Estimates — The preparation of financial statements in accordance with generally accepted accounting principles in the United States ("GAAP") requires management to make estimates and assumptions that affect the reported amounts and disclosures. Actual results could differ from those estimates.
G. Indemnifications — The Fund enters into contracts that contain a variety of indemnifications. The Fund's maximum exposure under these arrangements is unknown. However, the Fund has not had prior claims or losses pursuant to these contracts and expects the risk of loss to be remote.
2. Fair Valuation Measurements
Financial Accounting Standards Board ("FASB") Accounting Standards CodificationTM ("ASC") 820, "Fair Value Measurement" ("ASC 820"), defines fair value as the value 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. ASC 820 establishes a three-tier hierarchy to distinguish between (1) inputs that reflect the assumptions market participants would use in valuing 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 valuing 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. Factors considered in making this determination may include, but are not limited to, information obtained by contacting the issuer, analysts,
21
Morgan Stanley Limited Duration U.S. Government Trust
Notes to Financial Statements n May 31, 2015 continued
or the appropriate stock exchange (for exchange-traded securities), analysis of the issuer's financial statements or other available documents and, if necessary, available information concerning other securities in similar circumstances
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.
The following is a summary of the inputs used to value the Fund's investments as of May 31, 2015.
INVESTMENT TYPE | LEVEL 1 UNADJUSTED QUOTED PRICES | LEVEL 2 OTHER SIGNIFICANT OBSERVABLE INPUTS | LEVEL 3 SIGNIFICANT UNOBSERVABLE INPUTS | TOTAL | |||||||||||||||
Assets: | |||||||||||||||||||
Fixed Income Securities | |||||||||||||||||||
Agency Adjustable Rate Mortgages | $ | — | $ | 15,184,956 | $ | — | $ | 15,184,956 | |||||||||||
Agency Bond — Banking (FDIC Guaranteed) | — | 880,290 | — | 880,290 | |||||||||||||||
Agency Bond — Consumer Discretionary (U.S. Government Guaranteed) | — | 739,310 | — | 739,310 | |||||||||||||||
Agency Bonds — Sovereign (U.S. Government Guaranteed) | — | 2,672,559 | — | 2,672,559 | |||||||||||||||
Agency Fixed Rate Mortgages | — | 25,312,953 | — | 25,312,953 | |||||||||||||||
Asset-Backed Security | — | 659,798 | — | 659,798 | |||||||||||||||
Collateralized Mortgage Obligations — Agency Collateral Series | — | 13,415,345 | — | 13,415,345 | |||||||||||||||
U.S. Agency Security | — | 2,283,350 | — | 2,283,350 | |||||||||||||||
Total Fixed Income Securities | — | 61,148,561 | — | 61,148,561 | |||||||||||||||
Short-Term Investments | |||||||||||||||||||
U.S. Treasury Securities | — | 7,890,711 | — | 7,890,711 | |||||||||||||||
Investment Company | 562,161 | — | — | 562,161 | |||||||||||||||
Total Short-Term Investments | 562,161 | 7,890,711 | — | 8,452,872 | |||||||||||||||
Futures Contract | 36,750 | — | — | 36,750 | |||||||||||||||
Total Assets | 598,911 | 69,039,272 | — | 69,638,183 | |||||||||||||||
Liabilities: | |||||||||||||||||||
Futures Contracts | (29,264 | ) | — | — | (29,264 | ) | |||||||||||||
Interest Rate Swap Agreements | — | (36,859 | ) | — | (36,859 | ) | |||||||||||||
Total Liabilities | (29,264 | ) | (36,859 | ) | — | (66,123 | ) | ||||||||||||
Total | $ | 569,647 | $ | 69,002,413 | $ | — | $ | 69,572,060 |
22
Morgan Stanley Limited Duration U.S. Government Trust
Notes to Financial Statements n May 31, 2015 continued
Transfers between investment levels may occur as the markets fluctuate and/or the availability of data used in an investment's valuation changes. The Fund recognizes transfers between the levels as of the end of the period. As of May 31, 2015, the Fund did not have any investments transfer between investment levels.
3. Derivatives
The Fund may, but it is not required to, use derivative instruments for a variety of purposes, including hedging, risk management, portfolio management or to earn income. Derivatives are financial instruments whose value is based, in part, on the value of an underlying asset, interest rate, index or financial instrument. Prevailing interest rates and volatility levels, among other things, also affect the value of derivative instruments. A derivative instrument often has risks similar to its underlying asset and may have additional risks, including imperfect correlation between the value of the derivative and the underlying asset, risks of default by the counterparty to certain transactions, magnification of losses incurred due to changes in the market value of the securities, instruments, indices or interest rates to which the derivative instrument relates, risks that the transactions may not be liquid and risks arising from margin requirements. The use of derivatives involves risks that are different from, and possibly greater than, the risks associated with other portfolio investments. Derivatives may involve the use of highly specialized instruments that require investment techniques and risk analyses different from those associated with other portfolio investments. All of the Fund's holdings, including derivative instruments, are marked-to-market each day with the change in value reflected in unrealized appreciation (depreciation). Upon disposition, a realized gain or loss is recognized.
Certain derivative transactions may give rise to a form of leverage. Leverage magnifies the potential for gain and risk of loss. Leverage associated with derivative transactions may cause the Fund to liquidate portfolio positions when it may not be advantageous to do so to satisfy its obligations or to meet earmarking or segregation requirements, pursuant to applicable Securities and Exchange Commission rules and regulations, or may cause the Fund to be more volatile than if the Fund had not been leveraged. Although the Adviser seeks to use derivatives to further the Fund's investment objectives, there is no assurance that the use of derivatives will achieve this result.
Following is a description of the derivative instruments and techniques that the Fund used during the period and their associated risks:
Futures A futures contract is a standardized, exchange-traded agreement to buy or sell a specific quantity of an underlying asset, reference rate or index at a specific price at a specific future time. The value of a futures contract tends to increase and decrease in tandem with the value of the underlying instrument. Depending on the terms of the particular contract, futures contracts are settled through either physical delivery of the underlying instrument on the settlement date or by payment of a cash
23
Morgan Stanley Limited Duration U.S. Government Trust
Notes to Financial Statements n May 31, 2015 continued
settlement amount on the settlement date. During the period the futures contract is open, payments are received from or made to the broker based upon changes in the value of the contract (the variation margin). A decision as to whether, when and how to use futures contracts involves the exercise of skill and judgment and even a well-conceived futures transaction may be unsuccessful because of market behavior or unexpected events. In addition to the derivatives risks discussed above, the prices of futures contracts can be highly volatile, using futures contracts can lower total return, and the potential loss from futures contracts can exceed the Fund's initial investment in such contracts. No assurance can be given that a liquid market will exist for any particular futures contract at any particular time. There is also the risk of loss by the Fund of margin deposits in the event of bankruptcy of a broker with which the Fund has open positions in the futures contract.
Swaps The Fund may enter into over-the-counter ("OTC") swap contracts or cleared swap transactions. A swap contract is an agreement between two parties pursuant to which the parties exchange payments at specified dates on the basis of a specified notional amount, with the payments calculated by reference to specified securities, indices, reference rates, currencies or other instruments. Typically swap agreements provide that when the period payment dates for both parties are the same, the payments are made on a net basis (i.e., the two payment streams are netted out, with only the net amount paid by one party to the other). The Fund's obligations or rights under a swap contract entered into on a net basis will generally be equal only to the net amount to be paid or received under the agreement, based on the relative values of the positions held by each party. Cleared swap transactions may help reduce counterparty credit risk. In a cleared swap, the Fund's ultimate counterparty is a clearinghouse rather than a swap dealer, bank or other financial institution. OTC swap agreements are not entered into or traded on exchanges and often there is no central clearing or guaranty function for OTC swaps. These OTC swaps are often subject to credit risk or the risk of default or non-performance by the counterparty. Both OTC and cleared swaps could result in losses if interest rates, foreign currency exchange rates or other factors are not correctly anticipated by the Fund or if the reference index, security or investments do not perform as expected. During the period swap agreements are open, payments are received from or made to the clearinghouse or counterparty based upon changes in the value of the contract (variation margin). The Dodd-Frank Wall Street Reform and Consumer Protection Act and related regulatory developments require the clearing and exchange-trading of certain standardized swap transactions. Mandatory exchange-trading and clearing is occurring on a phased-in basis.
When the Fund has an unrealized loss on a swap agreement, the Fund has instructed the custodian to pledge cash or liquid securities as collateral with a value approximately equal to the amount of the unrealized loss. Collateral pledges are monitored and subsequently adjusted if and when the swap valuations fluctuate. If applicable, cash collateral is included with "Due from (to) broker" in the Statement of Assets and Liabilities.
24
Morgan Stanley Limited Duration U.S. Government Trust
Notes to Financial Statements n May 31, 2015 continued
FASB ASC 815, Derivatives and Hedging ("ASC 815"), is intended to improve financial reporting about derivative instruments by requiring enhanced disclosures to enable investors to better understand how and why the Fund uses derivative instruments, how these derivative instruments are accounted for and their effects on the Fund's financial position and results of operations.
The following table sets forth the fair value of the Fund's derivative contracts by primary risk exposure as of May 31, 2015.
PRIMARY RISK EXPOSURE | ASSET DERIVATIVES STATEMENT OF ASSETS AND LIABILITIES LOCATION | FAIR VALUE | LIABILITY DERIVATIVES STATEMENT OF ASSETS AND LIABILITIES LOCATION | FAIR VALUE | |||||||||||||||
Interest Rate Risk | Variation margin on open futures contracts | $ | 36,750 | (a) | Variation margin on open futures contracts | $ | (29,264 | ) (a) | |||||||||||
| Variation margin on open swap agreements | — | Variation margin on open swap agreements | (36,859 | ) (a) | ||||||||||||||
$ | 36,750 | $ | (66,123 | ) |
(a) Includes cumulative appreciation (depreciation) as reported in the Portfolio of Investments. Only current day's net variation margin is reported within the Statement of Assets and Liabilities.
The following tables set forth by primary risk exposure the Fund's realized gains (losses) and change in unrealized appreciation (depreciation) by type of derivative contract for the year ended May 31, 2015 in accordance with ASC 815.
AMOUNT OF REALIZED GAIN (LOSS) ON DERIVATIVE CONTRACTS | |||||||||||
PRIMARY RISK EXPOSURE | FUTURES | SWAP AGREEMENTS | |||||||||
Interest Rate Risk | $ | (535,388 | ) | $ | (63,495 | ) | |||||
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) ON DERIVATIVE CONTRACTS | |||||||||||
PRIMARY RISK EXPOSURE | FUTURES | SWAP AGREEMENTS | |||||||||
Interest Rate Risk | $ | (45,769 | ) | $ | (36,859 | ) |
For the year ended May 31, 2015, the average monthly amount outstanding for each derivative type is as follows:
Futures Contracts: | |||||||
Average monthly original value | $ | 49,611,927 | |||||
Swap Agreements: | |||||||
Average monthly notional amount | $ | 6,818,329 |
25
Morgan Stanley Limited Duration U.S. Government Trust
Notes to Financial Statements n May 31, 2015 continued
4. Advisory/Administration Agreements
Pursuant to an Investment Advisory Agreement with the Adviser, the Fund pays an advisory fee, accrued daily and paid monthly, by applying the following annual rates to the net assets of the Fund determined as of the close of each business day: 0.27% to the portion of the daily net assets not exceeding $1 billion and 0.25% to the portion of the daily net assets exceeding $1 billion. For the year ended May 31, 2015, the advisory fee rate (net of rebate) was equivalent to an annual effective rate of 0.27% of the Fund's average daily net assets.
The Adviser also serves as the Administrator to the Fund and provides administrative services pursuant to an Administration Agreement for an annual fee, accrued daily and paid monthly, of 0.08% of the Fund's average daily net assets.
Under a Sub-Administration 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.
5. Shareholder Services Plan
The Fund has adopted a Shareholder Services Plan (the "Plan"), pursuant to which the Advisor Class shares may pay Morgan Stanley Distribution, Inc. (the "Distributor"), an affiliate of the Adviser and Administrator, as compensation for the provision of services to shareholders a service fee up to the rate of 0.25% on an annualized basis of the average daily net assets of the Advisor Class. For the year ended May 31, 2015, the shareholder services fee was accrued at the annual rate of 0.25%.
6. Dividend Disbursing and Transfer Agent
The Fund's dividend disbursing and transfer agent is Boston Financial Data Services, Inc. ("BFDS"). Pursuant to a Transfer Agency Agreement, the Fund pays BFDS a fee based on the number of classes, accounts and transactions relating to the Fund.
7. Security Transactions and Transactions with Affiliates
The cost of purchases and proceeds from sales of investment securities, excluding short-term investments, for the year ended May 31, 2015, aggregated $182,595,289 and $222,972,170, respectively.
The Fund invests in the Institutional Class of the Morgan Stanley Institutional Liquidity Funds – Government Portfolio (the "Liquidity Funds"), an open-end management investment company managed by the Adviser. Advisory fees paid by the Fund are reduced by an amount equal to its pro-rata share of the
26
Morgan Stanley Limited Duration U.S. Government Trust
Notes to Financial Statements n May 31, 2015 continued
advisory and administration fees paid by the Fund due to its investment in the Liquidity Funds. For the year ended May 31, 2015, advisory fees paid were reduced by $1,245 relating to the Fund's investment in the Liquidity Funds.
A summary of the Fund's transactions in shares of the Liquidity Funds during the year ended May 31, 2015 is as follows:
VALUE MAY 31, 2014 | PURCHASES AT COST | SALES | DIVIDEND INCOME | VALUE MAY 31, 2015 | |||||||||||||||
$ | 527,369 | $ | 36,229,401 | $ | 36,194,609 | $ | 876 | $ | 562,161 |
The Fund has an unfunded noncontributory defined benefit pension plan covering certain independent Trustees of the Fund who will have served as independent Trustees for at least five years at the time of retirement. Benefits under this plan are based on factors which include years of service and compensation. The Trustees voted to close the plan to new participants and eliminate the future benefits growth due to increases to compensation after July 31, 2003. Aggregate pension costs for the year ended May 31, 2015, included in "Trustees' fees and expenses" in the Statement of Operations amounted to $6,020. At May 31, 2015, the Fund had an accrued pension liability of $58,283, which is included in "Accrued expenses and other payables" in the Statement of Assets and Liabilities.
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 NAV of the Fund.
8. Purposes of and Risks Relating to Certain Financial Instruments
The Fund may invest in mortgage securities, including securities issued by the Federal National Mortgage Association ("FNMA") and Federal Home Loan Mortgage Corporation ("FHLMC"). These are fixed income securities that derive their value from or represent interests in a pool of mortgages or mortgage securities. An unexpectedly high rate of defaults on the mortgages held by a mortgage pool may adversely affect the value of a mortgage-backed security and could result in losses to the Fund. The risk of such defaults is generally higher in the case of mortgage pools that include sub-prime mortgages. Sub-prime mortgages refer to loans made to borrowers with weakened credit histories or
27
Morgan Stanley Limited Duration U.S. Government Trust
Notes to Financial Statements n May 31, 2015 continued
with a lower capacity to make timely payments on their mortgages. The securities held by the Fund are not backed by sub-prime mortgages.
Additionally, securities issued by FNMA and FHLMC are not backed by or entitled to the full faith and credit of the United States; rather, they are supported by the right of the issuer to borrow from the U.S. Department of the Treasury.
The Federal Housing Finance Agency ("FHFA") serves as conservator of FNMA and FHLMC and the U.S. Department of the Treasury has agreed to provide capital as needed to ensure FNMA and FHLMC continue to provide liquidity to the housing and mortgage markets.
9. Shares of Beneficial Interest
Transactions in shares of beneficial interest were as follows:
FOR THE YEAR ENDED MAY 31, 2015 | FOR THE YEAR ENDED MAY 31, 2014 | ||||||||||||||||||
SHARES | AMOUNT | SHARES | AMOUNT | ||||||||||||||||
ADVISOR CLASS SHARES | |||||||||||||||||||
Sold | 1,471,952 | $ | 13,320,487 | 2,857,157 | $ | 26,065,716 | |||||||||||||
Reinvestment of dividends | 113,733 | 1,024,618 | 194,889 | 1,774,990 | |||||||||||||||
Redeemed | (5,733,926 | ) | (51,738,469 | ) | (11,346,023 | ) | (103,483,641 | ) | |||||||||||
Net decrease — Advisor Class | (4,148,241 | ) | (37,393,364 | ) | (8,293,977 | ) | (75,642,935 | ) | |||||||||||
CLASS I SHARES | |||||||||||||||||||
Sold | 68,306 | 618,433 | 187,755 | 1,716,355 | |||||||||||||||
Reinvestment of dividends | 1,236 | 11,139 | 956 | 8,701 | |||||||||||||||
Redeemed | (83,706 | ) | (754,914 | ) | (99,315 | ) | (906,265 | ) | |||||||||||
Net increase (decrease) — Class I | (14,164 | ) | (125,342 | ) | 89,396 | 818,791 | |||||||||||||
Net decrease in Fund | (4,162,405 | ) | $ | (37,518,706 | ) | (8,204,581 | ) | $ | (74,824,144 | ) |
10. Federal Income Tax Status
It is the Fund's intention to continue to qualify as a regulated investment company and distribute all of its taxable and tax-exempt income. Accordingly, no provision for Federal income taxes is required in the financial statements.
The Fund may be subject to taxes imposed by countries in which it invests. Such taxes are generally based on income and/or capital gains earned or repatriated. Taxes are accrued based on net investment income, net realized gains and net unrealized appreciation as such income and/or gains are earned. Taxes may also be based on transactions in foreign currency and are accrued based on the value of investments denominated in such currency.
28
Morgan Stanley Limited Duration U.S. Government Trust
Notes to Financial Statements n May 31, 2015 continued
FASB ASC 740-10, Income Taxes — Overall, 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. Management has concluded there are no significant uncertain tax positions that would require recognition in the 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. The Fund files tax returns with the U.S. Internal Revenue Service, New York and various states. Each of the tax years in the four-year period ended May 31, 2015, remains subject to examination by taxing authorities.
The tax character of distributions paid may differ from the character of distributions shown in the Statements of Changes in Net Assets due to short-term capital gains being treated as ordinary income for tax purposes. The tax character of distributions paid during fiscal years 2015 and 2014 was as follows:
2015 DISTRIBUTIONS PAID FROM: ORDINARY INCOME | 2014 DISTRIBUTIONS PAID FROM: ORDINARY INCOME | ||||||
$ | 1,037,148 | $ | 1,785,230 |
The amount and character of income and gains to be distributed are determined in accordance with income tax regulations which may differ from GAAP. These book/tax differences are either considered temporary or permanent in nature.
Temporary differences are attributable to differing book and tax treatments for the timing of the recognition of gains (losses) on certain investment transactions and the timing of the deductibility of certain expenses.
Permanent differences, primarily due to losses on paydowns, tax adjustments on swaps and debt securities sold by the Fund and an expired capital loss carryforward, resulted in the following reclassifications among the Fund's components of net assets at May 31, 2015:
ACCUMULATED UNDISTRIBUTED NET INVESTMENT INCOME | ACCUMULATED NET REALIZED LOSS | PAID-IN-CAPITAL | |||||||||
$ | 552,707 | $ | 10,663,659 | $ | (11,216,366 | ) |
29
Morgan Stanley Limited Duration U.S. Government Trust
Notes to Financial Statements n May 31, 2015 continued
At May 31, 2015, the components of distributable earnings for the Fund on a tax basis were as follows:
UNDISTRIBUTED ORDINARY INCOME | UNDISTRIBUTED LONG-TERM CAPITAL GAIN | ||||||
$ | 153,868 | $ | — |
At May 31, 2015, the aggregate cost for Federal income tax purposes is $68,688,591. The aggregate gross unrealized appreciation is $1,067,797 and the aggregate gross unrealized depreciation is $154,955 resulting in net unrealized appreciation of $912,842.
At May 31, 2015, the Fund had available for Federal income tax purposes unused short term and long term capital losses of $1,422,872 and $4,748,842, respectively, that do not have an expiration date.
In addition, at May 31, 2015, the Fund had available for Federal income tax purposes capital loss carryforwards which will expire on the indicated dates:
AMOUNT | EXPIRATION | ||||||
$ | 5,062,831 | May 31, 2018 | |||||
535,938 | May 31, 2019 |
Capital loss carryforwards of $11,216,366 expired during the year ended May 31, 2015.
To the extent that capital loss carryforwards are used to offset any future capital gains realized during the carryover period as provided by U.S. Federal income tax regulations, no capital gains tax liability will be incurred by the Fund for gains realized and not distributed. To the extent that capital gains are offset, such gains will not be distributed to the shareholders.
11. Subsequent Event
The Board of Trustees of the Fund approved an Agreement and Plan of Reorganization by and between the Fund and Morgan Stanley Institutional Fund Trust on behalf of its series Limited Duration Portfolio ("MSIFT Limited Duration Portfolio"), pursuant to which substantially all of the assets and liabilities of the Fund would be transferred to MSIFT Limited Duration Portfolio and shareholders of the Fund would become shareholders of MSIFT Limited Duration Portfolio, receiving shares of MSIFT Limited Duration Portfolio equal to the value of their holdings in the Fund (the "Reorganization"). Advisor Class and Class I shareholders of the Fund would receive Class A and Class I shares, respectively, of MSIFT Limited Duration Portfolio. The Reorganization is subject to the approval of shareholders of the Fund at a special meeting of shareholders scheduled to be held during the fourth quarter of 2015.
30
Morgan Stanley Limited Duration U.S. Government Trust
Financial Highlights
Selected ratios and per share data for a share of beneficial interest outstanding throughout each period:
FOR THE YEAR ENDED MAY 31, | |||||||||||||||||||||||
2015 | 2014 | 2013 | 2012 | 2011 | |||||||||||||||||||
Advisor Class Shares | |||||||||||||||||||||||
Selected Per Share Data: | |||||||||||||||||||||||
Net asset value, beginning of period | $ | 9.07 | $ | 9.19 | $ | 9.33 | $ | 9.36 | $ | 9.36 | |||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||
Net investment income | 0.05 | 0.01 | 0.03 | 0.09 | 0.09 | ||||||||||||||||||
Net realized and unrealized gain (loss) | (0.03 | ) | (0.01 | ) | (0.04 | ) | 0.04 | 0.07 | |||||||||||||||
Total income (loss) from investment operations | 0.02 | 0.00 | (1) | (0.01 | ) | 0.13 | 0.16 | ||||||||||||||||
Less dividends from net investment income | (0.12 | ) | (0.12 | ) | (0.13 | ) | (0.16 | ) | (0.16 | ) | |||||||||||||
Net asset value, end of period | $ | 8.97 | $ | 9.07 | $ | 9.19 | $ | 9.33 | $ | 9.36 | |||||||||||||
Total Return(2) | 0.09 | % | 0.01 | % | (0.07 | )% | 1.44 | % | 1.75 | % | |||||||||||||
Ratios to Average Net Assets: | |||||||||||||||||||||||
Net expenses | 0.97 | %(3) | 0.90 | %(3) | 0.72 | %(3) | 0.74 | %(3) | 0.71 | %(3) | |||||||||||||
Net investment income | 0.61 | %(3) | 0.44 | %(3) | 0.49 | %(3) | 0.97 | %(3) | 1.15 | %(3) | |||||||||||||
Rebate from Morgan Stanley affiliate | 0.00 | %(4) | 0.00 | %(4) | 0.01 | % | 0.01 | % | 0.00 | %(4) | |||||||||||||
Supplemental Data: | |||||||||||||||||||||||
Net assets, end of period, in thousands | $ | 61,234 | $ | 99,521 | $ | 177,153 | $ | 205,096 | $ | 217,528 | |||||||||||||
Portfolio turnover rate | 229 | % | 120 | % | 171 | % | 182 | % | 99 | % |
(1) Amount is less than $0.005.
(2) Calculated based on the net asset value as of the last business day of the period.
(3) 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."
(4) Amount is less than 0.005%.
See Notes to Financial Statements
31
Morgan Stanley Limited Duration U.S. Government Trust
Financial Highlights continued
FOR THE YEAR ENDED MAY 31, | FOR THE PERIOD MAY 29, 2013** | ||||||||||||||
THROUGH | |||||||||||||||
2015 | 2014 | MAY 31, 2013 | |||||||||||||
Class I Shares | |||||||||||||||
Selected Per Share Data: | |||||||||||||||
Net asset value, beginning of period | $ | 9.07 | $ | 9.19 | $ | 9.20 | |||||||||
Income (loss) from investment operations: | |||||||||||||||
Net investment income | 0.04 | 0.02 | 0.00 | (1) | |||||||||||
Net realized and unrealized loss | (0.04 | ) | (0.01 | ) | (0.01 | ) | |||||||||
Total income (loss) from investment operations | 0.00 | (1) | 0.01 | (0.01 | ) | ||||||||||
Less dividends from net investment income | (0.10 | ) | (0.13 | ) | (0.00 | )(1) | |||||||||
Net asset value, end of period | $ | 8.97 | $ | 9.07 | $ | 9.19 | |||||||||
Total Return(2) | 0.05 | % | 0.12 | % | (0.10 | )%(6) | |||||||||
Ratios to Average Net Assets: | |||||||||||||||
Net expenses | 1.10 | %(3) | 0.80 | %(3) | 0.44 | %(3)(7) | |||||||||
Net investment income | 0.49 | %(3) | 0.54 | %(3) | 1.00 | %(3)(7) | |||||||||
Rebate from Morgan Stanley affiliate | 0.00 | %(4) | 0.00 | %(4) | 0.01 | %(7) | |||||||||
Supplemental Data: | |||||||||||||||
Net assets, end of period, in thousands | $ | 684 | $ | 821 | $ | 10 | |||||||||
Portfolio turnover rate | 229 | % | 120 | % | 171 | %(7) |
** Commencement of Operations.
(1) Amount is less than $0.005.
(2) Calculated based on the net asset value as of the last business day of the period.
(3) 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."
(4) Amount is less than 0.005%.
(6) Not annualized.
(7) Annualized.
See Notes to Financial Statements
32
Morgan Stanley Limited Duration U.S. Government Trust
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Trustees of
Morgan Stanley Limited Duration U.S. Government Trust:
We have audited the accompanying statement of assets and liabilities of Morgan Stanley Limited Duration U.S. Government Trust (the "Fund"), including the portfolio of investments, as of May 31, 2015, 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 years or periods indicated therein. 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 was 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 May 31, 2015, by correspondence with the custodian and others or by other appropriate auditing procedures where replies from others were not received. 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 Limited Duration U.S. Government Trust at May 31, 2015, 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 years or periods indicated therein in conformity with U.S. generally accepted accounting principles.
Boston, Massachusetts
July 22, 2015
33
Morgan Stanley Limited Duration U.S. Government Trust
U.S. Privacy Policy (unaudited)
An Important Notice Concerning Our U.S. Privacy Policy
This privacy notice describes the U.S. privacy policy of Morgan Stanley Distribution, Inc., and the Morgan Stanley family of mutual funds ("us", "our", "we").
We are required by federal law to provide you with notice of our U.S. privacy policy ("Policy"). This Policy applies to both our current and former clients unless we state otherwise and is intended for individual clients who purchase products or receive services from us for personal, family or household purposes. This 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.
This notice sets out our business practices to protect your privacy; how we collect and share personal information about you; and how you can limit our sharing or certain uses by others of this information. We may amend this Policy at any time, and will inform you of any changes to our 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 your information. We strive to safeguard the information our clients entrust to us. Protecting the confidentiality and security of client information is an important part of how we conduct our business.
This notice describes what personal information we collect about you, how we collect it, when we may share it with others, and how certain others may use it. It discusses the steps you may take to limit our sharing of certain information about you with our affiliated companies, including, but not limited to our affiliated banking businesses, brokerage firms and credit service affiliates. It also discloses how you may limit our affiliates' use of shared information for marketing purposes.
Throughout this Policy, we refer to the nonpublic information that personally identifies you as "personal information." We also use the term "affiliated company" in this notice. An affiliated company is a company in our family of companies and includes companies with the Morgan Stanley name. These affiliated companies are financial institutions such as broker-dealers, banks, investment advisers and credit card issuers. We refer to any company that is not an affiliated company as a nonaffiliated third party. For purposes of Section 5 of this notice, and your ability to limit certain uses of personal information by our affiliates, this notice applies to the use of personal information by our affiliated companies.
34
Morgan Stanley Limited Duration U.S. Government Trust
U.S. Privacy Policy (unaudited) continued
1. What Personal Information Do We Collect From You?
We may collect the following types of information about you: (i) information provided by you, including information from applications and other forms we receive from you, (ii) information about your transactions with us or our affiliates, (iii) information about your transactions with nonaffiliated third parties, (iv) information from consumer reporting agencies, (v) information obtained from our websites, and (vi) information obtained from other sources. For example:
• We collect information such as your name, address, e-mail address, telephone/fax numbers, assets, income and investment objectives through applications and other forms you submit to us.
• 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?
We may disclose personal information we collect about you in each of the categories listed above to affiliated and nonaffiliated third parties.
a. Information We Disclose to Affiliated Companies. We may disclose personal information that we collect about you to our affiliated companies to manage your account(s) effectively, to service and process your transactions, and to let you know about products and services offered by us and affiliated companies, to manage our business, and as otherwise required or permitted by law. Offers for products and services from affiliated companies are developed under conditions designed to safeguard your personal information.
b. Information We Disclose to Third Parties. We may disclose personal information that we collect about you to nonaffiliated third parties to provide marketing services on our behalf or to other financial institutions with whom we have joint marketing agreements. We may also disclose all of the information we collect to other nonaffiliated third parties for our everyday business purposes, such as to process transactions, maintain account(s), respond to court orders and legal investigations, report to credit bureaus, offer our own products and services, protect against fraud, for institutional risk control, to perform services on our behalf, and as otherwise required or permitted by law.
35
Morgan Stanley Limited Duration U.S. Government Trust
U.S. Privacy Policy (unaudited) continued
When we share personal information about you with a nonaffiliated third party, they are required to limit their use of personal information about you to the particular purpose for which it was shared and they are not allowed to share personal information about you with others except to fulfill that limited purpose or as may be permitted or required by law.
3. How Do We Protect The Security and Confidentiality Of Personal Information We Collect About You?
We maintain physical, electronic and procedural security measures that comply with applicable law and regulations to help safeguard the personal information we collect about you. We have internal policies governing the proper handling of client information by employees. Third parties that provide support or marketing services on our behalf may also receive personal information about you, and we require them to adhere to appropriate security standards with respect to such information.
4. How Can You Limit Our Sharing Certain Personal Information About You With Our Affiliated Companies For Eligibility Determination?
By following the opt-out procedures in Section 6 below, you may limit the extent to which we share with our affiliated companies, personal information that was collected to determine your eligibility for products and services such as your credit reports and other information that you have provided to us or that we may obtain from third parties ("eligibility information"). Eligibility information does not include your identification information or personal information pertaining to our transactions or experiences with you. Please note that, even if you direct us not to share eligibility information with our affiliated companies, we may still share your personal information, including eligibility information, with our affiliated companies under circumstances that are permitted under applicable law, such as to process transactions or to service your account.
5. How Can You Limit the Use of Certain Personal Information About You by Our Affiliated Companies for Marketing?
By following the opt-out instructions in Section 6 below, you may limit our affiliated companies from marketing their products or services to you based on personal information we disclose to them. This information may include, for example, your income and account history with us. Please note that, even if you choose to limit our affiliated companies from using personal information about you that we may share with them for marketing their products and services to you, our affiliated companies may use your personal information that they obtain from us to market to you in circumstances permitted by law, such as if the affiliated party has its own relationship with you.
36
Morgan Stanley Limited Duration U.S. Government Trust
U.S. Privacy Policy (unaudited) continued
6. How Can You Send Us an Opt-Out Instruction?
If you wish to limit our sharing of eligibility information about you with our affiliated companies, or our affiliated companies' use of personal information for marketing purposes, as described in this notice, you may do so by:
• Calling us at (800) 548-7786
Monday–Friday between 8a.m. and 6p.m. (EST)
• Writing to us at the following address:
Boston Financial Data Services, Inc.
c/o Privacy Coordinator
P.O. Box 219804
Kansas City, Missouri 64121
If you choose to write to us, your request should include: your name, address, telephone number and account number(s) to which the opt-out applies and whether you are opting out with respect to sharing of eligibility information (Section 4 above), or information used for marketing (Section 5 above), or both. Written opt-out requests 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. Once you have informed us about your privacy preferences, your opt-out preference will remain in effect with respect to this Policy (as it may be amended) until you notify us otherwise. If you are a joint account owner, we will accept instructions from any one of you and apply those instructions to the entire account.
Please understand that if you limit our sharing or our affiliated companies' use of personal information, you and any joint account holder(s) may not receive information about our affiliated companies' products and services, including products or services that could help you manage your financial resources and achieve your investment objectives.
If you have more than one account or relationship with us, please specify the accounts to which you would like us to apply your privacy choices. If you have accounts or relationships with our affiliates, you may receive multiple privacy policies from them, and will need to separately notify those companies of your privacy choices for those accounts or relationships.
7. What if an affiliated company becomes a nonaffiliated third party?
If, at any time in the future, an affiliated company becomes a nonaffiliated third party, further disclosures of personal information made to the former affiliated company will be limited to those described in Section 2(b) above relating to nonaffiliated third parties. If you elected under Section 6 to limit disclosures we make to affiliated companies, or use of personal information by affiliated companies,
37
Morgan Stanley Limited Duration U.S. Government Trust
U.S. Privacy Policy (unaudited) continued
your election will not apply to use by any former affiliated company of your personal information in their possession once it becomes a nonaffiliated third party.
Special Notice to Residents of Vermont
The following section supplements our Policy with respect to our individual clients who have a Vermont address and supersedes anything to the contrary in the above 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 nonaffiliated third parties, or eligibility information with affiliated companies, other than in certain limited circumstances. Except as permitted by law, we will not share personal information we collect about you with nonaffiliated third parties or eligibility information with affiliated companies, unless you provide us with your written consent to share such information.
Special Notice to Residents of California
The following section supplements our Policy with respect to our individual clients who have a California address and supersedes anything to the contrary in the above Policy with respect to those clients only.
In response to a California law, if your account has a California home address, your personal information will not be disclosed to nonaffiliated third parties except as permitted by applicable California law, and we will limit sharing such personal information with our affiliates to comply with California privacy laws that apply to us.
38
Morgan Stanley Limited Duration U.S. Government Trust
Trustee and Officer Information (unaudited)
Independent Trustees:
Name, Age and Address of Independent Trustee | Position(s) Held with Registrant | Length of Time Served* | Principal Occupation(s) During Past 5 Years and Other Relevant Professional Experience | Number of Portfolios in Fund Complex Overseen by Trustee** | Other Directorships Held by Independent Trustee*** | ||||||||||||||||||
Frank L. Bowman (70) 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 Morgan Stanley 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) (February 2005- November 2008); retired as Admiral, U.S. Navy after serving over 38 years on active duty including 8 years as Director of the Naval Nuclear Propulsion Program in the Department of the Navy and the U.S. Department of Energy (1996-2004); served as Chief of Naval Personnel (July 1994-September 1996); and on the Joint Staff as Director of Political Military Affairs (June 1992-July1994); knighted as Honorary Knight Commander of the Most Excellent Order of the British Empire; awarded the Officier de l'Orde National du Mérite by the French Government; elected to the National Academy of Engineering (2009). | 96 | Director of BP p.l.c.; Director of Naval and Nuclear Technologies LLP; Director Emeritus of the Armed Services YMCA of the USA; Director of the U.S. Naval Submarine League; Member of the National Security Advisory Council of the Center for U.S. Global Engagement and a member of the CNA Military Advisory Board; Chairman of the charity, J Street Cup Golf; Trustee of Fairhaven United Methodist Church. |
39
Morgan Stanley Limited Duration U.S. Government Trust
Trustee and Officer Information (unaudited) continued
Name, Age and Address of Independent Trustee | Position(s) Held with Registrant | Length of Time Served* | Principal Occupation(s) During Past 5 Years and Other Relevant Professional Experience | Number of Portfolios in Fund Complex Overseen by Trustee** | Other Directorships Held by Independent Trustee*** | ||||||||||||||||||
Michael Bozic (74) 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 and a member of the advisory board of American Road Group LLC (retail) (since June 2000); Chairperson of the Compliance and Insurance Committee (since October 2006); Director or Trustee of various Morgan Stanley Funds (since April 1994); 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. | 98 | Trustee and member of the Hillsdale College Board of Trustees. | ||||||||||||||||||
Kathleen A. Dennis (61) 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 Morgan Stanley Funds (since August 2006); formerly, Senior Managing Director of Victory Capital Management (1993-2006). | 96 | Director of various nonprofit organizations. |
40
Morgan Stanley Limited Duration U.S. Government Trust
Trustee and Officer Information (unaudited) continued
Name, Age and Address of Independent Trustee | Position(s) Held with Registrant | Length of Time Served* | Principal Occupation(s) During Past 5 Years and Other Relevant Professional Experience | Number of Portfolios in Fund Complex Overseen by Trustee** | Other Directorships Held by Independent Trustee*** | ||||||||||||||||||
Nancy C. Everett (60) c/o Kramer Levin Naftalis & Frankel LLP Counsel to the Independent Trustees 1177 Avenue of the Americas New York, NY 10036 | Trustee | Since January 2015 | Owner, OBIR, LLC (institutional investment management consulting) (since June 2014); formerly, Managing Director, BlackRock, Inc. (February 2011-December 2013); and Chief Executive Officer, General Motors Asset Management (a/k/a Promark Global Advisors, Inc.) (June 2005-May 2010). | 96 | Member of Virginia Commonwealth University Board of Visitors; Member of Virginia Commonwealth University School of Business Foundation; formerly, Member of Committee on Directors for Emerging Markets Growth Fund, Inc. (2007-2010); Chairperson of Performance Equity Management, LLC (2006-2010); and Chairperson, GMAM Absolute Return Strategies Fund, LLC (2006-2010). | ||||||||||||||||||
Jakki L. Haussler (58) c/o Kramer Levin Naftalis & Frankel LLP Counsel to the Independent Trustees 1177 Avenue of the Americas New York, NY 10036 | Trustee | Since January 2015 | Chairman and Chief Executive Officer, Opus Capital Group (since January 1996); and formerly, Director, Capvest Venture Fund, LP (May 2000-December 2011); Partner, Adena Ventures, LP (July 1999-December 2010); Director, The Victory Funds (February 2005-July 2008). | 96 | Director of Cincinnati Bell Inc. and Member, Audit Committee and Compensation Committee; Director of Northern Kentucky University Foundation and Member, Investment Committee; Member of Chase College of Law Transactional Law Practice Center Board of Advisors; Director of Best Transport; Member, University of Cincinnati Foundation Investment Committee; formerly, Member, Miami University Board of Visitors (2008- 2011); Trustee of Victory Funds (2005-2008) and Chairman, Investment Committee (2007-2008) and Member, Service Provider Committee (2005-2008). | ||||||||||||||||||
Dr. Manuel H. Johnson (66) c/o Johnson Smick International, Inc. 220 I Street, N.E. — Suite 200 Washington, D.C. 20002 | 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 various Morgan Stanley Funds (since July 1991); 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. | 98 | Director of NVR, Inc. (home construction). |
41
Morgan Stanley Limited Duration U.S. Government Trust
Trustee and Officer Information (unaudited) continued
Name, Age and Address of Independent Trustee | Position(s) Held with Registrant | Length of Time Served* | Principal Occupation(s) During Past 5 Years and Other Relevant Professional Experience | Number of Portfolios in Fund Complex Overseen by Trustee** | Other Directorships Held by Independent Trustee*** | ||||||||||||||||||
Joseph J. Kearns (72) c/o Kearns & Associates LLC 23823 Malibu Road S-50-440 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 various Morgan Stanley Funds (since August 1994); formerly, Deputy Chairperson of the Audit Committee (July 2003-September 2006) and Chairperson of the Audit Committee of various Morgan Stanley Funds (since August 1994); CFO of the J. Paul Getty Trust. | 99 | Director of Electro Rent Corporation (equipment leasing). Prior to December 31, 2013, Director of The Ford Family Foundation. | ||||||||||||||||||
Michael F. Klein (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 | Managing Director, Aetos Capital, LLC (since March 2000); Co-President, Aetos Alternatives Management, LLC (since January 2004); and Co-Chief Executive Officer of Aetos Capital LLC (since August 2013); Chairperson of the Fixed Income Sub- Committee of the Investment Committee (since October 2006) and Director or Trustee of various Morgan Stanley Funds (since August 2006); formerly, Managing Director, Morgan Stanley & Co. Inc. and Morgan Stanley Dean Witter Investment Management, President, various Morgan Stanley Funds (June 1998-March 2000) and Principal, Morgan Stanley & Co. Inc. and Morgan Stanley Dean Witter Investment Management (August 1997- December 1999). | 96 | 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 (79) 522 Fifth Avenue New York, NY 10036 | Chairpersonof the Board and Trustee | Chairperson of the Boards since July 2006 and Trustee since July 1991 | Chairperson of the Boards of various Morgan Stanley Funds (since July 2006); Chairperson of the Closed-End Fund Committee (since June 2012) and Director or Trustee of various Morgan Stanley Funds (since July 1991); formerly, Chairperson of the Insurance Committee (until July 2006), General Partner, Triumph Capital, L.P. (private investment partnership) (1988-2013). | 98 | None. |
42
Morgan Stanley Limited Duration U.S. Government Trust
Trustee and Officer Information (unaudited) continued
Name, Age and Address of Independent Trustee | Position(s) Held with Registrant | Length of Time Served* | Principal Occupation(s) During Past 5 Years and Other Relevant Professional Experience | Number of Portfolios in Fund Complex Overseen by Trustee** | Other Directorships Held by Independent Trustee*** | ||||||||||||||||||
W. Allen Reed (68) 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 Morgan Stanley 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). | 96 | Director of Temple- Inland Industries (packaging and forest products); Director of Legg Mason, Inc. and Director of the Auburn University Foundation. | ||||||||||||||||||
Fergus Reid (82) c/o Joe Pietryka, Inc. 85 Charles Colman Blvd. Pawling, NY 12564 | Trustee | Since June 1992 | Chairman, Joe Pietryka, Inc.; Chairperson of the Governance Committee and Director or Trustee of various Morgan Stanley Funds (since June 1992). | 99 | Formerly, Trustee and Director of certain investment companies in the JP Morgan Fund Complex managed by JP Morgan Investment Management Inc. (1987-December 2012). |
43
Morgan Stanley Limited Duration U.S. Government Trust
Trustee and Officer Information (unaudited) continued
Interested Trustee:
Name, Age and Address of Interested Trustee | Position(s) Held with Registrant | Length of Time Served* | Principal Occupation(s) During Past 5 Years | Number of Portfolios in Fund Complex Overseen by Interested Trustee** | Other Directorships Held by Interested Trustee*** | ||||||||||||||||||
James F. Higgins (67) One New York Plaza, New York, NY 10004 | Trustee | Since June 2000 | Director or Trustee of various Morgan Stanley Funds (since June 2000); Senior Advisor of Morgan Stanley (since August 2000). | 97 | Formerly, Director of AXA Financial, Inc. and AXA Equitable Life Insurance Company (2002-2011) and Director of AXA MONY Life Insurance Company and AXA MONY Life Insurance Company of America (2004-2011). |
* This is the earliest date the Trustee began serving the Morgan Stanley Funds. Each Trustee serves an indefinite term, until his or her successor is elected.
** The Fund Complex includes (as of December 31, 2014) all open-end and closed-end funds (including all of their portfolios) advised by Morgan Stanley Investment Management Inc. (the "Adviser") and any funds that have an adviser that is an affiliated person of the Adviser (including, but not limited to, Morgan Stanley AIP GP LP).
*** This includes any directorships at public companies and registered investment companies held by the Trustee at any time during the past five years.
44
Morgan Stanley Limited Duration U.S. Government Trust
Trustee and Officer Information (unaudited) continued
Executive Officers:
Name, Age and Address of Executive Officer | Position(s) Held with Registrant | Length of Time Served* | Principal Occupation(s) During Past 5 Years | ||||||||||||
John H. Gernon (51) 522 Fifth Avenue New York, NY 10036 | President and Principal Executive Officer | Since September 2013 | President and Principal Executive Officer of the Equity and Fixed Income Funds and the Morgan Stanley AIP Funds (since September 2013) and the Liquidity Funds and various money market funds (since May 2014) in the Fund Complex, Managing Director of the Adviser; Head of Product (since 2006) and Global Portfolio Analysis and Reporting (since 2012); for MSIM's Long Only business. | ||||||||||||
Stefanie V. Chang Yu (48) 522 Fifth Avenue New York, NY 10036 | Chief Compliance Officer | Since December 1997 | Managing Director of the Adviser and various entities affiliated with the Adviser; Chief Compliance Officer of various Morgan Stanley Funds and the Adviser (since January 2014); formerly, Vice President of various Morgan Stanley Funds (December 1997-January 2014). | ||||||||||||
Joseph C. Benedetti (49) 522 Fifth Avenue New York, NY 10036 | Vice President | Since January 2014 | Managing Director of the Adviser and various entities affiliated with the Adviser; Vice President of various Morgan Stanley Funds (since January 2014); formerly, Assistant Secretary of various Morgan Stanley Funds (October 2004-January 2014). | ||||||||||||
Francis J. Smith (49) 522 Fifth Avenue New York, NY 10036 | Treasurer and Principal Financial Officer | Treasurer since July 2003 and Principal Financial Officer since September 2002 | Executive Director of the Adviser and various entities affiliated with the Adviser; Treasurer (since July 2003) and Principal Financial Officer of various Morgan Stanley Funds (since September 2002). | ||||||||||||
Mary E. Mullin (48) 522 Fifth Avenue New York, NY 10036 | Secretary | Since June 1999 | Executive Director of the Adviser and various entities affiliated with the Adviser; Secretary of various Morgan Stanley Funds (since June 1999). |
* This is the earliest date the officer began serving the Morgan Stanley Funds. Each officer serves a one-year term, until his or her successor is elected and has qualified.
45
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MORGAN STANLEY INSTITUTIONAL FUND TRUST
LIMITED DURATION PORTFOLIO
PART B
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information (the “SAI”) relates to the shares (“shares”) of the Limited Duration Portfolio (the “Acquiring Fund”), a series of Morgan Stanley Institutional Fund Trust (the “Trust”), to be issued pursuant to an Agreement and Plan of Reorganization, dated June 10, 2015, between the Trust, on behalf of the Acquiring Fund, and Morgan Stanley Limited Duration U.S. Government Trust (the “Acquired Fund”), in connection with the acquisition by the Acquiring Fund of substantially all of the assets and the liabilities of the Acquired Fund (the “Reorganization”).
This SAI does not constitute a prospectus. This SAI does not include all information that a shareholder should consider before voting on the proposals contained in the Proxy Statement and Prospectus, and, therefore, should be read in conjunction with the related Proxy Statement and Prospectus, dated [ ], 2015. A copy of the Proxy Statement and Prospectus may be obtained upon request and without charge by calling (800) 548-7786 (toll-free). Please retain this document for future reference.
The date of this SAI is [ ], 2015.
Table of Contents
| Page |
Introduction | B-2 |
Additional Information About the Acquiring Fund | B-2 |
Financial Statements | B-3 |
INTRODUCTION
This SAI is intended to supplement the information provided in the Proxy Statement and Prospectus dated [ ], 2015 (the “Proxy Statement and Prospectus”). The Proxy Statement and Prospectus has been sent to the Acquired Fund’s Shareholders in connection with the solicitation of proxies by the Board of Trustees of the Acquired Fund, to be voted at the Special Meeting of Shareholders of the Acquired Fund to be held on November 10, 2015. The Trust’s statement of additional information, dated January 30, 2015, as may be amended and supplemented from time to time (the “Trust’s Statement of Additional Information”) accompanies and is incorporated by reference in this SAI.
ADDITIONAL INFORMATION ABOUT THE ACQUIRING FUND
Fund History
For additional information about the Acquiring Fund’s history, see “General Information—Fund History” in the Trust’s Statement of Additional Information relating to the Acquiring Fund.
Investment Objectives and Policies
For additional information about the Acquiring Fund’s investment objectives and policies, see “The Portfolios’ Investments and Strategies” in the Trust’s Statement of Additional Information relating to the Acquiring Fund.
Fund Holdings
For additional information about the Acquiring Fund’s policies and procedures with respect to the disclosure of its portfolio securities to any person, see “Disclosure of Portfolio Holdings” in the Trust’s Statement of Additional Information relating to the Acquiring Fund.
Management
For additional information about the Board of Trustees, officers and management personnel of the Acquiring Fund, see “Management of the Fund” and “Investment Advisory and Other Services” in the Trust’s Statement of Additional Information relating to the Acquiring Fund.
Investment Advisory and Other Services
For additional information about the Acquiring Fund’s investment adviser, the Acquiring Fund’s independent registered public accounting firm and other services provided to the Acquiring Fund, see “Investment Advisory and Other Services” in the Trust’s Statement of Additional Information relating to the Acquiring Fund.
Codes of Ethics
For additional information about the Codes of Ethics adopted by the Acquiring Fund, the Acquiring Fund’s investment adviser and the Acquiring Fund’s distributor, see “Management of the Fund—Code of Ethics” in the Trust’s Statement of Additional Information relating to the Acquiring Fund.
Proxy Voting Policies
For additional information about the voting of proxies held by the Acquiring Fund, see “Investment Advisory and Other Services—Proxy Voting Policies and Proxy Voting Record” in the Trust’s Statement of Additional Information relating to the Acquiring Fund.
Fund Managers
For additional information about the portfolio managers primarily responsible for the day-to-day management of the Acquiring Fund, their compensation structure and their holdings in the Acquiring Fund, see “Investment Advisory and Other Services—Portfolio Managers” in the Trust’s Statement of Additional Information relating to the Acquiring Fund.
Fund Transactions and Brokerage
For additional information about brokerage allocation practices, see “Brokerage Practices” in the Trust’s Statement of Additional Information relating to the Acquiring Fund.
Description of Fund Shares
For additional information about the voting rights and other characteristics of the shares of the Acquiring Fund, see “General Information—Description of Shares and Voting Rights” in the Trust’s Statement of Additional Information relating to the Acquiring Fund.
Purchase, Redemption and Pricing of Shares
For additional information about the purchase and redemption of the Acquiring Fund’s shares and the determination of net asset value (“NAV”), see “Purchase and Redemption of Shares” in the Trust’s Statement of Additional Information relating to the Acquiring Fund.
Dividends, Distributions and Tax Status
For additional information about the Acquiring Fund’s policies regarding dividends and distributions and tax matters affecting the Acquiring Fund and its Shareholders, see “General Information—Dividends and Capital Gains Distributions” and “Taxes” in the Trust’s Statement of Additional Information relating to the Acquiring Fund.
Distribution of Shares
For additional information about the Acquiring Fund’s distributor and the distribution agreement between the Acquiring Fund and its distributor, see “Investment Advisory and Other Services” and “Distribution and Shareholder Services Plans” in the Trust’s Statement of Additional Information relating to the Acquiring Fund.
Performance Data
For additional information about the Acquiring Fund’s performance, see “Performance Information” in the Trust’ s Statement of Additional Information relating to the Acquiring Fund.
FINANCIAL STATEMENTS
1. The most recent audited financial statements of the Acquiring Fund for the fiscal year ended September 30, 2014 and the Acquired Fund for the fiscal year ended May 31, 2015, have been audited by Ernst & Young LLP, an independent registered public accounting firm. Ernst & Young LLP’s reports, along with the Funds’ audited financial statements, are included in each respective Fund’s Annual Report to Shareholders for the fiscal year ended September 30, 2014 and May 31, 2015, as applicable, each of which accompanies this SAI and is incorporated herein by reference. In addition, a copy of the Acquiring Fund’s Annual Report for the fiscal year ended September 30, 2014 accompanies the Proxy Statement and Prospectus.
2. Shown below are Financial Statements for the Acquired Fund and Acquiring Fund and Pro Forma Financial Statements for the Combined Fund as of March 31, 2015, as though the Reorganization occurred as of that
date. These financial statements set forth the unaudited pro forma condensed Statement of Assets and Liabilities as of March 31, 2015, the unaudited pro forma condensed Statement of Operations for the twelve-month period ended March 31, 2015 and the unaudited pro forma condensed Portfolio of Investments as of March 31, 2015. These statements have been derived from the books and records utilized in calculating the daily NAVs for each Fund.
The pro forma statements of investments, assets and liabilities and operations should be read in conjunction with the historical financial statements of the Funds included or incorporated by reference in the Statement of Additional Information of which the pro forma combined financial statements form a part. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities, if any, at the date of the financial statements and the reported amounts of increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates. Following the Reorganization, MSIFT Limited Duration will be the accounting survivor.
MSIFT Limited Duration has elected to be taxed as a “regulated investment company” under the Internal Revenue Code. After the Reorganization, MSIFT Limited Duration intends to continue to qualify as a regulated investment company, if such qualification is in the best interests of its shareholders, by complying with the provisions available to certain investment companies, as defined in applicable sections of the Internal Revenue Code, and to make distributions of taxable income sufficient to relieve it from all, or substantially all, Federal income taxes, if it is in the best interests of its shareholders.
The Reorganization is intended to qualify for federal income tax purposes as a tax-free reorganization under Section 368(a)(1) of the Code. As a condition to the Reorganization, the Acquired Fund has requested an opinion of Dechert LLP to the effect that, based upon certain facts, assumptions and representations, the Reorganization will constitute a tax-free reorganization for federal income tax purposes, and no gain or loss will be recognized by the Acquired Fund, the Acquiring Fund or the Acquired Fund’s Shareholders for federal income tax purposes as a result of the transactions included in the Reorganization. Receipt of such opinion is a condition to the Reorganization. For further information about the tax consequences of the Reorganization, see “The Reorganization—Tax Aspects of the Reorganization” in the Proxy Statement and Prospectus.
Pro Forma Combined Condensed Statements of Assets and Liabilities
As of March 31, 2015 (Unaudited)
|
| Morgan Stanley |
| Morgan |
| Adjustments |
| Pro-forma |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Assets: |
|
|
|
|
|
|
|
|
| ||||
Investments in Securities of Unaffiliated Issuers, at Value (Cost $178,192) |
| $ | 72,260 |
| $ | 108,331 |
| $ | — |
| $ | 180,591 |
|
Investment in Security of Affiliated Issuer, at Value (Cost $2,237) |
| 933 |
| 1,304 |
| — |
| 2,237 |
| ||||
Total Investments in Securities, at Value (Cost $180,429) |
| 73,193 |
| 109,635 |
| — |
| 182,828 |
| ||||
Cash |
| — |
| 6 |
| — |
| 6 |
| ||||
Receivable for Investments Sold |
| 2,253 |
| — |
| — |
| 2,253 |
| ||||
Interest Receivable |
| 296 |
| 592 |
| — |
| 888 |
| ||||
Receivable for Portfolio Shares Sold |
| — |
| 68 |
| — |
| 68 |
| ||||
Unrealized Appreciation on Foreign Currency Forward Exchange Contracts |
| — |
| 14 |
| — |
| 14 |
| ||||
Premium Paid on Open Swap Agreements |
| — |
| 13 |
| — |
| 13 |
| ||||
Receivable for Variation Margin on Futures Contracts |
| 6 |
| — |
| — |
| 6 |
| ||||
Receivable from Affiliate |
| 3 |
| — | @ | — |
| 3 |
| ||||
Other Assets |
| 29 |
| 34 |
| — |
| 63 |
| ||||
Total Assets |
| 75,780 |
| 110,362 |
| — |
| 186,142 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Liabilities: |
|
|
|
|
|
|
|
|
| ||||
Payable for Investments Purchased |
| 9,951 |
| 400 |
| — |
| 10,351 |
| ||||
Payable for Portfolio Shares Redeemed |
| 388 |
| 161 |
| — |
| 549 |
| ||||
Payable for Sub Transfer Agency Fees — Class I |
| — | @ | 126 |
| — |
| 126 |
| ||||
Payable for Sub Transfer Agency Fees — Advisor Class/Class A |
| 51 |
| 1 |
| — |
| 52 |
| ||||
Payable for Sub Transfer Agency Fees — Class L |
| — |
| — | @ | — |
| — | @ | ||||
Payable for Professional Fees |
| 61 |
| 46 |
| — |
| 107 |
| ||||
Payable for Advisory Fees |
| 16 |
| 46 |
| — |
| 62 |
| ||||
Payable for Variation Margin on Swap Agreements |
| 22 |
| 36 |
| — |
| 58 |
| ||||
Unrealized Depreciation on Swap Agreements |
| — |
| 30 |
| — |
| 30 |
| ||||
Premium Received on Open Swap Agreements |
| — |
| 11 |
| — |
| 11 |
| ||||
Payable for Administration Fees |
| 5 |
| 7 |
| — |
| 12 |
| ||||
Payable for Trustees’ Fees and Expenses |
| — |
| 7 |
| — |
| 7 |
| ||||
Payable for Variation Margin on Futures Contracts |
| — |
| 6 |
| — |
| 6 |
| ||||
Payable for Custodian Fees |
| 4 |
| 2 |
| — |
| 6 |
| ||||
Payable for Transfer Agency Fees — Class I |
| — | @ | 1 |
| — |
| 1 |
| ||||
Payable for Transfer Agency Fees — Advisor Class/Class A |
| 2 |
| — | @ | — |
| 2 |
| ||||
Payable for Transfer Agency Fees — Class L |
| — |
| 1 |
| — |
| 1 |
| ||||
Payable for Shareholder Services Fees — Advisor Class/Class A |
| 14 |
| — | @ | — |
| 14 |
| ||||
Payable for Distribution and Shareholder Services Fees — Class L |
| — |
| — | @ | — |
| — | @ | ||||
Payable for Reorganization Expense |
| — |
| — |
| 180 | (a) | 180 |
| ||||
Dividends Declared |
| 11 |
| — |
| — |
| 11 |
| ||||
Other Liabilities |
| 75 |
| 51 |
| — |
| 126 |
| ||||
Total Liabilities |
| 10,600 |
| 932 |
| 180 |
| 11,712 |
| ||||
Net Assets |
| $ | 65,180 |
| $ | 109,430 |
| $ | (180 | ) | $ | 174,430 |
|
|
|
|
|
|
|
|
|
|
| ||||
Composition of Net Assets: |
|
|
|
|
|
|
|
|
| ||||
Paid-in-capital |
| $ | 87,084 |
| $ | 350,274 |
| $ | — |
| $ | 437,358 |
|
Accumulated Undistributed Net Investment Income (Loss) |
| (191 | ) | 427 |
| (180 | )(a) | 56 |
| ||||
Accumulated Net Realized Loss |
| (22,684 | ) | (242,547 | ) | — |
| (265,231 | ) | ||||
Unrealized Appreciation (Depreciation) on: |
|
|
|
|
|
|
|
|
| ||||
Investments |
| 1,003 |
| 1,396 |
| — |
| 2,399 |
| ||||
Futures Contracts |
| 8 |
| (38 | ) | — |
| (30 | ) | ||||
Swap Agreements |
| (40 | ) | (96 | ) | — |
| (136 | ) | ||||
Foreign Currency Forward Exchange Contracts |
| — |
| 14 |
| — |
| 14 |
| ||||
Foreign Currency Translations |
| — |
| (—@ | ) | — |
| (—@ | ) | ||||
Net Assets |
| $ | 65,180 |
| $ | 109,430 |
| $ | (180 | ) | $ | 174,430 |
|
|
|
|
|
|
|
|
|
|
| ||||
CLASS I: |
|
|
|
|
|
|
|
|
| ||||
Net Assets |
| $ | 929 |
| $ | 107,584 |
| $ | (3 | )(b) | $ | 108,510 |
|
Shares Outstanding (not in 000’s) |
| 103,438 |
| 13,823,179 |
| 15,670 | (c) |
| 13,942,287 |
| |||
Net Asset Value, Offering and Redemption Price Per Share |
| $ | 8.98 |
| $ | 7.78 |
|
|
|
| $ | 7.78 |
|
|
|
|
|
|
|
|
|
|
| ||||
ADVISOR CLASS/CLASS A: |
|
|
|
|
|
|
|
|
| ||||
Net Assets |
| $ | 64,251 |
| $ | 1,528 |
| $ | (177 | )(b) | $ | 65,602 |
|
Shares Outstanding (not in 000’s) |
| 7,155,520 |
| 195,957 |
| 1,059,053 | (c) | 8,410,530 |
| ||||
Net Asset Value, Redemption Price Per Share |
| $ | 8.98 |
| $ | 7.80 |
|
|
|
| $ | 7.80 |
|
Maximum Sales Load |
|
|
| 4.25 | % |
|
|
|
| ||||
Maximum Sales Charge |
|
|
| $ | 0.35 |
|
|
|
|
|
| ||
Maximum Offering Price Per Share |
|
|
| $ | 8.15 |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
| ||||
CLASS L: |
|
|
|
|
|
|
|
|
| ||||
Net Assets |
|
|
|
| $ | 318 |
|
|
|
| $ | 318 |
|
Shares Outstanding (not in 000’s) |
|
|
| 40,896 |
|
|
| $ | 40,896 |
| |||
Net Asset Value, Offering and Redemption Price Per Share |
|
|
|
| $ | 7.78 |
|
|
|
| $ | 7.78 |
|
@ — Amount is less than $500.
(a) — Reorganization Expense.
(b) — Adjustment to net assets due to the Reorganization.
(c) — Adjustment to the shares outstanding due to the Reorganization.
PRO FORMA COMBINING CONDENSED STATEMENT OF OPERATIONS
FOR THE TWELVE MONTH PERIOD ENDED March 31, 2015 (Unaudited)
|
| Morgan Stanley Limited |
| Morgan Stanley |
| Adjustments (000) |
| Pro-forma |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Investment Income: |
|
|
|
|
|
|
|
|
| ||||
Interest from Securities of Unaffiliated Issuers |
| $ | 1,287 |
| $ | 2,465 |
| $ | — |
| $ | 3,752 |
|
Dividends from Security of Affiliated Issuer |
| 1 |
| 1 |
| — |
| 2 |
| ||||
Total Investment Income |
| 1,288 |
| 2,466 |
| — |
| 3,754 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Expenses: |
|
|
|
|
|
|
|
|
| ||||
Advisory Fees |
| 235 |
| 352 |
| (178 | )(a) | 409 |
| ||||
Sub Transfer Agency Fees |
| — |
| 5 |
| (5 | )(b) | — |
| ||||
Sub Transfer Agency Fees — Class I |
| — | @ | 30 |
| — |
| 30 |
| ||||
Sub Transfer Agency Fees — Advisor Class/Class A |
| 42 |
| 2 |
| — |
| 44 |
| ||||
Sub Transfer Agency Fees — Class L |
| — |
| — | @ | — |
| — | @ | ||||
Professional Fees |
| 131 |
| 120 |
| (131 | )(c) | 120 |
| ||||
Shareholder Reporting Fees |
| 26 |
| 72 |
| (26 | )(d) | 72 |
| ||||
Administration Fees |
| 70 |
| 94 |
| — |
| 164 |
| ||||
Registration Fees |
| 36 |
| 38 |
| (36 | )(e) | 38 |
| ||||
Custodian Fees |
| 20 |
| 29 |
| (20 | )(f) | 29 |
| ||||
Pricing Fees |
| 7 |
| 28 |
| (7 | )(g) | 28 |
| ||||
Transfer Agency Fees |
| 15 |
| 2 |
| (17 | )(b) | — |
| ||||
Transfer Agency Fees — Class I |
| 4 |
| 5 |
| — |
| 9 |
| ||||
Transfer Agency Fees — Advisor Class/Class A |
| 12 |
| 2 |
| — |
| 14 |
| ||||
Transfer Agency Fees — Class L |
| — |
| 4 |
| — |
| 4 |
| ||||
Trustees’ Fees and Expenses |
| 9 |
| 4 |
| — |
| 13 |
| ||||
Shareholder Services Fees — Advisor Class/Class A |
| 211 |
| 4 |
| 4 | (h) | 219 |
| ||||
Distribution and Shareholder Services Fees — Class L |
| — |
| 1 |
| — |
| 1 |
| ||||
Other Expenses |
| 13 |
| 18 |
| (11 | )(i) | 20 |
| ||||
Total Expenses |
| 831 |
| 810 |
| (427 | ) | 1,214 |
| ||||
Waiver of Advisory Fees |
| — |
| (143 | ) | (138 | )(j) | (281 | ) | ||||
Reimbursement of Class Specific Expenses — Class I |
| — |
| (35 | ) | (4 | )(k) | (39 | ) | ||||
Reimbursement of Class Specific Expenses — Class A |
| — |
| (2 | ) | (56 | )(k) | (58 | ) | ||||
Reimbursement of Class Specific Expenses — Class L |
| — |
| (3 | ) | (1 | )(k) | (4 | ) | ||||
Rebate from Morgan Stanley Affiliate |
| (1 | ) | (1 | ) | — |
| (2 | ) | ||||
Net Expenses |
| 830 |
| 626 |
| (626 | ) | 830 |
| ||||
Net Investment Income |
| 458 |
| 1,840 |
| 626 |
| 2,924 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Realized Gain (Loss): |
|
|
|
|
|
|
|
|
| ||||
Investments Sold |
| 194 |
| 493 |
| — |
| 687 |
| ||||
Foreign Currency Forward Exchange Contracts |
| — |
| (1 | ) | — |
| (1 | ) | ||||
Foreign Currency Transactions |
| — |
| (4 | ) | — |
| (4 | ) | ||||
Futures Contracts |
| (1,177 | ) | (348 | ) | — |
| (1,525 | ) | ||||
Swap Agreements |
| (49 | ) | (460 | ) | — |
| (509 | ) | ||||
Net Realized Loss |
| (1,032 | ) | (320 | ) | — |
| (1,352 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Change in Unrealized Appreciation (Depreciation): |
|
|
|
|
|
|
|
|
| ||||
Investments |
| 1,013 |
| 223 |
| — |
| 1,236 |
| ||||
Foreign Currency Forward Exchange Contracts |
| — |
| 14 |
| — |
| 14 |
| ||||
Foreign Currency Translations |
| — |
| (—@ | ) | — |
| (—@ | ) | ||||
Futures Contracts |
| (111 | ) | (257 | ) | — |
| (368 | ) | ||||
Swap Agreements |
| (40 | ) | (454 | ) | — |
| (494 | ) | ||||
Net Change in Unrealized Appreciation (Depreciation) |
| 862 |
| (474 | ) | — |
| 388 |
| ||||
Net Realized Loss and Change in Unrealized Appreciation (Depreciation) |
| (170 | ) | (794 | ) | — |
| (964 | ) | ||||
Net Increase in Net Assets Resulting from Operations |
| $ | 288 |
| $ | 1,046 |
| $ | 626 |
| $ | 1,960 |
|
Notes to Pro Forma Combining Financial Statements
@ — Amount is less than $500.
(a)-Reflects the new 20 bps of advisory fees.
(b)-Reflects the elimination of composite level fees.
(c)-Reflects the elimination of MS Limited Duration U.S. Government Trust’s Audit and Legal fees.
(d)-Reflects the elimination of MS Limited Duration U.S. Government Trust’s printing cost.
(e)-Reflects the elimination of MS Limited Duration U.S. Government Trust’s Registration fees.
(f)-Reflects the elimination of MS Limited Duration U.S. Government Trust’s transaction based fees.
(g)-Reflects the elimination of MS Limited Duration U.S. Government Trust’s pricing fees for common investments.
(h)-Reflects the elimination of refund for Advisor Class of MS Limited Duration U.S. Government Trust.
(i)-Reflects the reduction of MS Limited Duration U.S. Government Trust’s miscellaneous expenses due to the Reorganization.
(j)-Reflects the amount of waived Advisory fees due to new expense cap.
(k)-Reflects the waiver of class specific expenses due to new expense cap.
Portfolio of Investments
as of March 31, 2015 (unaudited)
|
| MS Limited |
| MSIFT Limited |
| Pro-Forma |
| MS Limited |
| MSIFT |
| Adjustments |
| Pro-Forma |
| ||||||
|
| Face Amount (000) |
| Face Amount (000) |
| Face Amount (000) |
| Value (000) |
| Value (000) |
| (000) |
| Value (000) |
| ||||||
Fixed Income Securities (97.8%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Agency Adjustable Rate Mortgages (11.4%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Federal Home Loan Mortgage Corporation, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Conventional Pools: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
2.30%, 7/1/36 – 7/1/38 |
| $ | 964 |
| $ | 816 |
| $ | 1,780 |
| $ | 1,025 |
| $ | 867 |
|
|
| $ | 1,892 |
|
2.32%, 6/1/38 |
| 661 |
| — |
| 661 |
| 708 |
| — |
|
|
| 708 |
| ||||||
2.33%, 6/1/36 |
| — |
| 459 |
| 459 |
| — |
| 491 |
|
|
| 491 |
| ||||||
2.34%, 5/1/40 |
| 789 |
| — |
| 789 |
| 848 |
| — |
|
|
| 848 |
| ||||||
2.39%, 8/1/35 |
| 501 |
| — |
| 501 |
| 536 |
| — |
|
|
| 536 |
| ||||||
2.40%, 6/1/37 – 9/1/35 |
| 1,027 |
| 589 |
| 1,616 |
| 1,098 |
| 629 |
|
|
| 1,727 |
| ||||||
2.43%, 1/1/36 – 7/1/38 |
| 2,730 |
| 935 |
| 3,665 |
| 2,923 |
| 1,002 |
|
|
| 3,925 |
| ||||||
2.66%, 1/1/38 |
| — |
| 112 |
| 112 |
| — |
| 120 |
|
|
| 120 |
| ||||||
3.49%, 9/1/40 |
| 428 |
| — |
| 428 |
| 457 |
| — |
|
|
| 457 |
| ||||||
Federal National Mortgage Association, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Conventional Pools: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
1.85%, 9/1/37 |
| 939 |
| — |
| 939 |
| 990 |
| — |
|
|
| 990 |
| ||||||
2.22%, 9/1/38 |
| 764 |
| — |
| 764 |
| 813 |
| — |
|
|
| 813 |
| ||||||
2.23%, 10/1/39 |
| 876 |
| — |
| 876 |
| 934 |
| — |
|
|
| 934 |
| ||||||
2.26%, 9/1/38 – 10/1/35 |
| 1,307 |
| — |
| 1,307 |
| 1,393 |
| — |
|
|
| 1,393 |
| ||||||
2.31%, 5/1/39 |
| 647 |
| 480 |
| 1,127 |
| 689 |
| 511 |
|
|
| 1,200 |
| ||||||
2.33%, 5/1/35 |
| 579 |
| 470 |
| 1,049 |
| 619 |
| 502 |
|
|
| 1,121 |
| ||||||
2.37%, 9/1/39 |
| 306 |
| — |
| 306 |
| 329 |
| — |
|
|
| 329 |
| ||||||
2.39%, 7/1/39 |
| 365 |
| — |
| 365 |
| 391 |
| — |
|
|
| 391 |
| ||||||
2.40%, 10/1/37 |
| 968 |
| — |
| 968 |
| 1,037 |
| — |
|
|
| 1,037 |
| ||||||
Government National Mortgage Association, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Various Pool: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
1.63%, 11/20/39 – 2/20/41 |
| 607 |
| — |
| 607 |
| 629 |
| — |
|
|
| 629 |
| ||||||
2.00%, 2/20/40 |
| 226 |
| 151 |
| 377 |
| 235 |
| 158 |
|
|
| 393 |
| ||||||
|
|
|
|
|
|
|
| 15,654 |
| 4,280 |
|
|
| 19,934 |
| ||||||
Agency Bond - Banking (FDIC Guaranteed) (0.5%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
NCUA Guaranteed Notes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
1.40%, 6/12/15 |
| 880 |
| — |
| 880 |
| 882 |
| — |
|
|
| 882 |
| ||||||
|
|
|
|
|
|
|
| 882 |
| — |
|
|
| 882 |
| ||||||
Agency Bond - Consumer Discretionary (U.S. Government Guaranteed) (0.4%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Safina Ltd. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
2.00%, 12/30/23 |
| 738 |
| — |
| 738 |
| 741 |
| — |
|
|
| 741 |
| ||||||
|
|
|
|
|
|
|
| 741 |
| — |
|
|
| 741 |
| ||||||
Agency Bonds - Sovereign (U.S. Government Guaranteed) (1.5%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Hashemite Kingdom of Jordan Government AID Bond |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
2.50%, 10/30/20 |
| 1,705 |
| — |
| 1,705 |
| 1,785 |
| — |
|
|
| 1,785 |
| ||||||
Tunisia Government AID Bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
1.69%, 7/16/19 |
| 885 |
| — |
| 885 |
| 898 |
| — |
|
|
| 898 |
| ||||||
|
|
|
|
|
|
|
| 2,683 |
| — |
|
|
| 2,683 |
| ||||||
Agency Fixed Rate Mortgages (15.4%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Federal Home Loan Mortgage Corporation, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
April TBA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
3.50%, 4/1/45 (a) |
| 2,160 |
| — |
| 2,160 |
| 2,264 |
| — |
|
|
| 2,264 |
| ||||||
Gold Pools: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
4.00%, 11/1/41 |
| 1,156 |
| — |
| 1,156 |
| 1,238 |
| — |
|
|
| 1,238 |
| ||||||
4.50%, 12/1/24 |
| 958 |
| — |
| 958 |
| 1,033 |
| — |
|
|
| 1,033 |
| ||||||
6.50%, 9/1/19 – 4/1/24 |
| — |
| 4 |
| 4 |
| — |
| 5 |
|
|
| 5 |
| ||||||
7.50%, 11/1/19 – 5/1/35 |
| 52 |
| 1 |
| 53 |
| 64 |
| 1 |
|
|
| 65 |
| ||||||
8.00%, 8/1/32 |
| 31 |
| — |
| 31 |
| 39 |
| — |
|
|
| 39 |
| ||||||
8.50%, 8/1/31 |
| 31 |
| — |
| 31 |
| 38 |
| — |
|
|
| 38 |
| ||||||
Federal National Mortgage Association, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
April TBA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
3.00%, 4/1/30 (a) |
| 2,060 |
| — |
| 2,060 |
| 2,160 |
| — |
|
|
| 2,160 |
| ||||||
3.50%, 4/1/30 (a) |
| 1,790 |
| — |
| 1,790 |
| 1,899 |
| — |
|
|
| 1,899 |
| ||||||
Conventional Pools: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
4.00%, 6/1/24 – 11/1/41 |
| 1,329 |
| — |
| 1,329 |
| 1,409 |
| — |
|
|
| 1,409 |
| ||||||
4.50%, 6/1/24 – 1/1/44 |
| 3,359 |
| — |
| 3,359 |
| 3,680 |
| — |
|
|
| 3,680 |
| ||||||
5.00%, 12/1/23 – 3/1/41 |
| 5,204 |
| — |
| 5,204 |
| 5,780 |
| — |
|
|
| 5,780 |
| ||||||
5.50%, 5/1/41 |
| 2,477 |
| — |
| 2,477 |
| 2,802 |
| — |
|
|
| 2,802 |
| ||||||
6.00%, 2/1/37 – 9/1/37 |
| 724 |
| — |
| 724 |
| 826 |
| — |
|
|
| 826 |
| ||||||
6.50%, 2/1/28 – 10/1/32 |
| — |
| 358 |
| 358 |
| — |
| 419 |
|
|
| 419 |
| ||||||
7.00%, 7/1/29 – 3/1/37 |
| 402 |
| 59 |
| 461 |
| 476 |
| 61 |
|
|
| 537 |
| ||||||
7.50%, 8/1/37 |
| 72 |
| — |
| 72 |
| 91 |
| — |
|
|
| 91 |
| ||||||
8.00%, 4/1/33 |
| 124 |
| — |
| 124 |
| 158 |
| — |
|
|
| 158 |
| ||||||
8.50%, 10/1/32 |
| 53 |
| — |
| 53 |
| 69 |
| — |
|
|
| 69 |
| ||||||
|
| MS Limited |
| MSIFT Limited |
| Pro-Forma |
| MS Limited |
| MSIFT |
| Adjustments |
| Pro-Forma |
|
|
| Face Amount (000) |
| Face Amount (000) |
| Face Amount (000) |
| Value (000) |
| Value (000) |
| (000) |
| Value (000) |
|
Government National Mortgage Association, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April TBA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.00%, 4/15/45 (a) |
| 1,340 |
| — |
| 1,340 |
| 1,428 |
| — |
|
|
| 1,428 |
|
Various Pools: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.00%, 11/15/38 |
| 274 |
| — |
| 274 |
| 312 |
| — |
|
|
| 312 |
|
7.50%, 11/15/32 |
| 367 |
| — |
| 367 |
| 432 |
| — |
|
|
| 432 |
|
8.50%, 7/15/30 |
| 194 |
| — |
| 194 |
| 224 |
| — |
|
|
| 224 |
|
9.00%, 11/15/16 – 12/15/16 |
| — |
| 15 |
| 15 |
| — |
| 15 |
|
|
| 15 |
|
|
|
|
|
|
|
|
| 26,422 |
| 501 |
|
|
| 26,923 |
|
Asset-Backed Securities (11.0%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ally Auto Receivables Trust |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.62%, 3/15/17 |
| — |
| 284 |
| 284 |
| — |
| 284 |
|
|
| 284 |
|
American Homes 4 Rent |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.25%, 6/17/31 (b)(c) |
| — |
| 270 |
| 270 |
| — |
| 268 |
|
|
| 268 |
|
American Residential Properties Trust |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.28%, 9/17/31 (b)(c) |
| — |
| 401 |
| 401 |
| — |
| 398 |
|
|
| 398 |
|
AWAS Aviation Capital Ltd. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.00%, 10/17/16 (c) |
| — |
| 308 |
| 308 |
| — |
| 316 |
|
|
| 316 |
|
Chase Issuance Trust, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.54%, 10/16/17 |
| — |
| 1,125 |
| 1,125 |
| — |
| 1,125 |
|
|
| 1,125 |
|
0.59%, 8/15/17 |
| — |
| 1,608 |
| 1,608 |
| — |
| 1,609 |
|
|
| 1,609 |
|
Citibank Credit Card Issuance Trust |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.88%, 1/23/23 |
| — |
| 450 |
| 450 |
| — |
| 469 |
|
|
| 469 |
|
Colony American Homes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.33%, 5/17/31 (b)(c) |
| — |
| 419 |
| 419 |
| — |
| 417 |
|
|
| 417 |
|
Colony American Homes Single-Family Rental Pass-Through Certificates |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.13%, 7/17/31 (b)(c) |
| — |
| 338 |
| 338 |
| — |
| 333 |
|
|
| 333 |
|
Discover Card Execution Note Trust, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.60%, 7/15/21 (b) |
| — |
| 670 |
| 670 |
| — |
| 672 |
|
|
| 672 |
|
1.22%, 10/15/19 |
| — |
| 465 |
| 465 |
| — |
| 467 |
|
|
| 467 |
|
Enterprise Fleet Financing LLC |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.05%, 3/20/20 (c) |
| — |
| 836 |
| 836 |
| — |
| 836 |
|
|
| 836 |
|
Ford Credit Auto Owner Trust |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.26%, 11/15/25 (c) |
| — |
| 1,165 |
| 1,165 |
| — |
| 1,188 |
|
|
| 1,188 |
|
GE Dealer Floorplan Master Note Trust |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.67%, 6/20/17 (b) |
| — |
| 750 |
| 750 |
| — |
| 750 |
|
|
| 750 |
|
GE Equipment Transportation LLC |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.62%, 7/25/16 |
| — |
| 99 |
| 99 |
| — |
| 99 |
|
|
| 99 |
|
GM Financial Automobile Leasing Trust |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.73%, 2/20/17 (c) |
| — |
| 552 |
| 552 |
| — |
| 552 |
|
|
| 552 |
|
Hertz Fleet Lease Funding LP |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.73%, 12/10/27 (b)(c) |
| — |
| 491 |
| 491 |
| — |
| 492 |
|
|
| 492 |
|
Hyundai Auto Receivables Trust, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.90%, 12/17/18 |
| — |
| 941 |
| 941 |
| — |
| 942 |
|
|
| 942 |
|
1.01%, 2/15/18 |
| — |
| 427 |
| 427 |
| — |
| 428 |
|
|
| 428 |
|
|
| MS Limited |
| MSIFT Limited |
| Pro-Forma |
| MS Limited |
| MSIFT |
| Adjustments |
| Pro-Forma |
|
|
| Face Amount (000) |
| Face Amount (000) |
| Face Amount (000) |
| Value (000) |
| Value (000) |
| (000) |
| Value (000) |
|
Invitation Homes Trust, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.18%, 6/17/31 (b)(c) |
| — |
| 429 |
| 429 |
| — |
| 425 |
|
|
| 425 |
|
1.40%, 12/17/30 (b)(c) |
| — |
| 604 |
| 604 |
| — |
| 603 |
|
|
| 603 |
|
1.53%, 6/17/32 (b)(c) |
| — |
| 400 |
| 400 |
| — |
| 400 |
|
|
| 400 |
|
John Deere Owner Trust |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.60%, 3/15/17 |
| — |
| 878 |
| 878 |
| — |
| 879 |
|
|
| 879 |
|
Nationstar Agency Advance Funding Trust |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.89%, 2/18/48 (c) |
| — |
| 100 |
| 100 |
| — |
| 98 |
|
|
| 98 |
|
North Carolina State Education Assistance Authority |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.06%, 7/25/25 (b) |
| — |
| 625 |
| 625 |
| — |
| 627 |
|
|
| 627 |
|
Panhandle-Plains Higher Education Authority, Inc. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.22%, 7/1/24 (b) |
| — |
| 221 |
| 221 |
| — |
| 223 |
|
|
| 223 |
|
PFS Tax Lien Trust |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.44%, 4/15/16 (c) |
| — |
| 405 |
| 405 |
| — |
| 406 |
|
|
| 406 |
|
Sunset Mortgage Loan Co., LLC |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.72%, 11/16/44 (c) |
| — |
| 310 |
| 310 |
| — |
| 308 |
|
|
| 308 |
|
United States Small Business Administration |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.25%, 9/10/22 |
| 660 |
| — |
| 660 |
| 660 |
| — |
|
|
| 660 |
|
Volkswagen Credit Auto Master Trust |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.40%, 7/22/19 (c) |
| — |
| 398 |
| 398 |
| — |
| 400 |
|
|
| 400 |
|
VOLT NPL X LLC |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.75%, 10/26/54 (c) |
| — |
| 282 |
| 282 |
| — |
| 277 |
|
|
| 277 |
|
VOLT XIX LLC |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.00%, 4/25/55 (c) |
| — |
| 200 |
| 200 |
| — |
| 196 |
|
|
| 196 |
|
VOLT XXII LLC |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.25%, 2/25/55 (c) |
| — |
| 200 |
| 200 |
| — |
| 197 |
|
|
| 197 |
|
VOLT XXX LLC |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.75%, 10/25/57 (c) |
| — |
| 200 |
| 200 |
| — |
| 197 |
|
|
| 197 |
|
VOLT XXXI LLC |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.50%, 2/25/55 (c) |
| — |
| 200 |
| 200 |
| — |
| 197 |
|
|
| 197 |
|
VOLT XXXIII LLC |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.25%, 3/25/55 (c) |
| — |
| 350 |
| 350 |
| — |
| 345 |
|
|
| 345 |
|
Volvo Financial Equipment LLC |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.74%, 3/15/17 (c) |
| — |
| 520 |
| 520 |
| — |
| 520 |
|
|
| 520 |
|
Wheels SPV LLC |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.84%, 3/20/23 (c) |
| — |
| 199 |
| 199 |
| — |
| 199 |
|
|
| 199 |
|
World Omni Automobile Lease Securitization Trust |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.10%, 12/15/16 |
| — |
| 321 |
| 321 |
| — |
| 322 |
|
|
| 322 |
|
|
|
|
|
|
|
|
| 660 |
| 18,464 |
| �� |
| 19,124 |
|
Collateralized Mortgage Obligations - Agency Collateral Series (10.2%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Home Loan Mortgage Corporation, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.43%, 8/25/17 |
| 1,025 |
| 688 |
| 1,713 |
| 1,036 |
| 695 |
|
|
| 1,731 |
|
1.44%, 1/25/19 |
| 705 |
| — |
| 705 |
| 710 |
| — |
|
|
| 710 |
|
1.56%, 10/25/18 |
| 264 |
| 196 |
| 460 |
| 266 |
| 198 |
|
|
| 464 |
|
1.62%, 9/25/18 |
| 623 |
| — |
| 623 |
| 631 |
| — |
|
|
| 631 |
|
1.66%, 11/25/16 |
| 2,450 |
| — |
| 2,450 |
| 2,478 |
| — |
|
|
| 2,478 |
|
1.69%, 6/25/18 |
| 900 |
| — |
| 900 |
| 911 |
| — |
|
|
| 911 |
|
1.78%, 4/25/18 – 10/25/20 |
| 964 |
| — |
| 964 |
| 975 |
| — |
|
|
| 975 |
|
1.87%, 1/25/18 |
| 144 |
| — |
| 144 |
| 145 |
| — |
|
|
| 145 |
|
1.88%, 5/25/19 |
| 843 |
| — |
| 843 |
| 856 |
| — |
|
|
| 856 |
|
2.06%, 10/25/20 |
| 686 |
| — |
| 686 |
| 699 |
| — |
|
|
| 699 |
|
2.09%, 3/25/19 |
| 265 |
| — |
| 265 |
| 271 |
| — |
|
|
| 271 |
|
2.26%, 10/25/20 |
| 541 |
| — |
| 541 |
| 554 |
| — |
|
|
| 554 |
|
2.30%, 9/25/18 |
| 320 |
| — |
| 320 |
| 330 |
| — |
|
|
| 330 |
|
2.32%, 10/25/18 |
| 285 |
| — |
| 285 |
| 294 |
| — |
|
|
| 294 |
|
3.03%, 10/25/20 (b) |
| 483 |
| — |
| 483 |
| 514 |
| — |
|
|
| 514 |
|
REMIC |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.50%, 9/15/29 |
| — |
| 977 |
| 977 |
| — |
| 1,143 |
|
|
| 1,143 |
|
Federal National Mortgage Association, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.39%, 6/25/18 (b) |
| 256 |
| — |
| 256 |
| 257 |
| — |
|
|
| 257 |
|
0.59%, 8/25/15 |
| — |
| 220 |
| 220 |
| — |
| 220 |
|
|
| 220 |
|
0.60%, 8/25/15 |
| 313 |
| — |
| 313 |
| 313 |
| — |
|
|
| 313 |
|
0.95%, 11/25/15 |
| 242 |
| 157 |
| 399 |
| 242 |
| 157 |
|
|
| 399 |
|
1.08%, 2/25/16 |
| 573 |
| 373 |
| 946 |
| 575 |
| 374 |
|
|
| 949 |
|
1.63%, 2/25/18 |
| 300 |
| — |
| 300 |
| 303 |
| — |
|
|
| 303 |
|
2.17%, 9/25/19 (b) |
| 587 |
| 783 |
| 1,370 |
| 601 |
| 802 |
|
|
| 1,403 |
|
|
| MS Limited |
| MSIFT Limited |
| Pro-Forma |
| MS Limited |
| MSIFT |
| Adjustments |
| Pro-Forma |
|
|
| Face Amount (000) |
| Face Amount (000) |
| Face Amount (000) |
| Value (000) |
| Value (000) |
| (000) |
| Value (000) |
|
Government National Mortgage Association, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IO |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.00%, 11/20/38 |
| 1,567 |
| — |
| 1,567 |
| 130 |
| — |
|
|
| 130 |
|
6.05%, 3/20/43 (b) |
| 456 |
| 729 |
| 1,185 |
| 71 |
| 113 |
|
|
| 184 |
|
6.32%, 5/20/40 (b) |
| 556 |
| 870 |
| 1,426 |
| 91 |
| 143 |
|
|
| 234 |
|
6.33%, 8/16/39 (b) |
| 1,263 |
| — |
| 1,263 |
| 153 |
| — |
|
|
| 153 |
|
6.43%, 1/16/40 (b) |
| 921 |
| — |
| 921 |
| 161 |
| — |
|
|
| 161 |
|
6.63%, 8/16/36 (b) |
| 1,379 |
| — |
| 1,379 |
| 298 |
| — |
|
|
| 298 |
|
|
|
|
|
|
|
|
| 13,865 |
| 3,845 |
|
|
| 17,710 |
|
Commercial Mortgage-Backed Securities (1.3%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BLCP Hotel Trust |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.13%, 8/15/29 (b)(c) |
| — |
| 605 |
| 605 |
| — |
| 604 |
|
|
| 604 |
|
CDGJ Commercial Mortgage Trust |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.57%, 12/15/27 (b)(c) |
| — |
| 575 |
| 575 |
| — |
| 577 |
|
|
| 577 |
|
Citigroup Commercial Mortgage Trust |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.11%, 1/12/30 (c) |
| — |
| 171 |
| 171 |
| — |
| 173 |
|
|
| 173 |
|
Hilton USA Trust |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.17%, 11/5/30 (b)(c) |
| — |
| 168 |
| 168 |
| — |
| 168 |
|
|
| 168 |
|
JP Morgan Chase Commercial Mortgage Securities Trust, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.15%, 7/15/31 (b)(c) |
| — |
| 285 |
| 285 |
| — |
| 284 |
|
|
| 284 |
|
5.46%, 12/12/43 |
| — |
| 400 |
| 400 |
| — |
| 413 |
|
|
| 413 |
|
|
|
|
|
|
|
|
| — |
| 2,219 |
|
|
| 2,219 |
|
Corporate Bonds (41.4%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance (17.4%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Abbey National Treasury Services PLC |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.05%, 8/23/18 |
| — |
| 370 |
| 370 |
| — |
| 386 |
|
|
| 386 |
|
ABN Amro Bank N.V. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.50%, 10/30/18 (c) |
| — |
| 630 |
| 630 |
| — |
| 644 |
|
|
| 644 |
|
AerCap Ireland Capital Ltd./AerCap Global Aviation Trust |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.75%, 5/15/19 (c) |
| — |
| 345 |
| 345 |
| — |
| 347 |
|
|
| 347 |
|
Ally Financial, Inc. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.25%, 2/13/18 |
| — |
| 265 |
| 265 |
| — |
| 263 |
|
|
| 263 |
|
American Express Credit Corp. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.25%, 8/15/19 |
| — |
| 675 |
| 675 |
| — |
| 685 |
|
|
| 685 |
|
Anthem, Inc. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.88%, 1/15/18 |
| — |
| 705 |
| 705 |
| — |
| 709 |
|
|
| 709 |
|
Bank of America Corp. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.60%, 1/15/19 |
| — |
| 900 |
| 900 |
| — |
| 916 |
|
|
| 916 |
|
Bayer US Finance LLC |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.38%, 10/8/19 (c) |
| — |
| 600 |
| 600 |
| — |
| 611 |
|
|
| 611 |
|
BB&T Corp. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.25%, 2/1/19 |
| — |
| 580 |
| 580 |
| — |
| 589 |
|
|
| 589 |
|
BioMed Realty LP |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.63%, 5/1/19 |
| — |
| 310 |
| 310 |
| — |
| 313 |
|
|
| 313 |
|
BNP Paribas SA, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MTN |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.70%, 8/20/18 |
| — |
| 610 |
| 610 |
| — |
| 629 |
|
|
| 629 |
|
|
| MS Limited |
| MSIFT Limited |
| Pro-Forma |
| MS Limited |
| MSIFT |
| Adjustments |
| Pro-Forma |
|
|
| Face Amount (000) |
| Face Amount (000) |
| Face Amount (000) |
| Value (000) |
| Value (000) |
| (000) |
| Value (000) |
|
BNZ International Funding Ltd. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.35%, 3/4/19 (c) |
| — |
| 650 |
| 650 |
| — |
| 657 |
|
|
| 657 |
|
BPCE SA, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MTN |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.25%, 1/27/20 |
| — |
| 600 |
| 600 |
| — |
| 604 |
|
|
| 604 |
|
Canadian Imperial Bank of Commerce |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.55%, 1/23/18 |
| — |
| 310 |
| 310 |
| — |
| 311 |
|
|
| 311 |
|
Capital One Financial Corp. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.45%, 4/24/19 |
| — |
| 1,005 |
| 1,005 |
| — |
| 1,018 |
|
|
| 1,018 |
|
CIT Group, Inc. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.88%, 2/19/19 |
| — |
| 550 |
| 550 |
| — |
| 546 |
|
|
| 546 |
|
Citigroup, Inc. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8.50%, 5/22/19 |
| — |
| 950 |
| 950 |
| — |
| 1,184 |
|
|
| 1,184 |
|
Commonwealth Bank of Australia |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.50%, 9/20/18 |
| — |
| 600 |
| 600 |
| — |
| 618 |
|
|
| 618 |
|
Cooperatieve Centrale Raiffeisen-Boerenleenbank BA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.38%, 1/19/17 |
| — |
| 330 |
| 330 |
| — |
| 344 |
|
|
| 344 |
|
Credit Agricole SA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.13%, 4/17/18 (c) |
| — |
| 775 |
| 775 |
| — |
| 785 |
|
|
| 785 |
|
Credit Suisse |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.30%, 5/28/19 |
| — |
| 650 |
| 650 |
| — |
| 657 |
|
|
| 657 |
|
DBS Group Holdings Ltd. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.25%, 7/16/19 (c) |
| — |
| 650 |
| 650 |
| — |
| 659 |
|
|
| 659 |
|
Discover Bank |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.00%, 2/21/18 |
| — |
| 665 |
| 665 |
| — |
| 666 |
|
|
| 666 |
|
DNB Bank ASA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.20%, 4/3/17 (c) |
| — |
| 610 |
| 610 |
| — |
| 632 |
|
|
| 632 |
|
ERP Operating LP |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.38%, 7/1/19 |
| — |
| 550 |
| 550 |
| — |
| 558 |
|
|
| 558 |
|
Goldman Sachs Group, Inc. (The) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.38%, 1/22/18 |
| — |
| 880 |
| 880 |
| — |
| 898 |
|
|
| 898 |
|
HSBC USA, Inc. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.25%, 6/23/19 |
| — |
| 659 |
| 659 |
| — |
| 665 |
|
|
| 665 |
|
Icahn Enterprises LP/Icahn Enterprises Finance Corp., |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series WI |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.88%, 3/15/19 |
| — |
| 375 |
| 375 |
| — |
| 383 |
|
|
| 383 |
|
ING Bank N.V. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.75%, 3/7/17 (c) |
| — |
| 600 |
| 600 |
| — |
| 628 |
|
|
| 628 |
|
Intesa Sanpaolo SpA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.88%, 1/16/18 |
| — |
| 355 |
| 355 |
| — |
| 373 |
|
|
| 373 |
|
JPMorgan Chase & Co. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.20%, 10/22/19 |
| — |
| 325 |
| 325 |
| — |
| 326 |
|
|
| 326 |
|
Lloyds Bank PLC |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.30%, 11/27/18 |
| — |
| 400 |
| 400 |
| — |
| 407 |
|
|
| 407 |
|
Macquarie Bank Ltd. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.60%, 6/24/19 (c) |
| — |
| 605 |
| 605 |
| — |
| 614 |
|
|
| 614 |
|
Manufacturers & Traders Trust Co. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.10%, 2/6/20 |
| — |
| 560 |
| 560 |
| — |
| 561 |
|
|
| 561 |
|
Metropolitan Life Global Funding I |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.50%, 1/10/18 (c) |
| — |
| 775 |
| 775 |
| — |
| 779 |
|
|
| 779 |
|
Mizuho Corporate Bank Ltd. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.85%, 3/21/18 (c) |
| — |
| 645 |
| 645 |
| — |
| 647 |
|
|
| 647 |
|
National Australia Bank Ltd. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.25%, 3/17/17 (c) |
| — |
| 400 |
| 400 |
| — |
| 402 |
|
|
| 402 |
|
Nordea Bank AB |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.88%, 5/13/16 (c) |
| — |
| 695 |
| 695 |
| — |
| 696 |
|
|
| 696 |
|
Principal Financial Group, Inc. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.85%, 11/15/17 |
| — |
| 725 |
| 725 |
| — |
| 732 |
|
|
| 732 |
|
QBE Insurance Group Ltd. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.40%, 5/1/18 (c) |
| — |
| 200 |
| 200 |
| — |
| 202 |
|
|
| 202 |
|
Royal Bank of Scotland Group PLC |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.55%, 9/18/15 |
| — |
| 495 |
| 495 |
| — |
| 499 |
|
|
| 499 |
|
Santander Bank NA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.00%, 1/12/18 |
| — |
| 525 |
| 525 |
| — |
| 528 |
|
|
| 528 |
|
Skandinaviska Enskilda Banken AB |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.75%, 3/19/18 (c) |
| — |
| 380 |
| 380 |
| — |
| 382 |
|
|
| 382 |
|
Standard Chartered PLC |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.50%, 9/8/17 (c) |
| — |
| 900 |
| 900 |
| — |
| 900 |
|
|
| 900 |
|
|
| MS Limited |
| MSIFT Limited |
| Pro-Forma |
| MS Limited |
| MSIFT |
| Adjustments |
| Pro-Forma |
|
|
| Face Amount (000) |
| Face Amount (000) |
| Face Amount (000) |
| Value (000) |
| Value (000) |
| (000) |
| Value (000) |
|
Sumitomo Mitsui Banking Corp. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.45%, 1/10/19 |
| — |
| 630 |
| 630 |
| — |
| 641 |
|
|
| 641 |
|
Swedbank AB |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.75%, 3/12/18 (c) |
| — |
| 305 |
| 305 |
| — |
| 306 |
|
|
| 306 |
|
Synchrony Financial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.00%, 8/15/19 |
| — |
| 800 |
| 800 |
| — |
| 818 |
|
|
| 818 |
|
Toronto-Dominion Bank (The), |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MTN |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.63%, 9/10/18 |
| — |
| 650 |
| 650 |
| — |
| 672 |
|
|
| 672 |
|
UBS AG |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.38%, 8/14/19 |
| — |
| 925 |
| 925 |
| — |
| 933 |
|
|
| 933 |
|
WEA Finance LLC/Westfield UK & Europe Finance PLC |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.70%, 9/17/19 (c) |
| — |
| 600 |
| 600 |
| — |
| 608 |
|
|
| 608 |
|
Wells Fargo & Co. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.15%, 1/15/19 |
| — |
| 360 |
| 360 |
| — |
| 366 |
|
|
| 366 |
|
|
|
|
|
|
|
|
| — |
| 30,297 |
|
|
| 30,297 |
|
Industrials (20.8%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ABB Treasury Center USA, Inc. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.50%, 6/15/16 (c) |
| — |
| 745 |
| 745 |
| — |
| 760 |
|
|
| 760 |
|
AbbVie, Inc. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.75%, 11/6/17 |
| — |
| 715 |
| 715 |
| — |
| 718 |
|
|
| 718 |
|
Actavis Funding SCS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.00%, 3/12/20 |
| — |
| 835 |
| 835 |
| — |
| 855 |
|
|
| 855 |
|
Air Canada |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.75%, 10/1/19 (c) |
| — |
| 250 |
| 250 |
| — |
| 268 |
|
|
| 268 |
|
Altera Corp. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.50%, 11/15/18 |
| — |
| 300 |
| 300 |
| — |
| 308 |
|
|
| 308 |
|
Altice Financing SA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.88%, 12/15/19 (c) |
| — |
| 250 |
| 250 |
| — |
| 266 |
|
|
| 266 |
|
Altria Group, Inc. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.13%, 9/11/15 |
| — |
| 250 |
| 250 |
| — |
| 254 |
|
|
| 254 |
|
Amazon.com, Inc. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.60%, 12/5/19 |
| — |
| 525 |
| 525 |
| — |
| 538 |
|
|
| 538 |
|
American Honda Finance Corp. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.60%, 2/16/18 (c) |
| — |
| 545 |
| 545 |
| — |
| 550 |
|
|
| 550 |
|
Amgen, Inc. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.50%, 11/15/16 |
| — |
| 425 |
| 425 |
| — |
| 435 |
|
|
| 435 |
|
Anadarko Petroleum Corp. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.95%, 9/15/16 |
| — |
| 575 |
| 575 |
| — |
| 614 |
|
|
| 614 |
|
Applied Materials, Inc. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.65%, 6/15/16 |
| — |
| 455 |
| 455 |
| — |
| 465 |
|
|
| 465 |
|
ArcelorMittal |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.25%, 2/25/17 |
| — |
| 375 |
| 375 |
| — |
| 391 |
|
|
| 391 |
|
AT&T, Inc. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.70%, 6/1/17 |
| — |
| 1,075 |
| 1,075 |
| — |
| 1,079 |
|
|
| 1,079 |
|
Baidu, Inc. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.25%, 8/6/18 |
| — |
| 225 |
| 225 |
| — |
| 233 |
|
|
| 233 |
|
BAT International Finance PLC |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.40%, 6/5/15 (c) |
| — |
| 600 |
| 600 |
| — |
| 601 |
|
|
| 601 |
|
Becton Dickinson and Co. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.68%, 12/15/19 |
| — |
| 300 |
| 300 |
| — |
| 307 |
|
|
| 307 |
|
Bombardier, Inc. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.75%, 4/15/19 (c) |
| — |
| 300 |
| 300 |
| — |
| 296 |
|
|
| 296 |
|
BW Group Ltd. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.63%, 6/28/17 (c) |
| — |
| 325 |
| 325 |
| — |
| 340 |
|
|
| 340 |
|
CBS Corp. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.30%, 8/15/19 |
| — |
| 625 |
| 625 |
| — |
| 626 |
|
|
| 626 |
|
Chesapeake Energy Corp. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.50%, 8/15/17 |
| — |
| 350 |
| 350 |
| — |
| 370 |
|
|
| 370 |
|
CNH Capital LLC |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.25%, 11/1/16 |
| — |
| 355 |
| 355 |
| — |
| 375 |
|
|
| 375 |
|
Comcast Corp. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.70%, 5/15/18 |
| — |
| 520 |
| 520 |
| — |
| 587 |
|
|
| 587 |
|
Compass Bank |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.85%, 9/29/17 |
| — |
| 600 |
| 600 |
| — |
| 605 |
|
|
| 605 |
|
Covidien International Finance SA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.35%, 5/29/15 |
| — |
| 265 |
| 265 |
| — |
| 265 |
|
|
| 265 |
|
Daimler Finance North America LLC |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.38%, 8/1/18 (c) |
| — |
| 750 |
| 750 |
| — |
| 769 |
|
|
| 769 |
|
|
| MS Limited |
| MSIFT Limited |
| Pro-Forma |
| MS Limited |
| MSIFT |
| Adjustments |
| Pro-Forma |
|
|
| Face Amount (000) |
| Face Amount (000) |
| Face Amount (000) |
| Value (000) |
| Value (000) |
| (000) |
| Value (000) |
|
DISH DBS Corp. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.63%, 7/15/17 |
| — |
| 375 |
| 375 |
| — |
| 386 |
|
|
| 386 |
|
Eaton Corp. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.50%, 11/2/17 |
| — |
| 630 |
| 630 |
| — |
| 633 |
|
|
| 633 |
|
Ecolab, Inc. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.00%, 12/8/16 |
| — |
| 320 |
| 320 |
| — |
| 330 |
|
|
| 330 |
|
EMD Finance LLC |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.40%, 3/19/20 (c) |
| — |
| 575 |
| 575 |
| — |
| 582 |
|
|
| 582 |
|
Enterprise Products Operating LLC |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.55%, 10/15/19 |
| — |
| 325 |
| 325 |
| — |
| 330 |
|
|
| 330 |
|
Experian Finance PLC |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.38%, 6/15/17 (c) |
| — |
| 600 |
| 600 |
| — |
| 607 |
|
|
| 607 |
|
Ford Motor Credit Co., LLC |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.00%, 5/15/18 |
| — |
| 825 |
| 825 |
| — |
| 900 |
|
|
| 900 |
|
General Motors Financial Co., Inc. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.15%, 1/15/20 |
| — |
| 600 |
| 600 |
| — |
| 608 |
|
|
| 608 |
|
Gilead Sciences, Inc. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.35%, 2/1/20 |
| — |
| 175 |
| 175 |
| — |
| 180 |
|
|
| 180 |
|
Glencore Funding LLC |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.70%, 5/27/16 (c) |
| — |
| 650 |
| 650 |
| — |
| 653 |
|
|
| 653 |
|
Goldcorp, Inc. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.13%, 3/15/18 |
| — |
| 520 |
| 520 |
| — |
| 524 |
|
|
| 524 |
|
Harley-Davidson Financial Services, Inc., |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.55%, 11/17/17 (c) |
| — |
| 258 |
| 258 |
| — |
| 260 |
|
|
| 260 |
|
2.15%, 2/26/20 (c) |
| — |
| 350 |
| 350 |
| — |
| 352 |
|
|
| 352 |
|
Heathrow Funding Ltd. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.50%, 6/25/15 (c) |
| — |
| 400 |
| 400 |
| — |
| 401 |
|
|
| 401 |
|
Hutchison Whampoa International 14 Ltd. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.63%, 10/31/17 (c) |
| — |
| 240 |
| 240 |
| — |
| 239 |
|
|
| 239 |
|
Hyundai Capital America |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.60%, 3/19/20 (c) |
| — |
| 325 |
| 325 |
| — |
| 329 |
|
|
| 329 |
|
Ingersoll-Rand Global Holding Co., Ltd. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.88%, 1/15/19 |
| — |
| 335 |
| 335 |
| — |
| 344 |
|
|
| 344 |
|
JM Smucker Co. (The) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.50%, 3/15/20 (c) |
| — |
| 225 |
| 225 |
| — |
| 228 |
|
|
| 228 |
|
Kinder Morgan, Inc. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.05%, 12/1/19 |
| — |
| 650 |
| 650 |
| — |
| 657 |
|
|
| 657 |
|
L-3 Communications Corp. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.50%, 5/28/17 |
| — |
| 275 |
| 275 |
| — |
| 273 |
|
|
| 273 |
|
LVMH Moet Hennessy Louis Vuitton SE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.63%, 6/29/17 (c) |
| — |
| 525 |
| 525 |
| — |
| 531 |
|
|
| 531 |
|
Marathon Petroleum Corp. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.50%, 3/1/16 |
| — |
| 595 |
| 595 |
| — |
| 608 |
|
|
| 608 |
|
McKesson Corp. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.25%, 3/1/16 |
| — |
| 1,070 |
| 1,070 |
| — |
| 1,092 |
|
|
| 1,092 |
|
Medtronic, Inc. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.50%, 3/15/20 (c) |
| — |
| 550 |
| 550 |
| — |
| 563 |
|
|
| 563 |
|
Nissan Motor Acceptance Corp. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.65%, 9/26/18 (c) |
| — |
| 720 |
| 720 |
| — |
| 742 |
|
|
| 742 |
|
Orange SA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.75%, 2/6/19 |
| — |
| 625 |
| 625 |
| — |
| 648 |
|
|
| 648 |
|
Origin Energy Finance Ltd. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.50%, 10/9/18 (c) |
| — |
| 200 |
| 200 |
| — |
| 205 |
|
|
| 205 |
|
Quest Diagnostics, Inc. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.70%, 4/1/19 |
| — |
| 675 |
| 675 |
| — |
| 687 |
|
|
| 687 |
|
Rio Tinto Finance USA PLC |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.38%, 6/17/16 |
| — |
| 325 |
| 325 |
| — |
| 327 |
|
|
| 327 |
|
RR Donnelley & Sons Co. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.13%, 1/15/17 |
| — |
| 300 |
| 300 |
| — |
| 318 |
|
|
| 318 |
|
Ryder System, Inc., |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MTN |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.65%, 3/2/20 |
| — |
| 125 |
| 125 |
| — |
| 127 |
|
|
| 127 |
|
Scripps Networks Interactive, Inc. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.75%, 11/15/19 |
| — |
| 575 |
| 575 |
| — |
| 581 |
|
|
| 581 |
|
Southwest Airlines Co. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.75%, 11/6/19 |
| — |
| 600 |
| 600 |
| — |
| 614 |
|
|
| 614 |
|
STATS ChipPAC Ltd. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.38%, 3/31/16 (c) |
| — |
| 300 |
| 300 |
| — |
| 303 |
|
|
| 303 |
|
|
| MS Limited |
| MSIFT Limited |
| Pro-Forma |
| MS Limited |
| MSIFT |
| Adjustments |
| Pro-Forma |
|
|
| Face Amount (000) |
| Face Amount (000) |
| Face Amount (000) |
| Value (000) |
| Value (000) |
| (000) |
| Value (000) |
|
T-Mobile USA, Inc. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.25%, 9/1/18 |
| — |
| 500 |
| 500 |
| — |
| 518 |
|
|
| 518 |
|
Thomson Reuters Corp., |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.30%, 2/23/17 |
| — |
| 325 |
| 325 |
| — |
| 326 |
|
|
| 326 |
|
1.65%, 9/29/17 |
| — |
| 150 |
| 150 |
| — |
| 150 |
|
|
| 150 |
|
Time Warner Cable, Inc. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.75%, 7/1/18 |
| — |
| 400 |
| 400 |
| — |
| 460 |
|
|
| 460 |
|
Transocean, Inc. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.50%, 10/15/17 |
| — |
| 350 |
| 350 |
| — |
| 322 |
|
|
| 322 |
|
TSMC Global Ltd. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.63%, 4/3/18 (c) |
| — |
| 800 |
| 800 |
| — |
| 794 |
|
|
| 794 |
|
Tyson Foods, Inc. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.65%, 8/15/19 |
| — |
| 600 |
| 600 |
| — |
| 615 |
|
|
| 615 |
|
Verizon Communications, Inc. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.55%, 6/17/19 |
| — |
| 1,250 |
| 1,250 |
| — |
| 1,281 |
|
|
| 1,281 |
|
Viacom, Inc. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.50%, 9/1/18 |
| — |
| 625 |
| 625 |
| — |
| 636 |
|
|
| 636 |
|
Waste Management, Inc. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.60%, 9/1/16 |
| — |
| 725 |
| 725 |
| — |
| 739 |
|
|
| 739 |
|
Wesfarmers Ltd. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.98%, 5/18/16 (c) |
| — |
| 395 |
| 395 |
| — |
| 404 |
|
|
| 404 |
|
Wm. Wrigley Jr. Co. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.40%, 10/21/16 (c) |
| — |
| 600 |
| 600 |
| — |
| 602 |
|
|
| 602 |
|
Yum! Brands, Inc. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.88%, 11/1/20 |
| — |
| 450 |
| 450 |
| — |
| 480 |
|
|
| 480 |
|
|
|
|
|
|
|
|
| — |
| 36,364 |
|
|
| 36,364 |
|
Utilities (3.2%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AES Corp. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8.00%, 10/15/17 |
| — |
| 40 |
| 40 |
| — |
| 46 |
|
|
| 46 |
|
DCP Midstream Operating LP |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.70%, 4/1/19 |
| — |
| 650 |
| 650 |
| — |
| 594 |
|
|
| 594 |
|
Dominion Gas Holdings LLC |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.50%, 12/15/19 |
| — |
| 825 |
| 825 |
| — |
| 842 |
|
|
| 842 |
|
Enbridge, Inc. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.71%, 6/2/17 (b) |
| — |
| 175 |
| 175 |
| — |
| 173 |
|
|
| 173 |
|
EnLink Midstream Partners LP |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.70%, 4/1/19 |
| — |
| 525 |
| 525 |
| — |
| 525 |
|
|
| 525 |
|
Eversource Energy |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.45%, 5/1/18 |
| — |
| 525 |
| 525 |
| — |
| 522 |
|
|
| 522 |
|
GDF Suez |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.63%, 10/10/17 (c) |
| — |
| 650 |
| 650 |
| — |
| 654 |
|
|
| 654 |
|
NRG Energy, Inc. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.63%, 1/15/18 |
| — |
| 275 |
| 275 |
| — |
| 304 |
|
|
| 304 |
|
PSEG Power LLC |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.50%, 12/1/15 |
| — |
| 570 |
| 570 |
| — |
| 587 |
|
|
| 587 |
|
Sempra Energy |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.40%, 3/15/20 |
| — |
| 600 |
| 600 |
| — |
| 607 |
|
|
| 607 |
|
Southern Co. (The) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.15%, 9/1/19 |
| — |
| 725 |
| 725 |
| — |
| 730 |
|
|
| 730 |
|
|
|
|
|
|
|
|
| — |
| 5,584 |
|
|
| 5,584 |
|
|
|
|
|
|
|
|
| — |
| 72,245 |
|
|
| 72,245 |
|
Mortgages - Other (2.4%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alternative Loan Trust, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.50%, 10/25/35 — 11/25/35 |
| — |
| 969 |
| 969 |
| — |
| 932 |
|
|
| 932 |
|
CHL Mortgage Pass-Through Trust |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.50%, 5/25/34 |
| — |
| 394 |
| 394 |
| — |
| 406 |
|
|
| 406 |
|
FDIC Guaranteed Notes Trust |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.72%, 2/25/48 (b)(c) |
| — |
| 147 |
| 147 |
| — |
| 147 |
|
|
| 147 |
|
Freddie Mac Structured Agency Credit Risk Debt Notes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.17%, 2/25/24 (b) |
| — |
| 227 |
| 227 |
| — |
| 227 |
|
|
| 227 |
|
HarborView Mortgage Loan Trust |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.37%, 1/19/38 (b) |
| — |
| 416 |
| 416 |
| — |
| 355 |
|
|
| 355 |
|
JP Morgan Alternative Loan Trust |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.00%, 12/25/35 |
| — |
| 131 |
| 131 |
| — |
| 123 |
|
|
| 123 |
|
Lehman Mortgage Trust |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.50%, 9/25/37 |
| — |
| 51 |
| 51 |
| — |
| 44 |
|
|
| 44 |
|
Opteum Mortgage Acceptance Corp. Trust |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.47%, 4/25/36 (b) |
| — |
| 470 |
| 470 |
| — |
| 406 |
|
|
| 406 |
|
|
| MS Limited |
| MSIFT Limited |
| Pro-Forma |
| MS Limited |
| MSIFT |
| Adjustments |
| Pro-Forma |
| |||||||||
|
| Face Amount (000) |
| Face Amount (000) |
| Face Amount (000) |
| Value (000) |
| Value (000) |
| (000) |
| Value (000) |
| |||||||||
RALI Trust, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
0.36%, 12/25/36 (b) |
| — |
| 571 |
| 571 |
| — |
| 444 |
|
|
| 444 |
| |||||||||
6.00%, 11/25/36 |
| — |
| 165 |
| 165 |
| — |
| 129 |
|
|
| 129 |
| |||||||||
Sequoia Mortgage Trust |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
0.80%, 8/20/34 (b) |
| — |
| 555 |
| 555 |
| — |
| 529 |
|
|
| 529 |
| |||||||||
Washington Mutual Mortgage Pass-Through Certificates Trust, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
1.09%, 8/25/46 (b) |
| — |
| 506 |
| 506 |
| — |
| 357 |
|
|
| 357 |
| |||||||||
1.12%, 6/25/46 (b) |
| — |
| 64 |
| 64 |
| — |
| 46 |
|
|
| 46 |
| |||||||||
|
|
|
|
|
|
|
| — |
| 4,145 |
|
|
| 4,145 |
| |||||||||
Sovereign (1.0%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
EUROFIMA, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
MTN |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
6.25%, 12/28/18 |
| — |
| AUD | 630 |
| AUD | 630 |
| — |
| 545 |
|
|
| 545 |
| |||||||
Korea Development Bank (The) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
1.50%, 1/22/18 |
| — |
| $ | 690 |
| $ | 690 |
| — |
| 687 |
|
|
| 687 |
| |||||||
Spain Government International Bond |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
4.00%, 3/6/18 (c) |
| — |
| 500 |
| 500 |
| — |
| 536 |
|
|
| 536 |
| |||||||||
|
|
|
|
|
|
|
| — |
| 1,768 |
|
|
| 1,768 |
| |||||||||
U.S. Agency Security (1.3%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Private Export Funding Corp. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
1.45%, 8/15/19 |
| 2,300 |
| — |
| 2,300 |
| 2,284 |
| — |
|
|
| 2,284 |
| |||||||||
|
|
|
|
|
|
|
| 2,284 |
| — |
|
|
| 2,284 |
| |||||||||
Total Fixed Income Securities (Cost $168,254) |
|
|
|
|
|
|
| 63,191 |
| 107,467 |
|
|
| 170,658 |
| |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
|
| Shares |
| Shares |
| Shares |
|
|
|
|
|
|
|
|
| |||||||||
Short-Term Investments (7.0%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Investment Company (1.3%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Morgan Stanley Institutional Liquidity Funds - Money Market Portfolio — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Institutional Class (See Note G) (Cost $1,304) |
| — |
| 1,303,736 |
| 1,303,736 |
| — |
| 1,304 |
|
|
| 1,304 |
| |||||||||
Morgan Stanley Institutional Liquidity Funds - Government Portfolio — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Institutional Class (Cost $933) |
| 933,246 |
| — |
| 933,246 |
| 933 |
| — |
|
|
| 933 |
| |||||||||
|
|
|
|
|
|
|
| 933 |
| 1,304 |
|
|
| 2,237 |
| |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
|
| Face Amount (000) |
| Face Amount (000) |
| Face Amount (000) |
|
|
|
|
|
|
|
|
| |||||||||
U.S. Treasury Securities (5.7%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
U.S. Treasury Bill |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
0.07%, 6/18/15 (d)(e) |
| $ | 486 |
| $ | 864 |
| $ | 1,350 |
| 486 |
| 864 |
|
|
| 1,350 |
| ||||||
U.S. Treasury Notes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
0.25%, 8/15/15 |
| 3,275 |
| — |
| 3,275 |
| 3,277 |
| — |
|
|
| 3,277 |
| |||||||||
0.38%, 8/31/15 |
| 5,300 |
| — |
| 5,300 |
| 5,306 |
| — |
|
|
| 5,306 |
| |||||||||
Total U.S. Treasury Securities (Cost $9,938) |
|
|
|
|
|
|
| 9,069 |
| 864 |
|
|
| 9,933 |
| |||||||||
Total Short-Term Investments (Cost $12,175) |
|
|
|
|
|
|
| 10,002 |
| 2,168 |
|
|
| 12,170 |
| |||||||||
Total Investments (104.8%) (Cost $180,429) (f) |
|
|
|
|
|
|
| 73,193 |
| 109,635 |
|
|
| 182,828 |
| |||||||||
Liabilities in Excess of Other Assets (4.8%) |
|
|
|
|
|
|
| (8,013 | ) | (205 | ) | (180 | )(g) | (8,398 | ) | |||||||||
Net Assets (100.0%) |
|
|
|
|
|
|
| $ | 65,180 |
| $ | 109,430 |
| $ | (180 | ) | $ | 174,430 |
| |||||
(a) Security is subject to delayed delivery.
(b) Variable/Floating Rate Security — Interest rate changes on these instruments are based on changes in a designated base rate. The rates shown are those in effect on March 31, 2015.
(c) 144A security — Certain conditions for public sale may exist. Unless otherwise noted, these securities are deemed to be liquid.
(d) Rate shown is the yield to maturity at March 31, 2015.
(e) All or a portion of the security was pledged to cover margin requirements for futures contracts and swap agreements.
(f) Securities are available for collateral in connection with securities purchased on a forward basis, open foreign currency forward exchange contract, open futures contracts and swap agreements.
(g) Reorganization Expenses of approximately $180,000.
AID | Agency for International Development. |
FDIC | Federal Deposit Insurance Corporation. |
IO | Interest Only. |
MTN | Medium Term Note. |
NCUA | National Credit Union Administration. |
REMIC | Real Estate Mortgage Investment Conduit. |
TBA | To Be Announced. |
Foreign Currency Forward Exchange Contract:
The Portfolio had the following foreign currency forward exchange contract open at March 31, 2015:
MSIFT Limited Duration Portfolio
Counterparty |
| Currency to |
| Value (000) |
| Settlement Date |
| In Exchange For |
| Value (000) |
| Unrealized |
| |||||
UBS AG |
| AUD | 720 |
| $ | 548 |
| 4/7/15 |
| USD | 562 |
| $ | 562 |
| $ | 14 |
|
Pro-Forma Combined Portfolio
UBS AG |
| AUD | 720 |
| $ | 548 |
| 4/7/15 |
| USD | 562 |
| $ | 562 |
| $ | 14 |
|
Futures Contracts:
The Portfolio had the following futures contracts open at March 31, 2015:
|
| Number of |
| Value (000) |
| Expiration Date |
| Unrealized |
| ||
MS Limited Duration U.S. Government Trust |
|
|
|
|
|
|
|
|
| ||
Long: |
|
|
|
|
|
|
|
|
| ||
U.S. Treasury 2 yr. Note |
| 134 |
| 29,367 |
| Jun-15 |
| $ | 54 |
| |
Short: |
|
|
|
|
|
|
|
|
| ||
U.S. Treasury 10 yr. Note |
| 9 |
| (1,160 | ) | Jun-15 |
| (12 | ) | ||
U.S. Treasury 5 yr. Note |
| 45 |
| (5,409 | ) | Jun-15 |
| (34 | ) | ||
|
|
|
|
|
|
|
| $ | 8 |
| |
MSIFT Limited Duration Portfolio |
|
|
|
|
|
|
|
|
| ||
Long: |
|
|
|
|
|
|
|
|
| ||
U.S. Treasury 2 yr. Note |
| 168 |
| $ | 36,818 |
| Jun-15 |
| $ | 79 |
|
U.S. Treasury 10 yr. Note |
| 23 |
| 2,965 |
| Jun-15 |
| 19 |
| ||
U.S. Treasury Long Bond |
| 1 |
| 164 |
| Jun-15 |
| 2 |
| ||
Short: |
|
|
|
|
|
|
|
|
| ||
U.S. Treasury 5 yr. Note |
| 171 |
| (20,556 | ) | Jun-15 |
| (138 | ) | ||
|
|
|
|
|
|
|
| $ | (38 | ) | |
Pro-Forma Combined Portfolio |
|
|
|
|
|
|
|
|
| ||
Long: |
|
|
|
|
|
|
|
|
| ||
U.S. Treasury 2 yr. Note |
| 302 |
| $ | 66,185 |
| Jun-15 |
| $ | 133 |
|
U.S. Treasury 10 yr. Note |
| 23 |
| 2,965 |
| Jun-15 |
| 19 |
| ||
U.S. Treasury Long Bond |
| 1 |
| 164 |
| Jun-15 |
| 2 |
| ||
Short: |
|
|
|
|
|
|
|
|
| ||
U.S. Treasury 5 yr. Note |
| 216 |
| (25,965 | ) | Jun-15 |
| (172 | ) | ||
U.S. Treasury 10 yr. Note |
| 9 |
| (1,160 | ) | Jun-15 |
| (12 | ) | ||
|
|
|
|
|
|
|
| $ | (30 | ) |
Credit Default Swap Agreements:
The Portfolio had the following credit default swap agreements open at March 31, 2015:
MSIFT Limited Duration Portfolio
|
| Buy/Sell |
| Notional Amount |
| Pay/Receive |
| Termination |
| Upfront |
| Unrealized |
| Value (000) |
| Credit Rating of Reference |
| ||||
Swap Counterparty and Reference Obligation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Barclays Bank PLC |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Quest Diagnostics, Inc. |
| Buy |
| $ | 645 |
| 1.00 | % | 3/20/19 |
| $ | 13 |
| $ | (25 | ) | $ | (12 | ) | BBB+ |
|
Barclays Bank PLC |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Yum! Brands, Inc. |
| Buy |
| 625 |
| 1.00 |
| 12/20/18 |
| (11 | ) | (5 | ) | (16 | ) | BBB |
| ||||
Morgan Stanley & Co., LLC* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
CDX.IG.24 |
| Buy |
| 1,200 |
| 1.00 |
| 6/20/20 |
| (23 | ) | 1 |
| (22 | ) | NR |
| ||||
|
|
|
| $ | 2,470 |
|
|
|
|
| $ | (21 | ) | $ | (29 | ) | $ | (50 | ) |
|
|
Pro-Forma Combined Portfolio |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Barclays Bank PLC |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Quest Diagnostics, Inc. |
| Buy |
| $ | 645 |
| 1.00 | % | 3/20/19 |
| $ | 13 |
| $ | (25 | ) | $ | (12 | ) | BBB+ |
|
Barclays Bank PLC |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Yum! Brands, Inc. |
| Buy |
| 625 |
| 1.00 |
| 12/20/18 |
| (11 | ) | (5 | ) | (16 | ) | BBB |
| ||||
Morgan Stanley & Co., LLC* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
CDX.IG.24 |
| Buy |
| 1,200 |
| 1.00 |
| 6/20/20 |
| (23 | ) | 1 |
| (22 | ) | NR |
| ||||
|
|
|
| $ | 2,470 |
|
|
|
|
| $ | (21 | ) | $ | (29 | ) | $ | (50 | ) |
|
|
Interest Rate Swap Agreements:
The Portfolio had the following interest rate swap agreements open at March 31, 2015:
MS Limited Duration U.S. Government Trust
|
| Floating Rate |
| Pay/Receive |
| Fixed Rate |
| Termination |
| Notional |
| Unrealized |
| ||
Swap Counterparty |
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Morgan Stanley & Co., LLC* |
| 3 Month LIBOR |
| Receive |
| 1.17 | % | 3/24/18 |
| $ | 13,500 |
| $ | (27 | ) |
Morgan Stanley & Co., LLC* |
| 3 Month LIBOR |
| Receive |
| 1.58 |
| 3/24/20 |
| 5,000 |
| (13 | ) | ||
|
|
|
|
|
|
|
|
|
|
|
| $ | (40 | ) | |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
MSIFT Limited Duration Portfolio |
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Morgan Stanley & Co., LLC* |
| 3 Month LIBOR |
| Receive |
| 1.17 | % | 3/24/18 |
| $ | 22,500 |
| $ | (45 | ) |
Morgan Stanley & Co., LLC* |
| 3 Month LIBOR |
| Receive |
| 1.58 |
| 3/24/20 |
| 8,300 |
| (22 | ) | ||
|
|
|
|
|
|
|
|
|
|
|
| $ | (67 | ) | |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Pro-Forma Combined Portfolio |
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Morgan Stanley & Co., LLC* |
| 3 Month LIBOR |
| Receive |
| 1.17 | % | 3/24/18 |
| $ | 36,000 |
| $ | (72 | ) |
Morgan Stanley & Co., LLC* |
| 3 Month LIBOR |
| Receive |
| 1.58 |
| 3/24/20 |
| 13,300 |
| (35 | ) | ||
|
|
|
|
|
|
|
|
|
|
|
| $ | (107 | ) |
† |
| Credit rating as issued by Standard & Poor’s. |
* |
| Cleared swap agreement, the broker is Morgan Stanley & Co., LLC. |
LIBOR |
| London Interbank Offered Rate. |
NR |
| Not Rated. |
AUD | - | Australian Dollar |
USD | - | United States Dollar |
As of March 31, 2015, the gross unrealized appreciation (depreciation) of investments based on the aggregate cost of investments for federal income tax purposes was as follows:
|
| MS Limited Duration U.S. |
| MSIFT Limited Duration |
| Pro-Forma Combined |
| |||
Aggregate gross unrealized appreciation |
| $ | 1,119 |
| $ | 1,571 |
| $ | 2,690 |
|
Aggregate gross unrealized depreciation |
| (126 | ) | (175 | ) | (301 | ) | |||
Net unrealized appreciation (depreciation) |
| $ | 993 |
| $ | 1,396 |
| $ | 2,389 |
|
|
|
|
|
|
|
|
| |||
Federal income tax cost of investments |
| $ | 72,190 |
| $ | 108,239 |
| $ | 180,429 |
|
Security Valuation: (1) Certain portfolio securities may be valued by an outside pricing service approved by the Fund’s Board of Trustees (the “Trustees”). The pricing service may utilize a matrix system or other model incorporating attributes such as security quality, maturity and coupon as the evaluation model parameters, and/or research evaluations by its staff, including review of broker-dealer market price quotations in determining what it believes is the fair valuation of the portfolios securities valued by such pricing service; (2) futures are valued at the latest price published by the commodities exchange on which they trade; (3) swaps are marked-to-market daily based upon quotations from market makers; (4) when market quotations are not readily available, including circumstances under which Morgan Stanley Investment Management Inc. (the “Adviser”) determines that the closing price, last sale price or the mean between the last reported bid and asked prices are not reflective of 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 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 of the New York Stock Exchange (“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 Trustees or by the Adviser using a pricing service and/or procedures approved by the Trustees; (5) investments in mutual funds, including the Morgan Stanley Institutional Liquidity Funds, are valued at the net asset value as of the close of each business day; and (6) short-term taxable debt securities with remaining maturities of 60 days or less at the time of purchase may be valued at amortized cost, unless the Adviser determines such price does not reflect the securities’ market value, in which case these securities will be valued at their fair market value determined by the Adviser. Other taxable short-term debt securities with maturities of more than 60 days will be valued on a mark-to-market basis until such time as they reach a maturity of 60 days, whereupon they will be valued at amortized cost using their value on the 61st day unless the Adviser determines such price does not reflect the securities’ fair value, in which case these securities will be valued at their fair market value as determined by the Adviser.
The Trustees have the ultimate responsibility of determining the fair value of the Investments. Under procedures approved by the Trustees, the Fund’s Adviser has formed a Valuation Committee whose members are approved by the Trustees. The Valuation Committee provides administration and oversight of the Fund’s valuation policies and procedures, which are reviewed at least annually by the Trustees. These procedures allow the Fund to utilize independent pricing services, quotations from securities and financial instrument dealers, and other market sources to determine fair value.
The Fund has procedures to determine the fair value of securities and other financial instruments for which market prices are not readily available. Under these procedures, the Valuation Committee convenes on a regular and ad hoc basis to review such securities and considers a number of factors, including valuation methodologies and significant unobservable valuation inputs, when arriving at fair value. The Valuation Committee may employ a market-based approach which may use related or comparable assets or liabilities, recent transactions, market multiples, book values, and other relevant information for the investment to determine the fair value of the investment. An income-based valuation approach may also be used in which the anticipated future cash flows of the investment are discounted to calculate fair value. Discounts may also be applied due to the nature or duration of any restrictions on the disposition of the investments. Due to the inherent uncertainty of valuations of such investments, the fair values may differ significantly from the values that would have been used had an active market existed. The Valuation Committee employs various methods for calibrating these valuation approaches including a regular review of valuation methodologies, key inputs and assumptions, transactional back-testing or disposition analysis, and reviews of any related market activity.
Fair Valuation Measurement
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification TM (“ASC”) 820, “Fair Value Measurement” (“ASC 820”), defines fair value as the value 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. ASC 820 establishes a three-tier hierarchy to distinguish between (1) inputs that reflect the assumptions market participants would use in valuing 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 valuing 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. Factors considered in making this determination may include, but are not limited to, information obtained by contacting the issuer, analysts, or the appropriate stock exchange (for exchange-traded securities), analysis of the issuer’s financial statements or other available documents and, if necessary, available information concerning other securities in similar circumstances
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.
The following is a summary of the inputs used to value each Portfolio’s investments as of March 31, 2015.
Portfolios |
| MS Limited Duration |
| MSIFT Limited |
| Pro-Forma |
| |||
Investments in Securities (Level 1) (000) |
| $ | 941 |
| $ | 1,266 |
| $ | 2,207 |
|
Investments in Securities (Level 2) (000) |
| 72,220 |
| 108,249 |
| 180,469 |
| |||
Investments in Securities (Level 3) (000) |
| — |
| — |
| — |
| |||
Total for Investments in Securities |
| $ | 73,161 |
| $ | 109,515 |
| $ | 182,676 |
|
Statement of Additional Information Supplement
April 20, 2015
Morgan Stanley Institutional Fund Trust
Supplement dated April 20, 2015 to the Morgan Stanley Institutional Fund Trust (the "Fund") Statement of Additional Information dated January 30, 2015 for:
Core Fixed Income Portfolio
Core Plus Fixed Income Portfolio
Corporate Bond Portfolio
Global Strategist Portfolio
High Yield Portfolio
Limited Duration Portfolio
Mid Cap Growth Portfolio
Strategic Income Portfolio
(collectively, the "Portfolios")
The first sentence of the fourth paragraph of the section of the Statement of Additional Information entitled "Management of the Fund—Independent Trustees and the Committees" is hereby deleted and replaced with the following:
The members of the Audit Committee of the Fund are Jakki L. Haussler, Joseph J. Kearns, Michael F. Klein and W. Allen Reed.
The last three sentences of the fifth paragraph of the section of the Statement of Additional Information entitled "Management of the Fund—Independent Trustees and the Committees" are hereby deleted and replaced with the following:
The members of the Governance Committee of the Fund are Kathleen A. Dennis, Michael E. Nugent and Fergus Reid, each of whom is an Independent Trustee. In addition, Michael E. Nugent (as Chairperson of the Morgan Stanley Funds) periodically may attend other operating committee meetings. The Chairperson of the Governance Committee is Fergus Reid.
The third sentence of the sixth paragraph of the section of the Statement of Additional Information entitled "Management of the Fund—Independent Trustees and the Committees" is hereby deleted and replaced with the following:
Accordingly, all the Independent Trustees participate in the selection and nomination of candidates for election as Independent Trustees for the Fund.
The second and third sentences of the seventh paragraph of the section of the Statement of Additional Information entitled "Management of the Fund—Independent Trustees and the Committees" are hereby deleted and replaced with the following:
The Compliance and Insurance Committee consists of Frank L. Bowman, Michael Bozic, Nancy C. Everett, James F. Higgins and Manuel H. Johnson. Frank L. Bowman, Michael Bozic, Nancy C. Everett and Manuel H. Johnson are Independent Trustees.
The third sentence of the eighth paragraph of the section of the Statement of Additional Information entitled "Management of the Fund—Independent Trustees and the Committees" is hereby deleted and replaced with the following:
The members of the Investment Committee are Frank L. Bowman, Michael Bozic, Kathleen A. Dennis, Nancy C. Everett, Jakki L. Haussler, James F. Higgins, Manuel H. Johnson, Joseph J. Kearns, Michael F. Klein, Michael E. Nugent, W. Allen Reed and Fergus Reid.
The ninth paragraph of the section of the Statement of Additional Information entitled "Management of the Fund—Independent Trustees and the Committees" is hereby deleted and replaced with the following:
The Investment Committee has three Sub-Committees, each with its own Chairperson. Each Sub-Committee focuses on the funds' primary areas of investment, namely equities, fixed income and alternatives. Within the Fund Complex, the Sub-Committees and their members are as follows:
(1) Equity—W. Allen Reed (Chairperson), Frank L. Bowman, Nancy C. Everett and Michael E. Nugent.
(2) Fixed Income—Michael F. Klein (Chairperson), Michael Bozic and Fergus Reid.
(3) Money Market and Alternatives—Kathleen A. Dennis (Chairperson), Jakki L. Haussler, James F. Higgins and Joseph J. Kearns.
The section of the Fund's SAI entitled "Distribution and Shareholder Services Plans—Revenue Sharing" is hereby deleted and replaced with the following:
This section does not apply to Class IS shares. The Adviser and/or the Distributor may pay compensation, out of their own funds and not as an expense of the Portfolios, to certain Financial Intermediaries, including recordkeepers and administrators of various deferred compensation plans, in connection with the sale, distribution, marketing and retention of shares of the Portfolios and/or shareholder servicing. For example, the Adviser or the Distributor may pay additional compensation to a Financial Intermediary for, among other things, promoting the sale and distribution of Portfolio shares, providing access to various programs, mutual fund platforms or preferred or recommended mutual fund lists that may be offered by a Financial Intermediary, granting the Distributor access to a Financial Intermediary's financial advisors and consultants, providing assistance in the ongoing education and training of a Financial Intermediary's financial personnel, furnishing marketing support, maintaining share balances and/or for sub-accounting, recordkeeping, administrative, shareholder or transaction processing services. Such payments are in addition to any distribution fees, shareholder servicing fees and/or transfer agency fees that may be payable by the Portfolios. The additional payments may be based on various factors, including level of sales (based on gross or net sales or some specified minimum sales or some other similar criteria related to sales of the Portfolios and/or some or all other Morgan Stanley Funds), amount of assets invested by the Financial Intermediary's customers (which could include current or aged assets of the Portfolios and/or some or all other Morgan Stanley Funds), a Portfolio's advisory fees, some other agreed upon amount or other measures as determined from time to time by the Adviser and/or the Distributor. The amount of these payments may be different for different Financial Intermediaries.
With respect to Morgan Stanley Smith Barney LLC, these payments currently include the following amounts, which are paid in accordance with the applicable compensation structure:
(1) an ongoing annual fee in an amount up to $750,000 in consideration of the Distributor's participation at various Morgan Stanley Smith Barney LLC events, including seminars, conferences and meetings as determined by Morgan Stanley Smith Barney LLC;
(2) on Class A and Class L shares of the Portfolios held in Morgan Stanley Smith Barney LLC brokerage accounts, an ongoing annual fee in an amount equal to 0.16% of the total average daily NAV of such shares for the applicable quarterly period;
(3) on Class I shares of a Portfolio held in Morgan Stanley Smith Barney LLC brokerage accounts as of June 30, 2014, where each such account holds $5 million or more in Class I shares of the Portfolio, an ongoing annual fee in an amount equal to 35% of the advisory fee the Adviser receives from such Portfolio based on the average daily NAV of such shares for the applicable quarterly period;
(4) on new referrals after June 30, 2014 of $5 million or more in Class I shares of a Portfolio, Morgan Stanley Smith Barney LLC, under extraordinary circumstances, may receive an agreed upon one-time payment in an amount not to exceed 0.68% of the actual amount invested; and
(5) on purchases of $1 million or more of Class A shares (for which no initial sales charge was paid), Morgan Stanley Smith Barney LLC may, at the discretion of the Distributor, receive a gross sales credit of up to 1.00% (with respect to the U.S. Equity and Asset Allocation Portfolios) or 0.50% (with respect to the Fixed Income Portfolios) of the amount sold, as applicable.*
With respect to other Financial Intermediaries, these payments currently include the following amounts, which are paid in accordance with the applicable compensation structure for each Financial Intermediary:
(1) on Class A, Class I and Class L shares of the Portfolios held in brokerage accounts only, a ticket charge of up to $10.00;
(2) on Class A, Class I and Class L shares of the Portfolios held in brokerage and/or advisory program accounts, an ongoing annual fee in an amount up to 0.15% of the total average daily NAV of such shares for the applicable quarterly period;
(3) an ongoing annual fee in an amount up to 0.25% on sales of Class A, Class I and Class L shares of the Portfolios through brokerage accounts; and
(4) on purchases of $1 million or more of Class A shares (for which no initial sales charge was paid), Financial Intermediaries may, at the discretion of the Distributor, receive a gross sales credit of up to 1.00% (with respect to the U.S. Equity and Asset Allocation Portfolios) or 0.50% (with respect to the Fixed Income Portfolios) of the amount sold, as applicable.*
The prospect of receiving, or the receipt of, additional compensation, as described above, by Morgan Stanley Smith Barney LLC or other Financial Intermediaries may provide Morgan Stanley Smith Barney LLC or other Financial Intermediaries and their financial advisors and other salespersons with an incentive to favor sales of shares of the Portfolios over other investment options with respect to which Morgan Stanley Smith Barney LLC or other Financial Intermediaries do not receive additional compensation (or receives lower levels of additional compensation). These payment arrangements, however, will not change the price that an investor pays for shares of the Portfolios or the amount that the Portfolios receive to invest on behalf of an investor. Investors may wish to take such payment arrangements into account when considering and evaluating any recommendations relating to Portfolio shares and should review carefully any disclosure provided by Morgan Stanley Smith Barney LLC and other Financial Intermediaries as to their compensation.
* Commissions or transaction fees paid when Morgan Stanley Smith Barney LLC or other Intermediaries initiate and are responsible for purchases of $1 million or more are computed on a percentage of the dollar value of such shares sold as follows: (i) with respect to the U.S. Equity and Asset Allocation Portfolios: 1.00% on sales of $1 million to $4 million, plus 0.50% on sales over $4 million to $15 million, plus 0.25% on the excess over $15 million; and (ii) with respect to the Fixed Income Portfolios: 0.50% on sales of $1 million to $4 million, plus 0.25% on sales over $4 million to $15 million, plus 0.15% on the excess over $15 million. Purchases of Class A shares for which no initial sales charge is paid are subject to a contingent deferred sales charge ("CDSC") of 1% if the redemption of such shares occurs within 18 months after purchase. The full amount of such CDSC will be retained by the Distributor.
PLEASE RETAIN THIS SUPPLEMENT FOR FUTURE REFERENCE.
Statement of Additional Information Supplement
May 27, 2015
Morgan Stanley Institutional Fund Trust
Supplement dated May 27, 2015 to the Morgan Stanley Institutional Fund Trust Statement of Additional Information dated January 30, 2015
Core Fixed Income Portfolio
Core Plus Fixed Income Portfolio
Corporate Bond Portfolio
Limited Duration Portfolio
Jim Caron and Gregory Finck have been added to the teams primarily responsible for the day-to-day management of the Core Fixed Income Portfolio and the Core Plus Fixed Income Portfolio. Mikhael Breiterman-Loader has been added to the team primarily responsible for the day-to-day management of the Corporate Bond Portfolio. Joseph Mehlman has been removed from and Eric Jesionowski has been added to the team primarily responsible for the day-to-day management of the Limited Duration Portfolio. Accordingly, effective immediately, the Statement of Additional Information is revised as follows:
The section of the Statement of Additional Information entitled "Investment Advisory and Other Services—Portfolio Managers—Other Accounts Managed by Portfolio Managers as of September 30, 2014 (unless otherwise indicated)—Core Fixed Income" is hereby deleted and replaced with the following:
Other Registered Investment Companies | Other Pooled Investment Vehicles | Other Accounts | |||||||||||||||||||||||||
Portfolio and Portfolio Managers | Number of Accounts | Total Assets in the Accounts | Number of Accounts | Total Assets in the Accounts | Number of Accounts | Total Assets in the Accounts | |||||||||||||||||||||
Core Fixed Income | |||||||||||||||||||||||||||
Joseph Mehlman | 7 | $891.9 million | 0 | $0 | 73 | $16.0 billion(2) | |||||||||||||||||||||
Neil Stone | 8 | $1.5 billion | 0 | $0 | 76 | $17.7 billion(1) | |||||||||||||||||||||
Matthew Dunning | 0 | $0 | 0 | $0 | 0 | $0 | |||||||||||||||||||||
Jim Caron* | 6 | $1.1 billion | 20 | $4.9 billion | 37 | $14.9 billion(3) | |||||||||||||||||||||
Gregory Finck* | 1 | $66.2 million | 5 | $1.7 billion | 6 | $2.4 billion(4) |
* As of March 31, 2015.
(1) Of these other accounts, four accounts with a total of approximately $1.2 billion in assets, had performance-based fees.
(2) Of these other accounts, one account with a total of approximately $254.1 million in assets, had performance-based fees.
(3) Of these other accounts, five accounts with a total of approximately $1.3 billion in assets, had performance-based fees.
(4) Of these other accounts, one account with a total of approximately $725.9 million in assets, had performance-based fees.
The section of the Statement of Additional Information entitled "Investment Advisory and Other Services—Portfolio Managers—Other Accounts Managed by Portfolio Managers as of September 30, 2014 (unless otherwise indicated)—Core Plus Fixed Income" is hereby deleted and replaced with the following:
Other Registered Investment Companies | Other Pooled Investment Vehicles | Other Accounts | |||||||||||||||||||||||||
Portfolio and Portfolio Managers | Number of Accounts | Total Assets in the Accounts | Number of Accounts | Total Assets in the Accounts | Number of Accounts | Total Assets in the Accounts | |||||||||||||||||||||
Core Plus Fixed Income | |||||||||||||||||||||||||||
Joseph Mehlman | 7 | $711.1 million | 0 | $ | 0 | 73 | $16.0 billion(2) | ||||||||||||||||||||
Neil Stone | 8 | $1.3 billion | 0 | $ | 0 | 76 | $17.7 billion(1) | ||||||||||||||||||||
Matthew Dunning | 0 | $ | 0 | 0 | $ | 0 | 0 | $ | 0 | ||||||||||||||||||
Jim Caron* | 6 | $1.1 billion | 20 | $4.9 billion | 37 | $14.9 billion(3) | |||||||||||||||||||||
Gregory Finck* | 1 | $66.2 million | 5 | $1.7 billion | 6 | $2.4 billion(4) |
* As of March 31, 2015.
(1) Of these other accounts, four accounts with a total of approximately $1.2 billion in assets, had performance-based fees.
(2) Of these other accounts, one account with a total of approximately $254.1 million in assets, had performance-based fees.
(3) Of these other accounts, five accounts with a total of approximately $1.3 billion in assets, had performance-based fees.
(4) Of these other accounts, one account with a total of approximately $725.9 million in assets, had performance-based fees.
The section of the Statement of Additional Information entitled "Investment Advisory and Other Services—Portfolio Managers—Other Accounts Managed by Portfolio Managers as of September 30, 2014 (unless otherwise indicated)—Corporate Bond" is hereby deleted and replaced with the following:
Other Registered Investment Companies | Other Pooled Investment Vehicles | Other Accounts | |||||||||||||||||||||||||
Portfolio and Portfolio Managers | Number of Accounts | Total Assets in the Accounts | Number of Accounts | Total Assets in the Accounts | Number of Accounts | Total Assets in the Accounts | |||||||||||||||||||||
Corporate Bond | |||||||||||||||||||||||||||
Joseph Mehlman | 7 | $867.1 million | 0 | $0 | 73 | $16.0 billion(2) | |||||||||||||||||||||
Christian G. Roth | 7 | $696.7 million | 30 | $9.9 billion | 43 | $17.7 billion(3) | |||||||||||||||||||||
Mikhael Breiterman-Loader* | 0 | $0 | 0 | $0 | 0 | $0 |
* As of March 31, 2015.
(2) Of these other accounts, one account with a total of approximately $254.1 million in assets, had performance-based fees.
(3) Of these other accounts, nine accounts with a total of approximately $3.7 billion in assets, had performance-based fees.
The section of the Statement of Additional Information entitled "Investment Advisory and Other Services—Portfolio Managers—Other Accounts Managed by Portfolio Managers as of September 30, 2014 (unless otherwise indicated)—Limited Duration" is hereby deleted and replaced with the following:
Other Registered Investment Companies | Other Pooled Investment Vehicles | Other Accounts | |||||||||||||||||||||||||
Portfolio and Portfolio Managers | Number of Accounts | Total Assets in the Accounts | Number of Accounts | Total Assets in the Accounts | Number of Accounts | Total Assets in the Accounts | |||||||||||||||||||||
Limited Duration | |||||||||||||||||||||||||||
Neil Stone | 8 | $1.4 billion | 0 | $0 | 76 | $17.7 billion(1) | |||||||||||||||||||||
Matthew Dunning | 0 | $0 | 0 | $0 | 0 | $0 | |||||||||||||||||||||
Eric Jesionowski* | 0 | $0 | 0 | $0 | 37 | $11 billion |
* As of March 31, 2015.
(1) Of these other accounts, four accounts with a total of approximately $1.2 billion in assets, had performance-based fees.
The section of the Statement of Additional Information entitled "Investment Advisory and Other Services—Portfolio Managers—Securities Ownership of Portfolio Managers—Core Fixed Income" is hereby deleted and replaced with the following:
Portfolio and Portfolio Managers | Portfolio Holdings | ||||||
Core Fixed Income | |||||||
Joseph Mehlman | None | ||||||
Neil Stone | None | ||||||
Matthew Dunning | None | ||||||
Jim Caron | None | ||||||
Gregory Finck | None |
The section of the Statement of Additional Information entitled "Investment Advisory and Other Services—Portfolio Managers—Securities Ownership of Portfolio Managers—Core Plus Fixed Income" is hereby deleted and replaced with the following:
Portfolio and Portfolio Managers | Portfolio Holdings | ||||||
Core Plus Fixed Income | |||||||
Joseph Mehlman | None | ||||||
Neil Stone | None | ||||||
Matthew Dunning | None | ||||||
Jim Caron | None | ||||||
Gregory Finck | None |
The section of the Statement of Additional Information entitled "Investment Advisory and Other Services—Portfolio Managers—Securities Ownership of Portfolio Managers—Corporate Bond" is hereby deleted and replaced with the following:
Portfolio and Portfolio Managers | Portfolio Holdings | ||||||
Corporate Bond | |||||||
Joseph Mehlman | None | ||||||
Christian G. Roth | None | ||||||
Mikhael Breiterman-Loader | None |
The section of the Statement of Additional Information entitled "Investment Advisory and Other Services—Portfolio Managers—Securities Ownership of Portfolio Managers—Limited Duration" is hereby deleted and replaced with the following:
Portfolio and Portfolio Managers | Portfolio Holdings | ||||||
Limited Duration | |||||||
Neil Stone | None | ||||||
Matthew Dunning | None | ||||||
Eric Jesionowski | None |
Please retain this supplement for future reference.
Statement of Additional Information Supplement
July 6, 2015
Morgan Stanley Institutional Fund Trust
Supplement dated July 6, 2015 to the Morgan Stanley Institutional Fund Trust (the "Fund") Statement of Additional Information dated January 30, 2015
Core Fixed Income Portfolio
Core Plus Fixed Income Portfolio
Corporate Bond Portfolio
Global Strategist Portfolio
High Yield Portfolio
Limited Duration Portfolio
Mid Cap Growth Portfolio
Strategic Income Portfolio
The table in the section entitled "Disclosure of Portfolio Holdings" in the Fund's Statement of Additional Information is hereby deleted and replaced with the following:
Name | Information Disclosed | Frequency(1) | Lag Time | ||||||||||||
Service Providers | |||||||||||||||
Institutional Shareholder Services(*) | Complete portfolio holdings | Daily basis | End of Day | ||||||||||||
State Street Bank and Trust Company(*) | Complete portfolio holdings | Daily basis | (2) | ||||||||||||
BlackRock Financial Management Inc.(*)(3) | Complete portfolio holdings | Daily basis | (2) | ||||||||||||
Fund Rating Agencies | |||||||||||||||
Lipper(*) | Top ten and complete portfolio holdings | Monthly basis | Approximately six business days after month end | ||||||||||||
Portfolio Analytics Providers | |||||||||||||||
FactSet Research Systems, Inc.(*) | Complete portfolio holdings | Daily basis | (2) |
(*) This entity has agreed to maintain Fund non-public portfolio holdings information in confidence and not to trade portfolio securities based on the non-public portfolio holdings information.
(1) Dissemination of portfolio holdings information to entities listed above may occur less frequently than indicated (or not at all).
(2) Information will typically be provided on a real time basis or as soon thereafter as possible.
(3) With respect to the Core Fixed Income, Core Plus Fixed Income, Corporate Bond, Global Strategist, High Yield, Limited Duration and Strategic Income Portfolios, only.
Please retain this supplement for future reference.
Statement of Additional Information Supplement
September 2, 2015
Morgan Stanley Institutional Fund Trust
Supplement dated September 2, 2015 to the Morgan Stanley Institutional Fund Trust (the "Fund") Statement of Additional Information dated January 30, 2015
Limited Duration Portfolio
(the "Portfolio")
The information in the table under the section of the Fund's Statement of Additional Information entitled "The Portfolios' Investments and Strategies" which summarize the permissible investments and strategies for the Portfolio is hereby deleted and replaced, on or about December 7, 2015, with the following:
Limited Duration Portfolio | |||||||
Investments: | |||||||
ADRs | a | ||||||
Agencies | a | ||||||
Asset-Backed Securities | a | ||||||
Borrowing | a | ||||||
Brady Bonds | a | ||||||
Cash Equivalents | a | ||||||
Commercial Paper | a | ||||||
Common Stock | |||||||
Convertibles | a | ||||||
Corporates | a | ||||||
Depositary Receipts | a | ||||||
Derivatives | a | ||||||
Emerging Market Securities | a | ||||||
Equity Securities | |||||||
Fixed Income Securities | a | ||||||
Floaters | a | ||||||
Foreign Currency | a | ||||||
Foreign Securities | a | ||||||
Forwards | a | ||||||
Futures Contracts | a | ||||||
High Yield Securities | a |
Limited Duration Portfolio | |||||||
Inverse Floaters | |||||||
Investment Companies | a | ||||||
Investment Funds | |||||||
Investment Grade Securities | a | ||||||
Loan Participations and Assignments | |||||||
Mortgage Related Securities | a | ||||||
— Mortgage-Backed Securities | a | ||||||
— Collateralized Mortgage Obligations | a | ||||||
— Stripped Mortgage-Backed Securities | |||||||
— Commercial Mortgage-Backed Securities | a | ||||||
Municipals | |||||||
Non-Publicly Traded Securities, Private Placements and Restricted Securities | a | ||||||
Options | a | ||||||
Preferred Stock | a | ||||||
Public Bank Loans | |||||||
Real Estate Investing | |||||||
— Real Estate Investment Trusts | |||||||
— Foreign Real Estate Companies | |||||||
Repurchase Agreements | a | ||||||
Reverse Repurchase Agreements | a | ||||||
Rights | |||||||
Securities Lending | a | ||||||
Short Selling | a | ||||||
Structured Investments | a |
Limited Duration Portfolio | |||||||
Swaps | a | ||||||
U.S. Government Securities | a | ||||||
Warrants | |||||||
When-Issued and Delayed Delivery Securities and Forward Commitments | a | ||||||
When, As and If Issued Securities | a | ||||||
Yankee and Eurobond Obligations | a | ||||||
Zero Coupons | a |
Please retain this supplement for future reference.
MORGAN STANLEY INSTITUTIONAL FUND TRUST
522 Fifth Ave.
New York, NY 10036
STATEMENT OF ADDITIONAL INFORMATION
January 30, 2015
Morgan Stanley Institutional Fund Trust (the “Fund”) is a mutual fund consisting of eight portfolios offering a variety of investment alternatives, all of which are included in this Statement of Additional Information (“SAI”) (each a “Portfolio” and collectively the “Portfolios”). Each Portfolio offers Class I, Class A and Class L shares. The High Yield Portfolio, Mid Cap Growth Portfolio and Strategic Income Portfolio also offer Class IS shares. Following is a list of the eight Portfolios included in this SAI:
|
| Share Class and Ticker Symbol | ||||||
|
| Class I |
| Class A |
| Class L |
| Class IS |
U.S. EQUITY PORTFOLIO: |
|
|
|
|
|
|
|
|
Mid Cap Growth Portfolio* |
| MPEGX |
| MACGX |
| MSKLX |
| MMCGX |
FIXED INCOME PORTFOLIOS: |
|
|
|
|
|
|
|
|
Core Fixed Income Portfolio |
| MPSFX |
| MDIAX |
| MSXLX |
| — |
Core Plus Fixed Income Portfolio |
| MPFIX |
| MFXAX |
| MSIOX |
| — |
Corporate Bond Portfolio |
| MPFDX |
| MIGAX |
| MGILX |
| — |
High Yield Portfolio |
| MSYIX |
| MSYPX |
| MSYLX |
| MSHYX |
Limited Duration Portfolio |
| MPLDX |
| MLDAX |
| MSJLX |
| — |
Strategic Income Portfolio** |
| MSIDX |
| MSADX |
| MSLSX |
| MSTCX |
ASSET ALLOCATION PORTFOLIO: |
|
|
|
|
|
|
|
|
Global Strategist Portfolio |
| MPBAX |
| MBAAX |
| MSDLX |
| — |
* | The Portfolio’s Class I, Class A, Class L and Class IS shares are currently closed to new investors with certain exceptions. |
** | Class L shares of the Portfolio are not being offered at this time. You do not currently have the option of purchasing Class L shares. |
This SAI is not a prospectus but should be read in conjunction with the Portfolios’ prospectuses, each dated January 30, 2015, as may be supplemented from time to time. To obtain any of these prospectuses, please call Shareholder Services at the number indicated below.
The Portfolios’ (except the Strategic Income Portfolio) most recent Annual Reports to Shareholders are separate documents supplied with this SAI and include the Portfolios’ audited financial statements, including notes thereto, and the reports of the Fund’s independent registered public accounting firm, which are incorporated by reference into this SAI. As of the date of this SAI, the Annual Report to Shareholders for the Strategic Income Portfolio is not yet available because it had not commenced operations as of the most recent fiscal year end.
Each Portfolio is “diversified” and, as such, each Portfolio’s investments are required to meet certain diversification requirements under federal securities laws.
SHAREHOLDER SERVICES: 1-800-548-7786
PRICES AND INVESTMENT RESULTS: WWW.MORGANSTANLEY.COM/IM
TABLE OF CONTENTS
| Page |
THE PORTFOLIOS’ INVESTMENTS AND STRATEGIES | 1 |
INVESTMENTS AND RISKS | 7 |
INVESTMENT LIMITATIONS | 41 |
DISCLOSURE OF PORTFOLIO HOLDINGS | 43 |
PURCHASE AND REDEMPTION OF SHARES | 46 |
ACCOUNT POLICIES AND FEATURES | 47 |
VALUATION OF SHARES | 48 |
MANAGEMENT OF THE FUND | 49 |
COMPENSATION | 62 |
INVESTMENT ADVISORY AND OTHER SERVICES | 64 |
PRINCIPAL UNDERWRITER | 65 |
FUND ADMINISTRATION | 66 |
DISTRIBUTION AND SHAREHOLDER SERVICES PLANS | 70 |
BROKERAGE PRACTICES | 72 |
GENERAL INFORMATION | 78 |
TAXES | 79 |
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES | 86 |
PERFORMANCE INFORMATION | 91 |
FINANCIAL STATEMENTS | 94 |
APPENDIX A — MORGAN STANLEY INVESTMENT MANAGEMENT PROXY VOTING POLICY AND PROCEDURES | A-1 |
APPENDIX B — DESCRIPTION OF RATINGS | B-1 |
THE PORTFOLIOS’ INVESTMENTS AND STRATEGIES
This SAI provides additional information about the investment policies and operations of the Fund and the Portfolios. The following tables summarize the permissible strategies and investments for each Portfolio. These tables should be read in conjunction with the investment summaries for each Portfolio contained in the Prospectus in order to provide a more complete description of such Portfolio’s investment policies. The tables exclude investments that Portfolios may make solely for temporary defensive purposes. More details about each investment and related risks are provided in the discussion following the tables.
U.S. EQUITY AND ASSET ALLOCATION PORTFOLIOS
|
| Mid Cap Growth Portfolio |
| Global Strategist Portfolio |
Investments: |
|
|
|
|
ADRs |
| x |
| x |
Agencies |
| x |
| x |
Asset-Backed Securities |
|
|
| x |
Borrowing |
| x |
| x |
Brady Bonds |
|
|
| x |
Cash Equivalents |
| x |
| x |
Commercial Paper |
| x |
| x |
Common Stock |
| x |
| x |
Contracts for Difference |
| x |
|
|
Convertibles |
| x |
| x |
Corporates |
| x |
| x |
Depositary Receipts |
| x |
| x |
Derivatives |
| x |
| x |
Emerging Market Securities |
| x |
| x |
Equity Securities |
| x |
| x |
Fixed Income Securities |
| x |
| x |
Floaters |
|
|
| x |
Foreign Currency |
| x |
| x |
Foreign Securities |
| x |
| x |
Forwards |
| x |
| x |
U.S. EQUITY AND ASSET ALLOCATION PORTFOLIOS
|
| Mid Cap Growth Portfolio |
| Global Strategist Portfolio |
Futures Contracts |
| x |
| x |
High Yield Securities |
|
|
| x |
Inverse Floaters |
|
|
| x |
Investment Companies |
| x |
| x |
Investment Funds |
|
|
| x |
Investment Grade Securities |
| x |
| x |
Limited Partnership and Limited Liability Company Interests |
| x |
| x |
Loan Participations and Assignments |
|
|
| x |
Mortgage Related Securities |
|
|
| x |
—Mortgage-Backed Securities |
|
|
| x |
—Collateralized Mortgage Obligations |
|
|
| x |
—Stripped Mortgage-Backed Securities |
|
|
| x |
—Commercial Mortgage-Backed Securities |
|
|
| x |
Non-Publicly Traded Securities, Private Placements and Restricted Securities |
| x |
| x |
Options |
| x |
| x |
Private Investments in Public Equity |
| x |
| x |
Preferred Stock |
| x |
| x |
Real Estate Investing |
| x |
| x |
—Real Estate Investment Trusts |
| x |
| x |
—Foreign Real Estate Companies |
| x |
| x |
Repurchase Agreements |
| x |
| x |
Reverse Repurchase Agreements |
| x |
| x |
Rights |
| x |
| x |
Securities Lending |
| x |
| x |
Short Selling |
| x |
| x |
U.S. EQUITY AND ASSET ALLOCATION PORTFOLIOS
|
| Mid Cap Growth Portfolio |
| Global Strategist Portfolio |
Structured Investments |
| x |
| x |
Swaps |
| x |
| x |
U.S. Government Securities |
| x |
| x |
Warrants |
| x |
| x |
When-Issued and Delayed Delivery Securities and Forward Commitments |
| x |
| x |
When, As and If Issued Securities |
| x |
| x |
Yankee and Eurobond Obligations |
| x |
| x |
Zero Coupons |
| x |
| x |
FIXED INCOME PORTFOLIOS
|
| Core Fixed |
| Core Plus |
| Corporate |
| High Yield |
| Limited |
| Strategic |
Investments: |
|
|
|
|
|
|
|
|
|
|
|
|
ADRs |
| x |
| x |
| x |
| x |
| x |
| x |
Agencies |
| x |
| x |
| x |
| x |
| x |
| x |
Asset-Backed Securities |
| x |
| x |
| x |
| x |
| x |
| x |
Borrowing |
| x |
| x |
| x |
| x |
| x |
| x |
Brady Bonds |
| x |
| x |
| x |
| x |
| x |
| x |
Cash Equivalents |
| x |
| x |
| x |
| x |
| x |
| x |
Commercial Paper |
| x |
| x |
| x |
| x |
| x |
| x |
Common Stock |
|
|
|
|
|
|
| x |
|
|
| x |
Convertibles |
| x |
| x |
| x |
| x |
| x |
| x |
Corporates |
| x |
| x |
| x |
| x |
| x |
| x |
Depositary Receipts |
| x |
| x |
| x |
| x |
| x |
| x |
Derivatives |
| x |
| x |
| x |
| x |
| x |
| x |
Emerging Market Securities |
| x |
| x |
| x |
| x |
| x |
| x |
Equity Securities |
|
|
|
|
|
|
| x |
|
|
| x |
Fixed Income Securities |
| x |
| x |
| x |
| x |
| x |
| x |
Floaters |
| x |
| x |
| x |
| x |
| x |
| x |
Foreign Currency |
|
|
| x |
|
|
| x |
| x |
| x |
Foreign Securities |
| x |
| x |
| x |
| x |
| x |
| x |
Forwards |
|
|
| x |
|
|
| x |
| x |
| x |
Futures Contracts |
| x |
| x |
| x |
| x |
| x |
| x |
High Yield Securities |
|
|
| x |
| x |
| x |
| x |
| x |
FIXED INCOME PORTFOLIOS
|
| Core Fixed |
| Core Plus |
| Corporate |
| High Yield |
| Limited |
| Strategic |
Inverse Floaters |
| x |
| x |
| x |
| x |
| x |
| x |
Investment Companies |
| x |
| x |
| x |
| x |
| x |
| x |
Investment Funds |
|
|
|
|
|
|
| x |
|
|
| x |
Investment Grade Securities |
| x |
| x |
| x |
| x |
| x |
| x |
Loan Participations and Assignments |
|
|
| x |
|
|
| x |
|
|
| x |
Mortgage Related Securities |
| x |
| x |
| x |
| x |
| x |
| x |
—Mortgage-Backed Securities |
| x |
| x |
| x |
| x |
| x |
| x |
—Collateralized Mortgage Obligations |
| x |
| x |
| x |
| x |
| x |
| x |
—Stripped Mortgage-Backed Securities |
| x |
| x |
| x |
| x |
| x |
| x |
—Commercial Mortgage-Backed Securities |
| x |
| x |
| x |
| x |
| x |
| x |
Municipals |
| x |
| x |
| x |
| x |
|
|
| x |
Non-Publicly Traded Securities, Private Placements and |
| x |
| x |
| x |
| x |
| x |
| x |
Options |
| x |
| x |
| x |
| x |
| x |
| x |
Preferred Stock |
| x |
| x |
| x |
| x |
| x |
| x |
Public Bank Loans |
|
|
| x |
|
|
| x |
|
|
| x |
Real Estate Investing |
|
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|
| x |
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| x |
—Real Estate Investment Trusts |
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| x |
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| x |
—Foreign Real Estate Companies |
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| x |
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| x |
Repurchase Agreements |
| x |
| x |
| x |
| x |
| x |
| x |
Reverse Repurchase Agreements |
| x |
| x |
| x |
| x |
| x |
| x |
Rights |
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| x |
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| x |
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| x |
Securities Lending |
| x |
| x |
| x |
| x |
| x |
| x |
FIXED INCOME PORTFOLIOS
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| Core Fixed |
| Core Plus |
| Corporate |
| High Yield |
| Limited |
| Strategic |
Short Selling |
| x |
| x |
| x |
| x |
| x |
| x |
Structured Investments |
| x |
| x |
| x |
| x |
| x |
| x |
Swaps |
| x |
| x |
| x |
| x |
| x |
| x |
U.S. Government Securities |
| x |
| x |
| x |
| x |
| x |
| x |
Warrants |
| x |
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| x |
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| x |
When-Issued and Delayed Delivery Securities and Forward Commitments |
| x |
| x |
| x |
| x |
| x |
| x |
When, As and If Issued Securities |
| x |
| x |
| x |
| x |
| x |
| x |
Yankee and Eurobond Obligations |
| x |
| x |
| x |
| x |
| x |
| x |
Zero Coupons |
| x |
| x |
| x |
| x |
| x |
| x |
INVESTMENTS AND RISKS
Morgan Stanley Investment Management Inc. is the adviser (the “Adviser”) to the Fund. Morgan Stanley Investment Management Limited is the investment sub-adviser (the “Sub-Adviser”) to the Strategic Income Portfolio.
ADRs: American Depositary Receipts (“ADRs”) are dollar-denominated securities which are listed and traded in the United States, but which represent claims to shares of foreign stocks. They are treated as U.S. equity securities for purposes of the Portfolios’ investment policies. ADRs may be either sponsored or unsponsored. Sponsored ADRs are established jointly by a depositary and the underlying issuer, whereas unsponsored ADRs may be established by a depositary without participation by the underlying issuer. Holders of unsponsored ADRs generally bear all the costs associated with establishing unsponsored ADRs. In addition, the issuers of the securities underlying unsponsored ADRs are not obligated to disclose material information in the United States and, therefore, there may be less information available regarding such issuers and there may not be a correlation between such information and the market value of the ADRs. ADRs also include American Depositary Shares.
Agencies: Agencies refer to fixed income securities issued or guaranteed by federal agencies and U.S. government sponsored instrumentalities. They may or may not be backed by the full faith and credit of the United States. If they are not backed by the full faith and credit of the United States, the investor must look principally to the agency or instrumentality issuing or guaranteeing the obligation for ultimate repayment, and may not be able to assert a claim against the United States itself in the event the agency or instrumentality does not meet its commitment. Agencies which are backed by the full faith and credit of the United States include the Export-Import Bank, Farmers Home Administration, Federal Financing Bank and others. Certain debt issued by Resolution Funding Corporation has both its principal and interest backed by the full faith and credit of the U.S. Treasury in that its principal is backed by U.S. Treasury zero coupon issues, while the U.S. Treasury is explicitly required to advance funds sufficient to pay interest on it, if needed. Certain agencies and instrumentalities, such as the Government National Mortgage Association (“Ginnie Mae”), are, in effect, backed by the full faith and credit of the United States through provisions in their charters that they may make “indefinite and unlimited” drawings on the Treasury if needed to service its debt. Debt from certain other agencies and instrumentalities, including the Federal Home Loan Bank, the Federal Home Loan Mortgage Corporation (“Freddie Mac”) and the Federal National Mortgage Association (“Fannie Mae”), are not guaranteed by the United States, but those institutions are protected by the discretionary authority of the U.S. Treasury to purchase certain amounts of their securities to assist them in meeting their debt obligations. Finally, other agencies and instrumentalities, such as the Farm Credit System, are federally chartered institutions under U.S. Government supervision, but their debt securities are backed only by the credit worthiness of those institutions, not the U.S. Government. Some of the U.S. government agencies that issue or guarantee securities include the Export-Import Bank of the United States, Farmers Home Administration, Federal Housing Administration, Maritime Administration, Small Business Administration and The Tennessee Valley Authority (the “TVA”).
In September 2008, the U.S. Treasury Department announced that the U.S. Government would be taking over Fannie Mae and Freddie Mac and placing the companies into a conservatorship. In addition, the U.S. Treasury announced additional steps that it intended to take with respect to the debt and mortgage-backed securities (“MBS”) issued by Fannie Mae and Freddie Mac in order to support the conservatorship. Fannie Mae and Freddie Mac are continuing to operate as going concerns while in conservatorship and each remains liable for all of its respective obligations, including its guaranty obligations, associated with its MBS. No assurance can be given that these initiatives will be successful. The maximum potential liability of the issuers of some U.S. government securities held by a Portfolio may greatly exceed their current resources, including their legal right to support from the U.S. Treasury. It is possible that these issuers will not have the funds to meet their payment obligations in the future.
An instrumentality of the U.S. Government is a government agency organized under federal charter with government supervision. Instrumentalities issuing or guaranteeing securities include, among others, Federal Home Loan Banks, the Federal Land Banks, Central Bank for Cooperatives, Federal Intermediate Credit Banks and Fannie Mae.
Asset-Backed Securities: Certain Portfolios may invest in asset-backed securities. Asset-backed securities utilize the securitization techniques used to develop MBS. These techniques are also applied to a broad range of other assets. Various types of assets, primarily automobile and credit card receivables and home equity loans, are being
securitized in pass-through structures similar to the mortgage pass-through structures. These types of securities are known as asset-backed securities. A Portfolio may invest in any type of asset-backed security. Asset-backed securities have risk characteristics similar to MBS. Like MBS, they generally decrease in value as a result of interest rate increases, but may benefit less than other fixed-income securities from declining interest rates, principally because of prepayments. Also, as in the case of MBS, prepayments generally increase during a period of declining interest rates although other factors, such as changes in credit use and payment patterns, may also influence prepayment rates. Asset-backed securities also involve the risk that various federal and state consumer laws and other legal, regulatory and economic factors may result in the collateral backing the securities being insufficient to support payment on the securities.
Borrowing: Each Portfolio is permitted to borrow money from banks in accordance with the Investment Company Act of 1940, as amended (the “1940 Act”), or the rules and regulations promulgated by the United States Securities and Exchange Commission (“SEC”) thereunder. Currently, the 1940 Act permits a fund to borrow money from banks in an amount up to 331/3% of its total assets (including the amount borrowed) less its liabilities (not including any borrowings but including the fair market value at the time of computation of any other senior securities then outstanding). Each Portfolio may also borrow an additional 5% of its total assets without regard to the foregoing limitation for temporary purposes such as clearance of portfolio transactions. Each Portfolio will only borrow when the Adviser and/or Sub-Adviser believe that such borrowings will benefit the Portfolio after taking into account considerations such as interest income and possible gains or losses upon liquidation. Each Portfolio will maintain asset coverage in accordance with the 1940 Act.
Borrowing by a Portfolio creates an opportunity for increased net income but, at the same time, creates special risks. For example, leveraging may exaggerate changes in and increase the volatility of the net asset value (“NAV”) of Portfolio shares. This is because leverage tends to exaggerate the effect of any increase or decrease in the value of the Portfolio’s portfolio securities. The use of leverage also may cause a Portfolio to liquidate portfolio positions when it may not be advantageous to do so in order to satisfy its obligations or to maintain asset coverage.
In general, each Portfolio may not issue any class of senior security, except that each Portfolio may (i) borrow from banks, provided that immediately following any such borrowing there is an asset coverage of at least 300% for all Portfolio borrowings and in the event such asset coverage falls below 300% the Portfolio will within three days or such longer period as the SEC may prescribe by rules and regulations, reduce the amount of its borrowings to an extent that the asset coverage of such borrowings shall be at least 300%, and (ii) engage in trading practices which could be deemed to involve the issuance of a senior security, including but not limited to options, futures, forward contracts and reverse repurchase agreements, provided that the Portfolio earmarks cash or segregates liquid assets in accordance with applicable SEC regulations and interpretations.
Brady Bonds: Brady Bonds are both Emerging Market Securities and Foreign Fixed Income Securities. They are created by exchanging existing commercial bank loans to foreign entities for new obligations for the purpose of restructuring the issuers’ debts under a plan introduced by former U.S. Secretary of the Treasury, Nicholas F. Brady. They may be collateralized or uncollateralized and issued in various currencies (although most are dollar-denominated). They are actively traded in the over-the-counter (“OTC”) secondary market. A Portfolio will only invest in Brady Bonds consistent with its quality specifications.
Dollar-denominated, collateralized Brady Bonds may be fixed rate par bonds or floating rate discount bonds. These Brady Bonds are generally collateralized in full as to principal due at maturity by U.S. Treasury Zero Coupon Obligations having the same maturity as the Brady Bonds. Interest payments on these Brady Bonds generally are collateralized by cash or securities in an amount that, in the case of fixed rate bonds, is equal to at least one year of rolling interest payments or, in the case of floating rate bonds, initially is equal to at least one year’s rolling interest payments based on the applicable interest rate at that time and is adjusted at regular intervals thereafter. Certain Brady Bonds are entitled to “value recovery payments” in certain circumstances, which in effect constitute supplemental interest payments but generally are not collateralized.
Brady Bonds are often viewed as having three or four valuation components: (i) the collateralized repayment of principal at final maturity; (ii) the collateralized interest payments; (iii) the uncollateralized interest payments; and (iv) any uncollateralized repayment of principal at maturity (these uncollateralized amounts constitute the
“residual risk”). In the event of a default with respect to collateralized Brady Bonds as a result of which the payment obligations of the issuer are accelerated, the U.S. Treasury Zero Coupon Obligations held as collateral for the payment of principal will not be distributed to investors, nor will such obligations be sold and the proceeds distributed. The collateral will be held by the collateral agent to the scheduled maturity of the defaulted Brady Bonds, which will continue to be outstanding, at which time the face amount of the collateral will equal the principal payments due on the Brady Bonds in the normal course. However, Brady Bonds should be viewed as speculative in light of the history of defaults with respect to commercial bank loans by public and private entities of countries issuing Brady Bonds.
Cash Equivalents: Cash equivalents are short-term fixed income securities comprising:
(1) Time deposits, certificates of deposit (including marketable variable rate certificates of deposit) and bankers’ acceptances issued by a commercial bank or savings and loan association. Time deposits are non-negotiable deposits maintained in a banking institution for a specified period of time at a stated interest rate. Certificates of deposit are negotiable short-term obligations issued by commercial banks or savings and loan associations against funds deposited in the issuing institution. Variable rate certificates of deposit are certificates of deposit on which the interest rate is periodically adjusted prior to their stated maturity based upon a specified market rate. A bankers’ acceptance is a time draft drawn on a commercial bank by a borrower, usually in connection with an international commercial transaction (to finance the import, export, transfer or storage of goods).
Each Portfolio may invest in obligations of U.S. banks, foreign branches of U.S. banks (Eurodollars) and U.S. branches of foreign banks (Yankee dollars). Eurodollar and Yankee dollar investments will involve some of the same risks of investing in international securities that are discussed in various foreign investing sections of this SAI.
A Portfolio will not invest in any security issued by a commercial bank unless (i) the bank has total assets of at least $1 billion, or the equivalent in other currencies, or, in the case of domestic banks which do not have total assets of at least $1 billion, the aggregate investment made in any one such bank is limited to $250,000 principal amount per certificate and the principal amount of such investment is insured in full by the Federal Deposit Insurance Corporation (“FDIC”), (ii) in the case of U.S. banks, it is a member of the FDIC and (iii) in the case of foreign branches of U.S. banks, the security is deemed by the Adviser and/or Sub-Adviser to be of an investment quality comparable with other debt securities which the Portfolio may purchase.
(2) Each Portfolio may invest in commercial paper (see below) rated at time of purchase by one or more nationally recognized statistical rating organizations (“NRSROs”) in one of their two highest categories (e.g., A-l or A-2 by Standard & Poor’s Ratings Group, a division of The McGraw-Hill Companies, Inc. (“S&P”) or Prime 1 or Prime 2 by Moody’s Investors Service, Inc. (“Moody’s”)) or, if not rated, issued by a corporation having an outstanding unsecured debt issue rated high-grade by a NRSRO (e.g., A or better by Moody’s, Standard & Poor’s or Fitch IBCA, Inc. (“Fitch”));
(3) Short-term corporate obligations rated high-grade at the time of purchase by a NRSRO (e.g., A or better by Moody’s, S&P or Fitch);
(4) U.S. government obligations including bills, notes, bonds and other debt securities issued by the U.S. Treasury. These are direct obligations of the U.S. Government and differ mainly in interest rates, maturities and dates of issue;
(5) Government agency securities issued or guaranteed by U.S. government sponsored instrumentalities and Federal agencies. These include securities issued by the Federal Home Loan Banks, Federal Land Bank, Farmers Home Administration, Farm Credit Banks, Federal Intermediate Credit Bank, Fannie Mae, Federal Financing Bank, the TVA and others; and
(6) Repurchase agreements collateralized by the securities listed above.
Commercial Paper. Commercial paper refers to short-term fixed income securities with maturities ranging from 1 to 270 days. They are primarily issued by corporations needing to finance large amounts of receivables, but
may be issued by banks and other borrowers. Commercial paper is issued either directly or through broker-dealers, and may be discounted or interest-bearing. Commercial paper is unsecured, but is almost always backed by bank lines of credit. Virtually all commercial paper is rated by Moody’s or S&P.
Commercial paper rated A-1 by S&P has the following characteristics: (1) liquidity ratios are adequate to meet cash requirements; (2) long-term senior debt is rated “A” or better; (3) the issuer has access to at least two additional channels of borrowing; (4) basic earnings and cash flow have an upward trend with allowance made for unusual circumstances; (5) typically, the issuer’s industry is well established and the issuer has a strong position within the industry; and (6) the reliability and quality of management are unquestioned. Relative strength or weakness of the above factors determine whether the issuer’s commercial paper is A-1, A-2 or A-3.
The rating Prime-1 is the highest commercial paper rating assigned by Moody’s. Among the factors considered by Moody’s in assigning ratings are the following: (1) evaluation of the management of the issuer; (2) economic evaluation of the issuer’s industry or industries and the appraisal of speculative-type risks which may be inherent in certain areas; (3) evaluation of the issuer’s products in relation to competition and customer acceptance; (4) liquidity; (5) amount and quality of long-term debt; (6) trend of earnings over a period of ten years; (7) financial strength of a parent company and the relationships that exist with the issuer; and (8) recognition by the management of obligations which may be present or may arise as a result of public interest questions and preparations to meet such obligations.
Commercial Paper: See Cash Equivalents.
Common Stock: Common stocks are equity securities representing an ownership interest in a corporation, entitling the stockholder to voting rights and receipt of dividends paid based on proportionate ownership.
Contracts for Difference (“CFDs”): The Mid Cap Growth Portfolio may purchase CFDs. A CFD is a privately negotiated contract between two parties, buyer and seller, stipulating that the seller will pay to or receive from the buyer the difference between the nominal value of the underlying instrument at the opening of the contract and that instrument’s value at the end of the contract. The underlying instrument may be a single security, stock basket or index. A CFD can be set up to take either a short or long position on the underlying instrument. The buyer and seller typically are both required to post margin, which is adjusted daily. The buyer will also pay to the seller a financing rate on the notional amount of the capital employed by the seller less the margin deposit. A CFD is usually terminated at the buyer’s initiative. The seller of the CFD will simply match the exposure of the underlying instrument in the open market and the parties will exchange whatever payment is due.
As is the case with owning any financial instrument, there is the risk of loss associated with buying a CFD. For example, if the Portfolio buys a long CFD and the underlying security is worth less at the end of the contract, the Portfolio would be required to make a payment to the seller and would suffer a loss. Also, there may be liquidity risk if the underlying instrument is illiquid because the liquidity of a CFD is based on the liquidity of the underlying instrument. A further risk is that adverse movements in the underlying security will require the buyer to post additional margin. CFDs also carry counterparty risk, i.e., the risk that the counterparty to the CFD transaction may be unable or unwilling to make payments or to otherwise honor its financial obligations under the terms of the contract. If the counterparty were to do so, the value of the contract, and of the Portfolio’s shares, may be reduced. The Portfolio will not enter into a CFD transaction that is inconsistent with its investment objective, policies and strategies.
Convertibles: A convertible security is a bond, debenture, note, preferred stock, right, warrant or other security that may be converted into or exchanged for a prescribed amount of common stock or other security of the same or a different issuer or into cash within a particular period of time at a specified price or formula. A convertible security generally entitles the holder to receive interest paid or accrued on debt securities or the dividend paid on preferred stock until the convertible security matures or is redeemed, converted or exchanged. Before conversion, convertible securities generally have characteristics similar to both debt and equity securities. The value of convertible securities tends to decline as interest rates rise and, because of the conversion feature, tends to vary with fluctuations in the market value of the underlying securities. Convertible securities ordinarily provide a stream of income with generally higher yields than those of common stock of the same or similar issuers. Convertible securities generally rank senior
to common stock in a corporation’s capital structure but are usually subordinated to comparable nonconvertible securities. Convertible securities generally do not participate directly in any dividend increases or decreases of the underlying securities although the market prices of convertible securities may be affected by any dividend changes or other changes in the underlying securities. Certain of the convertible securities in which a Portfolio may invest are rated below investment grade or are unrated. The prices of such securities are likely to be more sensitive to adverse economic changes, resulting in increased volatility of market prices of these securities during periods of economic uncertainty, or adverse individual corporate developments, than higher-rated securities. In addition, during an economic downturn or substantial period of rising interest rates, lower rated issuers may experience financial stress.
Corporates: Corporate bonds (“Corporates”) are fixed income securities issued by private corporations. Bondholders, as creditors, have a prior legal claim over common and preferred stockholders of the corporation as to both income and assets for the principal and interest due to the bondholder. A Portfolio will buy Corporates subject to any quality constraints as described in the Prospectuses. If a Portfolio holds a security that is downgraded, the Portfolio may retain the security if the Adviser and/or Sub-Adviser deem retention of the security to be in the best interests of the Portfolio.
Depositary Receipts: Depositary receipts are Global Depositary Receipts (“GDRs”), European Depositary Receipts (“EDRs”) and other similar types of depositary shares. Depositary receipts are securities that can be traded in U.S. or foreign securities markets but which represent ownership interests in a security or pool of securities by a foreign or U.S. corporation. Depositary receipts may be sponsored or unsponsored. The depositary of unsponsored depositary receipts may provide less information to receipt holders.
Holders of unsponsored GDRs and EDRs generally bear all the costs associated with establishing the unsponsored GDRs and EDRs. The depositary of unsponsored GDRs and EDRs is under no obligation to distribute shareholder communications received from the underlying issuer or to pass through to the holders of the unsponsored GDRs and EDRs voting rights with respect to the deposited securities or pool of securities. GDRs and EDRs are not necessarily denominated in the same currency as the underlying securities to which they may be connected. Generally, GDRs or EDRs in registered form are designed for use in the U.S. securities market and GDRs or EDRs in bearer form are designed for use in securities markets outside the United States. Portfolios may invest in sponsored and unsponsored GDRs and EDRs. For purposes of the Fund’s investment policies, a Portfolio’s investments in GDRs or EDRs will be deemed to be investments in the underlying securities.
Derivatives: Certain Portfolios may, but are not required to, use various derivatives and related investment strategies as described below. Derivatives may be used for a variety of purposes including hedging, risk management, portfolio management or to earn income. Any or all of the investment techniques described herein may be used at any time and there is no particular strategy that dictates the use of one technique rather than another, as the use of any derivative by a Portfolio is a function of numerous variables, including market conditions. A Portfolio complies with applicable regulatory requirements when using derivatives, including the earmarking of cash or the segregation of liquid assets when mandated by SEC rules or SEC staff positions. Although the Adviser and /or Sub-Adviser seek to use derivatives to further a Portfolio’s investment objective, no assurance can be given that the use of derivatives will achieve this result.
General Risks of Derivatives. Derivatives utilized by a Portfolio may involve the purchase and sale of derivative instruments. A derivative is a financial instrument the value of which depends upon (or derives from) the value of another asset, security, interest rate or index. Derivatives may relate to a wide variety of underlying instruments, including equity and debt securities, indices, interest rates, currencies and other assets. Certain derivative instruments which a Portfolio may use and the risks of those instruments are described in further detail below. A Portfolio may in the future also utilize derivatives techniques, instruments and strategies that may be newly developed or permitted as a result of regulatory changes, consistent with a Portfolio’s investment objective and policies. Such newly developed techniques, instruments and strategies may involve risks different than or in addition to those described herein. No assurance can be given that any derivatives strategy employed by a Portfolio will be successful.
The risks associated with the use of derivatives are different from, and possibly greater than, the risks associated with investing directly in the instruments underlying such derivatives. Derivatives are highly specialized instruments
that require investment techniques and risk analyses different from other portfolio investments. The use of derivative instruments requires an understanding not only of the underlying instrument but also of the derivative itself. Certain risk factors generally applicable to derivative transactions are described below.
· Derivatives are subject to the risk that the market value of the derivative itself or the market value of underlying instruments will change in a way adverse to a Portfolio’s interests. A Portfolio bears the risk that the Adviser and/or Sub-Adviser may incorrectly forecast future market trends and other financial or economic factors or the value of the underlying security, index, interest rate or currency when establishing a derivatives position for a Portfolio.
· Derivatives may be subject to pricing risk, which exists when a derivative becomes extraordinarily expensive (or inexpensive) relative to historical prices or corresponding instruments. Under such market conditions, it may not be economically feasible to initiate a transaction or liquidate a position at an advantageous time or price.
· Many derivatives are complex and often valued subjectively. Improper valuations can result in increased payment requirements to counterparties or a loss of value to a Portfolio.
· Using derivatives as a hedge against a portfolio investment subjects a Portfolio to the risk that the derivative will have imperfect correlation with the portfolio investment, which could result in a Portfolio incurring substantial losses. This correlation risk may be greater in the case of derivatives based on an index or other basket of securities, as the portfolio securities being hedged may not duplicate the components of the underlying index or the basket may not be of exactly the same type of obligation as those underlying the derivative. The use of derivatives for “cross hedging” purposes (using a derivative based on one instrument as a hedge on a different instrument) may also involve greater correlation risks.
· While using derivatives for hedging purposes can reduce a Portfolio’s risk of loss, it may also limit a Portfolio’s opportunity for gains or result in losses by offsetting or limiting a Portfolio’s ability to participate in favorable price movements in portfolio investments.
· Derivatives transactions for non-hedging purposes involve greater risks and may result in losses which would not be offset by increases in the value of portfolio securities or declines in the cost of securities to be acquired. In the event that a Portfolio enters into a derivatives transaction as an alternative to purchasing or selling the underlying instrument or in order to obtain desired exposure to an index or market, a Portfolio will be exposed to the same risks as are incurred in purchasing or selling the underlying instruments directly as well as additional risks associated with derivatives transactions.
· The use of certain derivatives transactions, including OTC derivatives, involves the risk of loss resulting from the insolvency or bankruptcy of the counterparty to the contract or the failure by the counterparty to make required payments or otherwise comply with the terms of the contract. In the event of default by a counterparty, a Portfolio may have contractual remedies pursuant to the agreements related to the transaction.
· Liquidity risk exists when a particular derivative is difficult to purchase or sell. If a derivative transaction is particularly large or if the relevant market is illiquid, a Portfolio may be unable to initiate a transaction or liquidate a position at an advantageous time or price.
· While some derivatives are cleared through a regulated, central clearinghouse, many derivatives transactions are not entered into or traded on exchanges or in markets regulated by the U.S. Commodity Futures Trading Commission (“CFTC”) or the SEC. Instead, such bilateral OTC derivatives are entered into directly by a Portfolio and a counterparty and may be traded only through financial institutions acting as market makers. OTC derivatives transactions can only be entered into with a willing counterparty that is approved by the Adviser in accordance with guidelines established by the Board. Where no such counterparty is available, a Portfolio will be unable to enter into a desired OTC transaction. There also may be greater risk that no liquid secondary market in the trading of OTC derivatives will exist, in which case a Portfolio may be required to hold such instruments until exercise, expiration or maturity. Many of the protections afforded to participants in the cleared derivatives markets are not available to participants in bilateral OTC derivatives transactions. Bilateral OTC derivatives transactions are not subject to the guarantee of a clearinghouse, and as a result a Portfolio would bear greater risk of default by the counterparties to such transactions.
· A Portfolio may be required to make physical delivery of portfolio securities underlying a derivative in order to close out a derivatives position or to sell portfolio securities at a time or price at which it may be disadvantageous to do so in order to obtain cash to close out or to maintain a derivatives position.
· As a result of the structure of certain derivatives, adverse changes in, among other things, interest rates, volatility or the value of the underlying instrument can result in losses substantially greater than the amount invested in the derivative itself. Certain derivatives have the potential for unlimited loss, regardless of the size of the initial investment.
· Certain derivatives may be considered illiquid and therefore subject to a Portfolio’s limitation on investments in illiquid securities.
· Derivatives transactions conducted outside the United States may not be conducted in the same manner as those entered into on U.S. exchanges, and may be subject to different margin, exercise, settlement or expiration procedures. Brokerage commissions, clearing costs and other transaction costs may be higher on foreign exchanges. Many of the risks of OTC derivatives transactions are also applicable to derivatives transactions conducted outside the United States. Derivatives transactions conducted outside the United States are subject to the risk of governmental action affecting the trading in, or the prices of, foreign securities, currencies and other instruments. The value of such positions could be adversely affected by foreign political and economic factors; lesser availability of data on which to make trading decisions; delays on a Portfolio’s ability to act upon economic events occurring in foreign markets; and less liquidity than U.S. markets.
· Currency derivatives are subject to additional risks. Currency derivatives transactions may be negatively affected by government exchange controls, blockages, and manipulations. Currency exchange rates may be influenced by factors extrinsic to a country’s economy. There is no systematic reporting of last sale information with respect to foreign currencies. As a result, the available information on which trading in currency derivatives will be based may not be as complete as comparable data for other transactions. Events could occur in the foreign currency market which will not be reflected in currency derivatives until the following day, making it more difficult for a Portfolio to respond to such events in a timely manner.
Regulatory Matters. As described herein, a Portfolio may be required to cover its potential economic exposure to certain derivatives transactions by holding an offsetting financial position and/or earmarking cash or segregating liquid assets equal in value to a Portfolio’s potential economic exposure under the transaction. A Portfolio will cover such transactions as described herein or in such other manner in accordance with applicable laws and regulations. Assets used to cover derivatives transactions cannot be sold while the derivatives position is open, unless they are replaced by other appropriate assets. Earmarked cash or segregated liquid assets and assets held in margin accounts are not otherwise available to a Portfolio for investment purposes. If a large portion of a Portfolio’s assets are used to cover derivatives transactions or are otherwise earmarked or segregated, it could affect portfolio management or a Portfolio’s ability to meet redemption requests or other current obligations. With respect to derivatives which are cash settled (i.e., have no physical delivery requirement), a Portfolio is permitted to earmark cash or segregate liquid assets in an amount equal to a Portfolio’s daily marked-to-market net obligations (i.e., a Portfolio’s daily net liability) under the derivative, if any, rather than the derivative’s full notional amount or the market value of the instrument underlying the derivative, as applicable. By segregating assets equal to only its net obligations under cash-settled derivatives, a Portfolio will have the ability to employ leverage to a greater extent than if a Portfolio were required to segregate assets equal to the full notional amount of the derivative or the market value of the underlying instrument, as applicable.
Regulatory developments affecting the exchange-traded and OTC derivatives markets may impair a Portfolio’s ability to manage or hedge its investment portfolio through the use of derivatives. The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and the rules promulgated thereunder may limit the ability of a Portfolio to enter into one or more exchange-traded or OTC derivatives transactions.
A Portfolio’s use of derivatives may also be limited by the requirements of the Internal Revenue Code of 1986, as amended (the “Code”), for qualification as a regulated investment company for U.S. federal income tax purposes.
The Fund has filed a notice of eligibility with the National Futures Association (“NFA”) claiming an exclusion from the definition of the term “commodity pool operator” (“CPO”) pursuant to CFTC Regulation 4.5, as promulgated under the Commodity Exchange Act, as amended (“CEA”), with respect to the Portfolios’ operations. Therefore, neither the Portfolios nor the Adviser (with respect to the Portfolios) are subject to registration or regulation as a commodity pool or CPO under the CEA. If the Portfolios become subject to these requirements, as well as related NFA rules, the Portfolios may incur additional compliance and other expenses.
With respect to investments in swap transactions, commodity futures, commodity options or certain other commodity interests used for purposes other than bona fide hedging purposes, an investment company must meet one of the following tests under the amended regulations in order for its investment adviser to claim an exemption from being considered a CPO. First, the aggregate initial margin and premiums required to establish an investment company’s positions in such investments may not exceed five percent (5%) of the liquidation value of the investment company’s portfolio (after accounting for unrealized profits and unrealized losses on any such investments). Alternatively, the aggregate net notional value of such instruments, determined at the time of the most recent position established, may not exceed one hundred percent (100%) of the liquidation value of the investment company’s portfolio (after accounting for unrealized profits and unrealized losses on any such positions). In addition to meeting one of the foregoing trading limitations, the investment company may not market itself as a commodity pool or otherwise as a vehicle for trading in the commodity futures, commodity options or swaps and derivatives markets.
Emerging Market Securities: Certain Portfolios may invest in emerging market securities. An emerging market security is one issued by a foreign government or private issuer that has one or more of the following characteristics: (i) its principal securities trading market is in an emerging market or developing country, (ii) alone or on a consolidated basis it derives 50% or more of its annual revenue from goods produced, sales made or services performed in emerging markets or (iii) it is organized under the laws of, or has a principal office in, an emerging market or developing country. Based on these criteria it is possible for a security to be considered issued by an issuer in more than one country. Therefore, it is possible for the securities of any issuer that has one or more of these characteristics in connection with any emerging market or developing country to be considered an emerging market security when held in one Portfolio, but not considered an emerging market security when held in another Portfolio if it has one or more of these characteristics in connection with a developed country.
Emerging market describes any country which is generally considered to be an emerging or developing country by major organizations in the international financial community, such as the International Bank for Reconstruction and Development (more commonly known as the World Bank) and the International Finance Corporation.
The economies of individual emerging market or developing countries may differ favorably or unfavorably from the U.S. economy in such respects as growth of gross domestic product, rate of inflation or deflation, currency depreciation, capital reinvestment, resource self-sufficiency and balance of payments position. Further, the economies of developing countries generally are heavily dependent upon international trade and, accordingly, have been, and may continue to be, adversely affected by trade barriers, exchange controls, managed adjustments in relative currency values and other protectionist measures. These economies also have been, and may continue to be, adversely affected by economic conditions in the countries with which they trade.
Prior governmental approval for foreign investments may be required under certain circumstances in some emerging market or developing countries, and the extent of foreign investment in certain fixed income securities and domestic companies may be subject to limitations in other emerging market or developing countries. Foreign ownership limitations also may be imposed by the charters of individual companies in emerging market or developing countries to prevent, among other concerns, violation of foreign investment limitations. Repatriation of investment income, capital and the proceeds of sales by foreign investors may require governmental registration and/or approval in some emerging countries. A Portfolio could be adversely affected by delays in, or a refusal to grant, any required governmental registration or approval for such repatriation. Any investment subject to such repatriation controls will be considered illiquid if it appears reasonably likely that this process will take more than seven days.
Investment in emerging market or developing countries may entail purchasing securities issued by or on behalf of entities that are insolvent, bankrupt, in default or otherwise engaged in an attempt to reorganize or reschedule their obligations, and in entities that have little or no proven credit rating or credit history. In any such case, the issuer’s
poor or deteriorating financial condition may increase the likelihood that a Portfolio will experience losses or diminution in available gains due to bankruptcy, insolvency or fraud. Emerging market or developing countries also pose the risk of nationalization, expropriation or confiscatory taxation, political changes, government regulation, social instability or diplomatic developments (including war) that could adversely affect the economies of such countries or the value of a Portfolio’s investments in those countries. In addition, it may be difficult to obtain and enforce a judgment in a court outside the United States.
Portfolios that invest in emerging markets may also be exposed to an extra degree of custodial and/or market risk, especially where the securities purchased are not traded on an official exchange or where ownership records regarding the securities are maintained by an unregulated entity (or even the issuer itself).
Equity Securities: Equity securities generally represent an ownership interest in an issuer, or may be convertible into or represent a right to acquire an ownership interest in an issuer. While there are many types of equity securities, prices of all equity securities will fluctuate. Economic, political and other events may affect the prices of broad equity markets. For example, changes in inflation or consumer demand may affect the prices of equity securities generally in the United States. Similar events also may affect the prices of particular equity securities. For example, news about the success or failure of a new product may affect the price of a particular issuer’s equity securities. Equity securities may include the following types of instruments, each of which is described in this SAI: ADRs, Common Stock, Convertibles, Depositary Receipts, Investment Companies, Limited Partnership and Limited Liability Company Interests, Preferred Stock, Real Estate Investing, Rights and Warrants.
Fixed Income Securities: Fixed income securities generally represent an issuer’s obligation to repay to the investor (or lender) the amount borrowed plus interest over a specified time period. A typical fixed income security specifies a fixed date when the amount borrowed (principal) is due in full, known as the maturity date, and specifies dates when periodic interest (coupon) payments will be made over the life of the security.
Fixed income securities come in many varieties and may differ in the way that interest is calculated, the amount and frequency of payments, the type of collateral, if any, and the presence of special features (e.g., conversion rights). Prices of fixed income securities fluctuate and, in particular, are subject to several key risks including, but not limited to, interest rate risk, credit risk, prepayment risk, and spread risk. Fixed income securities may include the following types of instruments, each of which is described in this SAI: Agencies, Asset-Backed Securities, Cash Equivalents, Corporates, Floaters, High Yield Securities, Inverse Floaters, Investment Grade Securities, Loan Participations and Assignments, Mortgage Related Securities, Municipals, Public Bank Loans, Repurchase Agreements, U.S. Government Securities, When, As and If Issued Securities, When-Issued and Delayed Delivery Securities and Forward Commitments, Yankee and Eurobond Obligations and Zero Coupons.
Interest rate risk arises due to general changes in the level of market rates after the purchase of a fixed income security. Generally, the values of fixed income securities vary inversely with changes in interest rates. During periods of falling interest rates, the values of most outstanding fixed income securities generally rise and during periods of rising interest rates, the values of most fixed income securities generally decline. The historically low interest rate environment increases the risk associated with rising interest rates. The Fund may face a heightened level of risk, especially since the Federal Reserve Board has ended its quantitative easing program and may begin to raise rates. While fixed income securities with longer final maturities often have higher yields than those with shorter maturities, they usually possess greater price sensitivity to changes in interest rates and other factors. Traditionally, the remaining term to maturity has been used as a barometer of a fixed income security’s sensitivity to interest rate changes. This measure, however, considers only the time until the final principal payment and takes no account of the pattern or amount of principal or interest payments prior to maturity. Duration combines consideration of yield, coupon, interest and principal payments, final maturity, and call (prepayment) features. Duration measures the likely percentage change in a fixed income security’s price for a small parallel shift in the general level of interest rates; it is also an estimate of the weighted average life of the remaining cash flows of a fixed income security. In almost all cases, the duration of a fixed income security is shorter than its term to maturity.
Credit risk, also known as default risk, represents the possibility that an issuer may be unable to meet scheduled interest and principal payment obligations. It is most often associated with corporate bonds, although it can be present in other fixed income securities, as well (note that the market generally assumes that obligations of the U.S. Treasury
are free from credit risk). Credit ratings and quantitative models attempt to measure the degree of credit risk in fixed income securities, and provide insight as to whether prevailing yield spreads afford sufficient compensation for such risk. Other things being equal, fixed income securities with high degrees of credit risk should trade in the market at lower prices (and higher yields) than fixed income securities with low degrees of credit risk.
Prepayment risk, also known as call risk, arises due to the issuer’s ability to prepay all or most of the fixed income security prior to the stated final maturity date. Prepayments generally rise in response to a decline in interest rates as debtors take advantage of the opportunity to refinance their obligations. This risk is often associated with mortgage securities where the underlying mortgage loans can be refinanced, although it can also be present in corporate or other types of bonds with call provisions. When a prepayment occurs, a Portfolio may be forced to reinvest in lower yielding fixed income securities. Quantitative models are designed to help assess the degree of prepayment risk, and provide insight as to whether prevailing yield spreads afford sufficient compensation for such risk.
Spread risk is the potential for the value of a Portfolio’s assets to fall due to the widening of spreads. Fixed income securities generally compensate for greater credit risk by paying interest at a higher rate. The difference (or “spread”) between the yield of a security and the yield of a benchmark, such as a U.S. Treasury security with a comparable maturity, measures the additional interest paid for credit risk. As the spread on a security widens (or increases), the price (or value) of the security falls. Spread widening may occur, among other reasons, as a result of market concerns over the stability of the market, excess supply, general credit concerns in other markets, security- or market-specific credit concerns or general reductions in risk tolerance.
While assets in fixed income markets have grown rapidly in recent years, the capacity for traditional dealer counterparties to engage in fixed income trading has not kept pace and in some cases has decreased. For example, primary dealer inventories of corporate bonds, which provide a core indication of the ability of financial intermediaries to “make markets,” are at or near historic lows in relation to market size. This reduction in market-making capacity may be a persistent change, to the extent it is resulting from broader structural changes, such as fewer proprietary trading desks at broker-dealers and increased regulatory capital requirements. Because market makers provide stability to a market through their intermediary services, the significant reduction in dealer inventories could potentially lead to decreased liquidity and increased volatility in the fixed income markets. Such issues may be exacerbated during periods of economic uncertainty.
Economic, political and other events also may affect the prices of broad fixed income markets, although the risks associated with such events are transmitted to the market via changes in the prevailing levels of interest rates, credit risk, prepayment risk or spread risk.
Floaters: Floaters are fixed income securities with a floating or variable rate of interest, i.e., the rate of interest varies with changes in specified market rates or indices, such as the prime rate, or at specified intervals. Certain floating or variable rate obligations may carry a demand feature that permits the holder to tender them back to the issuer of the underlying instrument, or to a third-party, at par value prior to maturity. When the demand feature of certain floating or variable rate obligations represents an obligation of a foreign entity, the demand feature will be subject to certain risks discussed under the various foreign investing sections.
Foreign Currency: Certain Portfolios will regularly transact security purchases and sales in foreign currencies when investing in foreign securities. These Portfolios may hold foreign currency or purchase or sell currencies on a forward basis. See Forwards, below.
Foreign Currency Warrants. Portfolios may invest in foreign currency warrants, which entitle the holder to receive from the issuer an amount of cash (generally, for warrants issued in the United States, in U.S. dollars) which is calculated pursuant to a predetermined formula and based on the exchange rate between a specified foreign currency and the U.S. dollar as of the exercise date of the warrant. Foreign currency warrants generally are exercisable upon their issuance and expire as of a specified date and time.
Foreign currency warrants have been issued in connection with U.S. dollar-denominated debt offerings by major corporate issuers in an attempt to reduce the foreign currency exchange risk which, from the point of view of
prospective purchasers of the securities, is inherent in the international fixed income marketplace. Foreign currency warrants may attempt to reduce the foreign exchange risk assumed by purchasers of a security by, for example, providing for a supplemental payment in the event that the U.S. dollar depreciates against the value of a major foreign currency such as the Japanese Yen. The formula used to determine the amount payable upon exercise of a foreign currency warrant may make the warrant worthless unless the applicable foreign currency exchange rate moves in a particular direction (e.g., unless the U.S. dollar appreciates or depreciates against the particular foreign currency to which the warrant is linked or indexed). Foreign currency warrants are severable from the debt obligations with which they may be offered, and may be listed on exchanges.
Foreign currency warrants may be exercisable only in certain minimum amounts, and an investor wishing to exercise warrants who possesses less than the minimum number required for exercise may be required either to sell the warrants or to purchase additional warrants, thereby incurring additional transaction costs. In the case of any exercise of warrants, there may be a delay between the time a holder of warrants gives instructions to exercise and the time the exchange rate relating to exercise is determined, during which time the exchange rate could change significantly, thereby affecting both the market and cash settlement values of the warrants being exercised. The expiration date of the warrants may be accelerated if the warrants should be delisted from an exchange or if their trading should be suspended permanently, which would result in the loss of any remaining “time value” of the warrants (i.e., the difference between the current market value and the exercise value of the warrants), and, in the case where the warrants were “out-of-the-money,” in a total loss of the purchase price of the warrants.
Foreign currency warrants are generally unsecured obligations of their issuers and are not standardized foreign currency options issued by the Options Clearing Corporation (“OCC”). Unlike foreign currency options issued by the OCC, the terms of foreign exchange warrants generally will not be amended in the event of governmental or regulatory actions affecting exchange rates or in the event of the imposition of other regulatory controls affecting the international currency markets. The initial public offering price of foreign currency warrants is generally considerably in excess of the price that a commercial user of foreign currencies might pay in the interbank market for a comparable option involving significantly larger amounts of foreign currencies. Foreign currency warrants are subject to complex political or economic factors.
Principal Exchange Rate Linked Securities. Principal exchange rate linked securities are debt obligations the principal on which is payable at maturity in an amount that may vary based on the exchange rate between the U.S. dollar and a particular foreign currency at or about that time. The return on “standard” principal exchange rate linked securities is enhanced if the foreign currency to which the security is linked appreciates against the U.S. dollar, and is adversely affected by increases in the foreign exchange value of the U.S. dollar; “reverse” principal exchange rate linked securities are like the “standard” securities, except that their return is enhanced by increases in the value of the U.S. dollar and adversely impacted by increases in the value of foreign currency. Interest payments on the securities are generally made in U.S. dollars at rates that reflect the degree of foreign currency risk assumed or given up by the purchaser of the notes (i.e., at relatively higher interest rates if the purchaser has assumed some of the foreign exchange risk, or relatively lower interest rates if the issuer has assumed some of the foreign exchange risk, based on the expectations of the current market). Principal exchange rate linked securities may in limited cases be subject to acceleration of maturity (generally, not without the consent of the holders of the securities), which may have an adverse impact on the value of the principal payment to be made at maturity.
Performance indexed paper. Performance indexed paper is U.S. dollar-denominated commercial paper the yield of which is linked to certain foreign exchange rate movements. The yield to the investor will be within a range stipulated at the time of purchase of the obligation, generally with a guaranteed minimum rate of return that is below, and a potential maximum rate of return that is above, market yields on U.S. dollar-denominated commercial paper, with both the minimum and maximum rates of return on the investment corresponding to the minimum and maximum values of the spot exchange rate two business days prior to maturity.
Foreign Securities: Foreign securities may include Brady Bonds, Emerging Market Securities, Foreign Currency, Foreign Equity Securities (defined below), Foreign Fixed Income Securities (defined below) and Investment Funds. Investing in foreign securities involves certain special risks not typically associated with investing in domestic securities. Since the securities of foreign issuers are frequently denominated in foreign currencies, and since the Portfolios may temporarily hold uninvested reserves in bank deposits in foreign currencies, the Portfolios
will be affected favorably or unfavorably by changes in currency rates and in exchange control regulations, and may incur costs in connection with conversions between various currencies. Certain Portfolios may enter into forward foreign currency exchange contracts to hedge their respective holdings and commitments against changes in the level of future currency rates. See Forwards, below. Such contracts involve an obligation to purchase or sell a specific currency at a future date at a price set at the time of the contract.
As non-U.S. companies are not generally subject to uniform accounting, auditing and financial reporting standards and practices comparable to those applicable to domestic issuers, there may be less publicly available information about certain foreign securities than about domestic securities. Securities of some foreign issuers are generally less liquid and more volatile than securities of comparable domestic companies. There is generally less government supervision and regulation of stock exchanges, brokers and listed issuers than in the United States. In addition, with respect to certain foreign countries, there is the possibility of expropriation or confiscatory taxation, political or social instability, or diplomatic developments which could affect U.S. investments in those countries.
Although the Adviser and/or Sub-Adviser will endeavor to achieve most favorable execution costs in their portfolio transactions, fixed commissions on many foreign exchanges are generally higher than negotiated commissions on U.S. exchanges. In addition, investments in certain foreign markets which have historically been considered stable may become more volatile and subject to increased risk due to ongoing developments and changing conditions in such markets. Moreover, the growing interconnectivity of global economies and financial markets has increased the probability that adverse developments and conditions in one country or region will affect the stability of economies and financial markets in other countries or regions. In addition, it is expected that the expenses for custodian arrangements of the Portfolio’s foreign securities will be somewhat greater than the expenses for the custodian arrangements for handling U.S. securities of equal value.
Certain foreign markets may rely heavily on particular industries or foreign capital and are more vulnerable to diplomatic developments, the imposition of economic sanctions against a particular country or countries, organizations, entities and/or individuals, changes in international trading patterns, trade barriers, and other protectionist or retaliatory measures. Economic sanctions could, among other things, effectively restrict or eliminate a Portfolio’s ability to purchase or sell securities or groups of securities for a substantial period of time, and may make a Portfolio’s investments in such securities harder to value. International trade barriers or economic sanctions against foreign countries, organizations, entities and/or individuals, may adversely affect a Portfolio’s foreign holdings or exposures. Investments in foreign markets may also be adversely affected by governmental actions such as the imposition of capital controls, nationalization of companies or industries, expropriation of assets, or the imposition of punitive taxes. Governmental actions can have a significant effect on the economic conditions in foreign countries, which also may adversely affect the value and liquidity of a Portfolio’s investments. For example, the governments of certain countries may prohibit or impose substantial restrictions on foreign investing in their capital markets or in certain sectors or industries. In addition, a foreign government may limit or cause delay in the convertibility or repatriation of its currency which would adversely affect the U.S. dollar value and/or liquidity of investments denominated in that currency. Any of these actions could severely affect security prices, impair a Portfolio’s ability to purchase or sell foreign securities or transfer a Portfolio’s assets back into the U.S., or otherwise adversely affect a Portfolio’s operations. Certain foreign investments may become less liquid in response to market developments or adverse investor perceptions, or become illiquid after purchase by a Portfolio, particularly during periods of market turmoil. Certain foreign investments may become illiquid when, for instance, there are few, if any, interested buyers and sellers or when dealers are unwilling to make a market for certain securities. When a Portfolio holds illiquid investments, its portfolio may be harder to value.
Certain foreign governments levy withholding or other taxes on dividend and interest income. Although in some countries a portion of these taxes is recoverable, the non-recovered portion of foreign withholding taxes will reduce the income received from investments in such countries. Certain Portfolios may be able to pass through to their shareholders a credit for U.S. tax purposes with respect to any such foreign taxes.
The Adviser and/or Sub-Adviser consider an issuer to be from a particular country or geographic region if (i) its principal securities trading market is in that country or geographic region; (ii) alone or on a consolidated basis it derives 50% or more of its annual revenue from goods produced, sales made or services performed in that country or geographic region; or (iii) it is organized under the laws of, or has a principal office in, that country or geographic
region. By applying these tests, it is possible that a particular company could be deemed to be from more than one country or geographic region.
Foreign Equity Securities. Foreign equity securities are equity securities of foreign issuers denominated in foreign currency and traded primarily in non-U.S. markets, including Depositary Receipts.
Foreign Fixed Income Securities. Foreign fixed income securities are fixed income securities which may be U.S. dollar denominated or denominated in a foreign currency, which include: (1) obligations issued or guaranteed by foreign national governments, their agencies, instrumentalities, or political subdivisions (“sovereign debt”); (2) debt securities issued, guaranteed or sponsored by supranational organizations established or supported by several national governments, including the World Bank, the European Community, the Asian Development Bank and others; (3) non-government foreign corporate debt securities; and (4) foreign mortgage securities and various other mortgages and asset-backed securities.
Certain emerging market countries are among the largest debtors to commercial banks and foreign governments. The issuer or governmental authority that controls the repayment of sovereign debt may not be willing or able to repay the principal and/or pay interest when due in accordance with the terms of such obligations.
Forwards: A foreign currency forward exchange contract is a negotiated agreement between two parties to exchange specified amounts of two or more currencies at a specified future time at a specified rate. The rate specified by the foreign currency forward exchange contract can be higher or lower than the spot rate between the currencies that are the subject of the contract. Currency futures are similar to foreign currency forward exchange contracts, except that they are traded on an exchange and standardized as to contract size and delivery date. Most currency futures call for payment or delivery in U.S. dollars. Unanticipated changes in currency prices may result in losses to a Portfolio and poorer overall performance for a Portfolio than if it had not entered into foreign currency forward exchange contracts. Certain Portfolios may enter into foreign currency forward exchange contracts under various circumstances. The typical use of a foreign currency forward exchange contract is to “lock in” the price of a security in U.S. dollars or some other foreign currency, which a Portfolio is holding in its portfolio. By entering into a foreign currency forward exchange contract for the purchase or sale, for a fixed amount of dollars or other currency, of the amount of foreign currency involved in the underlying security transactions, a Portfolio may be able to protect itself against a possible loss resulting from an adverse change in the relationship between the U.S. dollar or other currency which is being used for the security purchase and the foreign currency in which the security is denominated during the period between the date on which the security is purchased or sold and the date on which payment is made or received. The Adviser and/or Sub-Adviser also may from time to time utilize foreign currency forward exchange contracts for other purposes. For example, they may be used to hedge a foreign security held in the portfolio against a decline in value of the applicable foreign currency. They also may be used to lock in the current exchange rate of the currency in which those securities anticipated to be purchased are denominated. At times, a Portfolio may enter into “cross-currency” hedging transactions involving currencies other than those in which securities are held or proposed to be purchased are denominated.
A Portfolio will not enter into foreign currency forward exchange contracts or maintain a net exposure to these contracts where the consummation of the contracts would obligate a Portfolio to deliver an amount of foreign currency in excess of the value of a Portfolio’s portfolio securities.
When required by law, a Portfolio will earmark cash or segregate U.S. government securities or other appropriate liquid portfolio securities in an amount equal to the value of a Portfolio’s total assets committed to the consummation of foreign currency forward exchange contracts entered into under the circumstances set forth above. If the value of the securities so earmarked declines, additional cash or securities will be segregated or earmarked on a daily basis so that the value of such securities will equal the amount of a Portfolio’s commitments with respect to such contracts.
A Portfolio may be limited in its ability to enter into hedging transactions involving foreign currency forward exchange contracts by the Code requirements relating to qualification as a regulated investment company.
Foreign currency forward exchange contracts may limit gains on portfolio securities that could otherwise be realized had they not been utilized and could result in losses. The contracts also may increase a Portfolio’s volatility and may involve a significant amount of risk relative to the investment of cash.
Futures Contracts: A futures contract is a standardized agreement to buy or sell a specific quantity of an underlying asset, reference rate or index at a specific price at a specific future time (the “settlement date”). Futures contracts may be based on, among other things, a specified equity security (securities futures), a specified debt security or reference rate (interest rate futures), the value of a specified securities index (index futures) or the value of a foreign currency (currency futures). The value of a futures contract tends to increase and decrease in tandem with the value of the underlying instrument. The buyer of a futures contract agrees to purchase the underlying instrument on the settlement date and is said to be “long” the contract. The seller of a futures contract agrees to sell the underlying instrument on the settlement date and is said to be “short” the contract. Futures contracts call for settlement only on the expiration date and cannot be “exercised” at any other time during their term.
Depending on the terms of the particular contract, futures contracts are settled through either physical delivery of the underlying instrument on the settlement date (such as in the case of securities futures based on a specified debt security) or by payment of a cash settlement amount on the settlement date (such as in the case of futures contracts relating to broad-based securities indices). In the case of cash-settled futures contracts, the settlement amount is equal to the difference between the reference instrument’s price on the last trading day of the contract and the reference instrument’s price at the time the contract was entered into. Most futures contracts, particularly futures contracts requiring physical delivery, are not held until the settlement date, but instead are offset before the settlement date through the establishment of an opposite and equal futures position (buying a contract that had been sold, or selling a contract that had been purchased). All futures transactions are effected through a clearinghouse associated with the exchange on which the futures are traded.
The buyer and seller of a futures contract are not required to deliver or pay for the underlying commodity unless the contract is held until the settlement date. However, both the buyer and seller are required to deposit “initial margin” with a futures commission merchant when the futures contract is entered into. Initial margin deposits are typically calculated as a percentage of the contract’s market value. If the value of either party’s position declines, the party will be required to make additional “variation margin” payments to settle the change in value on a daily basis. The process is known as “marking-to-market.” Upon the closing of a futures position through the establishment of an offsetting position, a final determination of variation margin will be made and additional cash will be paid by or released to a Portfolio.
In addition, a Portfolio may be required to earmark cash or segregate liquid assets or maintain earmarked cash or segregated liquid assets in order to cover futures transactions. A Portfolio will segregate or earmark cash or liquid assets in an amount equal to the difference between the market value of a futures contract entered into by a Portfolio and the aggregate value of the initial and variation margin payments made by a Portfolio with respect to such contract or as otherwise permitted by SEC rules or SEC staff positions. See “Regulatory Matters” above.
Additional Risks of Futures Transactions. The risks associated with futures contract transactions are different from, and possibly greater than, the risks associated with investing directly in the underlying instruments. Futures are highly specialized instruments that require investment techniques and risk analyses different from those associated with other portfolio investments. The use of futures requires an understanding not only of the underlying instrument but also of the futures contract itself. Futures may be subject to the risk factors generally applicable to derivatives transactions described herein, and may also be subject to certain additional risk factors, including:
· The risk of loss in buying and selling futures contracts can be substantial. Small price movements in the commodity underlying a futures position may result in immediate and substantial loss (or gain) to a Portfolio.
· Buying and selling futures contracts may result in losses in excess of the amount invested in the position in the form of initial margin. In the event of adverse price movements in the underlying commodity, security, index, currency or instrument, a Portfolio would be required to make daily cash payments to maintain its required margin. A Portfolio may be required to sell portfolio securities, or make or take delivery of the underlying securities in order to meet daily margin requirements at a time when it may be disadvantageous to do so. A Portfolio could lose margin payments deposited with a futures commission merchant if the
futures commission merchant breaches its agreement with a Portfolio, becomes insolvent or declares bankruptcy.
· Most exchanges limit the amount of fluctuation permitted in futures contract prices during any single trading day. Once the daily limit has been reached in a particular futures contract, no trades may be made on that day at prices beyond that limit. If futures contract prices were to move to the daily limit for several trading days with little or no trading, a Portfolio could be prevented from prompt liquidation of a futures position and subject to substantial losses. The daily limit governs only price movements during a single trading day and therefore does not limit a Portfolio’s potential losses.
· Index futures based upon a narrower index of securities may present greater risks than futures based on broad market indices, as narrower indices are more susceptible to rapid and extreme fluctuations as a result of changes in value of a small number of securities.
High Yield Securities: High yield securities are fixed income securities, generally Corporates, Preferred Stocks and Convertibles, rated Ba through C by Moody’s or BB through D by S&P, and unrated fixed income securities considered to be of equivalent quality. Securities rated less than Baa by Moody’s or BBB by S&P are classified as non-investment grade securities and are commonly referred to as “junk bonds” or high yield, high risk securities. Such securities carry a high degree of risk and are considered speculative by the major credit rating agencies. See Appendix B for more information about fixed income security ratings. Investment grade securities that a Portfolio holds may be downgraded to below investment grade by the rating agencies. If a Portfolio holds a security that is downgraded, the Portfolio may choose to retain the security.
While fixed income securities rated below investment grade offer high yields, they also normally carry with them a greater degree of risk than securities with higher ratings. Lower-rated bonds are considered speculative by traditional investment standards. High yield securities may be issued as a consequence of corporate restructuring or similar events. Also, high yield securities are often issued by smaller, less credit worthy companies, or by highly leveraged (indebted) firms, which are generally less able than more established or less leveraged firms to make scheduled payments of interest and principal. High yield securities issued under these circumstances pose substantial risks. The price movement of high yield securities is influenced less by changes in interest rates and more by the financial and business position of the issuing corporation when compared to investment grade bonds. Compared with investment grade securities, the values of high yield securities tend to be more volatile and may react with greater sensitivity to changes in interest rates.
The high yield market is subject to credit risk. Default rates and recoveries fluctuate, driven by numerous factors including the general economy. In addition, the secondary market for high yield securities is generally less liquid than that for investment grade corporate securities. In periods of reduced market liquidity, high yield bond prices may become more volatile, and both the high yield market and a Portfolio may experience sudden and substantial price declines.
A lower level of liquidity might have an effect on a Portfolio’s ability to value or dispose of such securities. Also, there may be significant disparities in the prices quoted for high yield securities by various dealers. Under such conditions, a Portfolio may find it difficult to value its securities accurately. A Portfolio may also be forced to sell securities at a significant loss in order to meet shareholder redemptions. These factors add to the risks associated with investing in high yield securities.
High yield bonds may also present risks based on payment expectations. For example, high yield bonds may contain redemption or call provisions. If an issuer exercises these provisions in a declining interest rate market, a Portfolio would have to replace the security with a lower yielding security, resulting in a decreased return for investors.
Certain types of high yield bonds are non-income paying securities. For example, zero coupons pay interest only at maturity and payment-in-kind bonds pay interest in the form of additional securities. Payment in the form of additional securities, or interest income recognized through discount accretion, will, however, be treated as ordinary income which will be distributed to shareholders even though the Portfolio does not receive periodic cash flow from these investments.
Inverse Floaters: Inverse floating rate obligations are obligations which pay interest at rates that vary inversely with changes in market rates of interest. Because the interest rate paid to holders of such obligations is generally determined by subtracting a variable or floating rate from a predetermined amount, the interest rate paid to holders of such obligations will decrease as such variable or floating rate increases and increase as such variable or floating rate decreases.
Like most other fixed-income securities, the value of inverse floaters will decrease as interest rates increase. They are more volatile, however, than most other fixed-income securities because the coupon rate on an inverse floater typically changes at a multiple of the change in the relevant index rate. Thus, any rise in the index rate (as a consequence of an increase in interest rates) causes a correspondingly greater drop in the coupon rate of an inverse floater while a drop in the index rate causes a correspondingly greater increase in the coupon of an inverse floater. Some inverse floaters may also increase or decrease substantially because of changes in the rate of prepayments.
Inverse floating rate investments are variable debt instruments that pay interest at rates that move in the opposite direction of prevailing interest rates. Inverse floating rate investments tend to underperform the market for fixed rate bonds in a rising interest rate environment, but tend to outperform the market for fixed rate bonds when interest rates decline or remain relatively stable. Inverse floating rate investments have varying degrees of liquidity.
Investment Companies: Investment company securities are equity securities and include securities of other open-end, closed-end and unregistered investment companies, including foreign investment companies, hedge funds and exchange-traded funds. The 1940 Act generally prohibits a Portfolio from acquiring more than 3% of the outstanding voting shares of an investment company and limits such investments to no more than 5% of the Portfolio’s total assets in any one investment company and no more than 10% in any combination of investment companies. The 1940 Act also prohibits the Portfolios from acquiring in the aggregate more than 10% of the outstanding voting shares of any registered closed-end investment company. A Portfolio may invest in investment company securities of investment companies managed by the Adviser or its affiliates to the extent permitted under the 1940 Act or as otherwise authorized by the SEC. To the extent a Portfolio invests a portion of its assets in investment company securities, those assets will be subject to the risks of the purchased investment company’s portfolio securities, and a shareholder in the Portfolio will bear not only his proportionate share of the expenses of the Portfolio, but also, indirectly the expenses of the purchased investment company.
To the extent permitted by applicable law, a Portfolio may invest all or some of its short term cash investments in any money market fund advised or managed by the Adviser or its affiliates. In connection with any such investments, the Portfolio, to the extent permitted by the 1940 Act, will pay its share of all expenses (other than advisory and administrative fees) of a money market fund in which it invests which may result in the Portfolio bearing some additional expenses. The SEC recently adopted changes to the rules that govern money market funds. These changes have a phase-in period ranging from mid-2015 (primarily for certain new disclosure-related requirements) to the latter half of 2016 (for the most significant changes, such as the possible imposition of redemption fees and/or the temporary suspension of redemption privileges if a fund’s portfolio liquidity falls below certain required minimum levels because of market conditions or other factors). While the industry is still assessing the impact of these rule changes, they may affect the investment strategies, performance, operating expenses and structure of money market funds once implemented.
Exchange-Traded Funds (“ETFs”). Certain Portfolios may invest in ETFs. Investments in ETFs are subject to a variety of risks, including risks of a direct investment in the underlying securities that the ETF holds. For example, the general level of stock prices may decline, thereby adversely affecting the value of the underlying investments of the ETF and, consequently, the value of the ETF. In addition, the market value of the ETF shares may differ from their NAV because the supply and demand in the market for ETF shares at any point is not always identical to the supply and demand in the market for the underlying securities. Also, ETFs that track particular indices typically will be unable to match the performance of the index exactly due to, among other things, the ETF’s operating expenses and transaction costs. ETFs typically incur fees that are separate from those fees incurred directly by a Portfolio. Therefore, as a shareholder in an ETF, a Portfolio would bear its ratable share of that entity’s expenses. At the same time, a Portfolio would continue to pay its own investment management fees and other expenses. As a result, a Portfolio and its shareholders, in effect, will be absorbing duplicate levels of fees with respect to investments in
ETFs. Further, certain of the ETFs in which the Fund may invest are leveraged. The more the Fund invests in such leveraged ETFs, the more this leverage will magnify any losses on those investments.
Investment Funds: Some emerging market countries have laws and regulations that currently preclude or limit direct foreign investment in the securities of their companies. However, certain emerging market countries through investment funds permit indirect foreign investment in the securities of companies listed and traded on the stock exchanges in these countries. Portfolios that may invest in these Investment Funds will invest in such Investment Funds only where appropriate given that the Portfolio’s shareholders will bear indirectly the layer of expenses of the underlying investment funds in addition to their proportionate share of the expenses of the Portfolio.
Investment Grade Securities: Investment grade securities are fixed income securities that are (a) rated by one or more NRSROs in one of the four highest rating categories at the time of purchase (e.g., AAA, AA, A or BBB by S&P or Fitch or Aaa, Aa, A or Baa by Moody’s); (b) guaranteed by the U.S. Government or a private issuer; or (c) considered by the Adviser and/or Sub-Adviser to be investment grade quality. Securities rated BBB or Baa represent the lowest of four levels of investment grade securities and are regarded as borderline between definitely sound obligations and those in which the speculative element begins to predominate. Any Portfolio is permitted to hold investment grade securities or “high grade” securities, and may hold unrated securities if the Adviser and/or Sub-Adviser consider the risks involved in owning that security to be equivalent to the risks involved in holding an investment grade security. The Adviser and/or Sub-Adviser may retain securities if their ratings fall below investment grade if it deems retention of the security to be in the best interests of the Portfolio.
Mortgage securities, including mortgage pass-throughs and CMOs, deemed investment grade by the Adviser and/or Sub-Adviser, will either carry a guarantee from an agency or instrumentality of the U.S. Government or a private issuer of the timely payment of principal and interest (such guarantees do not extend to the market value of such securities or the NAV per share of the Portfolio) or, in the case of unrated securities, are considered by the Adviser and/or Sub-Adviser to be investment grade quality.
Leverage Risks: Certain transactions may give rise to a form of leverage. To mitigate leveraging risk, the Portfolios will earmark or segregate liquid assets or otherwise cover the transactions that may give rise to such risk as required by applicable rules and regulatory pronouncements of the SEC. The use of leverage may cause a Portfolio to liquidate portfolio positions when it may not be advantageous to do so to satisfy its obligations or to meet segregation requirements. Leverage, including borrowing, may cause a Portfolio to be more volatile than if the Portfolio had not been leveraged. This is because leverage tends to exaggerate the effect of any increase or decrease in the value of the Portfolio’s portfolio securities.
Limited Partnership and Limited Liability Company Interests: A limited partnership interest entitles a Portfolio to participate in the investment return of the partnership’s assets as defined by the agreement among the partners. As a limited partner, a Portfolio generally is not permitted to participate in the management of the partnership. However, unlike a general partner whose liability is not limited, a limited partner’s liability generally is limited to the amount of its commitment to the partnership. Certain Portfolios may invest in limited liability company interests to the same extent they invest in limited partnership interests. Limited liability company interests have similar characteristics as limited partnership interests.
Loan Participations and Assignments: Loan participations and assignments are fixed income securities. A Portfolio may invest in fixed rate and floating rate loans (“Loans”) arranged through private negotiations between an issuer and one or more financial institutions (“Lenders”). A Portfolio’s investments in Loans are expected in most instances to be in the form of participation in Loans (“Participations”) and assignments of all or a portion of Loans (“Assignments”) from third-parties. In the case of a Participation, a Portfolio will have the right to receive payments of principal, interest and any fees to which it is entitled only from the Lender selling the Participation and only upon receipt by the Lender of the payments from the borrower. If a Lender selling a Participation becomes insolvent, a Portfolio may be treated as a general creditor of the Lender and may not benefit from any set-off between the Lender and the borrower. Certain Participations may be structured in a manner designed to avoid purchasers of Participations being subject to the credit risk of the Lender with respect to the Participation. Even under such a structure, in the event of the Lender’s insolvency, the Lender’s servicing of the Participation may be delayed and the
assignability of the Participation may be impaired. A Portfolio will acquire Participations only if the Lender interpositioned between the Portfolio and the borrower is determined by the Adviser to be creditworthy.
When a Portfolio purchases Assignments from Lenders it will acquire direct rights against the borrower on the Loan. However, because Assignments are arranged through private negotiations between potential assignees and potential assignors, the rights and obligations acquired by the Portfolio as the purchaser of an Assignment may differ from, and be more limited than, those held by the assigning Lender. Because there is no liquid market for such securities, the Portfolio anticipates that such securities could be sold only to a limited number of institutional investors. The lack of a liquid secondary market may have an adverse impact on the value of such securities and the Portfolio’s ability to dispose of particular Assignments or Participations when necessary to meet the Portfolio’s liquidity needs or in response to a specific economic event, such as a deterioration in the creditworthiness of the borrower. The lack of a liquid secondary market for Assignments and Participations also may make it more difficult for the Portfolio to assign a value to those securities for purposes of valuing the Portfolio’s holdings and calculating its NAV.
Participations and Assignments involve a risk of loss in case of default or insolvency of the borrower. In addition, they may offer less legal protection to a Portfolio in the event of fraud or misrepresentation and may involve a risk of insolvency of the Lender. Certain Participations and Assignments may also include standby financing commitments that obligate the investing Portfolio to supply additional cash to the borrower on demand. Participations involving emerging market country issuers may relate to Loans as to which there has been or currently exists an event of default or other failure to make payment when due, and may represent amounts owed to Lenders that are themselves subject to political and economic risks, including the risk of currency devaluation, expropriation, or failure. Those Participations and Assignments present additional risk of default or loss.
Mortgage Related Securities: Mortgage related securities are securities that, directly or indirectly, represent a participation in, or are secured by and payable from, mortgage loans on real property. Mortgage related securities include collateralized mortgage obligations and MBS issued or guaranteed by agencies or instrumentalities of the U.S. Government or by private sector entities.
Mortgage-Backed Securities. With MBS, many mortgagees’ obligations to make monthly payments to their lending institution are pooled together and passed through to investors. The pools are assembled by various governmental, government-related and private organizations. A Portfolio may invest in securities issued or guaranteed by Ginnie Mae, Freddie Mac or Fannie Mae, private issuers and other government agencies. MBS issued by non-agency issuers, whether or not such securities are subject to guarantees, may entail greater risk, since private issuers may not be able to meet their obligations under the policies. If there is no guarantee provided by the issuer, a Portfolio will purchase only MBS that, at the time of purchase, are rated investment grade by one or more NRSROs or, if unrated, are deemed by the Adviser and/or Sub-Adviser to be of comparable quality.
MBS are issued or guaranteed by private sector originators of or investors in mortgage loans and structured similarly to governmental pass-through securities. Because private pass-throughs typically lack a guarantee by an entity having the credit status of a governmental agency or instrumentality, however, they are generally structured with one or more of the types of credit enhancement described below. Fannie Mae and Freddie Mac obligations are not backed by the full faith and credit of the U.S. Government as Ginnie Mae certificates are. Freddie Mac securities are supported by Freddie Mac’s right to borrow from the U.S. Treasury. Each of Ginnie Mae, Fannie Mae and Freddie Mac guarantees timely distributions of interest to certificate holders. Each of Ginnie Mae and Fannie Mae also guarantees timely distributions of scheduled principal. Although Freddie Mac has in the past guaranteed only the ultimate collection of principal of the underlying mortgage loan, Freddie Mac now issues MBS (Freddie Mac Gold PCS) that also guarantee timely payment of monthly principal reductions. Resolution Funding Corporation obligations are backed, as to principal payments, by zero coupon U.S. Treasury bonds and, as to interest payments, ultimately by the U.S. Treasury.
There are two methods of trading MBS. A specified pool transaction is a trade in which the pool number of the security to be delivered on the settlement date is known at the time the trade is made. This is in contrast with the typical MBS transaction, called a TBA (To Be Announced) transaction, in which the type of MBS to be delivered is specified at the time of trade but the actual pool numbers of the securities that will be delivered are not known at the time of the trade. The pool numbers of the pools to be delivered at settlement are announced shortly before
settlement takes place. The terms of the TBA trade may be made more specific if desired. Generally, agency pass-through MBSs are traded on a TBA basis. See also “Leverage Risks.”
Like fixed income securities in general, MBS will generally decline in price when interest rates rise. Rising interest rates also tend to discourage refinancings of home mortgages, with the result that the average life of MBS held by a Portfolio may be lengthened. As average life extends, price volatility generally increases. This extension of average life causes the market price of the MBS to decrease further when interest rates rise than if their average lives were fixed. However, when interest rates fall, mortgages may not enjoy as large a gain in market value due to prepayment risk because additional mortgage prepayments must be reinvested at lower interest rates. Faster prepayment will shorten the average life and slower prepayments will lengthen it. However, it is possible to determine what the range of the average life movement could be and to calculate the effect that it will have on the price of the MBS. In selecting MBS, the Adviser and/or Sub-Adviser look for those that offer a higher yield to compensate for any variation in average maturity. If the underlying mortgage assets experience greater than anticipated prepayments of principal, a Portfolio may fail to fully recoup its initial investment in these securities, even if the security is in one of the highest rating categories. A Portfolio may invest, without limit, in MBS issued by private issuers when the Adviser and/or Sub-Adviser deem that the quality of the investment, the quality of the issuer, and market conditions warrant such investments. A Portfolio will purchase securities issued by private issuers that are rated investment grade at the time of purchase by Moody’s, Fitch or S&P or are deemed by the Adviser and/or Sub-Adviser to be of comparable investment quality.
Fannie Mae Certificates. Fannie Mae is a federally chartered and privately owned corporation organized and existing under the Federal National Mortgage Association Charter Act of 1938. Each Fannie Mae certificate represents a pro rata interest in one or more pools of mortgage loans insured by the FHA under the Housing Act, or Title V of the Housing Act of 1949 (“FHA Loans”), or guaranteed by the Department of Veteran Affairs under the Servicemen’s Readjustment Act of 1944, as amended (“VA Loans”) or conventional mortgage loans (i.e., mortgage loans that are not insured or guaranteed by any governmental agency) of the following types: (i) fixed rate level payment mortgage loans; (ii) fixed rate growing equity mortgage loans; (iii) fixed rate graduated payment mortgage loans; (iv) variable rate California mortgage loans; (v) other adjustable rate mortgage loans; and (vi) fixed rate and adjustable mortgage loans secured by multi-family projects.
Freddie Mac Certificates. Freddie Mac is a corporate instrumentality of the United States created pursuant to the Emergency Home Finance Act of 1970, as amended (the “FHLMC Act”). Freddie Mac certificates represent a pro rata interest in a group of mortgage loans (a “Freddie Mac Certificate group”) purchased by Freddie Mac. The mortgage loans underlying the Freddie Mac Certificates consist of fixed rate or adjustable rate mortgage loans with original terms to maturity of between ten and thirty years, substantially all of which are secured by first liens on one-to-four-family residential properties or multi-family projects. Each mortgage loan must meet the applicable standards set forth in the FHLMC Act. A Freddie Mac Certificate group may include whole loans, participation interests in whole loans and undivided interests in whole loans and participations comprising another Freddie Mac Certificate group.
In September 2008, the U.S. Treasury Department announced that the government would be taking over Fannie Mae and Freddie Mac and placing the companies into a conservatorship. In addition, the U.S. Treasury announced additional steps that it intended to take with respect to the debt and MBS issued by Fannie Mae and Freddie Mac in order to support the conservatorship. Fannie Mae and Freddie Mac are continuing to operate as going concerns while in conservatorship and each remains liable for all of its respective obligations, including its guaranty obligations, associated with its MBS. No assurance can be given that these initiatives will be successful. The maximum potential liability of the issuers of some U.S. government securities held by a Portfolio may greatly exceed their current resources, including their legal right to support from the U.S. Treasury. It is possible that these issuers will not have the funds to meet their payment obligations in the future.
Ginnie Mae Certificates. Ginnie Mae is a wholly-owned corporate instrumentality of the United States within the Department of Housing and Urban Development. The National Housing Act of 1934, as amended (the “Housing Act”), authorizes Ginnie Mae to guarantee the timely payment of the principal and interest on certificates that are based on and backed by a pool of FHA Loans, VA Loans or by pools of other eligible mortgage loans. The Housing Act provides that the full faith and credit of the United States is pledged to the payment of all amounts that may be
required to be paid under any guaranty. In order to meet its obligations under such guaranty, Ginnie Mae is authorized to borrow from the U.S. Treasury with no limitations as to amount.
Each Ginnie Mae certificate represents a pro rata interest in one or more of the following types of mortgage loans: (i) fixed rate level payment mortgage loans; (ii) fixed rate graduated payment mortgage loans; (iii) fixed rate growing equity mortgage loans; (iv) fixed rate mortgage loans secured by manufactured (mobile) homes; (v) mortgage loans on multi-family residential properties under construction; (vi) mortgage loans on completed multi-family projects; (vii) fixed rate mortgage loans as to which escrowed funds are used to reduce the borrower’s monthly payments during the early years of the mortgage loans (“buydown” mortgage loans); (viii) mortgage loans that provide for adjustments in payments based on periodic changes in interest rates or in other payment terms of the mortgage loans; and (ix) mortgage-backed serial notes. All of these mortgage loans will be FHA Loans or VA loans and, except as otherwise specified above, will be fully-amortizing loans secured by first liens on one to four-family housing units.
Collateralized Mortgage Obligations. Certain Portfolios may invest in collateralized mortgage obligations (“CMOs”), which are MBS that are collateralized by mortgage loans or mortgage pass-through securities, and multi-class pass-through securities, which are equity interests in a trust composed of mortgage loans or other MBS. Unless the context indicates otherwise, the discussion of CMOs below also applies to multi-class pass through securities.
CMOs may be issued by governmental or government-related entities or by private entities, such as banks, savings and loan institutions, private mortgage insurance companies, mortgage bankers and other secondary market traders. CMOs are issued in multiple classes, often referred to as “tranches,” with each tranche having a specific fixed or floating coupon rate and stated maturity or final distribution date. Under the traditional CMO structure, the cash flows generated by the mortgages or mortgage pass-through securities in the collateral pool are used to first pay interest and then pay principal to the holders of the CMOs. Subject to the various provisions of individual CMO issues, the cash flow generated by the underlying collateral (to the extent it exceeds the amount required to pay the stated interest) is used to retire the bonds.
The principal and interest on the underlying collateral may be allocated among the several tranches of a CMO in innumerable ways. In a common CMO structure, the tranches are retired sequentially in the order of their respective stated maturities or final distribution dates (as opposed to the pro-rata return of principal found in traditional pass-through obligations). The fastest-pay tranches would initially receive all principal payments. When those tranches are retired, the next tranches in the sequence receive all of the principal payments until they are retired. The sequential retirement of bond groups continues until the last tranche is retired. Accordingly, the CMO structure allows the issuer to use cash flows of long maturity, monthly-pay collateral to formulate securities with short, intermediate, and long final maturities and expected average lives and risk characteristics.
The primary risk of CMOs is the uncertainty of the timing of cash flows that results from the rate of prepayments on the underlying mortgages serving as collateral and from the structure of the particular CMO transaction (that is, the priority of the individual tranches). An increase or decrease in prepayment rates (resulting from a decrease or increase in mortgage interest rates) may cause the CMOs to be retired substantially earlier than their stated maturities or final distribution dates and will affect the yield and price of CMOs. In addition, if the collateral securing CMOs or any third-party guarantees are insufficient to make payments, a Portfolio could sustain a loss. The prices of certain CMOs, depending on their structure and the rate of prepayments, can be volatile. Some CMOs may also not be as liquid as other types of mortgage securities. As a result, it may be difficult or impossible to sell the securities at an advantageous time or price.
Privately issued CMOs are arrangements in which the underlying mortgages are held by the issuer, which then issues debt collateralized by the underlying mortgage assets. Such securities may be backed by mortgage insurance, letters of credit, or other credit enhancing features. Although payment of the principal of, and interest on, the underlying collateral securing privately issued CMOs may be guaranteed by the U.S. Government or its agencies and instrumentalities, these CMOs represent obligations solely of the private issuer and are not insured or guaranteed by the U.S. Government, its agencies and instrumentalities or any other person or entity. Privately issued CMOs are subject to prepayment risk due to the possibility that prepayments on the underlying assets will alter the cash flow. Yields on privately issued CMOs have been historically higher than the yields on CMOs backed by mortgages
guaranteed by U.S. Government agencies and instrumentalities. The risk of loss due to default on privately issued CMOs, however, is historically higher since the U.S. Government has not guaranteed them.
New types of CMO tranches have evolved. These include floating rate CMOs, inverse floating rate CMOs, planned amortization classes, accrual bonds and CMO residuals. These newer structures affect the amount and timing of principal and interest received by each tranche from the underlying collateral. Under certain of these newer structures, given classes of CMOs have priority over others with respect to the receipt of prepayments on the mortgages. Therefore, depending on the type of CMOs in which a Portfolio invests, the investment may be subject to a greater or lesser risk of prepayment than other types of MBS.
CMOs may include real estate investment conduits (“REMICs”). REMICs, which were authorized under the Tax Reform Act of 1986, are private entities formed for the purpose of holding a fixed pool of mortgages secured by an interest in real property. A REMIC is a CMO that qualifies for special tax treatment under the Internal Revenue Code and invests in certain mortgages principally secured by interests in real property.
A Portfolio may invest in, among others, parallel pay CMOs and Planned Amortization Class CMOs (“PAC Bonds”). Parallel pay CMOs are structured to provide payments of principal on each payment date to more than one tranche. These simultaneous payments are taken into account in calculating the stated maturity date or final distribution date of each tranche which, as with other CMO structures, must be retired by its stated maturity date or final distribution date but may be retired earlier. PAC Bonds are a form of parallel pay CMO, with the required principal payment on such securities having the highest priority after interest has been paid to all classes. PAC Bonds generally require payments of a specified amount of principal on each payment date.
Stripped Mortgage-Backed Securities. Certain Portfolios may invest in stripped mortgage-backed securities (“SMBS”). An SMBS is a derivative multi-class mortgage security. SMBS usually are structured with two classes that receive different proportions of the interest and principal distribution on a pool of mortgage assets. In the most extreme case, one class will receive all of the interest (the interest-only or “IO” class), while the other class will receive all of the principal (the principal-only or “PO” class). The yield to maturity on an IO class is extremely sensitive to the rate of principal payments (including prepayments) on the related underlying mortgage assets, and a rapid rate of principal payments may have a material adverse effect on such security’s yield to maturity. If the underlying mortgage assets experience greater than anticipated prepayments of principal, a Portfolio may fail to fully recoup its initial investment in these securities. Conversely, if the underlying mortgage assets experience less than anticipated prepayments of principal, the yield of POs could be materially adversely affected. The market values of IOs and POs are subject to greater risk of fluctuation in response to changes in market rates of interest than many other types of government securities. To the extent a Portfolio invests in IOs and POs, it may increase the risk of fluctuations in the NAV of a Portfolio.
Commercial Mortgage-Backed Securities (“CMBS”). CMBS are generally multi-class or pass-through securities issued by special purpose entities that represent an undivided interest in a portfolio of mortgage loans backed by commercial properties, including, but not limited to, industrial and warehouse properties, office buildings, retail space and shopping malls, hotels, healthcare facilities, multifamily properties and cooperative apartments. Private lenders, such as banks or insurance companies, originate these loans and then sell the loans directly into a CMBS trust or other entity. The commercial mortgage loans that underlie CMBS are generally not amortizing or not fully amortizing. That is, at their maturity date, repayment of the remaining principal balance or “balloon” is due and is repaid through the attainment of an additional loan or sale of this property. An extension of the final payment on commercial mortgages will increase the average life of the CMBS, generally resulting in a lower yield for discount bonds and a higher yield for premium bonds.
CMBS are subject to credit risk and prepayment risk. Although prepayment risk is present, it is of a lesser degree in the CMBS than in the residential mortgage market; commercial real estate property loans often contain provisions which substantially reduce the likelihood that such securities will be prepaid (e.g., significant prepayment penalties on loans and, in some cases, prohibition on principal payments for several years following origination).
Municipals: Municipal securities are fixed income securities issued by local, state and regional governments that provide interest income which is exempt from federal income taxes. Municipals include both municipal bonds
(those securities with maturities of five years or more) and municipal notes (those with maturities of less than five years). Municipal bonds are issued for a wide variety of reasons: to construct public facilities, such as airports, highways, bridges, schools, hospitals, mass transportation, streets, water and sewer works; to obtain funds for operating expenses; to refund outstanding municipal obligations; and to loan funds to various public institutions and facilities. Certain industrial development bonds are also considered municipal bonds if their interest is exempt from federal income tax. Industrial development bonds are issued by, or on behalf of, public authorities to obtain funds for various privately-operated manufacturing facilities, housing, sports arenas, convention centers, airports, mass transportation systems and water, gas or sewage works. Industrial development bonds are ordinarily dependent on the credit quality of a private user, not the public issuer.
The two principal classifications of municipal bonds are “general obligation” and “revenue” or “special tax” bonds. General obligation bonds are secured by the issuer’s pledge of its full faith, credit and taxing power for the payment of principal and interest. Revenue or special tax bonds are payable only from the revenues derived from a particular facility or class of facilities or, in some cases, from the proceeds of a special excise or other tax, but not from general tax revenues.
Industrial revenue bonds in most cases are revenue bonds and generally do not have the pledge of the credit of the issuer. The payment of the principal and interest on such industrial revenue bonds is dependent solely on the ability of the user of the facilities financed by the bonds to meet its financial obligations and the pledge, if any, of real and personal property so financed as security for such payment. Short-term municipal obligations issued by states, cities, municipalities or municipal agencies, include tax anticipation notes, revenue anticipation notes, bond anticipation notes, construction loan notes and short-term discount notes.
Municipal notes are issued to meet the short-term funding requirements of local, regional and state governments. Municipal notes include bond anticipation notes, revenue anticipation notes and tax and revenue anticipation notes. These are short-term debt obligations issued by state and local governments to aid cash flows while waiting for taxes or revenue to be collected, at which time the debt is retired. Other types of municipal notes in which the Portfolio may invest are construction loan notes, short-term discount notes, tax-exempt commercial paper, demand notes, and similar instruments.
Municipal bonds generally include debt obligations issued by states and their political subdivisions, and duly constituted authorities and corporations, to obtain funds to construct, repair or improve various public facilities such as airports, bridges, highways, hospitals, housing, schools, streets and water and sewer works. Municipal bonds may also be issued to refinance outstanding obligations as well as to obtain funds for general operating expenses and for loans to other public institutions and facilities.
Note obligations with demand or put options may have a stated maturity in excess of one year, but permit any holder to demand payment of principal plus accrued interest upon a specified number of days’ notice. Frequently, such obligations are secured by letters of credit or other credit support arrangements provided by banks. The issuer of such notes normally has a corresponding right, after a given period, to repay at its discretion the outstanding principal of the note plus accrued interest upon a specific number of days’ notice to the bondholders. The interest rate on a demand note may be based upon a known lending rate, such as the prime lending rate, and be adjusted when such rate changes, or the interest rate on a demand note may be a market rate that is adjusted at specified intervals. Each note purchased by the Portfolios will meet the quality criteria set out in the Prospectus for the Portfolios.
The yields of municipal bonds depend on, among other things, general money market conditions, conditions in the municipal bond market, the size of a particular offering, the maturity of the obligation, and the rating of the issue. The ratings of Moody’s and S&P represent their opinions of the quality of the municipal bonds rated by them. It should be emphasized that such ratings are general and are not absolute standards of quality. Consequently, municipal bonds with the same maturity, coupon and rating may have different yields, while municipal bonds of the same maturity and coupon, but with different ratings, may have the same yield. It will be the responsibility of the Adviser and/or Sub-Adviser to appraise independently the fundamental quality of the bonds held by the Portfolios.
Municipal bonds are sometimes purchased on a “when-issued” or “delayed-delivery” basis, which means the Portfolio has committed to purchase certain specified securities at an agreed upon price when they are issued. The
period between commitment date and issuance date can be a month or more. It is possible that the securities will never be issued and the commitment canceled.
From time to time proposals have been introduced before state and local legislatures to restrict or eliminate the federal income tax exemption for interest on municipal bonds. Similar proposals may be introduced in the future. If any such proposal were enacted, it might restrict or eliminate the ability of the Portfolios to achieve their investment objectives. In that event, the Fund’s Trustees and officers would reevaluate investment objectives and policies and consider recommending to shareholders changes in such objectives and policies.
Similarly, from time to time proposals have been introduced before state and local legislatures to restrict or eliminate the state and local income tax exemption for interest on municipal bonds. Similar proposals may be introduced in the future. If any such proposal were enacted, it might restrict or eliminate the ability of a Portfolio to achieve its investment objective. In that event, the Fund’s Trustees and officers would reevaluate investment objectives and policies and consider recommending to shareholders changes in such investment objectives and policies.
The Portfolios eligible to purchase municipal bonds may also purchase bonds the income on which is subject to the alternative minimum tax (“AMT bonds”). AMT bonds are tax-exempt private activity bonds issued after August 7, 1986, the proceeds of which are directed, at least in part, to private, for-profit organizations. While the income from AMT bonds is exempt from regular federal income tax, it is a tax preference item in the calculation of the alternative minimum tax. The alternative minimum tax is a special separate tax that applies to some taxpayers who have certain adjustments to income or tax preference items.
Build America Bonds are taxable municipal securities on which the issuer receives federal support of the interest paid. Assuming certain specified conditions are satisfied, issuers of Build America Bonds may either (i) receive reimbursement from the U.S. Treasury with respect to a portion of its interest payments on the bonds (“direct pay” Build America Bonds) or (ii) provide tax credits to investors in the bonds (“tax credit” Build America Bonds). Unlike most other municipal securities, interest received on Build America Bonds is subject to federal and state income tax. Issuance of Build America Bonds ceased on December 31, 2010. The number of Build America Bonds available in the market is limited, which may negatively affect the value of the Build America Bonds.
Lease Obligations. Included within the revenue bonds category, as noted above, are participations in lease obligations or installment purchase contracts (hereinafter collectively called “lease obligations”) of municipalities. State and local governments, agencies or authorities issue lease obligations to acquire equipment and facilities. Lease obligations may have risks not normally associated with general obligation or other revenue bonds. Leases, and installment purchase or conditional sale contracts (which may provide for title to the leased asset to pass eventually to the issuer), have developed as a means for governmental issuers to acquire property and equipment without the necessity of complying with the constitutional and statutory requirements generally applicable for the issuance of debt. Certain lease obligations contain “non-appropriation” clauses that provide that the governmental issuer has no obligation to make future payments under the lease or contract unless money is appropriated for such purpose by the appropriate legislative body on an annual or other periodic basis. Consequently, continued lease payments on those lease obligations containing “non-appropriation” clauses are dependent on future legislative actions. If such legislative actions do not occur, the holders of the lease obligation may experience difficulty in exercising their rights, including disposition of the property.
In addition, lease obligations represent a relatively new type of financing that has not yet developed the depth of marketability associated with more conventional municipal obligations, and, as a result, certain of such lease obligations may be considered illiquid securities. To determine whether or not a Portfolio will consider such securities to be illiquid (and subject to each Portfolio’s limitation on investing in illiquid securities), the Fund’s Board of Trustees has established guidelines to be utilized by the Portfolios in determining the liquidity of a lease obligation. The factors to be considered in making the determination include: (i) the frequency of trades and quoted prices for the obligation; (ii) the number of dealers willing to purchase or sell the security and the number of other potential purchasers; (iii) the willingness of dealers to undertake to make a market in the security; and (iv) the nature of the marketplace trades, including the time needed to dispose of the security, the method of soliciting offers, and the mechanics of the transfer.
Non-Publicly Traded Securities, Private Placements and Restricted Securities: The Portfolios may invest in securities that are neither listed on a stock exchange nor traded OTC, including privately placed and restricted securities. Such unlisted securities may involve a higher degree of business and financial risk that can result in substantial losses. As a result of the absence of a public trading market for these securities, they may be less liquid than publicly traded securities. Although these securities may be resold in privately negotiated transactions, the prices realized from these sales could be less than those originally paid by the Portfolio or less than what may be considered the fair value of such securities. Furthermore, companies whose securities are not publicly traded may not be subject to the disclosure and other investor protection requirements which might be applicable if their securities were publicly traded. The illiquidity of the market, as well as the lack of publicly available information regarding these securities, may also adversely affect the ability of a Portfolio to arrive at a fair value for certain securities at certain times and could make it difficult for a Portfolio to sell certain securities. If such securities are required to be registered under the securities laws of one or more jurisdictions before being sold, a Portfolio may be required to bear the expenses of registration.
As a general matter, a Portfolio may not invest more than 15% of its net assets, determined at the time of investment, in illiquid securities, such as securities for which there is not a readily available secondary market or securities that are restricted from sale to the public without registration. However, certain Restricted Securities can be offered and sold to qualified institutional buyers under Rule 144A under the Securities Act of 1933, as amended (the “1933 Act”) (“Rule 144A Securities”), and may be deemed to be liquid under guidelines adopted by the Fund’s Board of Trustees. The Portfolios may invest without limit in liquid Rule 144A Securities. Rule 144A Securities may become illiquid if qualified institutional buyers are not interested in acquiring the securities.
Options: An option is a contract that gives the holder of the option the right, but not the obligation, to buy from (in the case of a call option) or sell to (in the case of a put option) the seller of the option (the “option writer”) the underlying security at a specified fixed price (the “exercise price”) on or prior to a specified date for American options or only at expiration for European options (the “expiration date”). The buyer of the option pays to the option writer the option premium, which is the purchase price of the option.
Exchange-traded options are issued by a regulated intermediary such as the Options Clearing Corporation (“OCC”), which guarantees the performance of the obligations of the parties to such options. OTC options are purchased from or sold to counterparties through direct bilateral agreement between the Portfolios and their counterparties. Certain options, such as options on individual securities, are settled through physical delivery of the underlying security, whereas other options, such as index options, may be settled in cash in an amount based on the difference between the value of the underlying instrument and the strike price, which is then multiplied by a specified multiplier.
Writing Options. Certain Portfolios may write call and put options. As the writer of a call option, a Portfolio receives the premium from the purchaser of the option and has the obligation, upon exercise of the option, to deliver the underlying security upon payment of the exercise price. If the option expires without being exercised a Portfolio is not required to deliver the underlying security but retains the premium received.
Certain Portfolios may only write call options that are “covered.” A call option on a security is covered if (a) a Portfolio owns the security underlying the call or has an absolute and immediate right to acquire that security without additional cash consideration (or, if additional cash consideration is required, such amount is maintained by a Portfolio in segregated or earmarked cash or liquid assets) upon conversion or exchange of other securities held by a Portfolio; or (b) a Portfolio has purchased a call on the underlying security, the exercise price of which is (i) equal to or less than the exercise price of the call written, or (ii) greater than the exercise price of the call written, provided the difference is maintained by a Portfolio in segregated or earmarked cash or liquid assets.
Selling call options involves the risk that a Portfolio may be required to sell the underlying security at a disadvantageous price, below the market price of such security, at the time the option is exercised. As the writer of a covered call option, a Portfolio forgoes, during the option’s life, the opportunity to profit from increases in the market value of the underlying security covering the option above the sum of the premium and the exercise price but retains the risk of loss should the price of the underlying security decline.
Certain Portfolios may write put options. As the writer of a put option, a Portfolio receives the premium from the purchaser of the option and has the obligation, upon exercise of the option, to pay the exercise price and receive delivery of the underlying security. If the option expires without being exercised, a Portfolio is not required to receive the underlying security in exchange for the exercise price and retains the option premium.
A Portfolio may only write put options that are “covered.” A put option on a security is covered if (a) a Portfolio segregates or earmarks cash or liquid assets equal to the exercise price; or (b) a Portfolio has purchased a put on the same security as the put written, the exercise price of which is (i) equal to or greater than the exercise price of the put written, or (ii) less than the exercise price of the put written, provided the difference is maintained by a Portfolio in segregated or earmarked cash or liquid assets.
Selling put options involves the risk that a Portfolio may be required to buy the underlying security at a disadvantageous price, above the market price of such security, at the time the option is exercised. While a Portfolio’s potential gain in writing a covered put option is limited to the premium received plus the interest earned on the liquid assets covering the put option, a Portfolio’s risks of loss is equal to the entire value of the underlying security, offset only by the amount of the premium received.
A Portfolio may close out an options position which it has written through a closing purchase transaction. A Portfolio could execute a closing purchase transaction with respect to a written call option by purchasing a call option on the same underlying security and having the same exercise price and expiration date as the call option written by a Portfolio. A Portfolio could execute a closing purchase transaction with respect to a put option written by purchasing a put option on the same underlying security and having the same exercise price and expiration date as the put option written by a Portfolio. A closing purchase transaction may or may not result in a profit to a Portfolio. A Portfolio can close out its position as an option writer only if a liquid market exists for options on the same underlying security and having the same exercise price and expiration date as the option written by a Portfolio. There is no assurance that such a market will exist with respect to any particular option.
The writer of an American option generally has no control over the time when the option is exercised and the option writer is required to deliver or acquire the underlying security. Once an option writer has received an exercise notice, it cannot effect a closing purchase transaction in order to terminate its obligation under the option. Thus, the use of options may require a Portfolio to buy or sell portfolio securities at inopportune times or for prices other than the current market values of such securities, may limit the amount of appreciation a Portfolio can realize on an investment, or may cause a Portfolio to hold a security that it might otherwise sell.
Purchasing Options. Certain Portfolios may purchase call and put options. As the buyer of a call option, a Portfolio pays the premium to the option writer and has the right to purchase the underlying security from the option writer at the exercise price. If the market price of the underlying security rises above the exercise price, a Portfolio could exercise the option and acquire the underlying security at a below-market price, which could result in a gain to a Portfolio, minus the premium paid. As the buyer of a put option, a Portfolio pays the premium to the option writer and has the right to sell the underlying security to the option writer at the exercise price. If the market price of the underlying security declines below the exercise price, a Portfolio could exercise the option and sell the underlying security at an above-market price, which could result in a gain to a Portfolio, minus the premium paid. A Portfolio may buy call and put options whether or not it holds the underlying securities.
As a buyer of a call or put option, a Portfolio may sell put or call options that it has purchased at any time prior to such option’s expiration date through a closing sale transaction. The principal factors affecting the market value of a put or a call option include supply and demand, interest rates, the current market price of the underlying security in relation to the exercise price of the option, the volatility of the underlying security, the underlying security’s dividend policy, and the time remaining until the expiration date. A closing sale transaction may or may not result in a profit to a Portfolio. A Portfolio’s ability to initiate a closing sale transaction is dependent upon the liquidity of the options market and there is no assurance that such a market will exist with respect to any particular option. If a Portfolio does not exercise or sell an option prior to its expiration date, the option expires and becomes worthless.
OTC Options. Unlike exchange-traded options, which are standardized with respect to the underlying instrument, expiration date, contract size and strike price, the terms of OTC options generally are established through negotiation between the parties to the options contract. This type of arrangement allows the purchaser and writer greater flexibility
to tailor the option to their needs. OTC options are available for a greater variety of securities or baskets of securities, and in a wider range of expiration dates and exercise prices than exchange-traded options. However, unlike exchange-traded options, which are issued and guaranteed by a regulated intermediary, such as the OCC, OTC options are entered into directly with the counterparty. Unless the counterparties provide for it, there is no central clearing or guaranty function for an OTC option. Therefore, OTC options are subject to the risk of default or non-performance by the counterparty. Accordingly, the Adviser and/or Sub-Adviser must assess the creditworthiness of the counterparty to determine the likelihood that the terms of the option will be satisfied. There can be no assurance that a continuous liquid secondary market will exist for any particular OTC option at any specific time. As a result, a Portfolio may be unable to enter into closing sale transactions with respect to OTC options.
Index Options. Call and put options on indices operate similarly to options on securities. Rather than the right to buy or sell a single security at a specified price, options on an index give the holder the right to receive, upon exercise of the option, an amount of cash determined by reference to the difference between the value of the underlying index and the strike price. The underlying index may be a broad-based index or a narrower market index. Unlike many options on securities, all settlements are in cash. The settlement amount, which the writer of a index option must pay to the holder of the option upon exercise, is generally equal to the difference between the strike price of the option and the value of the underlying index, multiplied by a specified multiplier. The multiplier determines the size of the investment position the option represents. Gain or loss to a Portfolio on index options transactions will depend, in part, on price movements in the underlying index generally or in a particular segment of the index rather than price movements of individual components of the index. As with other options, a Portfolio may close out its position in index options through closing purchase transactions and closing sale transactions provided that a liquid secondary market exists for such options.
Index options written by a Portfolio will generally be covered in a manner similar to the covering of other types of options, by holding an offsetting financial position and/or segregating or earmarking cash or liquid assets. A Portfolio may cover call options written on an index by owning securities whose price changes, in the opinion of the Adviser and/or Sub-Adviser, are expected to correlate to those of the underlying index.
Foreign Currency Options. Options on foreign currencies operate similarly to options on securities. Rather than the right to buy or sell a single security at a specified price, options on foreign currencies give the holder the right to buy or sell foreign currency for a fixed amount in U.S. dollars or other base currencies. Options on foreign currencies are traded primarily in the OTC market, but may also be traded on U.S. and foreign exchanges. The value of a foreign currency option is dependent upon the value of the underlying foreign currency relative to the U.S. dollar or other base currency. The price of the option may vary with changes in, among other things, the value of either or both currencies and has no relationship to the investment merits of a foreign security. Options on foreign currencies are affected by all of those factors which influence foreign exchange rates and foreign investment generally. As with other options, a Portfolio may close out its position in foreign currency options through closing purchase transactions and closing sale transactions provided that a liquid market exists for such options.
Foreign currency options written by a Portfolio will generally be covered in a manner similar to the covering of other types of options, by holding an offsetting financial position and/or segregating or earmarking cash or liquid assets.
Options on Futures Contracts. Options on futures contracts are similar to options on securities except that options on futures contracts give the purchasers the right, in return for the premium paid, to assume a position in a futures contract (a long position in the case of a call option and a short position in the case of a put option) at a specified exercise price at any time prior to the expiration of the option. Upon exercise of the option, the parties will be subject to all of the risks associated with futures transactions and subject to margin requirements. As the writer of options on futures contracts, a Portfolio would also be subject to initial and variation margin requirements on the option position.
Options on futures contracts written by a Portfolio will generally be covered in a manner similar to the covering of other types of options, by holding an offsetting financial position and/or segregating or earmarking cash or liquid assets. A Portfolio may cover an option on a futures contract by purchasing or selling the underlying futures contract. In such instances the exercise of the option will serve to close out a Portfolio’s futures position.
Additional Risks of Options Transactions. The risks associated with options transactions are different from, and possibly greater than, the risks associated with investing directly in the underlying instruments. Options are highly specialized instruments that require investment techniques and risk analyses different from those associated with other portfolio investments. The use of options requires an understanding not only of the underlying instrument but also of the option itself. Options may be subject to the risk factors generally applicable to derivatives transactions described herein, and may also be subject to certain additional risk factors, including:
· The exercise of options written or purchased by a Portfolio could cause a Portfolio to sell portfolio securities, thus increasing a Portfolio’s portfolio turnover.
· A Portfolio pays brokerage commissions each time it writes or purchases an option or buys or sells an underlying security in connection with the exercise of an option. Such brokerage commissions could be higher relative to the commissions for direct purchases of sales of the underlying securities.
· A Portfolio’s options transactions may be limited by limitations on options positions established by the SEC, the CFTC or the exchanges on which such options are traded.
· The hours of trading for exchange-listed options may not coincide with the hours during which the underlying securities are traded. To the extent that the options markets close before the markets for the underlying securities, significant price and rate movements can take place in the underlying securities that cannot be reflected in the options markets.
· Index options based upon a narrow index of securities or other assets may present greater risks than options based on broad market indices, as narrower indices are more susceptible to rapid and extreme fluctuations as a result of changes in the values of a smaller number of securities or other assets.
· A Portfolio is subject to the risk of market movements between the time that an option is exercised and the time of performance thereunder, which could increase the extent of any losses suffered by a Portfolio in connection with options transactions.
Combined Transactions. Combined transactions involve entering into multiple derivatives transactions (such as multiple options transactions, including purchasing and writing options in combination with each other; multiple futures transactions; and combinations of options, futures, forward and swap transactions) instead of a single derivatives transaction in order to customize the risk and return characteristics of the overall position. Combined transactions typically contain elements of risk that are present in each of the component transactions. A Portfolio may enter into a combined transaction instead of a single derivatives transaction when, in the opinion of the Adviser and/or Sub-Adviser, it is in the best interest of the Portfolio to do so. Because combined transactions involve multiple transactions, they may result in higher transaction costs and may be more difficult to close out.
Private Investments in Public Equity: A Portfolio may purchase equity securities in a private placement that are issued by issuers who have outstanding, publicly-traded equity securities of the same class (“private investments in public equity” or “PIPES”). Shares in PIPES generally are not registered with the SEC until after a certain time period from the date the private sale is completed. This restricted period can last many months. Until the public registration process is completed, PIPES are restricted as to resale and the Portfolio cannot freely trade the securities. Generally, such restrictions cause the PIPES to be illiquid during this time. PIPES may contain provisions that the issuer will pay specified financial penalties to the holder if the issuer does not publicly register the restricted equity securities within a specified period of time, but there is no assurance that the restricted equity securities will be publicly registered, or that the registration will remain in effect.
Preferred Stock: Preferred stocks are securities that evidence ownership in a corporation which pay a fixed or variable stream of dividends. Preferred stocks have a preference over common stocks in the event of the liquidation of an issuer and usually do not carry voting rights. Preferred stocks have many of the characteristics of both equity securities and fixed income securities.
Public Bank Loans: Certain Portfolios may invest in public loans made by banks or other financial institutions, which may be rated investment grade (Baa or higher by Moody’s, BBB or higher by S&P) or below investment grade (below Baa by Moody’s or below BBB by S&P). Public bank loans are privately negotiated loans for which information about the issuer has been made publicly available. However, public bank loans are not registered under
the 1933 Act, and are not publicly traded. They usually are second lien loans normally lower in priority of payment to senior loans, but have seniority in a company’s capital structure to other claims, such as subordinated corporate bonds or publicly-issued equity so that in the event of bankruptcy or liquidation, the company is required to pay down these second lien loans prior to such other lower-ranked claims on their assets. Bank loans normally pay floating rates that reset frequently, and as a result, protect investors from increases in interest rates.
Bank loans generally are negotiated between a borrower and several financial institutional lenders represented by one or more lenders acting as agent of all the lenders. The agent is responsible for negotiating the loan agreement that establishes the terms and conditions of the loan and the rights of the borrower and the lenders, monitoring any collateral, and collecting principal and interest on the loan. By investing in a loan, a Portfolio becomes a member of a syndicate of lenders. Certain bank loans are illiquid, meaning the Portfolio may not be able to sell them quickly at a fair price. Illiquid securities are also difficult to value. To the extent a bank loan has been deemed illiquid, it will be subject to a Portfolio’s restrictions on investment in illiquid securities. The secondary market for bank loans may be subject to irregular trading activity, wide bid/ask spreads and extended trade settlement periods.
Bank loans are subject to the risk of default. Default in the payment of interest or principal on a loan will result in a reduction of income to a Portfolio, a reduction in the value of the loan, and a potential decrease in the Portfolio’s NAV. The risk of default will increase in the event of an economic downturn or a substantial increase in interest rates. Bank loans are subject to the risk that the cash flow of the borrower and property securing the loan or debt, if any, may be insufficient to meet scheduled payments. As discussed above, however, because bank loans reside higher in the capital structure than high yield bonds, default losses have been historically lower in the bank loan market. Bank loans that are rated below investment grade share the same risks of other below investment grade securities.
Real Estate Investing: Investments in securities of issuers engaged in the real estate industry entail special risks and considerations. In particular, securities of such issuers may be subject to risks associated with the direct ownership of real estate. These risks include the cyclical nature of real estate values, risks related to general and local economic conditions, overbuilding and increased competition, increases in property taxes and operating expenses, demographic trends and variations in rental income, changes in zoning laws, casualty or condemnation losses, environmental risks, regulatory limitations on rents, changes in neighborhood values, changes in the appeal of properties to tenants, increases in interest rates and other real estate capital market influences. Generally, increases in interest rates will increase the costs of obtaining financing, which could directly and indirectly decrease the value of a Portfolio’s investments.
Real Estate Investment Trusts (“REITs”) and Foreign Real Estate Companies. Certain Portfolios may invest in REITs and/or foreign real estate companies, which are similar to entities organized and operated as REITs in the United States. REITs and foreign real estate companies pool investors’ funds for investment primarily in real estate properties or real estate-related loans. REITs and foreign real estate companies generally derive their income from rents on the underlying properties or interest on the underlying loans, and their value is impacted by changes in the value of the underlying property or changes in interest rates affecting the underlying loans owned by the REITs and/or foreign real estate companies. REITs and foreign real estate companies are more susceptible to risks associated with the ownership of real estate and the real estate industry in general. These risks can include fluctuations in the value of underlying properties; defaults by borrowers or tenants; market saturation; changes in general and local economic conditions; decreases in market rates for rents; increases in competition, property taxes, capital expenditures or operating expenses; and other economic, political or regulatory occurrences affecting the real estate industry. In addition, REITs and foreign real estate companies depend upon specialized management skills, may not be diversified (which may increase the volatility of a REIT’s and/or foreign real estate company’s value), may have less trading volume and may be subject to more abrupt or erratic price movements than the overall securities market. Foreign real estate companies may be subject to laws, rules and regulations governing those entities and their failure to comply with those laws, rules and regulations could negatively impact the performance of those entities. Operating REITs and foreign real estate companies requires specialized management skills and a Portfolio indirectly bears REIT and foreign real estate company management expenses along with the direct expenses of the Portfolio. REITs are generally not taxed on income distributed to shareholders provided they comply with several requirements of the Code. REITs are subject to the risk of failing to qualify for tax-free pass-through income under the Code.
Repurchase Agreements: The Portfolios may invest in repurchase agreements. When cash may be available for only a few days, it may be invested by a Portfolio in repurchase agreements until such time as it may otherwise be invested or used for payments of obligations of the Portfolio. These agreements typically involve the acquisition by the Portfolio of debt securities from a selling financial institution such as a bank, savings and loan association or broker-dealer. The agreement provides that the Portfolio will sell back to the institution, and that the institution will repurchase, the underlying securities serving as collateral at a specified price and at a fixed time in the future, usually not more than seven days from the date of purchase. The collateral will be marked-to-market daily to determine that the value of the collateral, as specified in the agreement, does not decrease below the purchase price plus accrued interest. If such decrease occurs, additional collateral will be requested and, when received, added to the account to maintain full collateralization. The Portfolio will accrue interest from the institution until the time when the repurchase is to occur. Although this date is deemed by the Portfolio to be the maturity date of a repurchase agreement, the maturities of securities subject to repurchase agreements are not subject to any limits.
While repurchase agreements involve certain risks not associated with direct investments in debt securities, the Portfolios follow procedures approved by the Trustees that are designed to minimize such risks. These procedures include effecting repurchase transactions only with large, well-capitalized and well-established financial institutions whose financial condition will be continually monitored by the Adviser. In addition, as described above, the value of the collateral underlying the repurchase agreement will be at least equal to the repurchase price, including any accrued interest earned on the repurchase agreement. In the event of a default or bankruptcy by a selling financial institution, a Portfolio will seek to liquidate such collateral. However, the exercising of a Portfolio’s right to liquidate such collateral could involve certain costs or delays and, to the extent that proceeds from any sale upon a default of the obligation to repurchase were less than the repurchase price, the Portfolio could suffer a loss.
Reverse Repurchase Agreements: Under a Reverse Repurchase Agreement, a Portfolio sells a security and promises to repurchase that security at an agreed upon future date and price. The price paid to repurchase the security reflects interest accrued during the term of the agreement. The Portfolio will establish a separate custodial account holding cash and other liquid assets in an amount not less than the purchase obligations of the agreement. Reverse Repurchase Agreements may be viewed as a speculative form of borrowing called leveraging. A Portfolio may invest in reverse repurchase agreements if (i) interest earned from leveraging exceeds the interest expense of the original reverse repurchase transaction and (ii) proceeds from the transaction are not invested for longer than the term of the Reverse Repurchase Agreement. All forms of borrowing (including reverse repurchase agreements) are limited in the aggregate and may not exceed 331/3% of a Portfolio’s total assets, except as permitted by law. See “Leverage Risks,” above, for a description of leverage risk.
Rights: Rights are equity securities representing a preemptive right of stockholders to purchase additional shares of a stock at the time of a new issuance, before the stock is offered to the general public. A stockholder who purchases rights may be able to retain the same ownership percentage after the new stock offering. A right usually enables the stockholder to purchase common stock at a price below the initial offering price. A Portfolio that purchases a right takes the risk that the right might expire worthless because the market value of the common stock falls below the price fixed by the right.
Securities Lending: Each Portfolio may lend its portfolio securities to brokers, dealers, banks and other institutional investors. By lending its portfolio securities, a Portfolio attempts to increase its net investment income through the receipt of interest on the cash collateral with respect to the loan or fees received from the borrower in connection with the loan. Any gain or loss in the market price of the securities loaned that might occur during the term of the loan would be for the account of the Portfolio. The Fund employs an agent to implement the securities lending program and the agent receives a portion of the fee paid by the Borrower to the Fund for its services.
Each Portfolio may lend its portfolio securities so long as the terms, the structure and the aggregate amount of such loans are not inconsistent with the 1940 Act or the rules and regulations or interpretations of the SEC thereunder, which currently require that (a) the borrower pledge and maintain with the Portfolio collateral consisting of liquid, unencumbered assets having a value at all times not less than 100% of the value of the securities loaned; (ii) the borrower add to such collateral whenever the price of the securities loaned rises (i.e., the borrower “marks to market” on a daily basis); (iii) the loan be made subject to termination by the Portfolio at any time; and (iv) the Portfolio receives a reasonable return on the loan (which may include the Portfolio investing any cash collateral in interest bearing short-term investments), any distributions on the loaned securities and any increase in their market value.
In addition, voting rights may pass with the loaned securities, but the Portfolio will retain the right to call any security in anticipation of a vote that the Adviser deems material to the security on loan.
There may be risks of delay and costs involved in recovery of securities or even loss of rights in the collateral should the borrower of the securities fail financially. These delays and costs could be greater for foreign securities. However, loans will be made only to borrowers deemed by the Adviser to be creditworthy and when, in the judgment of the Adviser, the income which can be earned from such securities loans justifies the attendant risk. All relevant facts and circumstances, including the creditworthiness of the broker, dealer, bank or institution, will be considered in making decisions with respect to the lending of securities, subject to review by the Fund’s Board. The Portfolio also bears the risk that the reinvestment of collateral will result in a principal loss. Finally, there is the risk that the price of the securities will increase while they are on loan and the collateral will not be adequate to cover their value.
Short Selling: A short sale is a transaction in which a Portfolio sells securities that it does not own, but has borrowed, in anticipation of a decline in the market price of the securities. To deliver the securities to the buyer, the Portfolio arranges through a broker to borrow the securities and, in so doing, the Portfolio becomes obligated to replace the securities borrowed at their market price at the time of replacement. When selling short, the Portfolio intends to replace the securities at a lower price and therefore, profit from the difference between the cost to replace the securities and the proceeds received from the sale of the securities. When the Portfolio makes a short sale, the proceeds it receives from the sale will be held on behalf of a broker until the Portfolio replaces the borrowed securities. The Portfolio may have to pay a premium to borrow the securities and must pay any dividends or interest payable on the securities until they are replaced.
A Portfolio secures its obligation to replace the borrowed securities by depositing collateral with the broker, consisting of cash or other liquid securities. The Portfolio also must place in a segregated account with its custodian cash or other liquid securities equal in value to the difference, if any, between (i) the current market value of the securities sold short and (ii) any cash or other liquid securities deposited as collateral with the broker in connection with the short sale. This amount will be adjusted daily to reflect changes in the value of the securities sold short. A Portfolio also can cover its obligations by owning another security (such as a call option) giving it the right to obtain the same kind and amount of the security it sold short.
Short sales by a Portfolio involve certain risks and special considerations. If the Adviser and/or Sub-Adviser incorrectly predict that the price of a borrowed security will decline, the Portfolio will have to replace the securities by purchasing them at a higher price than it received from the sale. Therefore, losses from short sales may be unlimited. By contrast, when a Portfolio purchases a security and holds it, the Portfolio cannot lose more than the amount it paid for the security.
Structured Investments: Certain Portfolios also may invest a portion of their assets in structured investments. A structured investment is a derivative security designed to offer a return linked to a particular underlying security, currency, commodity or market, for which the amount of principal repayment and/or interest payments is based on the change in value of such underlying security, currency, commodity or market, including, among others, currency exchange rates, interest rates (such as the prime lending rate or LIBOR), referenced bonds and stock indices or other financial references. Structured investments may come in various forms, including notes, warrants and options to purchase securities, and may be listed and traded on an exchange or otherwise traded in the OTC market.
A Portfolio will typically use structured investments to gain exposure to a permitted underlying security, currency, commodity or market when direct access to such security, currency, commodity or market is limited or inefficient from a tax, cost or regulatory standpoint. Investments in structured investments involve risks including issuer risk, counterparty risk and market risk. Holders of structured investments bear risks of the underlying investment and are subject to issuer or counterparty risk because the holders are relying on the creditworthiness of such issuer or counterparty and have no rights with respect to the underlying investment. Certain structured investments may be thinly traded or have a limited trading market and may have the effect of increasing a Portfolio’s illiquidity to the extent that the Portfolio, at a particular point in time, may be unable to find qualified buyers for these investments.
A structured investment may be linked either positively or negatively to an underlying security, currency, commodity, index or market and a change in interest rates, principal amount, volatility, currency values or other
factors, depending on the structured investment’s design, may result in a gain or loss that is a multiple of the movement of such interest rates, principal amount, volatility, currency values or other factors. Application of a multiplier is comparable to the use of financial leverage, a speculative technique. Leverage magnifies the potential for gain and the risk of loss. As a result, a relatively small decline in the value of the referenced factor could result in a relatively large loss in the value of a structured investment.
Other types of structured investments include interests in entities organized and operated for the purpose of restructuring the investment characteristics of underlying investment interests or securities. This type of securitization or restructuring usually involves the deposit or purchase of an underlying security by a U.S. or foreign entity, such as a corporation or trust of specified instruments, and the issuance by that entity of one or more classes of securities backed by, or representing an interest in, the underlying instruments. The cash flow or rate of return on the underlying investments may be apportioned among the newly issued securities to create different investment characteristics, such as varying maturities, credit quality, payment priorities and interest rate provisions. Structured investments which are subordinated, for example, in payment priority often offer higher returns, but may result in increased risks compared to other investments.
Swaps: An OTC swap contract is an agreement between two parties pursuant to which the parties exchange payments at specified dates on the basis of a specified notional amount, with the payments calculated by reference to specified securities, indices, reference rates, currencies or other instruments. Most swap agreements provide that when the period payment dates for both parties are the same, the payments are made on a net basis (i.e., the two payment streams are netted out, with only the net amount paid by one party to the other). A Portfolio’s obligations or rights under a swap contract entered into on a net basis will generally be equal only to the net amount to be paid or received under the agreement, based on the relative values of the positions held by each counterparty. Many swap agreements are not entered into or traded on exchanges and often there is no central clearing or guaranty function for swaps. These OTC swaps are often subject to the risk of default or non-performance by the counterparty. Accordingly, the Adviser and/or Sub-Adviser must assess the creditworthiness of the counterparty to determine the likelihood that the terms of the swap will be satisfied.
Swap agreements allow for a wide variety of transactions. For example, fixed rate payments may be exchanged for floating rate payments, U.S. dollar denominated payments may be exchanged for payments denominated in foreign currencies, and payments tied to the price of one security, index, reference rate, currency or other instrument may be exchanged for payments tied to the price of a different security, index, reference rate, currency or other instrument. Swap contracts are typically individually negotiated and structured to provide exposure to a variety of particular types of investments or market factors. Swap contracts can take many different forms and are known by a variety of names. To the extent consistent with a Portfolio’s investment objective and policies, a Portfolio is not limited to any particular form or variety of swap contract. A Portfolio may utilize swaps to increase or decrease its exposure to the underlying instrument, reference rate, foreign currency, market index or other asset. Certain Portfolios may also enter into related derivative instruments including caps, floors and collars.
A Portfolio may be required to cover swap transactions. Obligations under swap agreements entered into on a net basis are generally accrued daily and any accrued but unpaid amounts owed by a Portfolio to the swap counterparty will be covered by earmarking cash or segregating liquid assets. If a Portfolio enters into a swap agreement on other than a net basis, a Portfolio will earmark cash or segregate liquid assets with a value equal to the full notional amount of the Portfolio’s accrued obligations under the agreement.
The Dodd-Frank Act and related regulatory developments require the eventual clearing and exchange-trading of many standardized OTC derivative instruments that the CFTC and SEC recently defined as “swaps” and “security based swaps,” respectively. Mandatory exchange-trading and clearing is occurring on a phased-in basis based on the type of market participant and CFTC approval of contracts for central clearing and exchange trading. In a cleared swap, a Portfolio’s ultimate counterparty is a central clearinghouse rather than a brokerage firm, bank or other financial institution. A Portfolio initially will enter into cleared swaps through an executing broker. Such transactions will then be submitted for clearing and, if cleared, will be held at regulated futures commission merchants (“FCMs”) that are members of the clearinghouse that serves as the central counterparty. When a Portfolio enters into a cleared
swap, it must deliver to the central counterparty (via an FCM) an amount referred to as “initial margin.” Initial margin requirements are determined by the central counterparty, but an FCM may require additional initial margin above the amount required by the central counterparty. During the term of the swap agreement, a “variation margin” amount may also be required to be paid by a Portfolio or may be received by a Portfolio in accordance with margin controls set for such accounts, depending upon changes in the price of the underlying reference asset subject to the swap agreement. At the conclusion of the term of the swap agreement, if a Portfolio has a loss equal to or greater than the margin amount, the margin amount is paid to the FCM along with any loss that is greater than such margin amount. If a Portfolio has a loss of less than the margin amount, the excess margin is returned to the Portfolio. If a Portfolio has a gain, the full margin amount and the amount of the gain is paid to the Portfolio.
Central clearing is designed to reduce counterparty credit risk compared to uncleared swaps because central clearing interposes the central clearinghouse as the counterparty to each participant’s swap, but it does not eliminate those risks completely. There is also a risk of loss by a Portfolio of the initial and variation margin deposits in the event of bankruptcy of the FCM with which the Portfolio has an open position in a swap contract. The assets of a Portfolio may not be fully protected in the event of the bankruptcy of the FCM or central counterparty because the Portfolio might be limited to recovering only a pro rata share of all available funds and margin segregated on behalf of an FCM’s or central counterparty’s customers or clearing members. If the FCM does not provide accurate reporting, a Portfolio is also subject to the risk that the FCM could use the Portfolio’s assets, which are held in an omnibus account with assets belonging to the FCM’s other customers, to satisfy its own financial obligations or the payment obligations of another customer to the central counterparty. Certain swaps have begun trading on exchanges called swap execution facilities. Exchange-trading is expected to increase liquidity of swaps trading.
In addition, with respect to cleared swaps, a Portfolio may not be able to obtain as favorable terms as it would be able to negotiate for an uncleared swap. In addition, an FCM may unilaterally impose position limits or additional margin requirements for certain types of swaps in which a Portfolio may invest. Central counterparties and FCMs generally can require termination of existing cleared swap transactions at any time, and can also require increases in margin above the margin that is required at the initiation of the swap agreement. Margin requirements for cleared swaps vary on a number of factors, and the margin required under the rules of the clearinghouse and FCM may be in excess of the collateral required to be posted by a Portfolio to support its obligations under a similar uncleared swap. However, regulators are expected to adopt rules imposing certain margin requirements, including minimums, on uncleared swaps in the near future, which could change this comparison.
A Portfolio is also subject to the risk that, after entering into a cleared swap with an executing broker, no FCM or central counterparty is willing or able to clear the transaction. In such an event, the central counterparty would void the trade. Before a Portfolio can enter into a new trade, market conditions may become less favorable to the Portfolio.
The Adviser will continue to monitor developments regarding trading and execution of cleared swaps on exchanges, particularly to the extent regulatory changes affect a Portfolio’s ability to enter into swap agreements and the costs and risks associated with such investments.
Interest Rate Swaps, Caps, Floors and Collars. Interest rate swaps consist of an agreement between two parties to exchange their respective commitments to pay or receive interest (e.g., an exchange of floating rate payments for fixed rate payments). Interest rate swaps are generally entered into on a net basis. Interest rate swaps do not involve the delivery of securities, other underlying assets, or principal. Accordingly, the risk of market loss with respect to interest rate and total rate of return swaps is typically limited to the net amount of interest payments that a Portfolio is contractually obligated to make.
Certain Portfolios may also buy or sell interest rate caps, floors and collars. The purchase of an interest rate cap entitles the purchaser, to the extent that a specified interest rate index exceeds a predetermined level, to receive payments of interest on a specified notional amount from the party selling the interest rate cap. The purchase of an interest rate floor entitles the purchaser, to the extent that a specified interest rate falls below a predetermined level, to receive payments of interest on a specified notional amount from the party selling the interest rate floor. A collar is a combination of a cap and a floor that preserves a certain return within a predetermined range of interest rates. Caps, floors and collars may be less liquid than other types of derivatives. If a Portfolio sells caps, floors and collars,
it will earmark cash or segregate liquid assets with a value equal to the full amount, accrued daily, of a Portfolio’s net obligations with respect to the caps, floors or collars.
Index Swaps. An index swap consists of an agreement between two parties in which a party typically exchanges a cash flow based on a notional amount of a reference index for a cash flow based on a different index or on another specified instrument or reference rate. Index swaps are generally entered into on a net basis.
Inflation Swaps. Inflation swap agreements are contracts in which one party typically agrees to pay the cumulative percentage increase in a price index, such as the Consumer Price Index, over the term of the swap (with some lag on the referenced inflation index), and the other party pays a compounded fixed rate. Inflation swap agreements may be used to protect the NAV of a Portfolio against an unexpected change in the rate of inflation measured by an inflation index. The value of inflation swap agreements is expected to change in response to changes in real interest rates. Real interest rates are tied to the relationship between nominal interest rates and the rate of inflation.
Currency Swaps. A currency swap consists of an agreement between two parties to exchange cash flows on a notional amount of two or more currencies based on the relative value differential among them, such as exchanging a right to receive a payment in a foreign currency for the right to receive U.S. dollars. Currency swap agreements may be entered into on a net basis or may involve the delivery of the entire principal value of one designated currency in exchange for the entire principal value of another designated currency. In such cases, the entire principal value of a currency swap is subject to the risk that the counterparty will default on its contractual delivery obligations.
Credit Default Swaps. A credit default swap consists of an agreement between two parties in which the “buyer” typically agrees to pay to the “seller” a periodic stream of payments over the term of the contract and the seller agrees to pay the buyer the par (or other agreed-upon) value of a referenced debt obligation upon the occurrence of a credit event with respect to the issuer of that referenced debt obligation. Generally, a credit event means bankruptcy, failure to pay, obligation acceleration or modified restructuring. A Portfolio may be either the buyer or seller in a credit default swap. Where a Portfolio is the buyer of a credit default swap contract, it would typically be entitled to receive the par (or other agreed-upon) value of a referenced debt obligation from the counterparty to the contract only in the event of a default or similar event by the issuer of the debt obligation. If no default occurs, a Portfolio would have paid to the counterparty a periodic stream of payments over the term of the contract and received no benefit from the contract. A Portfolio will generally earmark cash or segregate liquid assets to cover any potential obligation under a credit default swap sold by the Portfolio. The use of credit default swaps could result in losses to a Portfolio if the Adviser and/or Sub-Adviser fail to correctly evaluate the creditworthiness of the issuer of the referenced debt obligation.
Swaptions. An option on a swap agreement, also called a “swaption,” is an option that gives the buyer the right, but not the obligation, to enter into a swap on a future date in exchange for a premium. A receiver swaption gives the owner the right to receive the return of a specified asset, reference rate, or index. A payer swaption gives the owner the right to pay the return of a specified asset, reference rate, or index. Swaptions also include options that allow an existing swap to be terminated or extended by one of the counterparties.
General Risks of Swaps. The risks associated with swap transactions are different from, and possibly greater than, the risks associated with investing directly in the underlying instruments. Swaps are highly specialized instruments that require investment techniques and risk analyses different from those associated with other portfolio investments. The use of swaps requires an understanding not only of the underlying instrument but also of the swap contract itself. Swap transactions may be subject to the risk factors generally applicable to derivatives transactions described above, and may also be subject to certain additional risk factors, including:
· OTC swap agreements are not traded on exchanges and may be subject to liquidity risk, which exists when a particular swap is difficult to purchase or sell.
· In addition to the risk of default by the counterparty, if the creditworthiness of a counterparty to a swap agreement declines, the value of the swap agreement would be likely to decline, potentially resulting in losses.
· The swaps market is subject to extensive regulation under the Dodd-Frank Act and certain CFTC and SEC rules promulgated thereunder. It is possible that further developments in the swaps market, including new and additional governmental regulation, could result in higher Portfolio costs and expenses and could adversely affect a Portfolio’s ability to utilize swaps, terminate existing swap agreements or realize amounts to be received under such agreements.
U.S. Government Securities: “U.S. government securities” refers to a variety of fixed income securities issued or guaranteed by the U.S. Government and various instrumentalities and agencies. The U.S. Government securities that certain Portfolios may purchase include U.S. Treasury bills, notes and bonds, all of which are direct obligations of the U.S. Government. In addition, certain Portfolios may purchase securities issued by agencies and instrumentalities of the U.S. Government which are backed by the full faith and credit of the United States. Among the agencies and instrumentalities issuing these obligations are Ginnie Mae and the Federal Housing Administration.
Certain of the Portfolios may also purchase securities issued by agencies and instrumentalities which are not backed by the full faith and credit of the United States, but whose issuing agency or instrumentality has the right to borrow, to meet its obligations, from the U.S. Treasury. Among these agencies and instrumentalities are Fannie Mae, Freddie Mac and the Federal Home Loan Banks. Further, certain Portfolios may purchase securities issued by agencies and instrumentalities which are backed solely by the credit of the issuing agency or instrumentality. Among these agencies and instrumentalities is the Federal Farm Credit System.
Warrants: Warrants are equity securities in the form of options issued by a corporation which give the holder the right, but not the obligation, to purchase stock, usually at a price that is higher than the market price at the time the warrant is issued. A purchaser takes the risk that the warrant may expire worthless because the market price of the common stock fails to rise above the price set by the warrant.
When-Issued and Delayed Delivery Securities and Forward Commitments: A Portfolio may purchase securities on a when-issued or delayed delivery basis or may purchase or sell securities on a forward commitment basis. When these transactions are negotiated, the price is fixed at the time of the commitment, but delivery and payment can take place a month or more after the date of commitment. A Portfolio may sell the securities before the settlement date, if it is deemed advisable. The securities so purchased or sold are subject to market fluctuation and no interest or dividends accrue to the purchaser prior to the settlement date.
At the time a Portfolio makes the commitment to purchase or sell securities on a when-issued, delayed delivery or forward commitment basis, it will record the transaction and thereafter reflect the value, each day, of such security purchased, or if a sale, the proceeds to be received, in determining its NAV. At the time of delivery of the securities, their value may be more or less than the purchase or sale price. An increase in the percentage of a Portfolio’s assets committed to the purchase of securities on a when-issued, delayed delivery or forward commitment basis may increase the volatility of its NAV. A Portfolio will also earmark cash or segregate liquid assets or establish a segregated account on the Portfolio’s books in which it will continually maintain cash or cash equivalents or other liquid portfolio securities equal in value to commitments to purchase securities on a when-issued, delayed delivery or forward commitment basis. See “Leverage Risks” above for a description of leverage risk.
When, As and If Issued Securities: A Portfolio may purchase securities on a “when, as and if issued” basis under which the issuance of the security depends upon the occurrence of a subsequent event, such as approval of a merger, corporate reorganization or debt restructuring. The commitment for the purchase of any such security will not be recognized in the portfolio of a Portfolio until the Adviser determines that issuance of the security is probable. At that time, the Portfolio will record the transaction and, in determining its NAV, will reflect the value of the security daily. At that time, the Portfolio will also establish a segregated account on its books in which it will maintain cash, cash equivalents or other liquid portfolio securities equal in value to recognized commitments for such securities.
An increase in the percentage of the Portfolio’s assets committed to the purchase of securities on a “when, as and if issued” basis may increase the volatility of its NAV. The Portfolio may also sell securities on a “when, as and if issued” basis provided that the issuance of the security will result automatically from the exchange or conversion of a security owned by the Portfolio at the time of sale.
Yankee and Eurobond Obligations: Each Portfolio may invest in Eurobond and Yankee obligations, which are fixed income securities. The Eurobonds that the Portfolios will purchase may include bonds issued and denominated in euros. Eurobonds may be issued by government and corporate issuers in Europe. Yankee bank obligations are U.S. dollar-denominated obligations issued in the U.S. capital markets by foreign banks.
Eurobond and Yankee obligations are subject to the same risks that pertain to domestic issues, notably credit risk, market risk and liquidity risk. However, Eurobond (and to a limited extent, Yankee) obligations also are subject to certain sovereign risks. One such risk is the possibility that a sovereign country might prevent capital from flowing across its borders. Other risks include adverse political and economic developments; the extent and quality of government regulation of financial markets and institutions; the imposition of foreign withholding taxes, and the expropriation or nationalization of foreign issuers.
Zero Coupons: Each Portfolio may invest in zero coupon bonds (“Zero Coupons”), which are fixed income securities that do not make regular interest payments. Instead, Zero Coupons are sold at substantial discounts from their face value. The difference between a Zero Coupon’s issue or purchase price and its face value represents the imputed interest an investor will earn if the obligation is held until maturity. For tax purposes, a portion of this imputed interest is deemed as income received by zero coupon bondholders each year. Each Portfolio intends to pass along such interest as a component of the Portfolio’s distributions of net investment income.
Zero Coupons may offer investors the opportunity to earn higher yields than those available on ordinary interest-paying obligations of similar credit quality and maturity. However, Zero Coupon prices may also exhibit greater price volatility than ordinary fixed income securities because of the manner in which their principal and interest are returned to the investor.
Special Risks Related to Cyber Security: The Fund and its service providers are susceptible to cyber security risks that include, among other things, theft, unauthorized monitoring, release, misuse, loss, destruction or corruption of confidential and highly restricted data; denial of service attacks; unauthorized access to relevant systems, compromises to networks or devices that the Fund and its service providers use to service the Fund’s operations; or operational disruption or failures in the physical infrastructure or operating systems that support the Fund and its service providers. Cyber attacks against or security breakdowns of the Fund or its service providers may adversely impact the Fund and its shareholders, potentially resulting in, among other things, financial losses; the inability of Fund shareholders to transact business and the Fund to process transactions; inability to calculate the Fund’s NAV; violations of applicable privacy and other laws; regulatory fines, penalties, reputational damage, reimbursement or other compensation costs; and/or additional compliance costs. The Fund may incur additional costs for cyber security risk management and remediation purposes. In addition, cyber security risks may also impact issuers of securities in which the Fund invests, which may cause the Fund’s investment in such issuers to lose value. There can be no assurance that the Fund or its service providers will not suffer losses relating to cyber attacks or other information security breaches in the future.
INVESTMENT LIMITATIONS
Fundamental Limitations. Each Portfolio is subject to the following restrictions which are fundamental policies and may not be changed without the approval of the lesser of: (1) at least 67% of the voting securities of the Portfolio present at a meeting if the holders of more than 50% of the outstanding voting securities of the Portfolio are present or represented by proxy, or (2) more than 50% of the outstanding voting securities of the Portfolio.
As a matter of fundamental policy, each Portfolio will not change its objective and will not:
(1) purchase or sell physical commodities unless acquired as a result of ownership of securities or other instruments; provided that this restriction shall not prohibit the Portfolio from purchasing or selling options, futures contracts and related options thereon, forward contracts, swaps, caps, floors, collars and any other financial instruments or from investing in securities or other instruments backed by physical commodities or as otherwise permitted by (i) the 1940 Act, as amended from time to time, (ii) the rules and regulations promulgated by the SEC
under the 1940 Act, as amended from time to time, or (iii) an exemption or other relief applicable to the Portfolio from the provisions of the 1940 Act, as amended from time to time;
(2) purchase or sell real estate, although it may purchase and sell securities of companies which deal in real estate, other than real estate limited partnerships, and may purchase and sell marketable securities which are secured by interests in real estate;
(3) make loans of money or property to any person, except (a) to the extent that securities or interests in which the Portfolio may invest are considered to be loans, (b) through the loan of portfolio securities, (c) by engaging in repurchase agreements or (d) as may otherwise be permitted by (i) the 1940 Act, as amended from time to time, (ii) the rules and regulations promulgated by the SEC under the 1940 Act, as amended from time to time, or (iii) an exemption or other relief applicable to the Fund from the provisions of the 1940 Act, as amended from time to time;
(4) invest in a manner inconsistent with its classification as a “diversified company” as a provided by (i) the 1940 Act, as amended from time to time, (ii) the rules and regulations promulgated by the SEC under the 1940 Act, as amended from time to time, or (iii) an exemption or other relief applicable to the Portfolio from the provisions of the 1940 Act, as amended from time to time;
(5) borrow money, except the Portfolio may borrow money to the extent permitted by (i) the 1940 Act, as amended from time to time, (ii) the rules and regulations promulgated by the SEC under the 1940 Act, as amended from time to time, or (iii) an exemption or other relief applicable to the Company from the provisions of the 1940 Act, as amended from time to time;
(6) underwrite the securities of other issuers (except to the extent that the Fund may be deemed to be an underwriter within the meaning of the 1933 Act in connection with the disposition of restricted securities);
(7) acquire any securities of companies within one industry, if, as a result of such acquisition, more than 25% of the value of the Portfolio’s total assets would be invested in securities of companies within such industry; provided, however that (i) there shall be no limitation on the purchase of obligations issued or guaranteed by the U.S. Government, its agencies or instrumentalities; (ii) utility companies will be divided according to their services, for example, gas, gas transmission, electric and telephone will each be considered a separate industry; (iii) financial service companies will be classified according to the end users of their services, for example, automobile finance, bank finance and diversified finance will each be considered a separate industry; and (iv) asset-backed securities will be classified according to the underlying assets securing such securities; and
(8) issue senior securities, except the Portfolio may issue senior securities to the extent permitted by (i) the 1940 Act, as amended from time to time, (ii) the rules and regulations promulgated by the SEC under the 1940 Act, as amended from time to time, or (iii) an exemption or other relief applicable to the Portfolio from the provisions of the 1940 Act, as amended from time to time.
Non-Fundamental Limitations. Each Portfolio is also subject to the following restrictions which may be changed by the Board without shareholder approval.
As a matter of non-fundamental policy, no Portfolio will:
(1) purchase on margin, except for use of short-term credit as may be necessary for the clearance of purchases and sales of securities, provided that each Portfolio may make margin deposits in connection with transactions in options, futures, and options on futures;
(2) sell short unless the Portfolio (i) by virtue of its ownership of other securities, has the right to obtain securities equivalent in kind and amount to the securities sold and, if the right is conditional, the sale is made upon the same conditions, or (ii) maintains in a segregated account on the books of the Fund’s custodian an amount that, when combined with the amount of collateral deposited with the broker in connection with the short sale, equals the
current market value of the security sold short or such other amount as the SEC or its staff may permit by rule, regulation, order or interpretation (transactions in futures contracts and options, however, are not deemed to constitute selling securities short);
(3) pledge, mortgage or hypothecate assets in an amount greater than 50% of its total assets, provided that each Portfolio may earmark or segregate assets without limit in order to comply with the requirements of Section 18(f) of the 1940 Act and applicable rules, regulations or interpretations of the SEC and its staff;
(4) invest more than an aggregate of 15% of the net assets of the Portfolio, determined at the time of investment, in illiquid securities provided that this limitation shall not apply to any investment in securities that are not registered under the 1933 Act but that can be sold to qualified institutional investors in accordance with Rule 144A under the 1933 Act and are determined to be liquid securities under guidelines or procedures adopted by the Board;
(5) invest for the purpose of exercising control over management of any company; and
(6) invest its assets in securities of any investment company, except as permitted by the 1940 Act or the rules, regulations, interpretations or orders of the SEC and its staff thereunder; provided that no Portfolio will invest in other investment companies in reliance on Sections 12(d)(1)(F), 12(d)(1)(G) or 12(d)(1)(J) of the 1940 Act.
The percentage limitations contained in these fundamental and non-fundamental limitations apply at the time of purchase of securities. A later change in percentage resulting from changes in the value of a Portfolio’s assets or in total or net assets of the Portfolio will not be considered a violation of the restriction and the sale of securities will not be required. The foregoing does not apply to borrowings. Future portfolios of the Fund may adopt different limitations.
Pursuant to an order from the SEC, the Portfolios may enter into interfund lending arrangements. Interfund loans and borrowings permit each Portfolio to lend money directly to and borrow from other Portfolios of the Fund for temporary purposes. Such loans and borrowings normally extend overnight but may have a maximum duration of seven days. A Portfolio will borrow through the interfund lending facility only when the costs are lower than the costs of bank loans, and will lend through the facility only when the returns are higher than those available from an investment in repurchase agreements. In addition, a Portfolio will borrow and lend money through interfund lending arrangements only if, and to the extent that, such practice is consistent with the Portfolio’s investment objective and other investments. Any delay in repayment to a lending Portfolio could result in a lost investment opportunity or additional borrowing costs.
The investment policies, limitations or practices of the Portfolios may not apply during periods of unusual or adverse market, economic, political or other conditions. Such market, economic, political or other conditions may include periods of abnormal or heightened market volatility, strained credit and/or liquidity conditions or increased governmental intervention in the markets or industries. During such periods, a Portfolio may not invest according to its principal investment strategies or in the manner in which its name may suggest, and may be subject to different and/or heightened risks. It is possible that such unusual or adverse conditions may continue for extended periods of time.
DISCLOSURE OF PORTFOLIO HOLDINGS
The Fund’s Board of Trustees and the Adviser have adopted policies and procedures regarding disclosure of portfolio holdings (the “Policy”). Pursuant to the Policy, the Adviser may disclose information concerning Fund portfolio holdings only if such disclosure is consistent with the antifraud provisions of the federal securities laws and the Fund’s and the Adviser’s fiduciary duties to Fund shareholders. In no instance may the Adviser, Sub-Adviser or the Fund receive compensation or any other consideration in connection with the disclosure of information about the portfolio securities of the Fund. Consideration includes any agreement to maintain assets in the Fund or in other investment companies or accounts managed by the Adviser or by any affiliated person of the Adviser. Non-public information concerning portfolio holdings may be divulged to third-parties only when the Fund has a legitimate business purpose for doing so and the recipients of the information are subject to a duty of confidentiality. Under no
circumstances shall current or prospective Fund shareholders receive non-public portfolio holdings information, except as described below.
The Fund makes available on its public website the following portfolio holdings information:
· complete portfolio holdings information monthly, at least 15 calendar days after the end of each month; and
· top 10 holdings monthly, at least 15 calendar days after the end of each month.
The Fund provides a complete schedule of portfolio holdings for the second and fourth fiscal quarters in its semiannual and annual reports, and for the first and third fiscal quarters in its filings with the SEC on Form N-Q.
All other portfolio holdings information that has not been disseminated in a manner making it available to investors generally as described above is non-public information for purposes of the Policy.
The Fund may make selective disclosure of non-public portfolio holdings information pursuant to certain exemptions set forth in the Policy. Third-parties eligible for exemptions under the Policy and therefore eligible to receive such disclosures currently include fund rating agencies, information exchange subscribers, consultants and analysts, portfolio analytics providers and service providers, provided that the third-party expressly agrees to maintain the disclosed information in confidence and not to trade portfolio securities or related derivative securities based on the non-public information. Non-public portfolio holdings information may not be disclosed to a third-party pursuant to an exemption unless and until the third-party recipient has entered into a non-disclosure agreement with the Fund and the arrangement has been reviewed and approved as set forth in the Policy and discussed below. In addition, persons who owe a duty of trust or confidence to the Fund or the Adviser may receive non-public portfolio holdings information without entering into a non-disclosure agreement. Currently, these persons include (i) the Fund’s independent registered public accounting firm (as of the Fund’s fiscal year end and on an as-needed basis), (ii) counsel to the Fund (on an as-needed basis), (iii) counsel to the independent Trustees (on an as-needed basis) and (iv) members of the Board of Trustees (on an as-needed basis). Subject to the terms and conditions of any agreement between the Adviser or the Fund and the third-party recipient, if these conditions for disclosure are satisfied, there shall be no restriction on the frequency with which Fund non-public portfolio holdings information is released, and no lag period shall apply (unless otherwise indicated below).
The Adviser and/or Sub-Adviser may provide interest lists to broker-dealers who execute securities transactions for the Fund without entering into a non-disclosure agreement with the broker-dealers, provided that the interest list satisfies all of the following criteria: (1) the interest list must contain only the CUSIP numbers and/or ticker symbols of securities held in all registered management investment companies advised by the Adviser and/or Sub-Adviser or any affiliate of the Adviser or Sub-Adviser (the “MSIM Funds”) on an aggregate, rather than a fund-by-fund basis; (2) the interest list must not contain information about the number or value of shares owned by a specified MSIM Fund; (3) the interest list may identify the investment strategy, but not the particular MSIM Funds, to which the list relates; and (4) the interest list may not identify the portfolio manager or team members responsible for managing the MSIM Funds.
Fund shareholders may elect in some circumstances to redeem their shares of the Fund in exchange for their pro rata share of the securities held by the Fund. Under such circumstances, Fund shareholders may receive a complete listing of the holdings of the Fund up to seven calendar days prior to making the redemption request provided that they represent in writing that they agree not to disclose or trade on the basis of the portfolio holdings information.
The Fund may discuss or otherwise disclose performance attribution analyses for a particular portfolio (i.e., mention the effects of having a particular security in the portfolio(s)) where such discussion is not contemporaneously made public, provided that the particular holding has been disclosed publicly or the information that includes such holding(s) has been made available to shareholders requesting such information. Additionally, any discussion of the analyses may not be more current than the date the holding was disclosed publicly or the information that includes such holding(s) has been made available to shareholders requesting such information.
The Fund may disclose portfolio holdings to transition managers, provided that the Fund has entered into a non-disclosure or confidentiality agreement with the party requesting that the information be provided to the transition manager and the party to the non-disclosure agreement has, in turn, entered into a non-disclosure or confidentiality agreement with the transition manager.
The Adviser, the Sub-Adviser, the Fund and/or certain Portfolios currently have entered into ongoing arrangements with the following parties:
Name |
| Information Disclosed |
| Frequency(1) |
| Lag Time |
Service Providers |
|
|
|
|
|
|
RiskMetrics Group |
| Complete portfolio holdings |
| Daily basis |
| (2) |
State Street Bank and Trust Company(*) |
| Complete portfolio holdings |
| As needed |
| (2) |
BlackRock Financial Management Inc(*) |
| Complete portfolio holdings |
| Daily basis |
| (2) |
Fund Rating Agencies |
|
|
|
|
|
|
Lipper(*) |
| Top ten and complete portfolio holdings |
| Monthly basis |
| Approximately six business days after month end |
Consultants and Analysts |
|
|
|
|
|
|
Citigroup(*) |
| Complete portfolio holdings |
| Quarterly basis(3) |
| At least one day after quarter end |
Credit Suisse First Boston(*) |
| Top ten and complete portfolio holdings |
| Monthly and quarterly basis, respectively |
| Approximately 10-12 days after month/quarter end |
Evaluation Associates(*) |
| Top ten and complete portfolio holdings |
| Monthly and quarterly basis, respectively(3) |
| Approximately 10-12 days after month/quarter end |
Merrill Lynch(*) |
| Top ten and complete portfolio holdings |
| Monthly and quarterly basis, respectively(3) |
| Approximately 10-12 days after month/quarter end |
Portfolio Analytics Providers |
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FactSet Research Systems, Inc.(*) |
| Complete portfolio holdings |
| Daily basis |
| One day |
(*) This entity has agreed to maintain Fund non-public portfolio holdings information in confidence and not to trade portfolio securities based on the non-public portfolio holdings information.
(1) Dissemination of portfolio holdings information to entities listed above may occur less frequently than indicated (or not at all).
(2) Information will typically be provided on a real time basis or as soon thereafter as possible.
(3) This information will also be provided upon request from time to time.
All disclosures of non-public portfolio holdings information made to third-parties pursuant to the exemptions set forth in the Policy must be reviewed by Morgan Stanley Investment Management’s (“MSIM”) Legal and Compliance Division and approved by the Head of the Long-Only Business of MSIM. Disclosures made to third-parties in connection with (i) broker-dealer interest lists; (ii) shareholder in-kind distributions; (iii) attribution analyses; or (iv) transition managers are pre-approved for purposes of the Policy. In addition, the following categories of third-parties that may receive non-public portfolio holdings information are also pre-approved provided that they enter into non-disclosure agreements (as discussed above) (i) fund rating agencies; (ii) information exchange subscribers; (iii) consultants and analysts (including defined benefit and defined contribution plan sponsors, and variable annuity providers); (iv) portfolio analytics providers; and (v) service providers.
The Adviser and/or Sub-Adviser shall report quarterly to the Board of Trustees (or a designated committee thereof) at the next regularly scheduled meeting (i) any material information concerning all parties receiving non-public portfolio holdings information pursuant to an exemption; and (ii) any new non-disclosure agreements entered into during the reporting period. Procedures to monitor the use of such non-public portfolio holdings information may include requiring annual certifications that the recipients have utilized such information only pursuant to the terms of the agreement between the recipient and the Adviser and, for those recipients receiving information electronically, acceptance of the information will constitute reaffirmation that the third-party expressly agrees to maintain the disclosed information in confidence and not to trade portfolio securities based on the non-public information.
PURCHASE AND REDEMPTION OF SHARES
Information concerning how Portfolio shares are offered to the public (and how they are redeemed or exchanged) is provided in the applicable Portfolio’s Prospectus. Each Portfolio reserves the right in its sole discretion (i) to suspend the offering of its shares; (ii) to reject purchase orders when in the judgment of management such rejection is in the best interest of the Fund; and (iii) to reduce or waive the minimum for initial investments for certain categories of investments.
The NAV per share of each Portfolio is calculated on days that the New York Stock Exchange (“NYSE”) is open for business. NAV per share is determined as of the close of trading of the NYSE (normally 4:00 p.m. Eastern Time) (for each Portfolio, the “Pricing Time”). A Portfolio may, however, elect to remain open and price its shares on days when the NYSE is closed but the primary securities markets on which the Portfolio’s securities trade remain open.
Additional Purchase Information. You may purchase Class I, Class A, Class L and Class IS shares directly from the Fund by Federal Funds wire or by check; however, on days that the NYSE is open but the custodian bank is closed, you may only purchase shares by check. Investors may also invest in a Portfolio by purchasing Class I, Class A, Class L and/or Class IS shares through certain third-parties, such as brokers, dealers or other financial intermediaries that have entered into a selling agreement with the Distributor (each a “Financial Intermediary”). Some Financial Intermediaries may charge an additional service or transaction fee (see also “Investment Through Financial Intermediaries”). If a purchase is canceled due to nonpayment or because your check does not clear, you will be responsible for any loss the Fund or its agents incur. If you are already a shareholder, the Fund may redeem shares from your account(s) to reimburse the Fund or its agents for any loss. In addition, you may be prohibited or restricted from making future investments in the Fund.
Federal Funds Wire. When a purchase order is received prior to the Pricing Time and Federal Funds are received prior to the regular close of the Federal Funds Wire Control Center (“FFWCC”) (normally 6:00 p.m. Eastern Time), the purchase will be executed at the NAV computed on the date of receipt. Purchases for which an order is received after the Pricing Time or for which Federal Funds are received after the regular close of the FFWCC will be executed at the NAV next determined. Certain institutional investors and financial institutions have entered into agreements with the Fund pursuant to which they may place orders prior to the Pricing Time, but make payment in Federal Funds for those shares the following business day.
Check. An account may be opened and you may purchase Class I, Class A, Class L and Class IS shares by completing and signing a New Account Application and mailing it, together with a check payable to “Morgan Stanley Institutional Fund Trust—[Portfolio name]” to:
Morgan Stanley Institutional Fund Trust
c/o Boston Financial Data Services, Inc.
P.O. Box 219804
Kansas City, MO 64121-9804
A purchase of shares by check ordinarily will be credited to your account at the NAV per share determined on the day of receipt.
Investment Through Financial Intermediaries. Certain Financial Intermediaries have made arrangements with the Fund so that an investor may purchase or redeem Class I, Class A, Class L and Class IS shares at the NAV per share next determined after the Financial Intermediary receives the share order. In other instances, the Fund has also authorized such Financial Intermediaries to designate other intermediaries to receive purchase and redemption orders on the Fund’s behalf at the share price next determined after such designees receive the share order. Under these arrangements, the Fund will be deemed to have received a purchase or redemption order when the Financial Intermediary or, if applicable, a Financial Intermediary’s authorized designee, receives the share order from an investor.
Conversion To a New Share Class. If the value of an account containing shares of a Portfolio falls below the investment minimum for the class of shares held by the account because of shareholder redemption(s) or the failure
to meet one of the waiver criteria set forth in the applicable Portfolio’s Prospectus and, if the account value remains below such investment minimum, the shares in such account may, at the Adviser’s discretion, convert to another class of shares offered by the Portfolio, if an account meets the minimum investment amount for such class, and will be subject to the shareholder services fee and other features applicable to such shares. Conversion to another class of shares will result in holding a share class with higher fees. The Fund will not convert to another class of shares based solely upon changes in the market that reduce the NAV of shares. Under current tax law, conversion between share classes is not a taxable event to the shareholder. Shareholders will be notified prior to any such conversion.
Involuntary Redemption of Shares. If the value of an account falls below the investment minimum for that Class because of shareholder redemption(s) or you no longer meet one of the waiver criteria set forth in the applicable Portfolio’s Prospectus and, if the account value remains below such investment minimum, the shares in such account may be subject to redemption by the Fund. The Fund will not redeem shares based solely upon changes in the market that reduce the NAV of shares. If shares are redeemed, redemption proceeds will be promptly paid to the shareholder. Shareholders will be notified prior to any such redemption.
Suspension of Redemptions. The Fund may suspend the right of redemption or postpone the date of payment (i) during any period that the NYSE is closed, or trading on the NYSE is restricted as determined by the SEC, (ii) during any period when an emergency exists as determined by the SEC as a result of which it is not practicable for a Portfolio to dispose of securities it owns, or fairly to determine the value of its assets, and (iii) for such other periods as the SEC may permit.
Further Redemption Information. To protect your account and the Fund from fraud, signature guarantees are required for certain redemptions. Signature guarantees enable the Fund to verify the identity of the person who has authorized a redemption from your account. Signature guarantees are required in connection with: (i) all redemptions, regardless of the amount involved, when the proceeds are to be paid to someone other than the registered owner(s) and/or registered address; and (ii) share transfer requests. An “eligible guarantor institution” may include a bank, a trust company, a credit union or savings and loan association, a member firm of a domestic stock exchange, or a foreign branch of any of the foregoing. Notaries public are not acceptable guarantors. The signature guarantees must appear either: (i) on the written request for redemption; (ii) on a separate instrument for assignment (“stock power”) which should specify the total number of shares to be redeemed; or (iii) on all stock certificates tendered for redemption and, if shares held by the Fund are also being redeemed, on the letter or stock power.
Transactions With Broker/Dealers. The Fund has authorized certain brokers to accept on its behalf purchase and redemption orders. Some of these brokers are authorized to designate other intermediaries to accept purchase and redemption orders on the Fund’s behalf. For purposes of determining the purchase price of shares, the Fund will be deemed to have received a purchase or redemption order when an authorized broker, or if applicable, a broker’s authorized designee, accepts the order. In other words, orders will be priced at the NAV next computed after such orders are accepted by an authorized broker or the broker’s authorized designee.
ACCOUNT POLICIES AND FEATURES
Transfer of Shares
Shareholders may transfer shares of the Portfolios to another person by written request to Shareholder Services at Morgan Stanley Institutional Fund Trust, c/o Boston Financial Data Services, Inc., P.O. Box 219804, Kansas City, MO 64121-9804. If shares are being transferred to a new account, requests for transfer must be accompanied by a completed New Account Application for the receiving party. If shares are being transferred to an existing account, the request should clearly identify the account and number of shares to be transferred and include the signature of all registered owners and all share certificates, if any, which are subject to the transfer. The signature on the letter of request, the share certificate or any stock power must be guaranteed in the same manner as described in the Prospectuses. As in the case of redemptions, the written request must be received in good order before any transfer can be made.
Valuation of Shares
NAV per share is determined by dividing the total market value of each Portfolio’s investments and other assets, less the total market value of all liabilities, by the total number of outstanding shares of that Portfolio. The NAV for each class of shares offered by the Fund may differ due to class-specific expenses paid by each class, including the shareholder servicing fees charged to Class A shares and Class L shares.
In the calculation of a Portfolio’s NAV: (1) an equity portfolio security listed or traded on an exchange is valued at its latest reported sale price (or at the exchange official closing price if such exchange reports an official closing price), and if there were no sales on a given day, the security is valued at the mean between the last reported bid and asked prices; and (2) all other equity portfolio securities for which OTC market quotations are readily available are valued at the mean between the last reported bid and asked prices. In cases where a security is traded on more than one exchange, the security is valued on the exchange designated as the primary market. When market quotations are not readily available, including circumstances under which it is determined by the Adviser that the closing price, the last sale price or the mean between the last reported bid and asked prices are not reflective of 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 Board. For valuation purposes, quotations of foreign portfolio securities, other assets and liabilities and forward contracts stated in foreign currency are translated into U.S. dollar equivalents at the prevailing market rates prior to the close of the NYSE.
Short-term debt securities with remaining maturities of 60 days or less at the time of purchase may be valued at amortized cost, unless the Adviser or Sub-Adviser determines such valuation does not reflect the securities’ market value, in which case these securities will be valued at their fair market value as determined by the Adviser or Sub-Adviser.
Certain of a Portfolio’s securities may be valued by an outside pricing service approved by the Board. The pricing service may utilize a matrix system or other model incorporating attributes such as security quality, maturity and coupon as the evaluation model parameters, and/or research evaluations by its staff, including review of broker-dealer market price quotations in determining what it believes is the fair valuation of the portfolio securities valued by such pricing service.
Listed options are valued at the last reported sales price on the exchange on which they are listed (or at the exchange official closing price if such exchange reports an official closing price). If an official closing price or last reported sale price is unavailable, the listed option should be fair valued at the mean between its latest bid and ask prices. If an exchange closing price or bid and asked prices are not available from the exchange, then the quotes from one or more brokers or dealers may be used. Unlisted options and swaps are valued by an outside pricing service approved by the Board or quotes from a broker or dealer. Unlisted options and swaps cleared on a clearinghouse or exchange may be valued using the closing price provided by the clearinghouse or exchange. Futures are valued at the settlement price on the exchange on which they trade or, if a settlement price is unavailable, then at the last sale price on the exchange.
If the Adviser determines that the valuation received from the outside pricing service or broker or dealer is not reflective of the security’s market value, such security is valued at its fair value as determined in good faith under procedures established by and under the general supervision of the Board.
Generally, trading in foreign securities, as well as corporate bonds, U.S. government securities and money market instruments, is substantially completed each day at various times prior to the close of the NYSE. The values of such securities used in computing the NAV of the Portfolio’s shares are determined as of such times. Foreign currency exchange rates are also generally determined prior to the close of the NYSE. Occasionally, events which may affect the values of such securities and such exchange rates may occur between the times at which they are determined and the close of the NYSE. If events that may affect the value of such securities occur during such period, then these securities may be valued at their fair value as determined in good faith under procedures established by and under the supervision of the Board.
Although the legal rights of Class I, Class A, Class L and Class IS shares will be identical, the different expenses borne by each class will result in different NAVs and dividends for the class. Dividends will differ by approximately
the amount of the distribution expense accrual differential among the classes. The NAV of Class A and Class L shares will generally be lower than the NAV of Class I and Class IS shares as a result of the shareholder services fees charged to Class A shares and the distribution and shareholder services fees charged to Class L shares and certain other class-specific expenses of Class A and Class L shares.
MANAGEMENT OF THE FUND
Trustees and Officers
The Board of the Fund consists of 12 Trustees. These same individuals also serve as directors or trustees for certain of the funds advised by the Adviser and Morgan Stanley AIP GP LP. Eleven Trustees have no affiliation or business connection with the Adviser or any of its affiliated persons and do not own any stock or other securities issued by the Adviser’s parent company, Morgan Stanley. These are the “non-interested” or “Independent” Trustees. The other Trustee (the “Interested Trustee”) is affiliated with the Adviser.
Board Structure and Oversight Function
The Board’s leadership structure features an Independent Trustee serving as Chairperson and the Board Committees described below. The Chairperson participates in the preparation of the agenda for meetings of the Board and the preparation of information to be presented to the Board with respect to matters to be acted upon by the Board. The Chairperson also presides at all meetings of the Board and is involved in discussions regarding matters pertaining to the oversight of the management of the Fund between meetings.
The Board of Trustees operates using a system of committees to facilitate the timely and efficient consideration of all matters of importance to the Trustees, the Fund and Fund stockholders, and to facilitate compliance with legal and regulatory requirements and oversight of the Fund’s activities and associated risks. The Board of Trustees has established five standing committees: (1) Audit Committee, (2) Governance Committee, (3) Compliance and Insurance Committee, (4) Investment Committee and (5) Closed-End Fund Committee. The Audit Committee, the Governance Committee and the Closed-End Fund Committee are comprised exclusively of Independent Trustees. Each committee charter governs the scope of the committee’s responsibilities with respect to the oversight of the Fund. The responsibilities of each committee, including their oversight responsibilities, are described further under the caption “Independent Trustees and the Committees.”
The Portfolios are subject to a number of risks, including investment, compliance, operational and valuation risk, among others. The Board of Trustees oversees these risks as part of its broader oversight of the Fund’s affairs through various Board and committee activities. The Board has adopted, and periodically reviews, policies and procedures designed to address various risks to the Portfolios. In addition, appropriate personnel, including but not limited to the Fund’s Chief Compliance Officer, members of the Fund’s administration and accounting teams, representatives from the Fund’s independent registered public accounting firm, the Fund’s Treasurer, portfolio management personnel and independent valuation and brokerage evaluation service providers, make regular reports regarding the Fund’s activities and related risks to the Board of Trustees and the committees, as appropriate. These reports include, among others, quarterly performance reports, quarterly derivatives activity and risk reports and discussions with members of the risk teams relating to each asset class. The Board’s committee structure allows separate committees to focus on different aspects of risk and the potential impact of these risks on some or all of the funds in the complex and then report back to the full Board. In between regular meetings, Fund officers also communicate with the Trustees regarding material exceptions and items relevant to the Board’s risk oversight function. The Board recognizes that it is not possible to identify all of the risks that may affect the Portfolios, and that it is not possible to develop processes and controls to eliminate all of the risks that may affect the Portfolios. Moreover, the Board recognizes that it may be necessary for the Portfolios to bear certain risks (such as investment risk) to achieve their respective investment objective.
As needed between meetings of the Board, the Board or a specific committee receives and reviews reports relating to the Fund and engages in discussions with appropriate parties relating to the Fund’s operations and related risks.
Trustees
The Fund seeks as Trustees individuals of distinction and experience in business and finance, government service or academia. In determining that a particular Trustee was and continues to be qualified to serve as Trustee, the Board has considered a variety of criteria, none of which, in isolation, was controlling. Based on a review of the experience, qualifications, attributes or skills of each Trustee, including those enumerated in the table below, the Board has determined that each of the Trustees is qualified to serve as a Trustee of the Fund. In addition, the Board believes that, collectively, the Trustees have balanced and diverse experience, qualifications, attributes and skills that allow the Board to operate effectively in governing the Fund and protecting the interests of shareholders. Information about the Fund’s Governance Committee and Board of Trustee nomination process is provided below under the caption “Independent Trustee and the Committees.”
The Trustees of the Fund, their ages, addresses, positions held, length of time served, their principal business occupations during the past five years, the number of portfolios in the Fund Complex (defined below) overseen by each Independent Trustee (as of December 31, 2014 unless otherwise indicated) and other directorships, if any, held by the Trustees, are shown below. The Fund Complex includes all open-end and closed-end funds (including all of their portfolios) advised by the Adviser and any registered funds that have an adviser that is an affiliate of the Adviser (including, but not limited to, Morgan Stanley AIP GP LP) (the “Morgan Stanley AIP Funds”) (collectively, the “Morgan Stanley Funds”).
Independent Trustees:
Name, Age and Address of |
| Position(s) |
| Length of |
| Principal Occupation(s) |
| Number of |
| Other Directorships Held |
Frank L. Bowman (70) |
| Trustee |
| Since August 2006 |
| President, Strategic Decisions, LLC (consulting) (since February 2009); Director or Trustee of various Morgan Stanley 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) (February 2005-November 2008); retired as Admiral, U.S. Navy after serving over 38 years on active duty including 8 years as Director of the Naval Nuclear Propulsion Program in the Department of the Navy and the U.S. Department of Energy (1996-2004); served as Chief of Naval Personnel (July 1994-September 1996) and on the Joint Staff as Director of Political Military Affairs (June 1992-July 1994); knighted as Honorary Knight Commander of the Most Excellent Order of the British Empire; awarded the Officier de l’Orde National du Mérite by the French Government; elected to the National Academy of Engineering (2009). |
| 100 |
| Director of BP p.l.c.; Director of Naval and Nuclear Technologies LLP; Director of the Armed Services YMCA of the USA and the U.S. Naval Submarine League; Director of the American Shipbuilding Suppliers Association; Member of the National Security Advisory Council of the Center for U.S. Global Engagement and a member of the CNA Military Advisory Board; Chairman of the charity J Street Cup Golf; Trustee of Fairhaven United Methodist Church. |
* This is the earliest date the Trustee began serving the Morgan Stanley Funds. Each Trustee serves an indefinite term, until his or her successor is elected.
** This includes any directorships at public companies and registered investment companies held by the Trustee at any time during the past five years.
Name, Age and Address of |
| Position(s) |
| Length of |
| Principal Occupation(s) |
| Number of |
| Other Directorships Held |
Michael Bozic (74) |
| Trustee |
| Since April 1994 |
| Private investor and a member of the advisory board of American Road Group LLC (retail) (since June 2000); Chairperson of the Compliance and Insurance Committee (since October 2006); Director or Trustee of various Morgan Stanley Funds (since April 1994); 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. |
| 102 |
| Trustee and member of the Hillsdale College Board of Trustees. |
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Kathleen A. Dennis (61) |
| 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 Morgan Stanley Funds (since August 2006); formerly, Senior Managing Director of Victory Capital Management (1993-2006). |
| 100 |
| Director of various non-profit organizations. |
* This is the earliest date the Trustee began serving the Morgan Stanley Funds. Each Trustee serves an indefinite term, until his or her successor is elected.
** This includes any directorships at public companies and registered investment companies held by the Trustee at any time during the past five years.
Name, Age and Address of |
| Position(s) |
| Length of |
| Principal Occupation(s) |
| Number of |
| Other Directorships Held |
Nancy C. Everett*** (59) |
| Trustee |
| Since January 2015 |
| Owner, OBIR, LLC (since June 2014); formerly, Managing Director, BlackRock, Inc. (February 2011-December 2013); and Chief Executive Officer, General Motors Asset Management (a/k/a Promark Global Advisors, Inc.) (June 2005-May 2010). |
| 98 |
| Member of Virginia Commonwealth University Board of Visitors; Member of Virginia Commonwealth University School of Business Foundation; formerly, Member of Committee on Directors for Emerging Markets Growth Fund, Inc. (2007-2010); Chairperson of Performance Equity Management, LLC (2006-2010); and Chairperson, GMAM Absolute Return Strategies Fund, LLC (2006-2010). |
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Jakki L. Haussler*** (57) |
| Trustee |
| Since January 2015 |
| Chairman and Chief Executive Officer, Opus Capital Group (since January 1996); and formerly, Director, Capvest Venture Fund, LP (May 2000-December 2011); Partner, Adena Ventures, LP (July 1999-December 2010); Director, The Victory Funds (February 2005-July 2008). |
| 98 |
| Director of Cincinnati Bell Inc. and Member, Audit Committee and Compensation Committee; Director of Northern Kentucky University Foundation and Member, Investment Committee; Member of Chase College of Law Transactional Law Practice Center Board of Advisors; Director of Best Transport; Member, University of Cincinnati Foundation Investment Committee; formerly, Member, Miami University Board of Visitors (2008-2011); Trustee of Victory Funds (2005-2008) and Chairman, Investment Committee (2007-2008) and Member, Service Provider Committee (2005-2008). |
* This is the earliest date the Trustee began serving the Morgan Stanley Funds. Each Trustee serves an indefinite term, until his or her successor is elected.
** This includes any directorships at public companies and registered investment companies held by the Trustee at any time during the past five years.
*** Ms. Everett and Ms. Haussler joined the Board of Trustees of the Fund as Independent Trustees effective January 1, 2015.
Name, Age and Address of |
| Position(s) |
| Length of |
| Principal Occupation(s) |
| Number of |
| Other Directorships Held |
Dr. Manuel H. Johnson (65) |
| 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 various Morgan Stanley Funds (since July 1991); 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. |
| 102 |
| Director of NVR, Inc. (home construction). |
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Joseph J. Kearns (72) |
| Trustee |
| Since August 1994 |
| President, Kearns & Associates LLC (investment consulting); Chairperson of the Audit Committee (since October 2006) and Director or Trustee of various Morgan Stanley Funds (since August 1994); formerly, Deputy Chairperson of the Audit Committee (July 2003-September 2006) and Chairperson of the Audit Committee of various Morgan Stanley Funds (since August 1994); CFO of the J. Paul Getty Trust. |
| 103 |
| Director of Electro Rent Corporation (equipment leasing). Prior to December 31, 2013, Director of The Ford Family Foundation. |
* This is the earliest date the Trustee began serving the Morgan Stanley Funds. Each Trustee serves an indefinite term, until his or her successor is elected.
** This includes any directorships at public companies and registered investment companies held by the Trustee at any time during the past five years.
Name, Age and Address of |
| Position(s) |
| Length of |
| Principal Occupation(s) |
| Number of |
| Other Directorships Held |
Michael F. Klein (56) |
| Trustee |
| Since August 2006 |
| Managing Director, Aetos Capital, LLC (since March 2000); Co-President, Aetos Alternatives Management, LLC (since January 2004) and Co-Chief Executive Officer of Aetos Capital LLC (since August 2013); Chairperson of the Fixed Income Sub-Committee of the Investment Committee (since October 2006) and Director or Trustee of various Morgan Stanley Funds (since August 2006); formerly, Managing Director, Morgan Stanley & Co. Inc. and Morgan Stanley Dean Witter Investment Management, President, various Morgan Stanley Funds (June 1998-March 2000) and Principal, Morgan Stanley & Co. Inc. and Morgan Stanley Dean Witter Investment Management (August 1997-December 1999). |
| 100 |
| Director of certain investment funds managed or sponsored by Aetos Capital, LLC; Director of Sanitized AG and Sanitized Marketing AG (specialty chemicals). |
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Michael E. Nugent (78) |
| Chairperson of the Board and Trustee |
| Chairpersonof the Boards since July 2006 and Trustee since July 1991 |
| Chairperson of the Boards of various Morgan Stanley Funds (since July 2006); Chairperson of the Closed-End Fund Committee (since June 2012) and Director or Trustee of various Morgan Stanley Funds (since July 1991); formerly, Chairperson of the Insurance Committee (until July 2006); General Partner, Triumph Capital, L.P. (private investment partnership) (1988-2013). |
| 102 |
| None. |
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W. Allen Reed (67) |
| Trustee |
| Since August 2006 |
| Chairperson of the Equity Sub-Committee of the Investment Committee (since October 2006) and Director or Trustee of various Morgan Stanley 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). |
| 100 |
| Director of Temple-Inland Industries (packaging and forest products); Director of Legg Mason, Inc. and Director of the Auburn University Foundation. |
* This is the earliest date the Trustee began serving the Morgan Stanley Funds. Each Trustee serves an indefinite term, until his or her successor is elected.
** This includes any directorships at public companies and registered investment companies held by the Trustee at any time during the past five years.
Name, Age and Address of |
| Position(s) |
| Length of |
| Principal Occupation(s) |
| Number of |
| Other Directorships Held |
Fergus Reid (82) |
| Trustee |
| Since June 1992 |
| Chairman, Joe Pietryka, Inc.; Chairperson of the Governance Committee and Director or Trustee of various Morgan Stanley Funds (since June 1992). |
| 103 |
| Through December 31, 2012, Trustee and Director of certain investment companies in the JPMorgan Fund complex managed by JP Morgan Investment Management Inc. (1987-December 2012). |
Interested Trustee:
Name, Age and Address of |
| Position(s) |
| Length of |
| Principal Occupation(s) |
| Number of |
| Other Directorships Held |
James F. Higgins (66) |
| Trustee |
| Since June 2000 |
| Director or Trustee of various Morgan Stanley Funds (since June 2000); Senior Advisor of Morgan Stanley (since August 2000). |
| 101 |
| Formerly, Director of AXA Financial, Inc. and AXA Equitable Life Insurance Company (2002-2011) and Director of AXA MONY Life Insurance Company and AXA MONY Life Insurance Company of America (2004-2011). |
* This is the earliest date the Trustee began serving the Morgan Stanley Funds. Each Trustee serves an indefinite term, until his or her successor is elected.
** This includes any directorships at public companies and registered investment companies held by the Trustee at any time during the past five years.
The executive officers of the Fund, their ages, addresses, positions held, length of time served and their principal business occupations during the past five years are shown below.
Executive Officers:
Name, Age and Address |
| Position(s) Held |
| Length of |
| Principal Occupation(s) During Past 5 Years |
John H. Gernon (51) |
| President and Principal Executive Officer |
| Since September 2013 |
| President and Principal Executive Officer of the Equity and Fixed Income Funds and the Morgan Stanley AIP Funds (since September 2013) and the Liquidity Funds and various money market funds (since May 2014) in the Fund Complex; Managing Director of the Adviser; Head of Product (since 2006) and Global Portfolio Analysis and Reporting (since 2012) for MSIM’s Long Only business. |
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Stefanie V. Chang Yu (48) |
| Chief Compliance Officer |
| Since December 1997 |
| Managing Director of the Adviser and various entities affiliated with the Adviser; Chief Compliance Officer of various Morgan Stanley Funds and the Adviser (since January 2014). Formerly, Vice President of various Morgan Stanley Funds (December 1997-January 2014). |
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Joseph C. Benedetti (49) |
| Vice President |
| Since January 2014 |
| Managing Director of the Adviser and various entities affiliated with the Adviser; Vice President of various Morgan Stanley Funds (since January 2014). Formerly, Assistant Secretary of various Morgan Stanley Funds (October 2004-January 2014). |
Name, Age and Address |
| Position(s) Held |
| Length of |
| Principal Occupation(s) During Past 5 Years |
Francis J. Smith (49) |
| Treasurer and Principal Financial Officer |
| Treasurer since July 2003 and Principal Financial Officer since September 2002 |
| Executive Director of the Adviser and various entities affiliated with the Adviser; Treasurer (since July 2003) and Principal Financial Officer of various Morgan Stanley Funds (since September 2002). |
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Mary E. Mullin (47) |
| Secretary |
| Since June 1999 |
| Executive Director of the Adviser and various entities affiliated with the Adviser; Secretary of various Morgan Stanley Funds (since June 1999). |
*** This is the earliest date the Officer began serving the Morgan Stanley Funds. Each officer serves an indefinite term, until his or her successor is elected.
In addition, the following individuals who are officers of the Adviser or its affiliates serve as assistant secretaries of the Fund: Joanne Antico, Daniel E. Burton, Gladys Chang and Edward J. Meehan.
For each Trustee, the dollar range of equity securities beneficially owned by the Trustee in the Fund and in the Family of Investment Companies (Family of Investment Companies includes all of the registered investment companies advised by the Adviser and Morgan Stanley AIP GP LP) for the calendar year ended December 31, 2014 is set forth in the table below.
Name of Trustee |
| Dollar Range of Equity Securities |
| Aggregate Dollar Range of |
Independent: |
|
|
|
|
Frank L. Bowman(1) |
| * |
| over $100,000 |
Michael Bozic |
| * |
| over $100,000 |
Kathleen A. Dennis |
| * |
| over $100,000 |
Nancy C. Everett(2) |
| N/A |
| N/A |
Jakki L. Haussler(2) |
| N/A |
| N/A |
Manuel H. Johnson |
| None |
| over $100,000 |
Joseph J. Kearns(1) |
| * |
| over $100,000 |
Michael F. Klein |
| * |
| over $100,000 |
Michael E. Nugent |
| * |
| over $100,000 |
W. Allen Reed(1) |
| * |
| over $100,000 |
Interested: |
|
|
|
|
Fergus Reid(1) |
| None |
| over $100,000 |
James F. Higgins |
| None |
| over $100,000 |
* Frank L. Bowman—Mid Cap Growth Portfolio ($50,001-$100,000). Michael Bozic—Mid Cap Growth Portfolio (over $100,000); Kathleen A. Dennis—Mid Cap Growth Portfolio (over $100,000); Joseph J. Kearns—Global Strategist Portfolio (over $100,000); Corporate Bond Portfolio ($50,001-$100,000). Michael F. Klein—Mid Cap Growth Portfolio ($50,001-$100,000); Michael E. Nugent—Global Strategist Portfolio (over $100,000); W. Allen Reed—Mid Cap Growth Portfolio ($10,001-$50,000) and Global Strategist Portfolio (over $100,000).
(1) Includes the total amount of compensation deferred by the Trustee at his election pursuant to a deferred compensation plan. Such deferred compensation is placed in a deferral account and deemed to be invested in one or more of the Morgan Stanley Funds (or portfolio thereof) that are offered as investment options under the plan.
(2) Ms. Everett and Ms. Haussler joined the Board of Trustees of the Fund as Independent Trustees effective January 1, 2015.
As to each Independent Trustee and his or her immediate family members, no person owned beneficially or of record securities of an investment adviser or principal underwriter of the Fund, or a person (other than a registered investment company) directly or indirectly controlling, controlled by or under common control with an investment adviser or principal underwriter of the Fund.
As of December 31, 2014, the Trustees and officers of the Fund, as a group, owned less than 1% of any Class of the outstanding common stock of each Portfolio of the Fund.
Independent Trustees and the Committees
Law and regulation establish both general guidelines and specific duties for the Independent Trustees. The Board has five committees: (1) Audit Committee, (2) Governance Committee, (3) Compliance and Insurance Committee, (4) Investment Committee and (5) Closed-End Fund Committee.
The Independent Trustees are charged with recommending to the full Board approval of management, advisory and administration contracts, Rule 12b-1 plans and distribution and underwriting agreements; continually reviewing fund performance, checking on the pricing of portfolio securities, brokerage commissions, transfer agent costs and performance and trading among funds in the same complex; and approving fidelity bond and related insurance coverage and allocations, as well as other matters that arise from time to time. The Independent Trustees are required to select and nominate individuals to fill any Independent Trustee vacancy on the board of any fund that has a Rule 12b-1 plan of distribution.
The Board of Trustees has a separately-designated standing Audit Committee established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended. The Audit Committee is charged with recommending to the full Board the engagement or discharge of the Fund’s independent registered public accounting firm; directing investigations into matters within the scope of the independent registered public accounting firm’s duties, including the power to retain outside specialists; reviewing with the independent registered public accounting firm the audit plan and results of the auditing engagement; approving professional services provided by the independent registered public accounting firm and other accounting firms prior to the performance of the services; reviewing the independence of the independent registered public accounting firm; considering the range of audit and non-audit fees; reviewing the adequacy of the Fund’s system of internal controls; and reviewing the valuation process. The Fund has adopted a formal, written Audit Committee Charter.
The members of the Audit Committee of the Fund are Joseph J. Kearns, Michael F. Klein, Michael E. Nugent and W. Allen Reed. None of the members of the Fund’s Audit Committee is an “interested person,” as defined under the 1940 Act, of the Fund (with such disinterested Trustees being “Independent Trustees” or individually, “Independent Trustee”). Each Independent Trustee is also “independent” from the Fund under the listing standards of the NYSE. The Chairperson of the Audit Committee of the Fund is Joseph J. Kearns.
The Board of Trustees of the Fund also has a Governance Committee. The Governance Committee identifies individuals qualified to serve as Independent Trustees on the Fund’s Board and on committees of the Board and recommends such qualified individuals for nomination by the Fund’s Independent Trustees as candidates for election as Independent Trustees, advises the Fund’s Board with respect to Board composition, procedures and committees, develops and recommends to the Fund’s Board a set of corporate governance principles applicable to the Fund, monitors and makes recommendations on corporate governance matters and policies and procedures of the Fund’s Board of Trustees and any Board committees and oversees periodic evaluations of the Fund’s Board and its committees. The members of the Governance Committee of the Fund are Kathleen A. Dennis and Fergus Reid, each of whom is an Independent Trustee. In addition, Michael E. Nugent (Chairperson of the Morgan Stanley Funds) periodically attends Governance Committee meetings. The Chairperson of the Governance Committee is Fergus Reid.
The Fund does not have a separate nominating committee. While the Fund’s Governance Committee recommends qualified candidates for nominations as Independent Trustees, the Board of Trustees of the Fund believes that the task of nominating prospective Independent Trustees is important enough to require the participation of all current Independent Trustees, rather than a separate committee consisting of only certain Independent Trustees. Accordingly, each Independent Trustee (Frank L. Bowman, Michael Bozic, Kathleen A. Dennis, Manuel H. Johnson, Joseph J. Kearns, Michael F. Klein, Michael E. Nugent, W. Allen Reed and Fergus Reid) participates in the election and nomination of candidates for election as Independent Trustees for the Fund. Persons recommended by the Fund’s Governance Committee as candidates for nomination as Independent Trustees shall possess such experience, qualifications, attributes, skills and diversity so as to enhance the Board’s ability to manage and direct the affairs
and business of the Fund, including, when applicable, to enhance the ability of committees of the Board to fulfill their duties and/or to satisfy any independence requirements imposed by law, regulation or any listing requirements of the NYSE. While the Independent Trustees of the Fund expect to be able to continue to identify from their own resources an ample number of qualified candidates for the Fund’s Board as they deem appropriate, they will consider nominations from shareholders to the Board. Nominations from shareholders should be in writing and sent to the Independent Trustees as described below under the caption “Shareholder Communications.”
The Board formed the Compliance and Insurance Committee to address insurance coverage and oversee the compliance function for the Fund and the Board. The Compliance and Insurance Committee consists of Frank L. Bowman, Michael Bozic, James F. Higgins and Manuel H. Johnson. Frank L. Bowman, Michael Bozic and Manuel H. Johnson are Independent Trustees. The Chairperson of the Compliance and Insurance Committee is Michael Bozic. The Compliance and Insurance Committee has an Insurance Sub-Committee to review and monitor the insurance coverage maintained by the Fund. The Chairperson of the Insurance Sub-Committee is Frank L. Bowman.
The Investment Committee oversees the portfolio investment process for and reviews the performance of the Fund. The Investment Committee also recommends to the Board to approve or renew the Fund’s Investment Advisory and Administration Agreements. The members of the Investment Committee are Frank L. Bowman, Michael Bozic, Kathleen A. Dennis, James F. Higgins, Manuel H. Johnson, Joseph J. Kearns, Michael F. Klein, Michael E. Nugent, W. Allen Reed and Fergus Reid. The Chairperson of the Investment Committee is Manuel H. Johnson.
The Investment Committee has three Sub-Committees, each with its own Chairperson. Each Sub-Committee focuses on the funds’ primary areas of investment, namely equities, fixed income and alternatives. The Sub-Committees and their members are as follows:
(1) Equity—W. Allen Reed (Chairperson), Frank L. Bowman and Michael E. Nugent.
(2) Fixed Income—Michael F. Klein (Chairperson), Michael Bozic and Fergus Reid.
(3) Money Market and Alternatives—Kathleen A. Dennis (Chairperson), James F. Higgins and Joseph J. Kearns.
The Board formed the Closed-End Fund Committee to consider a range of issues unique to closed-end funds. The Closed-End Fund Committee consists of Michael E. Nugent, W. Allen Reed and Fergus Reid, each of whom is an Independent Director. The Chairperson of the Closed-End Fund Committee is Michael E. Nugent.
During the Fund’s fiscal year ended September 30, 2014, the Board of Trustees held the following meetings:
Board of Trustees |
| 8 |
Committee/Sub-Committee: |
| Number of Meetings |
Audit Committee |
| 5 |
Governance Committee |
| 5 |
Compliance and Insurance Committee |
| 5 |
Insurance Sub-Committee |
| 1 |
Investment Committee |
| 6 |
Equity Sub-Committee |
| 6 |
Fixed Income Sub-Committee |
| 6 |
Money Market and Alternatives Sub-Committee |
| 6 |
Closed-End Fund Committee |
| 5 |
Experience, Qualifications and Attributes
The Board has concluded, based on each Trustee’s experience, qualifications and attributes that each Board member should serve as a Trustee. Following is a brief summary of the information that led to and/or supports this conclusion.
Mr. Bowman has experience in a variety of business and financial matters through his prior service as a Director or Trustee for various other funds in the Fund Complex, where he serves as Chairperson of the Insurance Sub-Committee of the Compliance and Insurance Committee, and as a Director of BP p.l.c. and Naval and Nuclear Technologies LLP. Mr. Bowman also serves as a Director for the Armed Services YMCA of the USA, the U.S. Naval Submarine League, the American Shipbuilding Suppliers Association and as Chairman of the charity J Street Cup Golf. Mr. Bowman serves as a Trustee of the Fairhaven United Methodist Church. Mr. Bowman is also a member of the National Security Advisory Council of the Center for U.S. Global Engagement and a member of the CNA Military Advisory Board. Mr. Bowman retired as an Admiral in the U.S. Navy after serving over 38 years on active duty including eight years as Director of the Naval Nuclear Propulsion Program in the Department of the Navy and the U.S. Department of Energy (1996-2004). Additionally, Mr. Bowman served as the U.S. Navy’s Chief of Naval Personnel (1994-1996) where he was responsible for the planning and programming of all manpower, personnel, training and education resources for the U.S. Navy, and on the Joint Staff as Director of Political Military Affairs (1992-1994). In addition, Mr. Bowman served as President and Chief Executive Officer of the Nuclear Energy Institute. Mr. Bowman has received such distinctions as a knighthood as Honorary Knight Commander of the Most Excellent Order of the British Empire and the Officier de l’Orde National du Mérite from the French Government, and was elected to the National Academy of Engineering (2009). He is President of the consulting firm Strategic Decisions, LLC.
With over 20 years of experience on the boards and in senior management of such companies as Kmart Corporation, Levitz Furniture Corporation, Hills Department Stores and Sears Merchandise Group of Sears, Roebuck & Co., where Mr. Bozic also served as Chief Executive Officer of the Merchandise Group, and with nearly 20 years of experience as a Director or Trustee of certain other funds in the Fund Complex, Mr. Bozic has experience with a variety of financial, management, regulatory and operational issues as well as experience with marketing and distribution. Mr. Bozic has served as the Chairperson of the Compliance and Insurance Committee since 2006.
Ms. Dennis has over 25 years of business experience in the financial services industry and related fields including serving as a Director or Trustee of various other funds in the Fund Complex, where she serves as Chairperson of the Money Market and Alternatives Sub-Committee of the Investment Committee. Ms. Dennis possesses a strong understanding of the regulatory framework under which investment companies must operate based on her years of service to this Board and her position as Senior Managing Director of Victory Capital Management.
Ms. Everett has over 35 years of experience in the financial services industry, including roles with both registered investment companies and registered investment advisers. By serving on the boards of other registered funds, such as GMAM Absolute Return Strategies Fund, LLC and Emerging Markets Growth Fund, Inc., Ms. Everett has acquired significant experience with financial, accounting, investment and regulatory matters. Ms. Everett is also a Chartered Financial Analyst.
With more than 30 years of experience in the financial services industry, including her years of entrepreneurial and managerial experience in the development and growth of Opus Capital Group, Ms. Haussler brings a valuable perspective to the Fund’s Board. Through her role at Opus Capital and her service as a director of several venture capital funds and other boards, Ms. Haussler has gained valuable experience dealing with accounting principles and evaluating financial results of large corporations. She is a certified public accountant (inactive), a licensed attorney in the State of Ohio (inactive), and an audit committee financial expert under SEC regulations.
In addition to his tenure as a Director or Trustee of various other funds in the Fund Complex, where he formerly served as Chairperson of the Audit Committee, Dr. Johnson has also served as an officer or a board member of numerous companies for over 20 years. These positions included Co-Chairman and a founder of the Group of Seven Council, Director of NVR, Inc., Director of Evergreen Energy and Director of Greenwich Capital Holdings. He also has served as Vice Chairman of the Board of Governors of the Federal Reserve System and Assistant Secretary of the U.S. Treasury. In addition, Dr. Johnson also served as Chairman of the Financial Accounting Foundation, which oversees the Financial Accounting Standards Board, for seven years.
Mr. Kearns gained extensive experience regarding accounting through his experience on the Audit Committees of the boards of other funds in the Funds Complex, including serving as either Chairperson or Deputy Chairperson of the Audit Committee for nearly 20 years, and through his position as Chief Financial Officer of the J. Paul Getty Trust. He also has experience in financial, accounting, investment and regulatory matters through his position as
President and founder of Kearns & Associates LLC, a financial consulting company. Mr. Kearns also serves as a Director of Electro Rent Corporation and previously served as Director of The Ford Family Foundation. The Board has determined that Mr. Kearns is an “audit committee financial expert” as defined by the SEC.
Through his prior positions as a Managing Director of Morgan Stanley & Co. Inc. and Morgan Stanley Dean Witter Investment Management and as President and a Trustee of the Morgan Stanley Institutional Funds, Mr. Klein has experience in the management and operation of registered investment companies, enabling him to provide management input and investment guidance to the Board. Mr. Klein also has extensive experience in the investment management industry based on his current positions as Managing Director and Co-Chief Executive Officer of Aetos Capital, LLC, Co-President of Aetos Alternatives Management, LLC and as a Director of certain investment funds managed or sponsored by Aetos Capital, LLC. In addition, he also has experience as a member of the board of other funds in the Fund Complex.
Mr. Nugent has extensive experience with financial, accounting, investment and regulatory matters through his over 20 years of service on the boards of various funds in the Fund Complex, including time as the Chairperson of the Insurance Committee, Chairperson of the Closed-End Fund Committee and Chairperson of the Morgan Stanley Funds. Mr. Nugent also has experience as a former General Partner in Triumph Capital, L.P.
Mr. Reed has experience on investment company boards and is experienced with financial, accounting, investment and regulatory matters through his prior service as a Director of iShares Inc. and his service as Trustee or Director of other funds in the Fund Complex. Mr. Reed also gained substantial experience in the financial services industry through his position as a Director of Legg Mason, Inc. and prior position as President and CEO of General Motors Asset Management.
Mr. Reid has served on a number of mutual fund boards, including as a Trustee or Director of certain investment companies in the JP Morgan Funds complex and as a Trustee or Director of other funds in the Fund Complex. Therefore, Mr. Reid is experienced with financial, accounting, investment and regulatory matters, enabling him to provide management input and investment guidance to the Board.
Mr. Higgins has over 30 years of experience in the financial services industry. Mr. Higgins has substantial mutual fund experience and is experienced with financial, accounting, investment and regulatory matters due to his experience on the boards of other funds in the Fund Complex. Mr. Higgins also previously served on the boards of other companies in the financial services industry, including AXA Financial, Inc. and AXA Equitable Life Insurance Company.
The Trustees’ principal occupations during the past five years or more are shown in the above tables.
Advantages of Having the Same Individuals as Trustees for the Morgan Stanley Funds
The Independent Trustees and the Fund’s management believe that having the same Independent Trustees for each of the Morgan Stanley Funds avoids the duplication of effort that would arise from having different groups of individuals serving as Independent Trustees for each of the funds or even of sub-groups of funds. They believe that having the same individuals serve as Independent Trustees of all the Morgan Stanley Funds tends to increase their knowledge and expertise regarding matters which affect the Fund Complex generally and enhances their ability to negotiate on behalf of each fund with the fund’s service providers. This arrangement also precludes the possibility of separate groups of Independent Trustees arriving at conflicting decisions regarding operations and management of the funds and avoids the cost and confusion that would likely ensue. Finally, having the same Independent Trustees serve on all fund boards enhances the ability of each fund to obtain, at modest cost to each separate fund, the services of Independent Trustees of the caliber, experience and business acumen of the individuals who serve as Independent Trustees of the Morgan Stanley Funds.
Trustee and Officer Indemnification
The Fund’s Declaration of Trust provides that no Trustee, officer, employee or agent of the Fund is liable to the Fund or to a shareholder, nor is any Trustee, officer, employee or agent liable to any third persons in connection with
the affairs of the Fund, except as such liability may arise from his/her or its own bad faith, willful misfeasance, gross negligence or reckless disregard of his/her or its duties. It also provides that all third persons shall look solely to Fund property for satisfaction of claims arising in connection with the affairs of the Fund. With the exceptions stated, the Declaration of Trust provides that a Trustee, officer, employee or agent is entitled to be indemnified against all liability in connection with the affairs of the Fund.
Shareholder Communications
Shareholders may send communications to the Fund’s Board of Trustees. Shareholders should send communications intended for the Fund’s Board by addressing the communications directly to the Board (or individual Board members) and/or otherwise clearly indicating in the salutation that the communication is for the Board (or individual Board members) and by sending the communication to either the Fund’s office or directly to such Board member(s) at the address specified for each Trustee previously noted. Other shareholder communications received by the Fund not directly addressed and sent to the Board will be reviewed and generally responded to by management, and will be forwarded to the Board only at management’s discretion based on the matters contained therein.
Compensation
Effective January 1, 2015, each Trustee (except for the Chairperson of the Boards) receives an annual retainer fee of $240,000 ($230,000 prior to January 1, 2015) for serving as a Trustee of the Morgan Stanley Funds.
The Chairperson of the Audit Committee receives an additional annual retainer fee of $78,750 and the Investment Committee Chairperson receives an additional annual retainer fee of $63,000. Other Committee and Sub-Committee Chairpersons (except for the Chairperson of the Closed-End Fund Committee) receive an additional annual retainer fee of $31,500. The aggregate compensation paid to each Trustee is paid by the Morgan Stanley Funds, and is allocated on a pro rata basis among each of the operational funds/portfolios of the Morgan Stanley Funds based on the relative net assets of each of the funds/portfolios. Michael E. Nugent receives a total annual retainer fee of $480,000 ($460,000 prior to January 1, 2015) for his services as Chairperson of the Boards of the Morgan Stanley Funds and for administrative services provided to each Board.
The Fund also reimburses such Trustees for travel and other out-of-pocket expenses incurred by them in connection with attending such meetings. Trustees of the Fund who are employed by the Adviser receive no compensation or expense reimbursement from the Fund for their services as a Trustee.
Effective April 1, 2004, the Fund began a Deferred Compensation Plan (the “DC Plan”), which allows each Trustee to defer payment of all, or a portion, of the fees he or she receives for serving on the Board of Trustees throughout the year. 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 (or portfolios thereof) that are offered as investment options under the DC Plan. At the Trustee’s election, distributions are either in one lump sum payment, or in the form of equal annual installments over a period of five years. The rights of an eligible Trustee and the beneficiaries to the amounts held under the DC Plan are unsecured and such amounts are subject to the claims of the creditors of the Fund.
Prior to April 1, 2004, the Fund maintained a similar Deferred Compensation Plan (the “Prior DC Plan”), which also allowed each Independent Trustee to defer payment of all, or a portion, of the fees he or she received for serving on the Board of Trustees throughout the year. Generally, the DC Plan amends and supersedes the Prior DC Plan and all amounts payable under the Prior DC Plan are now subject to the terms of the DC Plan (except for amounts paid during the calendar year 2004, which remain subject to the terms of the Prior DC Plan).
The following table shows aggregate compensation payable to each of the Fund’s Trustees from the Fund for the fiscal year ended September 30, 2014 and the aggregate compensation payable to each of the Fund’s Trustees by the Fund Complex (which includes all of the Morgan Stanley Funds) for the calendar year ended December 31, 2014.
COMPENSATION(1)
Name of Trustee |
| Aggregate Compensation |
| Total Compensation |
| ||
Frank L. Bowman |
| $ | 16,524 |
| $ | 261,500 |
|
Michael Bozic |
| 16,211 |
| 261,500 |
| ||
Kathleen A. Dennis |
| 16,524 |
| 261,500 |
| ||
Nancy C. Everett(4) |
| N/A |
| N/A |
| ||
Jakki L. Haussler(4) |
| N/A |
| N/A |
| ||
Manuel H. Johnson |
| 18,164 |
| 293,000 |
| ||
Joseph J. Kearns(3) |
| 19,139 |
| 340,750 |
| ||
Michael F. Klein(2)(3) |
| 16,523 |
| 261,500 |
| ||
Michael E. Nugent |
| 28,512 |
| 460,000 |
| ||
W. Allen Reed(2)(3) |
| 16,523 |
| 261,500 |
| ||
Fergus Reid(3) |
| 16,211 |
| 308,500 |
| ||
James F. Higgins |
| 14,299 |
| 230,000 |
| ||
(1) Includes all amounts paid for serving as director/trustee of the funds, as well as serving as Chairperson of the Boards or a Chairperson of a Committee or Sub-Committee.
(2) The amounts shown in this column represent the aggregate compensation before deferral with respect to the Fund’s fiscal year. The following Trustee deferred compensation from the Fund during the fiscal year ended September 30, 2014: Mr. Klein, $16,523 and Mr. Reed, $16,523.
(3) The amounts shown in this column represent the aggregate compensation paid by all of the funds in the Fund Complex as of December 31, 2014 before deferral by the Trustees under the DC Plan. As of December 31, 2014, the value (including interest) of the deferral accounts across the Fund Complex for Messrs. Kearns, Klein, Reed and Reid pursuant to the deferred compensation plan was $666,222, $260,630, $1,697,049 and $845,514, respectively. Because the funds in the Fund Complex have different fiscal year ends, the amounts shown in this column are presented on a calendar year basis.
(4) Ms. Everett and Ms. Haussler joined the Board of Trustees of the Fund as Independent Trustees effective January 1, 2015.
Prior to December 31, 2003, 49 of the Morgan Stanley Funds (the “Adopting Funds”) had adopted a retirement program under which an Independent Trustee who retired after serving for at least five years as an Independent Trustee of any such fund (an “Eligible Trustee”) would have been entitled to retirement payments based on factors such as length of service, upon reaching the eligible retirement age. On December 31, 2003, the amount of accrued retirement benefits for each Eligible Trustee was frozen, and will be payable, together with a return of 8% per annum, at or following each such Eligible Trustee’s retirement as shown in the table below. In connection with certain reorganizations, the Fund, on behalf of each of the Global Strategist and Mid Cap Growth Portfolios, assumed the retirement benefits accrued to the Eligible Trustees of the funds acquired by such Portfolios.
The following table illustrates the retirement benefits accrued to the Fund’s Independent Trustees by the Fund (on behalf of the Global Strategist and Mid Cap Growth Portfolios) for the period ended September 30, 2014 and by the Adopting Funds for the calendar year ended December 31, 2014, and the estimated retirement benefits for the Independent Trustees from the Adopting Funds for each calendar year following retirement. Only the Trustees listed below participated in the retirement program.
|
| Retirement Benefits Accrued |
| Estimated Annual Benefits |
| |||||||||||
Name of Independent Trustee |
| By the |
| By the |
| By all Adopting |
| From the |
| From all Adopting |
| |||||
Michael Bozic(2) |
| $ | (244 | ) | $ | (234 | ) | $ | (9,955 | ) | $ | 967 |
| $ | 43,940 |
|
Manuel H. Johnson |
| 669 |
| 699 |
| 31,557 |
| 1,420 |
| 64,338 |
| |||||
Michael E. Nugent(2) |
| (278 | ) | (295 | ) | (14,620 | ) | 1,269 |
| 57,539 |
| |||||
* Global Strategist Portfolio
** Mid Cap Growth Portfolio
*** Global Strategist Portfolio and Mid Cap Growth Portfolio
(1) Total compensation accrued under the retirement plan, together with a return of 8% per annum, will be paid annually commencing upon retirement and continuing for the remainder of the Trustee’s life.
(2) Messrs. Bozic’s and Nugent’s retirement expenses are negative due to the fact their expenses have been overaccrued.
Code of Ethics
The Fund, the Adviser and the Distributor have each adopted a Code of Ethics pursuant to Rule 17j-1 under the 1940 Act. The Codes of Ethics are designed to detect and prevent improper personal trading. The Codes of Ethics permit personnel subject to the Codes to invest in securities, including securities that may be purchased, sold or held by the Fund, subject to a number of restrictions and controls, including prohibitions against purchases of securities in an initial public offering and a preclearance requirement with respect to personal securities transactions.
INVESTMENT ADVISORY AND OTHER SERVICES
Adviser
The Adviser is a wholly-owned subsidiary of Morgan Stanley (NYSE: “MS”), a preeminent global financial services firm engaged in securities trading and brokerage activities, as well as providing investment banking, research and analysis, financing and financial advisory services. The principal offices of Morgan Stanley are located at 1585 Broadway, New York, NY 10036, and the principal offices of the Adviser are located at 522 Fifth Avenue, New York, NY 10036. As of December 31, 2014, the Adviser, together with its affiliated asset management companies, had approximately $403 billion in assets under management or supervision.
The Adviser provides investment advice and portfolio management services pursuant to an Investment Advisory Agreement (the “Agreement”) and, subject to the supervision of the Fund’s Board of Trustees, makes each of the Portfolio’s day-to-day investment decisions, arranges for the execution of portfolio transactions and generally manages each of the Portfolio’s investments. Pursuant to the Agreement, the Adviser is entitled to receive from each class of shares of each Portfolio an annual management fee, payable quarterly, equal to the percentage of average daily net assets set forth in the below table reflecting the contractual advisory fee and the maximum expense ratios for each Portfolio. The Adviser has agreed to a reduction in the fees payable to it and to reimburse the Portfolios, if necessary, if such fees would cause the total annual operating expenses of each such Portfolio to exceed the percentage of average daily net assets set forth in the below table reflecting the contractual advisory fee and the maximum expense ratios for each Portfolio. In determining the actual amount of fee waiver and/or expense reimbursement for a Portfolio, if any, the Adviser excludes from total annual operating expenses certain investment related expenses, taxes, interest and other extraordinary expenses (including litigation). The fee waivers and/or expense reimbursements for a Portfolio will continue for at least one year or until such time as the Fund’s Board of Trustees acts to discontinue all or a portion of such waivers and/or reimbursements when it deems such action is appropriate.
The following table reflects for each Portfolio (i) the advisory fee paid; and (ii) the advisory fee waived and/or affiliated rebates for each of the past three fiscal years ended September 30, 2012, 2013 and 2014.
|
| Advisory Fees Paid |
| Advisory Fees Waived |
| Affiliated Rebates |
| |||||||||||||||||||||
Portfolio |
| 2012 |
| 2013 |
| 2014 |
| 2012 |
| 2013 |
| 2014 |
| 2012 |
| 2013 |
| 2014 |
| |||||||||
Core Fixed Income |
| $ | 0 |
| $ | 0 |
| $ | 0 |
| $ | 227 |
| $ | 198 |
| $ | 140 |
| $ | 5 |
| $ | 3 |
| $ | 2 |
|
Core Plus Fixed Income |
| 990 |
| 765 |
| 541 |
| 0 |
| 20 |
| 154 |
| 19 |
| 15 |
| 23 |
| |||||||||
Corporate Bond |
| 210 |
| 157 |
| 3 |
| 0 |
| 10 |
| 145 |
| 2 |
| 1 |
| 1 |
| |||||||||
Global Strategist |
| 180 |
| 1,689 |
| 1,811 |
| 0 |
| 184 |
| 219 |
| 9 |
| 38 |
| 78 |
| |||||||||
High Yield |
| 0 |
| 0 |
| 0 |
| 40 |
| 76 |
| 136 |
| 0 |
| 0 |
| 1 |
| |||||||||
Limited Duration |
| 463 |
| 380 |
| 196 |
| 0 |
| 15 |
| 170 |
| 4 |
| 4 |
| 2 |
| |||||||||
Mid Cap Growth |
| 32,227 |
| 31,594 |
| 37,788 |
| 0 |
| 0 |
| 0 |
| 252 |
| 238 |
| 184 |
| |||||||||
Strategic Income* |
| N/A |
| N/A |
| N/A |
| N/A |
| N/A |
| N/A |
| N/A |
| N/A |
| N/A |
| |||||||||
* Not operational for the period.
The following table reflects the contractual advisory fee and the maximum expense ratios for each Portfolio, as applicable.
Portfolio |
| Contractual Rate of |
| Expense |
| Expense |
| Expense |
| Expense |
|
Core Fixed Income |
| 0.375% |
| 0.50 | % | 0.85 | % | 1.10 | % | — |
|
Core Plus Fixed Income |
| 0.375% of the portion of the daily net assets not exceeding $1 billion; and 0.300% of the portion of the daily net assets exceeding $1 billion |
| 0.52 | % | 0.87 | % | 1.12 | % | — |
|
Corporate Bond |
| 0.375% |
| 0.70 | % | 1.05 | % | 1.52 | % | — |
|
Global Strategist |
| 0.45% |
| 0.74 | % | 1.09 | % | 1.59 | % | — |
|
High Yield |
| 0.60% |
| 0.75 | % | 1.10 | % | 1.35 | % | 0.72 | % |
Limited Duration |
| 0.30% |
| 0.53 | % | 0.88 | % | 1.23 | % | — |
|
Mid Cap Growth |
| 0.50% |
| 0.80 | % | 1.15 | % | 1.65 | % | 0.73 | % |
Strategic Income |
| 0.40% of the portion of the daily net assets not exceeding $500 million; and 0.35% of the portion of the daily net assets exceeding $500 million |
| 1.00 | % | 1.35 | % | 1.60 | % | 0.95 | % |
The Agreement continues for successive one year periods, only if each renewal is specifically approved by an in-person vote of the Fund’s Board, including the affirmative votes of a majority of the Trustees who are not parties to the agreement or “interested persons” (as defined in the 1940 Act) of any such party at a meeting called for the purpose of considering such approval. In addition, the question of continuance of the Agreement may be presented to the shareholders of the Fund; in such event, continuance shall be effected only if approved by the affirmative vote of a majority of the outstanding voting securities of each Portfolio of the Fund. If the holders of any Portfolio fail to approve the Agreement, the Adviser may continue to serve as investment adviser to each Portfolio which approved the Agreement, and to any Portfolio which did not approve the Agreement until new arrangements have been made. The Agreement is automatically terminated if assigned, and may be terminated by any Portfolio without the payment of any penalty, at any time, (1) by vote of a majority of the entire Board or (2) by vote of a majority of the outstanding voting securities of the Portfolio on 60 days’ written notice to the Adviser or (3) by the Adviser without the payment of any penalty, upon 90 days’ written notice to the Fund.
The Fund bears all of its own costs and expenses, including but not limited to: services of its independent accountants, its administrator and dividend disbursing and transfer agent, legal counsel, taxes, insurance premiums, costs incidental to meetings of its shareholders and Trustees, the cost of filing its registration statements under federal and state securities laws, reports to shareholders, and custodian fees. These Fund expenses are, in turn, allocated to each Portfolio, based on their relative net assets. Each Portfolio bears its own advisory fees and brokerage commissions and transfer taxes in connection with the acquisition and disposition of its investment securities.
Sub-Adviser
The Adviser has entered into a Sub-Advisory Agreement with Morgan Stanley Investment Management Limited, located at 25 Cabot Square, Canary Wharf, London, E14 4QA, England (with respect to the Strategic Income Portfolio). The Sub-Adviser is a wholly owned subsidiary of Morgan Stanley. The Sub-Adviser provides the relevant Portfolio with investment advisory services subject to the overall supervision of the Adviser and the Fund’s Trustees. The Adviser pays the Sub-Adviser on a monthly basis a portion of the net advisory fees the Adviser receives from the relevant Portfolio.
Principal Underwriter
Morgan Stanley Distribution, Inc. (the “Distributor”), an indirect wholly-owned subsidiary of Morgan Stanley, with its principal office at 522 Fifth Avenue, New York, NY 10036, distributes the shares of the Fund. Under the Distribution Agreement, the Distributor, as agent of the Fund, agrees to use its best efforts as sole distributor of the Fund’s shares. The Distribution Agreement continues in effect so long as such continuance is approved at least annually by the Fund’s Board, including a majority of those Trustees who are not parties to such Distribution
Agreement nor interested persons of any such party. The Distribution Agreement provides that the Fund will bear the costs of the registration of its shares with the SEC and various states and the printing of its prospectuses, statements of additional information and reports to shareholders.
Fund Administration
The Adviser also serves as Administrator to the Fund pursuant to an Amended and Restated Administration Agreement dated as of November 1, 2004 (the “Administration Agreement”). For its services under the Administration Agreement, the Fund pays the Adviser a monthly fee which on an annual basis equals 0.08% of the average daily net assets of each Portfolio. The Adviser may compensate other service providers for performing shareholder servicing and administrative services.
For the fiscal years ended September 30, 2012, 2013 and 2014, the Fund paid the following administrative fees (no administrative fees were waived):
|
| Administrative Fees Paid |
| |||||||
Portfolio |
| 2012 |
| 2013 |
| 2014 |
| |||
Core Fixed Income |
| $ | 49 |
| $ | 42 |
| $ | 30 |
|
Core Plus Fixed Income |
| 215 |
| 171 |
| 153 |
| |||
Corporate Bond |
| 45 |
| 36 |
| 32 |
| |||
Global Strategist |
| 34 |
| 340 |
| 375 |
| |||
High Yield |
| 5 |
| 10 |
| 18 |
| |||
Limited Duration |
| 125 |
| 106 |
| 98 |
| |||
Mid Cap Growth |
| 5,197 |
| 5,093 |
| 6,076 |
| |||
Strategic Income* |
| N/A |
| N/A |
| N/A |
| |||
* Not operational for the period.
Sub-Administrator. 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 administrative fee the Administrator receives from the Fund. The Administrator supervises and monitors the administrative and accounting services provided by State Street. Their services are also subject to the supervision of the officers and Board of Trustees of the Fund.
Custodian
State Street, located at One Lincoln Street, Boston, MA 02111-2101, serves as Custodian for the Fund. The Custodian holds cash, securities, and other assets of the Fund as required by the 1940 Act.
Transfer and Dividend Disbursing Agent
Boston Financial Data Services, Inc., 2000 Crown Colony Drive, Quincy, MA 02169-0953, serves as the Fund’s Transfer Agent and Dividend Disbursing Agent.
Portfolio Managers
Other Accounts Managed by the Portfolio Managers
Because the portfolio managers may manage assets for other investment companies, pooled investment vehicles and/or other accounts (including institutional clients, pension plans and certain high net worth individuals), there may be an incentive to favor one client over another resulting in conflicts of interest. For instance, the Adviser and/or Sub-Adviser may receive fees from certain accounts that are higher than the fee it receives from the Fund, or it may receive a performance-based fee on certain accounts. In those instances, the portfolio managers may have an incentive to favor the higher and/or performance-based fee accounts over the Fund. In addition, a conflict of interest could exist
to the extent the Adviser and/or Sub-Adviser have proprietary investments in certain accounts, where portfolio managers have personal investments in certain accounts or when certain accounts are investment options in the Adviser’s and/or Sub-Adviser’s employee benefits and/or deferred compensation plans. The portfolio manager may have an incentive to favor these accounts over others. If the Adviser and/or Sub-Adviser manage accounts that engage in short sales of securities of the type in which the Fund invests, the Adviser and/or Sub-Adviser could be seen as harming the performance of the Fund for the benefit of the accounts engaging in short sales if the short sales cause the market value of the securities to fall. The Adviser and/or Sub-Adviser have adopted trade allocation and other policies and procedures that it believes are reasonably designed to address these and other conflicts of interest.
Portfolio Manager Compensation Structure
Morgan Stanley’s compensation structure is based on a total reward system of base salary and Incentive Compensation which is paid partially as a cash bonus and partially as mandatory deferred compensation. Deferred compensation may be granted as deferred cash under the Adviser’s Investment Management Alignment Plan (“IMAP”), as an equity-based award or it may be granted under other plans as determined annually by Morgan Stanley’s Compensation, Management Development and Succession Committee subject to vesting and other conditions.
Base salary compensation. Generally, portfolio managers receive base salary compensation based on the level of their position with the Adviser.
Incentive compensation. In addition to base compensation, portfolio managers may receive discretionary year-end compensation.
Incentive compensation may include:
· Cash Bonus.
· Deferred Compensation:
· A mandatory program that defers a portion of incentive compensation into restricted stock units or other awards based on Morgan Stanley common stock or other plans that are subject to vesting and other conditions.
· IMAP is a mandatory program that defers a portion of incentive compensation and notionally invests it in designated funds advised by the Adviser or its affiliates. The award is subject to vesting and other conditions. Portfolio managers must notionally invest a minimum of 25% to a maximum of 100% of their IMAP deferral account into a combination of the designated funds they manage that are included in the IMAP fund menu, which may or may not include one of the Portfolios.
All deferred compensation awards are subject to clawback provisions where awards can be cancelled, in whole or in part, if an employee takes any action, or omits to take any action which; causes a restatement of Morgan Stanley’s consolidated financial results; constitutes a violation by the portfolio manager of Morgan Stanley’s Global Risk Management Principles, Policies and Standards; or constitutes violation of internal risk and control policies involving a subsequent loss.
Several factors determine discretionary compensation, which can vary by portfolio management team and circumstances. These factors include:
· Revenues generated by the investment companies, pooled investment vehicles and other accounts managed by the portfolio manager.
· The investment performance of the funds/accounts managed by the portfolio manager.
· Contribution to the business objectives of the Adviser and/or Sub-Adviser.
· The dollar amount of assets managed by the portfolio manager.
· Market compensation survey research by independent third-parties.
· Other qualitative factors, such as contributions to client objectives.
· Performance of Morgan Stanley and Morgan Stanley Investment Management, and the overall performance of the investment team(s) of which the portfolio manager is a member.
Other Accounts Managed by Portfolio Managers at September 30, 2014
|
| Registered Investment |
| Other Pooled |
| Other Accounts |
| |||||||||
Portfolio and Portfolio Managers |
| Number of |
| Total Assets |
| Number of |
| Total Assets |
| Number of |
| Total Assets |
| |||
Core Fixed Income |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Joseph Mehlman |
| 7 |
| $ | 891.9 million |
| 0 |
| $ | 0 |
| 73 |
| $ | 16.0 billion | (2) |
Neil Stone |
| 8 |
| 1.5 billion |
| 0 |
| 0 |
| 76 |
| 17.7 billion | (1) | |||
Matthew Dunning |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| |||
Core Plus Fixed Income |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Joseph Mehlman |
| 7 |
| $ | 711.1 million |
| 0 |
| $ | 0 |
| 73 |
| $ | 16.0 billion | (2) |
Neil Stone |
| 8 |
| 1.3 billion |
| 0 |
| 0 |
| 76 |
| 17.7 billion | (1) | |||
Matthew Dunning |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| |||
Corporate Bond |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Joseph Mehlman |
| 7 |
| $ | 867.1 million |
| 0 |
| $ | 0 |
| 73 |
| $ | 16.0 billion | (2) |
Christian G. Roth |
| 7 |
| 696.7 million |
| 30 |
| 9.9 billion |
| 43 |
| 17.7 billion | (3) | |||
Global Strategist |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Mark A. Bavoso |
| 2 |
| $ | 638.1 million |
| 1 |
| $ | 114.4 million |
| 9 |
| $ | 5.3 billion | (4) |
Cyril Moullé-Berteaux |
| 2 |
| 638.1 million |
| 3 |
| 8.7 billion |
| 10 |
| 5.4 billion | (4) | |||
High Yield |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Richard Lindquist |
| 1 |
| $ | 144.1 million |
| 18 |
| $ | 2.3 billion |
| 1 |
| $ | 96.3 million | (7) |
Christian G. Roth |
| 7 |
| 681.1 million |
| 30 |
| 9.8 billion |
| 43 |
| 17.7 billion | (3) | |||
Limited Duration |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Joseph Mehlman |
| 7 |
| 786.1 million |
| 0 |
| 0 |
| 73 |
| 16.0 billion | (2) | |||
Neil Stone |
| 8 |
| 1.4 billion |
| 0 |
| 0 |
| 76 |
| 17.7 billion | (1) | |||
Matthew Dunning |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| |||
Mid Cap Growth |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Dennis P. Lynch |
| 24 |
| $ | 13.6 billion |
| 6 |
| $ | 6.7 billion |
| 13 |
| $ | 2.4 billion | (5) |
David S. Cohen |
| 24 |
| 13.6 billion |
| 6 |
| 6.7 billion |
| 12 |
| 2.3 billion | (6) | |||
Sam G. Chainani |
| 24 |
| 13.6 billion |
| 6 |
| 6.7 billion |
| 12 |
| 2.3 billion | (6) | |||
Alexander T. Norton |
| 24 |
| 13.6 billion |
| 6 |
| 6.7 billion |
| 12 |
| 2.3 billion | (6) | |||
Jason C. Yeung |
| 24 |
| 13.6 billion |
| 6 |
| 6.7 billion |
| 12 |
| 2.3 billion | (6) | |||
Armistead B. Nash |
| 24 |
| 13.6 billion |
| 6 |
| 6.7 billion |
| 12 |
| 2.3 billion | (6) | |||
Strategic Income |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Jim Caron |
| 3 |
| $ | 915.7 million |
| 1 |
| $ | 9.0 million |
| 1 |
| $ | 240.5 million | (7) |
Richard Ford |
| 1 |
| 144.1 million |
| 14 |
| 5.6 billion |
| 29 |
| 9.2 billion | (8) | |||
Michael Kushma |
| 3 |
| 243.5 million |
| 22 |
| 6.8 billion |
| 35 |
| 17.1 billion | (9) | |||
Christian G. Roth |
| 7 |
| 692.9 million |
| 30 |
| 9.9 billion |
| 43 |
| 17.7 billion | (3) |
(1) Of these other accounts, four accounts with a total of approximately $1.2 billion in assets, had performance-based fees.
(2) Of these other accounts, one account with a total of approximately $254.1 million in assets, had performance-based fees.
(3) Of these other accounts, nine accounts with a total of approximately $3.7 billion in assets, had performance-based fees.
(4) Of these other accounts, three accounts with a total of approximately $2.2 billion in assets, had performance-based fees.
(5) Of these other accounts, two accounts with a total of approximately $630.1 million in assets, had performance-based fees.
(6) Of these other accounts, two accounts with a total of approximately $2.3 billion in assets, had performance-based fees.
(7) Account had performance-based fees.
(8) Of these other accounts, seven accounts with a total of approximately $2.7 billion in assets had performance-based fees.
(9) Of these other accounts, nine accounts with a total of approximately $3 billion in assets had performance-based fees.
Securities Ownership of Portfolio Managers (at September 30, 2014)
Core Fixed Income
Joseph Mehlman — None
Neil Stone — None
Matthew Dunning — None
Core Plus Fixed Income
Joseph Mehlman — None
Neil Stone — None
Matthew Dunning — None
Corporate Bond
Joseph Mehlman — None
Christian G. Roth — None
Global Strategist
Mark Bavoso — $10,001-$50,000
Cyril Moullé-Berteaux — $500,001-$1 million
High Yield
Richard Lindquist— $100,001-$500,000
Christian G. Roth — $50,001-$100,000
Limited Duration
Joseph Mehlman — $1-$10,000
Neil Stone — None
Matthew Dunning — None
Mid Cap Growth
Dennis P. Lynch — over $1 million
David S. Cohen — $500,001-$1 million
Sam G. Chainani — $100,001-$500,000
Alexander T. Norton — $100,001-$500,000
Jason C. Yeung — $100,001-$500,000
Armistead B. Nash — $100,001-$500,000
Strategic Income
Jim Caron — None
Richard Ford — None
Michael Kushma — None
Christian G. Roth — None
Independent Registered Public Accounting Firm
Ernst & Young LLP, located at 200 Clarendon Street, Boston, MA 02116-5021, serves as the independent registered public accounting firm for the Fund and audits the annual financial statements of each Portfolio.
Fund Counsel
Dechert LLP, located at 1095 Avenue of the Americas, New York, NY 10036, acts as the Fund’s legal counsel.
Proxy Voting Policies and Procedures and Proxy Voting Record
The Board of Trustees believes that the voting of proxies on securities held by the Fund is an important element of the overall investment process. As such, the Trustees have delegated the responsibility to vote such proxies to MSIM.
A copy of MSIM’s Proxy Voting Policy (“Proxy Policy”) is attached hereto as Appendix A. In addition, a copy of the Proxy Policy, as well as the Fund’s most recent proxy voting record for the 12-month period ended June 30, as filed with the SEC, are available without charge on our web site at www.morganstanley.com/im. The Fund’s proxy voting record is also available without charge on the SEC’s web site at http://www.sec.gov.
DISTRIBUTION AND SHAREHOLDER SERVICES PLANS
Class A and Class L
The Fund has adopted a Shareholder Services Plan for Class A shares (the “Class A Plan”) and a Distribution and Shareholder Services Plan for Class L shares (the “Class L Plan”), each pursuant to Rule 12b-1 under the 1940 Act (together, the “Plans”). The Plans provide that the Fund, on behalf of each Portfolio, may pay the Distributor and other affiliated and unaffiliated broker-dealers, financial institutions and/or intermediaries an annualized service fee of up to 0.25% of the average daily net assets of each Portfolio attributable to Class A shares and Class L shares, as applicable. This service fee is for providing “personal service and/or the maintenance of shareholder accounts” as provided for in Section 2830(b)(9) of the Financial Industry Regulatory Authority (“FINRA”) Conduct Rules, including (i) expenditures for overhead and other expenses of the Distributor and other affiliated and unaffiliated broker-dealers, (ii) telephone and other communications expenses relating to the provision of shareholder services and (iii) compensation to and expenses of financial advisors and other employees of the Distributor and other affiliated and unaffiliated broker-dealers for the provision of shareholder services. In addition, the Class L Plan provides that the Fund, on behalf of each Portfolio, may pay the Distributor an annualized distribution fee of up to 0.25% (0.50% with respect to the Global Strategist and Mid Cap Growth Portfolios) of the average daily net assets of each Portfolio attributable to Class L shares. The Distributor may direct that all or any part of these fees be paid directly to its affiliates or other broker-dealers, financial institutions and/or intermediaries that provide shareholder services. The Distributor has agreed to waive the 12b-1 fee on Class A shares of the Corporate Bond Portfolio to the extent it exceeds 0.15% of the average daily net assets of such shares on an annualized basis. This waiver will continue for at least one year or until such time as the Fund’s Board of Trustees acts to discontinue all or a portion of such waiver when it deems such action is appropriate. For the Fund’s fiscal year ended September 30, 2014, all amounts paid by the Fund with respect to the distribution fee were used to compensate broker-dealers, banks and other intermediaries for sales of Class L shares of the respective Portfolios.
The following table describes the shareholder servicing fees paid by each Portfolio with respect to its Class A and Class L shares pursuant to the Plans and the distribution-related expenses for each Portfolio with respect to its Class A and Class L shares for the fiscal year ended September 30, 2014. To the extent that expenditures on distribution-related activities exceed the fees paid by a Portfolio, the excess amounts were paid by the Adviser or the Distributor out of its own resources.
Portfolio |
| Total Distribution |
| Distribution |
| Distribution |
| |||
Class A |
|
|
|
|
|
|
| |||
Core Fixed Income |
| $ | 1,049 |
| $ | 111 |
| $ | 938 |
|
Core Plus Fixed Income |
| 8,473 |
| 4,069 |
| 4,404 |
| |||
Corporate Bond |
| 1,784 | ** | 350 |
| 1,434 |
| |||
Global Strategist |
| 938,270 |
| 418,818 |
| 519,452 |
| |||
High Yield |
| 21,246 |
| 20,206 |
| 1,040 |
| |||
Limited Duration |
| 4,386 |
| 283 |
| 4,103 |
| |||
Mid Cap Growth |
| 5,240,525 |
| 4,636,668 |
| 603,857 |
| |||
Strategic Income*** |
| N/A |
| N/A |
| N/A |
| |||
Class L |
|
|
|
|
|
|
| |||
Core Fixed Income |
| $ | 68 |
| $ | 0 |
| $ | 68 |
|
Core Plus Fixed Income |
| 471 |
| 421 |
| 50 |
| |||
Corporate Bond |
| 12,290 |
| 3,509 |
| 8,781 |
| |||
Global Strategist |
| 217,677 |
| 213,116 |
| 4,561 |
| |||
High Yield |
| 5,230 |
| 2,396 |
| 2,834 |
|
Portfolio |
| Total Distribution |
| Distribution |
| Distribution |
| |||
Limited Duration |
| $ | 629 |
| $ | 580 |
| $ | 49 |
|
Mid Cap Growth |
| 132,168 |
| 123,164 |
| 9,004 |
| |||
Strategic Income*** |
| N/A |
| N/A |
| N/A |
| |||
Total Class A and Class L |
| $ | 6,584,266 |
| $ | 5,423,691 |
| $ | 1,160,575 |
|
* Includes payments for distribution and/or shareholder servicing to third-parties and affiliated entities.
** The shareholder servicing fee paid by the Corporate Bond Portfolio pursuant to the Class A Plan reflects a waiver of $1,189.
*** Not operational for the period.
The Plans were approved by the Fund’s Board of Trustees, including the Independent Trustees, none of whom has a direct or indirect financial interest in the operation of the Plan or in any agreements related thereto.
Revenue Sharing
This section applies only to Class I, Class A and Class L shares of the Portfolios.
The Adviser and/or the Distributor may pay compensation, out of their own funds and not as an expense of the Portfolios, to certain affiliated and unaffiliated brokers, dealers and other financial intermediaries, including recordkeepers and administrators of various deferred compensation plans (“Intermediaries”), in connection with the sale, distribution, marketing and retention of shares of the Portfolios and/or shareholder servicing. For example, the Adviser or the Distributor may pay additional compensation to an Intermediary for, among other things, promoting the sale and distribution of Portfolio shares, providing access to various programs, mutual fund platforms or preferred or recommended mutual fund lists that may be offered by an Intermediary, granting the Distributor access to an Intermediary’s financial advisors and consultants, providing assistance in the ongoing education and training of an Intermediary’s financial personnel, furnishing marketing support, maintaining share balances and/or for sub-accounting, recordkeeping, administrative, shareholder, or transaction processing services. Such payments are in addition to any shareholder servicing fees and/or transfer agency fees that may be payable by the Portfolios. The additional payments are generally based on current assets, but may also be based on other measures as determined from time to time by the Adviser and/or the Distributor (e.g., gross sales or number of accounts). The amount of these payments may be different for different Intermediaries.
With respect to Morgan Stanley Smith Barney LLC, these payments currently include the following amounts, which are paid in accordance with the applicable compensation structure:
(1) an ongoing annual fee in an amount equal to $550,000 in consideration of the Distributor’s participation at various Morgan Stanley Smith Barney LLC events, including seminars, conferences and meetings as determined by Morgan Stanley Smith Barney LLC;
(2) an ongoing annual fee in an amount equal to $200,000 in consideration of Morgan Stanley Smith Barney LLC providing the Adviser with access to distribution analytical data in relation to sales of the Portfolios and other Morgan Stanley Funds;
(3) on Class A and Class L shares of the Portfolios held in Morgan Stanley Smith Barney LLC brokerage accounts, an ongoing annual fee, payable quarterly, in an amount equal to 0.16% of the total average daily NAV of such shares for the applicable quarterly period;
(4) on Class I shares of a Portfolio held in Morgan Stanley Smith Barney LLC brokerage accounts as of June 30, 2014, where each such account holds $5 million or more in Class I shares of the Portfolio, an ongoing annual fee, payable quarterly, in an amount up to 35% of the advisory fee the Adviser receives from such Portfolio based on the total average daily NAV of such shares for the applicable quarterly period;
(5) on new referrals of $5 million or more, Morgan Stanley Smith Barney LLC, under extraordinary circumstances, may receive an agreed upon one-time payment in an amount not to exceed 0.68% of the actual amount invested; and
(6) on purchases of $1 million or more of Class A shares (for which no initial sales charge was paid), Morgan Stanley Smith Barney LLC may, at the discretion of the Distributor, receive a gross sales credit of up to 1.00% (with respect to the U.S. Equity and Asset Allocation Portfolios) or 0.50% (with respect to the Fixed Income Portfolios) of the amount sold, as applicable.*
With respect to other Intermediaries, these payments currently include the following amounts, which are paid in accordance with the applicable compensation structure for each Intermediary:
(1) on Class A, Class I and Class L shares of the Portfolios held in brokerage accounts only, a ticket charge of up to $10.00;
(2) on Class A, Class I and Class L shares of the Portfolios held in Intermediary brokerage and/or advisory program accounts, an ongoing annual fee, payable quarterly, in an amount up to 0.15% of the total average daily NAV of such shares for the applicable quarterly period;
(3) an ongoing annual fee in an amount up to 0.25% on sales of Class A, Class I and Class L shares of the Portfolios through a Financial Intermediary’s brokerage accounts; and
(4) on purchases of $1 million or more of Class A shares (for which no initial sales charge was paid), Intermediaries may, at the discretion of the Distributor, receive a gross sales credit of up to 1.00% (with respect to the U.S. Equity and Asset Allocation Portfolios) or 0.50% (with respect to the Fixed Income Portfolios) of the amount sold, as applicable.*
* Commissions or transaction fees paid when Morgan Stanley Smith Barney LLC or other Intermediaries initiate and are responsible for purchases of $1 million or more are computed on a percentage of the dollar value of such shares sold as follows: (i) with respect to the U.S. Equity and Asset Allocation Portfolios: 1.00% on sales of $1 million to $4 million, plus 0.50% on sales over $4 million to $15 million, plus 0.25% on the excess over $15 million; and (ii) with respect to the Fixed Income Portfolios: 0.50% on sales of $1 million to $4 million, plus 0.25% on sales over $4 million to $15 million, plus 0.15% on the excess over $15 million. Purchases of Class A shares for which no initial sales charge is paid are subject to a contingent deferred sales charge (“CDSC”) of 1% if the redemption of such shares occurs within 18 months after purchase. The full amount of such CDSC will be retained by the Distributor.
The prospect of receiving, or the receipt of, additional compensation as described above by Morgan Stanley Smith Barney LLC or other Intermediaries may provide Morgan Stanley Smith Barney LLC or other Intermediaries and their financial advisors and other salespersons with an incentive to favor sales of shares of the Portfolios over other investment options with respect to which Morgan Stanley Smith Barney LLC or other Intermediaries do not receive additional compensation (or receives lower levels of additional compensation). These payment arrangements, however, will not change the price that an investor pays for shares of the Portfolios or the amount that the Portfolios receive to invest on behalf of an investor. Investors may wish to take such payment arrangements into account when considering and evaluating any recommendations relating to Portfolio shares and should review carefully any disclosure provided by Morgan Stanley Smith Barney LLC and other Intermediaries as to their compensation.
BROKERAGE PRACTICES
Portfolio Transactions
The Adviser and/or Sub-Adviser are responsible for decisions to buy and sell securities for each Portfolio, for broker-dealer selection and for negotiation of commission rates. The Adviser and/or Sub-Adviser are prohibited
from directing brokerage transactions on the basis of the referral of clients or the sale of shares of advised investment companies. Purchases and sales of securities on a stock exchange are effected through brokers who charge a commission for their services. In the OTC market, securities may be traded as agency transactions through broker dealers or traded on a “net” basis with dealers acting as principal for their own accounts without a stated commission, although the price of the security usually includes profit to the dealer. In underwritten offerings, securities are purchased at a fixed price which includes an amount of compensation to the underwriter, generally referred to as the underwriter’s concession or discount. When securities are purchased or sold directly from or to an issuer, no commissions or discounts are paid.
On occasion, a Portfolio may purchase certain money market instruments directly from an issuer without payment of a commission or concession. Money market instruments are generally traded on a “net” basis with dealers acting as principal for their own accounts without a stated commission, although the price of the security usually includes a profit to the dealer.
The Fund anticipates that certain of its transactions involving foreign securities will be effected on securities exchanges. Fixed commissions on such transactions are generally higher than negotiated commissions on domestic transactions. There is also generally less government supervision and regulation of foreign securities exchanges and brokers than in the United States.
The Adviser and/or Sub-Adviser serve as investment adviser to a number of clients, including other investment companies. The Adviser attempts to equitably allocate purchase and sale transactions among the Portfolios of the Fund and other client accounts. To that end, the Adviser and/or Sub-Adviser consider various factors, including respective investment objectives, relative size of portfolio holdings of the same or comparable securities, availability of cash for investment, size of investment commitments generally held and the opinions of the persons responsible for managing the Portfolios of the Fund and other client accounts.
The Adviser and/or Sub-Adviser select the brokers or dealers that will execute the purchases and sales of investment securities for each Portfolio. The Adviser and/or Sub-Adviser effect transactions with those broker-dealers that it believes provide prompt execution of orders in an effective manner at the most favorable prices. The Adviser and/or Sub-Adviser may place portfolio transactions with those brokers and dealers who also furnish research and other services to the Fund, the Adviser and/or Sub-Adviser. Services provided may include certain research services (as described below), as well as effecting securities transactions and performing functions incidental thereto (such as clearance, settlement and custody).
The Adviser and its affiliated investment advisers have established commission sharing arrangements under a commission management program (the “Commission Management Program” or “CMP”), pursuant to which execution and research costs or a portion of those costs are decoupled in accordance with applicable laws, rules and regulations. Under the CMP, the Adviser and its affiliated investment advisers select approved equity brokers (which include the Adviser’s affiliates) for execution services and after accumulation of commissions at such brokers, the Adviser and/or its affiliated investment advisers instruct these approved equity brokers to pay for eligible research provided by any executing brokers or third-party research providers on MSIM’s and its affiliated investment advisers’ Approved Research Provider List, which are selected independently by a Research Services Committee of the Adviser and its affiliated investment advisers. Generally, the Adviser and its affiliated investment advisers will direct the approved equity broker to record research credits based upon a previously agreed-upon allocation and will periodically instruct the approved equity broker to direct specified dollar amounts from that pool to pay for eligible research services provided by third-party research providers and executing brokers. The research credits are pooled among the Adviser and its affiliated investment advisers and allocated on behalf of both the Adviser and its affiliated investment advisers. Likewise, the research services obtained under the CMP are shared among the Adviser and its affiliated investment advisers.
Selection of approved equity brokers for execution is based on three main criteria: access to liquidity, provision of capital and quality of execution. Under the CMP, each approved equity broker is responsible for the payment of fees for research services and obtains the research services pursuant to written agreements between the approved equity broker and the third-party research provider.
For those costs not decoupled, but retained by broker-dealers, the Adviser also effects transactions with brokers which directly pay for research services provided by those brokers in accordance with Section 28(e) of the 1934 Act. Such transactions include equity transactions and may include fixed-income transactions effected on an agency basis.
Transactions involving client accounts managed by two or more affiliated investment advisers may be aggregated and executed using the services of broker-dealers that provide third-party benefits/research so long as: (i) all client accounts involved in the transaction benefit from one or more of the services offered by such broker-dealer; and (ii) each affiliated investment adviser has approved the use of such broker-dealer and the services provided thereby.
The research services received include those of the nature described above and other services which aid the Adviser in fulfilling its investment decision making responsibilities, including (a) furnishing advice as to the value of securities, the advisability of investing in, purchasing or selling securities, and the availability of securities or purchasers or sellers of securities; and (b) furnishing analyses and reports concerning issuers, industries, securities, economic factors and trends, portfolio strategy and the performance of accounts. Where a particular item (such as proxy services) has both research and non-research related uses, the Adviser will make a reasonable allocation of the cost of the item between research and non-research uses and will only pay for the portion of the cost allocated to research uses with client brokerage transactions. Research services furnished or paid for by brokers through whom the Adviser effects transactions for a particular account may be used by the Adviser or its affiliated investment advisers in servicing their other accounts, and not all such services may be used for the benefit of the client which pays the brokerage commission which results in the receipt of such research services. Commissions paid to brokers providing research services may be higher than those charged by brokers not providing services.
The Adviser and its affiliated investment advisers make a good faith determination of the value of research services in accordance with Section 28(e) of the 1934 Act, UK Financial Conduct Authority and Prudential Regulation Authority Rules and other relevant regulatory requirements.
Certain investment professionals and other employees of the Adviser are also officers of affiliated investment advisers and may provide investment advisory services to clients of such affiliated investment advisers. The Adviser’s personnel also provide research and trading support to personnel of certain affiliated investment advisers. Research related costs may be shared by affiliated investment advisers and may benefit the clients of such affiliated investment advisers. Research services that benefit the Adviser may be received in connection with commissions generated by clients of its affiliated investment advisers. Similarly, research services received in connection with commissions generated by the Adviser’s clients may benefit affiliated investment advisers and their clients. Moreover, research services provided by broker-dealers through which the Adviser effects transactions for a particular account may be used by the Adviser and/or an affiliated investment adviser in servicing its other accounts and not all such research services may be used for the benefit of the particular client, which pays the brokerage commission giving rise to the receipt of such research services.
The Adviser and certain of its affiliates currently serve as an investment adviser to a number of clients, including other investment companies, and may in the future act as investment adviser to others. It is the practice of the Adviser, and its affiliates, to cause purchase and sale transactions (including transactions in certain initial and secondary public offerings) to be allocated among clients whose assets they manage (including the Fund) in such manner they deem equitable. In making such allocations among the Fund and other client accounts, various factors may be considered, including the respective investment objectives, the relative size of portfolio holdings of the same or comparable securities, the availability of cash for investment, the size of investment commitments generally held and the opinions of the persons responsible for managing the Fund and other client accounts. The Adviser and its affiliates may operate one or more order placement facilities and each facility will implement order allocation in accordance with the procedures described above. From time to time, each facility may transact in a security at the same time as other facilities are trading in that security.
Affiliated Brokers
Subject to the overriding objective of obtaining the best execution of orders, the Fund may use broker-dealer affiliates of the Adviser to effect Portfolio brokerage transactions, including transactions in futures contracts and
options on futures contracts, under procedures adopted by the Fund’s Board of Trustees. In order to use such affiliates, the commission rates and other remuneration paid to the affiliates must be fair and reasonable in comparison to those of other broker-dealers for comparable transactions involving similar securities being purchased or sold during a comparable time period. This standard would allow the affiliated broker or dealer to receive no more than the remuneration which would be expected to be received by an unaffiliated broker.
Pursuant to orders issued by the SEC, the Fund is permitted to engage in principal transactions, subject to certain conditions, with Morgan Stanley & Co. LLC, a broker-dealer affiliated with the Fund’s Adviser.
During the fiscal years ended September 30, 2012, 2013 and 2014, the Fund did not effect any principal transactions with Morgan Stanley & Co. LLC.
Brokerage Commissions Paid
During the fiscal years ended September 30, 2012, 2013 and 2014, the Fund paid brokerage commissions of approximately $3,558,606, $4,919,697 and $4,546,975, respectively. During the fiscal years ended September 30, 2012, 2013 and 2014, the Fund paid in the aggregate $29,318, $21,857 and $8,794, respectively, as brokerage commissions to Morgan Stanley & Co. LLC and/or its affiliated broker-dealers. During the fiscal year ended September 30, 2014, the brokerage commissions paid to Morgan Stanley & Co. LLC and/or its affiliated broker-dealers represented approximately 0.19% of the total brokerage commissions paid by the Fund during the period and were paid on account of transactions having an aggregate dollar value equal to approximately 0.03% of the aggregate dollar value of all portfolio transactions of the Fund during the period for which commissions were paid.
For the fiscal year ended September 30, 2014, each Portfolio paid brokerage commissions, including brokerage commissions paid to affiliated broker-dealers, as follows:
|
| Brokerage Commissions Paid During Fiscal Year Ended |
| ||||||||
|
|
|
| Commissions Paid to |
| ||||||
Portfolio |
| Total |
| Total |
| Percent of |
| Percent of |
| ||
Core Fixed Income |
| $ | 2,709 |
| $ | 0 |
| 0.00 | % | 0.00 | % |
Core Plus Fixed Income |
| 11,584 |
| 0 |
| 0.00 | % | 0.00 | % | ||
Corporate Bond |
| 4,370 |
| 0 |
| 0.00 | % | 0.00 | % | ||
Global Strategist |
| 167,449 |
| 0 |
| 0.00 | % | 0.00 | % | ||
High Yield |
| 0 |
| 0 |
| 0.00 | % | 0.00 | % | ||
Limited Duration |
| 14,511 |
| 0 |
| 0.00 | % | 0.00 | % | ||
Mid Cap Growth |
| 4,346,352 |
| 8,794 |
| 0.20 | % | 0.06 | % | ||
Strategic Income* |
| N/A |
| N/A |
| N/A |
| N/A |
| ||
* Not operational for the period.
During the fiscal years ended September 30, 2012 and September 30, 2013, each Portfolio paid brokerage commissions, including brokerage commissions paid to affiliated broker-dealers, as follows.
|
| Brokerage Commissions Paid |
| ||||||||||
|
| Fiscal Year Ended |
| Fiscal Year Ended |
| ||||||||
Portfolio |
| Total |
| Morgan |
| Total |
| Morgan |
| ||||
Core Fixed Income |
| $ | 3,649 |
| $ | 0 |
| $ | 3,644 |
| $ | 0 |
|
Core Plus Fixed Income |
| 24,476 |
| 0 |
| 16,115 |
| 0 |
| ||||
Corporate Bond |
| 5,613 |
| 0 |
| 4,841 |
| 0 |
| ||||
Global Strategist |
| 38,262 |
| 0 |
| 308,205 |
| 0 |
| ||||
|
| Brokerage Commissions Paid |
| ||||||||||
|
| Fiscal Year Ended |
| Fiscal Year Ended |
| ||||||||
Portfolio |
| Total |
| Morgan |
| Total |
| Morgan |
| ||||
High Yield* |
| $ | 0 |
| $ | 0 |
| $ | 0 |
| $ | 0 |
|
Limited Duration |
| 7,335 |
| 0 |
| 10,364 |
| 0 |
| ||||
Mid Cap Growth |
| 3,479,271 |
| 29,318 |
| 4,576,528 |
| 21,857 |
| ||||
Strategic Income** |
| N/A |
| N/A |
| N/A |
| N/A |
| ||||
* The Portfolio commenced operations on February 7, 2012.
** Not operational for the period.
Regular Broker-Dealers
During the fiscal year ended September 30, 2014, the Portfolios purchased securities issued by the following issuers, which issuers were among the ten brokers or ten dealers that executed transactions for or with the Fund or the Portfolio in the largest dollar amounts during the period:
Portfolio |
| Issuer |
|
|
|
Core Fixed Income |
| Bank of America Securities LLC |
|
|
|
Core Plus Fixed Income |
| Bank of America Securities LLC |
|
|
|
Corporate Bond |
| Bank of America Securities LLC |
|
|
|
Global Strategist |
| Bank of America Corp. |
|
|
|
High Yield |
| Jefferies & Company LLC |
Portfolio |
| Issuer |
Limited Duration |
| Bank of America Corp. |
|
|
|
Mid Cap Growth |
| None |
|
|
|
Strategic Income |
| None |
At September 30, 2014, the Portfolios held securities issued by such brokers or dealers with the following market values:
Portfolio |
| Issuer |
| Approximate |
| |
Core Fixed Income |
| Bank of America Securities LLC |
| $ | 144,000 |
|
|
| JP Morgan Chase & Co. |
| 142,000 |
| |
|
| Citigroup Global Markets, Inc. |
| 127,000 |
| |
|
| Goldman Sachs & Co. |
| 66,000 |
| |
|
|
|
|
|
| |
Core Plus Fixed Income |
| JP Morgan Chase & Co. |
| $ | 1,382,000 |
|
|
| Bank of America Securities LLC |
| 1,281,000 |
| |
|
| Goldman Sachs & Co. |
| 1,024,000 |
| |
|
| Wells Fargo & Co. |
| 491,000 |
| |
|
| Barclays Capital Group |
| 473,000 |
| |
|
| Credit Suisse Group AG |
| 463,000 |
| |
|
|
|
|
|
| |
Corporate Bond |
| Wells Fargo & Co. |
| $ | 1,065,000 |
|
|
| JP Morgan Chase & Co. |
| 792,000 |
| |
|
| Citigroup Global Markets, Inc. |
| 789,000 |
| |
|
| Bank of America Securities LLC |
| 726,000 |
| |
|
| Goldman Sachs & Co. |
| 722,000 |
| |
|
| HSBC Holdings PLC |
| 557,000 |
| |
|
| Credit Suisse Group AG |
| 315,000 |
| |
|
|
|
|
|
| |
Global Strategist |
| JP Morgan Chase & Co. |
| $ | 3,684,000 |
|
|
| Bank of America Corp. |
| 2,512,000 |
| |
|
| Goldman Sachs & Co. |
| 1,672,000 |
| |
|
| Barclays Bank PLC |
| 1,014,000 |
| |
|
| Deutsche Bank AG |
| 413,000 |
| |
|
|
|
|
|
| |
High Yield |
| Jefferies & Company LLC |
| $ | 445,000 |
|
|
|
|
|
|
| |
Limited Duration |
| Citigroup, Inc. |
| $ | 1,189,000 |
|
|
| Wells Fargo & Co. |
| 935,000 |
| |
|
| Bank of America Corp. |
| 899,000 |
| |
|
| JP Morgan Chase & Co. |
| 888,000 |
|
Portfolio Turnover
The Portfolios generally do not invest for short-term trading purposes; however, when circumstances warrant, each Portfolio may sell investment securities without regard to the length of time they have been held. Market conditions in a given year could result in a higher or lower portfolio turnover rate than expected and the Portfolios will not consider portfolio turnover rate a limiting factor in making investment decisions consistent with their investment objective and policies. Higher portfolio turnover (e.g., over 100%) necessarily will cause the Portfolios to pay correspondingly increased brokerage and trading costs. In addition to transaction costs, higher portfolio turnover may result in the realization of capital gains. As discussed under “Taxes,” to the extent net short-term capital gains are realized, any distributions resulting from such gains are considered ordinary income for federal income tax purposes.
GENERAL INFORMATION
Fund History
Morgan Stanley Institutional Fund Trust is an open-end, management investment company established under Pennsylvania law as a Pennsylvania business trust under an Amended and Restated Agreement and Declaration of Trust dated November 18, 1993 as further Amended and Restated on August 24, 2006 (the “Declaration of Trust”). The Fund was originally established as The MAS Pooled Trust Fund, a Pennsylvania business trust, in February 1984. Each of the Portfolios are diversified. No portfolio of the Fund is subject to the liabilities of any other portfolio of the Fund.
Description of Shares and Voting Rights
The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest, without par value, from an unlimited number of series of shares. Currently, the Fund consists of eight Portfolios.
The shares of each Portfolio of the Fund are fully paid and non-assessable, except as set forth below, and have no preference as to conversion, exchange, dividends, retirement or other features. The shares of each Portfolio of the Fund have no preemptive rights. The shares of the Fund have non-cumulative voting rights, which means that the holders of more than 50% of the shares voting for the election of Trustees can elect 100% of the Trustees if they choose to do so. A shareholder of a class is entitled to one vote for each full class share held (and a fractional vote for each fractional class share held) in the shareholder’s name on the books of the Fund. Shareholders of a class have exclusive voting rights regarding any matter submitted to shareholders that relates solely to that class of shares (such as a service agreement relating to that class), and separate voting rights on any other matter submitted to shareholders in which the interests of the shareholders of that class differ from the interests of holders of any other class.
Meetings of shareholders will not be held except as required by the 1940 Act and other applicable law. A meeting will be held to vote on the removal of a Trustee or Trustees of the Fund if requested in writing by the holders of not less than 10% of the outstanding shares of the Fund. The Fund will assist in shareholder communication in such matters to the extent required by law.
Dividends and Capital Gains Distributions
The Fund’s policy is to distribute substantially all of each Portfolio’s net investment income, if any, together with any net realized capital gains in the amount and at the times that will avoid both income (including capital gains) taxes on it and the imposition of the federal excise tax on undistributed income and capital gains. The amounts of any income dividends or capital gains distributions cannot be predicted.
Any dividend or distribution paid shortly after the purchase of shares of a Portfolio by an investor may have the effect of reducing the per share NAV of that Portfolio by the per share amount of the dividend or distribution. Furthermore, such dividends or distributions, although in effect a return of capital, are subject to income taxes.
As set forth in the Prospectuses, unless the shareholder elects otherwise in writing, all dividends and capital gains distributions for a class of shares are automatically reinvested in additional shares of the same class of the Portfolio at NAV (as of the business day following the record date). This automatic reinvestment of dividends and distributions will remain in effect until the shareholder notifies the Fund by telephone or in writing that either the Income Option (income dividends in cash and capital gain distributions reinvested in shares at NAV) or the Cash Option (both income dividends and capital gains distributions in cash) has been elected. It may take up to three business days to effect this change. An account statement is sent to shareholders whenever a dividend or distribution is paid.
Each Portfolio of the Fund is treated as a separate entity (and hence, as a separate “regulated investment company”) for federal tax purposes. Any net capital gains recognized by a Portfolio are distributed to its investors without need to offset (for federal income tax purposes) such gains against any net capital losses of another Portfolio.
Undistributed net investment income is included in the Portfolio’s net assets for the purpose of calculating NAV. Therefore, on the ex-dividend date, the NAV excludes the dividend (i.e., is reduced by the per share amount
of the dividend). Dividends paid shortly after the purchase of shares by an investor, although in effect a return of capital, are taxable as ordinary income.
Certain mortgage securities may provide for periodic or unscheduled payments of principal and interest as the mortgages underlying the securities are paid or prepaid. However, such principal payments (not otherwise characterized as original issue discount or bond premium expense) will not normally be considered as income to the Portfolio and therefore will not be distributed as dividends. Rather, these payments on MBS will be reinvested on your behalf by the Portfolio.
Shareholder and Trustee Liability
Under Pennsylvania law, shareholders of a trust such as the Fund may, under certain circumstances, be held personally liable as partners for the obligations of the trust. The Fund’s Declaration of Trust contains an express disclaimer of shareholder liability for acts or obligations of the Fund and requires that notice of such disclaimer be given in each agreement, obligation, or instrument entered into or executed by the Fund or the Trustees, but this disclaimer may not be effective in some jurisdictions or as to certain types of claims. The Declaration of Trust further provides for indemnification out of the Fund’s property of any shareholder held personally liable for the obligations of the Fund. The Declaration of Trust also provides that the Fund shall, upon request, assume the defense of any claim made against any shareholder for any act or obligation of the Fund and satisfy any judgment thereon. Thus, the risk of a shareholder incurring financial loss on account of shareholder liability is limited to circumstances in which the Fund itself would be unable to meet its obligations.
Pursuant to the Declaration of Trust, the Trustees may also authorize the creation of additional series of shares (the proceeds of which would be invested in separate, independently managed portfolios with distinct investment objectives and policies and share purchase, redemption and net asset valuation procedures) with such preferences, privileges, limitations and voting and dividend rights as the Trustees may determine. All consideration received by the Fund for shares of any additional series or class, and all assets in which such consideration is invested, would belong to that series or class (subject only to the rights of creditors of the Fund) and would be subject to the liabilities related thereto. Pursuant to the 1940 Act shareholders of any additional series or class of shares would normally have to approve the adoption of any advisory contract relating to such series or class and of any changes in the investment policies relating thereto.
The Declaration of Trust further provides that the Trustees will not be liable for errors of judgment or mistakes of fact or law, but nothing in the Declaration of Trust protects a Trustee against any liability to which he would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence, or reckless disregard of the duties involved in the conduct of the office.
TAXES
The following is only a summary of certain additional federal income tax considerations generally affecting the Fund, the Portfolios and its shareholders. No attempt is made to present a detailed explanation of the federal, state or local tax treatment of the Fund, the Portfolios or shareholders, and the discussion here and in the Prospectuses is not intended to be a substitute for careful tax planning.
The following general discussion of certain federal income tax consequences is based on the Code and the regulations issued thereunder as in effect on the date of this SAI. New legislation, as well as administrative changes or court decisions, may significantly change the conclusions expressed herein, and may have a retroactive effect with respect to the transactions contemplated herein.
Each Portfolio of the Fund is generally treated as a separate corporation for federal income tax purposes. Thus, the provisions of the Code generally will be applied to each Portfolio separately, rather than to the Fund as a whole.
Regulated Investment Company Qualification
Each Portfolio intends to qualify and elect to be treated for each taxable year as a RIC under Subchapter M of the Code. In order to so qualify, a Portfolio must, among other things, (i) derive at least 90% of its gross income each
taxable year from dividends, interest, payments with respect to securities loans, gains from the sale or other disposition of stock, securities or foreign currencies, and other income derived with respect to its business of investing in such stock, securities or currencies, including, generally, certain gains from options, futures and forward contracts; and (ii) diversify its holdings so that, at the end of each fiscal quarter of the Portfolio’s taxable year, (a) at least 50% of the market value of the Portfolio’s total assets is represented by cash and cash items, U.S. government securities, securities of other RICs, and other securities, with such other securities limited, in respect to any one issuer, to an amount not greater than 5% of the value of the Portfolio’s total assets or 10% of the outstanding voting securities of such issuer, and (b) not more than 25% of the value of its total assets are invested in the securities (other than U.S. government securities or securities of other RICs) of any one issuer or two or more issuers which the Portfolio controls and which are engaged in the same, similar, or related trades or businesses. For purposes of the 90% gross income requirement described above, foreign currency gains will generally be treated as qualifying income under current federal income tax law. However, the Code expressly provides the U.S. Treasury with authority to issue regulations that would exclude foreign currency gains from qualifying income if such gains are not directly related to a RIC’s business of investing in stock or securities (or options or futures with respect to stocks or securities). While to date the U.S. Treasury has not exercised this regulatory authority, there can be no assurance that it will not issue regulations in the future (possibly with retroactive application) that would treat some or all of a Portfolio’s foreign currency gains as non-qualifying income.
For purposes of the 90% test described above, dividends received by a Portfolio will be treated as qualifying income to the extent they are attributable to the issuer’s current and accumulated earnings and profits. Distributions in excess of the distributing issuer’s current and accumulated earnings and profits will first reduce a Portfolio’s basis in the stock as a return of capital and will not qualify as gross income. Distributions in excess of a Portfolio’s basis in the stock will qualify for the 90% test discussed above as the distribution will be treated as gain from the sale of stock. This gain will be long-term capital gain if a Portfolio held the stock for more than a year.
For purposes of the diversification requirement described above, a Portfolio will not be treated as in violation of such requirement as a result of a discrepancy between the value of its various investments and the diversification percentages described above, unless such discrepancy exists immediately following the acquisition of any security or other property and is wholly or partly the result of such acquisition. Moreover, even in the event of noncompliance with the diversification requirement as of the end of any given quarter, a Portfolio is generally permitted to cure the violation by eliminating the discrepancy causing such noncompliance within a period of 30 days from the close of the relevant quarter.
Net income derived from an interest in a “qualified publicly traded partnership,” as defined in the Code, will be treated as qualifying income for purposes of the income requirement in clause (i) above. In addition, for the purposes of the diversification requirements in clause (ii) above, the outstanding voting securities of any issuer includes the equity securities of a qualified publicly traded partnership, and no more than 25% of the value of a RIC’s total assets may be invested in the securities of one or more qualified publicly traded partnerships. The separate treatment for publicly traded partnerships under the passive loss rules of the Code applies to a RIC holding an interest in a qualified publicly traded partnership, with respect to items attributable to such interest.
A Portfolio may make certain investments indirectly though one or more entities treated as corporations for U.S. federal income tax purposes. Such entities will generally be required to pay U.S. corporate income tax, and possibly other taxes, on their earnings, which ultimately will reduce the Portfolio’s return on income derived from such investments.
In addition to the requirements described above, in order to qualify as a RIC, a Portfolio must distribute at least 90% of its investment company taxable income (which generally includes dividends, taxable interest, and the excess of net short-term capital gains over net long-term capital losses less operating expenses) and at least 90% of its net tax-exempt interest income, for each tax year, if any, to its shareholders. If a Portfolio meets all of the RIC requirements, it will not be subject to federal income tax on any of its investment company taxable income or capital gains that it distributes to shareholders.
If a Portfolio fails to qualify as a RIC for any taxable year, all of its net income will be subject to tax at regular corporate rates (whether or not distributed to shareholders), and its distributions (including capital gains distributions)
will be taxable as income dividends to its shareholders to the extent of a Portfolio’s current and accumulated earnings and profits, and will be eligible for the dividends-received deduction for corporate shareholders and for treatment as qualified dividend income, in the case of individual shareholders. If a Portfolio fails to satisfy either the income test or asset diversification test described above, in certain cases, however, the Portfolio may be able to avoid losing its status as a RIC by timely providing notice of such failure to the Internal Revenue Service, curing such failure and possibly paying an additional tax or penalty.
General Tax Treatment of Qualifying RICs and Shareholders
Each Portfolio intends to distribute substantially all of its net investment income (including, for this purpose, net short-term capital gains) to shareholders. Dividends from a Portfolio’s net investment income generally are taxable to shareholders as ordinary income, whether received in cash or in additional shares. Certain income distributions paid by a Portfolio to individual shareholders are taxed at rates equal to those applicable to net long-term capital gains (currently either 15% or 20%, depending on whether the individual’s income exceeds certain threshold amounts). This tax treatment applies only if certain holding period requirements are satisfied by the shareholder and the dividends are attributable to qualified dividends received by a Portfolio itself. For this purpose, “qualified dividends” means dividends received by a Portfolio from certain U.S. corporations and qualifying foreign corporations, provided that the Portfolio satisfies certain holding period and other requirements in respect of the stock of such corporations. Distributions received from REITs are generally comprised of ordinary income dividends and capital gains dividends, which are generally passed along to shareholders retaining the same character and are subject to tax accordingly, as described above. In the case of securities lending transactions, payments in lieu of dividends are not qualified dividends. Dividends received by a Portfolio from REITs are qualified dividends eligible for this lower tax rate only in limited circumstances.
A dividend paid by a Portfolio to a shareholder will not be treated as qualified dividend income of the shareholder if (1) the dividend is received with respect to any share held for fewer than 61 days during the 121-day period beginning on the date which is 60 days before the date on which such share becomes ex-dividend with respect to such dividend, (2) to the extent that the recipient is under an obligation (whether pursuant to a short sale or otherwise) to make related payments with respect to positions in substantially similar or related property or (3) if the recipient elects to have the dividend treated as investment income for purposes of the limitation on deductibility of investment interest.
You should also be aware that the benefits of the reduced tax rate applicable to long-term capital gains and qualified dividend income may be impacted by the application of the alternative minimum tax to individual shareholders.
Dividends paid to you out of a Portfolio’s investment company taxable income that are not attributable to qualified dividends generally will be taxable to you as ordinary income (currently at a maximum federal income tax rate of 39.6% in the case of an individual shareholder and 35% in the case of a corporate shareholder) to the extent of the Portfolio’s earnings and profits.
Distributions of net long-term capital gains, if any, are taxable to shareholders as long-term capital gains regardless of how long a shareholder has held a Portfolio’s shares and regardless of whether the distribution is received in additional shares or in cash. The maximum individual rate applicable to long-term capital gains is generally either 15% or 20%, depending on whether the individual’s income exceeds certain threshold amounts.
Each Portfolio will decide whether to distribute or to retain all or part of any net capital gains (the excess of net long-term capital gains over net short-term capital losses) in any year for reinvestment. Distributions of net capital gains are taxable to shareholders as a long-term capital gain regardless of how long shareholders have held their shares. A Portfolio will send reports annually to shareholders regarding the federal income tax status of all distributions made for the preceding year. To the extent such amounts include distributions received from a REIT, they may be based on estimates and be subject to change as REITs do not always have the information available by the time these reports are due and can recharacterize certain amounts after the end of the tax year. As a result, the final character and amount of distributions may differ from that initially reported. If any capital gains are retained, a Portfolio will pay federal income tax thereon, and, if the Portfolio makes an election, the shareholders will include
such undistributed gains in their income, and will increase their tax basis in Portfolio shares by the difference between the amount of the includable gains and the tax deemed paid by the shareholder in respect of such shares. The shareholder will be able to claim their share of the tax paid by a Portfolio as a refundable credit.
Shareholders generally are taxed on any ordinary dividend or capital gain distributions from a Portfolio in the year they are actually distributed. However, if any such dividends or distributions are declared in October, November or December, to shareholders of record of such month and paid in January, then such amounts will be treated for tax purposes as received by the shareholders on December 31.
Although income received on direct U.S. Government obligations is taxable at the federal level, such income may be exempt from state tax, depending on the state, when received by a shareholder. Each Portfolio will inform shareholders annually of the percentage of income and distributions derived from direct U.S. Government obligations. Shareholders should consult their tax advisors to determine whether any portion of dividends received from a Portfolio is considered tax exempt in their particular states.
A Portfolio may invest a portion of its net assets in below investment grade instruments. Investments in these types of instruments may present special tax issues for a Portfolio. U.S. federal income tax rules are not entirely clear about issues such as when a Portfolio may cease to accrue interest, original issue discount or market discount, when and to what extent deductions may be taken for bad debts or worthless instruments, how payments received on obligations in default should be allocated between principal and income and whether exchanges of debt obligations in a bankruptcy or workout context are taxable. These and other issues will be addressed by a Portfolio to the extent necessary in order to ensure that it distributes sufficient income such that it does not become subject to U.S. federal income or excise tax.
After the end of each calendar year, shareholders will be sent information on their dividends and capital gain distributions for tax purposes, including the portion taxable as ordinary income, the portion taxable as long-term capital gains, and the amount of any dividends eligible for the federal dividends received deduction for corporations.
Gains or losses on the sale of securities by a Portfolio held as a capital asset will generally be long-term capital gains or losses if the securities have a tax holding period of more than one year at the time of such sale. Gains or losses on the sale of securities with a tax holding period of one year or less will be short-term capital gains or losses. Special tax rules described below may change the normal treatment of gains and losses recognized by a Portfolio when it makes certain types of investments. Those special tax rules can, among other things, affect the treatment of capital gain or loss as long-term or short-term and may result in ordinary income or loss rather than character of distributions made by a Portfolio.
A gain or loss realized by a shareholder on the sale, exchange or redemption of shares of a Portfolio held as a capital asset will be capital gain or loss, and such gain or loss will be long-term if the holding period for the shares exceeds one year and otherwise will be short-term. Any loss realized on a sale, exchange or redemption of shares of a Portfolio will be disallowed to the extent the shares disposed of are replaced with substantially identical shares within the 61-day period beginning 30 days before and ending 30 days after the shares are disposed of. Any loss realized by a shareholder on the disposition of shares held six months or less is treated as a long-term capital loss to the extent of any distributions of net long-term capital gains received by the shareholder with respect to such shares or any inclusion of undistributed capital gain with respect to such shares. The ability to deduct capital losses may otherwise be limited under the Code.
An additional 3.8% Medicare tax is imposed on certain net investment income (including ordinary dividends and capital gain distributions received from a Portfolio and net gains from redemptions or other taxable dispositions of Portfolio shares) of U.S. individuals, estates and trusts to the extent that such person’s “modified adjusted gross income” (in the case of an individual) or “adjusted gross income” (in the case of an estate or trust) exceeds certain threshold amounts.
Each Portfolio (or its administrative agent) is required to report to the Internal Revenue Service (“IRS”) and furnish to Portfolio shareholders the cost basis information for sale transactions of shares purchased on or after
January 1, 2012. Shareholders may elect to have one of several cost basis methods applied to their account when calculating the cost basis of shares sold, including average cost, FIFO (“first-in, first out”) or some other specific identification method. Unless you instruct otherwise, each Portfolio will use average cost as its default cost basis method, and will treat sales as first coming from shares purchased prior to January 1, 2012. If average cost is used for the first sale of Portfolio shares covered by these new rules, the shareholder may only use an alternative cost basis method for shares purchased prospectively. Portfolio shareholders should consult with their tax advisors to determine the best cost basis method for their tax situation.
Each Portfolio will generally be subject to a nondeductible 4% federal excise tax to the extent it fails to distribute by the end of any calendar year an amount at least equal to the sum of 98% of its ordinary income for that year (taking into account certain deferrals and elections) and 98.2% of its capital gain net income (the excess of short- and long-term capital gains over short- and long-term capital losses, including any available capital loss carryforwards) for the one-year period ending on October 31 of that year, plus certain other amounts. Each Portfolio intends to make sufficient distributions or deemed distributions of its ordinary income and capital gain net income, prior to the end of each calendar year to avoid liability for federal excise tax, but can give no assurances that all such liability will be eliminated.
The Fund may be required to withhold and remit to the U.S. Treasury an amount equal to 28% of any dividends, capital gains distributions and redemption proceeds paid to any individual or certain other noncorporate shareholder (i) who has failed to provide a correct taxpayer identification number (generally an individual’s social security number or non-individual’s employer identification number) on the New Account Application; (ii) who is subject to backup withholding as notified by the IRS; or (iii) who has not certified to the Fund that such shareholder is not subject to backup withholding. This backup withholding is not an additional tax, and any amounts withheld would be sent to the IRS as an advance payment of taxes due on a shareholder’s income for such year.
A Portfolio may make investments in which it recognizes income or gain prior to receiving cash with respect to such investment. For example, under certain tax rules, a Portfolio may be required to accrue a portion of any discount at which certain securities are purchased as income each year even though a Portfolio receives no payments in cash on the security during the year. To the extent that a Portfolio makes such investments, it generally would be required to pay out such income or gain as a distribution in each year to avoid taxation at the Portfolio level. Such distributions will be made from the available cash of the Fund or by liquidation of portfolio securities if necessary. If a distribution of cash necessitates the liquidation of portfolio securities, the Adviser will select which securities to sell. The Portfolio may realize a gain or loss from such sales. In the event the Portfolio realizes net capital gains from such transactions, the Portfolio and consequently its shareholders may receive a larger capital gain distribution, if any, than they would in the absence of such transactions.
Special Rules for Certain Foreign Currency and Derivatives Transactions
In general, gains from foreign currencies and from foreign currency options, foreign currency futures and forward foreign exchange contracts relating to investments in stock, securities or foreign currencies are currently considered to be qualifying income for purposes of determining whether a Portfolio qualifies as a RIC.
Under Section 988 of the Code, special rules are provided for certain transactions in a foreign currency other than the taxpayer’s functional currency (i.e., unless certain special rules apply, currencies other than the U.S. dollar). In general, foreign currency gains or losses from forward contracts, from futures contracts that are not “regulated futures contracts,” and from unlisted options will be treated as ordinary income or loss under Section 988 of the Code. Also, certain foreign exchange gains or losses derived with respect to foreign fixed income securities are also subject to Section 988 treatment. In general, therefore, Section 988 gains or losses will increase or decrease the amount of a Portfolio’s investment company taxable income available to be distributed to shareholders as ordinary income, rather than increasing or decreasing the amount of the Portfolio’s net capital gain.
A Portfolio’s investment in options, swaps and related transactions, futures contracts and forward contracts, options on futures contracts and stock indices and certain other securities, including transactions involving actual or deemed short sales or foreign exchange gains or losses are subject to many complex and special tax rules. For example, OTC options on debt securities and equity options, including options on stock and on narrow-based stock
indices, will be subject to tax under Section 1234 of the Code, generally producing a long-term or short-term capital gain or loss upon exercise, lapse or closing out of the option or sale of the underlying stock or security. By contrast, a Portfolio’s treatment of certain other options, futures and forward contracts entered into by the Portfolio is generally governed by Section 1256 of the Code. These “Section 1256” positions generally include listed options on debt securities, options on broad based stock indices, options on securities indices, options on futures contracts, regulated futures contracts and certain foreign currency contracts and options thereon.
When a Portfolio holds options or futures contracts which substantially diminish their risk of loss with respect to other positions (as might occur in some hedging transactions), this combination of positions could be treated as a “straddle” for tax purposes, resulting in possible deferral of losses, adjustments in the holding periods of Portfolio securities and conversion of short-term capital losses into long-term capital losses. Certain tax elections exist for mixed straddles (i.e., straddles comprised of at least one Section 1256 position and at least one non-Section 1256 position) which may reduce or eliminate the operation of these straddle rules.
A Section 1256 position held by a Portfolio will generally be marked-to-market (i.e., treated as if it were sold for fair market value) on the last business day of the Fund’s fiscal year, and all gain or loss associated with fiscal year transactions and mark-to-market positions at fiscal year end (except certain currency gain or loss covered by Section 988 of the Code) will generally be treated as 60% long-term capital gain or loss and 40% short-term capital gain or loss. The effect of Section 1256 mark-to-market rules may be to accelerate income or to convert what otherwise would have been long-term capital gains into short-term capital gains or short-term capital losses into long-term capital losses within a Portfolio. The acceleration of income on Section 1256 positions may require a Portfolio to accrue taxable income without the corresponding receipt of cash. In order to generate cash to satisfy the distribution requirements of the Code, a Portfolio may be required to dispose of portfolio securities that it otherwise would have continued to hold or to use cash flows from other sources. Any or all of these rules may, therefore, affect the amount, character and timing of income earned and, in turn, distributed to shareholders by a Portfolio.
Special Tax Considerations Relating to Foreign Investments
Gains or losses attributable to foreign currency contracts, or to fluctuations in exchange rates that occur between the time a Portfolio accrues interest or other receivables or accrues expenses or other liabilities denominated in a foreign currency and the time the Portfolio actually collects such receivables or pays such liabilities are treated as ordinary income or ordinary loss to the Portfolio. Similarly, gains or losses on disposition of debt securities denominated in a foreign currency attributable to fluctuations in the value of the foreign currency between the date of acquisition of the security and the date of disposition also are treated as ordinary gain or loss to a Portfolio. These gains or losses increase or decrease the amount of a Portfolio’s net investment income available to be distributed to its shareholders as ordinary income.
It is expected that a Portfolio will be subject to foreign withholding taxes with respect to its dividend and interest income from foreign countries, and the Portfolio may be subject to foreign income taxes with respect to other income. If more than 50% in value of a Portfolio’s total assets at the close of the taxable year consists of stock or securities of foreign corporations, the Portfolio may elect to treat certain foreign income taxes imposed on it for federal income tax purposes as paid directly by its shareholders. If a Portfolio is eligible to make this election, the Portfolio will make such an election only if it deems it to be in the best interest of its shareholders and will notify shareholders in writing each year if it makes an election and of the amount of foreign income taxes, if any, to be treated as paid by the shareholders. If a Portfolio makes the election, shareholders will be required to include in income their proportionate share of the amount of foreign income taxes treated as imposed on the Portfolio and will be entitled to claim either a credit (subject to the limitations discussed below) or, if they itemize deductions, a deduction, for their shares of the foreign income taxes in computing their federal income tax liability.
Shareholders who choose to utilize a credit (rather than a deduction) for foreign taxes will be subject to a number of complex limitations regarding the availability and utilization of the credit. Because of these limitations, shareholders may be unable to claim a credit for the full amount of their proportionate shares of the foreign income taxes paid by the Portfolio. Shareholders are urged to consult their tax advisors regarding the application of these rules to their particular circumstances.
The Portfolio may invest in stocks of foreign companies that may be classified under the Code as passive foreign investment companies (“PFICs”). In general, a foreign company is classified as a PFIC if at least one-half of its assets constitute investment-type assets or 75% or more of its gross income is investment-type income. When investing in PFIC securities, the Portfolio intends to mark-to-market these securities under certain provisions of the Code and recognize any unrealized gains as ordinary income at the end of the Portfolio’s fiscal and excise tax years. Deductions for losses are allowable only to the extent of any current or previously recognized gains. These gains (reduced by allowable losses) are treated as ordinary income that the Portfolio is required to distribute, even though it has not sold or received dividends from these securities. In addition, if the Portfolio is unable to identify an investment as a PFIC and thus does not make a mark-to-market election, the Portfolio may be subject to U.S. federal income tax and interest on a portion of any “excess distribution” or gain from the disposition of such shares even if such income is distributed as a taxable dividend by the Portfolio to its shareholders.
Taxes and Foreign Shareholders
Taxation of a shareholder who, as to the United States, is a nonresident alien individual, a foreign trust or estate, or a foreign corporation (“Foreign Shareholder”) depends on whether the income from the Portfolio is “effectively connected” with a U.S. trade or business carried on by such shareholder.
If the income from the Portfolio is not effectively connected with a U.S. trade or business carried on by a Foreign Shareholder, distributions of investment company taxable income will generally be subject to U.S. withholding tax at the rate of 30% (or such lower treaty rate as may be applicable) upon the gross amount of the dividend. Furthermore, Foreign Shareholders will generally be exempt from U.S. federal income tax on gains realized on the sale of shares of the Portfolio, distributions of net long-term capital gains and amounts retained by the Fund that are reported as undistributed capital gains.
For distributions with respect to taxable years of regulated investment companies beginning before January 1, 2015 (or later date if extended by the U.S. Congress), the Fund is not required to withhold any amounts with respect to distributions to Foreign Shareholders that are properly reported by the Fund as “interest-related dividends” or “short-term capital gains dividends,” provided that the income is not subject to federal income tax if earned directly by the Foreign Shareholder. However, the Fund generally intends to withhold these amounts regardless of the fact that it is not required to do so. Foreign Shareholders that own, either directly or indirectly, more than 5% of a class of Fund shares, are urged to consult their own tax advisors concerning special tax rules that may apply to their investment in Fund shares.
If the income from the Portfolio is effectively connected with a U.S. trade or business carried on by a Foreign Shareholder, then distributions from the Portfolio and any gains realized upon the sale of shares of the Portfolio will be subject to U.S. federal income tax at the rates applicable to U.S. citizens and residents or domestic corporations. In addition, Foreign Shareholders that are corporations may be subject to a branch profit tax.
The Portfolio may be required to withhold federal income tax on distributions that are otherwise exempt from withholding tax (or taxable at a reduced treaty rate) unless the Foreign Shareholder complies with IRS certification requirements.
The Portfolio is required to withhold U.S. tax (at a 30% rate) on payments of taxable dividends and (effective January 1, 2017) redemption proceeds and certain capital gain dividends made to certain non-U.S. entities that fail to comply (or be deemed compliant) with extensive new reporting and withholding requirements designed to inform the U.S. Department of the Treasury of U.S.-owned foreign investment accounts. Shareholders may be requested to provide additional information to the Portfolio to enable the Portfolio to determine whether withholding is required.
The tax consequences to a Foreign Shareholder entitled to claim the benefits of an applicable tax treaty may differ from those described here. Furthermore, Foreign Shareholders are strongly urged to consult their own tax advisors with respect to the particular tax consequences to them of an investment in the Portfolio, including the potential application of the provisions of the Foreign Investment in Real Estate Property Tax Act of 1980, as amended and the possible applicability of the U.S. estate tax.
State and Local Tax Considerations
Rules of state and local taxation of dividend and capital gains from regulated investment companies often differ from the rules for federal income taxation described above. Shareholders are urged to consult their tax advisors as to the consequences of these and other state and local tax rules regarding an investment in the Fund.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of December 31, 2014, the following persons or entities own, of record or beneficially, more than 5% of the shares of any Class of the following Portfolios’ outstanding shares.
CLASS I
Portfolio |
| Name and Address |
| % of Class |
|
Core Fixed Income |
| Morgan Stanley Investment Management |
| 69.36 | % |
|
|
|
|
|
|
|
| Charles Schwab & Co Inc. |
| 12.81 | % |
|
|
|
|
|
|
|
| Morgan Stanley & Co. |
| 8.43 | % |
|
|
|
|
|
|
Core Plus Fixed Income |
| National Financial Services Corp. |
| 58.79 | % |
|
|
|
|
|
|
|
| Morgan Stanley & Co. |
| 30.14 | % |
|
|
|
|
|
|
Corporate Bond |
| Morgan Stanley & Co. |
| 85.04 | % |
Portfolio |
| Name and Address |
| % of Class |
|
Global Strategist |
| Morgan Stanley & Co. |
| 30.76 | % |
|
| Harborside Financial Center |
|
|
|
|
|
|
|
|
|
|
| National Financial Services Corp. |
| 15.11 | % |
|
|
|
|
|
|
|
| First Clearing, LLC |
| 14.26 | % |
|
|
|
|
|
|
|
| Kano Profit Sharing Plan |
| 12.20 | % |
|
|
|
|
|
|
|
| Pershing LLC |
| 7.65 | % |
|
|
|
|
|
|
High Yield |
| Morgan Stanley Investment Management |
| 81.10 | % |
|
| 485 Lexington Ave., Fl 14 |
|
|
|
|
|
|
|
|
|
|
| Morgan Stanley & Co. |
| 16.45 | % |
|
|
|
|
|
|
Limited Duration |
| Morgan Stanley & Co. |
| 95.15 | % |
|
| Harborside Financial Center |
|
|
|
|
|
|
|
|
|
Mid Cap Growth |
| National Financial Services Corp. |
| 48.32 | % |
|
| P.O. Box 3908 |
|
|
|
|
|
|
|
|
|
|
| Edward D. Jones & Co. |
| 12.53 | % |
|
|
|
|
|
|
|
| Charles Schwab & Co Inc. |
| 6.95 | % |
|
|
|
|
|
|
Strategic Income |
| Morgan Stanley Investment Management |
| 100 | % |
|
| 485 Lexington Ave., Fl 14 |
|
|
|
CLASS A
Portfolio |
| Name and Address |
| % of Class |
|
Core Fixed Income |
| Morgan Stanley & Co. |
| 44.99 | % |
|
| Harborside Financial Center |
|
|
|
|
|
|
|
|
|
|
| Pershing LLC |
| 31.34 | % |
|
|
|
|
|
|
|
| TD Ameritrade Inc. |
| 9.40 | % |
|
|
|
|
|
|
Core Plus Fixed Income |
| Morgan Stanley & Co. |
| 45.84 | % |
|
| Harborside Financial Center |
|
|
|
|
|
|
|
|
|
|
| National Financial Services LLC |
| 26.92 | % |
|
|
|
|
|
|
|
| VRSCO |
| 10.34 | % |
|
|
|
|
|
|
|
| Reliance Trust Company |
| 7.04 | % |
|
|
|
|
|
|
Corporate Bond |
| Morgan Stanley & Co. |
| 28.78 | % |
|
| Harborside Financial Center |
|
|
|
|
|
|
|
|
|
|
| FIIOC |
| 22.08 | % |
|
|
|
|
|
|
|
| Morgan Stanley Investment Management |
| 18.46 | % |
|
|
|
|
|
|
|
| National Financial Services LLC |
| 14.04 | % |
|
|
|
|
|
|
|
| Kaye Associates Inc. |
| 7.88 | % |
|
|
|
|
|
|
Global Strategist |
| Morgan Stanley & Co. |
| 70.09 | % |
|
| Harborside Financial Center |
|
|
|
|
|
|
|
|
|
|
| National Financial Services LLC |
| 9.56 | % |
Portfolio |
| Name and Address |
| % of Class |
|
High Yield |
| National Financial Services LLC |
| 96.62 | % |
|
| 499 Washington Blvd Fl. 4 |
|
|
|
|
|
|
|
|
|
Limited Duration |
| Morgan Stanley & Co. |
| 90.36 | % |
|
| Harborside Financial Center |
|
|
|
|
|
|
|
|
|
Mid Cap Growth |
| National Financial Services LLC |
| 49.53 | % |
|
|
|
|
|
|
|
| Morgan Stanley & Co. |
| 8.50 | % |
|
|
|
|
|
|
|
| Charles Schwab & Co. Inc. |
| 9.18 | % |
|
|
|
|
|
|
|
| Wells Fargo Bank NA |
| 5.58 | % |
|
|
|
|
|
|
Strategic Income |
| Morgan Stanley Investment Management |
| 100 | % |
|
| 485 Lexington Ave., Fl 14 |
|
|
|
CLASS L
Core Fixed Income |
| Morgan Stanley Investment Management |
| 79.73 | % |
|
| 485 Lexington Ave., Fl 14 |
|
|
|
|
|
|
|
|
|
|
| Morgan Stanley & Co. |
| 20.27 | % |
|
|
|
|
|
|
Core Plus Fixed Income |
| TD Ameritrade FBO |
| 64.75 | % |
|
| 27 Bittersweet Drive |
|
|
|
|
|
|
|
|
|
|
| Morgan Stanley & Co. |
| 31.10 | % |
|
|
|
|
|
|
Corporate Bond |
| Morgan Stanley & Co. |
| 97.35 | % |
|
| Harborside Financial Center |
|
|
|
|
|
|
|
|
|
Global Strategist |
| Morgan Stanley & Co. |
| 83.73 | % |
|
| Harborside Financial Center |
|
|
|
Portfolio |
| Name and Address |
| % of Class |
|
High Yield |
| Morgan Stanley & Co. |
| 80.57 | % |
|
| Harborside Financial Center |
|
|
|
|
|
|
|
|
|
|
| Morgan Stanley Investment Management |
| 10.65 | % |
|
|
|
|
|
|
|
| National Financial Services LLC |
| 8.72 | % |
|
|
|
|
|
|
Limited Duration |
| Morgan Stanley & Co. |
| 83.90 | % |
|
|
|
|
|
|
|
| LPL Financial |
| 10.38 | % |
|
|
|
|
|
|
|
| Morgan Stanley Investment Management |
| 5.72 | % |
|
|
|
|
|
|
Mid Cap Growth |
| Morgan Stanley & Co. |
| 67.56 | % |
|
| Harborside Financial Center |
|
|
|
|
|
|
|
|
|
|
| First Clearing, LLC |
| 10.14 | % |
Class IS
High Yield |
| Morgan Stanley Investment Management |
| 100 | % |
|
| 485 Lexington Ave., Fl 14 |
|
|
|
|
|
|
|
|
|
Mid Cap Growth |
| National Financial Services |
| 48.08 | % |
|
| 499 Washington Blvd Fl. 5 |
|
|
|
|
|
|
|
|
|
|
| Northern Trust Co. |
| 45.53 | % |
|
|
|
|
|
|
Strategic Income |
| Morgan Stanley Investment Management |
| 100 | % |
|
| 485 Lexington Ave., Fl 14 |
|
|
|
The persons listed above as owning 25% or more of the outstanding shares of a Portfolio may be presumed to “control” (as that term is defined in the 1940 Act) such Portfolio. As a result, those persons would have the ability to vote a majority of the shares of the respective Portfolio on any matter requiring the approval of shareholders of such Portfolio.
PERFORMANCE INFORMATION
The average annual compounded rates of return for the Class I shares of the Portfolios for the 1-, 5- and 10-year periods ended September 30, 2014 and for the period from inception through September 30, 2014 are as follows:
Portfolio |
| 1 Year |
| 5 Years |
| 10 Years |
| Inception |
| Date |
|
Core Fixed Income |
| 4.97 | % | 4.77 | % | 3.54 | % | 6.64 | % | 09/29/1987 |
|
Core Plus Fixed Income |
| 7.82 | % | 6.27 | % | 3.78 | % | 7.45 | % | 11/14/1984 |
|
Corporate Bond |
| 8.79 | % | 6.25 | % | 4.11 | % | 6.52 | % | 08/31/1990 |
|
Global Strategist |
| 9.37 | % | 10.90 | % | 7.58 | % | 7.94 | % | 12/31/1992 |
|
High Yield |
| 9.48 | % | N/A |
| N/A |
| 12.90 | % | 02/07/2012 |
|
Limited Duration |
| 2.06 | % | 2.18 | % | 0.26 | % | 3.12 | % | 03/31/1992 |
|
Mid Cap Growth |
| 7.25 | % | 14.11 | % | 11.01 | % | 12.94 | % | 03/30/1990 |
|
Strategic Income* |
| N/A |
| N/A |
| N/A |
| N/A |
| 12/30/2014 |
|
* Not operational for the period.
The average annual compounded rates of return for the Class A shares of the Portfolios for the 1-, 5- and 10-year periods ended September 30, 2014 and for the period from inception through September 30, 2014 are as follows:
Portfolio |
| 1 Year |
| 5 Years |
| 10 Years |
| Inception |
| Date |
|
Core Fixed Income |
| 4.61 | % | 4.51 | % | 3.27 | % | 4.30 | % | 03/01/1999 |
|
Core Plus Fixed Income |
| 7.35 | % | 5.97 | % | 3.50 | % | 4.79 | % | 11/07/1996 |
|
Corporate Bond |
| 8.43 | % | 6.07 | % | 3.95 | % | 4.28 | % | 05/20/2002 |
|
Global Strategist |
| 9.02 | % | 10.60 | % | 7.29 | % | 6.85 | % | 11/01/1996 |
|
High Yield |
| 9.15 | % | N/A |
| N/A |
| 12.57 | % | 02/07/2012 |
|
Limited Duration |
| 1.78 | % | 1.95 | % | N/A |
| -1.19 | % | 09/28/2007 |
|
Mid Cap Growth |
| 6.95 | % | 13.82 | % | 10.73 | % | 10.28 | % | 01/31/1997 |
|
Strategic Income* |
| N/A |
| N/A |
| N/A |
| N/A |
| 12/30/2014 |
|
* Not operational for the period.
The average annual compounded rates of return, inclusive of a maximum sales charge of 4.25% (5.25% with respect to the Global Strategist and Mid Cap Growth Portfolios), for the Class A shares of the Portfolios for the 1-, 5- and 10-year periods ended September 30, 2014 and for the period from inception through September 30, 2014 are as follows:
Portfolio |
| 1 Year |
| 5 Years |
| 10 Years |
| Inception |
| Date |
|
Core Fixed Income |
| 0.14 | % | 3.61 | % | 2.82 | % | 4.01 | % | 03/01/1999 |
|
Core Plus Fixed Income |
| 2.79 | % | 5.05 | % | 3.05 | % | 4.54 | % | 11/07/1996 |
|
Corporate Bond |
| 3.79 | % | 5.16 | % | 3.50 | % | 3.91 | % | 05/20/2002 |
|
Global Strategist |
| 3.27 | % | 9.42 | % | 6.71 | % | 6.53 | % | 11/01/1996 |
|
High Yield |
| 4.49 | % | N/A |
| N/A |
| 10.76 | % | 02/07/2012 |
|
Limited Duration |
| -2.48 | % | 1.07 | % | N/A |
| -1.80 | % | 09/28/2007 |
|
Mid Cap Growth |
| 1.34 | % | 12.60 | % | 10.13 | % | 9.95 | % | 01/31/1997 |
|
Strategic Income* |
| N/A |
| N/A |
| N/A |
| N/A |
| 12/30/2014 |
|
* Not operational for the period.
The average annual compounded rates of return for the Class L shares of the Portfolios for the 1-, 5- and 10-year periods ended September 30, 2014 and for the period from inception through September 30, 2014 are as follows:
Portfolio |
| 1 Year |
| 5 Years |
| 10 Years |
| Inception |
| Date |
|
Core Fixed Income |
| 4.34 | % | N/A |
| N/A |
| 2.23 | % | 04/27/2012 |
|
Core Plus Fixed Income |
| 7.19 | % | N/A |
| N/A |
| 4.41 | % | 04/27/2012 |
|
Corporate Bond |
| 8.15 | % | 5.70 | % | N/A |
| 4.83 | % | 06/16/2008 |
|
Global Strategist |
| 8.49 | % | N/A |
| N/A |
| 10.24 | % | 04/27/2012 |
|
High Yield |
| 8.88 | % | N/A |
| N/A |
| 12.30 | % | 02/07/2012 |
|
Limited Duration |
| 1.38 | % | N/A |
| N/A |
| 1.20 | % | 04/27/2012 |
|
Mid Cap Growth |
| 6.40 | % | N/A |
| N/A |
| 16.41 | % | 06/14/2012 |
|
Strategic Income* |
| N/A |
| N/A |
| N/A |
| N/A |
| N/A |
|
* Class L shares of the Portfolio are not being offered at this time. You do not currently have the option of purchasing Class L shares.
The average annual compounded rates of return (after taxes on distributions) for the Class I shares of the Portfolios for the 1-, 5- and 10-year periods ended September 30, 2014 and for the period from inception through September 30, 2014 are as follows:
Portfolio |
| 1 Year |
| 5 Years |
| 10 Years |
| Inception |
| Date |
|
Core Fixed Income |
| 3.58 | % | 3.52 | % | 1.91 | % | 4.30 | % | 09/29/1987 |
|
Core Plus Fixed Income |
| 6.39 | % | 4.65 | % | 1.97 | % | 4.72 | % | 11/14/1984 |
|
Corporate Bond |
| 7.40 | % | 4.90 | % | 2.48 | % | 4.28 | % | 08/31/1990 |
|
Global Strategist |
| 6.27 | % | 9.91 | % | 6.65 | % | 6.07 | % | 12/31/1992 |
|
High Yield |
| 4.29 | % | N/A |
| N/A |
| 8.73 | % | 02/07/2012 |
|
Limited Duration |
| 1.44 | % | 1.49 | % | -0.88 | % | 1.52 | % | 03/31/1992 |
|
Mid Cap Growth |
| 5.59 | % | 13.41 | % | 10.66 | % | 11.11 | % | 03/30/1990 |
|
Strategic Income* |
| N/A |
| N/A |
| N/A |
| N/A |
| 12/30/2014 |
|
* Not operational for the period.
The average annual compounded rates of return (after taxes on distributions and redemptions) for the Class I shares of the Portfolios for the 1-, 5- and 10-year periods ended September 30, 2014 and for the period from inception through September 30, 2014 are as follows:
Portfolio |
| 1 Year |
| 5 Years |
| 10 Years |
| Inception |
| Date |
|
Core Fixed Income |
| 2.79 | % | 3.19 | % | 2.10 | % | 4.32 | % | 09/29/1987 |
|
Core Plus Fixed Income |
| 4.39 | % | 4.21 | % | 2.19 | % | 4.76 | % | 11/14/1984 |
|
Corporate Bond |
| 4.94 | % | 4.30 | % | 2.52 | % | 4.22 | % | 08/31/1990 |
|
Global Strategist |
| 6.04 | % | 8.30 | % | 5.77 | % | 5.71 | % | 12/31/1992 |
|
High Yield |
| 5.37 | % | N/A |
| N/A |
| 8.16 | % | 02/07/2012 |
|
Limited Duration |
| 1.16 | % | 1.41 | % | -0.18 | % | 1.80 | % | 03/31/1992 |
|
Mid Cap Growth |
| 5.06 | % | 11.33 | % | 9.15 | % | 10.42 | % | 03/30/1990 |
|
Strategic Income* |
| N/A |
| N/A |
| N/A |
| N/A |
| 12/30/2014 |
|
* Not operational for the period.
The aggregate compounded rates of return for the Class I shares of the Portfolios for the 5- and 10-year periods ended September 30, 2014 and for the period from inception through September 30, 2014 are set forth below. One year aggregate total return figures are reflected under the average annual total return figures provided above.
Portfolio |
| 5 Years |
| 10 Years |
| Inception |
| Date |
|
Core Fixed Income |
| 26.21 | % | 41.65 | % | 467.10 | % | 09/29/1987 |
|
Core Plus Fixed Income |
| 35.55 | % | 44.96 | % | 755.57 | % | 11/14/1984 |
|
Corporate Bond |
| 35.39 | % | 49.54 | % | 358.15 | % | 08/31/1990 |
|
Global Strategist |
| 67.74 | % | 107.56 | % | 427.32 | % | 12/31/1992 |
|
High Yield |
| N/A |
| N/A |
| 37.87 | % | 02/07/2012 |
|
Limited Duration |
| 11.39 | % | 2.67 | % | 99.58 | % | 03/31/1992 |
|
Mid Cap Growth |
| 93.45 | % | 184.25 | % | 1871.76 | % | 03/30/1990 |
|
Strategic Income* |
| N/A |
| N/A |
| N/A |
| 12/30/2014 |
|
* Not operational for the period.
The 30-day yield figures for each of the Fund’s Fixed Income and Asset Allocation Portfolios is set forth below:
Class I Portfolios |
| Period Ending |
|
Core Fixed Income |
| 3.79 | % |
Core Plus Fixed Income |
| 3.55 | % |
Corporate Bond |
| 2.77 | % |
Global Strategist |
| 1.13 | % |
High Yield |
| 5.77 | % |
Limited Duration |
| 1.16 | % |
Strategic Income* |
| N/A |
|
* Not operational for the period.
Class A Portfolios |
| Period Ending |
|
Core Fixed Income |
| 3.36 | % |
Core Plus Fixed Income |
| 3.06 | % |
Corporate Bond |
| 2.44 | % |
Global Strategist |
| 0.57 | % |
High Yield |
| 5.37 | % |
Limited Duration |
| 0.77 | % |
Strategic Income* |
| N/A |
|
* Not operational for the period.
Class L Portfolio |
| Period Ending |
|
Core Fixed Income |
| 2.77 | % |
Core Plus Fixed Income |
| 2.94 | % |
Corporate Bond |
| 2.53 | % |
Global Strategist |
| 0.26 | % |
High Yield |
| 5.15 | % |
Limited Duration |
| 0.45 | % |
Strategic Income* |
| N/A |
|
* Class L shares of the Portfolio are not being offered at this time. You do not currently have the option of purchasing Class L shares.
Class IS Portfolio |
| Period Ending |
|
High Yield |
| 5.81 | % |
Strategic Income* |
| N/A |
|
* Not operational for the period.
FINANCIAL STATEMENTS
The Portfolios’ (except the Strategic Income Portfolio) audited financial statements for the fiscal year ended September 30, 2014, including notes thereto, and the reports of Ernst & Young LLP, an independent registered public accounting firm, are herein incorporated by reference to the Portfolios’ Annual Reports to Shareholders. The Strategic Income Portfolio was not audited for the year ended September 30, 2014 as the fund had not yet commenced operations. A copy of the Portfolios’ Annual Reports to Shareholders must accompany the delivery of this SAI.
APPENDIX A
MORGAN STANLEY INVESTMENT MANAGEMENT
PROXY VOTING POLICY AND PROCEDURES
I. POLICY STATEMENT
Morgan Stanley Investment Management’s (“MSIM”) policy and procedures for voting proxies (“Policy”) with respect to securities held in the accounts of clients applies to those MSIM entities that provide discretionary investment management services and for which an MSIM entity has authority to vote proxies. This Policy is reviewed and updated as necessary to address new and evolving proxy voting issues and standards.
The MSIM entities covered by this Policy currently include the following: Morgan Stanley AIP GP LP, Morgan Stanley Investment Management Inc., Morgan Stanley Investment Management Limited, Morgan Stanley Investment Management Company, Morgan Stanley Asset & Investment Trust Management Co., Limited, Morgan Stanley Investment Management Private Limited and Private Investment Partners Inc. (each an “MSIM Affiliate” and collectively referred to as the “MSIM Affiliates” or as “we” below).
Each MSIM Affiliate will use its best efforts to vote proxies as part of its authority to manage, acquire and dispose of account assets. With respect to the MSIM registered management investment companies (the “MSIM Funds”), each MSIM Affiliate will vote proxies under this Policy pursuant to authority granted under its applicable investment advisory agreement or, in the absence of such authority, as authorized by the Board of Directors/Trustees of the MSIM Funds. A MSIM Affiliate will not vote proxies unless the investment management or investment advisory agreement explicitly authorizes the MSIM Affiliate to vote proxies. MSIM Affiliates will vote proxies in a prudent and diligent manner and in the best interests of clients, including beneficiaries of and participants in a client’s benefit plan(s) for which the MSIM Affiliates manage assets, consistent with the objective of maximizing long-term investment returns (“Client Proxy Standard”). In addition to voting proxies at portfolio companies, MSIM routinely engages with the management or board of companies in which we invest on a range of governance issues. Governance is a window into or proxy for management and board quality. MSIM engages with companies where we believe we can make a positive impact on the governance structure. MSIM’s engagement process, through private communication with companies, allows us to understand the governance structure at investee companies and better inform our voting decisions. In certain situations, a client or its fiduciary may provide an MSIM Affiliate with a proxy voting policy. In these situations, the MSIM Affiliate will comply with the client’s policy.
Proxy Research Services—ISS Governance Services (“ISS”) and Glass Lewis (together with other proxy research providers as we may retain from time to time, the “Research Providers”) are independent advisers that specialize in providing a variety of fiduciary-level proxy-related services to institutional investment managers, plan sponsors, custodians, consultants, and other institutional investors. The services provided include in-depth research, global issuer analysis, and voting recommendations. While we may review and utilize the recommendations of one or more Research Providers in making proxy voting decisions, we are in no way obligated to follow such recommendations. In addition to research, ISS provides vote execution, reporting, and recordkeeping services.
Voting Proxies for Certain Non-U.S. Companies—Voting proxies of companies located in some jurisdictions may involve several problems that can restrict or prevent the ability to vote such proxies or entail significant costs. These problems include, but are not limited to: (i) proxy statements and ballots being written in a language other than English; (ii) untimely and/or inadequate notice of shareholder meetings; (iii) restrictions on the ability of holders outside the issuer’s jurisdiction of organization to exercise votes; (iv) requirements to vote proxies in person; (v) the imposition of restrictions on the sale of the securities for a period of time in proximity to the shareholder meeting; and (vi) requirements to provide local agents with power of attorney to facilitate our voting instructions. As a result, we vote clients’ non-U.S. proxies on a best efforts basis only, after weighing the costs and benefits of voting such proxies, consistent with the Client Proxy Standard. ISS has been retained to provide assistance in connection with voting non-U.S. proxies.
II. GENERAL PROXY VOTING GUIDELINES
To promotes consistency in voting proxies on behalf of its clients, we follow this Policy (subject to any exception set forth herein). The Policy addresses a broad range of issues, and provides general voting parameters on proposals that arise most frequently. However, details of specific proposals vary, and those details affect particular voting decisions, as do factors specific to a given company. Pursuant to the procedures set forth herein, we may vote in a manner that is not in accordance with the following general guidelines, provided the vote is approved by the Proxy
Review Committee (see Section III for description) and is consistent with the Client Proxy Standard. Morgan Stanley AIP GP LP will follow the procedures as described in Appendix A.
We endeavor to integrate governance and proxy voting policy with investment goals, using the vote to encourage portfolio companies to enhance long-term shareholder value and to provide a high standard of transparency such that equity markets can value corporate assets appropriately.
We seek to follow the Client Proxy Standard for each client. At times, this may result in split votes, for example when different clients have varying economic interests in the outcome of a particular voting matter (such as a case in which varied ownership interests in two companies involved in a merger results in different stakes in the outcome). We also may split votes at times based on differing views of portfolio managers.
We may abstain on matters for which disclosure is inadequate.
A. Routine Matters.
We generally support routine management proposals. The following are examples of routine management proposals:
· Approval of financial statements and auditor reports if delivered with an unqualified auditor’s opinion.
· General updating/corrective amendments to the charter, articles of association or bylaws, unless we believe that such amendments would diminish shareholder rights.
· Most proposals related to the conduct of the annual meeting, with the following exceptions. We generally oppose proposals that relate to “the transaction of such other business which may come before the meeting,” and open-ended requests for adjournment. However, where management specifically states the reason for requesting an adjournment and the requested adjournment would facilitate passage of a proposal that would otherwise be supported under this Policy (i.e. an uncontested corporate transaction), the adjournment request will be supported.
We generally support shareholder proposals advocating confidential voting procedures and independent tabulation of voting results.
B. Board of Directors.
1. Election of directors: Votes on board nominees can involve balancing a variety of considerations. In vote decisions, we may take into consideration whether the company has a majority voting policy in place that we believe makes the director vote more meaningful. In the absence of a proxy contest, we generally support the board’s nominees for director except as follows:
a. We consider withholding support from or voting against a nominee if we believe a direct conflict exists between the interests of the nominee and the public shareholders, including failure to meet fiduciary standards of care and/or loyalty. We may oppose directors where we conclude that actions of directors are unlawful, unethical or negligent. We consider opposing individual board members or an entire slate if we believe the board is entrenched and/or dealing inadequately with performance problems; if we believe the board is acting with insufficient independence between the board and management; or if we believe the board has not been sufficiently forthcoming with information on key governance or other material matters.
b. We consider witholding support from or voting against interested directors if the company’s board does not meet market standards for director independence, or if otherwise we believe board independence is insufficient. We refer to prevalent market standards as promulgated by a stock exchange or other authority within a given market (e.g., New York Stock Exchange or Nasdaq rules for most U.S. companies, and The Combined Code on Corporate Governance in the United Kingdom). Thus, for an NYSE company with no controlling shareholder, we would expect that at a minimum a majority of directors should be independent as defined by NYSE. Where we view market standards as inadequate, we may withhold votes based on stronger independence standards. Market standards notwithstanding, we generally do not view long board tenure alone as a basis to classify a director as non-independent.
i. At a company with a shareholder or group that controls the company by virtue of a majority economic interest in the company, we have a reduced expectation for board independence, although we believe the presence of independent directors can be helpful, particularly in staffing the audit committee, and at times we may withhold support from or vote against a nominee on the view the
board or its committees are not sufficiently independent. In markets where board independence is not the norm (e.g. Japan), however, we consider factors including whether a board of a controlled company includes independent members who can be expected to look out for interests of minority holders.
ii. We consider withholding support from or voting against a nominee if he or she is affiliated with a major shareholder that has representation on a board disproportionate to its economic interest.
c. Depending on market standards, we consider withholding support from or voting against a nominee who is interested and who is standing for election as a member of the company’s compensation/renumeration, nominating/governance or audit committee.
d. We consider withholding support or voting against nominees if the term for which they are nominated is excessive. We consider this issue on a market-specific basis.
e. We consider withholding support from or voting against nominees if, in our view, there has been insufficient board renewal (turnover), particularly in the context of extended poor company performance.
f. We consider withholding support from or voting against a nominee standing for election if the board has not taken action to implement generally accepted governance practices for which there is a “bright line” test. For example, in the context of the U.S. market, failure to eliminate a dead hand or slow hand poison pill would be seen as a basis for opposing one or more incumbent nominees.
g. In markets that encourage designated audit committee financial experts, we consider voting against members of an audit committee if no members are designated as such. We also consider voting against the audit committee members if the company has faced financial reporting issues and/or does not put the auditor up for ratification by shareholders.
h. We believe investors should have the ability to vote on individual nominees, and may abstain or vote against a slate of nominees where we are not given the opportunity to vote on individual nominees.
i. We consider withholding support from or voting against a nominee who has failed to attend at least 75% of the nominee’s board and board committee meetings within a given year without a reasonable excuse. We also consider opposing nominees if the company does not meet market standards for disclosure on attendance.
j. We consider withholding support from or voting against a nominee who appears overcommitted, particularly through service on an excessive number of boards. Market expectations are incorporated into this analysis; for U.S. boards, we generally oppose election of a nominee who serves on more than six public company boards (excluding investment companies), although we may reference National Association of Corporate Directors guidance suggesting that public company CEOs, for example, should serve no more than two outside boards given the level of time commitment required in their primary job.
2. Discharge of directors’ duties: In markets where an annual discharge of directors’ responsibility is a routine agenda item, we generally support such discharge. However, we may vote against discharge or abstain from voting where there are serious findings of fraud or other unethical behavior for which the individual bears responsibility. The annual discharge of responsibility represents shareholder approval of disclosed actions taken by the board during the year and may make future shareholder action against the board difficult to pursue.
3. Board independence: We generally support U.S. shareholder proposals requiring that a certain percentage (up to 66 2/3%) of the company’s board members be independent directors, and promoting all-independent audit, compensation and nominating/governance committees.
4. Board diversity: We consider on a case-by-case basis shareholder proposals urging diversity of board membership with respect to social, religious or ethnic group.
5. Majority voting: We generally support proposals requesting or requiring majority voting policies in election of directors, so long as there is a carve-out for plurality voting in the case of contested elections.
6. Proxy access: We consider on a case-by-case basis shareholder proposals on particular procedures for inclusion of shareholder nominees in company proxy statements.
7. Reimbursement for dissident nominees: We generally support well-crafted U.S. shareholder proposals that would provide for reimbursement of dissident nominees elected to a board, as the cost to shareholders in electing such nominees can be factored into the voting decision on those nominees.
8. Proposals to elect directors more frequently: In the U.S. public company context, we usually support shareholder and management proposals to elect all directors annually (to “declassify” the board), although we make an exception to this policy where we believe that long-term shareholder value may be harmed by this change given particular circumstances at the company at the time of the vote on such proposal. As indicated above, outside the U.S., we generally support greater accountability to shareholders that comes through more frequent director elections, but recognize that many markets embrace longer term lengths, sometimes for valid reasons given other aspects of the legal context in electing boards.
9. Cumulative voting: We generally support proposals to eliminate cumulative voting in the U.S. market context. (Cumulative voting provides that shareholders may concentrate their votes for one or a handful of candidates, a system that can enable a minority bloc to place representation on a board.) U.S. proposals to establish cumulative voting in the election of directors generally will not be supported.
10. Separation of Chairman and CEO positions: We vote on shareholder proposals to separate the Chairman and CEO positions and/or to appoint an independent Chairman based in part on prevailing practice in particular markets, since the context for such a practice varies. In many non-U.S. markets, we view separation of the roles as a market standard practice, and support division of the roles in that context. In the U.S., we consider such proposals on a case-by-case basis, considering, among other things, the existing board leadership structure, company performance, and any other evidence of entrenchment or perceived risk that power is overly concentrated in a single individual.
11. Director retirement age and term limits: Proposals setting or recommending director retirement ages or director term limits are voted on a case-by-case basis that includes consideration of company performance, the rate of board renewal, evidence of effective individual director evaluation processes, and any indications of entrenchment.
12. Proposals to limit directors’ liability and/or broaden indemnification of officers and directors. Generally, we will support such proposals provided that an individual is eligible only if he or she has not acted in bad faith, with gross negligence or with reckless disregard of his or her duties.
C. Statutory Auditor Boards
The statutory auditor board, which is separate from the main board of directors, plays a role in corporate governance in several markets. These boards are elected by shareholders to provide assurance on compliance with legal and accounting standards and the company’s articles of association. We generally vote for statutory auditor nominees if they meet independence standards. In markets that require disclosure on attendance by internal statutory auditors, however, we consider voting against nominees for these positions who failed to attend at least 75% of meetings in the previous year. We also consider opposing nominees if the company does not meet market standards for disclosure on attendance.
D. Corporate Transactions and Proxy Fights.
We examine proposals relating to mergers, acquisitions and other special corporate transactions (i.e., takeovers, spin-offs, sales of assets, reorganizations, restructurings and recapitalizations) on a case-by-case basis in the interests of each fund or other account. Proposals for mergers or other significant transactions that are friendly and approved by the Research Providers usually are supported if there is no portfolio manager objection. We also analyze proxy contests on a case-by-case basis.
E. Changes in Capital Structure.
1. We generally support the following:
· Management and shareholder proposals aimed at eliminating unequal voting rights, assuming fair economic treatment of classes of shares we hold.
· U.S. management proposals to increase the authorization of existing classes of common stock (or securities convertible into common stock) if: (i) a clear business purpose is stated that we can support and the number of shares requested is reasonable in relation to the purpose for which authorization is requested; and/or (ii) the authorization does not exceed 100% of shares currently authorized and at least 30% of the total new authorization will be outstanding. (We consider proposals that do not meet these criteria on a case-by-case basis.)
· U.S. management proposals to create a new class of preferred stock or for issuances of preferred stock up to 50% of issued capital, unless we have concerns about use of the authority for anti-takeover purposes.
· Proposals in non-U.S. markets that in our view appropriately limit potential dilution of existing shareholders. A major consideration is whether existing shareholders would have preemptive rights for any issuance under a proposal for standing share issuance authority. We generally consider market-specific guidance in making these decisions; for example, in the U.K. market, we usually follow Association of British Insurers’ (“ABI”) guidance, although company-specific factors may be considered and for example, may sometimes lead us to voting against share authorization proposals even if they meet ABI guidance.
· Management proposals to authorize share repurchase plans, except in some cases in which we believe there are insufficient protections against use of an authorization for anti-takeover purposes.
· Management proposals to reduce the number of authorized shares of common or preferred stock, or to eliminate classes of preferred stock.
· Management proposals to effect stock splits.
· Management proposals to effect reverse stock splits if management proportionately reduces the authorized share amount set forth in the corporate charter. Reverse stock splits that do not adjust proportionately to the authorized share amount generally will be approved if the resulting increase in authorized shares coincides with the proxy guidelines set forth above for common stock increases.
· Management dividend payout proposals, except where we perceive company payouts to shareholders as inadequate.
2. We generally oppose the following (notwithstanding management support):
· Proposals to add classes of stock that would substantially dilute the voting interests of existing shareholders.
· Proposals to increase the authorized or issued number of shares of existing classes of stock that are unreasonably dilutive, particularly if there are no preemptive rights for existing shareholders. However, depending on market practices, we consider voting for proposals giving general authorization for issuance of shares not subject to pre-emptive rights if the authority is limited.
· Proposals that authorize share issuance at a discount to market rates, except where authority for such issuance is de minimis, or if there is a special situation that we believe justifies such authorization (as may be the case, for example, at a company under severe stress and risk of bankruptcy).
· Proposals relating to changes in capitalization by 100% or more.
We consider on a case-by-case basis shareholder proposals to increase dividend payout ratios, in light of market practice and perceived market weaknesses, as well as individual company payout history and current circumstances. For example, currently we perceive low payouts to shareholders as a concern at some Japanese companies, but may deem a low payout ratio as appropriate for a growth company making good use of its cash, notwithstanding the broader market concern.
F. Takeover Defenses and Shareholder Rights.
1. Shareholder rights plans: We generally support proposals to require shareholder approval or ratification of shareholder rights plans (poison pills). In voting on rights plans or similar takeover defenses, we consider on a case-by-case basis whether the company has demonstrated a need for the defense in the context of promoting long-term share value; whether provisions of the defense are in line with generally accepted governance principles in the market (and specifically the presence of an adequate qualified offer provision that would
exempt offers meeting certain conditions from the pill); and the specific context if the proposal is made in the midst of a takeover bid or contest for control.
2. Supermajority voting requirements: We generally oppose requirements for supermajority votes to amend the charter or bylaws, unless the provisions protect minority shareholders where there is a large shareholder. In line with this view, in the absence of a large shareholder we support reasonable shareholder proposals to limit such supermajority voting requirements.
3. Shareholders right to call meetings: We consider proposals to enhance a shareholder’s rights to call a special meeting on a case-by-case basis. At large-cap U.S. companies, we generally support efforts to establish the rights of holders of 10% or more of shares to call special meetings, unless the board or state law has a set policy or law establishing such rights at a threshold that we believe to be acceptable.
4. Written consent rights: In the U.S. context, we examine proposals for shareholder written consent rights on a case-by-case basis.
5. Reincorporation: We consider management and shareholder proposals to reincorporate to a different jurisdiction on a case-by-case basis. We oppose such proposals if we believe the main purpose is to take advantage of laws or judicial precedents that reduce shareholder rights.
6. Anti-greenmail provisions: Proposals relating to the adoption of anti-greenmail provisions will be supported, provided that the proposal: (i) defines greenmail; (ii) prohibits buyback offers to large block holders (holders of at least 1% of the outstanding shares and in certain cases, a greater amount) not made to all shareholders or not approved by disinterested shareholders; and (iii) contains no anti-takeover measures or other provisions restricting the rights of shareholders.
7. Bundled proposals: We may consider opposing or abstaining on proposals if disparate issues are “bundled” and presented for a single vote.
G. Auditors.
We generally support management proposals for selection or ratification of independent auditors. However, we may consider opposing such proposals with reference to incumbent audit firms if the company has suffered from serious accounting irregularities and we believe rotation of the audit firm is appropriate, or if fees paid to the auditor for non-audit-related services are excessive. Generally, to determine if non-audit fees are excessive, a 50% test will be applied (i.e., non-audit-related fees should be less than 50% of the total fees paid to the auditor). We generally vote against proposals to indemnify auditors.
H. Executive and Director Remuneration.
1. We generally support the following:
· Proposals for employee equity compensation plans and other employee ownership plans, provided that our research does not indicate that approval of the plan would be against shareholder interest. Such approval may be against shareholder interest if it authorizes excessive dilution and shareholder cost, particularly in the context of high usage (“run rate”) of equity compensation in the recent past; or if there are objectionable plan design and provision.
· Proposals relating to fees to outside directors, provided the amounts are not excessive relative to other companies in the country or industry, and provided that the structure is appropriate within the market context. While stock-based compensation to outside directors is positive if moderate and appropriately structured, we are wary of significant stock option awards or other performance-based awards for outside directors, as well as provisions that could result in significant forfeiture of value on a director’s decision to resign from a board (such forfeiture can undercut director independence).
· Proposals for employee stock purchase plans that permit discounts, but only for grants that are part of a broad-based employee plan, including all non-executive employees, and only if the discounts are limited to a reasonable market standard or less.
· Proposals for the establishment of employee retirement and severance plans, provided that our research does not indicate that approval of the plan would be against shareholder interest.
2. We generally oppose retirement plans and bonuses for non-executive directors and independent statutory auditors.
3. In the U.S. context, we generally vote against shareholder proposals requiring shareholder approval of all severance agreements, but proposals we generally support that require shareholder approval for agreements in excess of three times the annual compensation (salary and bonus). We generally oppose shareholder proposals that would establish arbitrary caps on pay. We consider on a case-by-case basis shareholder proposals that seek to limit Supplemental Executive Retirement Plans (SERPs), but support such proposals where we consider SERPs to be excessive.
4. Shareholder proposals advocating stronger and/or particular pay-for-performance models will be evaluated on a case-by-case basis, with consideration of the merits of the individual proposal within the context of the particular company and its labor markets, and the company’s current and past practices. While we generally support emphasis on long-term components of senior executive pay and strong linkage of pay to performance, we consider factors including whether a proposal may be overly prescriptive, and the impact of the proposal, if implemented as written, on recruitment and retention.
5. We generally support proposals advocating reasonable senior executive and director stock ownership guidelines and holding requirements for shares gained in executive equity compensation programs
6. We generally support shareholder proposals for reasonable “claw-back” provisions that provide for company recovery of senior executive bonuses to the extent they were based on achieving financial benchmarks that were not actually met in light of subsequent restatements.
7. Management proposals effectively to re-price stock options are considered on a case-by-case basis. Considerations include the company’s reasons and justifications for a re-pricing, the company’s competitive position, whether senior executives and outside directors are excluded, potential cost to shareholders, whether the re-pricing or share exchange is on a value-for-value basis, and whether vesting requirements are extended.
8. Say-on-Pay: We consider proposals relating to an advisory vote on remuneration on a case-by-case basis. Considerations include a review of the relationship between executive remuneration and performance based on operating trends and total shareholder return over multiple performance periods. In addition, we review remuneration structures and potential poor pay practices, including relative magnitude of pay, discretionary bonus awards, tax gross ups, change-in-control features, internal pay equity and peer group construction. As long-term investors, we support remuneration policies that align with long-term shareholder returns.
I. Social, Political and Environmental Issues. Shareholders in the U.S. and certain other markets submit proposals encouraging changes in company disclosure and practices related to particular corporate, social, political and environmental matters. We consider how to vote on the proposals on a case-by-case basis to determine likely impacts on shareholder value. We seek to balance concerns on reputational and other risks that lie behind a proposal against costs of implementation, while considering appropriate shareholder and management prerogatives. We may abstain from voting on proposals that do not have a readily determinable financial impact on shareholder value. We support proposals that, if implemented, would enhance useful disclosure, but we generally vote against proposals requesting reports that we believe are duplicative, related to matters not material to the business, or that would impose unnecessary or excessive costs. We believe that certain social and environmental shareholder proposals may intrude excessively on management prerogatives, which can lead us to oppose them.
J. Fund of Funds. Certain Funds advised by an MSIM Affiliate invest only in other MSIM Funds. If an underlying fund has a shareholder meeting, in order to avoid any potential conflict of interest, such proposals will be voted in the same proportion as the votes of the other shareholders of the underlying fund, unless otherwise determined by the Proxy Review Committee. Other MSIM Funds invest in unaffiliated funds. If an unaffiliated underlying fund has a shareholder meeting and the MSIM Fund owns more than 25% of the voting shares of the underlying fund, the MSIM Fund will vote its shares in the unaffiliated underlying fund in the same proportion as the votes of the other shareholders of the underlying fund.
III. ADMINISTRATION OF POLICY
The MSIM Proxy Review Committee (the “Committee”) has overall responsibility for the Policy. The Committee, which is appointed by MSIM’s Long-Only Executive Committee, consists of investment professionals who represent the different investment disciplines and geographic locations of the firm, and is chaired by the director
of the Corporate Governance Team (“CGT”). Because proxy voting is an investment responsibility and impacts shareholder value, and because of their knowledge of companies and markets, portfolio managers and other members of investment staff play a key role in proxy voting, although the Committee has final authority over proxy votes.
The CGT Director is responsible for identifying issues that require Committee deliberation or ratification. The CGT, working with advice of investment teams and the Committee, is responsible for voting on routine items and on matters that can be addressed in line with these Policy guidelines. The CGT has responsibility for voting case-by-case where guidelines and precedent provide adequate guidance.
The Committee will periodically review and have the authority to amend, as necessary, the Policy and establish and direct voting positions consistent with the Client Proxy Standard.
CGT and members of the Committee may take into account Research Providers’ recommendations and research as well as any other relevant information they may request or receive, including portfolio manager and/or analyst comments and research, as applicable. Generally, proxies related to securities held in accounts that are managed pursuant to quantitative, index or index-like strategies (“Index Strategies”) will be voted in the same manner as those held in actively managed accounts, unless economic interests of the accounts differ. Because accounts managed using Index Strategies are passively managed accounts, research from portfolio managers and/or analysts related to securities held in these accounts may not be available. If the affected securities are held only in accounts that are managed pursuant to Index Strategies, and the proxy relates to a matter that is not described in this Policy, the CGT will consider all available information from the Research Providers, and to the extent that the holdings are significant, from the portfolio managers and/or analysts.
A. Committee Procedures
The Committee meets at least quarterly and reviews and considers changes to the Policy at least annually. Through meetings and/or written communications, the Committee is responsible for monitoring and ratifying “split votes” (i.e., allowing certain shares of the same issuer that are the subject of the same proxy solicitation and held by one or more MSIM portfolios to be voted differently than other shares) and/or “override voting” (i.e., voting all MSIM portfolio shares in a manner contrary to the Policy). The Committee will review developing issues and approve upcoming votes, as appropriate, for matters as requested by CGT.
The Committee reserves the right to review voting decisions at any time and to make voting decisions as necessary to ensure the independence and integrity of the votes.
B. Material Conflicts of Interest
In addition to the procedures discussed above, if the CGT Director determines that an issue raises a material conflict of interest, the CGT Director may request a special committee to review, and recommend a course of action with respect to, the conflict(s) in question (“Special Committee”).
A potential material conflict of interest could exist in the following situations, among others:
1. The issuer soliciting the vote is a client of MSIM or an affiliate of MSIM and the vote is on a matter that materially affects the issuer.
2. The proxy relates to Morgan Stanley common stock or any other security issued by Morgan Stanley or its affiliates except if echo voting is used, as with MSIM Funds, as described herein.
3. Morgan Stanley has a material pecuniary interest in the matter submitted for a vote (e.g., acting as a financial advisor to a party to a merger or acquisition for which Morgan Stanley will be paid a success fee if completed).
If the CGT Director determines that an issue raises a potential material conflict of interest, depending on the facts and circumstances, the issue will be addressed as follows:
1. If the matter relates to a topic that is discussed in this Policy, the proposal will be voted as per the Policy.
2. If the matter is not discussed in this Policy or the Policy indicates that the issue is to be decided case-by-case, the proposal will be voted in a manner consistent with the Research Providers, provided that all the Research Providers consulted have the same recommendation, no portfolio manager objects to that vote, and the vote is consistent with MSIM’s Client Proxy Standard.
3. If the Research Providers’ recommendations differ, the CGT Director will refer the matter to a Special Committee to vote on the proposal, as appropriate.
Any Special Committee shall be comprised of the CGT Director and at least two portfolio managers (preferably members of the Committee) as approved by the Committee. The CGT Director may request non-voting participation by MSIM’s General Counsel or his/her designee and the Chief Compliance Officer or his/her designee. In addition to the research provided by Research Providers, the Special Committee may request analysis from MSIM Affiliate investment professionals and outside sources to the extent it deems appropriate.
C. Proxy Voting Reporting
The CGT will document in writing all Committee and Special Committee decisions and actions, which documentation will be maintained by the CGT for a period of at least six years. To the extent these decisions relate to a security held by an MSIM Fund, the CGT will report the decisions to each applicable Board of Trustees/Directors of those Funds at each Board’s next regularly scheduled Board meeting. The report will contain information concerning decisions made during the most recently ended calendar quarter immediately preceding the Board meeting.
MSIM will promptly provide a copy of this Policy to any client requesting it. MSIM will also, upon client request, promptly provide a report indicating how each proxy was voted with respect to securities held in that client’s account.
MSIM’s Legal Department is responsible for filing an annual Form N-PX on behalf of each MSIM Fund for which such filing is required, indicating how all proxies were voted with respect to such Fund’s holdings.
APPENDIX A
The following procedures apply to accounts managed by Morgan Stanley AIP GP LP and Private Investment Partners Inc. (“AIP”): (i) closed-end funds registered under the Investment Company Act of 1940, as amended, (ii) separate accounts and (iii) unregistered funds.
Generally, AIP will follow the guidelines set forth in Section II of MSIM’s Proxy Voting Policy and Procedures. To the extent that such guidelines do not provide specific direction, or AIP determines that consistent with the Client Proxy Standard, the guidelines should not be followed, the Proxy Review Committee has delegated the voting authority to vote securities held by accounts managed by AIP to the Fund of Hedge Funds investment team, the Private Equity Fund of Funds investment team or the Private Equity Real Estate Fund of Funds investment team of AIP. A summary of decisions made by the investment teams will be made available to the Proxy Review Committee for its information at the next scheduled meeting of the Proxy Review Committee.
In certain cases, AIP may determine to abstain from determining (or recommending) how a proxy should be voted (and therefore abstain from voting such proxy or recommending how such proxy should be voted), such as where the expected cost of giving due consideration to the proxy does not justify the potential benefits to the affected account(s) that might result from adopting or rejecting (as the case may be) the measure in question.
Waiver of Voting Rights
For regulatory reasons, AIP may either 1) invest in a class of securities of an underlying fund (the “Fund”) that does not provide for voting rights; or 2) waive 100% of its voting rights with respect to the following:
1. Any rights with respect to the removal or replacement of a director, general partner, managing member or other person acting in a similar capacity for or on behalf of the Fund (each individually a “Designated Person,” and collectively, the “Designated Persons”), which may include, but are not limited to, voting on the election or removal of a Designated Person in the event of such Designated Person’s death, disability, insolvency, bankruptcy, incapacity, or other event requiring a vote of interest holders of the Fund to remove or replace a Designated Person; and
2. Any rights in connection with a determination to renew, dissolve, liquidate, or otherwise terminate or continue the Fund, which may include, but are not limited to, voting on the renewal, dissolution, liquidation, termination or continuance of the Fund upon the occurrence of an event described in the Fund’s organizational documents; provided, however, that, if the Fund’s organizational documents require the consent of the Fund’s general partner or manager, as the case may be, for any such termination or continuation of the Fund to be effective, then AIP may exercise its voting rights with respect to such matter.
Ratified by the Morgan Stanley Funds Board on October 2-3, 2013.
APPENDIX B — DESCRIPTION OF RATINGS
I. Excerpts from Moody’s Investors Service, Inc.’s Corporate Bond Ratings:
Aaa: Judged to be of the highest quality, with minimal credit risk;
Aa: judged to be of high quality and are subject to very low credit risk;
A: judged to be upper medium-grade obligations, subject to low credit risk;
Baa: judged to be medium-grade obligations and subject to moderate credit risk and as such may possess certain speculative characteristics;
Ba: judged to be speculative and are subject to substantial credit risk;
B: considered speculative and are subject to high credit risk;
Caa: judged to be of poor standing and are subject to very high credit risk;
Ca: highly speculative and are likely in, or very near, default, with some prospect of recovery of principal and interest;
C: the lowest rated and are typically in default, with little prospect for recovery of principal or interest.
Note: Moody’s applies numerical modifiers, 1, 2 and 3 in each generic rating classification from Aa through Caa. The modifier 1 indicates that the obligation ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of that generic rating category.
II. Excerpts from Standard & Poor’s Rating Group’s Corporate Bond Ratings
AAA: Highest rating assigned for an obligation; obligor’s capacity to meet its financial commitment on the obligation is extremely strong;
AA: obligation differs from the highest-rated obligations only to a small degree; obligor’s capacity to meet its financial commitment on the obligation is very strong;
A: obligation is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher-rated categories; obligor’s capacity to meet its financial commitment on the obligation is still strong;
BBB: obligation exhibits adequate protection parameters; adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation;
BB, B, CCC, CC, C: obligations rated BB, B, CCC, CC and C are regarded as having significant speculative characteristics. BB indicates the least degree of speculation and C the highest. While such obligations will likely have some quality and protective characteristics, these may be outweighed by large uncertainties or major exposures to adverse conditions;
BB: obligation is less vulnerable to nonpayment than other speculative issues; it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions which could lead to the obligor’s inadequate capacity to meet its financial commitment on the obligation;
B: obligation is more vulnerable to nonpayment than obligations rated BB, but the obligor currently has the capacity to meet its financial commitment on the obligation; adverse business, financial, or economic conditions will likely impair the obligor’s capacity or willingness to meet its financial commitment on the obligation;
CCC: obligation is currently vulnerable to nonpayment and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation; in the event of adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitment on the obligation;
CC: obligation is currently highly vulnerable to nonpayment; default has not yet occurred, but Standard & Poor’s expects default to be a virtual certainty, regardless of the anticipated time to default;
C: currently highly vulnerable to nonpayment, and the obligation is expected to have lower relative seniority or lower ultimate recovery compared to obligations that are rated higher;
D: obligation is in payment default. The D rating category is used when payments on an obligation are not made on the date due even if the applicable grace period has not expired, unless Standard & Poor’s believes that such payments will be made within five business days. The D rating also will be used upon the filing of a bankruptcy petition or the taking of a similar action if payments on an obligation are jeopardized.
Plus (+) or minus (-): The ratings from AA to CCC may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories.
NR: indicates that no rating has been requested, or that there is insufficient information on which to base a rating, or that Standard & Poor’s does not rate a particular obligation as a matter of policy.
III. Excerpts from Fitch, Inc.’s Corporate Bond Ratings:
AAA: Highest credit quality; denotes the lowest expectation of credit risk; assigned only in case of exceptionally strong capacity for payment of financial commitments. This capacity is highly unlikely to be adversely affected by foreseeable events.
AA: Very high credit quality; denote expectations of very low credit risk; indicate very strong capacity for payment of financial commitments. This capacity is not significantly vulnerable to foreseeable events.
A: High credit quality; denote expectations of low credit risk. The capacity for payment of financial commitments is considered strong. This capacity may, nevertheless, be more vulnerable to changes in circumstances or in economic conditions than is the case for higher ratings.
BBB: Good credit quality; indicate that expectations of credit risk are currently low. The capacity for payment of financial commitments is considered adequate but adverse changes in circumstances and economic conditions are more likely to impair this capacity. This is the lowest investment grade category.
BB: Speculative; indicate an elevated vulnerability to credit risk, particularly in the event of adverse changes in business or economic conditions over time; however, business or financial flexibility exists which supports the servicing of financial commitments. Securities rated in this category are not investment grade.
B: Highly speculative; indicate that significant credit risk is present, but a limited margin of safety remains. Financial commitments are currently being met; however, capacity for continued payment is vulnerable to deterioration in the business and economic environment.
CCC: Substantial credit risk; default is a real possibility.
CC: Very high levels of credit risk; default of some kind appears probable.
C: Exceptionally high levels of credit risk; default is imminent or inevitable, or the issuer is in standstill.
RD: Indicates an issuer that in Fitch’s opinion has experienced an uncured payment default on a bond, loan or other material financial obligation but which has not entered into bankruptcy filings, administration, receivership, liquidation or other formal winding-up procedure, and which has not otherwise ceased business.
D: Default indicates an issuer that in Fitch Ratings’ opinion has entered into bankruptcy filings, administration, receivership, liquidation or other formal winding-up procedure, or which has otherwise ceased business.
The modifiers “+” or “-” may be appended to a rating to denote relative status within major rating categories. Such suffixes are not added to the AAA Long-Term rating category or to categories below CCC.
IV. Excerpts from Moody’s Investors Service, Inc.’s Preferred Stock Ratings:
aaa: An issue which is rated aaa is considered to be a top-quality preferred stock. This rating indicates good asset protection and the least risk of dividend impairment within the universe of preferred stocks.
aa: An issue which is rated aa is considered a high-grade preferred stock. This rating indicates that there is reasonable assurance that earnings and asset protection will remain relatively well maintained in the foreseeable future.
a: An issue which is rated a is considered to be an upper medium-grade preferred stock. While risks are judged to be somewhat greater than in the aaa and aa classifications, earnings and asset protection are, nevertheless, expected to be maintained at adequate levels.
baa: An issue which is rated baa is considered to be medium-grade preferred stock, neither highly protected nor poorly secured. Earnings and asset protection appear adequate at present but may be questionable over any great length of time.
ba: an issue which is rated ba is considered to have speculative elements and its future cannot be considered well assured. Earnings and asset protection may be very moderate and not well safeguarded during adverse periods. Uncertainty of position characterizes preferred stocks in this class.
b: An issue which is rated b generally lacks the characteristics of a desirable investment. Assurance of dividend payments and maintenance of other terms of the issue over any long period of time may be small.
caa: An issue which is rated caa is likely to be in arrears on dividend payments. This rating designation does not purport to indicate the future status of payments.
ca: An issue which is rated ca is speculative in a high degree and is likely to be in arrears on dividends with little likelihood of eventual payments.
c: This is the lowest rated class of preferred or preference stock. Issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing.
Note: Moody’s may apply numerical modifiers 1, 2 and 3 in each rating classification. The modifier 1 indicates that the security ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates that the issue ranks in the lower end of its generic rating category.
V. �� Excerpts from Standard & Poor’s Rating Group’s Preferred Stock Ratings:
AAA: This is the highest rating that may be assigned by S&P to a preferred stock issue and indicates an extremely strong capacity to pay the preferred stock obligations.
AA: A preferred stock issue rated AA also qualifies as a high-quality fixed-income security. The capacity to pay preferred stock obligations is very strong, although not as overwhelming as for issues rated AAA.
A: An issue rated A is backed by a sound capacity to pay the preferred stock obligations, although it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions.
BBB: An issue rated BBB is regarded as backed by an adequate capacity to pay the preferred stock obligations. Whereas it normally exhibits adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to make payments for a preferred stock in this category than for issues in the A category.
BB, B, CCC: Preferred stock rated BB, B, and CCC are regarded, on balance, as predominantly speculative with respect to the issuer’s capacity to pay preferred stock obligations. BB indicates the lowest degree of speculation and CCC the highest degree of speculation. While such issues will likely have some quality and protective characteristics, these are outweighed by large uncertainties of major risk exposures to adverse conditions.
CC: The rating CC is reserved for a preferred stock in arrears on dividends or sinking fund payments but that is currently paying.
C: A preferred stock rated C is a non-paying issue.
D: A preferred stock rated D is a non-paying issue with the issuer in default on debt instruments. Plus (+) or Minus (-): The ratings from AA to CCC may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories.
NR: Indicates that no rating has been requested, that there is insufficient information on which to base a rating, or that S&P does not rate a particular type of obligation as a matter of policy.
VI. Excerpts from Fitch, Inc’s Preferred Stock Ratings:
AAA: These preferred stocks are considered to be investment grade and of the highest credit quality. The obligor has an exceptionally strong capacity for payment of financial commitments, which is unlikely to be adversely affected by foreseeable events.
AA: These preferred stocks are considered to be investment grade and of very high credit quality. The obligor’s capacity for payment of financial commitments is very strong and is not significantly vulnerable to foreseeable events.
A: These preferred stocks are considered to be investment grade and of high credit quality. The obligor’s capacity for payment of financial commitments is considered to be strong, but may be more vulnerable to adverse changes in economic conditions and circumstances than preferred stocks with higher ratings.
BBB: These preferred stocks are considered to be investment grade and of good credit quality. The obligor’s capacity for payment of financial commitments is considered to be adequate. Adverse changes in economic conditions and circumstances, however, are more likely to impair this capacity.
BB: These preferred stocks are considered speculative and have an elevated vulnerability to default risk, particularly in the event of adverse changes in business or economic conditions over time. However, business or financial flexibility exists which supports the servicing of financial commitments.
B: These preferred stocks are considered highly speculative. While preferred in this class are currently meeting financial commitments, the capacity for continued timely payment is vulnerable to deterioration in the business and economic environment.
CCC: These preferred stocks are considered to have substantial credit risk. Default is a real possibility.
CC: These preferred stocks are considered to have very high levels of credit risk. Default of some kind appears probable.
C: These preferred stocks are considered to have exceptionally high levels of credit risk. Default is imminent or inevitable, or the issuer is in standstill.
D: Default indicates an issuer that in Fitch Ratings’ opinion has entered into bankruptcy filings, administration, receivership, liquidation or other formal winding-up procedure, or which has otherwise ceased business.
Default ratings are not assigned prospectively to entities or their obligations; within this context, non-payment on an instrument that contains a deferral feature or grace period will generally not be considered a default until after the expiration of the deferral or grace period, unless a default is otherwise driven by bankruptcy or other similar circumstance, or by a distressed debt exchange.
“Imminent” default typically refers to the occasion where a payment default has been intimated by the issuer, and is all but inevitable. This may, for example, be where an issuer has missed a scheduled payment, but (as is typical) has a grace period during which it may cure the payment default. Another alternative would be where an issuer has formally announced a distressed debt exchange, but the date of the exchange still lies several days or weeks in the immediate future. In all cases, the assignment of a default rating reflects the agency’s opinion as to the most appropriate rating category consistent with the rest of its universe of ratings, and may differ from the definition of default under the terms of an issuer’s financial obligations or local commercial practice.
The modifiers “+” or “-” may be appended to a rating to denote relative status within major rating categories. Such suffixes are not added to the AAA Long-Term rating category, or to categories below CCC.
STATEMENT OF ADDITIONAL INFORMATION
Morgan Stanley
Limited Duration
U.S. Government
Trust
Ticker Symbol | |||||||
Advisor Class | LDTRX | ||||||
Class I | MLDUX |
September 30, 2015
This Statement of Additional Information ("SAI") is not a prospectus. The Prospectus (dated September 30, 2015) for Morgan Stanley Limited Duration U.S. Government Trust may be obtained without charge from the Fund at its address or telephone number listed below.
The Fund's audited financial statements for the fiscal year ended May 31, 2015, including notes thereto, and the report of the Fund's independent registered public accounting firm, are herein incorporated by reference to the Fund's Annual Report to Shareholders. A copy of the Fund's Annual Report to Shareholders must accompany the delivery of this SAI.
Morgan Stanley
Limited Duration U.S. Government Trust
522 Fifth Avenue
New York, NY 10036
(800) 548-7786
TABLE OF CONTENTS
I. | Fund History | 4 | |||||||||
II. | Description of the Fund and Its Investments and Risks | 4 | |||||||||
A. Classification | 4 | ||||||||||
B. Investment Strategies and Risks | 4 | ||||||||||
C. Fund Policies/Investment Restrictions | 18 | ||||||||||
D. Disclosure of Portfolio Holdings | 19 | ||||||||||
III. | Management of the Fund | 21 | |||||||||
A. Board of Trustees | 21 | ||||||||||
B. Management Information | 22 | ||||||||||
C. Compensation | 33 | ||||||||||
IV. | Control Persons and Principal Holders of Securities | 35 | |||||||||
V. | Investment Advisory and Other Services | 35 | |||||||||
A. Adviser and Administrator | 35 | ||||||||||
B. Principal Underwriter | 36 | ||||||||||
C. Services Provided by the Adviser and Administrator | 36 | ||||||||||
D. Shareholder Services Plan | 37 | ||||||||||
E. Other Service Providers | 37 | ||||||||||
F. Fund Management | 38 | ||||||||||
G. Codes of Ethics | 39 | ||||||||||
H. Proxy Voting Policy and Proxy Voting Record | 39 | ||||||||||
I. Revenue Sharing | 39 | ||||||||||
VI. | Brokerage Allocation and Other Practices | 41 | |||||||||
A. Brokerage Transactions | 41 | ||||||||||
B. Commissions | 41 | ||||||||||
C. Brokerage Selection | 41 | ||||||||||
D. Regular Broker-Dealers | 43 | ||||||||||
VII. | Capital Stock and Other Securities | 43 | |||||||||
VIII. | Purchase, Redemption and Pricing of Shares | 44 | |||||||||
A. Purchase/Redemption of Shares | 44 | ||||||||||
B. Offering Price | 45 | ||||||||||
IX. | Taxes | 46 | |||||||||
X. | Underwriters | 49 | |||||||||
XI. | Performance Data | 49 | |||||||||
XII. | Financial Statements | 49 | |||||||||
XIII. | Fund Counsel | 49 | |||||||||
Appendix A. — Morgan Stanley Investment Management Proxy Voting Policy and Procedures | A-1 | ||||||||||
Appendix B. — Description of Ratings | B-1 |
2
Glossary of Selected Defined Terms
The terms defined in this glossary are frequently used in this SAI (other terms used occasionally are defined in the text of the document).
"Administrator" — Morgan Stanley Investment Management Inc., a wholly-owned fund services subsidiary of Morgan Stanley.
"Adviser" — Morgan Stanley Investment Management Inc., a wholly-owned investment adviser subsidiary of Morgan Stanley.
"Custodian" — State Street Bank and Trust Company.
"Distributor" — Morgan Stanley Distribution, Inc., a wholly-owned broker-dealer subsidiary of Morgan Stanley.
"Financial Intermediaries" — Morgan Stanley authorized financial services representatives or other authorized third-parties, such as brokers, dealers or other financial intermediaries that have entered into a selling agreement with the Distributor.
"Fund" — Morgan Stanley Limited Duration U.S. Government Trust, a registered open-end investment company.
"Independent Trustees" — Trustees who are not "interested persons" (as defined by the Investment Company Act of 1940, as amended ("Investment Company Act")) of the Fund.
"Transfer Agent" — Boston Financial Data Services, Inc.
"Trustees" — The Board of Trustees of the Fund.
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I. FUND HISTORY
The Fund was organized as a Massachusetts business trust, under a Declaration of Trust, on June 4, 1991, with the name Dean Witter Short-Term U.S. Treasury Trust. Effective June 22, 1998, the Fund's name was changed to Morgan Stanley Dean Witter Short-Term U.S. Treasury Trust. Effective June 18, 2001, the Fund's name was changed to Morgan Stanley Short-Term U.S. Treasury Trust. Effective July 30, 2002, the Fund's name was changed to Morgan Stanley Limited Duration U.S. Treasury Trust. Effective November 22, 2006, the Fund's name was changed to Morgan Stanley Limited Duration U.S. Government Trust.
II. DESCRIPTION OF THE FUND AND ITS INVESTMENTS AND RISKS
A. Classification
The Fund is an open-end, diversified management investment company whose investment objective is to seek current income, preservation of principal and liquidity.
B. Investment Strategies and Risks
The following discussion of the Fund's investment strategies and risks should be read with the sections of the Fund's Prospectus titled "Principal Investment Strategies," "Principal Risks" and "Additional Information about the Fund's Investment Objective, Strategies and Risks."
Derivatives. The Fund may, but is not required to, use various derivatives and related investment strategies as described below. Derivatives may be used for a variety of purposes including hedging, risk management, portfolio management or to earn income. Any or all of the investment techniques described herein may be used at any time and there is no particular strategy that dictates the use of one technique rather than another, as the use of any derivative by the Fund is a function of numerous variables, including market conditions. The Fund complies with applicable regulatory requirements when using derivatives, including the earmarking or segregating of cash or liquid assets when mandated by U.S. Securities and Exchange Commission ("SEC") rules or SEC staff positions. Although the Adviser seeks to use derivatives to further the Fund's investment objective, no assurance can be given that the use of derivatives will achieve this result.
General Risks of Derivatives. Derivatives utilized by the Fund may involve the purchase and sale of derivative instruments. A derivative is a financial instrument the value of which depends upon (or derives from) the value of another asset, security, interest rate or index. Derivatives may relate to a wide variety of underlying instruments, including equity and debt securities, indices, interest rates, currencies and other assets. Certain derivative instruments which the Fund may use and the risks of those instruments are described in further detail below. The Fund may in the future also utilize derivatives techniques, instruments and strategies that may be newly developed or permitted as a result of regulatory changes, consistent with the Fund's investment objective and policies. Such newly developed techniques, instruments and strategies may involve risks different than or in addition to those described herein. No assurance can be given that any derivatives strategy employed by the Fund will be successful.
The risks associated with the use of derivatives are different from, and possibly greater than, the risks associated with investing directly in the instruments underlying such derivatives. Derivatives are highly specialized instruments that require investment techniques and risk analyses different from other portfolio investments. The use of derivative instruments requires an understanding not only of the underlying instrument but also of the derivative itself. Certain risk factors generally applicable to derivative transactions are described below.
• Derivatives are subject to the risk that the market value of the derivative itself or the market value of underlying instruments will change in a way adverse to the Fund's interests. The Fund bears the risk that the Adviser may incorrectly forecast future market trends and other financial or economic factors or the value of the underlying security, index, interest rate or currency when establishing a derivatives position for the Fund.
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• Derivatives may be subject to pricing risk, which exists when a derivative becomes extraordinarily expensive (or inexpensive) relative to historical prices or corresponding instruments. Under such market conditions, it may not be economically feasible to initiate a transaction or liquidate a position at an advantageous time or price.
• Many derivatives are complex and often valued subjectively. Improper valuations can result in increased payment requirements to counterparties or a loss of value to the Fund.
• Using derivatives as a hedge against a portfolio investment subjects the Fund to the risk that the derivative will have imperfect correlation with the portfolio investment, which could result in the Fund incurring substantial losses. This correlation risk may be greater in the case of derivatives based on an index or other basket of securities, as the portfolio securities being hedged may not duplicate the components of the underlying index or the basket may not be of exactly the same type of obligation as those underlying the derivative. The use of derivatives for "cross hedging" purposes (using a derivative based on one instrument as a hedge for a different instrument) may also involve greater correlation risks.
• While using derivatives for hedging purposes can reduce the Fund's risk of loss, it may also limit the Fund's opportunity for gains or result in losses by offsetting or limiting the Fund's ability to participate in favorable price movements in portfolio investments.
• Derivatives transactions for non-hedging purposes involve greater risks and may result in losses which would not be offset by increases in the value of portfolio securities or declines in the cost of securities to be acquired. In the event that the Fund enters into a derivatives transaction as an alternative to purchasing or selling the underlying instrument or in order to obtain desired exposure to an index or market, the Fund will be exposed to the same risks as are incurred in purchasing or selling the underlying instruments directly as well as additional risks associated with derivatives transactions.
• The use of certain derivatives transactions, including over-the-counter ("OTC") derivatives, involves the risk of loss resulting from the insolvency or bankruptcy of the counterparty to the contract or the failure by the counterparty to make required payments or otherwise comply with the terms of the contract. In the event of default by a counterparty, the Fund may have contractual remedies pursuant to the agreements related to the transaction.
• Liquidity risk exists when a particular derivative is difficult to purchase or sell. If a derivative transaction is particularly large or if the relevant market is illiquid, the Fund may be unable to initiate a transaction or liquidate a position at an advantageous time or price.
• While some derivatives are cleared through a regulated, central clearinghouse, many derivatives transactions are not entered into or traded on exchanges or in markets regulated by the U.S. Commodity Futures Trading Commission ("CFTC") or the SEC. Instead, such bilateral OTC derivatives are entered into directly by the Fund and a counterparty and may be traded only through financial institutions acting as market makers. OTC derivatives transactions can only be entered into with a willing counterparty that is approved by the Adviser in accordance with guidelines established by the Board. Where no such counterparty is available, the Fund will be unable to enter into a desired OTC transaction. There also may be greater risk that no liquid secondary market in the trading of OTC derivatives will exist, in which case the Fund may be required to hold such instruments until exercise, expiration or maturity. Many of the protections afforded to participants in the cleared derivatives markets are not available to participants in bilateral OTC derivatives transactions. Bilateral OTC derivatives transactions are not subject to the guarantee of a clearinghouse and, as a result, the Fund would bear greater risk of default by the counterparties to such transactions.
• The Fund may be required to make physical delivery of portfolio securities underlying a derivative in order to close out a derivatives position or to sell portfolio securities at a time or price at which it may be disadvantageous to do so in order to obtain cash to close out or to maintain a derivatives position.
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• As a result of the structure of certain derivatives, adverse changes in, among other things, interest rates, volatility or the value of the underlying instrument can result in losses substantially greater than the amount invested in the derivative itself. Certain derivatives have the potential for unlimited loss, regardless of the size of the initial investment.
• Certain derivatives may be considered illiquid and therefore subject to the Fund's limitation on investments in illiquid securities.
Options
An option is a contract that gives the holder of the option the right, but not the obligation, to buy from (in the case of a call option) or sell to (in the case of a put option) the seller of the option (the "option writer") the underlying security at a specified fixed price (the "exercise price") on or prior to a specified date for American options or only at expiration for European options (the "expiration date"). The buyer of the option pays to the option writer the option premium, which is the purchase price of the option.
Exchange-traded options are issued by a regulated intermediary such as the Options Clearing Corporation ("OCC"), which guarantees the performance of the obligations of the parties to such options. OTC options are purchased from or sold to counterparties through direct bilateral agreements between the Fund and its counterparties. Certain options, such as options on individual securities, may be settled through physical delivery of the underlying security, whereas other options, such as index options, are settled in cash in an amount based on the difference between the value of the underlying instrument and the strike price, which is then multiplied by a specified multiplier.
Writing Options. The Fund may write call and put options. As the writer of a call option, the Fund receives the premium from the purchaser of the option and has the obligation, upon exercise of the option, to deliver the underlying security upon payment of the exercise price. If the option expires without being exercised the Fund is not required to deliver the underlying security and retains the premium received.
The Fund may only write call options that are "covered." A call option on a security is covered if (a) the Fund owns the security underlying the call or has an absolute and immediate right to acquire that security without additional cash consideration (or, if additional cash consideration is required, such amount is maintained by the Fund in earmarked or segregated cash or liquid assets) upon conversion or exchange of other securities held by the Fund; or (b) the Fund has purchased a call on the underlying security, the exercise price of which is (i) equal to or less than the exercise price of the call written, or (ii) greater than the exercise price of the call written, provided the difference is maintained by the Fund in earmarked or segregated cash or liquid assets.
Selling call options involves the risk that the Fund may be required to sell the underlying security at a disadvantageous price, below the market price of such security, at the time the option is exercised. As the writer of a covered call option, the Fund forgoes, during the option's life, the opportunity to profit from increases in the market value of the underlying security covering the option above the sum of the premium and the exercise price but retains the risk of loss should the price of the underlying security decline.
The Fund may write put options. As the writer of a put option, the Fund receives the premium from the purchaser of the option and has the obligation, upon exercise of the option, to pay the exercise price and receive delivery of the underlying security. If the option expires without being exercised, the Fund is not required to receive the underlying security in exchange for the exercise price and retains the option premium.
The Fund may only write put options that are "covered." A put option on a security is covered if (a) the Fund segregates or earmarks or segregates cash or liquid assets equal to the exercise price; or (b) the Fund has purchased a put on the same security as the put written, the exercise price of which is (i) equal to or greater than the exercise price of the put written, or (ii) less than the exercise price of the put written, provided the difference is maintained by the Fund in earmarked or segregated cash or liquid assets.
Selling put options involves the risk that the Fund may be required to buy the underlying security at a disadvantageous price, above the market price of such security, at the time the option is exercised. While the Fund's potential gain in writing a covered put option is limited to the premium received plus the interest earned on the liquid assets covering the put option, the Fund's risk of loss is equal to the entire value of the underlying security, offset only by the amount of the premium received.
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The Fund may close out an options position which it has written through a closing purchase transaction. The Fund could execute a closing purchase transaction with respect to a written call option by purchasing a call option on the same underlying security which has the same exercise price and expiration date as the call option written by the Fund. The Fund could execute a closing purchase transaction with respect to a put option written by purchasing a put option on the same underlying security and having the same exercise price and expiration date as the put option written by the Fund. A closing purchase transaction may or may not result in a profit to a Fund. The Fund can close out its position as an option writer only if a liquid market exists for options on the same underlying security which have the same exercise price and expiration date as the option written by the Fund. There is no assurance that such a market will exist with respect to any particular option.
The writer of an American option generally has no control over the time when the option is exercised and the option writer is required to deliver or acquire the underlying security. Once an option writer has received an exercise notice, it cannot effect a closing purchase transaction in order to terminate its obligation under the option. Thus, the use of options may require the Fund to buy or sell portfolio securities at inopportune times or for prices other than the current market values of such securities, which may limit the amount of appreciation the Fund can realize on an investment, or may cause the Fund to hold a security that it might otherwise sell.
Purchasing Options. The Fund may purchase call and put options. As the buyer of a call option, the Fund pays the premium to the option writer and has the right to purchase the underlying security from the option writer at the exercise price. If the market price of the underlying security rises above the exercise price, the Fund could exercise the option and acquire the underlying security at a below-market price, which could result in a gain to the Fund, minus the premium paid. As the buyer of a put option, the Fund pays the premium to the option writer and has the right to sell the underlying security to the option writer at the exercise price. If the market price of the underlying security declines below the exercise price, the Fund could exercise the option and sell the underlying security at an above-market price, which could result in a gain to the Fund, minus the premium paid. The Fund may buy call and put options whether or not it holds the underlying securities.
As a buyer of a call or put option, the Fund may sell put or call options that it has purchased at any time prior to such option's expiration date through a closing sale transaction. The principal factors affecting the market value of a put or a call option include supply and demand, interest rates, the current market price of the underlying security in relation to the exercise price of the option, the volatility of the underlying security, the underlying security's dividend policy, and the time remaining until the expiration date. A closing sale transaction may or may not result in a profit to the Fund. The Fund's ability to initiate a closing sale transaction is dependent upon the liquidity of the options market and there is no assurance that such a market will exist with respect to any particular option. If the Fund does not exercise or sell an option prior to its expiration date, the option expires and becomes worthless.
OTC Options. Unlike exchange-traded options, which are standardized with respect to the underlying instrument, expiration date, contract size and strike price, the terms of OTC options generally are established through negotiation between the parties to the options contract. This type of arrangement allows the purchaser and writer greater flexibility to tailor the option to their needs. OTC options are available for a greater variety of securities or other assets, and in a wider range of expiration dates and exercise prices, than exchange-traded options. However, unlike exchange-traded options, which are issued and guaranteed by a regulated intermediary, such as the OCC, OTC options are entered into directly with the counterparty. Unless the counterparties provide for it, there is no central clearing or guaranty function for an OTC option. Therefore, OTC options are subject to the risk of default or non-performance by the counterparty. Accordingly, the Adviser must assess the creditworthiness of the counterparty to determine the likelihood that the terms of the option will be satisfied. There can be no assurance that a continuous liquid secondary market will exist for any particular OTC option at any specific time. As a result, the Fund may be unable to enter into closing sale transactions with respect to OTC options.
Index Options. Call and put options on indices operate similarly to options on securities. Rather than the right to buy or sell a single security at a specified price, options on an index give the holder the right to receive, upon exercise of the option, an amount of cash determined by reference to the difference between the value of the underlying index and the strike price. The underlying index may be a broad-based index or a narrower market index. Unlike many options on securities, all settlements are in cash. The set-
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tlement amount, which the writer of an index option must pay to the holder of the option upon exercise, is generally equal to the difference between the strike price of the option and the value of the underlying index, multiplied by a specified multiplier. The multiplier determines the size of the investment position the option represents. Gain or loss to the Fund on index options transactions will depend, in part, on price movements of the underlying index generally or in a particular segment of the index rather than price movements of individual components of the index. As with other options, the Fund may close out its position in index options through closing purchase transactions and closing sale transactions provided that a liquid secondary market exists for such options.
Index options written by the Fund will generally be covered in a manner similar to the covering of other types of options, by holding an offsetting financial position and/or segregating or earmarking cash or liquid assets. The Fund may cover call options written on an index by owning securities or other assets whose price changes, in the opinion of the Adviser, are expected to correlate to those of the underlying index.
Additional Risks of Options Transactions. The risks associated with options transactions are different from, and possibly greater than, the risks associated with investing directly in the underlying instruments. Options are highly specialized instruments that require investment techniques and risk analyses different from those associated with other portfolio investments. The use of options requires an understanding not only of the underlying instrument but also of the option itself. Options may be subject to the risk factors generally applicable to derivatives transactions described herein, and may also be subject to certain additional risk factors, including:
• The exercise of options written or purchased by the Fund could cause the Fund to sell portfolio securities, thus increasing the Fund's portfolio turnover.
• The Fund pays brokerage commissions each time it writes or purchases an option or buys or sells an underlying security in connection with the exercise of an option. Such brokerage commissions could be higher relative to the commissions for direct purchases of sales of the underlying securities.
• The Fund's options transactions may be limited by limitations on options positions established by the SEC, the CFTC or the exchanges on which such options are traded.
• The hours of trading for exchange-listed options may not coincide with the hours during which the underlying securities are traded. To the extent that the options markets close before the markets for the underlying securities, significant price and rate movements can take place in the underlying securities that cannot be reflected in the options markets.
• Index options based upon a narrow index of securities or other assets may present greater risks than options based on broad market indices, as narrower indices are more susceptible to rapid and extreme fluctuations as a result of changes in the values of a smaller number of securities or other assets.
• The Fund is subject to the risk of market movements between the time that an option is exercised and the time of performance thereunder, which could increase the extent of any losses suffered by the Fund in connection with options transactions.
Futures Contracts
A futures contract is a standardized, exchange-traded agreement to buy or sell a specific quantity of an underlying asset, reference rate or index at a specific price at a specific future time (the "settlement date"). Futures contracts may be based on, among other things, a specified equity security (securities futures), a specified debt security or reference rate (interest rate futures), the value of a specified securities index (index futures) or the value of a foreign currency (currency futures). The value of a futures contract tends to increase and decrease in tandem with the value of the underlying instrument. The buyer of a futures contract agrees to purchase the underlying instrument on the settlement date and is said to be "long" the contract. The seller of a futures contract agrees to sell the underlying instrument on the settlement date and is said to be "short" the contract. Futures contracts call for settlement only on the expiration date and cannot be "exercised" at any other time during their term.
Depending on the terms of the particular contract, futures contracts are settled through either physical delivery of the underlying instrument on the settlement date (such as in the case of securities futures based on a specified debt security) or by payment of a cash settlement amount on the settlement date (such as
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in the case of futures contracts relating to broad-based securities indices). In the case of cash-settled futures contracts, the settlement amount is equal to the difference between the reference instrument's price on the last trading day of the contract and the reference instrument's price at the time the contract was entered into. Most futures contracts, particularly futures contracts requiring physical delivery, are not held until the settlement date, but instead are offset before the settlement date through the establishment of an opposite and equal futures position (buying a contract that had been sold, or selling a contract that had been purchased). All futures transactions are effected through a clearinghouse associated with the exchange on which the futures are traded.
The buyer and seller of a futures contract are not required to deliver or pay for the underlying commodity unless the contract is held until the settlement date. However, both the buyer and seller are required to deposit "initial margin" with a futures commission merchant when the futures contract is entered into. Initial margin deposits are typically calculated as a percentage of the contract's market value. If the value of either party's position declines, the party will be required to make additional "variation margin" payments to settle the change in value on a daily basis. The process is known as "marking-to-market." Upon the closing of a futures position through the establishment of an offsetting position, a final determination of variation margin will be made and additional cash will be paid by or released to the Fund.
In addition, the Fund may be required to earmark or segregate cash or liquid assets or maintain earmarked cash or segregated liquid assets in order to cover futures transactions. The Fund will earmark cash or segregate liquid assets in an amount equal to the difference between the market value of a futures contract entered into by the Fund and the aggregate value of the initial and variation margin payments made by the Fund with respect to such contract or as otherwise permitted by SEC rules or SEC staff positions. See "Regulatory Matters" below.
Options on Futures Contracts. Options on futures contracts are similar to options on securities except that options on futures contracts give the purchasers the right, in return for the premium paid, to assume a position in a futures contract (a long position in the case of a call option and a short position in the case of a put option) at a specified exercise price at any time prior to the expiration of the option. Upon exercise of the option, the parties will be subject to all of the risks associated with futures transactions and subject to margin requirements. As the writer of options on futures contracts, the Fund would also be subject to initial and variation margin requirements on the option position.
Options on futures contracts written by the Fund will generally be covered in a manner similar to the covering of other types of options, by holding an offsetting financial position and/or earmarking or segregating cash or liquid assets. The Fund may cover an option on a futures contract by purchasing or selling the underlying futures contract. In such instances the exercise of the option will serve to close out the Fund's futures position.
Additional Risks of Futures Transactions. The risks associated with futures contract transactions are different from, and possibly greater than, the risks associated with investing directly in the underlying instruments. Futures are highly specialized instruments that require investment techniques and risk analyses different from those associated with other portfolio investments. The use of futures requires an understanding not only of the underlying instrument but also of the futures contract itself. Futures may be subject to the risk factors generally applicable to derivatives transactions described herein, and may also be subject to certain additional risk factors, including:
• The risk of loss in buying and selling futures contracts can be substantial. Small price movements in the commodity underlying a futures position may result in immediate and substantial loss (or gain) to the Fund.
• Buying and selling futures contracts may result in losses in excess of the amount invested in the position in the form of initial margin. In the event of adverse price movements in the underlying commodity, security, index, currency or instrument, the Fund would be required to make daily cash payments to maintain its required margin. The Fund may be required to sell portfolio securities, or make or take delivery of the underlying securities in order to meet daily margin requirements at a time when it may be disadvantageous to do so. The Fund could lose margin payments deposited with a futures commission merchant if the futures commission merchant breaches its agreement with the Fund, becomes insolvent or declares bankruptcy.
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• Most exchanges limit the amount of fluctuation permitted in futures contract prices during any single trading day. Once the daily limit has been reached in a particular futures contract, no trades may be made on that day at prices beyond that limit. If futures contract prices were to move to the daily limit for several trading days with little or no trading, the Fund could be prevented from prompt liquidation of a futures position and subject to substantial losses. The daily limit governs only price movements during a single trading day and therefore does not limit the Fund's potential losses.
• Index futures based upon a narrower index of securities may present greater risks than futures based on broad market indices, as narrower indices are more susceptible to rapid and extreme fluctuations as a result of changes in value of a small number of securities.
Swap Contracts and Related Derivative Instruments
An OTC swap contract is an agreement between two parties pursuant to which the parties exchange payments at specified dates on the basis of a specified notional amount, with the payments calculated by reference to specified securities, indices, reference rates, currencies or other instruments. Most swap agreements provide that when the period payment dates for both parties are the same, the payments are made on a net basis (i.e., the two payment streams are netted out, with only the net amount paid by one party to the other). The Fund's obligations or rights under a swap contract entered into on a net basis will generally be equal only to the net amount to be paid or received under the agreement, based on the relative values of the positions held by each party. Many swap agreements are not entered into or traded on exchanges and often there is no central clearing or guaranty function for swaps. These OTC swaps are often subject to the risk of default or non-performance by the counterparty. Accordingly, the Adviser must assess the creditworthiness of the counterparty to determine the likelihood that the terms of the swap will be satisfied.
Swap agreements allow for a wide variety of transactions. For example, fixed rate payments may be exchanged for floating rate payments, U.S. dollar-denominated payments may be exchanged for payments denominated in foreign currencies, and payments tied to the price of one security, index, reference rate, currency or other instrument may be exchanged for payments tied to the price of a different security, index, reference rate, currency or other instrument. Swap contracts are typically individually negotiated and structured to provide exposure to a variety of particular types of investments or market factors. Swap contracts can take many different forms and are known by a variety of names. To the extent consistent with a Fund's investment objective and policies, the Fund is not limited to any particular form or variety of swap contract. The Fund may utilize swaps to increase or decrease its exposure to the underlying instrument, reference rate, foreign currency, market index or other asset. The Fund may also enter into related derivative instruments including caps, floors and collars.
The Fund may be required to cover swap transactions. Obligations under swap agreements entered into on a net basis are generally accrued daily and any accrued but unpaid amounts owed by the Fund to the swap counterparty will be covered by earmarking or segregating cash or liquid assets. If the Fund enters into a swap agreement on other than a net basis, the Fund will earmark or segregate cash or liquid assets with a value equal to the full notional amount of the Fund's accrued obligations under the agreement.
The Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act") and related regulatory developments require the eventual clearing and exchange-trading of many standardized OTC derivative instruments that the CFTC and SEC recently defined as "swaps" and "security based swaps," respectively. Mandatory exchange-trading and clearing is occurring on a phased-in basis based on the type of market participant and CFTC approval of contracts for central clearing and exchange trading. In a cleared swap, the Fund's ultimate counterparty is a central clearinghouse rather than a brokerage firm, bank or other financial institution. The Fund initially will enter into cleared swaps through an executing broker. Such transactions will then be submitted for clearing and, if cleared, will be held at regulated futures commission merchants ("FCMs") that are members of the clearinghouse that serves as the central counterparty. When the Fund enters into a cleared swap, it must deliver to the central counterparty (via an FCM) an amount referred to as "initial margin." Initial margin requirements are determined by the central counterparty, but an FCM may require additional initial margin above the amount required by the central counterparty. During the term of the swap agreement, a "variation margin" amount may also be required to be paid by the Fund or may be received by the Fund in accordance with margin controls set for such accounts, depending upon changes in the price of the underlying reference asset subject to the swap agreement. At the conclusion of the term of the swap agreement, if the Fund has a loss equal to or greater than the margin amount, the margin amount is paid to the FCM along with any loss that is greater than such margin amount.
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If the Fund has a loss of less than the margin amount, the excess margin is returned to the Fund. If the Fund has a gain, the full margin amount and the amount of the gain is paid to the Fund.
Central clearing is designed to reduce counterparty credit risk compared to uncleared swaps because central clearing interposes the central clearinghouse as the counterparty to each participant's swap, but it does not eliminate those risks completely. There is also a risk of loss by the Fund of the initial and variation margin deposits in the event of bankruptcy of the FCM with which the Fund has an open position in a swap contract. The assets of the Fund may not be fully protected in the event of the bankruptcy of the FCM or central counterparty because the Fund might be limited to recovering only a pro rata share of all available funds and margin segregated on behalf of an FCM's or central counterparty's customers or clearing members. If the FCM does not provide accurate reporting, the Fund is also subject to the risk that the FCM could use the Fund's assets, which are held in an omnibus account with assets belonging to the FCM's other customers, to satisfy its own financial obligations or the payment obligations of another customer to the central counterparty. Certain swaps have begun trading on exchanges called swap execution facilities ("SEFs"). Exchange-trading is expected to increase liquidity of swaps trading.
In addition, with respect to cleared swaps, the Fund may not be able to obtain as favorable terms as it would be able to negotiate for an uncleared swap. In addition, an FCM may unilaterally impose position limits or additional margin requirements for certain types of swaps in which the Fund may invest. Central counterparties and FCMs generally can require termination of existing cleared swap transactions at any time, and can also require increases in margin above the margin that is required at the initiation of the swap agreement. Margin requirements for cleared swaps vary on a number of factors, and the margin required under the rules of the clearinghouse and FCM may be in excess of the collateral required to be posted by the Fund to support its obligations under a similar uncleared swap. However, regulators are expected to adopt rules imposing certain margin requirements, including minimums, on uncleared swaps in the near future, which could change this comparison.
The Fund is also subject to the risk that, after entering into a cleared swap with an executing broker, no FCM or central counterparty is willing or able to clear the transaction. In such an event, the central counterparty would void the trade. Before the Fund can enter into a new trade, market conditions may become less favorable to the Fund.
The Adviser will continue to monitor developments regarding trading and execution of cleared swaps on exchanges, particularly to the extent regulatory changes affect the Fund's ability to enter into swap agreements and the costs and risks associated with such investments.
Interest Rate Swaps, Caps, Floors and Collars. Interest rate swaps consist of an agreement between two parties to exchange their respective commitments to pay or receive interest (e.g., an exchange of floating rate payments for fixed rate payments). Interest rate swaps are generally entered into on a net basis. Interest rate swaps do not involve the delivery of securities, other underlying assets, or principal. Accordingly, the risk of loss with respect to interest rate and total rate of return swaps is limited to the net amount of interest payments that the Fund is contractually obligated to make.
The Fund may also buy or sell interest rate caps, floors and collars. The purchase of an interest rate cap entitles the purchaser, to the extent that a specified interest rate exceeds a predetermined level, to receive payments of interest on a specified notional amount from the party selling the interest rate cap. The purchase of an interest rate floor entitles the purchaser, to the extent that a specified interest rate falls below a predetermined level, to receive payments of interest on a specified notional amount from the party selling the interest rate floor. A collar is a combination of a cap and a floor that preserves a certain return within a predetermined range of interest rates. Caps, floors and collars may be less liquid than other types of derivatives. If a Fund sells caps, floors and collars, it will earmark or segregate cash or liquid assets with a value equal to the full amount, accrued daily, of the Fund's net obligations with respect to the caps, floors or collars.
Index Swaps. An index swap consists of an agreement between two parties in which a party typically exchanges a cash flow based on a notional amount of a reference index for a cash flow based on a different index or on another specified instrument or reference rate. Index swaps are generally entered into on a net basis.
Inflation Swaps. Inflation swap agreements are contracts in which one party typically agrees to pay the cumulative percentage increase in a price index, such as the Consumer Price Index, over the term of the swap (with some lag on the referenced inflation index), and the other party pays a compounded fixed
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rate. Inflation swap agreements may be used to protect the net asset value ("NAV") of the Fund against an unexpected change in the rate of inflation measured by an inflation index. The value of inflation swap agreements is expected to change in response to changes in real interest rates. Real interest rates are tied to the relationship between nominal interest rates and the rate of inflation.
Credit Default Swaps. A credit default swap consists of an agreement between two parties in which the "buyer" typically agrees to pay to the "seller" a periodic stream of payments over the term of the contract and the seller agrees to pay the buyer the par (or other agreed-upon) value of a referenced debt obligation upon the occurrence of a credit event with respect to the issuer of that referenced debt obligation. Generally, a credit event means a bankruptcy, failure to pay, or a restructuring. The Fund may be either the buyer or seller in a credit default swap. As the buyer in a credit default swap, the Fund would pay to the counterparty the periodic stream of payments. If no default occurs, the Fund would receive no benefit from the contract. As the seller in a credit default swap, the Fund would receive the stream of payments but would be subject to exposure on the notional amount of the swap, which it would be required to pay in the event of default. The Fund will generally earmark or segregate cash or liquid assets to cover any potential obligation under a credit default swap sold by the Fund. The use of credit default swaps could result in losses to the Fund if the Adviser fails to correctly evaluate the creditworthiness of the issuer of the referenced debt obligation.
Swaptions. An option on a swap agreement, also called a "swaption," is an option that gives the buyer the right, but not the obligation, to enter into a swap on a future date in exchange for a premium. A receiver swaption gives the owner the right to receive the return of a specified asset, reference rate, or index. A payer swaption gives the owner the right to pay the return of a specified asset, reference rate, or index. Swaptions also include options that allow an existing swap to be terminated or extended by one of the counterparties.
General Risks of Swaps. The risks associated with swap transactions are different from, and possibly greater than, the risks associated with investing directly in the underlying instruments. Swaps are highly specialized instruments that require investment techniques and risk analyses different from those associated with other portfolio investments. The use of swaps requires an understanding not only of the underlying instrument but also of the swap contract itself. Swap transactions may be subject to the risk factors generally applicable to derivatives transactions described above, and may also be subject to certain additional risk factors, including:
• OTC swap agreements are not traded on exchanges and may be subject to liquidity risk, which exists when a particular swap is difficult to purchase or sell.
• In addition to the risk of default by the counterparty, if the creditworthiness of a counterparty to a swap agreement declines, the value of the swap agreement would be likely to decline, potentially resulting in losses.
• The swaps market is subject to extensive regulation under the Dodd-Frank Act and certain CFTC and SEC rules promulgated thereunder. It is possible that further developments in the swaps market, including new and additional governmental regulation, could result in higher Fund costs and could adversely affect the Fund's ability to utilize swaps, terminate existing swap agreements or realize amounts to be received under such agreements.
Combined Transactions
Combined transactions involve entering into multiple derivatives transactions (such as multiple options transactions, including purchasing and writing options in combination with each other; multiple futures transactions; and combinations of options, futures, forward and swap transactions) instead of a single derivatives transaction in order to customize the risk and return characteristics of the overall position. Combined transactions typically contain elements of risk that are present in each of the component transactions. The Fund may enter into a combined transaction instead of a single derivatives transaction when, in the opinion of the Adviser, it is in the best interest of the Fund to do so. Because combined transactions involve multiple transactions, they may result in higher transaction costs and may be more difficult to close out.
Regulatory Matters
As described herein, the Fund may be required to cover its potential economic exposure to certain derivatives transactions by holding an offsetting financial position and/or earmarking cash or segregating cash or liquid assets equal in value to the Fund's potential economic exposure under the transaction. The
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Fund will cover such transactions as described herein or in such other manner in accordance with applicable laws and regulations. Assets used to cover derivatives transactions cannot be sold while the derivatives position is open, unless they are replaced by other appropriate assets. Earmarked or segregated cash or liquid assets and assets held in margin accounts are not otherwise available to the Fund for investment purposes. If a large portion of the Fund's assets are used to cover derivatives transactions or are otherwise segregated or earmarked, it could affect portfolio management or the Fund's ability to meet redemption requests or other current obligations. With respect to derivatives which are cash-settled (i.e., have no physical delivery requirement), the Fund is permitted to earmark or segregate cash or liquid assets in an amount equal to the Fund's daily marked-to-market net obligations (i.e., the Fund's daily net liability) under the derivative, if any, rather than the derivative's full notional amount or the market value of the instrument underlying the derivative, as applicable. By earmarking cash or segregating assets equal to only its net obligations under cash-settled derivatives, the Fund will have the ability to employ leverage to a greater extent than if the Fund were required to earmark cash or segregating assets equal to the full notional amount of the derivative or the market value of the underlying instrument, as applicable.
Regulatory developments affecting the exchange-traded and OTC derivatives markets may impair the Fund's ability to manage or hedge its investment portfolio through the use of derivatives. The Dodd-Frank Act and the rules promulgated thereunder may limit the ability of the Fund to enter into one or more exchange-traded or OTC derivatives transactions.
The Fund's use of derivatives may also be limited by the requirements of the Internal Revenue Code of 1986, as amended (the "Code"), for qualification as a regulated investment company for U.S. federal income tax purposes.
The Fund has filed a notice of eligibility with the National Futures Association ("NFA") claiming an exclusion from the definition of the term "commodity pool operator" ("CPO") pursuant to CFTC Regulation 4.5, as promulgated under the Commodity Exchange Act, as amended ("CEA"), with respect to the Fund's operations. Therefore, neither the Fund nor the Adviser (with respect to the Fund) is subject to registration or regulation as a CPO under the CEA. If the Fund becomes subject to these requirements, as well as related NFA rules, the Fund may incur additional compliance and other expenses.
With respect to investments in swap transactions, commodity futures, commodity options or certain other commodity interests used for purposes other than bona fide hedging purposes, an investment company must meet one of the following tests under the amended regulations in order for its investment adviser to claim an exemption from being considered a CPO. First, the aggregate initial margin and premiums required to establish an investment company's positions in such investments may not exceed five percent (5%) of the liquidation value of the investment company's portfolio (after accounting for unrealized profits and unrealized losses on any such investments). Alternatively, the aggregate net notional value of such instruments, determined at the time of the most recent position established, may not exceed one hundred percent (100%) of the liquidation value of the investment company's portfolio (after accounting for unrealized profits and unrealized losses on any such positions). In addition to meeting one of the foregoing trading limitations, the investment company may not market itself as a commodity pool or otherwise as a vehicle for trading in the commodity futures, commodity options or swaps and derivatives markets.
Collateralized Mortgage Obligations ("CMOs"). The Fund may invest in CMOs, which are mortgage-backed securities ("MBS") that are collateralized by mortgage loans or mortgage pass-through securities, and multi-class pass-through securities, which are equity interests in a trust composed of mortgage loans or other MBS. Unless the context indicates otherwise, the discussion of CMOs below also applies to multi-class pass through securities.
CMOs may be issued by governmental or government-related entities or by private entities, such as banks, savings and loan institutions, private mortgage insurance companies, mortgage bankers and other secondary market traders. CMOs are issued in multiple classes, often referred to as "tranches," with each tranche having a specific fixed or floating coupon rate and stated maturity or final distribution date. Under the traditional CMO structure, the cash flows generated by the mortgages or mortgage pass-through securities in the collateral pool are used to first pay interest and then pay principal to the holders of the CMOs. Subject to the various provisions of individual CMO issues, the cash flow generated by the underlying collateral (to the extent it exceeds the amount required to pay the stated interest) is used to retire the bonds.
The principal and interest on the underlying collateral may be allocated among the several tranches of a CMO in innumerable ways, including "interest only" and "inverse interest only" tranches. In a common
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CMO structure, the tranches are retired sequentially in the order of their respective stated maturities or final distribution dates (as opposed to the pro-rata return of principal found in traditional pass-through obligations). The fastest-pay tranches would initially receive all principal payments. When those tranches are retired, the next tranches in the sequence receive all of the principal payments until they are retired. The sequential retirement of bond groups continues until the last tranche is retired. Accordingly, the CMO structure allows the issuer to use cash flows of long maturity, monthly-pay collateral to formulate securities with short, intermediate, and long final maturities and expected average lives and risk characteristics.
The primary risk of CMOs is the uncertainty of the timing of cash flows that results from the rate of prepayments on the underlying mortgages serving as collateral and from the structure of the particular CMO transaction (that is, the priority of the individual tranches). An increase or decrease in prepayment rates (resulting from a decrease or increase in mortgage interest rates) may cause the CMOs to be retired substantially earlier than their stated maturities or final distribution dates and will affect the yield and price of CMOs. In addition, if the collateral securing CMOs or any third-party guarantees are insufficient to make payments, the Fund could sustain a loss. The prices of certain CMOs, depending on their structure and the rate of prepayments, can be volatile. Some CMOs may also not be as liquid as other types of mortgage securities. As a result, it may be difficult or impossible to sell the securities at an advantageous time or price.
Privately issued CMOs are arrangements in which the underlying mortgages are held by the issuer, which then issues debt collateralized by the underlying mortgage assets. Such securities may be backed by mortgage insurance, letters of credit, or other credit enhancing features. Although payment of the principal of, and interest on, the underlying collateral securing privately issued CMOs may be guaranteed by the U.S. Government or its agencies or instrumentalities, these CMOs represent obligations solely of the private issuer and are not insured or guaranteed by the U.S. Government, its agencies or instrumentalities or any other person or entity. Privately issued CMOs are subject to prepayment risk due to the possibility that prepayments on the underlying assets will alter the cash flow. Yields on privately issued CMOs have been historically higher than the yields on CMOs backed by mortgages guaranteed by U.S. government agencies or instrumentalities. The risk of loss due to default on privately issued CMOs, however, is historically higher since the U.S. government has not guaranteed them.
New types of CMO tranches have evolved. These include floating rate CMOs, planned amortization classes, accrual bonds and CMO residuals. These newer structures affect the amount and timing of principal and interest received by each tranche from the underlying collateral. For example, an inverse IO class CMO entitles holders to receive no payments of principal and to receive interest at a rate that will vary inversely with a specified index or a multiple thereof. Under certain of these newer structures, given classes of CMOs have priority over others with respect to the receipt of prepayments on the mortgages. Therefore, depending on the type of CMOs in which the Fund invests, the investment may be subject to a greater or lesser risk of prepayment than other types of MBS.
CMOs may include real estate investment conduits ("REMICs"). REMICs, which were authorized under the Tax Reform Act of 1986, are private entities formed for the purpose of holding a fixed pool of mortgages secured by an interest in real property. A REMIC is a CMO that qualifies for special tax treatment under the Code and invests in certain mortgages principally secured by interests in real property.
The Fund may invest in, among others, parallel pay CMOs and Planned Amortization Class CMOs ("PAC Bonds"). Parallel pay CMOs are structured to provide payments of principal on each payment date to more than one tranche. These simultaneous payments are taken into account in calculating the stated maturity date or final distribution date of each tranche which, as with other CMO structures, must be retired by its stated maturity date or final distribution date but may be retired earlier. PAC Bonds are a form of parallel pay CMO, with the required principal payment on such securities having the highest priority after interest has been paid to all classes. PAC Bonds generally require payments of a specified amount of principal on each payment date.
Stripped Mortgage-Backed Securities. The Fund may invest in stripped mortgage-backed securities ("SMBS"). An SMBS is a derivative multi-class mortgage security. SMBS usually are structured with two classes that receive different proportions of the interest and principal distribution on a pool of mortgage assets. In the most extreme case, one class will receive all of the interest (the interest-only or "IO" class), while the other class will receive all of the principal (the principal-only or "PO" class). The yield to maturity on an IO class is extremely sensitive to the rate of principal payments (including prepayments) on the
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related underlying mortgage assets, and a rapid rate of principal payments may have a material adverse effect on such security's yield to maturity. If the underlying mortgage assets experience greater than anticipated prepayments of principal, the Fund may fail to fully recoup its initial investment in these securities. Conversely, if the underlying mortgage assets experience less than anticipated prepayments of principal, the yield of POs could be materially adversely affected. The market values of IOs and POs are subject to greater risk of fluctuation in response to changes in market rates of interest than many other types of government securities. To the extent the Fund invests in IOs and POs, it may increase the risk of fluctuations in the NAV of the Fund.
Commercial Mortgage-Backed Securities ("CMBS"). The Fund may invest in CMBS. CMBS are generally multi-class or pass-through securities issued by special purpose entities that represent an undivided interest in a portfolio of mortgage loans backed by commercial properties, including, but not limited to, industrial and warehouse properties, office buildings, retail space and shopping malls, hotels, healthcare facilities, multifamily properties and cooperative apartments. Private lenders, such as banks or insurance companies, originate these loans and then sell the loans directly into a CMBS trust or other entity. The commercial mortgage loans that underlie CMBS are generally not amortizing or not fully amortizing. That is, at their maturity date, repayment of the remaining principal balance or "balloon" is due and is repaid through the attainment of an additional loan or sale of this property. An extension of the final payment on commercial mortgages will increase the average life of the CMBS, generally resulting in a lower yield for discount bonds and a higher yield for premium bonds.
CMBS are subject to credit risk and prepayment risk. Although prepayment risk is present, it is of a lesser degree in the CMBS than in the residential mortgage market; commercial real estate property loans often contain provisions which substantially reduce the likelihood that such securities will be prepaid (e.g., significant prepayment penalties on loans and, in some cases, prohibition on principal payments for several years following origination).
Inverse Floaters. Inverse floating rate obligations are obligations which pay interest at rates that vary inversely with changes in market rates of interest. Like most other fixed-income securities, the value of inverse floaters will decrease as interest rates increase. Because the interest rate paid to holders of such obligations is generally determined by subtracting a variable or floating rate from a predetermined amount, the interest rate paid to holders of such obligations will decrease as such variable or floating rate increases and increase as such variable or floating rate decreases. They are more volatile, however, than most other fixed-income securities because the coupon rate on an inverse floater typically changes at a multiple of the change in the relevant index rate. Thus, any rise in the index rate (as a consequence of an increase in interest rates) causes a correspondingly greater drop in the coupon rate of an inverse floater while a drop in the index rate causes a correspondingly greater increase in the coupon of an inverse floater. Some inverse floaters may also increase or decrease substantially because of changes in the rate of prepayments.
Borrowing. The Fund has an operating policy, which may be changed by the Fund's Board of Trustees, not to borrow except from a bank for temporary or emergency purposes in amounts not exceeding 5% (taken at the lower of cost or current value) of its total assets (not including the amount borrowed). Should the Board of Trustees remove this operating policy, the Fund would be permitted to borrow money from banks in accordance with the Investment Company Act, or the rules and regulations promulgated by the SEC thereunder. Currently, the Investment Company Act permits a fund to borrow money from banks in an amount up to 331/3% of its total assets (including the amount borrowed) less its liabilities (not including any borrowings but including the fair market value at the time of computation of any other senior securities then outstanding). The Fund may also borrow an additional 5% of its total assets without regard to the foregoing limitation for temporary purposes such as clearance of portfolio transactions. The Fund will only borrow when the Adviser believes that such borrowings will benefit the Fund after taking into account considerations such as interest income and possible gains or losses upon liquidation. The Fund will maintain asset coverage in accordance with the Investment Company Act.
Borrowing by the Fund creates an opportunity for increased net income but, at the same time, creates special risks. For example, leveraging may exaggerate changes in and increase the volatility of the NAV of Fund shares. This is because leverage tends to exaggerate the effect of any increase or decrease in the value of the Fund's portfolio securities. The use of leverage also may cause the Fund to liquidate portfolio positions when it may not be advantageous to do so in order to satisfy its obligations or to maintain asset coverage.
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In general, the Fund may not issue any class of senior security, except that the Fund may (i) borrow from banks, provided that immediately following any such borrowing there is an asset coverage of at least 300% for all Fund borrowings and in the event such asset coverage falls below 300% the Fund will within three days or such longer period as the SEC may prescribe by rules and regulations, reduce the amount of its borrowings to an extent that the asset coverage of such borrowings shall be at least 300%, and (ii) engage in trading practices which could be deemed to involve the issuance of a senior security, including but not limited to options, futures, forward contracts and reverse repurchase agreements, provided that the Fund earmarks or segregates cash or liquid assets in accordance with applicable SEC regulations and interpretations.
Loans of Portfolio Securities. The Fund may lend its portfolio securities to brokers, dealers, banks and other institutional investors. By lending its portfolio securities, the Fund attempts to increase its net investment income through the receipt of interest on the cash collateral with respect to the loan or fees received from the borrower in connection with the loan. Any gain or loss in the market price of the securities loaned that might occur during the term of the loan would be for the account of the Fund. The Fund employs an agent to implement the securities lending program and the agent receives a fee from the Fund for its services. The Fund will not lend more than 331/3% of the value of its total assets.
The Fund may lend its portfolio securities so long as the terms, structure and the aggregate amount of such loans are not inconsistent with the Investment Company Act or the rules and regulations or interpretations of the SEC thereunder, which currently require that (i) the borrower pledge and maintain with the Fund collateral consisting of liquid, unencumbered assets having a value at all times not less than 100% of the value of the securities loaned; (ii) the borrower add to such collateral whenever the price of the securities loaned rises (i.e., the borrower "marks to market" on a daily basis); (iii) the loan be made subject to termination by the Fund at any time; and (iv) the Fund receives a reasonable return on the loan (which may include the Fund investing any cash collateral in interest bearing short-term investments), any distributions on the loaned securities and any increase in their market value. In addition, voting rights may pass with the loaned securities, but the Fund will retain the right to call any security in anticipation of a vote that the Adviser deems material to the security on loan.
Loans of securities involve a risk that the borrower may fail to return the securities or may fail to maintain the proper amount of collateral, which may result in a loss of money by the Fund.
There may be risks of delay and costs involved in recovery of securities or even loss of rights in the collateral should the borrower of the securities fail financially. These delays and costs could be greater for foreign securities. However, loans will be made only to borrowers deemed by the Adviser to be creditworthy and when, in the judgment of the Adviser, the income which can be earned from such securities loans justifies the attendant risk. All relevant facts and circumstances, including the creditworthiness of the broker, dealer, bank or institution, will be considered in making decisions with respect to the lending of securities, subject to review by the Fund's Board of Trustees. The Fund also bears the risk that the reinvestment of collateral will result in a principal loss. Finally, there is the risk that the price of the securities will increase while they are on loan and the collateral will not be adequate to cover their value.
When-Issued and Delayed Delivery Securities and Forward Commitments. From time to time, the Fund may purchase securities on a when-issued or delayed delivery basis. When these transactions are negotiated, the price is fixed at the time of the commitment, but delivery and payment can take place a month or more after the date of commitment. The Fund may sell the securities before the settlement date, if it is deemed advisable. The securities so purchased or sold are subject to market fluctuation and no interest or dividends accrue to the purchaser prior to the settlement date.
At the time the Fund makes the commitment to purchase or sell securities on a when-issued, delayed delivery or forward commitment basis, it will record the transaction and thereafter reflect the value, each day, of such security purchased, or if a sale, the proceeds to be received, in determining its NAV. At the time of delivery of the securities, their value may be more or less than the purchase or sale price. An increase in the percentage of the Fund's assets committed to the purchase of securities on a when-issued, delayed delivery or forward commitment basis may increase the volatility of its NAV. The Fund will also earmark or segregate cash or liquid assets or establish a segregated account on the Fund's books in which it will continually maintain cash or cash equivalents or other liquid portfolio securities equal in value to commitments to purchase securities on a when-issued, delayed delivery or forward commitment basis.
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Zero Coupon Treasury Securities. A portion of the U.S. government securities purchased by the Fund may be "zero coupon" Treasury securities. These are U.S. Treasury notes and bonds which have been stripped of their unmatured interest coupons and receipts or which are certificates representing interests in such stripped debt obligations and coupons. Such securities are purchased at a discount from their face amount, giving the purchaser the right to receive their full value at maturity. A zero coupon security pays no interest to its holder during its life. Its value to an investor consists of the difference between its face value at the time of maturity and the price for which it was acquired, which is generally an amount significantly less than its face value (sometimes referred to as a "deep discount" price).
The interest earned on such securities is, implicitly, automatically compounded and paid out at maturity. While such compounding at a constant rate eliminates the risk of receiving lower yields upon reinvestment of interest if prevailing interest rates decline, the owner of a zero coupon security will be unable to participate in higher yields upon reinvestment of interest received if prevailing interest rates rise. For this reason, zero coupon securities are subject to substantially greater market price fluctuations during periods of changing prevailing interest rates than are comparable debt securities which make current distributions of interest. Current federal tax law requires that a holder (such as the Fund) of a zero coupon security accrue a portion of the discount at which the security was purchased as income each year even though the Fund receives no interest payments in cash on the security during the year.
Investment Company Securities. Investment company securities are securities of other open-end, closed-end and unregistered investment companies, including foreign investment companies and exchange-traded funds ("ETFs"). The Fund may invest in investment company securities as may be permitted by (i) the Investment Company Act, as amended from time to time; (ii) the rules and regulations promulgated by the SEC under the Investment Company Act; or (iii) an exemption or other relief applicable to the Fund from provisions of the Investment Company Act. The Investment Company Act generally prohibits an investment company from acquiring more than 3% of the outstanding voting shares of an investment company and limits such investments to no more than 5% of the Fund's total assets in any one investment company, and no more than 10% in any combination of investment companies. The Fund may invest in investment company securities of investment companies managed by the Adviser or its affiliates to the extent permitted under the Investment Company Act or as otherwise authorized by the SEC. To the extent the Fund invests a portion of its assets in investment company securities, those assets will be subject to the risks of the purchased investment company's portfolio securities, and a shareholder in the Fund will bear not only his proportionate share of the expenses of the Fund, but also, indirectly the expenses of the purchased investment company.
To the extent permitted by applicable law, the Fund may invest all or some of its short term cash investments in any money market fund advised or managed by the Adviser or its affiliates. In connection with any such investments, the Fund, to the extent permitted by the Investment Company Act, will pay its share of all expenses (other than advisory and administrative fees) of a money market fund in which it invests which may result in the Fund bearing some additional expenses.
Exchange-Traded Funds. The Fund may invest in ETFs. Investments in ETFs are subject to a variety of risks, including risks of a direct investment in the underlying securities that the ETF holds. For example, the general level of stock prices may decline, thereby adversely affecting the value of the underlying investments of the ETF and, consequently, the value of the ETF. In addition, the market value of the ETF shares may differ from their NAV because the supply and demand in the market for ETF shares at any point in time is not always identical to the supply and demand in the market for the underlying securities. Also, ETFs that track particular indices typically will be unable to match the performance of the index exactly due to, among other things, the ETF's operating expenses and transaction costs. ETFs typically incur fees that are separate from those fees incurred directly by the Fund. Therefore, as a shareholder in an ETF (as with other investment companies), the Fund would bear its ratable share of that entity's expenses. At the same time, the Fund would continue to pay its own investment management fees and other expenses. As a result, the Fund and its shareholders, in effect, will be absorbing duplicate levels of fees with respect to investments in ETFs.
Special Risks Related to Cyber Security
The Fund and its service providers are susceptible to cyber security risks that include, among other things, theft, unauthorized monitoring, release, misuse, loss, destruction or corruption of confidential and highly restricted data; denial of service attacks; unauthorized access to relevant systems; compromises
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to networks or devices that the Fund and its service providers use to service the Fund's operations; or operational disruption or failures in the physical infrastructure or operating systems that support the Fund and its service providers. Cyber attacks against or security breakdowns of the Fund or its service providers may adversely impact the Fund and its shareholders, potentially resulting in, among other things, financial losses; the inability of Fund shareholders to transact business and the Fund to process transactions; inability to calculate the Fund's NAV; violations of applicable privacy and other laws; regulatory fines, penalties, reputational damage, reimbursement or other compensation costs; and/or additional compliance costs. The Fund may incur additional costs for cyber security risk management and remediation purposes. In addition, cyber security risks may also impact issuers of securities in which the Fund invests, which may cause the Fund's investment in such issuers to lose value. There can be no assurance that the Fund or its service providers will not suffer losses relating to cyber attacks or other information security breaches in the future.
C. Fund Policies/Investment Restrictions
The investment objective, policies and restrictions listed below have been adopted by the Fund as fundamental policies. Under the Investment Company Act, a fundamental policy may not be changed without the vote of a majority of the outstanding voting securities of the Fund. The Investment Company Act defines a majority as the lesser of (a) 67% or more of the shares present at a meeting of shareholders, if the holders of 50% of the outstanding shares of the Fund are present or represented by proxy; or (b) more than 50% of the outstanding shares of the Fund. For purposes of the following restrictions: (i) all percentage limitations apply immediately after a purchase or initial investment, and (ii) any subsequent change in any applicable percentage resulting from market fluctuations or other changes in total or net assets does not require elimination of any security from the portfolio, except in the case of borrowings.
The Fund will:
1. Seek current income, preservation of principal and liquidity.
The Fund will not:
1. Invest in a manner inconsistent with its classification as a "diversified company" as provided by (i) the Investment Company Act, as amended from time to time, (ii) the rules and regulations promulgated by the SEC under the Investment Company Act, as amended from time to time, or (iii) an exemption or other relief applicable to the Fund from the provisions of the Investment Company Act, as amended from time to time.
2. Borrow money, except the Fund may borrow money to the extent permitted by (i) the Investment Company Act, as amended from time to time, (ii) the rules and regulations promulgated by the SEC under the Investment Company Act, as amended from time to time, or (iii) an exemption or other relief applicable to the Fund from the provisions of the Investment Company Act, as amended from time to time.
3. Underwrite the securities of other issuers or purchase restricted securities.
4. Purchase or sell real estate or real estate investment trust securities.
5. Purchase or sell physical commodities unless acquired as a result of ownership of securities or other instruments; provided that this restriction shall not prohibit the Fund from purchasing or selling options, futures contracts and related options thereon, forward contracts, swaps, caps, floors, collars and any other financial instruments or from investing in securities or other instruments backed by physical commodities or as otherwise permitted by (i) the Investment Company Act, as amended from time to time, (ii) the rules and regulations promulgated by the SEC under the Investment Company Act, as amended from time to time, or (iii) an exemption or other relief applicable to the Fund from the provisions of the Investment Company Act, as amended from time to time.
6. Make loans of money or property to any person, except (a) to the extent that securities or interests in which the Fund may invest are considered to be loans, (b) through the loan of portfolio securities, (c) by engaging in repurchase agreements or (d) as may otherwise be permitted by (i) the Investment Company Act, as amended from time to time, (ii) the rules and regulations promulgated by the SEC under the Investment Company Act, as amended from time to time, or (iii) an exemption or other relief applicable to the Fund from the provision of the Investment Company Act, as amended from time to time.
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7. Issue senior securities, except the Fund may issue senior securities to the extent permitted by (i) the Investment Company Act, as amended from time to time, (ii) the rules and regulations promulgated by the SEC under the Investment Company Act, as amended from time to time, or (iii) an exemption or other relief applicable to the Fund from the provisions of the Investment Company Act, as amended from time to time.
In addition, as non-fundamental policies, which can be changed with Board approval and without shareholder vote, the Fund will not:
1. Make short sales of securities, except short sales against the box.
2. Invest its assets in the securities of any investment company except as may be permitted by (i) the Investment Company Act, as amended from time to time; (ii) the rules and regulations promulgated by the SEC under the Investment Company Act, as amended from time to time; or (iii) an exemption or other relief applicable to the Fund from the provisions of the Investment Company Act, as amended from time to time.
The Fund has an operating policy, which may be changed by the Fund's Board of Trustees, not to borrow except from a bank for temporary or emergency purposes in amounts not exceeding 5% (taken at the lower of cost or current value) of its total assets (not including the amount borrowed).
Notwithstanding any other investment policy or restriction, the Fund may seek to achieve its investment objective by investing all or substantially all of its assets in another investment company having substantially the same investment objective and policies as the Fund.
The investment policies, limitations or practices of the Fund may not apply during periods of unusual or adverse market, economic, political or other conditions. Such market, economic, political or other conditions may include periods of abnormal or heightened market volatility, strained credit and/or liquidity conditions or increased governmental intervention in the markets or industries. During such periods, the Fund may not invest according to its principal investment strategies or in the manner in which its name may suggest, and may be subject to different and/or heightened risks. It is possible that such unusual or adverse conditions may continue for extended periods of time.
D. Disclosure of Portfolio Holdings
The Fund's Board of Trustees and the Adviser have adopted policies and procedures regarding disclosure of portfolio holdings (the "Policy"). Pursuant to the Policy, the Adviser may disclose information concerning Fund portfolio holdings only if such disclosure is consistent with the antifraud provisions of the federal securities laws and the Fund's and the Adviser's fiduciary duties to Fund shareholders. In no instance may the Adviser or the Fund receive compensation or any other consideration in connection with the disclosure of information about the portfolio securities of the Fund. Consideration includes any agreement to maintain assets in the Fund or in other investment companies or accounts managed by the Adviser or by any affiliated person of the Adviser. Non-public information concerning portfolio holdings may be divulged to third-parties only when the Fund has a legitimate business purpose for doing so and the recipients of the information are subject to a duty of confidentiality. Under no circumstances shall current or prospective Fund shareholders receive non-public portfolio holdings information, except as described below.
The Fund makes available on its public website the following portfolio holdings information:
• complete portfolio holdings information monthly, at least 15 calendar days after the end of each month; and
• top 10 holdings monthly, at least 15 calendar days after the end of each month.
The Fund provides a complete schedule of portfolio holdings for the second and fourth fiscal quarters in its semiannual and annual reports, and for the first and third fiscal quarters in its filings with the SEC on Form N-Q.
All other portfolio holdings information that has not been disseminated in a manner making it available to investors generally as described above is non-public information for purposes of the Policy.
The Fund may make selective disclosure of non-public portfolio holdings information pursuant to certain exemptions set forth in the Policy. Third-parties eligible for exemptions under the Policy and therefore eligible to receive such disclosures currently include fund rating agencies, information exchange subscribers, consultants and analysts, portfolio analytics providers and service providers, provided that the third-party expressly agrees to maintain the disclosed information in confidence and not to trade portfolio
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securities or related derivative securities based on the non-public information. Non-public portfolio holdings information may not be disclosed to a third-party pursuant to an exemption unless and until the third-party recipient has entered into a non-disclosure agreement with the Fund and the arrangement has been reviewed and approved, as set forth in the Policy and discussed below. In addition, persons who owe a duty of trust or confidence to the Fund or the Adviser may receive non-public portfolio holdings information without entering into a non-disclosure agreement. Currently, these persons include (i) the Fund's independent registered public accounting firm (as of the Fund's fiscal year-end and on an as-needed basis), (ii) counsel to the Fund (on an as-needed basis), (iii) counsel to the independent Trustees (on an as-needed basis) and (iv) members of the Board of Trustees (on an as-needed basis). Subject to the terms and conditions of any agreement between the Adviser or the Fund and the third-party recipient, if these conditions for disclosure are satisfied, there shall be no restriction on the frequency with which Fund non-public portfolio holdings information is released, and no lag period shall apply (unless otherwise indicated below).
The Adviser may provide interest lists to broker-dealers who execute securities transactions for the Fund without entering into a non-disclosure agreement with the broker-dealers, provided that the interest list satisfies all of the following criteria: (1) the interest list must contain only the CUSIP numbers and/or ticker symbols of securities held in all registered management investment companies advised by the Adviser or any affiliate of the Adviser (the "MSIM Funds") on an aggregate, rather than a fund-by-fund basis; (2) the interest list must not contain information about the number or value of shares owned by a specified MSIM Fund; (3) the interest list may identify the investment strategy, but not the particular MSIM Funds, to which the list relates; and (4) the interest list may not identify the portfolio manager or team members responsible for managing the MSIM Funds.
Fund shareholders may elect in some circumstances to redeem their shares of the Fund in exchange for their pro rata share of the securities held by the Fund. Under such circumstances, Fund shareholders may receive a complete listing of the holdings of the Fund up to seven calendar days prior to making the redemption request provided that they represent in writing that they agree not to disclose or trade on the basis of the portfolio holdings information.
The Fund may discuss or otherwise disclose performance attribution analyses (i.e., mention the effects of having a particular security in the portfolio(s)) where such discussion is not contemporaneously made public, provided that the particular holding has been disclosed publicly or the information that includes such holding(s) has been made available to shareholders requesting such information. Additionally, any discussion of the analyses may not be more current than the date the holding was disclosed publicly or the information that includes such holding(s) has been made available to shareholders requesting such information.
The Fund may disclose portfolio holdings to transition managers, provided that the Fund has entered into a non-disclosure or confidentiality agreement with the party requesting that the information be provided to the transition manager and the party to the non-disclosure agreement has, in turn, entered into a non-disclosure or confidentiality agreement with the transition manager.
The Adviser and/or the Fund currently have entered into ongoing arrangements with the following parties:
Name | Information Disclosed | Frequency(1) | Lag Time | ||||||||||||
Service Providers | |||||||||||||||
Institutional Shareholder Services(*) | Complete portfolio holdings | Daily basis | End of Day | ||||||||||||
State Street Bank and Trust Company(*) | Complete portfolio holdings | Daily basis | (2) | ||||||||||||
BlackRock Financial Management Inc.(*) | Complete portfolio holdings | Daily basis | (2) | ||||||||||||
Fund Rating Agencies | |||||||||||||||
Lipper(*) | Top ten and complete portfolio holdings | Monthly basis | Approximately six business days after month end |
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Name | Information Disclosed | Frequency(1) | Lag Time | ||||||||||||
Portfolio Analytics Providers | |||||||||||||||
FactSet Research Systems, Inc.(*) | Complete portfolio holdings | Daily basis | (2) |
(*) This entity has agreed to maintain Fund non-public portfolio holdings information in confidence and not to trade portfolio securities based on the non-public portfolio holdings information.
(1) Dissemination of portfolio holdings information to entities listed above may occur less frequently than indicated (or not at all).
(2) Information will typically be provided on a real time basis or as soon thereafter as possible.
All disclosures of non-public portfolio holdings information made to third-parties pursuant to the exemptions set forth in the Policy must be reviewed by Morgan Stanley Investment Management's ("MSIM") Legal and Compliance Division and approved by the Head of the Long-Only Business of MSIM. Disclosures made to third-parties in connection with (i) broker-dealer interest lists; (ii) shareholder in-kind distributions; (iii) attribution analyses; or (iv) transition managers are pre-approved for purposes of the Policy. In addition, the following categories of third-parties that may receive non-public portfolio holdings information are also pre-approved provided that they enter into non-disclosure agreements (as discussed above) (i) fund rating agencies; (ii) information exchange subscribers; (iii) consultants and analysts (including defined benefit and defined contribution plan sponsors, and variable annuity providers); (iv) portfolio analytics providers; and (v) service providers.
The Adviser shall report quarterly to the Board of Trustees (or a designated committee thereof) at the next regularly scheduled meeting (i) any material information concerning all parties receiving non-public portfolio holdings information pursuant to an exemption; and (ii) any new nondisclosure agreements entered into during the reporting period. Procedures to monitor the use of such non-public portfolio holdings information may include requiring annual certifications that the recipients have utilized such information only pursuant to the terms of the agreement between the recipient and the Adviser and, for those recipients receiving information electronically, acceptance of the information will constitute reaffirmation that the third-party expressly agrees to maintain the disclosed information in confidence and not to trade portfolio securities based on the non-public information.
III. MANAGEMENT OF THE FUND
A. Board of Trustees
General. The Board of Trustees of the Fund oversees the management of the Fund, but does not itself manage the Fund. The Trustees review various services provided by or under the direction of the Adviser to ensure that the Fund's general investment policies and programs are properly carried out. The Trustees also conduct their review to ensure that administrative services are provided to the Fund in a satisfactory manner.
Under state law, the duties of the Trustees are generally characterized as a duty of loyalty and a duty of care. The duty of loyalty requires a Trustee to exercise his or her powers in the interest of the Fund and not the Trustee's own interest or the interest of another person or organization. A Trustee satisfies his or her duty of care by acting in good faith with the care of an ordinarily prudent person and in a manner the Trustee reasonably believes to be in the best interest of the Fund and its shareholders.
Trustees and Officers. The Board of the Fund consists of 12 Trustees. These same individuals also serve as directors or trustees for certain of the funds advised by the Adviser and Morgan Stanley AIP GP LP. 11 Trustees have no affiliation or business connection with the Adviser or any of its affiliated persons and do not own any stock or other securities issued by the Adviser's parent company, Morgan Stanley. These are the "non-interested" or "Independent" Trustees. The other Trustee (the "Interested Trustee") is affiliated with the Adviser.
Board Structure and Oversight Function. The Board's leadership structure features an Independent Trustee serving as Chairperson and the Board Committees described below. The Chairperson participates in the preparation of the agenda for meetings of the Board and the preparation of information to be presented to the Board with respect to matters to be acted upon by the Board. The Chairperson also presides at all meetings of the Board and is involved in discussions regarding matters pertaining to the oversight of the management of the Fund between meetings.
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The Board of Trustees operates using a system of committees to facilitate the timely and efficient consideration of all matters of importance to the Trustees, the Fund and Fund shareholders, and to facilitate compliance with legal and regulatory requirements and oversight of the Fund's activities and associated risks. The Board of Trustees has established five standing committees: (1) Audit Committee, (2) Governance Committee, (3) Compliance and Insurance Committee, (4) Investment Committee and (5) Closed-End Fund Committee. The Audit Committee, the Governance Committee and the Closed-End Fund Committee are comprised exclusively of Independent Trustees. Each committee charter governs the scope of the committee's responsibilities with respect to the oversight of the Fund. The responsibilities of each committee, including their oversight responsibilities, are described further under the caption "Independent Trustees and the Committees."
The Fund is subject to a number of risks, including investment, compliance, operational and valuation risk, among others. The Board of Trustees oversees these risks as part of its broader oversight of the Fund's affairs through various Board and committee activities. The Board has adopted, and periodically reviews, policies and procedures designed to address various risks to the Fund. In addition, appropriate personnel, including but not limited to the Fund's Chief Compliance Officer, members of the Fund's administration and accounting teams, representatives from the Fund's independent registered public accounting firm, the Fund's Treasurer, portfolio management personnel and independent valuation and brokerage evaluation service providers, make regular reports regarding the Fund's activities and related risks to the Board of Trustees and the committees, as appropriate. These reports include, among others, quarterly performance reports, quarterly derivatives activity and risk reports and discussions with members of the risk teams relating to each asset class. The Board's committee structure allows separate committees to focus on different aspects of risk and the potential impact of these risks on some or all of the funds in the complex and then report back to the full Board. In between regular meetings, Fund officers also communicate with the Trustees regarding material exceptions and items relevant to the Board's risk oversight function. The Board recognizes that it is not possible to identify all of the risks that may affect the Fund, and that it is not possible to develop processes and controls to eliminate all of the risks that may affect the Fund. Moreover, the Board recognizes that it may be necessary for the Fund to bear certain risks (such as investment risk) to achieve its investment objective.
As needed between meetings of the Board, the Board or a specific committee receives and reviews reports relating to the Fund and engages in discussions with appropriate parties relating to the Fund's operations and related risks.
B. Management Information
Trustees. The Fund seeks as Trustees individuals of distinction and experience in business and finance, government service or academia. In determining that a particular Trustee was and continues to be qualified to serve as Trustee, the Board has considered a variety of criteria, none of which, in isolation, was controlling. Based on a review of the experience, qualifications, attributes or skills of each Trustee, including those enumerated in the table below, the Board has determined that each of the Trustees is qualified to serve as a Trustee of the Fund. In addition, the Board believes that, collectively, the Trustees have balanced and diverse experience, qualifications, attributes and skills that allow the Board to operate effectively in governing the Fund and protecting the interests of shareholders. Information about the Fund's Governance Committee and Board of Trustees nomination process is provided below under the caption "Independent Trustees and the Committees."
The Trustees of the Fund, their ages, addresses, positions held, length of time served, their principal business occupations during the past 5 years and other relevant professional experience, the number of portfolios in the Fund Complex (defined below) overseen by each Trustee (as of December 31, 2014 unless otherwise indicated) and other directorships, if any, held by the Trustees, are shown below. The Fund Complex includes all open-end and closed-end funds (including all of their portfolios) advised by the Adviser and any registered funds that have an adviser that is an affiliate of the Adviser (including, but not limited to, Morgan Stanley AIP GP LP) (the "Morgan Stanley AIP Funds") (collectively, the "Morgan Stanley Funds").
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Independent Trustees:
Name, Age and Address of Independent Trustee | Position(s) Held with Registrant | Length of Time Served* | Principal Occupation(s) During Past 5 Years and Other Relevant Professional Experience | Number of Portfolios in Fund Complex Overseen by Independent Trustee | Other Directorships Held by Independent Trustee** | ||||||||||||||||||
Frank L. Bowman (70) 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 Morgan Stanley 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) (February 2005-November 2008); retired as Admiral, U.S. Navy after serving over 38 years on active duty including 8 years as Director of the Naval Nuclear Propulsion Program in the Department of the Navy and the U.S. Department of Energy (1996-2004); served as Chief of Naval Personnel (July 1994-September 1996) and on the Joint Staff as Director of Political Military Affairs (June 1992-July 1994); knighted as Honorary Knight Commander of the Most Excellent Order of the British Empire; awarded the Officier de l'Orde National du Mérite by the French Government; elected to the National Academy of Engineering (2009). | 96 | Director of BP p.l.c.; Director of Naval and Nuclear Technologies LLP; Director Emeritus of the Armed Services YMCA of the USA; Director of the U.S. Naval Submarine League; Member of the National Security Advisory Council of the Center for U.S. Global Engagement and a member of the CNA Military Advisory Board; Chairman of the charity J Street Cup Golf; Trustee of Fairhaven United Methodist Church. | ||||||||||||||||||
Michael Bozic (74) 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 and a member of the advisory board of American Road Group LLC (retail) (since June 2000); Chairperson of the Compliance and Insurance Committee (since October 2006); Director or Trustee of various Morgan Stanley Funds (since April 1994); 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. | 98 | Trustee and member of the Hillsdale College Board of Trustees. |
* This is the earliest date the Trustee began serving the Morgan Stanley Funds. Each Trustee serves an indefinite term, until his or her successor is elected.
** This includes any directorships at public companies and registered investment companies held by the Trustee at any time during the past five years.
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Name, Age and Address of Independent Trustee | Position(s) Held with Registrant | Length of Time Served* | Principal Occupation(s) During Past 5 Years and Other Relevant Professional Experience | Number of Portfolios in Fund Complex Overseen by Independent Trustee | Other Directorships Held by Independent Trustee** | ||||||||||||||||||
Kathleen A. Dennis (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 | 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 Morgan Stanley Funds (since August 2006); formerly, Senior Managing Director of Victory Capital Management (1993-2006). | 96 | Director of various non-profit organizations. | ||||||||||||||||||
Nancy C. Everett*** (60) c/o Kramer Levin Naftalis & Frankel LLP Counsel to the Independent Trustees 1177 Avenue of the Americas New York, NY 10036 | Trustee | Since January 2015 | Owner, OBIR, LLC (institutional investment management consulting) (since June 2014); formerly, Managing Director, BlackRock, Inc. (February 2011-December 2013); and Chief Executive Officer, General Motors Asset Management (a/k/a Promark Global Advisors, Inc.) (June 2005-May 2010). | 96 | Member of Virginia Commonwealth University Board of Visitors; Member of Virginia Commonwealth University School of Business Foundation; formerly, Member of Committee on Directors for Emerging Markets Growth Fund, Inc. (2007-2010); Chairperson of Performance Equity Management, LLC (2006-2010); and Chairperson, GMAM Absolute Return Strategies Fund, LLC (2006-2010). |
* This is the earliest date the Trustee began serving the Morgan Stanley Funds. Each Trustee serves an indefinite term, until his or her successor is elected.
** This includes any directorships at public companies and registered investment companies held by the Trustee at any time during the past five years.
*** Mmes. Everett and Haussler joined the Board of Trustees of the Fund as Independent Trustees effective January 1, 2015.
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Name, Age and Address of Independent Trustee | Position(s) Held with Registrant | Length of Time Served* | Principal Occupation(s) During Past 5 Years and Other Relevant Professional Experience | Number of Portfolios in Fund Complex Overseen by Independent Trustee | Other Directorships Held by Independent Trustee** | ||||||||||||||||||
Jakki L. Haussler*** (58) c/o Kramer Levin Naftalis & Frankel LLP Counsel to the Independent Trustees 1177 Avenue of the Americas New York, NY 10036 | Trustee | Since January 2015 | Chairman and Chief Executive Officer, Opus Capital Group (since January 1996); and formerly, Director, Capvest Venture Fund, LP (May 2000-December 2011); Partner, Adena Ventures, LP (July 1999-December 2010); Director, The Victory Funds (February 2005-July 2008). | 96 | Director of Cincinnati Bell Inc. and Member, Audit Committee and Compensation Committee; Director of Northern Kentucky University Foundation and Member, Investment Committee; Member of Chase College of Law Transactional Law Practice Center Board of Advisors; Director of Best Transport; Member, University of Cincinnati Foundation Investment Committee; formerly, Member, Miami University Board of Visitors (2008-2011); Trustee of Victory Funds (2005-2008) and Chairman, Investment Committee (2007-2008) and Member, Service Provider Committee (2005-2008). | ||||||||||||||||||
Dr. Manuel H. Johnson (66) c/o Johnson Smick International, Inc. 220 I Street, NE Suite 200 Washington, D.C. 20002 | 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 various Morgan Stanley Funds (since July 1991); 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. | 98 | Director of NVR, Inc. (home construction). |
* This is the earliest date the Trustee began serving the Morgan Stanley Funds. Each Trustee serves an indefinite term, until his or her successor is elected.
** This includes any directorships at public companies and registered investment companies held by the Trustee at any time during the past five years.
*** Mmes. Everett and Haussler joined the Board of Trustees of the Fund as Independent Trustees effective January 1, 2015.
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Name, Age and Address of Independent Trustee | Position(s) Held with Registrant | Length of Time Served* | Principal Occupation(s) During Past 5 Years and Other Relevant Professional Experience | Number of Portfolios in Fund Complex Overseen by Independent Trustee | Other Directorships Held by Independent Trustee** | ||||||||||||||||||
Joseph J. Kearns (73) c/o Kearns & Associates LLC 23823 Malibu Road S-50-440 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 various Morgan Stanley Funds (since August 1994); formerly, Deputy Chairperson of the Audit Committee (July 2003-September 2006) and Chairperson of the Audit Committee of various Morgan Stanley Funds (since August 1994); CFO of the J. Paul Getty Trust. | 99 | Director of Electro Rent Corporation (equipment leasing). Prior to December 31, 2013, Director of The Ford Family Foundation. | ||||||||||||||||||
Michael F. Klein (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 | Managing Director, Aetos Capital, LLC (since March 2000); Co-President, Aetos Alternatives Management, LLC (since January 2004) and Co-Chief Executive Officer of Aetos Capital LLC (since August 2013); Chairperson of the Fixed Income Sub-Committee of the Investment Committee (since October 2006) and Director or Trustee of various Morgan Stanley Funds (since August 2006); formerly, Managing Director, Morgan Stanley & Co. Inc. and Morgan Stanley Dean Witter Investment Management, President, various Morgan Stanley Funds (June 1998-March 2000) and Principal, Morgan Stanley & Co. Inc. and Morgan Stanley Dean Witter Investment Management (August 1997-December 1999). | 96 | 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 (79) 522 Fifth Avenue New York, NY 10036 | Chairperson of the Board and Trustee | Chairperson of the Boards since July 2006 and Trustee since July 1991 | Chairperson of the Boards of various Morgan Stanley Funds (since July 2006); Chairperson of the Closed-End Fund Committee (since June 2012) and Director or Trustee of various Morgan Stanley Funds (since July 1991); formerly, Chairperson of the Insurance Committee (until July 2006); General Partner, Triumph Capital, L.P. (private investment partnership) (1988-2013). | 98 | None. |
* This is the earliest date the Trustee began serving the Morgan Stanley Funds. Each Trustee serves an indefinite term, until his or her successor is elected.
** This includes any directorships at public companies and registered investment companies held by the Trustee at any time during the past five years.
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Name, Age and Address of Independent Trustee | Position(s) Held with Registrant | Length of Time Served* | Principal Occupation(s) During Past 5 Years and Other Relevant Professional Experience | Number of Portfolios in Fund Complex Overseen by Independent Trustee | Other Directorships Held by Independent Trustee** | ||||||||||||||||||
W. Allen Reed (68) 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 Morgan Stanley 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). | 96 | Director of Temple-Inland Industries (packaging and forest products); Director of Legg Mason, Inc. and Director of the Auburn University Foundation. | ||||||||||||||||||
Fergus Reid (83) c/o Joe Pietryka, Inc. 85 Charles Colman Blvd. Pawling, NY 12564 | Trustee | Since June 1992 | Chairman, Joe Pietryka, Inc.; Chairperson of the Governance Committee and Director or Trustee of various Morgan Stanley Funds (since June 1992). | 99 | Formerly, Trustee and Director of certain investment companies in the JP Morgan Fund complex managed by JP Morgan Investment Management Inc. (1987-2012). |
Interested Trustee:
Name, Age and Address of Interested Trustee | Position(s) Held with Registrant | Length of Time Served* | Principal Occupation(s) During Past 5 Years and Other Relevant Professional Experience | Number of Portfolios in Fund Complex Overseen by Interested Trustee | Other Directorships Held by Interested Trustee** | ||||||||||||||||||
James F. Higgins (67) One New York Plaza New York, NY 10004 | Trustee | Since June 2000 | Director or Trustee of various Morgan Stanley Funds (since June 2000); Senior Advisor of Morgan Stanley (since August 2000). | 97 | Formerly, Director of AXA Financial, Inc. and AXA Equitable Life Insurance Company (2002-2011) and Director of AXA MONY Life Insurance Company and AXA MONY Life Insurance Company of America (2004-2011). |
* This is the earliest date the Trustee began serving the Morgan Stanley Funds. Each Trustee serves an indefinite term, until his or her successor is elected.
** This includes any directorships at public companies and registered investment companies held by the Trustee at any time during the past five years.
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The executive officers of the Fund, their ages, addresses, positions held, length of time served and their principal business occupations during the past five years are shown below.
Executive Officers:
Name, Age and Address of Executive Officer | Position(s) Held with Registrant | Length of Time Served* | Principal Occupation(s) During Past 5 Years | ||||||||||||
John Gernon (52) 522 Fifth Avenue New York, NY 10036 | President and Principal Executive Officer | Since September 2013 | President and Principal Executive Officer of the Equity and Fixed Income Funds and the Morgan Stanley AIP Funds (since September 2013) and the Liquidity Funds and various money market funds (since May 2014) in the Fund Complex; Managing Director of the Adviser; Head of Product (since 2006) and Global Portfolio Analysis and Reporting (since 2012) for MSIM's Long Only business. | ||||||||||||
Stefanie V. Chang Yu (48) 522 Fifth Avenue New York, NY 10036 | Chief Compliance Officer | Since December 1997 | Managing Director of the Adviser and various entities affiliated with the Adviser; Chief Compliance Officer of various Morgan Stanley Funds and the Adviser (since January 2014). Formerly, Vice President of various Morgan Stanley Funds (December 1997-January 2014). | ||||||||||||
Joseph C. Benedetti (50) 522 Fifth Avenue New York, NY 10036 | Vice President | Since January 2014 | Managing Director of the Adviser and various entities affiliated with the Adviser; Vice President of various Morgan Stanley Funds (since January 2014). Formerly, Assistant Secretary of various Morgan Stanley Funds (October 2004-January 2014). | ||||||||||||
Francis J. Smith (50) 522 Fifth Avenue New York, NY 10036 | Treasurer and Principal Financial Officer | Treasurer since July 2003 and Principal Financial Officer since September 2002 | Executive Director of the Adviser and various entities affiliated with the Adviser; Treasurer (since July 2003) and Principal Financial Officer of various Morgan Stanley Funds (since September 2002). | ||||||||||||
Mary E. Mullin (48) 522 Fifth Avenue New York, NY 10036 | Secretary | Since June 1999 | Executive Director of the Adviser and various entities affiliated with the Adviser; Secretary of various Morgan Stanley Funds (since June 1999). |
* This is the earliest date the officer began serving the Morgan Stanley Funds. Each officer serves an indefinite term, until his or her successor is elected and has qualified.
In addition, the following individuals who are officers of the Adviser or its affiliates serve as assistant secretaries of the Fund: Joanne Antico, Daniel E. Burton, Gladys Chang and Edward J. Meehan.
It is a policy of the Fund's Board that each Trustee shall invest at least $250,000 in any combination of the Morgan Stanley Funds that the Trustee determines meets his or her own specific investment objectives, without requiring any specific investment in any particular Fund.
For each Trustee, the dollar range of equity securities beneficially owned by the Trustee in the Fund and in the Family of Investment Companies (Family of Investment Companies includes all of the registered investment companies advised by the Adviser and Morgan Stanley AIP GP LP) for the calendar year ended December 31, 2014, is set forth in the table below.
Name of Trustee | Dollar Range of Equity Securities in the Fund (As of December 31, 2014) | Aggregate Dollar Range of Equity Securities in All Registered Investment Companies Overseen by Trustee in Family of Investment Companies (As of December 31, 2014) | |||||||||
Independent: | |||||||||||
Frank L. Bowman(1) | None | over $100,000 | |||||||||
Michael Bozic | None | over $100,000 | |||||||||
Kathleen A. Dennis | None | over $100,000 | |||||||||
Nancy C. Everett(2) | N/A | N/A | |||||||||
Jakki L. Haussler(2) | N/A | N/A | |||||||||
Manuel H. Johnson | over $100,000 | over $100,000 | |||||||||
Joseph J. Kearns(1) | None | over $100,000 | |||||||||
Michael F. Klein | None | over $100,000 | |||||||||
Michael E. Nugent | None | over $100,000 | |||||||||
W. Allen Reed(1) | None | over $100,000 | |||||||||
Fergus Reid(1) | None | over $100,000 |
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Name of Trustee | Dollar Range of Equity Securities in the Fund (As of December 31, 2014) | Aggregate Dollar Range of Equity Securities in All Registered Investment Companies Overseen by Trustee in Family of Investment Companies (As of December 31, 2014) | |||||||||
Interested: | |||||||||||
James F. Higgins | None | over $100,000 |
(1) Includes the total amount of compensation deferred by the Trustee at his election pursuant to a deferred compensation plan. Such deferred compensation is placed in a deferral account and deemed to be invested in one or more of the Morgan Stanley Funds (or portfolio thereof) that are offered as investment options under the plan.
(2) Mmes. Everett and Haussler joined the Board of Trustees of the Fund as Independent Trustees effective January 1, 2015.
As to each Independent Trustee and his or her immediate family members, no person owned beneficially or of record securities of an investment adviser or principal underwriter of the Fund, or a person (other than a registered investment company) directly or indirectly controlling, controlled by or under common control with an investment adviser or principal underwriter of the Fund.
Independent Trustees and the Committees. Law and regulation establish both general guidelines and specific duties for the Independent Trustees. The Board has five committees: (1) Audit Committee, (2) Governance Committee, (3) Compliance and Insurance Committee, (4) Investment Committee and (5) Closed-End Fund Committee.
The Independent Trustees are charged with recommending to the full Board approval of management, advisory and administration contracts, Rule 12b-1 plans and distribution and underwriting agreements; continually reviewing fund performance; checking on the pricing of portfolio securities, brokerage commissions, transfer agent costs and performance, and trading among funds in the same complex; and approving fidelity bond and related insurance coverage and allocations, as well as other matters that arise from time to time. The Independent Trustees are required to select and nominate individuals to fill any Independent Trustee vacancy on the board of any fund that has a Rule 12b-1 plan of distribution. Most of the retail Morgan Stanley Funds have a Rule 12b-1 plan.
The Board of Trustees has a separately-designated standing Audit Committee established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended (the "1934 Act"). The Audit Committee is charged with recommending to the full Board the engagement or discharge of the Fund's independent registered public accounting firm; directing investigations into matters within the scope of the independent registered public accounting firm's duties, including the power to retain outside specialists; reviewing with the independent registered public accounting firm the audit plan and results of the auditing engagement; approving professional services provided by the independent registered public accounting firm and other accounting firms prior to the performance of the services; reviewing the independence of the independent registered public accounting firm; considering the range of audit and non-audit fees; reviewing the adequacy of the Fund's system of internal controls; and reviewing the valuation process. The Fund has adopted a formal, written Audit Committee Charter.
The members of the Audit Committee of the Fund are Jakki L. Haussler, Joseph J. Kearns, Michael F. Klein and W. Allen Reed. None of the members of the Fund's Audit Committee is an "interested person," as defined under the Investment Company Act, of the Fund (with such disinterested Trustees being "Independent Trustees" or individually, an "Independent Trustee"). Each Independent Trustee is also "independent" from the Fund under the listing standards of the New York Stock Exchange, Inc. ("NYSE"). The Chairperson of the Audit Committee of the Fund is Joseph J. Kearns.
The Board of Trustees of the Fund also has a Governance Committee. The Governance Committee identifies individuals qualified to serve as Independent Trustees on the Fund's Board and on committees of such Board and recommends such qualified individuals for nomination by the Fund's Independent Trustees as candidates for election as Independent Trustees, advises the Fund's Board with respect to Board composition, procedures and committees, develops and recommends to the Fund's Board a set of corporate governance principles applicable to the Fund, monitors and makes recommendations on corporate governance matters and policies and procedures of the Fund's Board of Trustees and any Board committees and oversees periodic evaluations of the Fund's Board and its committees. The members of the Governance Committee of the Fund are Kathleen A. Dennis, Michael E. Nugent and Fergus Reid, each of whom is an Independent Trustee. In addition, Michael E. Nugent (as Chairperson of the Morgan Stanley
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Funds) periodically may attend other operating committee meetings. The Chairperson of the Governance Committee is Fergus Reid.
The Fund does not have a separate nominating committee. While the Fund's Governance Committee recommends qualified candidates for nominations as Independent Trustees, the Board of Trustees of the Fund believes that the task of nominating prospective Independent Trustees is important enough to require the participation of all current Independent Trustees, rather than a separate committee consisting of only certain Independent Trustees. Accordingly, all the Independent Trustees participate in the selection and nomination of candidates for election as Independent Trustees for the Fund. Persons recommended by the Fund's Governance Committee as candidates for nomination as Independent Trustees shall possess such experience, qualifications, attributes, skills and diversity so as to enhance the Board's ability to manage and direct the affairs and business of the Fund, including, when applicable, to enhance the ability of committees of the Board to fulfill their duties and/or to satisfy any independence requirements imposed by law, regulation or any listing requirements of the NYSE. While the Independent Trustees of the Fund expect to be able to continue to identify from their own resources an ample number of qualified candidates for the Fund's Board as they deem appropriate, they will consider nominations from shareholders to the Board. Nominations from shareholders should be in writing and sent to the Independent Trustees as described below under the caption "Shareholder Communications."
The Board formed the Compliance and Insurance Committee to address insurance coverage and oversee the compliance function for the Fund and the Board. The Compliance and Insurance Committee consists of Frank L. Bowman, Michael Bozic, Nancy C. Everett, James F. Higgins and Manuel H. Johnson. Frank L. Bowman, Michael Bozic, Nancy C. Everett and Manuel H. Johnson are Independent Trustees. The Chairperson of the Compliance and Insurance Committee is Michael Bozic. The Compliance and Insurance Committee has an Insurance Sub-Committee to review and monitor the insurance coverage maintained by the Fund. The Chairperson of the Insurance Sub-Committee is Frank L. Bowman.
The Investment Committee oversees the portfolio investment process for and reviews the performance of the Fund. The Investment Committee also recommends to the Board to approve or renew the Fund's Investment Advisory and Administration Agreements. The members of the Investment Committee are Frank L. Bowman, Michael Bozic, Kathleen A. Dennis, Nancy C. Everett, Jakki L. Haussler, James F. Higgins, Manuel H. Johnson, Joseph J. Kearns, Michael F. Klein, Michael E. Nugent, W. Allen Reed and Fergus Reid. The Chairperson of the Investment Committee is Manuel H. Johnson.
The Investment Committee has three Sub-Committees, each with its own Chairperson. Each Sub-Committee focuses on the funds' primary areas of investment, namely equities, fixed income and alternatives. Within the Fund Complex, the Sub-Committees and their members are as follows:
(1) Equity — W. Allen Reed (Chairperson), Frank L. Bowman, Nancy C. Everett and Michael E. Nugent.
(2) Fixed Income — Michael F. Klein (Chairperson), Michael Bozic and Fergus Reid.
(3) Money Market and Alternatives — Kathleen A. Dennis (Chairperson), Jakki L. Haussler, James F. Higgins and Joseph J. Kearns.
The Board formed the Closed-End Fund Committee to consider a range of issues unique to closed-end funds. The Closed-End Fund Committee consists of Michael E. Nugent, W. Allen Reed and Fergus Reid, each of whom is an Independent Trustee. The Chairperson of the Closed-End Fund Committee is Michael E. Nugent.
During the Fund's fiscal year ended May 31, 2015, the Board of Trustees held the following meetings:
Board of Trustees | 4 | ||||||
Committee/Sub-Committee: | Number of meetings: | ||||||
Audit Committee | 3 | ||||||
Governance Committee | 3 | ||||||
Compliance and Insurance Committee | 3 | ||||||
Insurance Sub-Committee | 1 |
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Committee/Sub-Committee: | Number of meetings: | ||||||
Investment Committee | 4 | ||||||
Equity Sub-Committee | 4 | ||||||
Fixed Income Sub-Committee | 4 | ||||||
Money Market and Alternatives Sub-Committee | 4 | ||||||
Closed-End Fund Committee | 3 |
Experience, Qualifications and Attributes. The Board has concluded, based on each Trustee's experience, qualifications and attributes that each Board member should serve as a Trustee. Following is a brief summary of the information that led to and/or supports this conclusion.
Mr. Bowman has experience in a variety of business and financial matters through his prior service as a Director or Trustee for various other funds in the Fund Complex, where he serves as Chairperson of the Insurance Sub-Committee of the Compliance and Insurance Committee, and as a Director of BP p.l.c. and Naval and Nuclear Technologies LLP. Mr. Bowman also serves as a Director Emeritus for the Armed Services YMCA of the USA, Director of the U.S. Naval Submarine League and as Chairman of the charity J Street Cup Golf. Mr. Bowman serves as a Trustee of the Fairhaven United Methodist Church. Mr. Bowman is also a member of the National Security Advisory Council of the Center for U.S. Global Engagement and a member of the CNA Military Advisory Board. Mr. Bowman retired as an Admiral in the U.S. Navy, after serving over 38 years on active duty including eight years as Director of the Naval Nuclear Propulsion Program in the Department of the Navy and the U.S. Department of Energy (1996-2004). Additionally, Mr. Bowman served as the U.S. Navy's Chief of Naval Personnel (1994-1996), where he was responsible for the planning and programming of all manpower, personnel, training and education resources for the U.S. Navy, and on the Joint Staff as Director of Political Military Affairs (1992-1994). In addition, Mr. Bowman served as President and Chief Executive Officer of the Nuclear Energy Institute. Mr. Bowman has received such distinctions as a knighthood as Honorary Knight Commander of the Most Excellent Order of the British Empire and the Officier de l'Orde National du Mérite from the French Government, and was elected to the National Academy of Engineering (2009). He is President of the consulting firm Strategic Decisions, LLC.
With over 20 years of experience on the boards and in senior management of such companies as Kmart Corporation, Levitz Furniture Corporation, Hills Department Stores and Sears Merchandise Group of Sears, Roebuck & Co., where Mr. Bozic also served as Chief Executive Officer of the Merchandise Group, and with nearly 20 years of experience as a Director or Trustee of certain other funds in the Fund Complex, Mr. Bozic has experience with a variety of financial, management, regulatory and operational issues as well as experience with marketing and distribution. Mr. Bozic has served as the Chairperson of the Compliance and Insurance Committee since 2006.
Ms. Dennis has over 25 years of business experience in the financial services industry and related fields including serving as a Director or Trustee of various other funds in the Fund Complex, where she serves as Chairperson of the Money Market and Alternatives Sub-Committee of the Investment Committee. Ms. Dennis possesses a strong understanding of the regulatory framework under which investment companies must operate based on her years of service to this Board and her position as Senior Managing Director of Victory Capital Management.
Ms. Everett has over 35 years of experience in the financial services industry, including roles with both registered investment companies and registered investment advisers. By serving on the boards of other registered funds, such as GMAM Absolute Return Strategies Fund, LLC and Emerging Markets Growth Fund, Inc., Ms. Everett has acquired significant experience with financial, accounting, investment and regulatory matters. Ms. Everett is also a Chartered Financial Analyst.
With more than 30 years of experience in the financial services industry, including her years of entrepreneurial and managerial experience in the development and growth of Opus Capital Group, Ms. Haussler brings a valuable perspective to the Fund's Board. Through her role at Opus Capital and her service as a director of several venture capital funds and other boards, Ms. Haussler has gained valuable experience dealing with accounting principles and evaluating financial results of large corporations. She is a certified public accountant (inactive) and a licensed attorney in the State of Ohio (inactive).
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In addition to his tenure as a Director or Trustee of various other funds in the Fund Complex, where he formerly served as Chairperson of the Audit Committee, Dr. Johnson has also served as an officer or a board member of numerous companies for over 20 years. These positions included Co-Chairman and a founder of the Group of Seven Council, Director of NVR, Inc., Director of Evergreen Energy and Director of Greenwich Capital Holdings. He also has served as Vice Chairman of the Board of Governors of the Federal Reserve System and Assistant Secretary of the U.S. Treasury. In addition, Dr. Johnson also served as Chairman of the Financial Accounting Foundation, which oversees the Financial Accounting Standards Board, for seven years.
Mr. Kearns gained extensive experience regarding accounting through his experience on the Audit Committees of the boards of other funds in the Funds Complex, including serving as either Chairperson or Deputy Chairperson of the Audit Committee for nearly 20 years, and through his position as Chief Financial Officer of the J. Paul Getty Trust. He also has experience in financial, accounting, investment and regulatory matters through his position as President and founder of Kearns & Associates LLC, a financial consulting company. Mr. Kearns also serves as a Director of Electro Rent Corporation and previously served as Director of The Ford Family Foundation. The Board has determined that Mr. Kearns is an "audit committee financial expert" as defined by the SEC.
Through his prior positions as a Managing Director of Morgan Stanley & Co. Inc. and Morgan Stanley Dean Witter Investment Management and as President and a Trustee of the Morgan Stanley Institutional Funds, Mr. Klein has experience in the management and operation of registered investment companies, enabling him to provide management input and investment guidance to the Board. Mr. Klein also has extensive experience in the investment management industry based on his current positions as Managing Director and Co-Chief Executive Officer of Aetos Capital, LLC, Co-President of Aetos Alternatives Management, LLC and as a Director of certain investment funds managed or sponsored by Aetos Capital, LLC. In addition, he also has experience as a member of the board of other funds in the Fund Complex.
Mr. Nugent has extensive experience with financial, accounting, investment and regulatory matters through his over 20 years of service on the boards of various funds in the Fund Complex, including time as the Chairperson of the Insurance Committee, Chairperson of the Closed-End Fund Committee and Chairperson of the Morgan Stanley Funds. Mr. Nugent also has experience as a former General Partner in Triumph Capital, L.P.
Mr. Reed has experience on investment company boards and is experienced with financial, accounting, investment and regulatory matters through his prior service as a Director of iShares Inc. and his service as Trustee or Director of other funds in the Fund Complex. Mr. Reed also gained substantial experience in the financial services industry through his position as a Director of Legg Mason, Inc. and prior position as President and CEO of General Motors Asset Management.
Mr. Reid has served on a number of mutual fund boards, including as a Trustee or Director of certain investment companies in the JP Morgan Funds complex and as a Trustee or Director of other funds in the Fund Complex. Therefore, Mr. Reid is experienced with financial, accounting, investment and regulatory matters, enabling him to provide management input and investment guidance to the Board.
Mr. Higgins has over 30 years of experience in the financial services industry. Mr. Higgins has substantial mutual fund experience and is experienced with financial, accounting, investment and regulatory matters due to his experience on the boards of other funds in the Fund Complex. Mr. Higgins also previously served on the boards of other companies in the financial services industry, including AXA Financial, Inc. and AXA Equitable Life Insurance Company.
The Trustees' principal occupations and other relevant professional experience during the past five years or more are shown in the above tables.
Advantages of Having the Same Individuals as Trustees for the Morgan Stanley Funds. The Independent Trustees and the Fund's management believe that having the same Independent Trustees for each of the Morgan Stanley Funds avoids the duplication of effort that would arise from having different groups of individuals serving as Independent Trustees for each of the funds or even of sub-groups of funds. They believe that having the same individuals serve as Independent Trustees of all the Morgan Stanley Funds tends to increase their knowledge and expertise regarding matters which affect the Fund Complex generally and enhances their ability to negotiate on behalf of each fund with the fund's service providers.
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This arrangement also precludes the possibility of separate groups of Independent Trustees arriving at conflicting decisions regarding operations and management of the funds and avoids the cost and confusion that would likely ensue. Finally, having the same Independent Trustees serve on all fund boards enhances the ability of each fund to obtain, at modest cost to each separate fund, the services of Independent Trustees of the caliber, experience and business acumen of the individuals who serve as Independent Trustees of the Morgan Stanley Funds.
Trustee and Officer Indemnification. The Fund's Declaration of Trust provides that no Trustee, officer, employee or agent of the Fund is liable to the Fund or to a shareholder, nor is any Trustee, officer, employee or agent liable to any third persons in connection with the affairs of the Fund, except as such liability may arise from his/her or its own bad faith, willful misfeasance, gross negligence or reckless disregard of his/her or its duties. It also provides that all third persons shall look solely to Fund property for satisfaction of claims arising in connection with the affairs of the Fund. With the exceptions stated, the Declaration of Trust provides that a Trustee, officer, employee or agent is entitled to be indemnified against all liability in connection with the affairs of the Fund.
Shareholder Communications. Shareholders may send communications to the Fund's Board of Trustees. Shareholders should send communications intended for the Fund's Board by addressing the communications directly to the Board (or individual Board members) and/or otherwise clearly indicating in the salutation that the communication is for the Board (or individual Board members) and by sending the communication to either the Fund's office or directly to such Board member(s) at the address specified for each Trustee previously noted. Other shareholder communications received by the Fund not directly addressed and sent to the Board will be reviewed and generally responded to by management, and will be forwarded to the Board only at management's discretion based on the matters contained therein.
C. Compensation
Effective January 1, 2015, each Trustee (except for the Chairperson of the Boards) receives an annual retainer fee of $240,000 ($230,000 prior to January 1, 2015) for serving as a Trustee of the Morgan Stanley Funds.
The Chairperson of the Audit Committee receives an additional annual retainer fee of $78,750 and the Investment Committee Chairperson receives an additional annual retainer fee of $63,000. Other Committee and Sub-Committee Chairpersons (except for the Chairperson of the Closed-End Fund Committee) receive an additional annual retainer fee of $31,500. The aggregate compensation paid to each Trustee is paid by the Morgan Stanley Funds, and is allocated on a pro rata basis among each of the operational funds/portfolios of the Morgan Stanley Funds based on the relative net assets of each of the funds/portfolios. Michael E. Nugent receives a total annual retainer fee of $480,000 ($460,000 prior to January 1, 2015) for his services as Chairperson of the Boards of the Morgan Stanley Funds and for administrative services provided to each Board.
The Fund also reimburses such Trustees for travel and other out-of-pocket expenses incurred by them in connection with attending such meetings. Trustees of the Fund who are employed by the Adviser receive no compensation or expense reimbursement from the Fund for their services as Trustee.
Effective April 1, 2004, the Fund began a Deferred Compensation Plan (the "DC Plan"), which allows each Trustee to defer payment of all, or a portion, of the fees he or she receives for serving on the Board of Trustees throughout the year. 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 (or portfolios thereof) that are offered as investment options under the DC Plan. At the Trustee's election, distributions are either in one lump sum payment, or in the form of equal annual installments over a period of five years. The rights of an eligible Trustee and the beneficiaries to the amounts held under the DC Plan are unsecured and such amounts are subject to the claims of the creditors of the Fund.
Prior to April 1, 2004, certain Morgan Stanley Funds maintained a similar Deferred Compensation Plan (the "Prior DC Plan"), which also allowed each Independent Trustee to defer payment of all, or a portion, of the fees he or she received for serving on the Board of Trustees throughout the year. Generally, the DC Plan amends and supersedes the Prior DC Plan and all amounts payable under the Prior DC Plan are now subject to the terms of the DC Plan (except for amounts paid during the calendar year 2004, which remain subject to the terms of the Prior DC Plan).
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The following table shows aggregate compensation payable to each of the Fund's Trustees from the Fund for the fiscal year ended May 31, 2015 and the aggregate compensation payable to each of the funds' Trustees by the Fund Complex (which includes all of the Morgan Stanley Funds) for the calendar year ended December 31, 2014.
Compensation(1)
Name of Independent Trustee | Aggregate Compensation From the Fund(2) | Total Compensation From Fund and Fund Complex Paid to Trustee(3) | |||||||||
Frank L. Bowman | $ | 165 | $ | 261,500 | |||||||
Michael Bozic | 162 | 261,500 | |||||||||
Kathleen A. Dennis | 165 | 261,500 | |||||||||
Nancy C. Everett(4) | 61 | N/A | |||||||||
Jakki L. Haussler(4) | 61 | N/A | |||||||||
Manuel H. Johnson | 181 | 293,000 | |||||||||
Joseph J. Kearns(3) | 191 | 340,750 | |||||||||
Michael F. Klein(2)(3) | 165 | 261,500 | |||||||||
Michael E. Nugent | 286 | 460,000 | |||||||||
W. Allen Reed(2)(3) | 165 | 261,500 | |||||||||
Fergus Reid(3) | 162 | 308,500 | |||||||||
Name of Interested Trustee | |||||||||||
James F. Higgins | 143 | $ | 230,000 |
(1) Includes all amounts paid for serving as director/trustee of the funds, as well as serving as Chairperson of the Boards or a Chairperson of a Committee or Sub-Committee.
(2) The amounts shown in this column represent the aggregate compensation before deferral with respect to the Fund's fiscal year. The following Trustees deferred compensation from the Fund during the fiscal year ended May 31, 2015: Mr. Klein, $165 and Mr. Reed, $165.
(3) The amounts shown in this column represent the aggregate compensation paid by all of the funds in the Fund Complex as of December 31, 2014 before deferral by the Trustees under the DC Plan. As of December 31, 2014, the value (including interest) of the deferral accounts across the Fund Complex for Messrs. Kearns, Klein, Reed and Reid pursuant to the deferred compensation plan was $666,222, $260,630, $1,697,049 and $845,514, respectively. Because the funds in the Fund Complex have different fiscal year ends, the amounts shown in this column are presented on a calendar year basis.
(4) Mmes. Everett and Haussler joined the Board of Trustees of the Fund as Independent Trustees effective January 1, 2015.
Prior to December 31, 2003, 49 of the Morgan Stanley Funds (the "Adopting Funds"), including the Fund, had adopted a retirement program under which an Independent Trustee who retired after serving for at least five years as an Independent Trustee of any such fund (an "Eligible Trustee") would have been entitled to retirement payments, based on factors such as length of service, upon reaching the eligible retirement age. On December 31, 2003, the amount of accrued retirement benefits for each Eligible Trustee was frozen, and will be payable, together with a return of 8% per annum, at or following each such Eligible Trustee's retirement as shown in the table below.
The following table illustrates the retirement benefits accrued to the Fund's Independent Trustees by the Fund for the fiscal year ended May 31, 2015 and by the Adopting Funds for the calendar year ended December 31, 2014, and the estimated retirement benefits for the Independent Trustees, from the Fund as of the fiscal year ended May 31, 2015 and from the Adopting Funds for each calendar year following retirement. Only the Trustees listed below participated in the retirement program.
Name of Independent Trustee | Retirement Benefits Accrued as Fund Expenses | Estimated Annual Benefits Upon Retirement(1) | |||||||||||||||||
By the Fund | By all Adopting Funds | From the Fund | From all Adopting Funds | ||||||||||||||||
Michael Bozic(2) | $ | 249 | $ | (9,955 | ) | $ | 967 | $ | 43,940 | ||||||||||
Manuel H. Johnson | 831 | 31,557 | 1,420 | 64,338 | |||||||||||||||
Michael E. Nugent(2) | 227 | (14,620 | ) | 1,269 | 57,539 |
(1) Total compensation accrued under the retirement plan, together with a return of 8% per annum, will be paid annually commencing upon retirement and continuing for the remainder of the Trustee's life.
(2) Messrs. Bozic's and Nugent's retirement expenses are negative due to the fact their expenses have been overaccrued.
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IV. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
The following owned beneficially or of record 5% or more of the outstanding Advisor Class shares of the Fund as of September 1, 2015: Morgan Stanley & Co., Harborside Financial Center, 201 Plaza II, 3rd Floor, Jersey City, NJ 07311 — 90.32%. The following owned beneficially or of record 5% or more of the outstanding Class I shares of the Fund as of September 23, 2015: Morgan Stanley & Co., Harborside Financial Center, 201 Plaza II, 3rd Floor, Jersey City, NJ 07311 — 97.47%. The percentage ownership of shares of the Fund changes from time to time depending on purchases and redemptions by shareholders and the total number of shares outstanding.
As of September 1, 2015, the aggregate number of shares of beneficial interest of the Fund owned by the Fund's officers and Trustees as a group was less than 1% of the Fund's shares of beneficial interest outstanding.
V. INVESTMENT ADVISORY AND OTHER SERVICES
A. Adviser and Administrator
The Adviser to the Fund is Morgan Stanley Investment Management Inc., a Delaware corporation, whose address is 522 Fifth Avenue, New York, NY 10036. The Adviser is a wholly-owned subsidiary of Morgan Stanley, a Delaware corporation traded on the NYSE under the symbol "MS." Morgan Stanley is a preeminent global financial services firm engaged in securities trading and brokerage activities, as well as providing investment banking, research and analysis, financing and financial advisory services.
Pursuant to an Investment Advisory Agreement (the "Investment Advisory Agreement") with the Adviser, the Fund has retained the Adviser to manage and/or oversee the investment of the Fund's assets, including the placing of orders for the purchase and sale of portfolio securities. The Fund pays the Adviser monthly compensation calculated daily by applying the following annual rates to the average daily net assets of the Fund determined as of the close of each business day: 0.27% of the portion of daily net assets not exceeding $1 billion and 0.25% of the portion of daily net assets exceeding $1 billion. The investment advisory fee will be allocated among the two Classes pro rata based on the net assets of the Fund attributable to each Class.
Administration services are provided to the Fund by Morgan Stanley Investment Management Inc. ("Administrator"), a wholly-owned subsidiary of Morgan Stanley, pursuant to a separate administration agreement (the "Administration Agreement") entered into by the Fund with the Administrator. Prior to January 1, 2014, the Administrator was Morgan Stanley Services Company Inc. The Fund pays the Administrator monthly compensation of 0.08% of daily net assets.
The following table reflects for the Fund (i) the advisory fee paid; and (ii) the advisory fee waived and/or affiliated rebates for each of the past three fiscal years ended May 31, 2013, 2014 and 2015:
Advisory Fees Paid (After Fee Waivers and/or Affiliated Rebates) | Advisory Fees Waived | Affiliated Rebates | |||||||||||||||||||||||||||||||||
2013 | 2014 | 2015 | 2013 | 2014 | 2015 | 2013 | 2014 | 2015 | |||||||||||||||||||||||||||
$ | 542,126 | $ | 355,648 | $ | 215,744 | – | – | – | $ | 12,554 | $ | 5,543 | $ | 1,245 |
For the fiscal years ended May 31, 2013, 2014 and 2015, the Fund paid compensation under its Administration Agreement as follows (no administrative fees were waived):
Compensation Paid for the Fiscal Year Ended May 31, | |||||||||||||||
2013 | 2014 | 2015 | |||||||||||||
$ | 164,349 | $ | 107,019 | $ | 64,293 |
Under a Sub-Administration 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. The Administrator supervises and monitors the administrative and accounting services provided by State Street.
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Their services are also subject to the supervision of the officers and Board of Trustees of the Fund. State Street's business address is One Lincoln Street, Boston, MA 02111-2101.
B. Principal Underwriter
The Fund's principal underwriter is the Distributor (which has the same address as the Adviser). In this capacity, the Fund's shares are distributed by the Distributor. The Distributor has entered into a selected dealer agreement with Morgan Stanley Smith Barney LLC and Morgan Stanley & Co. LLC, which through their own sales organizations sell shares of the Fund. In addition, the Distributor may enter into similar agreements with other selected broker-dealers. The Distributor, a Delaware corporation, is a wholly-owned subsidiary of Morgan Stanley.
The Distributor bears all expenses it may incur in providing services under the Distribution Agreement. These expenses include the payment to Financial Intermediaries of any sales commissions, service fees and other expenses for sales of the Fund's shares incurred or paid by Financial Intermediaries. The Distributor also pays certain expenses in connection with the distribution of the Fund's shares, including the costs of preparing, printing and distributing advertising or promotional materials, and the costs of printing and distributing prospectuses and supplements thereto used in connection with the offering and sale of the Fund's shares. The Fund bears the costs of initial typesetting, printing and distribution of prospectuses and supplements thereto to shareholders. The Fund also bears the costs of registering the Fund and its shares under federal and state securities laws and pays filing fees in accordance with state securities laws.
The Fund and the Distributor have agreed to indemnify each other against certain liabilities, including liabilities under the Securities Act of 1933, as amended. Under the Distribution Agreement, the Distributor uses its best efforts in rendering services to the Fund, but in the absence of willful misfeasance, bad faith, gross negligence or reckless disregard of its obligations, the Distributor is not liable to the Fund or any of its shareholders for any error of judgment or mistake of law or for any act or omission or for any losses sustained by the Fund or its shareholders.
C. Services Provided by the Adviser and Administrator
The Adviser manages the investment of the Fund's assets, including the placing of orders for the purchase and sale of portfolio securities. The Adviser obtains and evaluates the information and advice relating to the economy, securities markets and specific securities as it considers necessary or useful to continuously manage the assets of the Fund in a manner consistent with its investment objective.
Under the terms of the Administration Agreement, the Administrator maintains certain of the Fund's books and records and furnishes, at its own expense, the office space, facilities, equipment, clerical help and bookkeeping as the Fund may reasonably require in the conduct of its business. The Administrator also assists in the preparation of prospectuses, proxy statements and reports required to be filed with federal and state securities commissions (except insofar as the participation or assistance of the independent registered public accounting firm and attorneys is, in the opinion of the Administrator, necessary or desirable). The Administrator also bears the cost of telephone service, heat, light, power and other utilities provided to the Fund.
Expenses not expressly assumed by the Adviser under the Investment Advisory Agreement or by the Administrator under the Administration Agreement or by the Distributor will be paid by the Fund. These expenses will be allocated among the two Classes of shares pro rata based on the net assets of the Fund attributable to each Class, except as described below. Such expenses include, but are not limited to: expenses of the Shareholder Services Plan; charges and expenses of any registrar, custodian, stock transfer and dividend disbursing agent; brokerage commissions; taxes; engraving and printing share certificates; registration costs of the Fund and its shares under federal and state securities laws; the cost and expense of printing, including typesetting, and distributing prospectuses of the Fund and supplements thereto to the Fund's shareholders; all expenses of shareholders' and Trustees' meetings and of preparing, printing and mailing of proxy statements and reports to shareholders; fees and travel expenses of Trustees or members of any advisory board or committee who are not employees of the Adviser or any corporate affiliate of the Adviser; all expenses incident to any dividend, withdrawal or redemption options; charges and expenses of any outside service used for pricing of the Fund's shares; fees and expenses of legal counsel, including counsel to
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the Trustees who are not interested persons of the Fund or of the Adviser (not including compensation or expenses of attorneys who are employees of the Adviser); fees and expenses of the Fund's independent registered public accounting firm; membership dues of industry associations; interest on Fund borrowings; postage; insurance premiums on property or personnel (including officers and Trustees) of the Fund which inure to its benefit; extraordinary expenses (including, but not limited to, legal claims and liabilities and litigation costs and any indemnification relating thereto); and all other costs of the Fund's operation. The expenses of the Shareholder Services Plan will be allocated directly to Advisor Class shares. In addition sub-accounting and other expenses directly attributable to a particular Class (except advisory or custodial fees) will be allocated directly to such Class.
The Investment Advisory Agreement provides that in the absence of willful misfeasance, bad faith, gross negligence or reckless disregard of its obligations thereunder, the Adviser is not liable to the Fund or any of its investors for any act or omission by the Adviser or for any losses sustained by the Fund or its investors.
The Investment Advisory Agreement will remain in effect from year to year, provided continuance of the Investment Advisory Agreement is approved at least annually by the vote of the holders of a majority, as defined in the Investment Company Act, of the outstanding shares of the Fund, or by the Trustees; provided that in either event such continuance is approved annually by the vote of a majority of the Independent Trustees.
The Administration Agreement provides that in the absence of willful misfeasance, bad faith, gross negligence or reckless disregard of its obligations thereunder, the Administrator is not liable to the Fund or any of its investors for any act or omission by the Administrator or for any losses sustained by the Fund or its investors. The Administration Agreement will continue unless terminated by either party by written notice delivered to the other party within 30 days.
D. Shareholder Services Plan
The Fund has adopted a Shareholder Services Plan (the "Plan") pursuant to which Advisor Class shares of the Fund pay the Distributor as compensation for the provision of services to shareholders a service fee up to the rate of 0.25% on an annualized basis of the average daily net assets of the Fund. The fee is calculated and accrued daily and paid monthly. The service fee is for providing "personal service and/or the maintenance of shareholder accounts" as provided for in Section 2830(b)(9) of the NASD Conduct Rules, including (i) expenditures for overhead and other expenses of the Distributor, Morgan Stanley & Co. LLC and other affiliated broker-dealers, (ii) telephone and other communications expenses relating to the provision of shareholder services and (iii) compensation to and expenses of financial advisors and other employees of the Distributor, Morgan Stanley Smith Barney LLC, Morgan Stanley & Co. LLC and other affiliated broker-dealers for the provision of shareholder services. For the fiscal year ended May 31, 2015, Advisor Class shares of the Fund paid $198,505 to compensate the Distributor pursuant to the Plan.
E. Other Service Providers
(1) Transfer Agent/Dividend Disbursing Agent
Boston Financial Data Services, Inc., 2000 Crown Colony Drive, Quincy, MA 02169-0953, is the Transfer Agent for the Fund's shares and the Dividend Disbursing Agent for payment of dividends and distributions on Fund shares.
(2) Custodian and Independent Registered Public Accounting Firm
State Street Bank and Trust Company, One Lincoln Street, Boston, MA 02111-2101, is the Custodian of the Fund's assets. Any of the Fund's cash balances with the Custodian in excess of $250,000 are unprotected by federal deposit insurance. These balances may, at times, be substantial.
Ernst & Young LLP, located at 200 Clarendon Street, Boston, MA 02116-5021, is the independent registered public accounting firm of the Fund. The Fund's independent registered public accounting firm is responsible for auditing the annual financial statements.
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F. Fund Management
Other Accounts Managed by the Portfolio Managers
Other Accounts Managed by Portfolio Managers at May 31, 2015:
Other Registered Investment Companies | Other Pooled Investment Vehicles | Other Accounts | |||||||||||||||||||||||||
Portfolio Managers | Number of Accounts | Total Assets in the Accounts | Number of Accounts | Total Assets in the Accounts | Number of Accounts | Total Assets in the Accounts | |||||||||||||||||||||
Jim Caron | 6 | $1.1 billion | 20 | $4.9 billion | 36 | (1) | $14.6 billion(1) | ||||||||||||||||||||
Matthew Dunning | 6 | $1.2 billion | 0 | $0 | 52 | (2) | $14.1 billion(2) | ||||||||||||||||||||
Neil Stone | 7 | $1.2 billion | 5 | $1.7 billion | 66 | (3) | $19.1 billion(3) |
(1) Of these other accounts, six accounts with a total of approximately $1.5 billion in assets had performance-based fees.
(2) Of these other accounts, one account with a total of approximately $303.4 million in assets had performance-based fees.
(3) Of these other accounts, three accounts with a total of approximately $1.3 billion in assets had performance-based fees.
Because the portfolio managers may manage assets for other investment companies, pooled investment vehicles, and/or other accounts (including institutional clients, pension plans and certain high net worth individuals), there may be an incentive to favor one client over another resulting in conflicts of interest. For instance, the Adviser may receive fees from certain accounts that are higher than the fee it receives from the Fund, or it may receive a performance-based fee on certain accounts. In those instances, the portfolio managers may have an incentive to favor the higher and/or performance-based fee accounts over the Fund. In addition, a conflict of interest could exist to the extent the Adviser has proprietary investments in certain accounts, where portfolio managers have personal investments in certain accounts or when certain accounts are investment options in the Adviser's employee benefits and/or deferred compensation plans. The portfolio managers may have an incentive to favor these accounts over others. If the Adviser manages accounts that engage in short sales of securities of the type in which the Fund invests, the Adviser could be seen as harming the performance of the Fund for the benefit of the accounts engaging in short sales if the short sales cause the market value of the securities to fall. The Adviser has adopted trade allocation and other policies and procedures that it believes are reasonably designed to address these and other conflicts of interest.
Portfolio Manager Compensation Structure
Morgan Stanley's compensation structure is based on a total reward system of base salary and Incentive Compensation which is paid partially as a cash bonus and partially as mandatory deferred compensation. Deferred compensation may be granted as deferred cash under the Adviser's Investment Management Alignment Plan ("IMAP"), as an equity-based award or it may be granted under other plans as determined annually by Morgan Stanley's Compensation, Management Development and Succession Committee subject to vesting and other conditions.
Base salary compensation. Generally, portfolio managers receive base salary compensation based on the level of their position with the Adviser.
Incentive compensation. In addition to base compensation, portfolio managers may receive discretionary year-end compensation.
Incentive compensation may include:
• Cash Bonus.
• Deferred Compensation:
• A mandatory program that defers a portion of incentive compensation into restricted stock units or other awards based on Morgan Stanley common stock or other plans that are subject to vesting and other conditions.
• IMAP is a mandatory program that defers a portion of incentive compensation and notionally invests it in designated funds advised by the Adviser or its affiliates. The award is subject to vesting and other conditions. Portfolio managers must notionally invest a minimum of 25% to a maximum of 100% of their IMAP deferral account into a combination of the designated funds
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they manage that are included in the IMAP fund menu, which may or may not include one of the Portfolios.
All deferred compensation awards are subject to clawback provisions where awards can be cancelled, in whole or in part, if an employee takes any action, or omits to take any action which: causes a restatement of Morgan Stanley's consolidated financial results; constitutes a violation by the portfolio manager of Morgan Stanley's Global Risk Management Principles, Policies and Standards; or constitutes a violation of internal risk and control policies involving a subsequent loss.
Several factors determine incentive compensation, which can vary by portfolio management team and circumstances. These factors include:
• Revenues generated by the investment companies, pooled investment vehicles and other accounts managed by the portfolio manager.
• The investment performance of the funds/accounts managed by the portfolio manager.
• Contribution to the business objectives of the Adviser.
• The dollar amount of assets managed by the portfolio manager.
• Market compensation survey research by independent third-parties.
• Other qualitative factors, such as contributions to client objectives.
• Performance of Morgan Stanley and Morgan Stanley Investment Management, and the overall performance of the investment team(s) of which the portfolio manager is a member.
Securities Ownership of Portfolio Managers
As of May 31, 2015, none of the portfolio managers beneficially owned (or held notionally through IMAP) shares of the Fund.
G. Codes of Ethics
The Fund, the Adviser and the Distributor have each adopted a Code of Ethics pursuant to Rule 17j-1 under the Investment Company Act. The Codes of Ethics are designed to detect and prevent improper personal trading. The Codes of Ethics permit personnel subject to the Codes to invest in securities, including securities that may be purchased, sold or held by the Fund, subject to a number of restrictions and controls, including prohibitions against purchases of securities in an initial public offering and a preclearance requirement with respect to personal securities transactions.
H. Proxy Voting Policy and Proxy Voting Record
The Board of Trustees believes that the voting of proxies on securities held by the Fund is an important element of the overall investment process. As such, the Trustees have delegated the responsibility to vote such proxies to MSIM.
A copy of MSIM's Proxy Voting Policy ("Proxy Policy") is attached hereto as Appendix A. In addition, a copy of the Proxy Policy, as well as the Fund's most recent proxy voting record for the 12-month period ended June 30, as filed with the SEC, are available without charge on our web site at www.morganstanley.com/im. The Fund's proxy voting record is also available without charge on the SEC's web site at www.sec.gov.
I. Revenue Sharing
The Adviser and/or the Distributor may pay compensation, out of their own funds and not as an expense of the Fund, to certain Financial Intermediaries, including recordkeepers and administrators of various deferred compensation plans, in connection with the sale, distribution, marketing and retention of Fund shares and/or shareholder servicing. For example, the Adviser or the Distributor may pay additional compensation to a Financial Intermediary for, among other things, promoting the sale and distribution of Fund shares, providing access to various programs, mutual fund platforms or preferred or recommended mutual fund lists that may be offered by a Financial Intermediary, granting the Distributor access to a Financial Intermediary's financial advisors and consultants, providing assistance in the ongoing education and training of a Financial Intermediary's financial personnel, furnishing marketing support, maintaining share balances and/or for sub-accounting, recordkeeping, administrative, shareholder or transaction processing services. Such payments are in addition to any distribution fees, shareholder servicing fees and/or
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transfer agency fees that may be payable by the Fund. The additional payments may be based on various factors, including level of sales (based on gross or net sales or some specified minimum sales or some other similar criteria related to sales of the Fund and/or some or all other Morgan Stanley Funds), amount of assets invested by the Financial Intermediary's customers (which could include current or aged assets of the Fund and/or some or all other Morgan Stanley Funds), the Fund's advisory fees, some other agreed upon amount or other measures as determined from time to time by the Adviser and/or Distributor. The amount of these payments may be different for different Financial Intermediaries.
With respect to Morgan Stanley Smith Barney LLC, these payments currently include the following amounts, which are paid in accordance with the applicable compensation structure:
(1) an ongoing annual fee in an amount up to $750,000 in consideration of the Distributor's participation at various Morgan Stanley Smith Barney LLC events, including seminars, conferences and meetings as determined by Morgan Stanley Smith Barney LLC;
(2) on Advisor Class shares held in Morgan Stanley Smith Barney LLC brokerage accounts, an ongoing annual fee in an amount equal to 0.16% of the total average daily NAV of such shares for the applicable quarterly period;
(3) on Class I shares of the Fund held in Morgan Stanley Smith Barney LLC brokerage accounts as of June 30, 2014, where each such account holds $5 million or more in Class I shares of the Fund, an ongoing annual fee in an amount equal to 35% of the advisory fee the Adviser receives based on the average daily NAV of such shares for the applicable quarterly period;
(4) on new referrals after June 30, 2014 of $5 million or more in Class I shares of the Fund, Morgan Stanley Smith Barney LLC, under extraordinary circumstances, may receive an agreed upon one-time payment in an amount not to exceed 0.68% of the actual amount invested; and
(5) on Advisor Class shares and Class I shares of the Fund held in an account through certain 401(k) platforms in Morgan Stanley Smith Barney LLC's Corporate Retirement Solutions, an ongoing annual fee in an amount up to 0.20% of the total average daily NAV of such shares for the applicable quarterly period.
With respect to other Financial Intermediaries, these payments currently include the following amounts, which are paid in accordance with the applicable compensation structure for each Financial Intermediary:
(1) on Advisor Class shares and Class I shares of the Fund held in brokerage accounts only, a ticket charge of up to $10.00;
(2) on Advisor Class shares and Class I shares of the Fund held in brokerage and/or advisory program accounts, an ongoing annual fee in an amount up to 0.15% of the total average daily NAV of such shares for the applicable quarterly period; and
(3) an ongoing annual fee in an amount up to 0.25% on sales of Advisor Class shares and Class I shares of the Fund through brokerage accounts.
The prospect of receiving, or the receipt of, additional compensation, as described above, by Morgan Stanley Smith Barney LLC or other Financial Intermediaries may provide Morgan Stanley Smith Barney LLC or other Financial Intermediaries and their financial advisors and other salespersons with an incentive to favor sales of shares of the Fund over other investment options with respect to which Morgan Stanley Smith Barney LLC or other Financial Intermediaries do not receive additional compensation (or receives lower levels of additional compensation). These payment arrangements, however, will not change the price that an investor pays for shares of the Fund or the amount that the Fund receives to invest on behalf of an investor. Investors may wish to take such payment arrangements into account when considering and evaluating any recommendations relating to Fund shares and should review carefully any disclosure provided by Morgan Stanley Smith Barney LLC and other Financial Intermediaries as to their compensation.
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VI. BROKERAGE ALLOCATION AND OTHER PRACTICES
A. Brokerage Transactions
Subject to the general supervision of the Trustees, the Adviser is responsible for decisions to buy and sell securities for the Fund, the selection of brokers and dealers to effect the transactions, and the negotiation of brokerage commissions, if any. Purchases and sales of securities are normally transacted through issuers, underwriters or major dealers in U.S. government securities acting as principals. Such transactions are made on a net basis and do not involve payment of brokerage commissions. The cost of securities purchased from an underwriter usually includes a commission paid by the issuer to the underwriters; transactions with dealers normally reflect the spread between bid and asked prices.
Pursuant to orders issued by the SEC, the Fund is permitted to engage in principal transactions, subject to certain conditions, with Morgan Stanley & Co. LLC, a broker-dealer affiliated with the Fund's Adviser.
During the fiscal years ended May 31, 2013, 2014 and 2015, the Fund did not effect any principal transactions with Morgan Stanley & Co. LLC.
B. Commissions
Brokerage transactions in securities listed on exchanges or admitted to unlisted trading privileges may be effected through Morgan Stanley & Co. LLC and other affiliated brokers and dealers. In order for an affiliated broker or dealer to effect any portfolio transactions on an exchange for the Fund, the commissions, fees or other remuneration received by the affiliated broker or dealer must be reasonable and fair compared to the commissions, fees or other remuneration paid to other brokers in connection with comparable transactions involving similar securities being purchased or sold on an exchange during a comparable period of time. This standard would allow the affiliated broker or dealer to receive no more than the remuneration which would be expected to be received by an unaffiliated broker in a commensurate arm's-length transaction. Furthermore, the Trustees, including the Independent Trustees, have adopted procedures which are reasonably designed to provide that any commissions, fees or other remuneration paid to an affiliated broker or dealer are consistent with the foregoing standard. The Fund does not reduce the management fee it pays to the Adviser by any amount of the brokerage commissions it may pay to an affiliated broker or dealer.
During the fiscal years ended May 31, 2013, 2014 and 2015, the Fund paid a total of $7,409, $5,303 and $6,576, respectively, in brokerage commissions.
During the fiscal years ended May 31, 2013, 2014 and 2015, the Fund did not pay brokerage commissions to an affiliated broker or dealer.
C. Brokerage Selection
The Adviser is responsible for decisions to buy and sell securities for the Fund, for broker-dealer selection and for negotiation of commission rates. The Adviser is prohibited from directing brokerage transactions on the basis of the referral of clients or the sale of shares of advised investment companies. Purchases and sales of securities on a stock exchange are effected through brokers who charge a commission for their services. In the OTC market, securities may be traded as agency transactions through broker dealers or traded on a "net" basis with dealers acting as principal for their own accounts without a stated commission, although the price of the security usually includes profit to the dealer. In underwritten offerings, securities are purchased at a fixed price which includes an amount of compensation to the underwriter, generally referred to as the underwriter's concession or discount. When securities are purchased or sold directly from or to an issuer, no commissions or discounts are paid.
On occasion, the Fund may purchase certain money market instruments directly from an issuer without payment of a commission or concession. Money market instruments are generally traded on a "net" basis with dealers acting as principal for their own accounts without a stated commission, although the price of the security usually includes a profit to the dealer.
The Fund anticipates that certain of its transactions involving foreign securities will be effected on foreign securities exchanges. Fixed commissions on such transactions are generally higher than negotiated commissions on domestic transactions. There is also generally less government supervision and regulation of foreign securities exchanges and brokers than in the United States.
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The Adviser serves as investment adviser to a number of clients, including other investment companies. The Adviser attempts to equitably allocate purchase and sale transactions among the Fund and other client accounts. To that end, the Adviser considers various factors, including respective investment objectives, relative size of portfolio holdings of the same or comparable securities, availability of cash for investment, size of investment commitments generally held and the opinions of the persons responsible for managing the Fund and other client accounts.
The Adviser selects the brokers or dealers that will execute the purchases and sales of investment securities for the Fund. Selection of approved brokers for execution is based on three main criteria: access to liquidity, provision of capital and quality of execution. The Adviser effects transactions with those broker-dealers under the obligation to seek best execution. The Adviser may place portfolio transactions with those brokers and dealers who also furnish research and other services to the Fund and the Adviser. Services provided may include certain research services (as described below), as well as effecting securities transactions and performing functions incidental thereto (such as clearance, settlement and custody).
The Adviser and its affiliated investment advisers have established commission sharing arrangements under a commission management program (the "Commission Management Program" or "CMP"), pursuant to which execution and research costs or a portion of those costs are decoupled in accordance with applicable laws, rules and regulations.
"Approved Equity CMP Partner Brokers" are those executing brokers with which the Adviser or its affiliated investment advisers have agreement(s) to accrue research commission credits for the benefit of clients. Over a certain time period, the research credits are pooled at the Approved Equity CMP Partner Brokers and a third-party vendor (also known as the "CMP Aggregator") who will, under the Adviser's supervision, act as the administrator of certain CMP related activities which may include reconciliation of research credits with brokers, as well as holding research credits in an account for purposes of distribution to applicable research providers at a later time. These research credits are subsequently used to pay for eligible research services.
Under the CMP, the Adviser and its affiliated investment advisers select approved equity brokers (which include the Adviser's affiliates) for execution services and after accumulation of commissions at such brokers, the Adviser and/or its affiliated investment advisers instruct these approved equity brokers to transfer a predetermined percentage of commissions to an aggregator. The Adviser and/or its affiliated investment advisers then instruct the aggregator to utilize these balances to pay for eligible research provided by executing brokers or third-party research providers on the Adviser's and its affiliated investment advisers' Approved Research Provider List. Generally, the Adviser and its affiliated investment advisers will direct the aggregator and/or approved equity broker to record research credits based upon a previously agreed-upon allocation and will periodically instruct the aggregator and/or approved equity broker to direct specified dollar amounts from that pool to pay for eligible research services provided by third-party research providers and/or executing brokers. The research credits are pooled among the Adviser and its affiliated investment advisers and allocated on behalf of both the Adviser and its affiliated investment advisers. Likewise, the research services obtained under the CMP are shared among the Adviser and its affiliated investment advisers.
Under the CMP, the aggregator and/or approved equity broker is responsible for the payment of fees for research services and obtains the research services pursuant to written agreements between the approved equity broker and the third-party research provider.
For those costs not decoupled, but retained by broker-dealers, the Adviser also effects transactions with brokers which directly pay for proprietary research services provided in accordance with Section 28(e) of the 1934 Act. Such transactions include equity transactions effected on an agency basis.
Transactions involving client accounts managed by two or more affiliated investment advisers may be aggregated and executed using the services of broker-dealers that provide third-party benefits/research so long as all client accounts involved in the transaction benefit from one or more of the services offered by such broker-dealer.
The research services received include those of the nature described above and other services which aid the Adviser in fulfilling its investment decision-making responsibilities, including (a) furnishing advice as to the value of securities, the advisability of investing in, purchasing or selling securities, and the
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availability of securities or purchasers or sellers of securities; and (b) furnishing analyses and reports concerning issuers, industries, securities, economic factors and trends, portfolio strategy, and the performance of accounts. Where a particular item (such as proxy services) has both research and non-research related uses, the Adviser will make a reasonable allocation of the cost of the item between research and non-research uses and will only pay for the portion of the cost allocated to research uses with client brokerage transactions.
Certain investment professionals and other employees of the Adviser are also officers of affiliated investment advisers and may provide investment advisory services to clients of such affiliated investment advisers. Research services furnished or paid for by brokers through whom the Adviser effects transactions for a particular account may be used by the Adviser or its affiliated investment advisers in servicing their other accounts, and not all such services may be used for the benefit of the client which pays the brokerage commission that results in the receipt of such research services. Commissions paid to brokers providing research services may be higher than those charged by brokers not providing such services.
The Adviser's personnel also provide research and trading support to personnel of certain affiliated investment advisers. Research related costs may be shared by affiliated investment advisers and may benefit the clients of such affiliated investment advisers. Research services that benefit the Adviser may be received in connection with commissions generated by clients of its affiliated investment advisers.
The Adviser and its affiliated investment advisers make a good faith determination of the value of research services in accordance with Section 28(e) of the 1934 Act, UK Financial Conduct Authority and Prudential Regulation Authority Rules and other relevant regulatory requirements.
The Adviser and certain of its affiliates currently serve as an investment adviser to a number of clients, including other investment companies, and may in the future act as investment adviser to others. It is the practice of the Adviser, and its affiliates, to cause purchase and sale transactions (including transactions in certain initial and secondary public offerings) to be allocated among clients whose assets they manage (including the Fund) in such manner they deem equitable. In making such allocations among the Fund and other client accounts, various factors may be considered, including the respective investment objectives, the relative size of portfolio holdings of the same or comparable securities, the availability of cash for investment, the size of investment commitments generally held and the opinions of the persons responsible for managing the Fund and other client accounts. The Adviser and its affiliates may operate one or more order placement facilities and each facility will implement order allocation in accordance with the procedures described above. From time to time, each facility may transact in a security at the same time as other facilities are trading in that security.
D. Regular Broker-Dealers
During the fiscal year ended May 31, 2015, the Fund did not purchase any securities issued by issuers who were among the ten brokers or ten dealers which executed transactions for or with the Fund in the largest dollar amounts during the period. At May 31, 2015, the Fund did not own any securities issued by any of such issuers.
VII. CAPITAL STOCK AND OTHER SECURITIES
The shareholders of the Fund are entitled to a full vote for each full share of beneficial interest held. The Fund is authorized to issue an unlimited number of shares of beneficial interest. All shares of beneficial interest of the Fund are of $0.01 par value and are equal as to earnings, assets and voting privileges except that each Class will have exclusive voting privileges with respect to matters relating to distribution expenses borne solely by such Class or any other matter in which the interests of one Class differ from the interests of the other Class.
The Fund's Declaration of Trust permits the Trustees to authorize the creation of additional series of shares (the proceeds of which would be invested in separate, independently managed portfolios) and additional Classes of shares within any series. The Trustees have not presently authorized any such additional series or Classes of shares other than as set forth in the Prospectus.
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The Fund is not required to hold annual meetings of shareholders and in ordinary circumstances the Fund does not intend to hold such meetings. The Trustees may call special meetings of shareholders for action by shareholder vote as may be required by the Investment Company Act or the Declaration of Trust. Under certain circumstances, the Trustees may be removed by the actions of the Trustees. In addition, under certain circumstances, the shareholders may call a meeting to remove the Trustees and the Fund is required to provide assistance in communication with shareholders about such a meeting. The voting rights of shareholders are not cumulative, so that holders of more than 50% of the shares voting can, if they choose, elect all Trustees being selected, while the holders of the remaining shares would be unable to elect any Trustees.
Under Massachusetts law, shareholders of a business trust may, under certain limited circumstances, be held personally liable as partners for the obligations of the Fund. However, the Declaration of Trust contains an express disclaimer of shareholder liability for acts or obligations of the Fund, requires that notice of such Fund obligations include such disclaimer, and provides for indemnification out of the Fund's property for any shareholder held personally liable for the obligations of the Fund. Thus, the risk of a shareholder incurring financial loss on account of shareholder liability is limited to circumstances in which the Fund itself would be unable to meet its obligations. Given the above limitations on shareholder personal liability, and the nature of the Fund's assets and operations, the possibility of the Fund being unable to meet its obligations is remote and thus, in the opinion of Massachusetts counsel to the Fund, the risk to Fund shareholders of personal liability is remote.
The Trustees themselves have the power to alter the number and the terms of office of the Trustees (as provided for in the Declaration of Trust), and they may at any time lengthen or shorten their own terms or make their terms of unlimited duration and appoint their own successors, provided that always at least a majority of the Trustees has been elected by the shareholders of the Fund.
VIII. PURCHASE, REDEMPTION AND PRICING OF SHARES
A. Purchase/Redemption of Shares
Information concerning how Fund shares are offered to the public (and how they are redeemed and exchanged) is provided in the Fund's Prospectus.
Suspension of Redemptions. Redemptions are not made on days during which the NYSE is closed. The right of redemption may be suspended and the payment therefore may be postponed for more than seven days during any period when (a) the NYSE is closed for other than customary weekends or holidays; (b) the SEC determines trading on the NYSE is restricted; (c) the SEC determines an emergency exists as a result of which disposal by the Fund of securities owned by it is not reasonably practicable or it is not reasonably practicable for the Fund to fairly determine the value of its net assets; or (d) the SEC, by order, so permits.
Transfer Agent as Agent. With respect to the redemption or repurchase of Fund shares, the application of proceeds to the purchase of new shares in the Fund or any other Morgan Stanley Funds and the general administration of the exchange privilege, the Transfer Agent acts as agent for the Distributor and for the shareholder's authorized broker-dealer, if any, in the performance of such functions. With respect to exchanges, redemptions or repurchases, the Transfer Agent is liable for its own negligence and not for the default or negligence of its correspondents or for losses in transit. The Fund is not liable for any default or negligence of the Transfer Agent, the Distributor or any authorized broker-dealer.
The Distributor and any authorized broker-dealer have appointed the Transfer Agent to act as their agent in connection with the application of proceeds of any redemption of Fund shares to the purchase of shares of any other Morgan Stanley Fund and the general administration of the exchange privilege. No commission or discounts will be paid to the Distributor or any authorized broker-dealer for any transaction pursuant to the exchange privilege.
Outside Brokerage Accounts/Limited Portability. Most Fund shareholders hold their shares with Morgan Stanley Smith Barney LLC. Please note that your ability to transfer your Fund shares to a brokerage account at another securities dealer may be limited. Fund shares may only be transferred to accounts held at securities dealers or Financial Intermediaries that have entered into agreements with the Distributor. After a transfer, you may purchase additional shares of the Morgan Stanley Fund(s) you owned before the
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transfer and, in most instances, you will also be able to purchase shares of most other Morgan Stanley Funds. If you transfer shares of a fund that is not a Morgan Stanley Multi-Class Fund (for example, a Morgan Stanley Money Market Fund) you will not be able to exchange shares of that fund for any other Morgan Stanley Fund after the transfer.
If you wish to transfer Fund shares to a securities dealer or other financial intermediary that has not entered into an agreement with the Distributor, you may request that the securities dealer or financial intermediary maintain the shares in an account at the Transfer Agent registered in the name of such securities dealer or financial intermediary for your benefit. You may also hold your Fund shares in your own name directly with the Transfer Agent. In either case, you will continue to have the ability to purchase additional Morgan Stanley Funds and will have full exchange privileges. Other options may also be available; please check with the respective securities dealer or financial intermediary. If you choose not to hold your shares with the Transfer Agent, either directly or through a securities dealer or other financial intermediary, you must redeem your shares and pay any applicable contingent deferred sales charges.
B. Offering Price
The Fund's Advisor Class and Class I shares are offered at NAV. The price of Fund shares, called NAV, is based on the value of the Fund's portfolio securities. NAV per share of each Class is calculated by dividing the value of the portion of the Fund's securities and other assets attributable to that Class, less the total market value of the liabilities attributable to that Class, by the number of shares of that Class outstanding. The assets of each Class of shares are invested in a single portfolio. The NAV of each Class, however, will differ because the Classes have different ongoing fees.
The NAV per share is determined by the Adviser as of 4:00 p.m. New York time on each day that the NYSE is open (or, on days when the NYSE closes prior to 4:00 p.m., at such earlier time). The NAV per share will not be determined on Good Friday and on such other federal and non-federal holidays as are observed by the NYSE. On any business day when the Securities Industry and Financial Markets Association recommends that the securities markets close trading early, the Fund may close trading early and determine NAV as of an earlier time.
In the calculation of the Fund's NAV when market quotations are not readily available, including circumstances under which it is determined by the Adviser that the closing price, last sale price or the mean between the last reported bid and asked prices are not reflective of 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 Board.
Short-term debt securities with remaining maturities of 60 days or less at the time of purchase may be valued at amortized cost, unless the Adviser determines such price does not reflect the securities' market value, in which case these securities will be valued at their fair value as determined by the Adviser. Other taxable short-term debt securities with maturities of more than 60 days will be valued on a mark-to-market basis until such time as they reach a maturity of 60 days, whereupon they will be valued at amortized cost using their value on the 61st day unless the Adviser determines such price does not reflect the securities' fair value, in which case these securities will be valued at their fair market value as determined by the Adviser.
Certain of the Fund's portfolio securities may be valued by an outside pricing service approved by the Fund's Board. The pricing service may utilize a matrix system or other model incorporating attributes such as security quality, maturity and coupon as the evaluation model parameters, and/or research evaluations by its staff, including review of broker-dealer market price quotations in determining what it believes is the fair valuation of the portfolio securities valued by such pricing service.
Listed options are valued at the last reported sales price on the exchange on which they are listed (or at the exchange official closing price if such exchange reports an official closing price). If an official closing price or last reported sale price is unavailable, the listed option should be fair valued at the mean between its latest bid and ask prices. If an exchange closing price or bid and asked prices are not available from the exchange, then the quotes from one or more brokers or dealers may be used. Unlisted options and swaps are valued by an outside pricing service approved by the Board or quotes from a broker or dealer. Unlisted options and swaps cleared on a clearinghouse or exchange may be valued using the closing price provided by the clearinghouse or exchange. Futures are valued at the settlement price on the exchange on which they trade, or, if a settlement price is unavailable, then at the last sale price on the exchange.
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If the Adviser determines that the valuation received from the outside pricing service or broker or dealer is not reflective of the security's market value, such security is valued at its fair value as determined in good faith under procedures established by and under the general supervision of the Board.
IX. TAXES
The Fund generally will make two basic types of distributions: ordinary dividends and long-term capital gain distributions. These two types of distributions are reported differently on a shareholder's income tax return. The tax treatment of the investment activities of the Fund will affect the amount, timing and character of the distributions made by the Fund. The following discussion is only a summary of certain tax considerations generally affecting the Fund and shareholders of the Fund and is not intended as a substitute for careful tax planning. Tax issues relating to the Fund are not generally a consideration for shareholders such as tax-exempt entities and tax-advantaged retirement vehicles such as an IRA or 401(k) plan. Shareholders are urged to consult their own tax professionals regarding specific questions as to federal, state or local taxes.
Investment Company Taxation. The Fund intends to continue to qualify as a regulated investment company under Subchapter M of the Code. To continue to so qualify, the Fund will be required to, among other things, satisfy an asset diversification test, a qualifying income test (the "Income Test") and a distribution test. Assuming the Fund satisfies the foregoing requirements, the Fund will not be subject to federal income tax on its net investment income and capital gains, if any, to the extent that it timely distributes such income and capital gains to its shareholders. If the Fund fails to qualify for any taxable year as a regulated investment company, all of its taxable income will be subject to tax at regular corporate income tax rates without any deduction for distributions to shareholders, and such distributions generally will be taxable to shareholders as ordinary dividends to the extent of the Fund's current and accumulated earnings and profits.
The Fund generally intends to distribute sufficient income and gains so that the Fund will not pay corporate income tax on its earnings. The Fund also generally intends to distribute to its shareholders in each calendar year a sufficient amount of ordinary income and capital gains to avoid the imposition of a 4% excise tax. However, the Fund may instead determine to retain all or part of any income or net long-term capital gains in any year for reinvestment. In such event, the Fund will pay federal income tax (and possibly excise tax) on such retained income or gains.
Gains or losses on sales of securities by the Fund will generally be long-term capital gains or losses if the securities have a tax holding period of more than one year at the time of such sale. Gains or losses on the sale of securities with a tax holding period of one year or less will be short-term capital gains or losses. Special tax rules may change the normal treatment of gains and losses recognized by the Fund when the Fund invests in options and futures transactions. Those special tax rules can, among other things, affect the treatment of capital gain or loss as long-term or short-term and may result in ordinary income or loss rather than capital gain or loss. The application of these special rules would therefore also affect the character of distributions made by the Fund.
The Fund may make investments in which it recognizes income or gain prior to receiving cash with respect to such investment. For example, under certain tax rules, the Fund may be required to accrue a portion of any discount at which certain securities are purchased as income each year even though the Fund receives no payments in cash on the security during the year. To the extent that the Fund makes such investments, it generally would be required to pay out such income or gain as a distribution in each year to avoid taxation at the Fund level. Such distributions will be made from the available cash of the Fund or by liquidation of portfolio securities if necessary. If a distribution of cash necessitates the liquidation of portfolio securities, the Adviser will select which securities to sell. The Fund may realize a gain or loss from such sales. In the event the Fund realizes net capital gains from such transactions, its shareholders may receive a larger capital gain distribution, if any, than they would in the absence of such transactions.
The Fund might invest directly or indirectly in residual interests in REMICs or equity interests in taxable mortgage pools ("TMPs"). Under a notice issued by the IRS in October 2006 and Treasury regulations that have not yet been issued (but may apply with retroactive effect) a portion of the Fund's income from a real estate investment trust ("REIT") that is attributable to the REIT's residual interest in a REMIC or a TMP (referred to in the Code as an "excess inclusion") will be subject to federal income taxation in all events.
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This notice also provides, and the regulations are expected to provide, that excess inclusion income of a regulated investment company, such as each of the Funds, will generally be allocated to shareholders of the regulated investment company in proportion to the dividends received by such shareholders, with the same consequences as if the shareholders held the related REMIC or TMP residual interest directly.
In general, excess inclusion income allocated to shareholders (i) cannot be offset by net operating losses (subject to a limited exception for certain thrift institutions) and (ii) will constitute unrelated business taxable income ("UBTI") to entities (including a qualified pension plan, an individual retirement account, a 401(k) plan, a Keogh plan or other tax-exempt entity) subject to tax on UBTI, thereby potentially requiring such an entity that is allocated excess inclusion income, and otherwise might not be required to file a tax return, to file a tax return and pay tax on such income. In addition, because the Code provides that excess inclusion income is ineligible for treaty benefits, a regulated investment company must withhold tax on excess inclusions attributable to its foreign shareholders at a 30% rate of withholding, regardless of any treaty benefits for which a shareholder is otherwise eligible.
Taxation of Dividends and Distribution Shareholders normally will be subject to federal income taxes on the dividends and other distributions they receive from the Fund. Such distributions also may be subject to state and local income tax. However, dividends attributable to interest earned on direct obligations of the U.S. government may be exempt from state and local taxes. Such dividends and distributions, to the extent that they are derived from net investment income or short-term capital gains, are generally taxable to the shareholder as ordinary income regardless of whether the shareholder receives such payments in additional shares or in cash. The Fund does not anticipate that it will make distributions eligible for the reduced rate of taxation applicable to qualified dividend income or for the corporate dividends received reduction.
Distributions of net long-term capital gains, if any, are taxable to shareholders as long-term capital gains regardless of how long a shareholder has held the Fund's shares and regardless of whether the distribution is received in additional shares or in cash. The maximum individual rate applicable to long-term capital gains is generally either 15% or 20%, depending on whether the individual's income exceeds certain threshold amounts.
Shareholders are generally taxed on any income dividend or capital gain distributions from the Fund in the year they are actually distributed. However, if any such dividends or distributions are declared in October, November or December and paid to shareholders of record of such month in January then such amounts will be treated for tax purposes as received by the shareholders on December 31.
An additional 3.8% Medicare tax is imposed on certain net investment income (including ordinary dividends and capital gain distributions received from the Fund and net gains from redemptions or other taxable dispositions of Fund shares) of U.S. individuals, estates and trusts to the extent that such person's "modified adjusted gross income" (in the case of an individual) or "adjusted gross income" (in the case of an estate or trust) exceeds certain threshold amounts.
Shareholders who are not citizens or residents of the United States and certain foreign entities, while generally not subject to U.S. tax on distributions of net long-term capital gains, will generally be subject to withholding of U.S. tax at a rate of 30% on distributions made by the Fund of investment income and short-term capital gains. Prospective investors are urged to consult their tax advisors regarding the specific tax consequences discussed above. Such prospective investors are urged to consult their tax advisors regarding the tax consequences to them of dividends and distributions and the potential applicability of the U.S. estate tax.
The Fund is required to withhold U.S. tax (at a 30% rate) on payments of taxable dividends and (effective January 1, 2017) redemption proceeds and certain capital gain dividends made to certain non-U.S. entities that fail to comply (or be deemed compliant) with extensive new reporting and withholding requirements designed to inform the U.S. Department of the Treasury of U.S.-owned foreign investment accounts. Shareholders may be requested to provide additional information to the Fund to enable the Fund to determine whether withholding is required.
After the end of each calendar year, shareholders will be sent information on their dividends and capital gain distributions for tax purposes, including the portion taxable as ordinary income and the portion taxable as long-term capital gains.
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State and Local Taxes. Shareholders normally will be subject to state and/or local income taxes on dividends paid from interest income. Because many States presently allow the pass-through of interest derived from direct obligations of the U.S. government, the portion of the Fund's interest income attributable to such obligations that is paid out to shareholders as net investment income may be exempt from the taxation of most state and local jurisdictions. However, capital gains distributions generally will be subject to state and local tax.
Purchases and Redemptions and Exchanges of Fund Shares. Any dividend or capital gains distribution received by a shareholder from any investment company will have the effect of reducing the NAV of the shareholder's stock in that company by the exact amount of the dividend or capital gains distribution. Furthermore, such dividends and capital gains distributions are subject to federal income taxes. If the NAV of the shares should be reduced below a shareholder's cost as a result of the payment of dividends or the distribution of realized long-term capital gains, such payment or distribution would be in part a return of the shareholder's investment but nonetheless would be taxable to the shareholder. Therefore, an investor should consider the tax implications of purchasing Fund shares immediately prior to a distribution record date.
Shareholders normally will be subject to federal income taxes, and state and/or local income taxes, on the sale or disposition of Fund shares at a gain. In general, a sale of shares results in capital gain or loss, and for individual shareholders, is taxable at a federal rate dependent upon the length of time the shares were held. A redemption of a shareholder's Fund shares is normally treated as a sale for tax purposes. Fund shares held for a period of one year or less at the time of such sale or redemption will, for tax purposes, generally result in short-term capital gains or losses and those held for more than one year will generally result in long-term capital gains or losses. The maximum individual rate applicable to long-term capital gains is generally either 15% or 20%, depending on whether the individual's income exceeds certain threshold amounts. Any loss realized by shareholders upon a sale or redemption of shares within six months of the date of their purchase will be treated as a long-term capital loss to the extent of any distributions of net long-term capital gains with respect to such shares during the six-month period.
Gain or loss on the sale or redemption of shares in the Fund is measured by the difference between the amount of cash received (or the fair market value of any property received) and the adjusted tax basis of the shares.
Exchanges of Fund shares for shares of another fund, including shares of other Morgan Stanley Funds, are also subject to similar tax treatment. Such an exchange is treated for tax purposes as a sale of the original shares in the Fund, followed by the purchase of shares in the other fund.
The ability to deduct capital losses may be limited. In addition, if a shareholder realizes a loss on the redemption or exchange of a fund's shares and receives securities that are considered substantially identical to that fund's shares or reinvests in that fund's shares or substantially identical shares within 30 days before or after the redemption or exchange, the transactions may be subject to the "wash sale" rules, resulting in a postponement of the recognition of such loss for tax purposes.
Shareholders should keep records of investments made (including shares acquired through reinvestment of dividends and distributions) so they can compute the tax basis of their shares. Under certain circumstances a shareholder may compute and use an average cost basis in determining the gain or loss on the sale or redemption of shares.
The Fund (or its administrative agent) is required to report to the Internal Revenue Service ("IRS") and furnish to Fund shareholders the cost basis information for sale transactions of shares purchased on or after January 1, 2012. Shareholders may elect to have one of several cost basis methods applied to their account when calculating the cost basis of shares sold, including average cost, FIFO ("first-in, first-out") or some other specific identification method. Unless you instruct otherwise, the Fund will use average cost as its default cost basis method, and will treat sales as first coming from shares purchased prior to January 1, 2012. If average cost is used for the first sale of Fund shares covered by these new rules, the shareholder may only use an alternative cost basis method for shares purchased prospectively. Fund shareholders should consult with their tax advisors to determine the best cost basis method for their tax situation.
Backup Withholding. The Fund may be required to withhold U.S. federal income tax (currently, at a rate of 28%) ("backup withholding") from all taxable distributions payable to (1) any shareholder who fails to furnish the Fund with its correct taxpayer identification number or a certificate that the shareholder is exempt from backup withholding, and (2) any shareholder with respect to whom the IRS notifies the Fund
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that the shareholder has failed to properly report certain interest and dividend income to the IRS and to respond to notices to that effect. An individual's taxpayer identification number is his or her social security number. The 28% backup withholding tax is not an additional tax and may be credited against a taxpayer's regular federal income tax liability.
X. UNDERWRITERS
The Fund's shares are offered to the public on a continuous basis. The Distributor, as the principal underwriter of the shares, has certain obligations under the Distribution Agreement concerning the distribution of the shares. These obligations and the compensation the Distributor receives are described above in the sections titled "Principal Underwriter" and "Shareholder Services Plan."
XI. PERFORMANCE DATA
The Fund's annualized yield for the 30-day period ended May 31, 2015 was 0.37% and –0.11% for Advisor Class and Class I shares, respectively.
Average annual returns
Period Ended May 31, 2015
Class | Inception Date | 1 Year | 5 Years | 10 Years | Life of Fund | ||||||||||||||||||
Advisor Class | 08/13/91 | 0.09 | % | 0.64 | % | 2.11 | % | 3.48 | % | ||||||||||||||
Class I | 05/29/13 | 0.05 | % | N/A | N/A | 0.04 | % |
Aggregate total returns
Period Ended May 31, 2015
Class | Inception Date | 1 Year | 5 Years | 10 Years | Life of Fund | ||||||||||||||||||
Advisor Class | 08/13/91 | 0.09 | % | 3.24 | % | 23.24 | % | 125.81 | % | ||||||||||||||
Class I | 05/29/13 | 0.05 | % | N/A | N/A | 0.07 | % |
Average annual after-tax returns
Period Ended May 31, 2015
Class | Calculation Methodology | Inception Date | 1 Year | 5 Years | 10 Years | Life of Fund | |||||||||||||||||||||
Advisor Class | After taxes on distributions | 08/13/91 | –0.48% | 0.06 | % | 1.27% | 1.99% | ||||||||||||||||||||
Advisor Class | After taxes on distributions and redemptions | 08/13/91 | 0.05% | 0.26 | % | 1.32% | 2.09% |
XII. FINANCIAL STATEMENTS
The Fund's audited financial statements for the fiscal year ended May 31, 2015, including notes thereto, and the report of Ernst & Young LLP, an independent registered public accounting firm, are herein incorporated by reference to the Fund's Annual Report to Shareholders. A copy of the Fund's Annual Report to Shareholders must accompany the delivery of this SAI.
XIII. FUND COUNSEL
Dechert LLP, located at 1095 Avenue of the Americas, New York, NY 10036, acts as the Fund's legal counsel.
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This SAI and the Prospectus do not contain all of the information set forth in the Registration Statement the Fund has filed with the SEC. The complete Registration Statement may be obtained from the SEC.
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Appendix A
MORGAN STANLEY INVESTMENT MANAGEMENT
PROXY VOTING POLICY AND PROCEDURES
I. POLICY STATEMENT
Morgan Stanley Investment Management's ("MSIM") policy and procedures for voting proxies ("Policy") with respect to securities held in the accounts of clients applies to those MSIM entities that provide discretionary investment management services and for which an MSIM entity has authority to vote proxies. This Policy is reviewed and updated as necessary to address new and evolving proxy voting issues and standards.
The MSIM entities covered by this Policy currently include the following: Morgan Stanley AIP GP LP, Morgan Stanley Investment Management Inc., Morgan Stanley Investment Management Limited, Morgan Stanley Investment Management Company, Morgan Stanley Investment Management (Japan) Co. Limited and Morgan Stanley Investment Management Private Limited (each an "MSIM Affiliate" and collectively referred to as the "MSIM Affiliates" or as "we" below).
Each MSIM Affiliate will use its best efforts to vote proxies as part of its authority to manage, acquire and dispose of account assets. With respect to the MSIM registered management investment companies (the "MSIM Funds"), each MSIM Affiliate will vote proxies under this Policy pursuant to authority granted under its applicable investment advisory agreement or, in the absence of such authority, as authorized by the Board of Directors/Trustees of the MSIM Funds. A MSIM Affiliate will not vote proxies unless the investment management or investment advisory agreement explicitly authorizes the MSIM Affiliate to vote proxies. MSIM Affiliates will vote proxies in a prudent and diligent manner and in the best interests of clients, including beneficiaries of and participants in a client's benefit plan(s) for which the MSIM Affiliates manage assets, consistent with the objective of maximizing long-term investment returns ("Client Proxy Standard"). In addition to voting proxies at portfolio companies, MSIM routinely engages with the management or board of companies in which we invest on a range of governance issues. Governance is a window into or proxy for management and board quality. MSIM engages with companies where we believe we can make a positive impact on the governance structure. MSIM's engagement process, through private communication with companies, allows us to understand the governance structure at investee companies and better inform our voting decisions. In certain situations, a client or its fiduciary may provide an MSIM Affiliate with a proxy voting policy. In these situations, the MSIM Affiliate will comply with the client's policy.
Retention and Oversight of Proxy Advisory Firms — ISS Governance Services ("ISS") and Glass Lewis (together with other proxy research providers as we may retain from time to time, the "Research Providers") are independent advisers that specialize in providing a variety of fiduciary-level proxy-related services to institutional investment managers, plan sponsors, custodians, consultants, and other institutional investors. The services provided include in-depth research, global issuer analysis, and voting recommendations.
MSIM has retained Research Providers to analyze proxy issues and to make vote recommendations on those issues. While we may review and utilize the recommendations of one or more Research Providers in making proxy voting decisions, we are in no way obligated to follow such recommendations. MSIM votes all proxies based on its own proxy voting policies in the best interests of each MSIM Affiliate. In addition to research, ISS provides vote execution, reporting, and recordkeeping services to MSIM.
As part of MSIM's ongoing oversight of the Research Providers, MSIM performs periodic due diligence on the Research Providers. Topics of the reviews include, but are not limited to, conflicts of interest, methodologies for developing their policies and vote recommendations, and resources.
Voting Proxies for Certain Non-U.S. Companies — Voting proxies of companies located in some jurisdictions may involve several problems that can restrict or prevent the ability to vote such proxies or entail significant costs. These problems include, but are not limited to: (i) proxy statements and ballots
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being written in a language other than English; (ii) untimely and/or inadequate notice of shareholder meetings; (iii) restrictions on the ability of holders outside the issuer's jurisdiction of organization to exercise votes; (iv) requirements to vote proxies in person; (v) the imposition of restrictions on the sale of the securities for a period of time in proximity to the shareholder meeting; and (vi) requirements to provide local agents with power of attorney to facilitate our voting instructions. As a result, we vote clients' non-U.S. proxies on a best efforts basis only, after weighing the costs and benefits of voting such proxies, consistent with the Client Proxy Standard. ISS has been retained to provide assistance in connection with voting non-U.S. proxies.
II. GENERAL PROXY VOTING GUIDELINES
To promote consistency in voting proxies on behalf of its clients, we follow this Policy (subject to any exception set forth herein). The Policy addresses a broad range of issues, and provides general voting parameters on proposals that arise most frequently. However, details of specific proposals vary, and those details affect particular voting decisions, as do factors specific to a given company. Pursuant to the procedures set forth herein, we may vote in a manner that is not in accordance with the following general guidelines, provided the vote is approved by the Proxy Review Committee (see Section III for description) and is consistent with the Client Proxy Standard. Morgan Stanley AIP GP LP will follow the procedures as described in Appendix A.
We endeavor to integrate governance and proxy voting policy with investment goals, using the vote to encourage portfolio companies to enhance long-term shareholder value and to provide a high standard of transparency such that equity markets can value corporate assets appropriately.
We seek to follow the Client Proxy Standard for each client. At times, this may result in split votes, for example when different clients have varying economic interests in the outcome of a particular voting matter (such as a case in which varied ownership interests in two companies involved in a merger results in different stakes in the outcome). We also may split votes at times based on differing views of portfolio managers.
We may abstain on matters for which disclosure is inadequate.
A. Routine Matters.
We generally support routine management proposals. The following are examples of routine management proposals:
• Approval of financial statements and auditor reports if delivered with an unqualified auditor's opinion.
• General updating/corrective amendments to the charter, articles of association or bylaws, unless we believe that such amendments would diminish shareholder rights.
• Most proposals related to the conduct of the annual meeting, with the following exceptions. We generally oppose proposals that relate to "the transaction of such other business which may come before the meeting," and open-ended requests for adjournment. However, where management specifically states the reason for requesting an adjournment and the requested adjournment would facilitate passage of a proposal that would otherwise be supported under this Policy (i.e. an uncontested corporate transaction), the adjournment request will be supported. We do not support proposals that allow companies to call a special meeting with a short (generally two weeks or less) time frame for review.
We generally support shareholder proposals advocating confidential voting procedures and independent tabulation of voting results.
B. Board of Directors.
1. Election of directors: Votes on board nominees can involve balancing a variety of considerations. In vote decisions, we may take into consideration whether the company has a majority voting policy in place that we believe makes the director vote more meaningful. In the absence of a proxy contest, we generally support the board's nominees for director except as follows:
a. We consider withholding support from or voting against a nominee if we believe a direct conflict exists between the interests of the nominee and the public shareholders, including
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failure to meet fiduciary standards of care and/or loyalty. We may oppose directors where we conclude that actions of directors are unlawful, unethical or negligent. We consider opposing individual board members or an entire slate if we believe the board is entrenched and/or dealing inadequately with performance problems; if we believe the board is acting with insufficient independence between the board and management; or if we believe the board has not been sufficiently forthcoming with information on key governance or other material matters.
b. We consider withholding support from or voting against interested directors if the company's board does not meet market standards for director independence, or if otherwise we believe board independence is insufficient. We refer to prevalent market standards as promulgated by a stock exchange or other authority within a given market (e.g., New York Stock Exchange or Nasdaq rules for most U.S. companies, and The Combined Code on Corporate Governance in the United Kingdom). Thus, for an NYSE company with no controlling shareholder, we would expect that at a minimum a majority of directors should be independent as defined by NYSE. Where we view market standards as inadequate, we may withhold votes based on stronger independence standards. Market standards notwithstanding, we generally do not view long board tenure alone as a basis to classify a director as non-independent.
i. At a company with a shareholder or group that controls the company by virtue of a majority economic interest in the company, we have a reduced expectation for board independence, although we believe the presence of independent directors can be helpful, particularly in staffing the audit committee, and at times we may withhold support from or vote against a nominee on the view the board or its committees are not sufficiently independent. In markets where board independence is not the norm (e.g. Japan), however, we consider factors including whether a board of a controlled company includes independent members who can be expected to look out for interests of minority holders.
ii. We consider withholding support from or voting against a nominee if he or she is affiliated with a major shareholder that has representation on a board disproportionate to its economic interest.
c. Depending on market standards, we consider withholding support from or voting against a nominee who is interested and who is standing for election as a member of the company's compensation/renumeration, nominating/governance or audit committee.
d. We consider withholding support or voting against nominees if the term for which they are nominated is excessive. We consider this issue on a market-specific basis.
e. We consider withholding support from or voting against nominees if, in our view, there has been insufficient board renewal (turnover), particularly in the context of extended poor company performance.
f. We consider withholding support from or voting against a nominee standing for election if the board has not taken action to implement generally accepted governance practices for which there is a "bright line" test. For example, in the context of the U.S. market, failure to eliminate a dead hand or slow hand poison pill would be seen as a basis for opposing one or more incumbent nominees.
g. In markets that encourage designated audit committee financial experts, we consider voting against members of an audit committee if no members are designated as such. We also consider voting against the audit committee members if the company has faced financial reporting issues and/or does not put the auditor up for ratification by shareholders.
h. We believe investors should have the ability to vote on individual nominees, and may abstain or vote against a slate of nominees where we are not given the opportunity to vote on individual nominees.
i. We consider withholding support from or voting against a nominee who has failed to attend at least 75% of the nominee's board and board committee meetings within a given year without a reasonable excuse. We also consider opposing nominees if the company does not meet market standards for disclosure on attendance.
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j. We consider withholding support from or voting against a nominee who appears overcommitted, particularly through service on an excessive number of boards. Market expectations are incorporated into this analysis; for U.S. boards, we generally oppose election of a nominee who serves on more than six public company boards (excluding investment companies), although we may reference National Association of Corporate Directors guidance suggesting that public company CEOs, for example, should serve no more than two outside boards given the level of time commitment required in their primary job.
2. Discharge of directors' duties: In markets where an annual discharge of directors' responsibility is a routine agenda item, we generally support such discharge. However, we may vote against discharge or abstain from voting where there are serious findings of fraud or other unethical behavior for which the individual bears responsibility. The annual discharge of responsibility represents shareholder approval of disclosed actions taken by the board during the year and may make future shareholder action against the board difficult to pursue.
3. Board independence: We generally support U.S. shareholder proposals requiring that a certain percentage (up to 66 2/3%) of the company's board members be independent directors, and promoting all-independent audit, compensation and nominating/governance committees.
4. Board diversity: We consider on a case-by-case basis shareholder proposals urging diversity of board membership with respect to social, religious or ethnic group.
5. Majority voting: We generally support proposals requesting or requiring majority voting policies in election of directors, so long as there is a carve-out for plurality voting in the case of contested elections.
6. Proxy access: We consider proposals on procedures for inclusion of shareholder nominees and to have those nominees included in the company's proxy statement and on the company's proxy ballot on a case-by-case basis. Considerations include ownership thresholds, holding periods, the number of directors that shareholders may nominate and any restrictions on forming a group.
7. Reimbursement for dissident nominees: We generally support well-crafted U.S. shareholder proposals that would provide for reimbursement of dissident nominees elected to a board, as the cost to shareholders in electing such nominees can be factored into the voting decision on those nominees.
8. Proposals to elect directors more frequently: In the U.S. public company context, we usually support shareholder and management proposals to elect all directors annually (to "declassify" the board), although we make an exception to this policy where we believe that long-term shareholder value may be harmed by this change given particular circumstances at the company at the time of the vote on such proposal. As indicated above, outside the U.S., we generally support greater accountability to shareholders that comes through more frequent director elections, but recognize that many markets embrace longer term lengths, sometimes for valid reasons given other aspects of the legal context in electing boards.
9. Cumulative voting: We generally support proposals to eliminate cumulative voting in the U.S. market context. (Cumulative voting provides that shareholders may concentrate their votes for one or a handful of candidates, a system that can enable a minority bloc to place representation on a board.) U.S. proposals to establish cumulative voting in the election of directors generally will not be supported.
10. Separation of Chairman and CEO positions: We vote on shareholder proposals to separate the Chairman and CEO positions and/or to appoint an independent Chairman based in part on prevailing practice in particular markets, since the context for such a practice varies. In many non-U.S. markets, we view separation of the roles as a market standard practice, and support division of the roles in that context. In the U.S., we consider such proposals on a case-by-case basis, considering, among other things, the existing board leadership structure, company performance, and any other evidence of entrenchment or perceived risk that power is overly concentrated in a single individual.
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11. Director retirement age and term limits: Proposals setting or recommending director retirement ages or director term limits are voted on a case-by-case basis that includes consideration of company performance, the rate of board renewal, evidence of effective individual director evaluation processes, and any indications of entrenchment.
12. Proposals to limit directors' liability and/or broaden indemnification of officers and directors. Generally, we will support such proposals provided that an individual is eligible only if he or she has not acted in bad faith, with gross negligence or with reckless disregard of their duties.
C. Statutory Auditor Boards.
The statutory auditor board, which is separate from the main board of directors, plays a role in corporate governance in several markets. These boards are elected by shareholders to provide assurance on compliance with legal and accounting standards and the company's articles of association. We generally vote for statutory auditor nominees if they meet independence standards. In markets that require disclosure on attendance by internal statutory auditors, however, we consider voting against nominees for these positions who failed to attend at least 75% of meetings in the previous year. We also consider opposing nominees if the company does not meet market standards for disclosure on attendance.
D. Corporate Transactions and Proxy Fights.
We examine proposals relating to mergers, acquisitions and other special corporate transactions (i.e., takeovers, spin-offs, sales of assets, reorganizations, restructurings and recapitalizations) on a case-by-case basis in the interests of each fund or other account. Proposals for mergers or other significant transactions that are friendly and approved by the Research Providers usually are supported if there is no portfolio manager objection. We also analyze proxy contests on a case-by-case basis.
E. Changes in Capital Structure.
1. We generally support the following:
• Management and shareholder proposals aimed at eliminating unequal voting rights, assuming fair economic treatment of classes of shares we hold.
• U.S. management proposals to increase the authorization of existing classes of common stock (or securities convertible into common stock) if: (i) a clear business purpose is stated that we can support and the number of shares requested is reasonable in relation to the purpose for which authorization is requested; and/or (ii) the authorization does not exceed 100% of shares currently authorized and at least 30% of the total new authorization will be outstanding. (We consider proposals that do not meet these criteria on a case-by-case basis.)
• U.S. management proposals to create a new class of preferred stock or for issuances of preferred stock up to 50% of issued capital, unless we have concerns about use of the authority for anti-takeover purposes.
• Proposals in non-U.S. markets that in our view appropriately limit potential dilution of existing shareholders. A major consideration is whether existing shareholders would have preemptive rights for any issuance under a proposal for standing share issuance authority. We generally consider market-specific guidance in making these decisions; for example, in the U.K. market, we usually follow Association of British Insurers' ("ABI") guidance, although company-specific factors may be considered and for example, may sometimes lead us to voting against share authorization proposals even if they meet ABI guidance.
• Management proposals to authorize share repurchase plans, except in some cases in which we believe there are insufficient protections against use of an authorization for anti-takeover purposes.
• Management proposals to reduce the number of authorized shares of common or preferred stock, or to eliminate classes of preferred stock.
• Management proposals to effect stock splits.
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• Management proposals to effect reverse stock splits if management proportionately reduces the authorized share amount set forth in the corporate charter. Reverse stock splits that do not adjust proportionately to the authorized share amount generally will be approved if the resulting increase in authorized shares coincides with the proxy guidelines set forth above for common stock increases.
• Management dividend payout proposals, except where we perceive company payouts to shareholders as inadequate.
2. We generally oppose the following (notwithstanding management support):
• Proposals to add classes of stock that would substantially dilute the voting interests of existing shareholders.
• Proposals to increase the authorized or issued number of shares of existing classes of stock that are unreasonably dilutive, particularly if there are no preemptive rights for existing shareholders. However, depending on market practices, we consider voting for proposals giving general authorization for issuance of shares not subject to pre-emptive rights if the authority is limited.
• Proposals that authorize share issuance at a discount to market rates, except where authority for such issuance is de minimis, or if there is a special situation that we believe justifies such authorization (as may be the case, for example, at a company under severe stress and risk of bankruptcy).
• Proposals relating to changes in capitalization by 100% or more.
We consider on a case-by-case basis shareholder proposals to increase dividend payout ratios, in light of market practice and perceived market weaknesses, as well as individual company payout history and current circumstances. For example, currently we perceive low payouts to shareholders as a concern at some Japanese companies, but may deem a low payout ratio as appropriate for a growth company making good use of its cash, notwithstanding the broader market concern.
F. Takeover Defenses and Shareholder Rights.
1. Shareholder rights plans: We generally support proposals to require shareholder approval or ratification of shareholder rights plans (poison pills). In voting on rights plans or similar takeover defenses, we consider on a case-by-case basis whether the company has demonstrated a need for the defense in the context of promoting long-term share value; whether provisions of the defense are in line with generally accepted governance principles in the market (and specifically the presence of an adequate qualified offer provision that would exempt offers meeting certain conditions from the pill); and the specific context if the proposal is made in the midst of a takeover bid or contest for control.
2. Supermajority voting requirements: We generally oppose requirements for supermajority votes to amend the charter or bylaws, unless the provisions protect minority shareholders where there is a large shareholder. In line with this view, in the absence of a large shareholder we support reasonable shareholder proposals to limit such supermajority voting requirements.
3. Shareholder right to call meetings: We consider proposals to enhance a shareholder's right to call a special meeting on a case-by-case basis. At large-cap U.S. companies, we generally support efforts to establish the rights of holders of 10% or more of shares to call special meetings, unless the board or state law has a set policy or law establishing such rights at a threshold that we believe to be acceptable.
4. Written consent rights: In the U.S. context, we examine proposals for shareholder written consent rights on a case-by-case basis.
5. Reincorporation: We consider management and shareholder proposals to reincorporate to a different jurisdiction on a case-by-case basis. We oppose such proposals if we believe the main purpose is to take advantage of laws or judicial precedents that reduce shareholder rights.
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6. Anti-greenmail provisions: Proposals relating to the adoption of anti-greenmail provisions will be supported, provided that the proposal: (i) defines greenmail; (ii) prohibits buyback offers to large block holders (holders of at least 1% of the outstanding shares and in certain cases, a greater amount) not made to all shareholders or not approved by disinterested shareholders; and (iii) contains no anti-takeover measures or other provisions restricting the rights of shareholders.
7. Bundled proposals: We may consider opposing or abstaining on proposals if disparate issues are "bundled" and presented for a single vote.
G. Auditors.
We generally support management proposals for selection or ratification of independent auditors. However, we may consider opposing such proposals with reference to incumbent audit firms if the company has suffered from serious accounting irregularities and we believe rotation of the audit firm is appropriate, or if fees paid to the auditor for non-audit-related services are excessive. Generally, to determine if non-audit fees are excessive, a 50% test will be applied (i.e., non-audit-related fees should be less than 50% of the total fees paid to the auditor). We generally vote against proposals to indemnify auditors.
H. Executive and Director Remuneration.
1. We generally support the following:
• Proposals for employee equity compensation plans and other employee ownership plans, provided that our research does not indicate that approval of the plan would be against shareholder interest. Such approval may be against shareholder interest if it authorizes excessive dilution and shareholder cost, particularly in the context of high usage ("run rate") of equity compensation in the recent past; or if there are objectionable plan design and provision.
• Proposals relating to fees to outside directors, provided the amounts are not excessive relative to other companies in the country or industry, and provided that the structure is appropriate within the market context. While stock-based compensation to outside directors is positive if moderate and appropriately structured, we are wary of significant stock option awards or other performance-based awards for outside directors, as well as provisions that could result in significant forfeiture of value on a director's decision to resign from a board (such forfeiture can undercut director independence).
• Proposals for employee stock purchase plans that permit discounts, but only for grants that are part of a broad-based employee plan, including all non-executive employees, and only if the discounts are limited to a reasonable market standard or less.
• Proposals for the establishment of employee retirement and severance plans, provided that our research does not indicate that approval of the plan would be against shareholder interest.
2. We generally oppose retirement plans and bonuses for non-executive directors and independent statutory auditors.
3. In the U.S. context, we generally vote against shareholder proposals requiring shareholder approval of all severance agreements, but we generally support proposals that require shareholder approval for agreements in excess of three times the annual compensation (salary and bonus) and proposals that require companies to adopt a provision requiring an executive to receive accelerated vesting of equity awards if there is a change of control and the executive is terminated. We generally oppose shareholder proposals that would establish arbitrary caps on pay. We consider on a case-by-case basis shareholder proposals that seek to limit Supplemental Executive Retirement Plans (SERPs), but support such proposals where we consider SERPs to be excessive.
4. Shareholder proposals advocating stronger and/or particular pay-for-performance models will be evaluated on a case-by-case basis, with consideration of the merits of the individual proposal within the context of the particular company and its labor markets, and the company's current and past practices. While we generally support emphasis on long-term components of senior executive pay and strong linkage of pay to performance, we consider factors including whether a proposal may be overly prescriptive, and the impact of the proposal, if implemented as written, on recruitment and retention.
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5. We generally support proposals advocating reasonable senior executive and director stock ownership guidelines and holding requirements for shares gained in executive equity compensation programs
6. We generally support shareholder proposals for reasonable "claw-back" provisions that provide for company recovery of senior executive bonuses to the extent they were based on achieving financial benchmarks that were not actually met in light of subsequent restatements.
7. Management proposals effectively to re-price stock options are considered on a case-by-case basis. Considerations include the company's reasons and justifications for a re-pricing, the company's competitive position, whether senior executives and outside directors are excluded, potential cost to shareholders, whether the re-pricing or share exchange is on a value-for-value basis, and whether vesting requirements are extended.
8. Say-on-Pay: We consider proposals relating to an advisory vote on remuneration on a case-by-case basis. Considerations include a review of the relationship between executive remuneration and performance based on operating trends and total shareholder return over multiple performance periods. In addition, we review remuneration structures and potential poor pay practices, including relative magnitude of pay, discretionary bonus awards, tax gross ups, change-in-control features, internal pay equity and peer group construction. As long-term investors, we support remuneration policies that align with long-term shareholder returns.
I. Social, Political and Environmental Issues. Shareholders in the U.S. and certain other markets submit proposals encouraging changes in company disclosure and practices related to particular corporate, social, political and environmental matters. We consider how to vote on the proposals on a case-by-case basis to determine likely impacts on shareholder value. We seek to balance concerns on reputational and other risks that lie behind a proposal against costs of implementation, while considering appropriate shareholder and management prerogatives. We may abstain from voting on proposals that do not have a readily determinable financial impact on shareholder value. We support proposals that, if implemented, would enhance useful disclosure, but we generally vote against proposals requesting reports that we believe are duplicative, related to matters not material to the business, or that would impose unnecessary or excessive costs. We believe that certain social and environmental shareholder proposals may intrude excessively on management prerogatives, which can lead us to oppose them.
J. Funds of Funds. Certain MSIM Funds advised by an MSIM Affiliate invest only in other MSIM Funds. If an underlying fund has a shareholder meeting, in order to avoid any potential conflict of interest, such proposals will be voted in the same proportion as the votes of the other shareholders of the underlying fund, unless otherwise determined by the Proxy Review Committee. Other MSIM Funds invest in unaffiliated funds. If an unaffiliated underlying fund has a shareholder meeting and the MSIM Fund owns more than 25% of the voting shares of the underlying fund, the MSIM Fund will vote its shares in the unaffiliated underlying fund in the same proportion as the votes of the other shareholders of the underlying fund to the extent possible.
III. ADMINISTRATION OF POLICY
The MSIM Proxy Review Committee (the "Committee") has overall responsibility for the Policy. The Committee, which is appointed by MSIM's Long-Only Executive Committee, consists of investment professionals who represent the different investment disciplines and geographic locations of the firm, and is chaired by the director of the Corporate Governance Team ("CGT"). Because proxy voting is an investment responsibility and impacts shareholder value, and because of their knowledge of companies and markets, portfolio managers and other members of investment staff play a key role in proxy voting, although the Committee has final authority over proxy votes.
The CGT Director is responsible for identifying issues that require Committee deliberation or ratification. The CGT, working with advice of investment teams and the Committee, is responsible for voting on routine items and on matters that can be addressed in line with these Policy guidelines. The CGT has responsibility for voting case-by-case where guidelines and precedent provide adequate guidance.
The Committee will periodically review and have the authority to amend, as necessary, the Policy and establish and direct voting positions consistent with the Client Proxy Standard.
A-8
CGT and members of the Committee may take into account Research Providers' recommendations and research as well as any other relevant information they may request or receive, including portfolio manager and/or analyst comments and research, as applicable. Generally, proxies related to securities held in accounts that are managed pursuant to quantitative, index or index-like strategies ("Index Strategies") will be voted in the same manner as those held in actively managed accounts, unless economic interests of the accounts differ. Because accounts managed using Index Strategies are passively managed accounts, research from portfolio managers and/or analysts related to securities held in these accounts may not be available. If the affected securities are held only in accounts that are managed pursuant to Index Strategies, and the proxy relates to a matter that is not described in this Policy, the CGT will consider all available information from the Research Providers, and to the extent that the holdings are significant, from the portfolio managers and/or analysts.
A. Committee Procedures
The Committee meets at least quarterly and reviews and considers changes to the Policy at least annually. Through meetings and/or written communications, the Committee is responsible for monitoring and ratifying "split votes" (i.e., allowing certain shares of the same issuer that are the subject of the same proxy solicitation and held by one or more MSIM portfolios to be voted differently than other shares) and/or "override voting" (i.e., voting all MSIM portfolio shares in a manner contrary to the Policy). The Committee will review developing issues and approve upcoming votes, as appropriate, for matters as requested by CGT.
The Committee reserves the right to review voting decisions at any time and to make voting decisions as necessary to ensure the independence and integrity of the votes.
B. Material Conflicts of Interest
In addition to the procedures discussed above, if the CGT Director determines that an issue raises a material conflict of interest, the CGT Director may request a special committee to review, and recommend a course of action with respect to, the conflict(s) in question ("Special Committee").
A potential material conflict of interest could exist in the following situations, among others:
1. The issuer soliciting the vote is a client of MSIM or an affiliate of MSIM and the vote is on a matter that materially affects the issuer.
2. The proxy relates to Morgan Stanley common stock or any other security issued by Morgan Stanley or its affiliates except if echo voting is used, as with MSIM Funds, as described herein.
3. Morgan Stanley has a material pecuniary interest in the matter submitted for a vote (e.g., acting as a financial advisor to a party to a merger or acquisition for which Morgan Stanley will be paid a success fee if completed).
If the CGT Director determines that an issue raises a potential material conflict of interest, depending on the facts and circumstances, the issue will be addressed as follows:
1. If the matter relates to a topic that is discussed in this Policy, the proposal will be voted as per the Policy.
2. If the matter is not discussed in this Policy or the Policy indicates that the issue is to be decided case-by-case, the proposal will be voted in a manner consistent with the Research Providers, provided that all the Research Providers consulted have the same recommendation, no portfolio manager objects to that vote, and the vote is consistent with MSIM's Client Proxy Standard.
3. If the Research Providers' recommendations differ, the CGT Director will refer the matter to a Special Committee to vote on the proposal, as appropriate.
Any Special Committee shall be comprised of the CGT Director and at least two portfolio managers (preferably members of the Committee) as approved by the Committee. The CGT Director may request non-voting participation by MSIM's General Counsel or his/her designee and the Chief Compliance Officer or his/her designee. In addition to the research provided by Research Providers, the Special Committee may request analysis from MSIM Affiliate investment professionals and outside sources to the extent it deems appropriate.
A-9
C. Proxy Voting Reporting
The CGT will document in writing all Committee and Special Committee decisions and actions, which documentation will be maintained by the CGT for a period of at least six years. To the extent these decisions relate to a security held by an MSIM Fund, the CGT will report the decisions to each applicable Board of Trustees/Directors of those Funds at each Board's next regularly scheduled Board meeting. The report will contain information concerning decisions made during the most recently ended calendar quarter immediately preceding the Board meeting.
MSIM will promptly provide a copy of this Policy to any client requesting it. MSIM will also, upon client request, promptly provide a report indicating how each proxy was voted with respect to securities held in that client's account.
MSIM's Legal Department is responsible for filing an annual Form N-PX on behalf of each MSIM Fund for which such filing is required, indicating how all proxies were voted with respect to such Fund's holdings.
APPENDIX A
The following procedures apply to accounts managed by Morgan Stanley AIP GP LP: (i) closed-end funds registered under the Investment Company Act of 1940, as amended; (ii) discretionary separate accounts; (iii) unregistered funds; and (iv) non-discretionary accounts offered in connection with AIP's Customized Advisory Portfolio Solutions service.
Generally, AIP will follow the guidelines set forth in Section II of MSIM's Proxy Voting Policy and Procedures. To the extent that such guidelines do not provide specific direction, or AIP determines that consistent with the Client Proxy Standard, the guidelines should not be followed, the Proxy Review Committee has delegated the voting authority to vote securities held by accounts managed by AIP to the Fund of Hedge Funds investment team, the Private Equity Fund of Funds investment team, the Private Equity Real Estate Fund of Funds investment team or the Portfolio Solutions team of AIP. A summary of decisions made by the applicable investment teams will be made available to the Proxy Review Committee for its information at the next scheduled meeting of the Proxy Review Committee.
In certain cases, AIP may determine to abstain from determining (or recommending) how a proxy should be voted (and therefore abstain from voting such proxy or recommending how such proxy should be voted), such as where the expected cost of giving due consideration to the proxy does not justify the potential benefits to the affected account(s) that might result from adopting or rejecting (as the case may be) the measure in question.
Waiver of Voting Rights
For regulatory reasons, AIP may either 1) invest in a class of securities of an underlying fund (the "Fund") that does not provide for voting rights; or 2) waive 100% of its voting rights with respect to the following:
1. Any rights with respect to the removal or replacement of a director, general partner, managing member or other person acting in a similar capacity for or on behalf of the Fund (each individually a "Designated Person," and collectively, the "Designated Persons"), which may include, but are not limited to, voting on the election or removal of a Designated Person in the event of such Designated Person's death, disability, insolvency, bankruptcy, incapacity, or other event requiring a vote of interest holders of the Fund to remove or replace a Designated Person; and
2. Any rights in connection with a determination to renew, dissolve, liquidate, or otherwise terminate or continue the Fund, which may include, but are not limited to, voting on the renewal, dissolution, liquidation, termination or continuance of the Fund upon the occurrence of an event described in the Fund's organizational documents; provided, however, that, if the Fund's organizational documents require the consent of the Fund's general partner or manager, as the case may be, for any such termination or continuation of the Fund to be effective, then AIP may exercise its voting rights with respect to such matter.
Approved by the Morgan Stanley Funds Board on September 16-17, 2015.
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APPENDIX B — DESCRIPTION OF RATINGS
Standard & Poor's Ratings Services
A Standard & Poor's issue credit rating is a forward-looking opinion about the creditworthiness of an obligor with respect to a specific financial obligation, a specific class of financial obligations, or a specific financial program (including ratings on medium-term note programs and commercial paper programs). It takes into consideration the creditworthiness of guarantors, insurers, or other forms of credit enhancement on the obligation and takes into account the currency in which the obligation is denominated. The opinion reflects Standard & Poor's view of the obligor's capacity and willingness to meet its financial commitments as they come due, and may assess terms, such as collateral security and subordination, which could affect ultimate payment in the event of default.
Issue credit ratings can be either long-term or short-term. Short-term ratings are generally assigned to those obligations considered short-term in the relevant market. In the U.S., for example, that means obligations with an original maturity of no more than 365 days — including commercial paper. Short-term ratings are also used to indicate the creditworthiness of an obligor with respect to put features on long-term obligations. Medium-term notes are assigned long-term ratings.
I. S&P's Long-Term Issue Credit Ratings
AAA: An obligation rated 'AAA' has the highest rating assigned by Standard & Poor's. The obligor's capacity to meet its financial commitment on the obligation is extremely strong.
AA: An obligation rated 'AA' differs from the highest-rated obligations only to a small degree. The obligor's capacity to meet its financial commitment on the obligation is very strong.
A: An obligation rated 'A' is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher-rated categories. However, the obligor's capacity to meet its financial commitment on the obligation is still strong.
BBB: An obligation rated 'BBB' exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.
BB; B; CCC; CC; and C: Obligations rated 'BB', 'B', 'CCC', 'CC', and 'C' are regarded as having significant speculative characteristics. 'BB' indicates the least degree of speculation and 'C' the highest. While such obligations will likely have some quality and protective characteristics, these may be outweighed by large uncertainties or major exposures to adverse conditions.
BB: An obligation rated 'BB' is less vulnerable to nonpayment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions which could lead to the obligor's inadequate capacity to meet its financial commitment on the obligation.
B: An obligation rated 'B' is more vulnerable to nonpayment than obligations rated 'BB', but the obligor currently has the capacity to meet its financial commitment on the obligation. Adverse business, financial, or economic conditions will likely impair the obligor's capacity or willingness to meet its financial commitment on the obligation.
CCC: An obligation rated 'CCC' is currently vulnerable to nonpayment, and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation. In the event of adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitment on the obligation.
CC: An obligation rated 'CC' is currently highly vulnerable to nonpayment. The 'CC' rating is used when a default has not yet occurred, but Standard & Poor's expects default to be a virtual certainty, regardless of the anticipated time to default.
C: An obligation rated 'C' is currently highly vulnerable to nonpayment,and the obligation is expected to have lower relative seniority or lower ultimate recovery compared to obligations that are rated higher.
D: An obligation rated 'D' is in default or in breach of an imputed promise. For non-hybrid capital instruments, the 'D' rating category is used when payments on an obligation are not made on the date due, unless Standard &
B-1
Poor's believes that such payments will be made within five business days in the absence of a stated grace period or within the earlier of the stated grace period or 30 calendar days. The 'D' rating also will be used upon the filing of a bankruptcy petition or the taking of similar action and where default on an obligation is a virtual certainty, for example due to automatic stay provisions. An obligation's rating is lowered to 'D' if it is subject to a distressed exchange offer.
NR: This indicates that no rating has been requested, or that there is insufficient information on which to base a rating, or that Standard & Poor's does not rate a particular obligation as a matter of policy.
Note: The ratings from 'AA' to 'CCC' may be modified by the addition of a plus (+) or minus (–) sign to show relative standing within the major rating categories.
II. S&P's Short-Term Issue Credit Ratings
A-1: A short-term obligation rated 'A-1' is rated in the highest category by Standard & Poor's. The obligor's capacity to meet its financial commitment on the obligation is strong. Within this category, certain obligations are designated with a plus sign (+). This indicates that the obligor's capacity to meet its financial commitment on these obligations is extremely strong.
A-2: A short-term obligation rated 'A-2' is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher rating categories. However, the obligor's capacity to meet its financial commitment on the obligation is satisfactory.
A-3: A short-term obligation rated 'A-3' exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.
B: A short-term obligation rated 'B' is regarded as vulnerable and has significant speculative characteristics. The obligor currently has the capacity to meet its financial commitments; however, it faces major ongoing uncertainties which could lead to the obligor's inadequate capacity to meet its financial commitments.
C: A short-term obligation rated 'C' is currently vulnerable to nonpayment and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation.
D: A short-term obligation rated 'D' is in default or in breach of an imputed promise. For non-hybrid capital instruments, the 'D' rating category is used when payments on an obligation are not made on the date due, unless Standard & Poor's believes that such payments will be made within any stated grace period. However, any stated grace period longer than five business days will be treated as five business days. The 'D' rating also will be used upon the filing of a bankruptcy petition or the taking of a similar action and where default on an obligation is a virtual certainty, for example due to automatic stay provisions. An obligation's rating is lowered to 'D' if it is subject to a distressed exchange offer.
Moody's Investors, Inc.
Ratings assigned on Moody's global long-term and short-term rating scales are forward-looking opinions of the relative credit risks of financial obligations issued by non-financial corporates, financial institutions, structured finance vehicles, project finance vehicles, and public sector entities. Long-term ratings are assigned to issuers or obligations with an original maturity of one year or more and reflect both on the likelihood of a default on contractually promised payments and the expected financial loss suffered in the event of default. Short-term ratings are assigned to obligations with an original maturity of thirteen months or less and reflect both on the likelihood of a default on contractually promised payments and the expected financial loss suffered in the event of default.
I. Moody's Global Long-Term Rating Scale
Aaa: Obligations rated Aaa are judged to be of the highest quality, subject to the lowest level of credit risk.
Aa: Obligations rated Aa are judged to be of high quality and are subject to very low credit risk.
A: Obligations rated A are judged to be upper-medium grade and are subject to low credit risk.
Baa: Obligations rated Baa are judged to be medium-grade and subject to moderate credit risk and as such may possess certain speculative characteristics.
B-2
Ba: Obligations rated Ba are judged to be speculative and are subject to substantial credit risk.
B: Obligations rated B are considered speculative and are subject to high credit risk.
Caa: Obligations rated Caa are judged to be speculative of poor standing and are subject to very high credit risk.
Ca: Obligations rated Ca are highly speculative and are likely in, or very near, default, with some prospect of recovery of principal and interest.
C: Obligations rated C are the lowest rated and are typically in default, with little prospect for recovery of principal or interest.
Note: Moody's appends numerical modifiers 1, 2, and 3 to each generic rating classification from Aa through Caa. The modifier 1 indicates that the obligation ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of that generic rating category. Additionally, a "(hyb)" indicator is appended to all ratings of hybrid securities issued by banks, insurers, finance companies, and securities firms.
II. Moody's Global Short-Term Rating Scale
P-1: Issuers (or supporting institutions) rated Prime-1 have a superior ability to repay short-term debt obligations.
P-2: Issuers (or supporting institutions) rated Prime-2 have a strong ability to repay short-term debt obligations.
P-3: Issuers (or supporting institutions) rated Prime-3 have an acceptable ability to repay short-term obligations.
NP: Issuers (or supporting institutions) rated Not Prime do not fall within any of the Prime rating categories.
Fitch Ratings Inc.
Fitch Ratings' credit ratings provide an opinion on the relative ability of an entity to meet financial commitments, such as interest, preferred dividends, repayment of principal, insurance claims or counterparty obligations. Credit ratings are used by investors as indications of the likelihood of receiving the money owed to them in accordance with the terms on which they invested. The agency's credit ratings cover the global spectrum of corporate, sovereign (including supranational and sub-national), financial, bank, insurance, municipal and other public finance entities and the securities or other obligations they issue, as well as structured finance securities backed by receivables or other financial assets.
I. Fitch's Long-Term Issuer Credit Rating Scales
AAA: Highest credit quality. 'AAA' ratings denote the lowest expectation of default risk. They are assigned only in cases of exceptionally strong capacity for payment of financial commitments. This capacity is highly unlikely to be adversely affected by foreseeable events.
AA: Very high credit quality. 'AA' ratings denote expectations of very low default risk. They indicate very strong capacity for payment of financial commitments. This capacity is not significantly vulnerable to foreseeable events.
A: High credit quality. 'A' ratings denote expectations of low default risk. The capacity for payment of financial commitments is considered strong. This capacity may, nevertheless, be more vulnerable to adverse business or economic conditions than is the case for higher ratings.
BBB: Good credit quality. 'BBB' ratings indicate that expectations of default risk are currently low. The capacity for payment of financial commitments is considered adequate but adverse business or economic conditions are more likely to impair this capacity.
BB: Speculative. 'BB' ratings indicate an elevated vulnerability to default risk, particularly in the event of adverse changes in business or economic conditions over time; however, business or financial flexibility exists which supports the servicing of financial commitments.
B-3
B: Highly speculative. 'B' ratings indicate that material default risk is present, but a limited margin of safety remains. Financial commitments are currently being met; however, capacity for continued payment is vulnerable to deterioration in the business and economic environment.
CCC: Substantial credit risk. Default is a real possibility.
CC: Very high levels of credit risk. Default of some kind appears probable.
C: Exceptionally high levels of credit risk Default is imminent or inevitable, or the issuer is in standstill. Conditions that are indicative of a 'C' category rating for an issuer include: a. the issuer has entered into a grace or cure period following non-payment of a material financial obligation; b. the issuer has entered into a temporary negotiated waiver or standstill agreement following a payment default on a material financial obligation; or c. Fitch Ratings otherwise believes a condition of 'RD' or 'D' to be imminent or inevitable, including through the formal announcement of a distressed debt exchange.
RD: Restricted default. 'RD' ratings indicate an issuer that in Fitch Ratings' opinion has experienced an uncured payment default on a bond, loan or other material financial obligation but which has not entered into bankruptcy filings, administration, receivership, liquidation or other formal winding-up procedure, and which has not otherwise ceased operating. This would include: a. the selective payment default on a specific class or currency of debt; b. the uncured expiry of any applicable grace period, cure period or default forbearance period following a payment default on a bank loan, capital markets security or other material financial obligation; c. the extension of multiple waivers or forbearance periods upon a payment default on one or more material financial obligations, either in series or in parallel; or d. execution of a distressed debt exchange on one or more material financial obligations.
D: Default. 'D' ratings indicate an issuer that in Fitch Ratings' opinion has entered into bankruptcy filings, administration, receivership, liquidation or other formal winding-up procedure, or which has otherwise ceased business.
Default ratings are not assigned prospectively to entities or their obligations; within this context, non-payment on an instrument that contains a deferral feature or grace period will generally not be considered a default until after the expiration of the deferral or grace period, unless a default is otherwise driven by bankruptcy or other similar circumstance, or by a distressed debt exchange.
"Imminent" default typically refers to the occasion where a payment default has been intimated by the issuer, and is all but inevitable. This may, for example, be where an issuer has missed a scheduled payment, but (as is typical) has a grace period during which it may cure the payment default. Another alternative would be where an issuer has formally announced a distressed debt exchange, but the date of the exchange still lies several days or weeks in the immediate future.
In all cases, the assignment of a default rating reflects the agency's opinion as to the most appropriate rating category consistent with the rest of its universe of ratings, and may differ from the definition of default under the terms of an issuer's financial obligations or local commercial practice.
Note: The modifiers "+" or "–" may be appended to a rating to denote relative status within major rating categories. Such suffixes are not added to the 'AAA' Long-Term Issuer Default Ratings category, or to Long-Term Issuer Default Ratings categories below 'B'.
II. Fitch's Short-Term Ratings Assigned to Issuers or Obligations in Corporate, Public and Structure Finance
F1: Highest short-term credit quality. Indicates the strongest intrinsic capacity for timely payment of financial commitments; may have an added "+" to denote any exceptionally strong credit feature.
F2: Good short-term credit quality. Good intrinsic capacity for timely payment of financial commitments.
F3: Fair short-term credit quality. The intrinsic capacity for timely payment of financial commitments is adequate.
B: Speculative short-term credit quality. Minimal capacity for timely payment of financial commitments, plus heightened vulnerability to near term adverse changes in financial and economic conditions.
C: High short-term default risk. Default is a real possibility.
B-4
RD: Restricted default. Indicates an entity that has defaulted on one or more of its financial commitments, although it continues to meet other financial obligations. Typically applicable to entity ratings only.
D: Default. Indicates a broad-based default event for an entity, or the default of a short-term obligation.
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PART C. OTHER INFORMATION
ITEM 15. INDEMNIFICATION
The response to this item is incorporated herein by reference to Exhibits 1 and 2 under Item 16 below and by reference to Item 30 of the Company’s Post-Effective Amendment No. 133 to its Registration Statement on Form N-1A dated May 12, 2015 (File Nos. 2-89729; 811-03980).
ITEM 16. EXHIBITS
(1) |
| Amended and Restated Declaration of Trust, dated August 24, 2006, is incorporated by reference to Exhibit (a) of Post- Effective Amendment No. 70 to the Registration Statement on Form N-1A, as filed on November 30, 2006. |
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(2) |
| Amended and Restated By-Laws, dated July 31, 2003, are incorporated by reference to Exhibit (b)(5) of Post-Effective Amendment No. 61 to the Registration Statement on Form N-1A, as filed on December 10, 2003. |
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(3) |
| Not applicable. |
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(4) |
| Copy of Agreement and Plan of Reorganization (filed herewith as Exhibit A to the Proxy Statement and Prospectus). |
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(5) |
| Not applicable. |
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(6) |
| Amended and Restated Investment Advisory Agreement with Morgan Stanley Investment Management Inc., dated June 1, 2005, is incorporated by reference to Exhibit (d)(1) of Post-Effective Amendment No. 127 to the Registration Statement on Form N-1A, as filed on March 4, 2015. |
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(7) |
| Distribution Agreement with MAS Fund Distribution, Inc. (now Morgan Stanley Distribution, Inc.), dated May 31, 1997, is incorporated by reference to Exhibit 6(b) of Post-Effective Amendment No. 50 to the Registration Statement on Form N-1A, as filed on July 10, 1998. |
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(8) |
| Not applicable. |
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(9) |
| Custody Agreement between Registrant and State Street Bank and Trust Company, is incorporated by reference to Exhibit (g) to Post-Effective Amendment No. 137 to the Registration Statement on Form N-1A of Morgan Stanley Institutional Fund, Inc., filed on April 27, 2015. |
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(10) (a) |
| Amended and Restated Shareholder Services Plan under Rule 12b-1 relating to Class A Shares, is incorporated by reference to Exhibit (m)(1) of Post-Effective Amendment No. 127 to the Registration Statement on Form N-1A, as filed on March 4, 2015. |
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(b) |
| Amended and Restated Distribution and Shareholder Services Plan under Rule 12b-1 relating to Class L Shares, is incorporated by reference to Exhibit (m)(2) to Post-Effective Amendment No. 127 to the Registration Statement on Form N-1A filed on March 4, 2015. |
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(c) |
| Form of Distribution and Shareholder Services Plan under Rule 12b-1 relating to Class C shares, is incorporated by reference to Exhibit (m)(3) to Post-Effective Amendment No. 132 to the Registration Statement on Form N-1A filed on May 5, 2015. |
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(d) |
| Amended Rule 18f-3 Multiple Class Plan, is filed herewith. |
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(11) |
| Opinion and Consent of Dechert LLP, is filed herewith. |
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(12) |
| Form of Opinion of Dechert LLP (as to tax matters), is incorporated by reference to Exhibit (12) to the Registration Statement on Form N-14 filed on August 3, 2015. |
(13) (a) |
| Amended and Restated Administration Agreement with Morgan Stanley Investment Management Inc., dated November 1, 2004, is incorporated by reference to Exhibit (h)(1) of Post-Effective Amendment No. 100 to the Registration Statement on Form N-1A, as filed on February 6, 2012. |
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(b) |
| Transfer Agency and Service Agreement with Boston Financial Data Services, Inc., dated April 1, 2013, is incorporated by reference to Exhibit (h)(2) of Post-Effective Amendment No. 137 to the Registration Statement on Form N-1A of Morgan Stanley Institutional Fund, Inc., as filed on April 27, 2015. |
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(c) |
| Amendment to Transfer Agency and Service Agreement between the Registrant and Boston Financial Data Services, Inc., dated July 1, 2013, is incorporated by reference to Exhibit (h)(2) of Post-Effective Amendment No. 34 to the Registration Statement on Form N-1A of Morgan Stanley Limited Duration U.S. Government Trust, as filed on September 26, 2014. |
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(14) |
| Consent of Ernst & Young LLP (with respect to Form N-14), is filed herewith. |
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(15) |
| Not applicable. |
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(16) |
| Powers of Attorney of Trustees, dated June 9, 2015, are incorporated by reference to Exhibit (q) to the Registration Statement on Form N-1A of AIP Series Trust filed on July 29, 2015. |
ITEM 17. UNDERTAKINGS
(1) The undersigned registrant agrees that prior to any public reoffering of the securities registered through the use of a prospectus which is a part of this registration statement on Form N-14 by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c) of the Securities Act, the reoffering prospectus will contain the information called for by the applicable registration form for the reofferings by persons who may be deemed underwriters, in addition to the information called for by the other items of the applicable form.
(2) The undersigned registrant agrees that every prospectus that is filed under paragraph (1) above will be filed as a part of an amendment to this registration statement on Form N-14 and will not be used until the amendment is effective, and that, in determining any liability under the Securities Act, each post-effective amendment shall be deemed to be a new registration statement for the securities offered therein, and the offering of the securities at that time shall be deemed to be the initial bona fide offering of them.
(3) The undersigned registrant undertakes to file a post-effective amendment to this registration statement upon the closing of the Reorganization described in this registration statement that contains opinions of counsel supporting the tax matters discussed in this registration statement.
SIGNATURES
As required by the Securities Act of 1933, this registration statement has been signed on behalf of the registrant, in the City of New York and State of New York on this 30th day of September, 2015.
| MORGAN STANLEY INSTITUTIONAL FUND TRUST | |
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| By: | /s/ John H. Gernon |
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| John H. Gernon |
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| President and Principal Executive Officer |
As required by the Securities Act of 1933, this registration statement has been signed below by the following persons in the capacities and on the dates indicated.
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(1) Principal Executive Officer |
| President and Principal Executive Officer |
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By: | /s/ John H. Gernon |
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| September 30, 2015 |
| John H. Gernon |
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(2) Principal Financial Officer |
| Principal Financial Officer |
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By: | /s/ Francis J. Smith |
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| September 30, 2015 |
| Francis J. Smith |
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(3) Majority of the Trustees |
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INDEPENDENT TRUSTEES |
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Frank L. Bowman |
| Joseph J. Kearns |
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Michael Bozic |
| Michael F. Klein |
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Kathleen A. Dennis |
| Michael E. Nugent |
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Nancy C. Everett |
| W. Allen Reed |
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Jakki L. Haussler |
| Fergus Reid |
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Dr. Manuel H. Johnson |
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By: | /s/ Carl Frischling |
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| September 30, 2015 |
| Carl Frischling |
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| Independent Trustees |
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INTERESTED TRUSTEE |
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James F. Higgins |
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By: | /s/ Joseph C. Benedetti |
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| September 30, 2015 |
| Joseph C. Benedetti |
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| Attorney-in-Fact for the |
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| Interested Trustee |
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EXHIBIT INDEX
(10) | (d) |
| Amended and Restated Rule 18f-3 Multiple Class Plan. |
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|
|
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(11) |
|
| Opinion and Consent of Dechert LLP. |
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|
|
|
(14) |
|
| Consent of Ernst & Young LLP (with respect to Form N-14). |