UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number: 811-06711 Morgan Stanley Special Growth Fund (Exact name of registrant as specified in charter) 1221 Avenue of the Americas, New York, New York 10020 (Address of principal executive offices) (Zip code) Ronald E. Robison 1221 Avenue of the Americas, New York, New York 10020 (Name and address of agent for service) Registrant's telephone number, including area code: 212-762-4000 Date of fiscal year end: February 28, 2006 Date of reporting period: August 31, 2005 Item 1 - Report to Shareholders
Welcome, Shareholder:
In this report, you'll learn about how your investment in Morgan Stanley Special Growth Fund performed during the semiannual period. We will provide an overview of the market conditions, and discuss some of the factors that affected performance during the reporting period. In addition, this report includes the Fund's financial statements and a list of Fund investments.
 | This material must be preceded or accompanied by a prospectus for the fund being offered. |
| Market forecasts provided in this report may not necessarily come to pass. There is no assurance that the Fund will achieve its investment objective. The Fund is subject to market risk, which is the possibility that market values of securities owned by the Fund will decline and, therefore, the value of the Fund's shares may be less than what you paid for them. Accordingly, you can lose money investing in this Fund. Please see the prospectus for more complete information on investment risks. |
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| Fund Report |
| For the six months ended August 31, 2005 |
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Total Return for the 6 Months Ended August 31, 2005
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| Class A | | | | Class B | | | | Class C | | | | Class D | | | | Russell 2000® Growth Index1 | | | | Lipper Small-Cap Growth Funds Index2 | ||||||||||||
| 6.21% | | | | 5.81 | % | | | | 5.88 | % | | | | 6.39 | % | | | | 5.06 | % | | | | 4.99 | % | |||||||
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| The performance of the Fund's four share classes varies because each has different expenses. The Fund's total returns assume the reinvestment of all distributions but do not reflect the deduction of any applicable sales charges. Such costs would lower performance. See Performance Summary for standardized performance and benchmark information. |
Market Conditions
Although the environment was often choppy and uncertain, domestic stocks advanced during the six-month period ended August 31, 2005. Broadly speaking, small and mid capitalization stocks outpaced their large cap rivals.
In the opening months of the period, investors were troubled by soaring oil prices, inflation concerns, a potential slowdown in economic growth, and the future intentions of the Federal Open Market Committee ("the Fed"). The travails of the auto industry further hampered sentiment. A degree of optimism returned to the market in mid-spring, however, and continued through July. Relatively benign inflation data and comments from the Fed allayed inflationary concerns and encouraged speculation that the end of its rate-tightening cycle was near. Better economic data, improved consumer confidence, mergers-and-acquisition activity, and a growing acceptance of high oil prices buoyed stocks. Corporate earnings, while varying by company and sector, were generally good. Investors seemed undeterred by geopolitical turmoil, such as the terror attacks in London.
In August, though, this optimism abated. The Fed increased the federal funds target rate once again, and investors realized that an end to the tightening cycle might not be imminent after all. As the hurricane season unfolded, concerns mounted about the potential impact to the energy markets, and in turn, to consumer sentiment and corporate profitability. Uncertainty reached heightened levels during the final days of the period, as Hurricane Katrina caused substantial damage to the Gulf Coast region. Yet, although oil prices soared to unprecedented heights, the market demonstrated resiliency overall.
Performance Analysis
Morgan Stanley Special Growth Fund outperformed the Russell 2000® Growth Index and the Lipper Small-Cap Growth Funds Index for the six months ended August 31, 2005, assuming no deduction of applicable sales charges.
During the period, the top three performing areas for the Fund were materials and processing, utilities and energy. Within its materials and processing exposure, the Fund was well served by stock selection in building materials, miscellaneous materials and steel company stocks. Performance relative to the Russell benchmark was further enhanced by an underweighting to the sector overall. The Fund was also buoyed by a modest
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overweight versus the Russell benchmark in utilities stocks. Gas distributors were the most notable contributors to upside performance. Although sector selection tempered the pace of relative gains within the energy sector, the Fund reaped significant returns from a number of individual positions, notably crude oil producers. The Fund also benefited from underweightings in the technology and producer durables sectors relative to the Russell benchmark, as well as stock selection within healthcare.
In contrast, the Fund's consumer discretionary position included pockets of weakness within its hotel/motel, retail and casino and gaming holdings. Exposure to the integrated oil industry also dampened the Fund's return for the period. Within the consumer staples, relative performance was hurt by a modest sector-level overweight relative to the Russell benchmark. Additionally, stock selection in the food industry proved disadvantageous. Our investment discipline also resulted in an avoidance of drugs and grocery store chains; this positioning was out of step with market sentiment during the six-month period, however, and hindered returns relative to the Russell benchmark.
As the result of individual stock selection decisions, the Fund's largest weightings were in consumer discretionary, healthcare and technology stocks, as of the close of the reporting period. Relative to the Russell Index, the Fund's most substantial overweighting was within the consumer discretionary sector.
| There is no guarantee that any sectors mentioned will continue to perform well or that securities in such sectors will be held by the Fund in the future. |
Investment Strategy
The Fund will normally invest at least 65 percent of its assets in a diversified portfolio of common stocks and other equity securities of small companies with market capitalizations, at the time of purchase, within the capitalization range of securities comprising the Russell 2000 Growth Index (approximately $20 million to $4.945 billion as of May 31, 2005). The Fund's "Investment Adviser," Morgan Stanley Investment Advisors Inc., follows a flexible investment program in seeking to achieve the Fund's investment objective. The Investment Adviser focuses on companies it believes have consistent or rising earnings growth records, potential for strong free cash flow and compelling business strategies. In this regard, the Investment Adviser studies company developments, including business strategy and financial results. Valuation is viewed in the context of prospects for sustainable earnings and cash flow growth. The Investment Adviser generally considers selling a portfolio holding when it determines that the holding no longer satisfies its investment criteria. There are no minimum rating or quality requirements with respect to the convertible securities in which the Fund may invest and the Fund may invest up to 35 percent of its net assets in these investments.
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| TOP 10 HOLDINGS | | |||||
| Strayer Education, Inc. | | 3.1 | % | |||
| Landstar System, Inc. | | 3.0 | ||||
| Range Resources Corp. | | 2.9 | ||||
| Dade Behring Holdings Inc. | | 2.8 | ||||
| Stericycle, Inc. | | 2.8 | ||||
| Techne Corp. | | 2.7 | ||||
| Advisory Board Co. (The) | | 2.6 | ||||
| Gaylord Entertainment Co. | | 2.3 | ||||
| Greenhill & Co., Inc. | | 2.2 | ||||
| Tractor Supply Co. | | 2.1 | ||||
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| TOP FIVE INDUSTRIES | | |||||
| Oil & Gas Production | | 6.7 | % | |||
| Medical Specialties | | 6.4 | ||||
| Other Consumer Services | | 6.2 | ||||
| Services To The Health Industry | | 5.4 | ||||
| Specialty Stores | | 5.4 | ||||
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| Data as of August 31, 2005. Subject to change daily. All percentages for top 10 holdings and top five industries are as a percentage of net assets. These data are provided for informational purposes only and should not be deemed a recommendation to buy or sell the securities mentioned. Morgan Stanley is a full-service securities firm engaged in securities trading and brokerage activities, investment banking, research and analysis, financing and financial advisory services. |
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 by filing the schedule electronically with the Securities and Exchange Commission (SEC). The semiannual reports are filed on Form N-CSRS and the annual reports are filed on Form N-CSR. Morgan Stanley also delivers the semiannual and annual reports to fund shareholders and makes these reports available on its public Web site, www.morganstanley.com. Each Morgan Stanley fund also files a complete schedule of portfolio holdings with the SEC for the fund's first and third fiscal quarters on Form N-Q. Morgan Stanley does not deliver the reports for the first and third fiscal quarters to shareholders, nor are the reports posted to the Morgan Stanley public Web site. You may, however, obtain the Form N-Q filings (as well as the Form N-CSR and N-CSRS filings) by accessing the SEC's Web site, http://www.sec.gov. You may also review and copy them at the SEC's Public Reference Room in Washington, DC. Information on the operation of the SEC's Public Reference Room may be obtained by calling the SEC at (800) SEC-0330. You can also request copies of these materials, upon payment of a duplicating fee, by electronic request at the SEC's e-mail address (publicinfo@sec.gov) or by writing the Public Reference section of the SEC, Washington, DC 20549-0102.
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Proxy Voting Policy and Procedures and Proxy Voting Record
You may obtain a copy of the Fund's Proxy Voting Policy and Procedures without charge, upon request, by calling toll free (800) 869-NEWS or by visiting the Mutual Fund Center on our Web site at www.morganstanley.com. It is also available on the Securities and Exchange Commission's Web site at http://www.sec.gov.
You may obtain information regarding how the Fund voted proxies relating to portfolio securities during the most recent twelve-month period ended June 30 by visiting the Mutual Fund Center on our Web site at www.morganstanley.com. This information is also available on the Securities and Exchange Commission's Web site at http://www.sec.gov.
Householding Notice
To reduce printing and mailing costs, the Fund attempts to eliminate duplicate mailings to the same address. The Fund delivers a single copy of certain shareholder documents, including shareholder reports, prospectuses and proxy materials, to investors with the same last name who reside at the same address. Your participation in this program will continue for an unlimited period of time unless you instruct us otherwise. You can request multiple copies of these documents by calling (800) 350-6414, 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.
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| Performance Summary |
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Average Annual Total Returns — Period Ended August 31, 2005
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| | | Class A Shares* (since 07/28/97) | | | | Class B Shares** (since 08/02/93) | | | | Class C Shares† (since 07/28/97) | | | | Class D Shares†† (since 07/28/97) | |||||||||||
| Symbol | | | | SMPAX | | | | SMPBX | | | | SMPCX | | | | SMPDX | ||||||||||
| 1 Year | | | | 32.02% | 3 | | | | 31.01% | 3 | | | | 31.05% | 3 | | | | 32.37% | 3 | ||||||
| | | 25.09 | 4 | | | | 26.01 | 4 | | | | 30.05 | 4 | | | | — | ||||||||
| 5 Years | | | | (18.81) | 3 | | | | (19.47) | 3 | | | | (19.42) | 3 | | | | (18.64) | 3 | ||||||
| | | (19.68) | 4 | | | | (19.79) | 4 | | | | (19.42) | 4 | | | | — | ||||||||
| 10 Years | | | | — | | | | 4.05 | 3 | | | | — | | | | — | |||||||||
| | | — | | | | 4.05 | 4 | | | | — | | | | — | ||||||||||
| Since Inception | | | | 1.84 | 3 | | | | 5.81 | 3 | | | | 1.07 | 3 | | | | 2.06 | 3 | ||||||
| | | 1.17 | 4 | | | | 5.81 | 4 | | | | 1.07 | 4 | | | | — | ||||||||
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| 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 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 table does not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. Performance for Class A, Class B, Class C, and Class D shares will vary due to differences in sales charges and expenses. |
| * | The maximum front-end sales charge for Class A is 5.25%. |
| ** | The maximum contingent deferred sales charge (CDSC) for Class B is 5.0%. The CDSC declines to 0% after six years. |
| † | The maximum contingent deferred sales charge for Class C is 1% for shares redeemed within one year of purchase. |
| †† | Class D has no sales charge. |
| (1) | The Russell 2000® Growth Index measures the performance of those companies in the Russell 2000® Index with higher price-to-book ratios and higher forecasted growth values. Indexes are unmanaged and their returns do not include any sales charges or fees. Such costs would lower performance. It is not possible to invest directly in an index. |
| (2) | The Lipper Small-Cap Growth Funds Index is an equally weighted performance index of the largest qualifying funds (based on net assets) in the Lipper Small-Cap Growth Funds classification. The Index, which is adjusted for capital gains distributions and income dividends, is unmanaged and should not be considered an investment. There are currently 30 funds represented in this Index. |
| (3) | Figure shown assumes reinvestment of all distributions and does not reflect the deduction of any sales charges. |
| (4) | Figure shown assumes reinvestment of all distributions and the deduction of the maximum applicable sales charge. See the Fund's current prospectus for complete details on fees and sales charges. |
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| Expense Example |
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As a shareholder of the Fund, you incur two types of costs: (1) transaction costs, including sales charges (loads) on purchase payments and redemption fees; and (2) ongoing costs, including advisory fees; distribution and service (12b-1) fees; and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period 03/01/05 – 08/31/05.
Actual Expenses
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled "Expenses Paid During Period" to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table below provides information about hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing cost of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as sales charges (loads) and redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs, and will not help you determine the relative total cost of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
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| Beginning Account Value | | Ending Account Value | | Expenses Paid During Period* | |||||||||
| 03/01/05 | | 08/31/05 | | 03/01/05 − 08/31/05 | |||||||||
| Class A | | | | |||||||||||
| Actual (6.21% return) | | $ | 1,000.00 | | $ | 1,062.10 | | $ | 9.15 | |||||
| Hypothetical (5% annual return before expenses) | | $ | 1,000.00 | | $ | 1,016.33 | | $ | 8.94 | |||||
| Class B | | | | |||||||||||
| Actual (5.81% return) | | $ | 1,000.00 | | $ | 1,058.10 | | $ | 13.02 | |||||
| Hypothetical (5% annual return before expenses) | | $ | 1,000.00 | | $ | 1,012.55 | | $ | 12.73 | |||||
| Class C | | | | |||||||||||
| Actual (5.88% return) | | $ | 1,000.00 | | $ | 1,058.80 | | $ | 13.03 | |||||
| Hypothetical (5% annual return before expenses) | | $ | 1,000.00 | | $ | 1,012.55 | | $ | 12.73 | |||||
| Class D | | | | |||||||||||
| Actual (6.39% return) | | $ | 1,000.00 | | $ | 1,063.90 | | $ | 7.86 | |||||
| Hypothetical (5% annual return before expenses) | | $ | 1,000.00 | | $ | 1,017.59 | | $ | 7.68 | |||||
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| * | Expenses are equal to the Fund's annualized expense ratio of 1.76%, 2.51%, 2.51% and 1.51% for Class A, Class B, Class C and Class D shares, respectively, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period). |
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Nature, Extent and Quality of Services
The Board reviewed and considered the nature and extent of the investment advisory services provided by the Investment Adviser 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 Fund's Administrator under the Administration Agreement, including accounting, clerical, bookkeeping, compliance, business management and planning, and the provision of supplies, office space and utilities. (The Investment Adviser and the Administrator together are referred to as the "Adviser" and the Advisory and Administration Agreements together are referred to as the "Management Agreement.") The Board also compared the nature of the services provided by the Adviser with similar services provided by non-affiliated advisers as reported to the Board by Lipper Inc. ("Lipper").
The Board reviewed and considered the qualifications of the portfolio managers, the senior administrative managers and other key personnel of the Adviser who provide the administrative and investment advisory services to the Fund. The Board determined that the Adviser's portfolio managers and key personnel are well qualified by education and/or training and experience to perform the services in an efficient and professional manner. The Board concluded that the nature and extent of the advisory and administrative services provided were necessary and appropriate for the conduct of the business and investment activities of the Fund. The Board also concluded that the overall quality of the advisory and administrative services was satisfactory.
Performance Relative to Comparable Funds Managed by Other Advisers
The Board reviewed the Fund's performance for the one-, three- and five-year periods ended November 30, 2004, as shown in reports provided by Lipper (the "Lipper Reports"), compared to the performance of comparable funds selected by Lipper (the "performance peer group"), and noted that the Fund's performance was lower than its performance peer group average for the three- and five-year periods but better for the one-year period. The Board considered that the Portfolio's performance, relative to its performance peer group, has improved, as the gap between the Portfolio's performance and the average of its performance peer group has narrowed from the five- to the three- to the one-year period. The Board concluded that the Fund's performance was improving and was now competitive with that of its performance peer group.
Fees and Expenses Relative to Comparable Funds Managed by Other Advisers
The Board reviewed the advisory and administrative fees (together, the "management fee") paid by the Fund under the Management Agreement and the total expense ratio of the Fund. The Board noted that: (i) the Fund's management fee rate was higher than the average management fee rate for funds, selected by Lipper (the "expense peer group"), managed by other advisers with investment strategies comparable to those of the Fund, as shown in the Lipper Report for the Fund; and (ii) the Fund's total expense ratio was also higher than the average total expense ratio of the funds included in the Fund's expense peer group. The Board considered that the Fund's higher than average management fee rate was reasonable for the quality of services provided by the Adviser and the higher expense ratio was attributable to both the higher management fee and higher transfer agency costs due to the Fund's small average account size. The Board concluded that the Fund's management fee was not excessive relative to its expense peer group.
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Breakpoints and Economies of Scale
The Board reviewed the structure of the Fund's management fee schedule under the Management Agreement and noted that it includes a breakpoint. The Board recommended that the Adviser consider incorporating an additional breakpoint in the management fee schedule. The Adviser agreed to introduce a breakpoint which would reduce the management fee to 0.80% on assets above $1.50 billion. The Board concluded that the proposed new breakpoint in the management fee would reflect economies of scale as assets increase.
Profitability of Adviser and Affiliates
The Board considered and reviewed information concerning the costs incurred and profits realized by the Adviser and its affiliates during the last two years from their relationship with the Fund and the Morgan Stanley Fund Complex and reviewed with the Controller of the Adviser the cost allocation methodology used to determine the Adviser's profitability. Based on their review of the information they received, the Board concluded that the profits earned by the Adviser and its affiliates were not excessive in light of the advisory, administrative and other services provided to the Fund.
Fall-Out Benefits
The Board considered so-called "fall-out benefits" derived by the Adviser and its affiliates from their relationship with the Fund and the Morgan Stanley Fund Complex, such as "float" benefits derived from handling of checks for purchases and redemptions of Fund shares through a broker-dealer affiliate of the Adviser and "soft dollar" benefits (discussed in the next section). The Board also considered that a broker-dealer affiliate of the Adviser receives from the Fund 12b-1 fees for distribution and shareholder services. The Board also considered that an affiliate of the Adviser, through a joint venture, receives revenue in connection with trading done on behalf of the Fund through an electronic trading system network ("ECN"). The Board concluded that the float benefits and the above-referenced ECN-related revenue were relatively small and that the 12b-1 fees were competitive with those of other broker-dealer affiliates of investment advisers of mutual funds.
Soft Dollar Benefits
The Board considered whether the Adviser realizes any benefits as a result of brokerage transactions executed through "soft dollar" arrangements. Under such arrangements, brokerage commissions paid by the Fund and/or other funds managed by the Adviser would be used to pay for research that a securities broker obtains from third parties, or to pay for both research and execution services from securities brokers who effect transactions for the Fund. The Adviser informed the Board that it does not use Fund commissions to pay for third party research. It does use commissions to pay for research which is bundled with execution services. The Board recognized that the receipt of such research from brokers may reduce the Adviser's costs but concluded that the receipt of such research strengthens the investment management resources of the Adviser, which may ultimately benefit the Fund and other funds in the Morgan Stanley Fund Complex.
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Adviser Financially Sound and Financially Capable of Meeting the Fund's Needs
The Board considered whether the Adviser is financially sound and has the resources necessary to perform its obligations under the Management Agreement. The Board noted that the Adviser's operations remain profitable, although increased expenses in recent years have reduced the Adviser's profitability. The Board concluded that the Adviser has the financial resources necessary to fulfill its obligations under the Management Agreement.
Historical Relationship Between the Fund and the Adviser
The Board also reviewed and considered the historical relationship between the Fund and the Adviser, including the organizational structure of the Adviser, the policies and procedures formulated and adopted by the Adviser for managing the Fund's operations and the Board's confidence in the competence and integrity of the senior managers and key personnel of the Adviser. The Board concluded that it is beneficial for the Fund to continue its relationship with the Adviser.
Other Factors and Current Trends
The Board considered the controls and procedures adopted and implemented by the Adviser and monitored by the Fund's Chief Compliance Officer and concluded that the conduct of business by the Adviser indicates a good faith effort on its part to adhere to high ethical standards in the conduct of the Fund's business.
General Conclusion
After considering and weighing all of the above factors, the Board concluded it would be in the best interest of the Fund and its shareholders to approve renewal of the Management Agreement for another year.
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Morgan Stanley Special Growth Fund
Portfolio of Investments 
August 31, 2005 (unaudited)
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| NUMBER OF SHARES | | | VALUE | |||||||||||
| Common Stocks (99.9%) | | ||||||||||||
| Advertising/Marketing Services (0.0%) | | ||||||||||||
| 2,800 | | Focus Media Holdings Ltd. (ADR) (China)* | | $ | 53,088 | |||||||||
| Aerospace & Defense (0.6%) | | ||||||||||||
| 35,300 | | FLIR Systems, Inc.* | | 1,139,837 | ||||||||||
| Apparel/Footwear (2.3%) | | ||||||||||||
| 46,550 | | Carter's, Inc.* | | 2,532,786 | ||||||||||
| 93,000 | | Maidenform Brands, Inc.* | | 1,534,500 | ||||||||||
| | 4,067,286 | ||||||||||||
| Apparel/Footwear Retail (1.8%) | | ||||||||||||
| 69,300 | | Citi Trends Inc.* | | 1,884,267 | ||||||||||
| 47,100 | | Eddie Bauer Holdings Inc.* | | 1,266,990 | ||||||||||
| | 3,151,257 | ||||||||||||
| Biotechnology (3.6%) | | ||||||||||||
| 35,600 | | Gen-Probe Inc.* | | 1,620,512 | ||||||||||
| 85,504 | | Techne Corp.* | | 4,871,163 | ||||||||||
| | 6,491,675 | ||||||||||||
| Casino/Gaming (3.2%) | | ||||||||||||
| 57,700 | | Kerzner International Ltd. (Bahamas)* | | 3,291,785 | ||||||||||
| 65,100 | | Lakes Entertainment, Inc.* | | 807,240 | ||||||||||
| 64,875 | | Shuffle Master, Inc.* | | 1,586,194 | ||||||||||
| | 5,685,219 | ||||||||||||
| Chemicals: Specialty (1.0%) | | ||||||||||||
| 73,000 | | NuCo2 Inc.* | | 1,827,920 | ||||||||||
| Construction Materials (2.0%) | | ||||||||||||
| 18,960 | | Eagle Materials, Inc. | | 2,045,025 | ||||||||||
| 25,800 | | Texas Industries, Inc. | | 1,543,098 | ||||||||||
| | 3,588,123 | ||||||||||||
| Consumer Sundries (1.1%) | | ||||||||||||
| 72,100 | | Yankee Candle Co., Inc. (The) | | 1,980,587 | ||||||||||
| Electronic Production Equipment (2.0%) | |||||||||||||
| 108,400 | | Tessera Technologies, Inc.* | | 3,596,712 | ||||||||||
| Engineering & Construction (0.8%) | | ||||||||||||
| 25,100 | | Washington Group International, Inc.* | | 1,326,284 | ||||||||||
| Financial Publishing/Services (1.4%) | | ||||||||||||
| 83,300 | | Morningstar, Inc.* | | $ | 2,533,986 | |||||||||
| Food Retail (1.0%) | | ||||||||||||
| 49,700 | | Pantry, Inc. (The)* | | 1,783,733 | ||||||||||
| Food: Major Diversified (1.1%) | | ||||||||||||
| 64,600 | | TreeHouse Foods, Inc.* | | 1,944,460 | ||||||||||
| Food: Specialty/Candy (0.3%) | | ||||||||||||
| 32,100 | | Rocky Mountain Chocolate Factory, Inc. | | 578,763 | ||||||||||
| Home Building (1.7%) | | ||||||||||||
| 98,700 | | Desarrolladora Homex S.A. de C.V. (Mexico)* | | 2,966,922 | ||||||||||
| Hotels/Resorts/Cruiselines (3.1%) | | ||||||||||||
| 97,480 | | Gaylord Entertainment Co.* | | 4,152,648 | ||||||||||
| 113,628 | | Great Wolf Resorts, Inc.* | | 1,306,722 | ||||||||||
| | 5,459,370 | ||||||||||||
| Industrial Machinery (1.2%) | | ||||||||||||
| 32,300 | | Middleby Corp.* | | 2,122,756 | ||||||||||
| Internet Retail (4.3%) | | ||||||||||||
| 94,800 | | Blue Nile Inc.* | | 3,205,188 | ||||||||||
| 80,100 | | Netflix Inc.* | | 1,726,956 | ||||||||||
| 44,000 | | Overstock.com, Inc.* | | 1,774,960 | ||||||||||
| 39,800 | | Provide Commerce Inc.* | | 1,015,696 | ||||||||||
| | 7,722,800 | ||||||||||||
| Internet Software/Services (4.0%) | | ||||||||||||
| 142,500 | | Akamai Technologies, Inc.* | | 1,972,200 | ||||||||||
| 171,745 | | CNET Networks, Inc.* | | 2,297,948 | ||||||||||
| 21,900 | | Netease.com Inc. (ADR) (Cayman Islands)* | | 1,591,473 | ||||||||||
| 43,600 | | SINA Corp.* | | 1,253,500 | ||||||||||
| | 7,115,121 | ||||||||||||
| Investment Banks/Brokers (2.2%) | | ||||||||||||
| 95,957 | | Greenhill & Co., Inc. | | 3,859,390 | ||||||||||
| Investment Managers (1.1%) | | ||||||||||||
| 74,600 | | Calamos Asset Management Inc. (Class A) | | 2,009,724 | ||||||||||
| Investment Trusts/Mutual Funds (1.4%) | | ||||||||||||
| 87,400 | | Macquarie Infrastructure Company Trust | | 2,511,876 | ||||||||||
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See Notes to Financial Statements
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Morgan Stanley Special Growth Fund
Portfolio of Investments August 31, 2005 (unaudited) continued
| | | | | | | | | | | |
| NUMBER OF SHARES | | | VALUE | ||||||||
| Medical Specialties (6.4%) | | |||||||||
| 36,940 | | Adams Respitory Therapeutics, Inc.* | | $ | 1,250,050 | ||||||
| 63,600 | | American Medical System Holdings, Inc.* | | 1,303,800 | |||||||
| 69,100 | | Animas Corp.* | | 1,202,340 | |||||||
| 137,800 | | Dade Behring Holdings Inc. | | 5,042,102 | |||||||
| 44,856 | | Flamel Technologies S.A. (ADR) (France)* | | 719,042 | |||||||
| 28,700 | | IDEXX Laboratories, Inc.* | | 1,837,948 | |||||||
| | 11,355,282 | |||||||||
| Medical/Nursing Services (1.0%) | | |||||||||
| 75,500 | | VCA Antech, Inc.* | | 1,811,245 | |||||||
| Miscellaneous Commercial Services (3.6%) | | |||||||||
| 83,600 | | Bright Horizons Family Solutions, Inc.* | | 3,287,152 | |||||||
| 38,000 | | Corporate Executive Board Co. (The) | | 3,069,260 | |||||||
| | 6,356,412 | |||||||||
| Office Equipment/Supplies (0.0%) | | |||||||||
| 8,600 | | TransAct Technologies Inc.* | | 61,404 | |||||||
| Oil & Gas Production (6.7%) | | |||||||||
| 355,100 | | Gasco Energy Inc* | | 2,048,927 | |||||||
| 83,200 | | Petrohawk Energy Corp.* | | 973,440 | |||||||
| 83,110 | | Quicksilver Resources Inc.* | | 3,606,974 | |||||||
| 150,800 | | Range Resources Corp. | | 5,252,364 | |||||||
| | 11,881,705 | |||||||||
| Other Consumer Services (6.2%) | | |||||||||
| 39,500 | | Ambassadors Group, Inc. | | 1,841,490 | |||||||
| 40,790 | | Bankrate, Inc.* | | 968,355 | |||||||
| 63,700 | | Coinstar, Inc.* | | 1,222,403 | |||||||
| 57,300 | | HouseValues, Inc.* | | 747,192 | |||||||
| 38,700 | | Priceline.com Inc.* | | 831,663 | |||||||
| 53,950 | | Strayer Education, Inc. | | 5,444,634 | |||||||
| | 11,055,737 | |||||||||
| Packaged Software (3.1%) | | |||||||||
| 76,700 | | Blackboard Inc.* | | 1,853,072 | |||||||
| 88,900 | | Convera Corp.* | | 892,556 | |||||||
| 141,400 | | Salesforce.com Inc.* | | 2,731,848 | |||||||
| | 5,477,476 | |||||||||
| Pharmaceuticals: Other (0.5%) | | |||||||||
| 52,500 | | Noven Pharmaceuticals, Inc.* | | $ | 874,650 | ||||||
| Pulp & Paper (1.0%) | | |||||||||
| 56,300 | | Neenah Paper Inc. | | 1,705,890 | |||||||
| Real Estate Development (0.8%) | | |||||||||
| 30,300 | | Jones Lang LaSalle, Inc.* | | 1,494,699 | |||||||
| Recreational Products (4.8%) | | |||||||||
| 51,900 | | Shanda Interactive Entertainment, Ltd. (ADR) (Cayman Islands)* | | 1,726,194 | |||||||
| 49,300 | | Take-Two Interactive Software, Inc.* | | 1,173,340 | |||||||
| 61,000 | | THQ, Inc.* | | 2,050,210 | |||||||
| 121,100 | | WMS Industries, Inc.* | | 3,507,056 | |||||||
| | 8,456,800 | |||||||||
| Restaurants (5.3%) | | |||||||||
| 130,970 | | AFC Enterprises, Inc. | | 1,737,972 | |||||||
| 117,799 | | BJ'S Restaurants Inc.* | | 2,507,941 | |||||||
| 60,275 | | P.F. Chang's China Bistro, Inc.* | | 3,084,874 | |||||||
| 67,200 | | Peet's Coffee & Tea, Inc.* | | 2,101,344 | |||||||
| | 9,432,131 | |||||||||
| Services to the Health Industry (5.4%) | | |||||||||
| 89,700 | | Advisory Board Co. (The)* | | 4,685,031 | |||||||
| 85,382 | | Stericycle, Inc.* | | 4,963,256 | |||||||
| | 9,648,287 | |||||||||
| Specialty Stores (5.4%) | | |||||||||
| 80,600 | | Build-A-Bear-Workshop, Inc.* | | 1,787,708 | |||||||
| 129,500 | | CKX, Inc.* | | 1,800,050 | |||||||
| 71,787 | | Tractor Supply Co.* | | 3,694,159 | |||||||
| 81,300 | | Tuesday Morning Corp. | | 2,352,822 | |||||||
| | 9,634,739 | |||||||||
| Tobacco (1.1%) | | |||||||||
| 52,400 | | Loews Corp.- Carolina Group | | 2,023,164 | |||||||
| Trucking (3.0%) | | |||||||||
| 147,300 | | Landstar System, Inc. | | 5,349,936 | |||||||
| Wholesale Distributors (3.3%) | | |||||||||
| 69,600 | | Beacon Roofing Supply, Inc.* | | 2,262,000 | |||||||
| 97,850 | | SCP Pool Corp. | | 3,581,310 | |||||||
| | 5,843,310 | |||||||||
| |||||||||||
See Notes to Financial Statements
12
Morgan Stanley Special Growth Fund
Portfolio of Investments August 31, 2005 (unaudited) continued
| | | | | | | | | | | |
| NUMBER OF SHARES | | | VALUE | ||||||||
| Wireless Telecommunications (1.1%) | | |||||||||
| 130,523 | | SBA Communications Corp.* | | $ | 1,964,371 | ||||||
| Total Common Stocks (Cost $153,431,960) | | 177,944,127 | ||||||||
| |||||||||||
| | | | | | | | | | | |
| PRINCIPAL AMOUNT IN THOUSANDS | | | |||||||||
| Short-Term Investment (0.9%) | | |||||||||
| Repurchase Agreement | | |||||||||
| $ | 1,660 | | Joint repurchase agreement account 3.575% due 09/01/05 (dated 08/31/05; proceeds $1,660,165) (a) (Cost $1,660,000) | | 1,660,000 | ||||||
| |||||||||||
| | | | | | | | | | |
| Total Investments (Cost $155,091,960) (b) | | 100.8 | % | | 179,604,127 | |||||
| Liabilities in Excess of Other Assets | | (0.8 | ) | | (1,477,117 | ) | ||||
| Net Assets | | 100.0 | % | | $ | 178,127,010 | ||||
| ||||||||||
|
| ADR | American Depositary Receipt. |
| * | Non-income producing security. |
| (a) | Collateralized by federal agency and U.S. Treasury obligations. |
| (b) | The aggregate cost for federal income tax purposes approximates the aggregate cost for book purposes. The aggregate gross unrealized appreciation is $30,175,694 and the aggregate gross unrealized depreciation is $5,663,527, resulting in net unrealized appreciation of $24,512,167. |
See Notes to Financial Statements
13
Morgan Stanley Special Growth Fund
Summary of Investments August 31, 2005 (unaudited)
| | | | | | | | | | |
| INDUSTRY | | VALUE | | PERCENT OF NET ASSETS | ||||||
| Oil & Gas Production | | $ | 11,881,705 | | 6.7 | % | ||||
| Medical Specialties | | 11,355,282 | | 6.4 | ||||||
| Other Consumer Services | | 11,055,737 | | 6.2 | ||||||
| Services To The Health Industry | | 9,648,287 | | 5.4 | ||||||
| Specialty Stores | | 9,634,739 | | 5.4 | ||||||
| Restaurants | | 9,432,131 | | 5.3 | ||||||
| Recreational Products | | 8,456,800 | | 4.8 | ||||||
| Internet Retail | | 7,722,800 | | 4.3 | ||||||
| Internet Software/Services | | 7,115,121 | | 4.0 | ||||||
| Biotechnology | | 6,491,675 | | 3.6 | ||||||
| Miscellaneous Commercial Services | | 6,356,412 | | 3.6 | ||||||
| Wholesale Distributors | | 5,843,310 | | 3.3 | ||||||
| Casino/Gaming | | 5,685,219 | | 3.2 | ||||||
| Packaged Software | | 5,477,476 | | 3.1 | ||||||
| Hotels/Resorts/Cruiselines | | 5,459,370 | | 3.1 | ||||||
| Trucking | | 5,349,936 | | 3.0 | ||||||
| Apparel/Footwear | | 4,067,286 | | 2.3 | ||||||
| Investment Banks/Brokers | | 3,859,390 | | 2.2 | ||||||
| Electronic Production Equipment | | 3,596,712 | | 2.0 | ||||||
| Construction Materials | | 3,588,123 | | 2.0 | ||||||
| Apparel/Footwear Retail | | 3,151,257 | | 1.8 | ||||||
| Home Building | | 2,966,922 | | 1.7 | ||||||
| Financial Publishing/Services | | $ | 2,533,986 | | 1.4 | % | ||||
| Investment Trusts/Mutual Funds | | 2,511,876 | | 1.4 | ||||||
| Industrial Machinery | | 2,122,756 | | 1.2 | ||||||
| Tobacco | | 2,023,164 | | 1.1 | ||||||
| Investment Managers | | 2,009,724 | | 1.1 | ||||||
| Consumer Sundries | | 1,980,587 | | 1.1 | ||||||
| Wireless Telecommunications | | 1,964,371 | | 1.1 | ||||||
| Food: Major Diversified | | 1,944,460 | | 1.1 | ||||||
| Chemicals: Specialty | | 1,827,920 | | 1.0 | ||||||
| Medical/Nursing Services | | 1,811,245 | | 1.0 | ||||||
| Food Retail | | 1,783,733 | | 1.0 | ||||||
| Pulp & Paper | | 1,705,890 | | 1.0 | ||||||
| Repurchase Agreement | | 1,660,000 | | 0.9 | ||||||
| Real Estate Development | | 1,494,699 | | 0.8 | ||||||
| Engineering & Construction | | 1,326,284 | | 0.8 | ||||||
| Aerospace & Defense | | 1,139,837 | | 0.6 | ||||||
| Pharmaceuticals: Other | | 874,650 | | 0.5 | ||||||
| Food: Specialty/Candy | | 578,763 | | 0.3 | ||||||
| Office Equipment/Supplies | | 61,404 | | 0.0 | ||||||
| Advertising/Marketing Services | | 53,088 | | 0.0 | ||||||
| $ | 179,604,127 | | 100.8 | % | |||||
| ||||||||||
See Notes to Financial Statements
14
Morgan Stanley Special Growth Fund
Financial Statements
Statement of Assets and Liabilities
August 31, 2005 (unaudited)
| | | | | | |
| Assets: | | |||||
| Investments in securities, at value (cost $155,091,960) | | $ | 179,604,127 | |||
| Receivable for: | | |||||
| Investments sold | | 775,492 | ||||
| Dividends | | 67,687 | ||||
| Shares of beneficial interest sold | | 38,218 | ||||
| Prepaid expenses and other assets | | 28,685 | ||||
| Total Assets | | 180,514,209 | ||||
| Liabilities: | | |||||
| Payable for: | | |||||
| Shares of beneficial interest redeemed | | 1,394,446 | ||||
| Investments purchased | | 688,530 | ||||
| Investment advisory fee | | 151,444 | ||||
| Distribution fee | | 80,277 | ||||
| Administration fee | | 13,169 | ||||
| Transfer agent fee | | 1,355 | ||||
| Accrued expenses and other payables | | 57,978 | ||||
| Total Liabilities | | 2,387,199 | ||||
| Net Assets | | $ | 178,127,010 | |||
| Composition of Net Assets: | | |||||
| Paid-in-capital | | $ | 385,430,323 | |||
| Net unrealized appreciation | | 24,512,167 | ||||
| Accumulated net investment loss | | (1,042,668 | ) | |||
| Accumulated net realized loss | | (230,772,812 | ) | |||
| Net Assets | | $ | 178,127,010 | |||
| Class A Shares: | | |||||
| Net Assets | | $ | 60,011,669 | |||
| Shares Outstanding (unlimited authorized, $.01 par value) | | 3,192,897 | ||||
| Net Asset Value Per Share | | $ | 18.80 | |||
| Maximum Offering Price Per Share, (net asset value plus 5.54% of net asset value) | | $ | 19.84 | |||
| Class B Shares: | | |||||
| Net Assets | | $ | 63,793,228 | |||
| Shares Outstanding (unlimited authorized, $.01 par value) | | 3,612,659 | ||||
| Net Asset Value Per Share | | $ | 17.66 | |||
| Class C Shares: | | |||||
| Net Assets | | $ | 7,786,675 | |||
| Shares Outstanding (unlimited authorized, $.01 par value) | | 441,297 | ||||
| Net Asset Value Per Share | | $ | 17.64 | |||
| Class D Shares: | | |||||
| Net Assets | | $ | 46,535,438 | |||
| Shares Outstanding (unlimited authorized, $.01 par value) | | 2,431,864 | ||||
| Net Asset Value Per Share | | $ | 19.14 | |||
| ||||||
See Notes to Financial Statements
15
Morgan Stanley Special Growth Fund
Financial Statements continued
Statement of Operations
For the six months ended August 31, 2005 (unaudited)
| | | | | | |
| Net Investment Loss: | | |||||
| Income | | |||||
| Dividends (net of $553 foreign withholding tax) | | $ | 801,524 | |||
| Interest | | 44,559 | ||||
| Total Income | | 846,083 | ||||
| Expenses | | |||||
| Investment advisory fee | | 843,084 | ||||
| Distribution fee (Class A shares) | | 57,372 | ||||
| Distribution fee (Class B shares) | | 412,869 | ||||
| Distribution fee (Class C shares) | | 37,163 | ||||
| Transfer agent fees and expenses | | 347,009 | ||||
| Administration fee | | 73,312 | ||||
| Shareholder reports and notices | | 33,404 | ||||
| Professional fees | | 31,796 | ||||
| Registration fees | | 28,521 | ||||
| Custodian fees | | 15,807 | ||||
| Trustees' fees and expenses | | 2,297 | ||||
| Other | | 5,992 | ||||
| Total Expenses | | 1,888,626 | ||||
| Net Investment Loss | | (1,042,543 | ) | |||
| Net Realized and Unrealized Gain (Loss): | | |||||
| Net realized gain | | 24,479,686 | ||||
| Net change in unrealized appreciation | | (13,164,513 | ) | |||
| Net Gain | | 11,315,173 | ||||
| Net Increase | | $ | 10,272,630 | |||
| ||||||
See Notes to Financial Statements
16
Morgan Stanley Special Growth Fund
Financial Statements continued
Statement of Changes in Net Assets
| | | | | | | | | | |
| FOR THE SIX MONTHS ENDED AUGUST 31, 2005 | | FOR THE YEAR ENDED FEBRUARY 28, 2005 | |||||||
| (unaudited) | | ||||||||
| Increase (Decrease) in Net Assets: | | | ||||||||
| Operations: | | | ||||||||
| Net investment loss | | $ | (1,042,543 | ) | | $ | (3,704,196 | ) | ||
| Net realized gain | | 24,479,686 | | 25,508,639 | ||||||
| Net change in unrealized appreciation/depreciation | | (13,164,513 | ) | | 5,249,067 | |||||
| Net Increase | | 10,272,630 | | 27,053,510 | ||||||
| Net decrease from transactions in shares of beneficial interest | | (25,263,588 | ) | | (36,469,347 | ) | ||||
| Net Decrease | | (14,990,958 | ) | | (9,415,837 | ) | ||||
| Net Assets: | | | ||||||||
| Beginning of period | | 193,117,968 | | 202,533,805 | ||||||
| End of Period (Including accumulated net investment losses of $1,042,668 and $125, respectively) | | $ | 178,127,010 | | $ | 193,117,968 | ||||
| ||||||||||
See Notes to Financial Statements
17
Morgan Stanley Special Growth Fund
Notes to Financial Statements August 31, 2005 (unaudited)
1. Organization and Accounting Policies
Morgan Stanley Special Growth Fund (the "Fund") is registered under the Investment Company Act of 1940, as amended (the "Act"), as a diversified, open-end management investment company. The Fund's investment objective is capital appreciation. The Fund was organized as a Massachusetts business trust on March 11, 1992 and commenced operations on August 2, 1993. On July 28, 1997, the Fund converted to a multiple class share structure.
The Fund offers Class A shares, Class B shares, Class C shares and Class D shares. The four classes are substantially the same except that most Class A shares are subject to a sales charge imposed at the time of purchase and some Class A shares, and most Class B shares and Class C shares are subject to a contingent deferred sales charge imposed on shares redeemed within eighteen months, six years and one year, respectively. Class D shares are not subject to a sales charge. Additionally, Class A shares, Class B shares and Class C shares incur distribution expenses.
Effective August 29, 2005, the Board of Trustees of the Fund approved the implementation of a 2% redemption fee on Class A shares, Class B shares, Class C shares, and Class D shares, which is paid directly to the Fund, for shares redeemed within thirty days of purchase. The redemption fee is designed to protect the Fund and its remaining shareholders from the effects of short-term trading.
The following is a summary of significant accounting policies:
A. Valuation of Investments — (1) an equity portfolio security listed or traded on the New York Stock Exchange ("NYSE") or American Stock Exchange or other exchange is valued at its latest sale price prior to the time when assets are valued; if there were no sales that day, the security is valued at the mean between the last reported bid and asked price; (2) an equity portfolio security listed or traded on the Nasdaq is valued at the Nasdaq Official Closing Price; if there were no sales that day, the security is valued at the mean between the last reported bid and asked price; (3) all other portfolio securities for which over-the-counter market quotations are readily available are valued at the mean between the last reported bid and asked price. In cases where a security is traded on more than one exchange, the security is valued on the exchange designated as the primary market; (4) for equity securities traded on foreign exchanges, the last reported sale price or the latest bid price may be used if there were no sales on a particular day; (5) when market quotations are not readily available or Morgan Stanley Investment Advisors Inc. (the "Investment Adviser") determines that the latest sale price, the bid price or the mean between the last reported bid and asked price do not reflect a security's market value, portfolio securities are valued at their fair value as determined in good faith under procedures established by and under the general supervision of the Fund's Trustees. Occasionally, developments affecting the closing prices of securities and other assets may occur between the times at which valuations of such securities are determined (that is, close of the foreign market on which the securities trade) and the close of business on the NYSE. If developments occur during such periods that are
18
Morgan Stanley Special Growth Fund
Notes to Financial Statements August 31, 2005 (unaudited) continued
expected to materially affect the value of such securities, such valuations may be adjusted to reflect the estimated fair value of such securities as of the close of the NYSE, as determined in good faith by the Fund's Trustees or by the Investment Adviser using a pricing service and/or procedures approved by the Trustees of the Fund; (6) certain portfolio securities may be valued by an outside pricing service approved by the Fund's Trustees; and (7) short-term debt securities having a maturity date of more than sixty days at time of purchase are valued on a mark-to-market basis until sixty days prior to maturity and thereafter at amortized cost based on their value on the 61st day. Short-term debt securities having a maturity date of sixty days or less at the time of purchase are valued at amortized cost.
B. Accounting for Investments — Security transactions are accounted for on the trade date (date the order to buy or sell is executed). Realized gains and losses on security transactions are determined by the identified cost method. Dividend income and other distributions are recorded on the ex-dividend date. Discounts are accreted and premiums are amortized over the life of the respective securities. Interest income is accrued daily.
C. Repurchase Agreements — Pursuant to an Exemptive Order issued by the Securities and Exchange Commission, the Fund, along with other affiliated entities managed by the Investment Adviser, may transfer uninvested cash balances into one or more joint repurchase agreement accounts. These balances are invested in one or more repurchase agreements and are collateralized by cash, U.S. Treasury or federal agency obligations. The Fund may also invest directly with institutions in repurchase agreements. The Fund's custodian receives the collateral, which is marked-to-market daily to determine that the value of the collateral does not decrease below the repurchase price plus accrued interest.
D. Multiple Class Allocations — Investment income, expenses (other than distribution fees), and realized and unrealized gains and losses are allocated to each class of shares based upon the relative net asset value on the date such items are recognized. Distribution fees are charged directly to the respective class.
E. Federal Income Tax Policy — It is the Fund's policy to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of its taxable income to its shareholders. Accordingly, no federal income tax provision is required.
F. Dividends and Distributions to Shareholders — Dividends and distributions to shareholders are recorded on the ex-dividend date.
G. Use of Estimates — The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and disclosures. Actual results could differ from those estimates.
2. Investment Advisory/Administration Agreements
Effective June 1, 2005, pursuant to an Investment Advisory Agreement, the Fund pays the Investment Adviser an advisory fee, accrued daily and payable monthly, by applying the following annual rates to the net assets of
19
Morgan Stanley Special Growth Fund
Notes to Financial Statements August 31, 2005 (unaudited) continued
the Fund determined as of the close of each business day: 0.92% to the portion of the daily net assets not exceeding $1 billion; 0.85% to the portion of the daily net assets exceeding 1 billion but not exceeding 1.5 billion and 0.80% of the daily net assets in excess of $1.5 billion. (Prior to June 1, 2005, 0.92% to the portion of the daily net assets not exceeding $1 billion and 0.85% to the portion of the daily net assets in excess of $1 billion).
Pursuant to an Administration Agreement with Morgan Stanley Services Company Inc. (the "Administrator"), an affiliate of the Investment Adviser, the Fund pays an administration fee, accrued daily and payable monthly, by applying the annual rate of 0.08% to the Fund's daily net assets.
3. Plan of Distribution
Shares of the Fund are distributed by Morgan Stanley Distributors Inc. (the "Distributor"), an affiliate of the Investment Adviser and Administrator. The Fund has adopted a Plan of Distribution (the "Plan") pursuant to Rule 12b-1 under the Act. The Plan provides that the Fund will pay the Distributor a fee which is accrued daily and paid monthly at the following annual rates: (i) Class A – up to 0.25% of the average daily net assets of Class A; (ii) Class B – up to 1.0% of the lesser of: (a) the average daily aggregate gross sales of the Class B shares since the inception of the Fund (not including reinvestment of dividend or capital gain distributions) less the average daily aggregate net asset value of the Class B shares redeemed since the Fund's inception upon which a contingent deferred sales charge has been imposed or waived; or (b) the average daily net assets of Class B; and (iii) Class C – up to 1.0% of the average daily net assets of Class C.
In the case of Class B shares, provided that the Plan continues in effect, any cumulative expenses incurred by the Distributor but not yet recovered may be recovered through the payment of future distribution fees from the Fund pursuant to the Plan and contingent deferred sales charges paid by investors upon redemption of Class B shares. Although there is no legal obligation for the Fund to pay expenses incurred in excess of payments made to the Distributor under the Plan and the proceeds of contingent deferred sales charges paid by investors upon redemption of shares, if for any reason the Plan is terminated, the Trustees will consider at that time the manner in which to treat such expenses. The Distributor has advised the Fund that such excess amounts totaled $21,798,557 at August 31, 2005.
In the case of Class A shares and Class C shares, expenses incurred pursuant to the Plan in any calendar year in excess of 0.25% or 1.0% of the average daily net assets of Class A or Class C, respectively, will not be reimbursed by the Fund through payments in any subsequent year, except that expenses representing a gross sales credit to Morgan Stanley Financial Advisors or other selected broker-dealer representatives may be reimbursed in the subsequent calendar year. For the six months ended August 31, 2005, the distribution fee was accrued for Class A shares and Class C shares at the annual rate of 0.25% and 1.0%, respectively.
20
Morgan Stanley Special Growth Fund
Notes to Financial Statements August 31, 2005 (unaudited) continued
The Distributor has informed the Fund that for the six months ended August 31, 2005, it received contingent deferred sales charges from certain redemptions of the Fund's Class B shares and Class C shares of $98,440 and $404, respectively and received $7,963 in front-end sales charges from sales of the Fund's Class A shares. The respective shareholders pay such charges which are not an expense of the Fund.
4. Security Transactions and Transactions with Affiliates
The cost of purchases and proceeds from sales of portfolio securities, excluding short-term investments, for the six months ended August 31, 2005, aggregated $86,713,989 and $111,232,291, respectively. Included in the aforementioned are purchases and sales of $170,925 and $4,945,683, respectively with other Morgan Stanley funds including a net realized gain of $2,820,739.
For the six months ended August 31, 2005, the Fund incurred brokerage commissions of $4,059 with Morgan Stanley & Co., Inc., an affiliate of the Investment Adviser, Administrator and Distributor, for portfolio transactions executed on behalf of the Fund.
Morgan Stanley Trust, an affiliate of the Investment Adviser, Administrator and Distributor, is the Fund's transfer agent.
The Fund has an unfunded Deferred Compensation Plan (the "Compensation Plan") which allows each independent Trustee to defer payment of all, or a portion, of the fees he receives for serving on the Board of Trustees. Each eligible Trustee generally may elect to have the deferred amounts credited with a return equal to the total return on one or more of the Morgan Stanley funds that are offered as investment options under the Compensation Plan. Appreciation/depreciation and distributions received from these investments are recorded with an offsetting increase/decrease in the deferred compensation obligation and do not affect the net asset value of the Fund.
5. Legal Matters
The Investment Adviser, certain affiliates of the Investment Adviser, certain officers of such affiliates and certain investment companies advised by the Investment Adviser or its affiliates, including the Fund, are named as defendants in a consolidated class action. This consolidated action also names as defendants certain individual Trustees and Directors of the Morgan Stanley funds. The consolidated amended complaint, filed in the United States District Court Southern District of New York on April 16, 2004, generally alleges that defendants, including the Fund, violated their statutory disclosure obligations and fiduciary duties by failing properly to disclose (i) that the Investment Adviser and certain affiliates of the Investment Adviser allegedly offered economic incentives to brokers and others to recommend the funds advised by the Investment Adviser or its affiliates to investors rather than funds managed by other companies, and (ii) that the funds advised by the Investment Adviser or its affiliates, including the Fund, allegedly paid excessive commissions to brokers in return for their efforts to recommend these funds to investors. The complaint seeks, among other
21
Morgan Stanley Special Growth Fund
Notes to Financial Statements August 31, 2005 (unaudited) continued
things, unspecified compensatory damages, rescissionary damages, fees and costs. The defendants have moved to dismiss the action and intend to otherwise vigorously defend it. On March 9, 2005, Plaintiffs sought leave to supplement their complaint to assert claims on behalf of other investors. While the Fund and Adviser believe that each has meritorious defenses, the ultimate outcome of this matter is not presently determinable at this early stage of the litigation, and no provision has been made in the Fund's financial statements for the effect, if any, of this matter.
6. Shares of Beneficial Interest†
Transactions in shares of beneficial interest were as follows:
| | | | | | | | | | | | | | | | | | | |
| FOR THE SIX MONTHS ENDED AUGUST 31, 2005 | | FOR THE YEAR ENDED FEBRUARY 28, 2005 | | |||||||||||||||
| (unaudited) | | |||||||||||||||||
| SHARES | | AMOUNT | | SHARES | | AMOUNT | ||||||||||||
| CLASS A SHARES | |||||||||||||||||||
| Sold | | 83,704 | | $ | 1,512,264 | | 185,594 | | $ | 2,898,632 | |||||||||
| Conversion from Class B | | 3,037,440 | | 50,513,800 | | — | | — | |||||||||||
| Redeemed | | (529,646 | ) | | (9,542,144 | ) | | (309,005 | ) | | (4,789,564 | ) | |||||||
| Net increase (decrease) – Class A | | 2,591,498 | | 42,483,920 | | (123,411 | ) | | (1,890,932 | ) | |||||||||
| CLASS B SHARES | | | | | |||||||||||||||
| Sold | | 130,309 | | 2,184,686 | | 584,314 | | 8,003,676 | |||||||||||
| Conversion to Class A | | (3,223,194 | ) | | (50,513,800 | ) | | — | | — | |||||||||
| Redeemed | | (882,075 | ) | | (14,644,692 | ) | | (2,964,635 | ) | | (43,933,507 | ) | |||||||
| Net decrease – Class B | | (3,974,960 | ) | | (62,973,806 | ) | | (2,430,321 | ) | | (35,929,831 | ) | |||||||
| CLASS C SHARES | | | | | |||||||||||||||
| Sold | | 60,793 | | 1,007,052 | | 132,103 | | 1,957,167 | |||||||||||
| Redeemed | | (63,185 | ) | | (1,049,196 | ) | | (225,461 | ) | | (3,341,893 | ) | |||||||
| Net decrease – Class C | | (2,392 | ) | | (42,144 | ) | | (93,358 | ) | | (1,384,726 | ) | |||||||
| CLASS D SHARES | | | | | |||||||||||||||
| Sold | | 141,510 | | 2,529,093 | | 919,584 | | 14,759,736 | |||||||||||
| Redeemed | | (400,305 | ) | | (7,260,651 | ) | | (750,158 | ) | | (12,023,594 | ) | |||||||
| Net increase (decrease) – Class D | | (258,795 | ) | | (4,731,558 | ) | | 169,426 | | 2,736,142 | |||||||||
| Net decrease in Fund | | (1,644,649 | ) | | $ | (25,263,588 | ) | | (2,477,664 | ) | | $ | (36,469,347 | ) | |||||
| |||||||||||||||||||
|
| † | On August 25, 2005, the Fund suspended offering of its shares to new investors. The Fund may recommence offering its shares to new investors at such time as the Investment Adviser determines that it would be consistent with prudent portfolio management to do so. |
7. Federal Income Tax Status
The amount of dividends and distributions from net investment income and net realized capital gains are determined in accordance with federal income tax regulations which may differ from generally accepted accounting principles. These "book/tax" differences are either considered temporary or permanent in nature.
22
Morgan Stanley Special Growth Fund
Notes to Financial Statements August 31, 2005 (unaudited) continued
To the extent these differences are permanent in nature, such amounts are reclassified within the capital accounts based on their federal tax-basis treatment; temporary differences do not require reclassification. Dividends and distributions which exceed net investment income and net realized capital gains for tax purposes are reported as distributions of paid-in-capital.
*As of February 28, 2005, the Fund had a net capital loss carryforward of $255,160,523 of which $95,699,714 will expire on February 28, 2010, and $159,460,809 will expire on February 28, 2011 to offset future capital gains to the extent provided by regulations.
As of February 28, 2005, the Fund had temporary book/tax differences attributable to capital loss deferrals on wash sales.
23
Morgan Stanley Special Growth Fund
Financial Highlights
Selected ratios and per share data for a share of beneficial interest outstanding throughout each period:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| FOR THE SIX MONTHS ENDED AUGUST 31, 2005 | | FOR THE YEAR ENDED FEBRUARY 28, | | |||||||||||||||||||||||
| 2005 | | 2004* | | 2003 | | 2002 | | 2001 | ||||||||||||||||||
| (unaudited) | | | | | ||||||||||||||||||||||
| Class A Shares | |||||||||||||||||||||||||||
| Selected Per Share Data: | |||||||||||||||||||||||||||
| Net asset value, beginning of period | | $ | 17.70 | | $ | 15.21 | | $ | 9.64 | | $ | 16.45 | | $ | 24.42 | | $ | 62.72 | |||||||||
| Income (loss) from investment operations: | | ||||||||||||||||||||||||||
| Net investment loss‡ | | (0.05 | ) | | (0.23 | ) | | (0.21 | ) | | (0.20 | ) | | (0.30 | ) | | (0.40 | ) | |||||||||
| Net realized and unrealized gain (loss) | | 1.15 | | 2.72 | | 5.78 | | (6.61 | ) | | (7.67 | ) | | (36.19 | ) | ||||||||||||
| Total income (loss) from investment operations | | 1.10 | | 2.49 | | 5.57 | | (6.81 | ) | | (7.97 | ) | | (36.59 | ) | ||||||||||||
| Less distributions from net realized gain | | — | | — | | — | | — | | — | | (1.71 | ) | ||||||||||||||
| Net asset value, end of period | | $ | 18.80 | | $ | 17.70 | | $ | 15.21 | | $ | 9.64 | | $ | 16.45 | | $ | 24.42 | |||||||||
| Total Return† | | 6.21 | %(1) | | 16.37 | % | | 57.78 | % | | (41.40 | )% | | (32.64 | )% | | (59.57 | )% | |||||||||
| Ratios to Average Net Assets(3): | | | | | | | |||||||||||||||||||||
| Expenses | | 1.76 | %(2) | | 1.79 | % | | 1.81 | % | | 1.76 | % | | 1.59 | % | | 1.33 | % | |||||||||
| Net investment loss | | (0.84) | % (2) | | (1.47 | )% | | (1.66 | )% | | (1.65 | )% | | (1.40 | )% | | (0.95 | )% | |||||||||
| Supplemental Data: | | ||||||||||||||||||||||||||
| Net assets, end of period, in thousands | | $60,012 | | $10,642 | | $11,026 | | $11,270 | | $14,064 | | $21,357 | |||||||||||||||
| Portfolio turnover rate | | 48 | %(1) | | 99 | % | | 177 | % | | 119 | % | | 25 | % | | 37 | % | |||||||||
| |||||||||||||||||||||||||||
|
| * | Year ended February 29. |
| ‡ | The per share amounts were computed using an average number of shares outstanding during the period. |
| † | Does not reflect the deduction of sales charge. Calculated based on the net asset value as of the last business day of the period. |
| (1) | Not annualized. |
| (2) | Annualized. |
| (3) | Reflects overall Fund ratios for investment income and non-class specific expenses. |
See Notes to Financial Statements
24
Morgan Stanley Special Growth Fund
Financial Highlights continued
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| FOR THE SIX MONTHS ENDED AUGUST 31, 2005 | | FOR THE YEAR ENDED FEBRUARY 28, | | |||||||||||||||||||||||
| 2005 | | 2004* | | 2003 | | 2002 | | 2001 | ||||||||||||||||||
| (unaudited) | ||||||||||||||||||||||||||
| Class B Shares | |||||||||||||||||||||||||||
| Selected Per Share Data: | |||||||||||||||||||||||||||
| Net asset value, beginning of period | | $ | 16.69 | | $ | 14.46 | | $ | 9.23 | | $ | 15.88 | | $ | 23.76 | | $ | 61.57 | |||||||||
| Income (loss) from investment operations: | |||||||||||||||||||||||||||
| Net investment loss‡ | | (0.15 | ) | | (0.33 | ) | | (0.29 | ) | | (0.30 | ) | | (0.45 | ) | | (0.69 | ) | |||||||||
| Net realized and unrealized gain (loss) | | 1.12 | | 2.56 | | 5.52 | | (6.35 | ) | | (7.43 | ) | | (35.41 | ) | ||||||||||||
| Total income (loss) from investment operations | | 0.97 | | 2.23 | | 5.23 | | (6.65 | ) | | (7.88 | ) | | (36.10 | ) | ||||||||||||
| Less distributions from net realized gain | | — | | — | | — | | — | | — | | (1.71 | ) | ||||||||||||||
| Net asset value, end of period | | $ | 17.66 | | $ | 16.69 | | $ | 14.46 | | $ | 9.23 | | $ | 15.88 | | $ | 23.76 | |||||||||
| Total Return† | | 5.81 | %(1) | | 15.42 | % | | 56.66 | % | | (41.88 | )% | | (33.16 | )% | | (59.89 | )% | |||||||||
| Ratios to Average Net Assets(3): | | | | | | | |||||||||||||||||||||
| Expenses | | 2.51 | %(2) | | 2.54 | % | | 2.56 | % | | 2.55 | % | | 2.35 | % | | 2.03 | % | |||||||||
| Net investment loss | | (1.59) | % (2) | | (2.22 | )% | | (2.41 | )% | | (2.44 | )% | | (2.16 | )% | | (1.65 | )% | |||||||||
| Supplemental Data: | | | | | | | |||||||||||||||||||||
| Net assets, end of period, in thousands | | $63,793 | | $126,659 | | $144,850 | | $109,784 | | $260,504 | | $459,380 | |||||||||||||||
| Portfolio turnover rate | | 48 | %(1) | | 99 | % | | 177 | % | | 119 | % | | 25 | % | | 37 | % | |||||||||
| |||||||||||||||||||||||||||
|
| * | Year ended February 29. |
| ‡ | The per share amounts were computed using an average number of shares outstanding during the period. |
| † | Does not reflect the deduction of sales charge. Calculated based on the net asset value as of the last business day of the period. |
| (1) | Not annualized. |
| (2) | Annualized. |
| (3) | Reflects overall Fund ratios for investment income and non-class specific expenses. |
See Notes to Financial Statements
25
Morgan Stanley Special Growth Fund
Financial Highlights continued
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| FOR THE SIX MONTHS ENDED AUGUST 31, 2005 | | FOR THE YEAR ENDED FEBRUARY 28, | | |||||||||||||||||||||||
| 2005 | | 2004* | | 2003 | | 2002 | | 2001 | ||||||||||||||||||
| (unaudited) | ||||||||||||||||||||||||||
| Class C Shares | |||||||||||||||||||||||||||
| Selected Per Share Data: | |||||||||||||||||||||||||||
| Net asset value, beginning of period | | $ | 16.68 | | $ | 14.43 | | $ | 9.21 | | $ | 15.85 | | $ | 23.67 | | $ | 61.40 | |||||||||
| Income (loss) from investment operations: | |||||||||||||||||||||||||||
| Net investment loss‡ | | (0.13 | ) | | (0.32 | ) | | (0.29 | ) | | (0.30 | ) | | (0.41 | ) | | (0.73 | ) | |||||||||
| Net realized and unrealized gain (loss) | | 1.09 | | 2.57 | | 5.51 | | (6.34 | ) | | (7.41 | ) | | (35.29 | ) | ||||||||||||
| Total income (loss) from investment operations | | 0.96 | | 2.25 | | 5.22 | | (6.64 | ) | | (7.82 | ) | | (36.02 | ) | ||||||||||||
| Less distributions from net realized gain | | — | | — | | — | | — | | — | | (1.71 | ) | ||||||||||||||
| Net asset value, end of period | | $ | 17.64 | | $ | 16.68 | | $ | 14.43 | | $ | 9.21 | | $ | 15.85 | | $ | 23.67 | |||||||||
| Total Return† | | 5.88 | %(1) | | 15.37 | % | | 56.79 | % | | (41.78 | )% | | (33.16 | )% | | (59.93 | )% | |||||||||
| Ratios to Average Net Assets(3): | |||||||||||||||||||||||||||
| Expenses | | 2.51 | %(2) | | 2.46 | % | | 2.56 | % | | 2.55 | % | | 2.20 | % | | 2.16 | % | |||||||||
| Net investment loss | | (1.59) | % (2) | | (2.14 | )% | | (2.41 | )% | | (2.44 | )% | | (2.01 | )% | | (1.78 | )% | |||||||||
| Supplemental Data: | |||||||||||||||||||||||||||
| Net assets, end of period, in thousands | | $7,787 | | $7,399 | | $7,751 | | $5,398 | | $11,294 | | $19,639 | |||||||||||||||
| Portfolio turnover rate | | 48 | %(1) | | 99 | % | | 177 | % | | 119 | % | | 25 | % | | 37 | % | |||||||||
| |||||||||||||||||||||||||||
|
| * | Year ended February 29. |
| ‡ | The per share amounts were computed using an average number of shares outstanding during the period. |
| † | Does not reflect the deduction of sales charge. Calculated based on the net asset value as of the last business day of the period. |
| (1) | Not annualized. |
| (2) | Annualized. |
| (3) | Reflects overall Fund ratios for investment income and non-class specific expenses. |
See Notes to Financial Statements
26
Morgan Stanley Special Growth Fund
Financial Highlights continued
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| FOR THE SIX MONTHS ENDED AUGUST 31, 2005 | | FOR THE YEAR ENDED FEBRUARY 28, | | |||||||||||||||||||||||
| 2005 | | 2004* | | 2003 | | 2002 | | 2001 | ||||||||||||||||||
| (unaudited) | ||||||||||||||||||||||||||
| Class D Shares | |||||||||||||||||||||||||||
| Selected Per Share Data: | |||||||||||||||||||||||||||
| Net asset value, beginning of period | | $ | 17.99 | | $ | 15.43 | | $ | 9.75 | | $ | 16.61 | | $ | 24.60 | | $ | 63.11 | |||||||||
| Income (loss) from investment operations: | |||||||||||||||||||||||||||
| Net investment loss‡ | | (0.05 | ) | | (0.20 | ) | | (0.18 | ) | | (0.18 | ) | | (0.25 | ) | | (0.32 | ) | |||||||||
| Net realized and unrealized gain (loss) | | 1.20 | | 2.76 | | 5.86 | | (6.68 | ) | | (7.74 | ) | | (36.48 | ) | ||||||||||||
| Total income (loss) from investment operations | | 1.15 | | 2.56 | | 5.68 | | (6.86 | ) | | (7.99 | ) | | (36.80 | ) | ||||||||||||
| Less distributions from net realized gain | | — | | — | | — | | — | | — | | (1.71 | ) | ||||||||||||||
| Net asset value, end of period | | $ | 19.14 | | $ | 17.99 | | $ | 15.43 | | $ | 9.75 | | $ | 16.61 | | $ | 24.60 | |||||||||
| Total Return† | | 6.39 | %(1) | | 16.59 | % | | 58.26 | % | | (41.30 | )% | | (32.48 | )% | | (59.53 | )% | |||||||||
| Ratios to Average Net Assets(3): | |||||||||||||||||||||||||||
| Expenses | | 1.51 | %(2) | | 1.54 | % | | 1.56 | % | | 1.55 | % | | 1.35 | % | | 1.16 | % | |||||||||
| Net investment loss | | (0.59) | % (2) | | (1.22 | )% | | (1.41 | )% | | (1.44 | )% | | (1.16 | )% | | (0.78 | )% | |||||||||
| Supplemental Data: | |||||||||||||||||||||||||||
| Net assets, end of period, in thousands | | $46,535 | | $48,418 | | $38,907 | | $29,634 | | $35,683 | | $41,207 | |||||||||||||||
| Portfolio turnover rate | | 48 | %(1) | | 99 | % | | 177 | % | | 119 | % | | 25 | % | | 37 | % | |||||||||
| |||||||||||||||||||||||||||
|
| * | Year ended February 29. |
| ‡ | The per share amounts were computed using an average number of shares outstanding during the period. |
| † | Calculated based on the net asset value as of the last business day of the period. |
| (1) | Not annualized. |
| (2) | Annualized. |
| (3) | Reflects overall Fund ratios for investment income and non-class specific expenses. |
See Notes to Financial Statements
27
| | |
Trustees Michael Bozic Officers Charles A. Fiumefreddo Ronald E. Robison Joseph J. McAlinden Barry Fink Amy R. Doberman Carsten Otto Stefanie V. Chang Francis J. Smith Thomas F. Caloia Mary E. Mullin Transfer Agent Morgan Stanley Trust Independent Registered Public Accounting Firm Deloitte & Touche LLP Investment Adviser Morgan Stanley Investment Advisors Inc. The financial statements included herein have been taken from the records of the Fund without examination by the independent auditors and accordingly they do not express an opinion thereon. This report is submitted for the general information of the shareholders of the Fund. For more detailed information about the Fund, its fees and expenses and other pertinent information, please read its Prospectus. The Fund's Statement of Additional Information contains additional information about the Fund, including its trustees. It is available, without charge, by calling (800) 869-NEWS. This report is not authorized for distribution to prospective investors in the Fund unless preceded or accompanied by an effective Prospectus. Read the Prospectus carefully before investing. Investments and services offered through Morgan Stanley DW Inc., member SIPC. Morgan Stanley Distributors Inc., member NASD. © 2005 Morgan Stanley  37892RPT–RA05–00853P–Y08/05 | | MORGAN STANLEY FUNDS |
Morgan Stanley Special Growth Fund Semiannual Report August 31, 2005 | ||
 |
Item 2. Code of Ethics. Not applicable for semiannual reports. Item 3. Audit Committee Financial Expert. Not applicable for semiannual reports. Item 4. Principal Accountant Fees and Services Not applicable for semiannual reports. Item 5. Audit Committee of Listed Registrants. Not applicable for semiannual reports. Item 6. Refer to Item 1. Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies. Not applicable for semiannual reports. Item 8. Portfolio Managers of Closed-End Management Investment Companies Applicable only to reports filed by closed-end funds. Item 9. Closed-End Fund Repurchases Applicable to reports filed by closed-end funds. Item 10. Submission of Matters to a Vote of Security Holders Not applicable. Item 11. Controls and Procedures (a) The Fund's principal executive officer and principal financial officer have concluded that the Fund's disclosure controls and procedures are sufficient to ensure that information required to be disclosed by the Fund in this Form N-CSR was recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, based upon such officers' evaluation of these controls and procedures as of a date within 90 days of the filing date of the report. (b) There were no changes in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. Item 12. Exhibits (a) Code of Ethics - Not applicable for semiannual reports. (b) A separate certification for each principal executive officer and principal financial officer of the registrant are attached hereto as part of EX-99.CERT. 2 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Morgan Stanley Special Growth Fund /s/ Ronald E. Robison Ronald E. Robison Principal Executive Officer October 20, 2005 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ Ronald E. Robison Ronald E. Robison Principal Executive Officer October 20, 2005 /s/ Francis Smith Francis Smith Principal Financial Officer October 20, 2005 3 EXHIBIT 12 B1 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER CERTIFICATIONS -------------- I, Ronald E. Robison, certify that: 1. I have reviewed this report on Form N-CSR of Morgan Stanley Special Growth Fund; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): 4 a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: October 20, 2005 /s/ Ronald E. Robison Ronald E. Robison Principal Executive Officer 5 EXHIBIT 12 B2 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER CERTIFICATIONS -------------- I, Francis Smith, certify that: 1. I have reviewed this report on Form N-CSR of Morgan Stanley Special Growth Fund; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): 6 a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: October 20, 2005 /s/ Francis Smith Francis Smith Principal Financial Officer 7 SECTION 906 CERTIFICATION Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Morgan Stanley Special Growth Fund In connection with the Report on Form N-CSR (the "Report") of the above-named issuer for the period ended August 31, 2005 that is accompanied by this certification, the undersigned hereby certifies that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Issuer. Date: October 20, 2005 /s/ Ronald E. Robison --------------------------- Ronald E. Robison Principal Executive Officer A signed original of this written statement required by Section 906 has been provided to Morgan Stanley Special Growth Fund and will be retained by Morgan Stanley Special Growth Fund and furnished to the Securities and Exchange Commission or its staff upon request. 8 SECTION 906 CERTIFICATION Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Morgan Stanley Special Growth Fund In connection with the Report on Form N-CSR (the "Report") of the above-named issuer for the period ended August 31, 2005 that is accompanied by this certification, the undersigned hereby certifies that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Issuer. Date: October 20, 2005 /s/ Francis Smith ---------------------- Francis Smith Principal Financial Officer A signed original of this written statement required by Section 906 has been provided to Morgan Stanley Special Growth Fund and will be retained by Morgan Stanley Special Growth Fund and furnished to the Securities and Exchange Commission or its staff upon request. 9