UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 811-56853
Morgan Stanley Balanced Fund
(Exact name of registrant as specified in charter)
522 Fifth Avenue, New York, New York | 10036 | |
(Address of principal executive offices) | (Zip code) |
Randy Takian
522 Fifth Avenue, New York, New York 10036
(Name and address of agent for service)
522 Fifth Avenue, New York, New York 10036
(Name and address of agent for service)
Registrant’s telephone number, including area code: 212-296-6990
Date of fiscal year end: January 31, 2010
Date of reporting period: January 31, 2010
Item 1 — Report to Shareholders
INVESTMENT MANAGEMENT | ![]() |
Welcome, Shareholder:
In this report, you’ll learn about how your investment in Morgan Stanley Balanced Fund performed during the annual period. We will provide an overview of the market conditions, and discuss some of the factors that affected performance during the reporting period. In addition, this report includes the Fund’s financial statements and a list of Fund investments.
This material must be preceded or accompanied by a prospectus for the fund being offered.
Market forecasts provided in this report may not necessarily come to pass. There is no assurance that the Fund will achieve its investment objective. The Fund is subject to market risk, which is the possibility that market values of securities owned by the Fund will decline and, therefore, the value of the Fund’s shares may be less than what you paid for them. Accordingly, you can lose money investing in this Fund. Please see the prospectus for more complete information on investment risks.
Fund Report
For the year ended January 31, 2010
Total Return for the 12 Months Ended January 31, 2010
Barclays | Lipper | |||||||||||||||||
Capital | Mixed-Asset | |||||||||||||||||
Russell | U.S. | Target | ||||||||||||||||
1000® | Government/ | Allocation | ||||||||||||||||
Value | Credit | Growth Funds | ||||||||||||||||
Class A | Class B | Class C | Class I | Index1 | Index2 | Index3 | ||||||||||||
26.99% | 26.06% | 26.00% | 27.37% | 31.44% | 7.73% | 30.04% | ||||||||||||
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
The 12-month period ended January 31, 2010 began on a down note with the stock market falling amid the intensifying financial crisis and weakening economy. However, beginning in March, improvements on a number of fronts drove a sizeable rally. The financial system appeared to regain its footing, aided by continued widespread deleveraging and initial large capital raises by some financial institutions. Furthermore, low interest rates, liquidity injections, and other policy measures enacted by the Federal Reserve and Treasury helped stabilize the credit markets. Importantly, earnings reports were generally better than expected for the first quarter of 2009, as expectations for corporate earnings had been sufficiently reduced.
Although the market’s advance paused briefly in July and again in October, investors continued to gain confidence in an economic recovery. The rate of decline in some economic indicators continued to slow, bolstering hopes that the worst had past. However, while conditions were becoming “less bad,” the economy and market still faced many headwinds, most notably unemployment rates continuing to hover near 10 percent and the weak real estate market. Corporate earnings continued to reflect improvement relative to expectations. The improvements, however, were generally attributable to aggressive cost cutting rather than growth in real demand. An uptick in merger and acquisition activity and initial public offerings contributed further to positive investor sentiment. Weakness in the U.S. dollar also supported the market’s rise as cheaper-priced goods in the U.S. bolstered exports.
In January, concerns from China and Europe slowed the market’s gains. Credit tightening by the Chinese government and the enormous budget deficits in Greece and several other European Union nations were potential threats to a global economic recovery.
In this environment, the Russell 1000® Value Index, the Fund’s equity benchmark, was up 31.44 percent for the 12-month period.
Within the fixed income markets, a more optimistic outlook on the economy led to increased investor appetite for riskier assets and spread tightening in most asset classes. The Barclays Capital U.S. Government/Credit Index, the Fund’s fixed income benchmark, rose 7.73 percent for the period.
As investors assumed more risk and shifted to other sectors of the market, performance of Treasuries began to wane and yields rose. In the third quarter, yields reversed course but rose again in the fourth quarter, ending the year higher across the curve.
2
Yields on long-maturity issues increased more so than shorter maturities, causing the slope of the curve to further steepen. The agency sector performed relatively well during the period, thanks in part to growing investor interest in FDIC-backed bank notes, which were introduced in late 2008 as part of the Temporary Liquidity Guarantee Program.
The Federal Reserve’s program of purchasing large quantities of agency mortgage-backed securities (MBS) and investors’ increasing confidence in credit-related securities led to much stronger performance for the residential mortgage sector in 2009. Despite lower rates and The Home Affordable Modification Program, refinancing activity remained low and mortgage prepayment speed only modestly increased. Investment grade bond spreads narrowed substantially after reaching their widest point for the period in mid-March. The best performing sectors were those that began the period at the widest spreads: real estate investment trusts (REITs), metals/mining, life insurance, and financials.
Performance Analysis
All share classes of Morgan Stanley Balanced Fund underperformed the Russell 1000® Value Index (the “Index”) and the Lipper Mixed-Asset Target Allocation Growth Funds Index and outperformed the Barclays Capital U.S. Government/Credit Index for the 12 months ended January 31, 2010, assuming no deduction of applicable sales charges.
In the Fund’s stock portfolio, the financials sector was the largest detractor relative to the Index during the review period. The Fund has maintained a significant underweight in financials versus the Index for some time, which benefited the portfolio significantly in 2007 and 2008. However, over the past 12 months, and specifically from March through May, financial stocks rebounded from their earlier dramatic decline. The Fund’s exposure has been focused on financial companies that we believe possess conservative balance sheets and appropriate risk/return characteristics, and these companies did not participate in the rally to the degree that others in the sector did. In particular, the portfolio was underexposed to the banks and diversified financials that rebounded most strongly during the period. The underexposure was based on our concerns regarding quality of balance sheets, uncertainty regarding additional capital requirements and incremental dividend cuts, and the unpredictability of government influence. Additionally, the Fund held an insurance stock that had performed well in 2008 on news of the company’s turnaround, but in the 12-month reporting period the company struggled with revenue expectations and hampered the Fund’s relative performance.
The materials sector also dampened relative gains. The Fund’s underweight in the sector meant that it had less exposure to these economically sensitive stocks, which performed well as the market rebounded.
In contrast, positive relative performance was driven by the energy sector, especially exploration and production (E&P) companies. E&P companies benefited from rising energy prices and the improving economic environment, whereas integrated oil companies (which we deemphasized in the portfolio) lagged the broad sector during the period. Although we increased the Fund’s exposure to the energy sector overall, the sector remained a relative underweight.
3
The consumer staples sector added to relative performance. One of the Fund’s top holdings was a confectionary company that performed strongly following an announcement that a competitor would acquire them. Although we had decreased the portfolio’s consumer staples exposure during the fiscal year, later in the period we began adding attractive consumer staples companies that met our value-with-a-catalyst criteria.
In the technology sector, exposure to both software and services and to semiconductors added to relative gains. In software and services, we bought an undervalued Internet company undergoing a management change. The company’s stock price appreciated as the new management drove revenue growth and sold a non-core asset.
Health care also contributed positively during the period. The Fund has historically maintained an overweight in the sector; however, over the past 12 months the weight has declined. Most of the exposure in health care had been in the pharmaceutical industry and the Fund benefited from holding two companies that were targeted for acquisition. Given the relative strength in health care over the preceding fiscal year and the merger and acquisition tailwind in pharmaceuticals in this fiscal year, we reduced the portfolio’s exposure in the sector and used the proceeds to invest in other areas we believed had better risk/reward opportunities.
Within the fixed income portfolio, relative to the Barclays Capital U.S. Government/Credit Index, overweight allocations to the banking, food and beverage, insurance and media sectors were additive to relative returns during the period as significant spread tightening in these sectors led to their strong performance.
There is no guarantee that any sectors mentioned will continue to perform as discussed herein or that securities in such sectors will be held by the Fund in the future.
TOP 10 HOLDINGS as of 01/31/10 | ||||
U.S. Treasury Securities | 3 | .6% | ||
JPMorgan Chase & Co. | 3 | .3 | ||
General Electric Co. | 2 | .1 | ||
Marsh & McLennan Cos., Inc. | 2 | .1 | ||
Bank of America Corp. | 2 | .0 | ||
Viacom, Inc. (Class B) | 1 | .7 | ||
Kraft Foods Inc. (Class A) | 1 | .6 | ||
Occidental Petroleum Corp. | 1 | .6 | ||
Anadarko Petroleum Corp. | 1 | .6 | ||
American Electric Power Co., Inc. | 1 | .5 |
PORTFOLIO COMPOSITION as of 01/31/10* | ||||
Common Stocks | 68 | .6% | ||
U.S. Government Agencies & Obligations | 17 | .0 | ||
Corporate Bonds | 10 | .6 | ||
Short-Term Investments | 2 | .8 | ||
Foreign Government Obligations | 0 | .3 | ||
Convertible Preferred Stock | 0 | .3 | ||
U.S. Government Agencies – Mortgage-Backed Securities | 0 | .2 | ||
Asset-Backed Securities | 0 | .2 |
* Does not include open long/short futures contracts with an underlying face amount of $8,695,804 and total unrealized depreciation of $36,651.
Subject to change daily. Provided for informational purposes only and should not be deemed as a recommendation to buy or sell the securities mentioned above. Top 10 holdings are as a percentage of net assets and portfolio composition are as a percentage of total investments. 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.
4
Investment Strategy
The Fund will normally invest at least 60 percent of its assets in common stocks and securities convertible into common stocks and at least 25 percent of its assets in fixed-income securities. Within these limitations, the Fund’s “Investment Adviser,” Morgan Stanley Investment Advisors Inc., may purchase or sell securities in any proportion it believes desirable based on its assessment of business, economic and investment conditions.
For More Information About Portfolio Holdings
Each Morgan Stanley fund provides a complete schedule of portfolio holdings in its semiannual and annual reports within 60 days of the end of the fund’s second and fourth fiscal quarters. The semiannual reports and the annual reports are filed electronically with the Securities and Exchange Commission (SEC) on Form N-CSRS and Form N-CSR, respectively. Morgan Stanley also delivers the semiannual and annual reports to fund shareholders and makes these reports available on its public web site, www.morganstanley.com. Each Morgan Stanley fund also files a complete schedule of portfolio holdings 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.
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 SEC’s web site at http://www.sec.gov.
You may obtain information regarding how the Fund voted proxies relating to portfolio securities during the most recent twelve-month period ended June 30 without charge by visiting the Mutual Fund Center on our web site at www.morganstanley.com. This information is also available on the SEC’s web site at http://www.sec.gov.
Householding Notice
To reduce printing and mailing costs, the Fund attempts to eliminate duplicate mailings to the same address. The Fund delivers a single copy of certain shareholder documents, including shareholder reports, prospectuses and proxy materials, to investors with the same last name who reside at the same address. Your participation in this program will continue for an unlimited period of time unless you instruct us otherwise. You can request multiple copies of these documents by calling (800) 869-NEWS, 8:00 a.m. to 8:00 p.m., ET. Once our Customer Service Center has received your instructions, we will begin sending individual copies for each account within 30 days.
5
Performance Summary
Performance of $10,000 Investment – Class C
Over 10 Years
![LINE GRAPH](https://capedge.com/proxy/N-CSR/0000950123-10-034080/y82052y8205201.gif)
6
Average Annual Total Returns — Period Ended January 31, 2010
Class A Shares | * | Class B Shares | ** | Class C Shares | † | Class I Shares | †† | |||||||||
(since 07/28/97 | ) | (since 07/28/97 | ) | (since 03/28/95 | ) | (since 07/28/97 | ) | |||||||||
Symbol | BGRAX | BGRBX | BGRCX | BGRDX | ||||||||||||
1 Year | 26.99 | %4 | 26.06 | %4 | 26.00 | %4 | 27.37 | %4 | ||||||||
20.33 | 5 | 21.06 | 5 | 25.00 | 5 | — | ||||||||||
5 Years | 2.20 | 4 | 1.43 | 4 | 1.42 | 4 | 2.42 | 4 | ||||||||
1.10 | 5 | 1.10 | 5 | 1.42 | 5 | — | ||||||||||
10 Years | 3.41 | 4 | 2.79 | 4 | 2.63 | 4 | 3.66 | 4 | ||||||||
2.86 | 5 | 2.79 | 5 | 2.63 | 5 | — | ||||||||||
Since Inception | 4.29 | 4 | 3.78 | 4 | 6.22 | 4 | 4.53 | 4 | ||||||||
3.84 | 5 | 3.78 | 5 | 6.22 | 5 | — |
Performance data quoted represents past performance, which is no guarantee of future results and current performance may be lower or higher than the figures shown. For most recent month-end performance figures, please visit www.morganstanley.com/im or speak with your Financial Advisor. Investment returns and principal value will fluctuate and fund shares, when redeemed, may be worth more or less than their original cost. The graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. Performance for Class A, Class B, Class C, and Class I shares will vary due to differences in sales charges and expenses. See the Fund’s current prospectus for complete details on fees and sales charges.
* | The maximum front-end sales charge for Class A is 5.25%. | |
** | The maximum contingent deferred sales charge (CDSC) for Class B is 5.0%. The CDSC declines to 0% after six years. Effective April 2005, Class B shares will generally convert to Class A shares approximately eight years after the end of the calendar month in which the shares were purchased. Performance for periods greater than eight years reflects this conversion. | |
† | The maximum contingent deferred sales charge for Class C is 1.0% for shares redeemed within one year of purchase. | |
†† | Class I has no sales charge. | |
(1) | The Russell 1000® Value Index measures the performance of the large-cap value segment of the U.S. equity universe. It includes those Russell 1000® Index companies with lower price-to-book ratios and lower forecasted growth values. The Russell 1000® Index is an index of approximately 1,000 of the largest U.S. securities based on a combination of market capitalization and current index membership. The Index is unmanaged and its returns do not include any sales charges or fees. Such costs would lower performance. It is not possible to invest directly in an index. | |
(2) | The Barclays Capital U.S. Government/Credit Index tracks the performance of government and corporate obligations, including U.S. government agency and Treasury securities and corporate and Yankee bonds. 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. | |
(3) | The Lipper Mixed-Asset Target Allocation Growth Funds Index is an equally-weighted performance Index of the largest qualifying funds (based on net assets) in the Lipper Mixed-Asset Target Allocation 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. The Fund was in the Lipper Mixed-Asset Target Allocation Growth Funds classification as of the date of this report. | |
(4) | Figure shown assumes reinvestment of all distributions and does not reflect the deduction of any sales charges. | |
(5) | Figure shown assumes reinvestment of all distributions and the deduction of the maximum applicable sales charge. See the Fund’s current prospectus for complete details on fees and sales charges. | |
‡ | Ending value assuming a complete redemption on January 31, 2010. |
7
Expense Example
As a shareholder of the Fund, you incur two types of costs: (1) transaction costs, including sales charges (loads) on purchase payments; and (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 08/01/09 – 01/31/10.
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). 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.
Beginning | Ending | Expenses Paid | ||||||||||
Account Value | Account Value | During Period@ | ||||||||||
08/01/09 – | ||||||||||||
08/01/09 | 01/31/10 | 01/31/10 | ||||||||||
Class A | ||||||||||||
Actual (9.81% return) | $ | 1,000.00 | $ | 1,098.10 | $ | 6.35 | ||||||
Hypothetical (5% annual return before expenses) | $ | 1,000.00 | $ | 1,019.16 | $ | 6.11 | ||||||
Class B | ||||||||||||
Actual (9.47% return) | $ | 1,000.00 | $ | 1,094.70 | $ | 10.30 | ||||||
Hypothetical (5% annual return before expenses) | $ | 1,000.00 | $ | 1,015.38 | $ | 9.91 | ||||||
Class C | ||||||||||||
Actual (9.40% return) | $ | 1,000.00 | $ | 1,094.00 | $ | 10.29 | ||||||
Hypothetical (5% annual return before expenses) | $ | 1,000.00 | $ | 1,015.38 | $ | 9.91 | ||||||
Class I | ||||||||||||
Actual (9.97% return) | $ | 1,000.00 | $ | 1,099.70 | $ | 5.03 | ||||||
Hypothetical (5% annual return before expenses) | $ | 1,000.00 | $ | 1,020.42 | $ | 4.84 |
@ | Expenses are equal to the Fund’s annualized expense ratios of 1.20%, 1.95%, 1.95% and 0.95% for Class A, Class B, Class C and Class I shares, respectively, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period). |
8
Morgan Stanley Balanced Fund
Portfolio of Investments - January 31, 2010
NUMBER OF | |||||||||||||||||
SHARES | VALUE | ||||||||||||||||
Common Stocks (69.0%) | |||||||||||||||||
Aerospace & Defense (0.4%) | |||||||||||||||||
9,100 | General Dynamics Corp. | $ | 608,335 | ||||||||||||||
Air Freight & Logistics (0.5%) | |||||||||||||||||
11,500 | FedEx Corp. | 901,025 | |||||||||||||||
Automobiles (0.7%) | |||||||||||||||||
58,200 | Ford Motor Co. (a) | 630,888 | |||||||||||||||
25,763 | Harley-Davidson, Inc. | 585,851 | |||||||||||||||
1,216,739 | |||||||||||||||||
Beverages (0.5%) | |||||||||||||||||
17,320 | Coca-Cola Co. (The) | 939,610 | |||||||||||||||
Biotechnology (0.3%) | |||||||||||||||||
9,100 | Genzyme Corp. (a) | 493,766 | |||||||||||||||
Capital Markets (1.5%) | |||||||||||||||||
96,560 | Charles Schwab Corp. (The) | 1,766,082 | |||||||||||||||
19,400 | State Street Corp. | 831,872 | |||||||||||||||
2,597,954 | |||||||||||||||||
Casino Gaming (0.0%) | |||||||||||||||||
4,685 | Fitzgeralds Gaming Corp. (b) | 0 | |||||||||||||||
Chemicals (0.8%) | |||||||||||||||||
49,800 | Dow Chemical Co. (The) | 1,349,082 | |||||||||||||||
Commercial Banks (4.0%) | |||||||||||||||||
38,200 | BB&T Corp. | 1,064,634 | |||||||||||||||
69,500 | Fifth Third Bancorp | 864,580 | |||||||||||||||
27,548 | First Horizon National Corp. (a) | 356,747 | |||||||||||||||
43,478 | PNC Financial Services Group, Inc. | 2,409,985 | |||||||||||||||
27,400 | US Bancorp | 687,192 | |||||||||||||||
49,700 | Wells Fargo & Co. | 1,412,971 | |||||||||||||||
6,796,109 | |||||||||||||||||
Commercial Services & Supplies (0.7%) | |||||||||||||||||
18,400 | Avery Dennison Corp. | 598,184 | |||||||||||||||
24,800 | Cintas Corp. | 622,728 | |||||||||||||||
1,220,912 | |||||||||||||||||
Communications Equipment (1.0%) | |||||||||||||||||
78,680 | Cisco Systems, Inc. (a) | 1,767,940 | |||||||||||||||
See Notes to Financial Statements
9
Morgan Stanley Balanced Fund
Portfolio of Investments - January 31, 2010 continued
NUMBER OF | |||||||||||||||||
SHARES | VALUE | ||||||||||||||||
Computers & Peripherals (1.8%) | |||||||||||||||||
59,500 | Dell, Inc. (a) | $ | 767,550 | ||||||||||||||
48,422 | Hewlett-Packard Co. | 2,279,224 | |||||||||||||||
3,046,774 | |||||||||||||||||
Diversified Financial Services (5.3%) | |||||||||||||||||
156,100 | Bank of America Corp. | 2,369,598 | |||||||||||||||
277,000 | Citigroup, Inc. (See Note 6) | 919,640 | |||||||||||||||
146,588 | JPMorgan Chase & Co. | 5,708,137 | |||||||||||||||
8,997,375 | |||||||||||||||||
Diversified Telecommunication Services (0.7%) | |||||||||||||||||
39,695 | Verizon Communications, Inc. | 1,167,827 | |||||||||||||||
Electric Utilities (3.1%) | |||||||||||||||||
75,556 | American Electric Power Co., Inc. | 2,618,015 | |||||||||||||||
17,500 | Edison International | 583,100 | |||||||||||||||
12,558 | Entergy Corp. | 958,301 | |||||||||||||||
26,990 | FirstEnergy Corp. | 1,177,304 | |||||||||||||||
5,336,720 | |||||||||||||||||
Electronic Equipment, Instruments & Components (0.7%) | |||||||||||||||||
42,200 | Agilent Technologies, Inc. (a) | 1,182,866 | |||||||||||||||
Energy Equipment & Services (1.6%) | |||||||||||||||||
24,820 | Schlumberger Ltd. (Netherlands Antilles) | 1,575,077 | |||||||||||||||
40,400 | Smith International, Inc. | 1,224,928 | |||||||||||||||
2,800,005 | |||||||||||||||||
Food & Staples Retailing (3.0%) | |||||||||||||||||
48,000 | Sysco Corp. | 1,343,520 | |||||||||||||||
47,500 | Wal-Mart Stores, Inc. | 2,537,925 | |||||||||||||||
33,500 | Walgreen Co. | 1,207,675 | |||||||||||||||
5,089,120 | |||||||||||||||||
Food Products (2.0%) | |||||||||||||||||
92,800 | Kraft Foods, Inc. (Class A) | 2,566,848 | |||||||||||||||
30,010 | Unilever N.V. (NY Registered Shares) (Netherlands) | 917,706 | |||||||||||||||
3,484,554 | |||||||||||||||||
Health Care Equipment & Supplies (1.6%) | |||||||||||||||||
94,340 | Boston Scientific Corp. (a) | 814,154 | |||||||||||||||
36,707 | Covidien PLC (Ireland) | 1,855,906 | |||||||||||||||
2,670,060 | |||||||||||||||||
See Notes to Financial Statements
10
Morgan Stanley Balanced Fund
Portfolio of Investments - January 31, 2010 continued
NUMBER OF | |||||||||||||||||
SHARES | VALUE | ||||||||||||||||
Health Care Providers & Services (1.2%) | |||||||||||||||||
23,700 | Cardinal Health, Inc. | $ | 783,759 | ||||||||||||||
40,300 | UnitedHealth Group, Inc. | 1,329,900 | |||||||||||||||
2,113,659 | |||||||||||||||||
Household Durables (1.1%) | |||||||||||||||||
55,580 | Sony Corp. (ADR) (Japan) | 1,846,923 | |||||||||||||||
Industrial Conglomerates (3.9%) | |||||||||||||||||
227,500 | General Electric Co. | 3,658,200 | |||||||||||||||
13,550 | Siemens AG (ADR) (Germany) | 1,207,441 | |||||||||||||||
50,327 | Tyco International Ltd. (Luxembourg) | 1,783,085 | |||||||||||||||
6,648,726 | |||||||||||||||||
Information Technology Services (0.3%) | |||||||||||||||||
16,700 | Amdocs Ltd. (Guernsey) (a) | 477,453 | |||||||||||||||
Insurance (3.7%) | |||||||||||||||||
27,601 | Chubb Corp. | 1,380,050 | |||||||||||||||
163,010 | Marsh & McLennan Cos., Inc. | 3,514,495 | |||||||||||||||
7,500 | Transatlantic Holdings, Inc. | 372,675 | |||||||||||||||
22,043 | Travelers Companies, Inc. (The) | 1,116,919 | |||||||||||||||
6,384,139 | |||||||||||||||||
Internet Software & Services (2.0%) | |||||||||||||||||
112,140 | eBay, Inc. (a) | 2,581,463 | |||||||||||||||
59,100 | Yahoo!, Inc. (a) | 887,091 | |||||||||||||||
3,468,554 | |||||||||||||||||
Machinery (1.5%) | |||||||||||||||||
38,200 | Dover Corp. | 1,638,016 | |||||||||||||||
26,416 | Ingersoll-Rand PLC (Ireland) | 857,463 | |||||||||||||||
2,495,479 | |||||||||||||||||
Media (4.6%) | |||||||||||||||||
104,169 | Comcast Corp. (Class A) | 1,648,996 | |||||||||||||||
27,515 | Time Warner Cable, Inc. | 1,199,379 | |||||||||||||||
74,125 | Time Warner, Inc. | 2,034,731 | |||||||||||||||
104,986 | Viacom, Inc. (Class B) (a) | 3,059,292 | |||||||||||||||
7,942,398 | |||||||||||||||||
Metals & Mining (0.9%) | |||||||||||||||||
11,700 | Freeport-McMoRan Copper & Gold, Inc. | 780,273 | |||||||||||||||
17,690 | Newmont Mining Corp. | 758,193 | |||||||||||||||
1,538,466 | |||||||||||||||||
See Notes to Financial Statements
11
Morgan Stanley Balanced Fund
Portfolio of Investments - January 31, 2010 continued
NUMBER OF | |||||||||||||||||
SHARES | VALUE | ||||||||||||||||
Oil, Gas & Consumable Fuels (8.0%) | |||||||||||||||||
42,100 | Anadarko Petroleum Corp. | $ | 2,685,138 | ||||||||||||||
22,700 | BP PLC (ADR) (United Kingdom) | 1,273,924 | |||||||||||||||
20,066 | ConocoPhillips | 963,168 | |||||||||||||||
18,470 | Devon Energy Corp. | 1,235,828 | |||||||||||||||
24,740 | Exxon Mobil Corp. | 1,593,998 | |||||||||||||||
15,300 | Hess Corp. | 884,187 | |||||||||||||||
35,460 | Occidental Petroleum Corp. | 2,777,936 | |||||||||||||||
40,400 | Royal Dutch Shell PLC (ADR) (United Kingdom) | 2,237,756 | |||||||||||||||
13,651,935 | |||||||||||||||||
Personal Products (0.7%) | |||||||||||||||||
24,070 | Estee Lauder Cos., Inc. (The) (Class A) | 1,264,156 | |||||||||||||||
Pharmaceuticals (6.0%) | |||||||||||||||||
18,640 | Abbott Laboratories | 986,802 | |||||||||||||||
25,350 | Bayer AG (ADR) (Germany) | 1,719,744 | |||||||||||||||
88,010 | Bristol-Myers Squibb Co. | 2,143,923 | |||||||||||||||
47,532 | Merck & Co., Inc. | 1,814,772 | |||||||||||||||
112,700 | Pfizer, Inc. | 2,102,982 | |||||||||||||||
34,440 | Roche Holding AG (ADR) (Switzerland) | 1,443,897 | |||||||||||||||
10,212,120 | |||||||||||||||||
Professional Services (0.8%) | |||||||||||||||||
14,601 | Manpower, Inc. | 756,186 | |||||||||||||||
22,600 | Robert Half International, Inc. | 608,392 | |||||||||||||||
1,364,578 | |||||||||||||||||
Semiconductors & Semiconductor Equipment (1.3%) | |||||||||||||||||
68,626 | Intel Corp. | 1,331,344 | |||||||||||||||
26,588 | Lam Research Corp. (a) | 877,670 | |||||||||||||||
2,209,014 | |||||||||||||||||
Software (0.2%) | |||||||||||||||||
17,161 | Symantec Corp. (a) | 290,879 | |||||||||||||||
Specialty Retail (1.7%) | |||||||||||||||||
43,600 | Gap, Inc. (The) | 831,888 | |||||||||||||||
73,800 | Home Depot, Inc. | 2,067,138 | |||||||||||||||
2,899,026 | |||||||||||||||||
Wireless Telecommunication Services (0.9%) | |||||||||||||||||
71,100 | Vodafone Group PLC (ADR) (United Kingdom) | 1,525,806 | |||||||||||||||
Total Common Stocks (Cost $122,817,938) | 118,000,084 | ||||||||||||||||
See Notes to Financial Statements
12
Morgan Stanley Balanced Fund
Portfolio of Investments - January 31, 2010 continued
PRINCIPAL | |||||||||||||||||
AMOUNT IN | COUPON | MATURITY | |||||||||||||||
THOUSANDS | RATE | DATE | VALUE | ||||||||||||||
Corporate Bonds (10.7%) | |||||||||||||||||
Advertising Services (0.1%) | |||||||||||||||||
$ | 100 | WPP Finance (United Kingdom) | 8 | .00 | % | 09/15/14 | $ | 114,737 | |||||||||
Aerospace/Defense (0.1%) | |||||||||||||||||
144 | Systems 2001 Asset Trust (144A) (Cayman Islands) (c) | 6 | .664 | 09/15/13 | 154,000 | ||||||||||||
Agricultural Chemicals (0.1%) | |||||||||||||||||
40 | Potash Corp. of Saskatchewan, Inc. (Canada) | 4 | .875 | 03/30/20 | 40,096 | ||||||||||||
50 | Potash Corp. of Saskatchewan, Inc. (Canada) | 5 | .875 | 12/01/36 | 50,550 | ||||||||||||
35 | Potash Corp. of Saskatchewan, Inc. (Canada) | 6 | .50 | 05/15/19 | 39,178 | ||||||||||||
129,824 | |||||||||||||||||
Agricultural Operations (0.0%) | |||||||||||||||||
45 | Bunge Ltd. Finance Corp. | 8 | .50 | 06/15/19 | 52,910 | ||||||||||||
Auto-Cars/Light Trucks (0.1%) | |||||||||||||||||
85 | Daimler Finance North America LLC | 7 | .30 | 01/15/12 | 93,556 | ||||||||||||
20 | Daimler Finance North America LLC | 8 | .50 | 01/18/31 | 24,930 | ||||||||||||
118,486 | |||||||||||||||||
Biotechnology (0.1%) | |||||||||||||||||
95 | Biogen Idec, Inc. | 6 | .875 | 03/01/18 | 103,843 | ||||||||||||
Brewery (0.2%) | |||||||||||||||||
110 | Anheuser-Busch InBev Worldwide, Inc. (144A) (c) | 7 | .20 | 01/15/14 | 125,902 | ||||||||||||
150 | FBG Finance Ltd. (144A) (Australia) (c) | 5 | .125 | 06/15/15 | 159,314 | ||||||||||||
285,216 | |||||||||||||||||
Building Product-Cement/Aggregation (0.0%) | |||||||||||||||||
45 | Holcim US Finance Sarl & Cie SCS (144A) (Luxembourg) (c) | 6 | .00 | 12/30/19 | 47,458 | ||||||||||||
Building Societies (0.1%) | |||||||||||||||||
170 | Nationwide Building Society (144A) (United Kingdom) (c) | 4 | .25 | 02/01/10 | 170,000 | ||||||||||||
Cable/Satellite TV (0.2%) | |||||||||||||||||
135 | COX Communications, Inc. (144A) (c) | 8 | .375 | 03/01/39 | 171,372 | ||||||||||||
125 | DIRECTV Holdings LLC / Financing Co., Inc. (144A) (c) | 5 | .875 | 10/01/19 | 131,005 | ||||||||||||
302,377 | |||||||||||||||||
Capital Markets (0.3%) | |||||||||||||||||
300 | Goldman Sachs Group, Inc. (The) | 6 | .15 | 04/01/18 | 319,722 | ||||||||||||
110 | Goldman Sachs Group, Inc. (The) | 6 | .75 | 10/01/37 | 109,102 | ||||||||||||
428,824 | |||||||||||||||||
See Notes to Financial Statements
13
Morgan Stanley Balanced Fund
Portfolio of Investments - January 31, 2010 continued
PRINCIPAL | |||||||||||||||||
AMOUNT IN | COUPON | MATURITY | |||||||||||||||
THOUSANDS | RATE | DATE | VALUE | ||||||||||||||
Commercial Banks (0.4%) | |||||||||||||||||
$ | 85 | BB&T Corp. (MTN) | 6 | .85 | % | 04/30/19 | $ | 97,910 | |||||||||
30 | Credit Suisse New York (Switzerland) | 6 | .00 | 02/15/18 | 31,724 | ||||||||||||
80 | PNC Funding Corp. | 6 | .70 | 06/10/19 | 91,478 | ||||||||||||
500 | Wells Fargo & Co. | 5 | .625 | 12/11/17 | 526,430 | ||||||||||||
747,542 | |||||||||||||||||
Commercial Banks-Non-U.S. (0.7%) | |||||||||||||||||
210 | Barclays Bank PLC (United Kingdom) | 6 | .75 | 05/22/19 | 234,890 | ||||||||||||
140 | Commonwealth Bank of Australia (144A) (Australia) (c) | 5 | .00 | 10/15/19 | 141,773 | ||||||||||||
45 | Credit Suisse AG (Switzerland) | 5 | .40 | 01/14/20 | 45,026 | ||||||||||||
225 | HBOS PLC (144A) (United Kingdom) (c) | 6 | .75 | 05/21/18 | 220,313 | ||||||||||||
100 | Nordea Bank AB (144A) (Sweden) (c) | 4 | .875 | 01/27/20 | 98,672 | ||||||||||||
205 | Rabobank Nederland (144A) (Netherlands) (c) | 4 | .75 | 01/15/20 | 207,200 | ||||||||||||
100 | Royal Bank of Scotland PLC (The) (144A) (United Kingdom) (c) | 4 | .875 | 08/25/14 | 102,718 | ||||||||||||
105 | Westpac Banking Corp. (Australia) | 4 | .20 | 02/27/15 | 108,763 | ||||||||||||
1,159,355 | |||||||||||||||||
Commercial Services & Supplies (0.1%) | |||||||||||||||||
100 | Waste Management, Inc. | 6 | .125 | 11/30/39 | 101,642 | ||||||||||||
Communications Equipment (0.0%) | |||||||||||||||||
25 | Cisco Systems, Inc. | 5 | .90 | 02/15/39 | 25,472 | ||||||||||||
Computers (0.1%) | |||||||||||||||||
100 | International Business Machines Corp. | 7 | .625 | 10/15/18 | 123,788 | ||||||||||||
Containers-Paper/Plastic (0.0%) | |||||||||||||||||
40 | Sealed Air Corp. (144A) (c) | 7 | .875 | 06/15/17 | 42,282 | ||||||||||||
Diversified Financial Services (1.4%) | |||||||||||||||||
175 | Bank of America Corp. (Series L) | 5 | .65 | 05/01/18 | 176,934 | ||||||||||||
295 | Bank of America Corp. | 5 | .75 | 12/01/17 | 301,330 | ||||||||||||
40 | Bank of America Corp. | 7 | .625 | 06/01/19 | 45,844 | ||||||||||||
135 | Citigroup, Inc. (See Note 6) | 5 | .875 | 05/29/37 | 120,722 | ||||||||||||
155 | Citigroup, Inc. (See Note 6) | 6 | .125 | 11/21/17 | 157,000 | ||||||||||||
130 | Citigroup, Inc. (See Note 6) | 6 | .125 | 05/15/18 | 130,780 | ||||||||||||
230 | Citigroup, Inc. (See Note 6) | 8 | .50 | 05/22/19 | 268,610 | ||||||||||||
45 | General Electric Capital Corp. | 5 | .50 | 01/08/20 | 44,650 | ||||||||||||
55 | General Electric Capital Corp. (MTN) | 5 | .875 | 01/14/38 | 51,093 | ||||||||||||
515 | General Electric Capital Corp. (Series G) | 6 | .00 | 08/07/19 | 534,032 | ||||||||||||
75 | Iberdrola Finance Ireland Ltd. (144A) (Ireland) (c) | 3 | .80 | 09/11/14 | 76,482 |
See Notes to Financial Statements
14
Morgan Stanley Balanced Fund
Portfolio of Investments - January 31, 2010 continued
PRINCIPAL | |||||||||||||||||
AMOUNT IN | COUPON | MATURITY | |||||||||||||||
THOUSANDS | RATE | DATE | VALUE | ||||||||||||||
$ | 320 | JPMorgan Chase & Co. | 6 | .00 | % | 01/15/18 | $ | 346,286 | |||||||||
100 | UBS AG/Stamford Branch (Switzerland) | 5 | .875 | 12/20/17 | 105,646 | ||||||||||||
2,359,409 | |||||||||||||||||
Diversified Manufactured Operation (0.1%) | |||||||||||||||||
115 | Cooper US, Inc. | 5 | .25 | 11/15/12 | 124,433 | ||||||||||||
Diversified Minerals (0.1%) | |||||||||||||||||
65 | Rio Tinto Finance USA Ltd. (Australia) | 9 | .00 | 05/01/19 | 83,137 | ||||||||||||
85 | Vale Overseas Ltd. (Cayman Islands) | 5 | .625 | 09/15/19 | 86,782 | ||||||||||||
20 | Vale Overseas Ltd. (Cayman Islands) | 6 | .875 | 11/10/39 | 20,523 | ||||||||||||
190,442 | |||||||||||||||||
Diversified Telecommunication Services (0.3%) | |||||||||||||||||
30 | AT&T Corp. | 8 | .00 | (d) | 11/15/31 | 37,182 | |||||||||||
65 | AT&T, Inc. | 6 | .15 | 09/15/34 | 65,052 | ||||||||||||
150 | AT&T, Inc. | 6 | .30 | 01/15/38 | 153,730 | ||||||||||||
40 | AT&T, Inc. | 6 | .55 | 02/15/39 | 42,587 | ||||||||||||
160 | Verizon Communications, Inc. | 6 | .35 | 04/01/19 | 177,395 | ||||||||||||
65 | Verizon Communications, Inc. | 8 | .95 | 03/01/39 | 88,907 | ||||||||||||
564,853 | |||||||||||||||||
Electric Utilities (0.1%) | |||||||||||||||||
210 | FirstEnergy Solutions Corp. | 6 | .05 | 08/15/21 | 220,605 | ||||||||||||
Electric-Integrated (0.4%) | |||||||||||||||||
150 | Enel Finance International SA (144A) (Luxembourg) (c) | 5 | .125 | 10/07/19 | 152,288 | ||||||||||||
50 | NiSource Finance Corp. | 6 | .125 | 03/01/22 | 52,267 | ||||||||||||
120 | NiSource Finance Corp. | 6 | .80 | 01/15/19 | 131,497 | ||||||||||||
100 | Ohio Power Co. (Series 1) | 5 | .375 | 10/01/21 | 102,973 | ||||||||||||
95 | PPL Energy Supply LLC | 6 | .30 | 07/15/13 | 103,753 | ||||||||||||
25 | PPL Energy Supply LLC | 6 | .50 | 05/01/18 | 26,887 | ||||||||||||
155 | Progress Energy, Inc. | 7 | .05 | 03/15/19 | 176,394 | ||||||||||||
746,059 | |||||||||||||||||
Electronic Component (0.1%) | |||||||||||||||||
115 | Koninklijke Philips Electronics N.V. (Netherlands) | 5 | .75 | 03/11/18 | 124,229 | ||||||||||||
Electronic Connectors (0.0%) | |||||||||||||||||
55 | Amphenol Corp. | 4 | .75 | 11/15/14 | 56,330 | ||||||||||||
Electronic Equipment, Instruments & Components (0.1%) | |||||||||||||||||
65 | Agilent Technologies, Inc. | 5 | .50 | 09/14/15 | 69,777 | ||||||||||||
40 | Corning, Inc. | 6 | .625 | 05/15/19 | 44,824 | ||||||||||||
114,601 | |||||||||||||||||
See Notes to Financial Statements
15
Morgan Stanley Balanced Fund
Portfolio of Investments - January 31, 2010 continued
PRINCIPAL | |||||||||||||||||
AMOUNT IN | COUPON | MATURITY | |||||||||||||||
THOUSANDS | RATE | DATE | VALUE | ||||||||||||||
Electronic Forms (0.0%) | |||||||||||||||||
$ | 75 | Adobe Systems, Inc. (e) | 4 | .75 | % | 02/01/20 | $ | 74,970 | |||||||||
Finance-Auto Loans (0.0%) | |||||||||||||||||
45 | Nissan Motor Acceptance Corp. (144A) (c) | 4 | .50 | 01/30/15 | 45,234 | ||||||||||||
Finance-Consumer Loans (0.2%) | |||||||||||||||||
135 | HSBC Finance Corp. | 6 | .375 | 10/15/11 | 144,366 | ||||||||||||
225 | HSBC Finance Corp. | 6 | .75 | 05/15/11 | 238,448 | ||||||||||||
382,814 | |||||||||||||||||
Finance-Credit Card (0.2%) | |||||||||||||||||
85 | American Express Co. | 8 | .125 | 05/20/19 | 102,973 | ||||||||||||
155 | American Express Credit Corp. (Series C) | 7 | .30 | 08/20/13 | 176,243 | ||||||||||||
279,216 | |||||||||||||||||
Finance-Investment Banker/Broker (0.4%) | |||||||||||||||||
110 | Bear Stearns Cos. LLC (The) | 6 | .40 | 10/02/17 | 121,449 | ||||||||||||
190 | Bear Stearns Cos. LLC (The) | 7 | .25 | 02/01/18 | 218,225 | ||||||||||||
85 | Credit Suisse USA, Inc. | 5 | .125 | 08/15/15 | 91,655 | ||||||||||||
210 | Merrill Lynch & Co., Inc. (MTN) | 6 | .875 | 04/25/18 | 227,076 | ||||||||||||
658,405 | |||||||||||||||||
Finance-Other Services (0.1%) | |||||||||||||||||
100 | NASDAQ OMX Group, Inc. (The) | 5 | .55 | 01/15/20 | 99,288 | ||||||||||||
Food Products (0.1%) | |||||||||||||||||
95 | Kraft Foods, Inc. | 6 | .875 | 01/26/39 | 102,700 | ||||||||||||
135 | Kraft Foods, Inc. | 7 | .00 | 08/11/37 | 147,935 | ||||||||||||
250,635 | |||||||||||||||||
Food-Miscellaneous/Diversified (0.1%) | |||||||||||||||||
120 | ConAgra Foods, Inc. | 7 | .00 | 10/01/28 | 130,725 | ||||||||||||
25 | ConAgra Foods, Inc. | 8 | .25 | 09/15/30 | 30,465 | ||||||||||||
161,190 | |||||||||||||||||
Food-Retail (0.1%) | |||||||||||||||||
40 | Delhaize America, Inc. | 9 | .00 | 04/15/31 | 51,221 | ||||||||||||
70 | Delhaize Group SA (Belgium) | 5 | .875 | 02/01/14 | 77,010 | ||||||||||||
90 | Kroger Co. (The) | 3 | .90 | 10/01/15 | 91,897 | ||||||||||||
20 | Kroger Co. (The) | 6 | .40 | 08/15/17 | 22,383 | ||||||||||||
242,511 | |||||||||||||||||
Health Care Providers & Services (0.1%) | |||||||||||||||||
125 | UnitedHealth Group, Inc. | 6 | .00 | 02/15/18 | 134,597 | ||||||||||||
See Notes to Financial Statements
16
Morgan Stanley Balanced Fund
Portfolio of Investments - January 31, 2010 continued
PRINCIPAL | |||||||||||||||||
AMOUNT IN | COUPON | MATURITY | |||||||||||||||
THOUSANDS | RATE | DATE | VALUE | ||||||||||||||
Industrial Conglomerates (0.1%) | |||||||||||||||||
$ | 180 | General Electric Co. | 5 | .25 | % | 12/06/17 | $ | 188,275 | |||||||||
Life/Health Insurance (0.2%) | |||||||||||||||||
70 | Principal Financial Group, Inc. | 8 | .875 | 05/15/19 | 83,670 | ||||||||||||
120 | Prudential Financial, Inc. (MTN) | 4 | .75 | 09/17/15 | 125,370 | ||||||||||||
80 | Prudential Financial, Inc. (MTN) | 6 | .625 | 12/01/37 | 86,545 | ||||||||||||
295,585 | |||||||||||||||||
Media (0.4%) | |||||||||||||||||
200 | Comcast Corp. | 5 | .70 | 05/15/18 | 211,551 | ||||||||||||
35 | Time Warner Cable, Inc. | 6 | .75 | 06/15/39 | 37,224 | ||||||||||||
65 | Time Warner Cable, Inc. | 8 | .25 | 04/01/19 | 78,431 | ||||||||||||
80 | Time Warner Cable, Inc. | 8 | .75 | 02/14/19 | 99,122 | ||||||||||||
60 | Time Warner, Inc. | 5 | .875 | 11/15/16 | 65,748 | ||||||||||||
70 | Time Warner, Inc. | 7 | .70 | 05/01/32 | 83,209 | ||||||||||||
100 | Viacom, Inc. | 6 | .875 | 04/30/36 | 108,640 | ||||||||||||
683,925 | |||||||||||||||||
Medical Labs & Testing Services (0.0%) | |||||||||||||||||
70 | Quest Diagnostics, Inc. | 4 | .75 | 01/30/20 | 70,067 | ||||||||||||
Medical-HMO (0.0%) | |||||||||||||||||
30 | WellPoint, Inc. | 7 | .00 | 02/15/19 | 34,779 | ||||||||||||
Metals & Mining (0.0%) | |||||||||||||||||
30 | Freeport-McMoRan Copper & Gold, Inc. | 8 | .375 | 04/01/17 | 32,669 | ||||||||||||
30 | Newmont Mining Corp. | 5 | .125 | 10/01/19 | 30,439 | ||||||||||||
63,108 | |||||||||||||||||
Mortgage Banks (0.1%) | |||||||||||||||||
105 | Abbey National Treasury Services PLC (144A) (United Kingdom) (c) | 3 | .875 | 11/10/14 | 106,559 | ||||||||||||
Multi-line Insurance (0.2%) | |||||||||||||||||
100 | Aegon N.V. (Netherlands) | 4 | .625 | 12/01/15 | 100,138 | ||||||||||||
65 | Allstate Corp. (The) | 7 | .45 | 05/16/19 | 76,013 | ||||||||||||
35 | MetLife, Inc. | 6 | .75 | 06/01/16 | 40,123 | ||||||||||||
90 | MetLife, Inc. (Series A) | 6 | .817 | 08/15/18 | 102,682 | ||||||||||||
40 | MetLife, Inc. | 7 | .717 | 02/15/19 | 48,064 | ||||||||||||
367,020 | |||||||||||||||||
Multimedia (0.1%) | |||||||||||||||||
135 | News America, Inc. | 7 | .85 | 03/01/39 | 164,109 | ||||||||||||
65 | Vivendi SA (144A) (France) (c) | 6 | .625 | 04/04/18 | 70,987 | ||||||||||||
235,096 | |||||||||||||||||
See Notes to Financial Statements
17
Morgan Stanley Balanced Fund
Portfolio of Investments - January 31, 2010 continued
PRINCIPAL | |||||||||||||||||
AMOUNT IN | COUPON | MATURITY | |||||||||||||||
THOUSANDS | RATE | DATE | VALUE | ||||||||||||||
Non-Hazardous Waste Disposal (0.0%) | |||||||||||||||||
$ | 80 | Republic Services, Inc. (144A) (c) | 5 | .50 | % | 09/15/19 | $ | 83,119 | |||||||||
Office Automation & Equipment (0.1%) | |||||||||||||||||
20 | Xerox Corp. | 5 | .625 | 12/15/19 | 20,720 | ||||||||||||
60 | Xerox Corp. | 6 | .35 | 05/15/18 | 65,162 | ||||||||||||
85,882 | |||||||||||||||||
Oil Company-Exploration & Production (0.1%) | |||||||||||||||||
100 | Questar Market Resources, Inc. | 6 | .80 | 04/01/18 | 109,937 | ||||||||||||
Oil Company-Integrated (0.1%) | |||||||||||||||||
95 | Petrobras International Finance Co. (Cayman Islands) | 5 | .75 | 01/20/20 | 94,417 | ||||||||||||
Oil, Gas & Consumable Fuels (0.0%) | |||||||||||||||||
75 | Hess Corp. | 6 | .00 | 01/15/40 | 74,728 | ||||||||||||
Oil-Field Services (0.1%) | |||||||||||||||||
175 | Weatherford International Ltd. (Switzerland) | 9 | .625 | 03/01/19 | 222,497 | ||||||||||||
Pharmacy Services (0.1%) | |||||||||||||||||
140 | Medco Health Solutions, Inc. | 7 | .125 | 03/15/18 | 161,608 | ||||||||||||
Pipelines (0.5%) | |||||||||||||||||
95 | CenterPoint Energy Resources Corp. | 6 | .25 | 02/01/37 | 95,209 | ||||||||||||
55 | CenterPoint Energy Resources Corp. (Series B) | 7 | .875 | 04/01/13 | 63,126 | ||||||||||||
100 | Energy Transfer Partners LP | 8 | .50 | 04/15/14 | 117,504 | ||||||||||||
55 | Enterprise Products Operating LLC | 5 | .25 | 01/31/20 | 56,136 | ||||||||||||
110 | Enterprise Products Operating LLC (Series N) | 6 | .50 | 01/31/19 | 121,121 | ||||||||||||
200 | Kinder Morgan Energy Partners LP | 5 | .95 | 02/15/18 | 217,051 | ||||||||||||
90 | Plains All American Pipeline LP/PAA Finance Corp. | 6 | .70 | 05/15/36 | 94,882 | ||||||||||||
75 | Plains All American Pipeline LP/PAA Finance Corp. | 8 | .75 | 05/01/19 | 93,490 | ||||||||||||
858,519 | |||||||||||||||||
Property Trust (0.1%) | |||||||||||||||||
125 | WEA Finance LLC/WT Finance Aust Pty Ltd. (144A) (c) | 6 | .75 | 09/02/19 | 136,178 | ||||||||||||
Real Estate Operation/Development (0.1%) | |||||||||||||||||
80 | Brookfield Asset Management, Inc. (Canada) | 7 | .125 | 06/15/12 | 85,447 | ||||||||||||
Reinsurance (0.1%) | |||||||||||||||||
135 | Platinum Underwriters Finance, Inc. (Series B) | 7 | .50 | 06/01/17 | 142,775 | ||||||||||||
75 | Reinsurance Group of America, Inc. | 6 | .45 | 11/15/19 | 77,266 | ||||||||||||
220,041 | |||||||||||||||||
REITS-Apartments (0.0%) | |||||||||||||||||
75 | AvalonBay Communities, Inc. (MTN) | 6 | .10 | 03/15/20 | 79,662 | ||||||||||||
See Notes to Financial Statements
18
Morgan Stanley Balanced Fund
Portfolio of Investments - January 31, 2010 continued
PRINCIPAL | |||||||||||||||||
AMOUNT IN | COUPON | MATURITY | |||||||||||||||
THOUSANDS | RATE | DATE | VALUE | ||||||||||||||
REITS-Office Property (0.1%) | |||||||||||||||||
$ | 100 | Boston Properties LP | 5 | .875 | % | 10/15/19 | $ | 104,317 | |||||||||
REITS-Regional Malls (0.1%) | |||||||||||||||||
30 | Simon Property Group LP | 5 | .65 | 02/01/20 | 30,078 | ||||||||||||
110 | Simon Property Group LP | 6 | .75 | 05/15/14 | 122,409 | ||||||||||||
152,487 | |||||||||||||||||
Retail-Drug Store (0.2%) | |||||||||||||||||
255 | CVS Pass-Through Trust | 6 | .036 | 12/10/28 | 256,627 | ||||||||||||
Retail-Regional Department Store (0.1%) | |||||||||||||||||
95 | Kohl’s Corp. | 6 | .875 | 12/15/37 | 107,798 | ||||||||||||
Retail-Restaurants (0.1%) | |||||||||||||||||
80 | Yum! Brands, Inc. | 5 | .30 | 09/15/19 | 82,828 | ||||||||||||
45 | Yum! Brands, Inc. | 6 | .25 | 03/15/18 | 49,548 | ||||||||||||
132,376 | |||||||||||||||||
Semiconductor Equipment (0.0%) | |||||||||||||||||
65 | KLA-Tencor Corp. | 6 | .90 | 05/01/18 | 70,668 | ||||||||||||
Special Purpose Entity (0.5%) | |||||||||||||||||
340 | AIG SunAmerica Global Financing (144A) (c) | 6 | .30 | 05/10/11 | 340,429 | ||||||||||||
100 | Farmers Exchange Capital (144A) (c) | 7 | .05 | 07/15/28 | 89,323 | ||||||||||||
105 | Harley-Davidson Funding Corp. (144A) (c) | 6 | .80 | 06/15/18 | 109,513 | ||||||||||||
100 | Pearson Dollar Finance Two PLC (144A) (United Kingdom) (c) | 6 | .25 | 05/06/18 | 108,124 | ||||||||||||
130 | Xlliac Global Funding (144A) (c) | 4 | .80 | 08/10/10 | 130,773 | ||||||||||||
778,162 | |||||||||||||||||
Specialty Retail (0.1%) | |||||||||||||||||
105 | Home Depot, Inc. | 5 | .875 | 12/16/36 | 102,091 | ||||||||||||
Steel-Producers (0.1%) | |||||||||||||||||
200 | ArcelorMittal (Luxembourg) | 9 | .85 | 06/01/19 | 254,464 | ||||||||||||
Super – Regional Banks – U.S. (0.1%) | |||||||||||||||||
220 | Capital One Financial Corp. | 6 | .75 | 09/15/17 | 243,169 | ||||||||||||
Telephone-Integrated (0.3%) | |||||||||||||||||
95 | Deutsche Telekom International Finance BV (Netherlands) | 8 | .75 | (d) | 06/15/30 | 122,622 | |||||||||||
95 | Telecom Italia Capital SA (Luxembourg) | 6 | .999 | 06/04/18 | 105,524 | ||||||||||||
100 | Telecom Italia Capital SA (Luxembourg) | 7 | .175 | 06/18/19 | 112,492 | ||||||||||||
200 | Telefonica Europe BV (Netherlands) | 8 | .25 | 09/15/30 | 251,893 | ||||||||||||
592,531 | |||||||||||||||||
See Notes to Financial Statements
19
Morgan Stanley Balanced Fund
Portfolio of Investments - January 31, 2010 continued
PRINCIPAL | |||||||||||||||||
AMOUNT IN | COUPON | MATURITY | |||||||||||||||
THOUSANDS | RATE | DATE | VALUE | ||||||||||||||
Tobacco (0.1%) | |||||||||||||||||
$ | 80 | Altria Group, Inc. | 9 | .25 | % | 08/06/19 | $ | 98,665 | |||||||||
75 | BAT International Finance PLC (144A) (United Kingdom) (c) | 9 | .50 | 11/15/18 | 96,981 | ||||||||||||
195,646 | |||||||||||||||||
Transport-Rail (0.0%) | |||||||||||||||||
40 | CSX Corp. | 6 | .15 | 05/01/37 | 41,426 | ||||||||||||
Total Corporate Bonds (Cost $17,167,765) | 18,225,788 | ||||||||||||||||
Foreign Government Obligations (0.3%) | |||||||||||||||||
310 | Brazilian Government International Bond (Brazil) | 6 | .00 | 01/17/17 | 332,165 | ||||||||||||
145 | Italian Republic (Italy) | 6 | .875 | 09/27/23 | 168,765 | ||||||||||||
35 | Peruvian Government International Bond (Peru) | 7 | .125 | 03/30/19 | 39,725 | ||||||||||||
Total Foreign Government Obligations (Cost $512,742) | 540,655 | ||||||||||||||||
U.S. Government Agencies & Obligations (17.1%) | |||||||||||||||||
Diversified Financial Service – FDIC Guaranteed (2.2%) | |||||||||||||||||
1,500 | Citigroup Funding, Inc. (See Note 6) | 2 | .25 | 12/10/12 | 1,526,741 | ||||||||||||
1,880 | General Electric Capital Corp. (Series G) | 2 | .625 | 12/28/12 | 1,933,924 | ||||||||||||
250 | GMAC, Inc. | 2 | .20 | 12/19/12 | 254,120 | ||||||||||||
3,714,785 | |||||||||||||||||
U.S. Government Agencies (1.6%) | |||||||||||||||||
Federal Home Loan Mortgage Corp. | |||||||||||||||||
680 | 4 | .875 | 06/13/18 | 737,822 | |||||||||||||
Federal National Mortgage Assoc. | |||||||||||||||||
600 | 2 | .875 | 12/11/13 | 617,725 | |||||||||||||
880 | 4 | .375 | 10/15/15 | 946,131 | |||||||||||||
345 | 6 | .625 | 11/15/30 | 423,935 | |||||||||||||
2,725,613 | |||||||||||||||||
U.S. Government Obligations (13.3%) | |||||||||||||||||
U.S. Treasury Bonds | |||||||||||||||||
2,100 | 3 | .50 | 02/15/39 | 1,760,065 | |||||||||||||
200 | 4 | .25 | 05/15/39 | 191,688 | |||||||||||||
190 | 4 | .375 | 02/15/38 | 186,794 | |||||||||||||
200 | 4 | .375 | 11/15/39 | 195,688 | |||||||||||||
110 | 6 | .125 | 11/15/27 | 134,406 | |||||||||||||
U.S. Treasury Notes | |||||||||||||||||
2,700 | 0 | .75 | 11/30/11 | 2,701,582 | |||||||||||||
1,700 | 0 | .875 | 03/31/11 | 1,710,492 | |||||||||||||
1,000 | 1 | .375 | 09/15/12 | 1,004,766 | |||||||||||||
3,000 | 1 | .50 | 12/31/13 | 2,961,798 | |||||||||||||
2,500 | 1 | .75 | 03/31/14 | 2,479,102 |
See Notes to Financial Statements
20
Morgan Stanley Balanced Fund
Portfolio of Investments - January 31, 2010 continued
PRINCIPAL | |||||||||||||||||
AMOUNT IN | COUPON | MATURITY | |||||||||||||||
THOUSANDS | RATE | DATE | VALUE | ||||||||||||||
$ | 6,100 | 2 | .375 | % | 10/31/14 | $ | 6,139,546 | ||||||||||
480 | 2 | .625 | 12/31/14 | 487,163 | |||||||||||||
250 | 2 | .75 | 02/15/19 | 235,078 | |||||||||||||
550 | 3 | .375 | 11/15/19 | 539,601 | |||||||||||||
800 | 3 | .625 | 08/15/19 | 802,313 | |||||||||||||
750 | 3 | .75 | 11/15/18 | 765,703 | |||||||||||||
500 | 4 | .375 | 08/15/12 | 541,485 | |||||||||||||
22,837,270 | |||||||||||||||||
Total U.S. Government Agencies & Obligations (Cost $29,426,124) | 29,277,668 | ||||||||||||||||
Asset-Backed Securities (0.1%) | |||||||||||||||||
Auto Floor Plan Other | |||||||||||||||||
125 | GE Dealer Floorplan Master Note Trust 2009-2A A (144A) (c) | 1 | .781 | 10/20/14 | 125,091 | ||||||||||||
125 | Nissan Master Owner Trust Receivables 2010-AA A (144A) (c)(e) | 1 | .378 | 01/15/13 | 125,000 | ||||||||||||
Total Asset-Backed Securities (Cost $250,000) | 250,091 | ||||||||||||||||
U.S. Government Agencies – Mortgage-Backed Securities (0.2%) | |||||||||||||||||
10 | Federal Home Loan Mortgage Corp. | 7 | .50 | 06/01/11 – 08/01/11 | 10,113 | ||||||||||||
194 | Federal National Mortgage Assoc. | 7 | .00 | 07/01/18 – 07/01/32 | 215,908 | ||||||||||||
14 | Federal National Mortgage Assoc. (DWARF) | 7 | .00 | 03/01/12 – 06/01/12 | 15,291 | ||||||||||||
69 | Government National Mortgage Assoc. | 8 | .00 | 04/15/26 – 08/15/26 | 79,394 | ||||||||||||
Total U.S. Government Agencies – Mortgage-Backed Securities (Cost $297,599) | 320,706 | ||||||||||||||||
NUMBER OF | |||||||||||||||||
SHARES | |||||||||||||||||
Convertible Preferred Stock (0.3%) | |||||||||||||||||
Diversified Financial Services | |||||||||||||||||
30,000 | Bank of America Corp. $1.50 (Cost $450,000) | 450,000 | |||||||||||||||
See Notes to Financial Statements
21
Morgan Stanley Balanced Fund
Portfolio of Investments - January 31, 2010 continued
PRINCIPAL | |||||||||||||||||
AMOUNT IN | COUPON | MATURITY | |||||||||||||||
THOUSANDS | RATE | DATE | VALUE | ||||||||||||||
Short-Term Investments (2.8%) | |||||||||||||||||
U.S. Government Obligation (0.0%) | |||||||||||||||||
$ | 70 | U.S. Treasury Bill (f)(g) (Cost $69,972) | 0 | .152 | % | 05/06/10 | $ | 69,972 | |||||||||
NUMBER OF | |||||||||||||||||
SHARES (000) | |||||||||||||||||
Investment Company (2.8%) | |||||||||||||||||
4,808 | Morgan Stanley Institutional Liquidity Funds �� Money Market Portfolio – Institutional Class (see Note 6)(Cost $4,807,558) | 4,807,558 | |||||||||||||||
Total Short-Term Investments (Cost $4,877,530) | 4,877,530 | ||||||||||||||||
Total Investments (Cost $175,799,698) (h)(i) | 100.5% | 171,942,522 | |||||||||||||||
Liabilities in Excess of Other Assets | (0.5) | (905,978 | ) | ||||||||||||||
Net Assets | 100.0% | $ | 171,036,544 | ||||||||||||||
ADR | American Depositary Receipt. | |
FDIC | Federal Deposit Insurance Corporation. | |
MTN | Medium Term Note. | |
(a) | Non-income producing security. | |
(b) | Securities with a total market value equal to $0 have been valued at their fair value as determined in good faith under procedures established by and under the general supervision of the Fund’s Trustees. Such fair value measurements may be level 2 measurements if observable inputs are available. See Note 2. | |
(c) | Resale is restricted to qualified institutional investors. | |
(d) | Floating rate security. Rate shown is the rate in effect at January 31, 2010. | |
(e) | Security purchased on a when-issued basis. | |
(f) | Purchased on a discount basis. The interest rates shown have been adjusted to reflect a money market equivalent yield. | |
(g) | A portion of this security has been physically segregated in connection with open futures contracts. | |
(h) | Securities have been designated as collateral in connection with open futures and swap contracts. | |
(i) | The aggregate cost for federal income tax purposes is $176,388,034. The aggregate gross unrealized appreciation is $10,747,026 and the aggregate gross unrealized depreciation is $15,192,538 resulting in net unrealized depreciation of $4,445,512. |
See Notes to Financial Statements
22
Morgan Stanley Balanced Fund
Portfolio of Investments - January 31, 2010 continued
Futures Contracts Open at January 31, 2010:
NUMBER OF | DESCRIPTION, DELIVERY | UNDERLYING FACE | UNREALIZED | |||||||||||
CONTRACTS | LONG/SHORT | MONTH AND YEAR | AMOUNT AT VALUE | DEPRECIATION | ||||||||||
11 | Long | U.S. Treasury Notes 5 Year, March 2010 | $ | 1,281,070 | $ | (3,742 | ) | |||||||
3 | Short | U.S. Treasury Bonds 30 Year, March 2010 | (356,437 | ) | (9,537 | ) | ||||||||
21 | Short | U.S. Treasury Notes 10 Year, March 2010 | (2,481,281 | ) | (11,125 | ) | ||||||||
21 | Short | U.S. Treasury Notes 2 Year, March 2010 | (4,577,016 | ) | (12,247 | ) | ||||||||
Total Unrealized Depreciation | $ | (36,651 | ) | |||||||||||
Credit Default Swaps Contracts Open at January 31, 2010:
NOTIONAL | CREDIT RATING | ||||||||||||||||||||||||||||||
SWAP COUNTERPARTY & | BUY/SELL | AMOUNT | INTEREST | TERMINATION | UNREALIZED | UPFRONT | OF REFERENCE | ||||||||||||||||||||||||
REFERENCE OBLIGATION | PROTECTION | (000’S) | RATE | DATE | APPRECIATION | PAYMENTS | VALUE | OBLIGATION+ | |||||||||||||||||||||||
(Unaudited) | |||||||||||||||||||||||||||||||
Bank of America, N.A., Sealed Air Corp. | Buy | $ | 40 | 1 | .12 | % | March 20, 2018 | $ | 1,109 | $ | — | $ | 1,109 | BB+ | |||||||||||||||||
+ | Credit Rating as issued by Standard & Poors. |
See Notes to Financial Statements
23
Morgan Stanley Balanced Fund
Financial Statements
Statement of Assets and Liabilities
January 31, 2010
Assets: | ||||
Investments in securities, at value (cost $167,681,706) | $ | 164,011,471 | ||
Investment in affiliates, at value (cost $8,117,992) | 7,931,051 | |||
Unrealized appreciation on open swap contracts | 1,109 | |||
Cash | 15,176 | |||
Receivable for: | ||||
Interest | 473,725 | |||
Investments sold | 199,723 | |||
Dividends | 182,799 | |||
Foreign withholding taxes reclaimed | 31,458 | |||
Interest and dividends from affiliates | 13,939 | |||
Shares of beneficial interest sold | 7,082 | |||
Prepaid expenses and other assets | 15,766 | |||
Total Assets | 172,883,299 | |||
Liabilities: | ||||
Payable for: | ||||
Investments purchased | 1,126,880 | |||
Shares of beneficial interest redeemed | 358,107 | |||
Distribution fee | 98,515 | |||
Investment advisory fee | 76,359 | |||
Transfer agent fee | 15,863 | |||
Variation margin | 12,242 | |||
Administration fee | 12,001 | |||
Accrued expenses and other payables | 146,788 | |||
Total Liabilities | 1,846,755 | |||
Net Assets | $ | 171,036,544 | ||
Composition of Net Assets: | ||||
Paid-in-capital | $ | 208,506,254 | ||
Net unrealized depreciation | (3,892,718 | ) | ||
Accumulated undistributed net investment income | 84,167 | |||
Accumulated net realized loss | (33,661,159 | ) | ||
Net Assets | $ | 171,036,544 | ||
Class A Shares: | ||||
Net Assets | $78,855,133 | |||
Shares Outstanding (unlimited shares authorized, $.01 par value) | 6,690,348 | |||
Net Asset Value Per Share | $11.79 | |||
Maximum Offering Price Per Share, (net asset value plus 5.54% of net asset value) | $12.44 | |||
Class B Shares: | ||||
Net Assets | $39,746,110 | |||
Shares Outstanding (unlimited shares authorized, $.01 par value) | 3,366,134 | |||
Net Asset Value Per Share | $11.81 | |||
Class C Shares: | ||||
Net Assets | $52,267,577 | |||
Shares Outstanding (unlimited shares authorized, $.01 par value) | 4,427,822 | |||
Net Asset Value Per Share | $11.80 | |||
Class I Shares: | ||||
Net Assets | $167,724 | |||
Shares Outstanding (unlimited shares authorized, $.01 par value) | 14,249 | |||
Net Asset Value Per Share | $11.77 | |||
See Notes to Financial Statements
24
Morgan Stanley Balanced Fund
Financial Statements continued
Statement of Operations
For the year ended January 31, 2010
Net Investment Income: | ||||
Income | ||||
Dividends (net of $70,046 foreign withholding tax) | $ | 2,700,835 | ||
Interest | 1,871,980 | |||
Interest and dividends from affiliates (net of $196 foreign withholding tax) | 59,050 | |||
Total Income | 4,631,865 | |||
Expenses | ||||
Distribution fee (Class A shares) | 185,283 | |||
Distribution fee (Class B shares) | 468,947 | |||
Distribution fee (Class C shares) | 522,348 | |||
Investment advisory fee | 901,599 | |||
Transfer agent fees and expenses | 259,182 | |||
Shareholder reports and notices | 139,686 | |||
Administration fee | 138,708 | |||
Professional fees | 86,378 | |||
Registration fees | 48,201 | |||
Custodian fees | 26,767 | |||
Trustees’ fees and expenses | 4,106 | |||
Other | 49,058 | |||
Total Expenses | 2,830,263 | |||
Less: rebate from Morgan Stanley affiliated cash sweep (Note 6) | (8,170 | ) | ||
Net Expenses | 2,822,093 | |||
Net Investment Income | 1,809,772 | |||
Realized and Unrealized Gain (Loss): | ||||
Realized Gain (Loss) on: | ||||
Investments | (10,083,551 | ) | ||
Investments in affiliates | (127,495 | ) | ||
Futures contracts | 137,069 | |||
Options written | 16,753 | |||
Swap contracts | (97,937 | ) | ||
Forward foreign currency contracts | (2,770 | ) | ||
Foreign currency translation | 2,654 | |||
Net Realized Loss | (10,155,277 | ) | ||
Change in Unrealized Appreciation/Depreciation on: | ||||
Investments | 48,757,795 | |||
Investments in affiliates | (186,941 | ) | ||
Futures contracts | 12,934 | |||
Options written | (9,843 | ) | ||
Swap contracts | 22,700 | |||
Net Change in Unrealized Appreciation/Depreciation | 48,596,645 | |||
Net Gain | 38,441,368 | |||
Net Increase | $ | 40,251,140 | ||
See Notes to Financial Statements
25
Morgan Stanley Balanced Fund
Financial Statements continued
Statements of Changes in Net Assets
FOR THE YEAR | FOR THE YEAR | |||||||
ENDED | ENDED | |||||||
JANUARY 31, 2010 | JANUARY 31, 2009 | |||||||
Increase (Decrease) in Net Assets: | ||||||||
Operations: | ||||||||
Net investment income | $ | 1,809,772 | $ | 5,045,458 | ||||
Net realized loss | (10,155,277 | ) | (20,578,294 | ) | ||||
Net change in unrealized appreciation/depreciation | 48,596,645 | (65,900,903 | ) | |||||
Net Increase (Decrease) | 40,251,140 | (81,433,739 | ) | |||||
Dividends and Distributions to Shareholders from: | ||||||||
Net investment income | ||||||||
Class A shares | (1,570,532 | ) | (2,636,621 | ) | ||||
Class B shares | (653,019 | ) | (1,786,930 | ) | ||||
Class C shares | (720,946 | ) | (1,557,010 | ) | ||||
Class I shares | (3,358 | ) | (11,869 | ) | ||||
Net realized gain | ||||||||
Class A shares | — | (1,773,758 | ) | |||||
Class B shares | — | (1,764,357 | ) | |||||
Class C shares | — | (1,486,425 | ) | |||||
Class I shares | — | (8,270 | ) | |||||
Total Dividends and Distributions | (2,947,855 | ) | (11,025,240 | ) | ||||
Net decrease from transactions in shares of beneficial interest | (42,974,430 | ) | (69,315,884 | ) | ||||
Net Decrease | (5,671,145 | ) | (161,774,863 | ) | ||||
Net Assets: | ||||||||
Beginning of period | 176,707,689 | 338,482,552 | ||||||
End of Period (Including accumulated undistributed net investment income of $84,167 and $998,004, respectively) | $ | 171,036,544 | $ | 176,707,689 | ||||
See Notes to Financial Statements
26
Morgan Stanley Balanced Fund
Notes to Financial Statements - January 31, 2010
1. Organization and Accounting Policies
Morgan Stanley Balanced 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 growth with reasonable current income. The Fund was organized as a Massachusetts business trust on November 23, 1994 and commenced operations on March 28, 1995. On July 28, 1997, the Fund converted to a multiple class share structure.
The Fund offers Class A shares, Class B shares, Class C shares and Class I shares. The four classes are substantially the same except that most Class A shares are subject to a sales charge imposed at the time of purchase and some Class A shares, and most Class B shares and Class C shares are subject to a contingent deferred sales charge imposed on shares redeemed within eighteen months, six years and one year, respectively. Class I shares are not subject to a sales charge. Additionally, Class A shares, Class B shares and Class C shares incur distribution expenses.
Morgan Stanley announced on October 19, 2009 that it has entered into a definitive agreement to sell substantially all of its retail asset management business to Invesco Ltd. (“Invesco”), a leading global investment management company. The Trustees of the Fund approved an Agreement and Plan of Reorganization (the “Plan”). Pursuant to the Plan, substantially all of the assets of the Fund would be combined with those of a newly organized mutual fund advised by an affiliate of Invesco Ltd. (the “New Fund”). Pursuant to the Plan, shareholders of the Fund would become shareholders of the New Fund, receiving shares of such New Fund equal to the value of their holdings in the Fund. The Plan is subject to the approval of the Fund’s shareholders at a special meeting of shareholders anticipated to be held during the second quarter of 2010.
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 ask 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 ask 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 ask 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) listed options are valued at the latest sale price on the exchange on which they are listed unless no sales of such options
27
Morgan Stanley Balanced Fund
Notes to Financial Statements - January 31, 2010 continued
have taken place that day, in which case they are valued at the mean between their latest bid and ask price; (6) futures are valued at the latest price published by the commodities exchange on which they trade; (7) credit default swaps are marked-to-market daily based upon quotations from market makers; (8) when market quotations are not readily available including circumstances under which Morgan Stanley Investment Advisors Inc. (the “Investment Adviser”) determines that the latest sale price, the bid price or the mean between the last reported bid and ask price do not reflect a security’s market value, portfolio securities are valued at their fair value as determined in good faith under procedures established by and under the general supervision of the Fund’s Trustees. Occasionally, developments affecting the closing prices of securities and other assets may occur between the times at which valuations of such securities are determined (that is, close of the foreign market on which the securities trade) and the close of business on the NYSE. If developments occur during such periods that are expected to materially affect the value of such securities, such valuations may be adjusted to reflect the estimated fair value of such securities as of the close of the NYSE, as determined in good faith by the Fund’s Trustees or by the Investment Adviser using a pricing service and/or procedures approved by the Trustees of the Fund; (9) certain portfolio securities may be valued by an outside pricing service approved by the Fund’s Trustees. The prices provided by a pricing service take into account broker dealer market price quotations for trading in similar groups of securities, security quality, maturity, coupon and other security characteristics as well as any developments related to the specific securities; (10) investments in open-end 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 (11) short-term debt securities having a maturity date of more than sixty days at time of purchase are valued on a mark-to-market basis until sixty days prior to maturity and thereafter at amortized cost based on their value on the 61st day. Short-term debt securities having a maturity date of sixty days or less at the time of purchase are valued at amortized cost, which approximates market value.
B. Accounting for Investments — Security transactions are accounted for on the trade date (date the order to buy or sell is executed). Realized gains and losses on security transactions are determined by the identified cost method. Dividend income and other distributions are recorded on the ex-dividend date. Discounts are accreted and premiums are amortized over the life of the respective securities and are included in interest income. Interest income is accrued daily as earned.
C. Multiple Class Allocations — Investment income, expenses (other than distribution fees), and realized and unrealized gains and losses are allocated to each class of shares based upon the relative net asset value on the date such items are recognized. Distribution fees are charged directly to the respective class.
D. Futures — A futures contract is an agreement between two parties to buy and sell financial instruments or contracts based on financial indices at a set price on a future date. Upon entering into such a contract, the Fund is required to pledge to the broker cash, U.S. Government securities or other liquid portfolio
28
Morgan Stanley Balanced Fund
Notes to Financial Statements - January 31, 2010 continued
securities equal to the minimum initial margin requirements of the applicable futures exchange. Pursuant to the contract, the Fund agrees to receive from or pay to the broker an amount of cash equal to the daily fluctuation in the value of the contract. Such receipts or payments known as variation margin are recorded by the Fund as unrealized gains and losses. Upon closing of the contract, the Fund realizes a gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed.
E. Options — When the Fund writes a call or put option, an amount equal to the premium received is included in the Fund’s Statement of Assets and Liabilities as a liability which is subsequently marked-to-market to reflect the current market value of the option written. If a written option either expires or the Fund enters into a closing purchase transaction, the Fund realizes a gain or loss without regard to any unrealized gain or loss on the underlying security and the liability related to such option is extinguished. If a written call option is exercised, the Fund realizes a gain or loss from the sale of the underlying security or currency and the proceeds from such sale are increased by the premium originally received. If a written put option is exercised, the amount of the premium originally received reduces the cost of the security which the Fund purchases upon exercise of the option. By writing a covered call option, the Fund, in exchange for the premium, foregoes the opportunity for capital appreciation above the exercise price, should the market price of the underlying security increase. By writing a put option, the Fund, in exchange for the premium, accepts the risk of having to purchase a security at an exercise price that is above the current market price.
When the Fund purchases a call or put option, the premium paid is recorded as an investment which is subsequently marked-to-market to reflect the current market value. If a purchased option expires, the Fund will realize a loss to the extent of the premium paid. If the Fund enters into a closing sale transaction, a gain or loss is realized for the difference between the proceeds from the sale and the cost of the option. If a put option is exercised, the cost of the security or currency sold upon exercise will be increased by the premium originally paid. If a call option is exercised, the cost of the security purchased upon exercise will be increased by the premium originally paid. The maximum exposure to loss for any purchased option is limited to the premium initially paid for the option.
F. Swaps — The Fund may enter into credit default swap contracts, a type of credit derivative, for hedging purposes or to gain exposure to a credit or index of credits in which the Fund may otherwise invest. A credit default swap is an agreement between two parties to exchange the credit risk of an issuer or index of issuers. A buyer of a credit default swap is said to buy protection by paying periodic fees in return for a contingent payment from the seller if the issuer has a credit event such as bankruptcy, a failure to pay outstanding obligations or deteriorating credit while the swap is outstanding. A seller of a credit default swap is said to sell protection and thus collects the periodic fees and profits if the credit of the issuer remains stable or improves while the swap is outstanding. The seller in a credit default swap contract would be
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Notes to Financial Statements - January 31, 2010 continued
required to pay an agreed-upon amount, to the buyer in the event of an adverse credit event of the issuer. This agreed-upon amount approximates the notional amount of the swap as disclosed in the table following the Portfolio of Investments and is estimated to be the maximum potential future payment that the seller could be required to make under the credit default swap contract. In the event of an adverse credit event, the seller generally does not have any contractual remedies against the issuer or any other third party. However, if a physical settlement is elected, the seller would receive the defaulted credit and, as a result, become a creditor of the issuer.
The current credit rating of each individual issuer is listed in the table following the Portfolio of Investments and serves as 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.
The Fund accrues for the periodic fees on credit default swaps on a daily basis as earned with the net amount accrued recorded within realized gains/losses on swap contracts on the Statement of Operations. Net unrealized gains are recorded as an asset or net unrealized losses are reported as a liability on the Statement of Assets and Liabilities. The change in value of the swap contracts is reported as unrealized gains or losses on the Statement of Operations. Payments received or made upon entering into a credit default swap contract, if any, are recorded as realized gains or losses on the Statement of Operations upon termination or maturity of the swap. Credit default swaps may involve greater risks than if a Fund had invested in the issuer directly. Credit default swaps are subject to general market risk, counterparty risk and credit risk.
The Fund may also enter into interest rate swaps and asset swaps (where parties combine the purchase or sale of a bond/note with an interest rate swap) primarily to preserve a return or spread on a particular investment or portion of its portfolio, as a duration management technique or to protect against any increase in the price of securities the Fund anticipates purchasing at a later date. These are contractual agreements to exchange periodic interest payment streams calculated on a predetermined notional principal amount. They generally involve one party paying a fixed interest rate and the other party paying a variable rate. The Fund will usually enter into them on a net basis, i.e, the two payment streams are netted out in a cash settlement on the payment date or date specified in the instrument, with the Fund receiving or paying, as the case may be, only the net amount of the two payments. The Fund accrues the net amount with respect to each swap on a daily basis. This net amount is recorded within realized gains/losses on swap contracts on the Statement of Operations. Risk may arise as a result of the potential inability of the counterparties to meet the terms of the contracts.
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Swap agreements are not entered into or traded on exchanges and there is no central clearing or guaranty function for swaps. Therefore, swaps are subject to the risk of default or non-performance by the counterparty. If there is a default by the counterparty to a swap agreement, the Fund will have contractual remedies pursuant to the agreements related to the transaction. Counterparties are required to pledge collateral daily (based on the valuation of each swap) on behalf of the Fund with a value approximately equal to the amount of any unrealized gain. Reciprocally, when the Fund has an unrealized loss on a swap contract, 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. For cash collateral received, the Fund pays a monthly fee to the counterparty based on the effective rate for Federal Funds.
G. Foreign Currency Translation and Forward Foreign Currency Contracts — The books and records of the Fund are maintained in U.S. dollars as follows: (1) the foreign currency market value of investment securities, other assets and liabilities and forward foreign currency contracts (“forward contracts”) are translated at the exchange rates prevailing at the end of the period; and (2) purchases, sales, income and expenses are translated at the exchange rates prevailing on the respective dates of such transactions. The resultant exchange gains and losses are recorded as realized and unrealized gains/losses on forward contracts and foreign currency translations. Pursuant to U.S. federal income tax regulations, certain foreign exchange gains/losses included in realized and unrealized gains/losses are included in or are a reduction of ordinary income for federal income tax purposes. The Fund does not isolate that portion of the results of operations arising as a result of changes in the foreign exchange rates from the changes in the market prices of the securities. Forward contracts are valued daily at the appropriate exchange rates. The resultant unrealized exchange gains and losses are recorded as unrealized foreign currency translation gains or losses. The Fund records realized gains or losses on delivery of the currency or at the time the forward contract is extinguished (compensated) by entering into a closing transaction prior to delivery.
H. Federal Income Tax Policy — It is the Fund’s policy to comply with the requirements of Subchapter M of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of its taxable income to its shareholders. Therefore, no federal income tax provision is required. The Fund files tax returns with the U.S. Internal Revenue Service, New York State and New York City. The Fund recognizes the tax effects of a tax position taken or expected to be taken in a tax return only if it is more likely than not to be sustained based solely on its technical merits as of the reporting date. The more-likely-than-not threshold must continue to be met in each reporting period to support continued recognition of the benefit. The difference between the tax benefit recognized in the financial statements for a tax position taken and the tax benefit claimed in the income tax return is referred to as an unrecognized tax benefit. There are no unrecognized tax benefits in the accompanying financial statements. If applicable, the Fund recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in other expenses in
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the Statement of Operations. Each of the tax years filed in the four-year period ended January 31, 2010 remains subject to examination by taxing authorities.
I. Dividends and Distributions to Shareholders — Dividends and distributions to shareholders are recorded on the ex-dividend date.
J. 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.
K. Subsequent Events — The Fund considers events or transactions that occur after the date of the Statement of Assets and Liabilities but before the financial statements are issued to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure. Subsequent events have been evaluated through the date of issuance of these financial statements.
2. Fair Valuation Measurements
Fair value is defined as the price that the Fund would receive to sell an investment or pay to transfer a liability in a timely transaction with an independent buyer in the principal market, or in the absence of a principal market the most advantageous market for the investment or liability. GAAP utilizes a three-tier hierarchy to distinguish between (1) inputs that reflect the assumptions market participants would use in pricing an asset or liability developed based on market data obtained from sources independent of the reporting entity (observable inputs) and (2) inputs that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing an asset or liability developed based on the best information available in the circumstances (unobservable inputs) and to establish classification of fair value measurements for disclosure purposes. Various inputs are used in determining the value of the Fund’s investments. The inputs are summarized in the three broad levels listed below.
• | Level 1 — unadjusted quoted prices in active markets for identical investments | |
• | Level 2 — other significant observable inputs (including quoted prices for similar investments, interest rates, prepayment speeds, credit risk, etc.) | |
• | Level 3 — significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments) |
The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities and the determination of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to each security.
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The following is the summary of the inputs used as of January 31, 2010 in valuing the Fund’s investments carried at fair value:
FAIR VALUE MEASUREMENTS AT JANUARY 31, 2010 USING | ||||||||||||||||
UNADJUSTED | OTHER | |||||||||||||||
QUOTED PRICES IN | SIGNIFICANT | SIGNIFICANT | ||||||||||||||
ACTIVE MARKET FOR | OBSERVABLE | UNOBSERVABLE | ||||||||||||||
IDENTICAL INVESTMENTS | INPUTS | INPUTS | ||||||||||||||
INVESTMENT TYPE | TOTAL | (LEVEL 1) | (LEVEL 2) | (LEVEL 3) | ||||||||||||
Assets: | ||||||||||||||||
Common Stocks | ||||||||||||||||
Aerospace & Defense | $ | 608,335 | $ | 608,335 | — | — | ||||||||||
Air Freight & Logistics | 901,025 | 901,025 | — | — | ||||||||||||
Automobiles | 1,216,739 | 1,216,739 | — | — | ||||||||||||
Beverages | 939,610 | 939,610 | — | — | ||||||||||||
Biotechnology | 493,766 | 493,766 | — | — | ||||||||||||
Capital Markets | 2,597,954 | 2,597,954 | — | — | ||||||||||||
Casino Gaming | 0 | — | — | $ | 0 | |||||||||||
Chemicals | 1,349,082 | 1,349,082 | — | — | ||||||||||||
Commercial Banks | 6,796,109 | 6,796,109 | — | — | ||||||||||||
Commercial Services & Supplies | 1,220,912 | 1,220,912 | — | — | ||||||||||||
Communications Equipment | 1,767,940 | 1,767,940 | — | — | ||||||||||||
Computers & Peripherals | 3,046,774 | 3,046,774 | — | — | ||||||||||||
Diversified Financial Services | 8,997,375 | 8,997,375 | — | — | ||||||||||||
Diversified Telecommunication Services | 1,167,827 | 1,167,827 | — | — | ||||||||||||
Electric Utilities | 5,336,720 | 5,336,720 | — | — | ||||||||||||
Electronic Equipment, Instruments & Components | 1,182,866 | 1,182,866 | — | — | ||||||||||||
Energy Equipment & Services | 2,800,005 | 2,800,005 | — | — | ||||||||||||
Food & Staples Retailing | 5,089,120 | 5,089,120 | — | — | ||||||||||||
Food Products | 3,484,554 | 3,484,554 | — | — | ||||||||||||
Health Care Equipment & Supplies | 2,670,060 | 2,670,060 | — | — | ||||||||||||
Health Care Providers & Services | 2,113,659 | 2,113,659 | — | — | ||||||||||||
Household Durables | 1,846,923 | 1,846,923 | — | — | ||||||||||||
Industrial Conglomerates | 6,648,726 | 6,648,726 | — | — | ||||||||||||
Information Technology Services | 477,453 | 477,453 | — | — | ||||||||||||
Insurance | 6,384,139 | 6,384,139 | — | — | ||||||||||||
Internet Software & Services | 3,468,554 | 3,468,554 | — | — | ||||||||||||
Machinery | 2,495,479 | 2,495,479 | — | — | ||||||||||||
Media | 7,942,398 | 7,942,398 | — | — | ||||||||||||
Metals & Mining | 1,538,466 | 1,538,466 | — | — | ||||||||||||
Oil, Gas & Consumable Fuels | 13,651,935 | 13,651,935 | — | — | ||||||||||||
Personal Products | 1,264,156 | 1,264,156 | — | — | ||||||||||||
Pharmaceuticals | 10,212,120 | 10,212,120 | — | — | ||||||||||||
Professional Services | 1,364,578 | 1,364,578 | — | — | ||||||||||||
Semiconductors & Semiconductor Equipment | 2,209,014 | 2,209,014 | — | — | ||||||||||||
Software | 290,879 | 290,879 | — | — |
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Notes to Financial Statements - January 31, 2010 continued
FAIR VALUE MEASUREMENTS AT JANUARY 31, 2010 USING | ||||||||||||||||
UNADJUSTED | OTHER | |||||||||||||||
QUOTED PRICES IN | SIGNIFICANT | SIGNIFICANT | ||||||||||||||
ACTIVE MARKET FOR | OBSERVABLE | UNOBSERVABLE | ||||||||||||||
IDENTICAL INVESTMENTS | INPUTS | INPUTS | ||||||||||||||
INVESTMENT TYPE | TOTAL | (LEVEL 1) | (LEVEL 2) | (LEVEL 3) | ||||||||||||
Specialty Retail | $ | 2,899,026 | $ | 2,899,026 | — | — | ||||||||||
Wireless Telecommunication Services | 1,525,806 | 1,525,806 | — | — | ||||||||||||
Total Common Stocks | 118,000,084 | 118,000,084 | — | $ | 0 | |||||||||||
Corporate Bonds | 18,225,788 | — | $ | 18,225,788 | — | |||||||||||
Foreign Government Obligations | 540,655 | — | 540,655 | — | ||||||||||||
U.S. Government Agencies & Obligations | 29,277,668 | — | 29,277,668 | — | ||||||||||||
Asset-Backed Securities | 250,091 | — | 250,091 | — | ||||||||||||
U.S. Government Agencies – Mortgage-Backed Securities | 320,706 | — | 320,706 | — | ||||||||||||
Convertible Preferred Stock | 450,000 | — | 450,000 | — | ||||||||||||
Short-Term Investments | ||||||||||||||||
U.S. Government Obligation | 69,972 | — | 69,972 | — | ||||||||||||
Investment Company | 4,807,558 | 4,807,558 | — | — | ||||||||||||
Total Short-Term Investments | 4,877,530 | 4,807,558 | 69,972 | — | ||||||||||||
Credit Default Swaps | 1,109 | — | 1,109 | — | ||||||||||||
Total | $ | 171,943,631 | $ | 122,807,642 | $ | 49,135,989 | $ | 0 | ||||||||
Liabilities: | ||||||||||||||||
Futures | $ | (36,651 | ) | $ | (36,651 | ) | — | — | ||||||||
Following is a reconciliation of investments in which significant unobservable inputs (level 3) were used in determining value:
INVESTMENTS IN | ||||
SECURITIES | ||||
Beginning Balance | $ | 176,041 | ||
Net purchases (sales) | (266,885 | ) | ||
Amortization of discount | (11,826 | ) | ||
Transfers in and/or out | — | |||
Change in unrealized appreciation/depreciation | 221,458 | |||
Realized gains (losses) | (118,788 | ) | ||
Ending Balance | — | |||
Net change in unrealized appreciation/depreciation from investments still held as of January 31, 2010 | — | |||
As of January 31, 2010, the Fund held one level 3 security with a value of $0 for the entire period.
3. Derivative Financial Instruments
A derivative financial instrument in very general terms refers to a security whose value is “derived” from the value of an underlying asset, reference rate or index.
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The Fund may use derivative instruments for a variety of reasons, such as to attempt to protect the Fund against possible changes in the market value of its portfolio or to manage the Fund’s foreign currency exposure or to generate potential gain. All of the Fund’s portfolio 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 accordingly, except when taking delivery of a security underlying a contract. In these instances, the recognition of gain or loss is postponed until the disposal of the security underlying the contract. Risk may arise as a result of the potential inability of the counterparties to meet the terms of their contracts.
Summarized below are specific types of derivative financial instruments used by the Fund.
Forward Foreign Currency Contracts The Fund may enter into forward contracts for many purposes, including to facilitate settlement of foreign currency denominated portfolio transactions or to manage foreign currency exposure associated with foreign currency denominated securities. Forward contracts involve elements of market risk in excess of the amount reflected in the Statement of Assets and Liabilities. The Fund bears the risk of an unfavorable change in the foreign exchange rates underlying the forward contracts. Risks may also arise upon entering into these contracts from the potential inability of the counterparties to meet the terms of their contracts.
During the year ended January 31, 2010, the value of forward foreign currency contracts opened and closed were $30,595 and $578,527, respectively.
Futures The Fund may purchase and sell interest rate, swap and Eurodollar futures to facilitate trading; increase or decrease Fund’s market exposure, seek higher investment returns, or to protect against a decline in the value of the Fund’s securities or an increase in prices of securities that may be purchased. These futures contracts involve elements of market risk in excess of the amount reflected in the Statement of Assets and Liabilities. The Fund bears the risk of an unfavorable change in the value of the underlying securities. Risks may also arise upon entering into these contracts from the potential inability of the counterparties to meet the terms of their contracts.
Transactions in futures contracts for the year ended January 31, 2010, were as follows:
NUMBER OF | ||||
CONTRACTS | ||||
Futures, outstanding at beginning of the period | 38 | |||
Futures opened | 836 | |||
Futures closed | (818 | ) | ||
Futures, outstanding at end of the period | 56 | |||
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Options For hedging and investment purposes, the Fund may engage in transactions in listed and over-the-counter options. Risks may arise from an imperfect correlation between the change in the market value of the securities held by the Fund and the price of options relating to the securities purchased or sold by the Fund and from the possible lack of a liquid secondary market for an option.
Transactions in options for the year ended January 31, 2010, were as follows:
NUMBER OF | ||||||||
CONTRACTS | COST | |||||||
Options purchased, outstanding at beginning of period | 103 | $ | 79,863 | |||||
Options purchased | — | — | ||||||
Options closed | (103 | ) | (79,863 | ) | ||||
Options purchased, outstanding at end of period | — | — | ||||||
NUMBER OF | ||||||||
CONTRACTS | PREMIUM | |||||||
Options written, outstanding at beginning of period | 103 | $ | 24,224 | |||||
Options written | 54 | 5,257 | ||||||
Options closed | (157 | ) | (29,481 | ) | ||||
Options written, outstanding at end of period | — | — | ||||||
Swaps The Fund may enter into interest rate swaps and asset swaps (where parties combine the purchase or sale of a bond/note with an interest rate swap) (“swaps”) and may purchase or sell interest rate caps, floors and collars. The Fund expects to enter into these transactions primarily to manage interest rate risk, hedge portfolio positions and preserve a return or spread on a particular investment or portion of its portfolio. The Fund may also enter into these transactions to protect against any increase in the price of securities the Fund anticipates purchasing at a later date. Swap transactions are subject to market risk, risk of default by the other party to the transaction, risk of imperfect correlation and manager risk. Such risks may exceed the related amounts shown in the Statement of Assets and Liabilities.
The Fund may enter into credit default swaps for hedging purposes, to add leverage to its portfolio or to gain exposure to a credit in which the Fund may otherwise invest. Credit default swaps may involve greater risks than if the Fund had invested in the issuer directly. Credit default swaps are subject to general market risk, counterparty risk and credit risk. If the Fund is a buyer and no credit event occurs, it will lose its investment. In addition, if the Fund is a seller and a credit event occurs, the value of the referenced obligation received by the Fund coupled with the periodic payments previously received may be less than the maximum payout amount it pays to the buyer, resulting in a loss to the Fund.
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Notes to Financial Statements - January 31, 2010 continued
Transactions in swap contracts for the year ended January 31, 2010, were as follows:
NOTIONAL | NOTIONAL | |||||||
AMOUNT | AMOUNT | |||||||
(000’s) | (000’s) | |||||||
Swaps, outstanding at beginning of period | $ | 65,503 | EUR | 40,226 | ||||
Swaps opened | 4,045 | — | ||||||
Swaps closed | (69,508 | ) | (40,226 | ) | ||||
Swaps, outstanding at end of period | $ | 40 | — | |||||
The following table sets forth the fair value of the Fund’s derivative contracts by primary risk exposure as of January 31, 2010.
ASSET DERIVATIVES | LIABILITY DERIVATIVES | |||||||||||
PRIMARY RISK EXPOSURE | BALANCE SHEET LOCATION | FAIR VALUE | BALANCE SHEET LOCATION | FAIR VALUE | ||||||||
Interest Rate Risk | Variation margin | — | Variation margin | $ | (36,651 | )† | ||||||
Credit Risk | Unrealized appreciation on open swap contracts | $ | 1,109 | Unrealized depreciation on open swap contracts | — | |||||||
$ | 1,109 | $ | (36,651 | ) | ||||||||
† | Includes cumulative appreciation/depreciation of futures contracts as reported in the Portfolio of Investments. Only current day’s 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 gains (losses) by type of derivative contracts for the year ended January 31, 2010.
AMOUNT OF REALIZED GAIN (LOSS) ON DERIVATIVE CONTRACTS | ||||||||||||||||||||
FORWARD | ||||||||||||||||||||
FOREIGN | ||||||||||||||||||||
PRIMARY RISK EXPOSURE | FUTURES | OPTIONS PURCHASED†† | OPTIONS WRITTEN | CURRENCY | SWAPS | |||||||||||||||
Interest Rate Risk | $ | 137,069 | $ | (76,274 | ) | $ | 16,753 | — | $ | (126,115 | ) | |||||||||
Credit Risk | — | — | — | — | 28,178 | |||||||||||||||
Foreign Currency Risk | — | — | — | $ | (2,770 | ) | — | |||||||||||||
Total | $ | 137,069 | $ | (76,274 | ) | $ | 16,753 | $ | (2,770 | ) | $ | (97,937 | ) | |||||||
CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION ON DERIVATIVE CONTRACTS | ||||||||||||||||
PRIMARY RISK EXPOSURE | FUTURES | OPTIONS PURCHASED†† | OPTIONS WRITTEN | SWAPS | ||||||||||||
Interest Rate Risk | $ | 12,934 | $ | 30,294 | $ | (9,843 | ) | $ | 64,624 | |||||||
Credit Risk | — | — | — | (41,924 | ) | |||||||||||
Total | $ | 12,934 | $ | 30,294 | $ | (9,843 | ) | $ | 22,700 | |||||||
†† | Amounts are included in Investments in the Statement of Operations. |
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Notes to Financial Statements - January 31, 2010 continued
4. Investment Advisory/Administration Agreements
Pursuant to an Investment Advisory Agreement with the Investment Adviser, the Fund pays an advisory fee, accrued daily and payable monthly, by applying the following annual rates to the net assets of the Fund determined as of the close of each business day: 0.52% to the portion of the daily net assets not exceeding $500 million and 0.495% to the portion of the daily net assets exceeding $500 million.
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.
Under an agreement between the Administrator and State Street Bank and Trust Company (“State Street”), State Street provides certain administrative services to the Fund. For such services, the Administrator pays State Street a portion of the fee the Administrator receives from the Fund.
5. Plan of Distribution
Shares of the Fund are distributed by Morgan Stanley Distributors Inc. (the “Distributor”), an affiliate of the Investment Adviser and Administrator. The Fund has adopted a Plan of Distribution (the “Plan”) pursuant to Rule 12b-1 under the Act. The Plan provides that the Fund will pay the Distributor a fee which is accrued daily and paid monthly at the following annual rates: (i) Class A — up to 0.25% of the average daily net assets of Class A shares; (ii) Class B — up to 1.0% of the average daily net assets of Class B shares; and (iii) Class C — up to 1.0% of the average daily net assets of Class C shares.
In the case of Class B shares, provided that the Plan continues in effect, any cumulative expenses incurred by the Distributor but not yet recovered may be recovered through the payment of future distribution fees from the Fund pursuant to the Plan and contingent deferred sales charges paid by investors upon redemption of Class B shares. Although there is no legal obligation for the Fund to pay expenses incurred in excess of payments made to the Distributor under the Plan and the proceeds of contingent deferred sales charges paid by investors upon redemption of shares, if for any reason the Plan is terminated, the Trustees will consider at that time the manner in which to treat such expenses. The Distributor has advised the Fund that such excess amounts totaled $21,144,676 at January 31, 2010.
In the case of Class A shares and Class C shares, expenses incurred pursuant to the Plan in any calendar year in excess of 0.25% or 1.0% of the average daily net assets of Class A or Class C, respectively, will not be reimbursed by the Fund through payments in any subsequent year, except that expenses representing a gross sales credit to Morgan Stanley Financial Advisors and other authorized financial representatives at the time of sale may be reimbursed in the subsequent calendar year. For the year ended January 31, 2010, the distribution fee was accrued for Class A shares and Class C shares at the annual rate of 0.25% and 1.0%, respectively.
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Notes to Financial Statements - January 31, 2010 continued
The Distributor has informed the Fund that for the year ended January 31, 2010, it received contingent deferred sales charges from certain redemptions of the Fund’s Class A shares, Class B shares and Class C shares of $803, $54,825 and $3,300, respectively and received $11,147 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.
6. Security Transactions and Transactions with Affiliates
The Fund invests in Morgan Stanley Institutional Liquidity Funds – Money Market Portfolio – Institutional Class, an open-end management investment company managed by an affiliate of the Investment Adviser. Investment advisory fees paid by the Fund are reduced by an amount equal to the advisory and administrative service fees paid by Morgan Stanley Institutional Liquidity Funds – Money Market Portfolio – Institutional Class with respect to assets invested by the Fund in Morgan Stanley Institutional Liquidity Funds – Money Market Portfolio – Institutional Class. For the year ended January 31, 2010, advisory fees paid were reduced by $8,170 relating to the Fund’s investment in Morgan Stanley Institutional Liquidity Funds – Money Market Portfolio – Institutional Class. Income distributions earned by the Fund are included in “interest and dividends from affiliates” in the Statement of Operations and totaled $15,659 for the year ended January 31, 2010. During the year ended January 31, 2010, the cost of purchases and sales of investments in Morgan Stanley Institutional Liquidity Funds – Money Market Portfolio – Institutional Class aggregated $62,596,111 and $68,815,933, respectively.
The cost of purchases and proceeds from sales/maturities/prepayments of portfolio securities, excluding short-term investments, for the year ended January 31, 2010 aggregated $112,878,955 and $149,692,013, respectively. Included in the aforementioned are purchases and sales/maturities/prepayments of U.S. Government securities in the amount of $47,253,500 and $48,016,537, respectively. The Fund had purchases and sales with other Morgan Stanley funds of $90,456 and $131,681, respectively, including a realized loss of $14,650.
The Fund had the following transactions with Mitsubishi UFJ Financial Group, Inc. and Citigroup, Inc., both affiliates of the Investment Adviser, Administrator and Distributor for the year ended January 31, 2010:
NET REALIZED | ||||||||||||||||||||
PURCHASES | SALES | GAINS(LOSS) | INCOME | VALUE | ||||||||||||||||
Citigroup, Inc. (June 1, 2009@@ – January 31, 2010) | $ | 2,940,409 | $ | 37,365 | $ | 3,941 | $ | 41,394 | $ | 3,123,493 | ||||||||||
Mitsubishi UFJ Financial Group, Inc. | — | 265,409 | (131,436 | ) | 1,997 | — | ||||||||||||||
Total | $ | 2,940,409 | $ | 302,774 | $ | (127,495 | ) | $ | 43,391 | $ | 3,123,493 | |||||||||
@@ | Date on which Citigroup, Inc. and Citigroup Funding, Inc. became affiliates. |
39
Morgan Stanley Balanced Fund
Notes to Financial Statements - January 31, 2010 continued
For the year ended January 31, 2010, the Fund incurred brokerage commissions of $5,973 with Morgan Stanley & Co., Inc. an affiliate of the Investment Adviser, Administrator and Distributor, for portfolio transactions executed on behalf of the Fund.
For the period June 1, 2009 (the date on which Citigroup, Inc. became an affiliate of the Investment Adviser, Administrator, and Distributor) through January 31, 2010, the Fund incurred brokerage commissions of $1,686 with Citigroup, Inc. for portfolio transactions executed on behalf of the Fund.
Morgan Stanley Trust, an affiliate of the Investment Adviser, Administrator and Distributor, is the Fund’s transfer agent.
The Fund has an unfunded Deferred Compensation Plan (the “Compensation Plan”) which allows each independent Trustee to defer payment of all, or a portion, of the fees he or she receives for serving on the Board of Trustees. Each eligible Trustee generally may elect to have the deferred amounts credited with a return equal to the total return on one or more of the Morgan Stanley funds that are offered as investment options under the Compensation Plan. Appreciation/depreciation and distributions received from these investments are recorded with an offsetting increase/decrease in the deferred compensation obligation and do not affect the net asset value of the Fund.
40
Morgan Stanley Balanced Fund
Notes to Financial Statements - January 31, 2010 continued
7. Shares of Beneficial Interest
Transactions in shares of beneficial interest were as follows:
FOR THE YEAR | FOR THE YEAR | |||||||||||||||
ENDED | ENDED | |||||||||||||||
JANUARY 31, 2010 | JANUARY 31, 2009 | |||||||||||||||
SHARES | AMOUNT | SHARES | AMOUNT | |||||||||||||
CLASS A SHARES | ||||||||||||||||
Sold | 959,087 | $ | 10,246,614 | 895,581 | $ | 10,524,475 | ||||||||||
Conversion from Class B | 162,126 | 1,746,014 | 248,091 | 3,099,433 | ||||||||||||
Reinvestment of dividends and distributions | 147,522 | 1,516,567 | 352,613 | 4,295,287 | ||||||||||||
Redeemed | (1,889,433 | ) | (19,884,143 | ) | (2,495,647 | ) | (29,739,132 | ) | ||||||||
Net decrease – Class A | (620,698 | ) | (6,374,948 | ) | (999,362 | ) | (11,819,937 | ) | ||||||||
CLASS B SHARES | ||||||||||||||||
Sold | 93,585 | 967,454 | 285,153 | 3,584,727 | ||||||||||||
Conversion to Class A | (161,899 | ) | (1,746,014 | ) | (247,853 | ) | (3,099,433 | ) | ||||||||
Reinvestment of dividends and distributions | 61,655 | 615,910 | 278,392 | 3,427,319 | ||||||||||||
Redeemed | (2,343,828 | ) | (24,606,684 | ) | (3,556,143 | ) | (42,492,441 | ) | ||||||||
Net decrease – Class B | (2,350,487 | ) | (24,769,334 | ) | (3,240,451 | ) | (38,579,828 | ) | ||||||||
CLASS C SHARES | ||||||||||||||||
Sold | 115,755 | 1,209,724 | 145,830 | 1,708,340 | ||||||||||||
Reinvestment of dividends and distributions | 69,816 | 702,940 | 244,229 | 2,995,721 | ||||||||||||
Redeemed | (1,329,489 | ) | (13,744,438 | ) | (1,979,669 | ) | (23,410,723 | ) | ||||||||
Net decrease – Class C | (1,143,918 | ) | (11,831,774 | ) | (1,589,610 | ) | (18,706,662 | ) | ||||||||
CLASS I SHARES | ||||||||||||||||
Sold | 3,413 | 39,790 | 9,277 | 118,058 | ||||||||||||
Reinvestment of dividends and distributions | 302 | 3,126 | 1,577 | 19,460 | ||||||||||||
Redeemed | (3,891 | ) | (41,290 | ) | (31,260 | ) | (346,975 | ) | ||||||||
Net increase (decrease) – Class I | (176 | ) | 1,626 | (20,406 | ) | (209,457 | ) | |||||||||
Net decrease in Fund | (4,115,279 | ) | $ | (42,974,430 | ) | (5,849,829 | ) | $ | (69,315,884 | ) | ||||||
8. Purposes of and Risks Relating to Certain Financial Instruments
The Fund may invest in mortgage securities, including securities issued by Federal National Mortgage Assoc. (“FNMA”) and Federal Home Loan Mortgage Corp. (“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 subprime mortgages. Subprime mortgages refer to loans made to
41
Morgan Stanley Balanced Fund
Notes to Financial Statements - January 31, 2010 continued
borrowers with weakened credit histories or 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 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. Expense Offset
The expense offset represents a reduction of the fees and expenses for interest earned on cash balances maintained by the Fund with the transfer agent. For the year ended January 31, 2010, the Fund did not have an expense offset.
10. 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 GAAP. These “book/tax” differences are either considered temporary or permanent in nature. To the extent these differences are permanent in nature, such amounts are reclassified within the capital accounts based on their federal tax-basis treatment; temporary differences do not require reclassification. Dividends and distributions which exceed net investment income and net realized capital gains for tax purposes are reported as distributions of paid-in-capital.
The tax character of distributions paid was as follows:
FOR THE YEAR | FOR THE YEAR | |||||||
ENDED | ENDED | |||||||
JANUARY 31, 2010 | JANUARY 31, 2009 | |||||||
Ordinary income | $ | 2,947,855 | $ | 5,992,430 | ||||
Long-term capital gains | — | 5,032,810 | ||||||
Total distributions | $ | 2,947,855 | $ | 11,025,240 | ||||
As of January 31, 2010, the tax-basis components of accumulated losses were as follows:
Undistributed ordinary income | $ | 218,531 | ||||||
Undistributed long-term gains | — | |||||||
Net accumulated earnings | 218,531 | |||||||
Capital loss carryforward | (33,243,189 | ) | ||||||
Temporary differences | (649 | ) | ||||||
Net unrealized depreciation | (4,444,403 | ) | ||||||
Total accumulated losses | $ | (37,469,710 | ) | |||||
42
Morgan Stanley Balanced Fund
Notes to Financial Statements - January 31, 2010 continued
As of January 31, 2010, the Fund had a net capital loss carryforward of $33,243,189, to offset future capital gains to the extent provided by regulations, which will expire according to the following schedule.
AMOUNT | EXPIRATION | |||||||
$ | 12,105,892 | January 31, 2017 | ||||||
21,137,297 | January 31, 2018 |
As of January 31, 2010, the Fund had temporary book/tax differences primarily attributable to mark-to-market of open futures and options contracts, capital loss deferrals on wash sales and straddles and book amortization of premiums on debt securities.
Permanent differences, primarily due to losses on paydowns, gains on swaps and tax adjustments on debt securities sold by the Fund, resulted in the following reclassifications among the Fund’s components of net assets at January 31, 2010:
ACCUMULATED | ||||||||||
UNDISTRIBUTED | ACCUMULATED | |||||||||
NET INVESTMENT | NET REALIZED | |||||||||
INCOME | LOSS | PAID-IN-CAPITAL | ||||||||
$ | 224,246 | $ | (224,246 | ) | — | |||||
11. New Accounting Pronouncement
On January 21, 2010, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2010-06. The ASU amends Accounting Standards Codification 820 to add new requirements for disclosures about transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements. It also clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques in Level 2 and Level 3 fair value measurements. The application of ASU 2010-06 is required for fiscal years and interim periods beginning after December 15, 2009, except for disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements, which are required for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. At this time, the Fund’s management is evaluating the implications of ASU 2010-06 on the Fund’s financial statements.
43
Morgan Stanley Balanced Fund
Financial Highlights
Selected ratios and per share data for a share of beneficial interest outstanding throughout each period:
FOR THE YEAR ENDED JANUARY 31, | |||||||||||||||||||||||||
2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||||||||
Class A Shares | |||||||||||||||||||||||||
Selected Per Share Data: | |||||||||||||||||||||||||
Net asset value, beginning of period | $9.49 | $13.83 | $14.89 | $14.57 | $13.76 | ||||||||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||
Net investment income(1) | 0.16 | 0.29 | 0.32 | 0.30 | 0.24 | ||||||||||||||||||||
Net realized and unrealized gain (loss) | 2.37 | (4.06 | ) | (0.35 | ) | 1.20 | 1.21 | ||||||||||||||||||
Total income (loss) from investment operations | 2.53 | (3.77 | ) | (0.03 | ) | 1.50 | 1.45 | ||||||||||||||||||
Less dividends and distributions from: | |||||||||||||||||||||||||
Net investment income | (0.23 | ) | (0.34 | ) | (0.35 | ) | (0.29 | ) | (0.27 | ) | |||||||||||||||
Net realized gain | — | (0.23 | ) | (0.68 | ) | (0.89 | ) | (0.37 | ) | ||||||||||||||||
Total dividends and distributions | (0.23 | ) | (0.57 | ) | (1.03 | ) | (1.18 | ) | (0.64 | ) | |||||||||||||||
Net asset value, end of period | $11.79 | $9.49 | $13.83 | $14.89 | $14.57 | ||||||||||||||||||||
Total Return(2) | 26.99 | % | (28.15 | ) | % | (0.42 | ) | % | 10.54 | % | 10.99 | % | |||||||||||||
Ratios to Average Net Assets(3): | |||||||||||||||||||||||||
Total expenses (before expense offset) | 1.20%(4 | ) | 1.09%(4 | ) | 1.04%(4 | ) | 1.14 | % | 1.13 | % | |||||||||||||||
Net investment income | 1.47%(4 | ) | 2.39%(4 | ) | 2.10%(4 | ) | 2.06 | % | 1.70 | % | |||||||||||||||
Rebate from Morgan Stanley affiliate | 0.00%(5 | ) | 0.01 | % | 0.00%(5 | ) | — | — | |||||||||||||||||
Supplemental Data: | |||||||||||||||||||||||||
Net assets, end of period, in thousands | $78,855 | $69,354 | $114,929 | $125,180 | $33,217 | ||||||||||||||||||||
Portfolio turnover rate | 68 | % | 62 | % | 64 | % | 56 | % | 52 | % |
(1) | The per share amounts were computed using an average number of shares outstanding during the period. | |
(2) | Does not reflect the deduction of sales charge. Calculated based on the net asset value as of the last business day of the period. | |
(3) | Reflects overall Fund ratios for investment income and non-class specific expenses. | |
(4) | The ratios reflect the rebate of certain Fund expenses in connection with investments in a Morgan Stanley affiliate during the period. The effect of the rebate on the ratios is disclosed in the above table as “Rebate from Morgan Stanley affiliate”. | |
(5) | Amount is less than 0.005%. |
See Notes to Financial Statements
44
Morgan Stanley Balanced Fund
Financial Highlights continued
FOR THE YEAR ENDED JANUARY 31, | |||||||||||||||||||||||||
2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||||||||
Class B Shares | |||||||||||||||||||||||||
Selected Per Share Data: | |||||||||||||||||||||||||
Net asset value, beginning of period | $9.50 | $13.84 | $14.90 | $14.56 | $13.75 | ||||||||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||
Net investment income(1) | 0.08 | 0.20 | 0.20 | 0.19 | 0.14 | ||||||||||||||||||||
Net realized and unrealized gain (loss) | 2.37 | (4.07 | ) | (0.35 | ) | 1.22 | 1.20 | ||||||||||||||||||
Total income (loss) from investment operations | 2.45 | (3.87 | ) | (0.15 | ) | 1.41 | 1.34 | ||||||||||||||||||
Less dividends and distributions from: | |||||||||||||||||||||||||
Net investment income | (0.14 | ) | (0.24 | ) | (0.23 | ) | (0.18 | ) | (0.16 | ) | |||||||||||||||
Net realized gain | — | (0.23 | ) | (0.68 | ) | (0.89 | ) | (0.37 | ) | ||||||||||||||||
Total dividends and distributions | (0.14 | ) | (0.47 | ) | (0.91 | ) | (1.07 | ) | (0.53 | ) | |||||||||||||||
Net asset value, end of period | $11.81 | $9.50 | $13.84 | $14.90 | $14.56 | ||||||||||||||||||||
Total Return(2) | 26.06 | % | (28.71 | ) | % | (1.20 | ) | % | 9.80 | % | 10.12 | % | |||||||||||||
Ratios to Average Net Assets(3): | |||||||||||||||||||||||||
Total expenses (before expense offset) | 1.95%(4 | ) | 1.84%(4 | ) | 1.79%(4 | ) | 1.89 | % | 1.89 | % | |||||||||||||||
Net investment income | 0.72%(4 | ) | 1.64%(4 | ) | 1.35%(4 | ) | 1.31 | % | 0.94 | % | |||||||||||||||
Rebate from Morgan Stanley affiliate | 0.00%(5 | ) | 0.01 | % | 0.00%(5 | ) | — | — | |||||||||||||||||
Supplemental Data: | |||||||||||||||||||||||||
Net assets, end of period, in thousands | $39,746 | $54,297 | $123,951 | $185,534 | $84,568 | ||||||||||||||||||||
Portfolio turnover rate | 68 | % | 62 | % | 64 | % | 56 | % | 52 | % |
(1) | The per share amounts were computed using an average number of shares outstanding during the period. | |
(2) | Does not reflect the deduction of sales charge. Calculated based on the net asset value as of the last business day of the period. | |
(3) | Reflects overall Fund ratios for investment income and non-class specific expenses. | |
(4) | The ratios reflect the rebate of certain Fund expenses in connection with investments in a Morgan Stanley affiliate during the period. The effect of the rebate on the ratios is disclosed in the above table as “Rebate from Morgan Stanley affiliate”. | |
(5) | Amount is less than 0.005%. |
See Notes to Financial Statements
45
Morgan Stanley Balanced Fund
Financial Highlights continued
FOR THE YEAR ENDED JANUARY 31, | |||||||||||||||||||||||||
2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||||||||
Class C Shares | |||||||||||||||||||||||||
Selected Per Share Data: | |||||||||||||||||||||||||
Net asset value, beginning of period | $9.50 | $13.84 | $14.90 | $14.57 | $13.76 | ||||||||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||
Net investment income(1) | 0.08 | 0.20 | 0.20 | 0.19 | 0.14 | ||||||||||||||||||||
Net realized and unrealized gain (loss) | 2.37 | (4.07 | ) | (0.34 | ) | 1.21 | 1.20 | ||||||||||||||||||
Total income (loss) from investment operations | 2.45 | (3.87 | ) | (0.14 | ) | 1.40 | 1.34 | ||||||||||||||||||
Less dividends and distributions from: | |||||||||||||||||||||||||
Net investment income | (0.15 | ) | (0.24 | ) | (0.24 | ) | (0.18 | ) | (0.16 | ) | |||||||||||||||
Net realized gain | — | (0.23 | ) | (0.68 | ) | (0.89 | ) | (0.37 | ) | ||||||||||||||||
Total dividends and distributions | (0.15 | ) | (0.47 | ) | (0.92 | ) | (1.07 | ) | (0.53 | ) | |||||||||||||||
Net asset value, end of period | $11.80 | $9.50 | $13.84 | $14.90 | $14.57 | ||||||||||||||||||||
Total Return(2) | 26.00 | % | (28.70 | ) | % | (1.19 | ) | % | 9.75 | % | 10.15 | % | |||||||||||||
Ratios to Average Net Assets(3): | |||||||||||||||||||||||||
Total expenses (before expense offset) | 1.95%(4 | ) | 1.84%(4 | ) | 1.79%(4 | ) | 1.89 | % | 1.89 | % | |||||||||||||||
Net investment income | 0.72%(4 | ) | 1.64%(4 | ) | 1.35%(4 | ) | 1.31 | % | 0.94 | % | |||||||||||||||
Rebate from Morgan Stanley affiliate | 0.00%(5 | ) | 0.01 | % | 0.00%(5 | ) | — | — | |||||||||||||||||
Supplemental Data: | |||||||||||||||||||||||||
Net assets, end of period, in thousands | $52,268 | $52,920 | $99,121 | $123,508 | $81,339 | ||||||||||||||||||||
Portfolio turnover rate | 68 | % | 62 | % | 64 | % | 56 | % | 52 | % |
(1) | The per share amounts were computed using an average number of shares outstanding during the period. | |
(2) | Does not reflect the deduction of sales charge. Calculated based on the net asset value as of the last business day of the period. | |
(3) | Reflects overall Fund ratios for investment income and non-class specific expenses. | |
(4) | The ratios reflect the rebate of certain Fund expenses in connection with investments in a Morgan Stanley affiliate during the period. The effect of the rebate on the ratios is disclosed in the above table as “Rebate from Morgan Stanley affiliate”. | |
(5) | Amount is less than 0.005%. |
See Notes to Financial Statements
46
Morgan Stanley Balanced Fund
Financial Highlights continued
FOR THE YEAR ENDED JANUARY 31, | |||||||||||||||||||||||||
2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||||||||
Class I Shares | |||||||||||||||||||||||||
Selected Per Share Data: | |||||||||||||||||||||||||
Net asset value, beginning of period | $9.47 | $13.82 | $14.89 | $14.56 | $13.76 | ||||||||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||
Net investment income(1) | 0.18 | 0.33 | 0.36 | 0.34 | 0.28 | ||||||||||||||||||||
Net realized and unrealized gain (loss) | 2.37 | (4.08 | ) | (0.36 | ) | 1.21 | 1.19 | ||||||||||||||||||
Total income (loss) from investment operations | 2.55 | (3.75 | ) | 0.00 | 1.55 | 1.47 | |||||||||||||||||||
Less dividends and distributions from: | |||||||||||||||||||||||||
Net investment income | (0.25 | ) | (0.37 | ) | (0.39 | ) | (0.33 | ) | (0.30 | ) | |||||||||||||||
Net realized gain | — | (0.23 | ) | (0.68 | ) | (0.89 | ) | (0.37 | ) | ||||||||||||||||
Total dividends and distributions | (0.25 | ) | (0.60 | ) | (1.07 | ) | (1.22 | ) | (0.67 | ) | |||||||||||||||
Net asset value, end of period | $11.77 | $9.47 | $13.82 | $14.89 | $14.56 | ||||||||||||||||||||
Total Return(2) | 27.37 | % | (28.06 | ) | % | (0.23 | ) | % | 10.89 | % | 11.17 | % | |||||||||||||
Ratios to Average Net Assets(3): | |||||||||||||||||||||||||
Total expenses (before expense offset) | 0.95%(4 | ) | 0.84%(4 | ) | 0.79%(4 | ) | 0.89 | % | 0.89 | % | |||||||||||||||
Net investment income | 1.72%(4 | ) | 2.64%(4 | ) | 2.35%(4 | ) | 2.31 | % | 1.94 | % | |||||||||||||||
Rebate from Morgan Stanley affiliate | 0.00%(5 | ) | 0.01 | % | 0.00%(5 | ) | — | — | |||||||||||||||||
Supplemental Data: | |||||||||||||||||||||||||
Net assets, end of period, in thousands | $168 | $137 | $481 | $2,181 | $909 | ||||||||||||||||||||
Portfolio turnover rate | 68 | % | 62 | % | 64 | % | 56 | % | 52 | % |
(1) | The per share amounts were computed using an average number of shares outstanding during the period. | |
(2) | Calculated based on the net asset value as of the last business day of the period. | |
(3) | Reflects overall Fund ratios for investment income and non-class specific expenses. | |
(4) | The ratios reflect the rebate of certain Fund expenses in connection with investments in a Morgan Stanley affiliate during the period. The effect of the rebate on the ratios is disclosed in the above table as “Rebate from Morgan Stanley affiliate”. | |
(5) | Amount is less than 0.005%. |
See Notes to Financial Statements
47
Morgan Stanley Balanced Fund
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Trustees of
Morgan Stanley Balanced Fund:
Morgan Stanley Balanced Fund:
We have audited the accompanying statement of assets and liabilities of Morgan Stanley Balanced Fund (the “Fund”), including the portfolio of investments, as of January 31, 2010, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of January 31, 2010, by correspondence with the custodian and brokers; where replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Morgan Stanley Balanced Fund as of January 31, 2010, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America.
Deloitte & Touche LLP
New York, New York
March 25, 2010
New York, New York
March 25, 2010
48
Morgan Stanley Balanced Fund
An Important Notice Concerning Our U.S. Privacy Policy (unaudited)
We are required by federal law to provide you with a copy of our privacy policy (“Policy”) annually.
This Policy applies to current and former individual clients of Morgan Stanley Distributors Inc., as well as current and former individual investors in Morgan Stanley mutual funds and related companies.
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, 529 Educational Savings Accounts, accounts subject to the Uniform Gifts to Minors Act, or similar accounts. We may amend this Policy at any time, and will inform you of any changes to this Policy as required by law.
We Respect Your Privacy
We appreciate that you have provided us with your personal financial information and understand your concerns about safeguarding such information. We strive to maintain the privacy of such information while we help you achieve your financial objectives. This Policy describes what non-public personal information we collect about you, how we collect it, when we may share it with others, and how others may use it. It discusses the steps you may take to limit our sharing of information about you with affiliated Morgan Stanley companies (“affiliated companies”). It also discloses how you may limit our affiliates’ use of shared information for marketing purposes. Throughout this Policy, we refer to the non-public information that personally identifies you or your accounts as “personal information.”
1. | What Personal Information Do We Collect About You? |
To better serve you and manage our business, it is important that we collect and maintain accurate information about you. We obtain this information from applications and other forms you submit to us, from your dealings with us, from consumer reporting agencies, from our websites and from third parties and other sources.
For example:
• | We collect information such as your name, address, e-mail address, telephone/fax numbers, assets, income and investment objectives through application 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. |
49
Morgan Stanley Balanced Fund
An Important Notice Concerning Our U.S. Privacy Policy (unaudited) continued
• | We may collect background information from and through third-party vendors to verify representations you have made and to comply with various regulatory requirements. |
• | If you interact with us through our public and private Web sites, we may collect information that you provide directly through online communications (such as an e-mail address). We may also collect information about your Internet service provider, your domain name, your computer’s operating system and Web browser, your use of our Web sites and your product and service preferences, through the use of “cookies.” “Cookies” recognize your computer each time you return to one of our sites, and help to improve our sites’ content and personalize your experience on our sites by, for example, suggesting offerings that may interest you. Please consult the Terms of Use of these sites for more details on our use of cookies. |
2. | When Do We Disclose Personal Information We Collect About You? |
To provide you with the products and services you request, to better serve you, to manage our business and as otherwise required or permitted by law, we may disclose personal information we collect about you to other affiliated companies and to non-affiliated third parties.
A. Information We Disclose to Our Affiliated Companies. In order to manage your account(s) effectively, including servicing and processing your transactions, to let you know about products and services offered by us and affiliated companies, to manage our business, and as otherwise required or permitted by law, we may disclose personal information about you to other affiliated companies. 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 do not disclose personal information that we collect about you to non-affiliated third parties except to enable them to provide marketing services on our behalf, to perform joint marketing agreements with other financial institutions, and as otherwise required or permitted by law. For example, some instances where we may disclose information about you to third parties include: for servicing and processing transactions, to offer our own products and services, to protect against fraud, for institutional risk control, to respond to judicial process or to perform services on our behalf. When we share personal information with a non-affiliated 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 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 to help safeguard the personal information we collect about you. We have internal policies governing the proper handling of client information. Third parties that provide support or marketing services on our behalf may also receive personal information about you, and we require them to adhere to confidentiality standards with respect to such information.
50
Morgan Stanley Balanced Fund
An Important Notice Concerning Our U.S. Privacy Policy (unaudited) continued
4. | How Can You Limit Our Sharing of Certain Personal Information About You With Our Affiliated Companies for Eligibility Determination? |
We respect your privacy and offer you choices as to whether we share with our affiliated companies personal information that was collected to determine your eligibility for products and services such as credit reports and other information that you have provided to us or that we may obtain from third parties (“eligibility information”). Please note that, even if you direct us not to share certain eligibility information with our affiliated companies, we may still share your personal information, including eligibility information, with those companies under circumstances that are permitted under applicable law, such as to process transactions or to service your account. We may also share certain other types of personal information with affiliated companies — such as your name, address, telephone number, e-mail address and account number(s), and information about your transactions and experiences with us.
5. | How Can You Limit the Use of Certain Personal Information About You by our Affiliated Companies for Marketing? |
You may limit our affiliated companies from using certain personal information about you that we may share with them for marketing their products or services to you. This information includes our transactions and other experiences with you such as your assets and account history. Please note that, even if you choose to limit our affiliated companies from using certain personal information about you that we may share with them for marketing their products and services to you, we may still share such personal information about you with them, including our transactions and experiences with you, for other purposes as permitted under applicable law.
6. How Can You Send Us an Opt-Out Instruction?
If you wish to limit our sharing of certain personal information about you with our affiliated companies for “eligibility purposes” and for our affiliated companies’ use in marketing products and services to you as described in this notice, you may do so by:
• | Calling us at (800) 869-6397 Monday-Friday between 8 a.m. and 8 p.m. (EST) |
• | Writing to us at the following address: Morgan Stanley Privacy Department Harborside Financial Center, Plaza Two, 3rd Floor Jersey City, NJ 07311 |
If you choose to write to us, your written request should include: your name, address, telephone number and account number(s) to which the opt-out applies and should not be sent with any other correspondence. In order to process your request, we require that the request be provided by you directly and not through a
51
Morgan Stanley Balanced Fund
An Important Notice Concerning Our U.S. Privacy Policy (unaudited) continued
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 allow approximately 30 days from our receipt of your opt-out for your instructions to become effective.
Please understand that if you opt-out, you and any joint account holders may not receive certain Morgan Stanley or our affiliated companies’ products and services that could help you manage your financial resources and achieve your investment objectives.
If you have more than one account with us or our affiliates, you may receive multiple privacy policies from us, and would need to follow the directions stated in each particular policy for each account you have with us.
Special Notice to Residents of Vermont
This section supplements our Policy with respect to our individual clients who have a Vermont address and supersedes anything to the contrary in the 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 affiliated companies and non-affiliated third parties other than in certain limited circumstances. Except as permitted by law, we will not share personal information we collect about you with non-affiliated third parties or other affiliated companies unless you provide us with your written consent to share such information (“opt-in”).
If you wish to receive offers for investment products and services offered by or through other affiliated companies, please notify us in writing at the following address:
Morgan Stanley Privacy Department
Harborside Financial Center, Plaza Two, 3rd Floor
Jersey City, NJ 07311
Harborside Financial Center, Plaza Two, 3rd Floor
Jersey City, NJ 07311
Your authorization should include: your name, address, telephone number and account number(s) to which the opt-in applies and should not be sent with any other correspondence. In order to process your authorization, we require that the authorization be provided by you directly and not through a third-party.
52
Morgan Stanley Balanced Fund
Trustee and Officer Information (unaudited)
Independent Trustees:
Number of | ||||||||||||
Portfolios | ||||||||||||
in Fund | ||||||||||||
Term of | Complex | |||||||||||
Office and | Overseen | |||||||||||
Position(s) | Length of | by | ||||||||||
Name, Age and Address of | Held with | Time | Principal Occupation(s) | Independent | Other Directorships | |||||||
Independent Trustee | Registrant | Served* | During Past 5 Years | Trustee** | Held by Independent Trustee*** | |||||||
Frank L. Bowman (65) c/o Kramer Levin Naftalis & Frankel LLP Counsel to the Independent Trustees 1177 Avenue of the Americas New York, NY 10036 | Trustee | Since August 2006 | President, Strategic Decisions, LLC (consulting) (since February 2009); Director or Trustee of various Retail Funds and Institutional Funds (since August 2006); Chairperson of the Insurance Sub-Committee of the Compliance and Insurance Committee (since February 2007); served as President and Chief Executive Officer of the Nuclear Energy Institute (policy organization) through November 2008; retired as Admiral, U.S. Navy in January 2005 after serving over 8 years as Director of the Naval Nuclear Propulsion Program and Deputy Administrator–Naval Reactors in the National Nuclear Security Administration at the U.S. Department of Energy (1996-2004), Knighted as Honorary Knight Commander of the Most Excellent Order of the British Empire; Awarded the Officer de l’Orde National du Mérite by the French Government. | 162 | Director of the Armed Services YMCA of the USA; member, BP America External Advisory Council (energy); member, National Academy of Engineers. | |||||||
Michael Bozic (69) c/o Kramer Levin Naftalis & Frankel LLP Counsel to the Independent Trustees 1177 Avenue of the Americas New York, NY 10036 | Trustee | Since April 1994 | Private investor; Chairperson of the Compliance and Insurance Committee (since October 2006); Director or Trustee of the Retail Funds (since April 1994) and Institutional Funds (since July 2003); formerly, Chairperson of the Insurance Committee (July 2006-September 2006); Vice Chairman of Kmart Corporation (December 1998-October 2000), Chairman and Chief Executive Officer of Levitz Furniture Corporation (November 1995-November 1998) and President and Chief Executive Officer of Hills Department Stores (May 1991-July 1995); variously Chairman, Chief Executive Officer, President and Chief Operating Officer (1987-1991) of the Sears Merchandise Group of Sears, Roebuck & Co. | 164 | Director of various business organizations. |
53
Morgan Stanley Balanced Fund
Trustee and Officer Information (unaudited) continued
Number of | ||||||||||||
Portfolios | ||||||||||||
in Fund | ||||||||||||
Term of | Complex | |||||||||||
Office and | Overseen | |||||||||||
Position(s) | Length of | by | ||||||||||
Name, Age and Address of | Held with | Time | Principal Occupation(s) | Independent | Other Directorships | |||||||
Independent Trustee | Registrant | Served* | During Past 5 Years | Trustee** | Held by Independent Trustee*** | |||||||
Kathleen A. Dennis (56) c/o Kramer Levin Naftalis & Frankel LLP Counsel to the Independent Trustees 1177 Avenue of the Americas New York, NY 10036 | Trustee | Since August 2006 | President, Cedarwood Associates (mutual fund and investment management consulting) (since July 2006); Chairperson of the Money Market and Alternatives Sub-Committee of the Investment Committee (since October 2006) and Director or Trustee of various Retail Funds and Institutional Funds (since August 2006); formerly, Senior Managing Director of Victory Capital Management (1993-2006). | 162 | Director of various non-profit organizations. | |||||||
Dr. Manuel H. Johnson (60) c/o Johnson Smick Group, Inc. 888 16th Street, N.W. Suite 740 Washington, D.C. 20006 | Trustee | Since July 1991 | Senior Partner, Johnson Smick International, Inc. (consulting firm); Chairperson of the Investment Committee (since October 2006) and Director or Trustee of the Retail Funds (since July 1991) and Institutional Funds (since July 2003); Co-Chairman and a founder of the Group of Seven Council (G7C) (international economic commission); formerly, Chairperson of the Audit Committee (July 1991-September 2006); Vice Chairman of the Board of Governors of the Federal Reserve System and Assistant Secretary of the U.S. Treasury. | 164 | Director of NVR, Inc. (home construction); Director of Evergreen Energy; Director of Greenwich Capital Holdings. | |||||||
Joseph J. Kearns (67) c/o Kearns & Associates LLC PMB754 23852 Pacific Coast Highway Malibu, CA 90265 | Trustee | Since August 1994 | President, Kearns & Associates LLC (investment consulting); Chairperson of the Audit Committee (since October 2006) and Director or Trustee of the Retail Funds (since July 2003) and Institutional Funds (since August 1994); formerly, Deputy Chairperson of the Audit Committee (July 2003-September 2006) and Chairperson of the Audit Committee of Institutional Funds (October 2001-July 2003); CFO of the J. Paul Getty Trust. | 165 | Director of Electro Rent Corporation (equipment leasing) and The Ford Family Foundation. |
54
Morgan Stanley Balanced Fund
Trustee and Officer Information (unaudited) continued
Number of | ||||||||||||
Portfolios | ||||||||||||
in Fund | ||||||||||||
Term of | Complex | |||||||||||
Office and | Overseen | |||||||||||
Position(s) | Length of | by | ||||||||||
Name, Age and Address of | Held with | Time | Principal Occupation(s) | Independent | Other Directorships | |||||||
Independent Trustee | Registrant | Served* | During Past 5 Years | Trustee** | Held by Independent Trustee*** | |||||||
Michael F. Klein (51) c/o Kramer Levin Naftalis & Frankel LLP Counsel to the Independent Trustees 1177 Avenue of the Americas New York, NY 10036 | Trustee | Since August 2006 | Managing Director, Aetos Capital, LLC (since March 2000) and Co-President, Aetos Alternatives Management, LLC (since January 2004); Chairperson of the Fixed Income Sub-Committee of the Investment Committee (since October 2006) and Director or Trustee of various Retail Funds and Institutional Funds (since August 2006); formerly, Managing Director, Morgan Stanley & Co. Inc. and Morgan Stanley Dean Witter Investment Management, President, Morgan Stanley Institutional Funds (June 1998-March 2000) and Principal, Morgan Stanley & Co. Inc. and Morgan Stanley Dean Witter Investment Management (August 1997-December 1999). | 162 | Director of certain investment funds managed or sponsored by Aetos Capital, LLC. Director of Sanitized AG and Sanitized Marketing AG (specialty chemicals). | |||||||
Michael E. Nugent (73) c/o Triumph Capital, L.P. 445 Park Avenue New York, NY 10022 | Chairperson of the Board and Trustee | Chairperson of the Boards since July 2006 and Trustee since July 1991 | General Partner, Triumph Capital, L.P. (private investment partnership); Chairperson of the Boards of the Retail Funds and Institutional Funds (since July 2006); Director or Trustee of the Retail Funds (since July 1991) and Institutional Funds (since July 2001); formerly, Chairperson of the Insurance Committee (until July 2006). | 164 | None. | |||||||
W. Allen Reed (62)† c/o Kramer Levin Naftalis & Frankel LLP Counsel to the Independent Trustees 1177 Avenue of the Americas New York, NY 10036 | Trustee | Since August 2006 | Chairperson of the Equity Sub-Committee of the Investment Committee (since October 2006) and Director or Trustee of various Retail Funds and Institutional Funds (since August 2006); formerly, President and CEO of General Motors Asset Management; Chairman and Chief Executive Officer of the GM Trust Bank and Corporate Vice President of General Motors Corporation (August 1994-December 2005). | 162 | Director of Temple-Inland Industries (packaging and forest products); Director of Legg Mason, Inc. and Director of the Auburn University Foundation; formerly, Director of iShares, Inc. (2001-2006). |
55
Morgan Stanley Balanced Fund
Trustee and Officer Information (unaudited) continued
Number of | ||||||||||||
Portfolios | ||||||||||||
in Fund | ||||||||||||
Term of | Complex | |||||||||||
Office and | Overseen | |||||||||||
Position(s) | Length of | by | ||||||||||
Name, Age and Address of | Held with | Time | Principal Occupation(s) | Independent | Other Directorships | |||||||
Independent Trustee | Registrant | Served* | During Past 5 Years | Trustee** | Held by Independent Trustee*** | |||||||
Fergus Reid (77) c/o Joe Pretryka, Inc. 85 Charles Colman Blvd. Pawling, NY 12564 | Trustee | Since June 1992 | Chairman, Joe Pretryka, Inc.; Chairperson of the Governance Committee and Director or Trustee of the Retail Funds (since July 2003) and Institutional Funds (since June 1992). | 165 | Trustee and Director of certain investment companies in the JPMorgan Funds complex managed by JP Morgan Investment Management Inc. |
Interested Trustee:
Number of | ||||||||||||
Portfolios | ||||||||||||
in Fund | ||||||||||||
Term of | Complex | |||||||||||
Office and | Overseen | |||||||||||
Position(s) | Length of | by | Other Directorships | |||||||||
Name, Age and Address of | Held with | Time | Principal Occupation(s) | Interested | Held by Interested | |||||||
Interested Trustee | Registrant | Served* | During Past 5 Years | Trustee** | Trustee*** | |||||||
James F. Higgins (62) c/o Morgan Stanley Trust Harborside Financial Center Plaza Two Jersey City, NJ 07311 | Trustee | Since June 2000 | Director or Trustee of the Retail Funds (since June 2000) and Institutional Funds (since July 2003); Senior Advisor of Morgan Stanley (since August 2000). | 163 | Director of AXA Financial, Inc. and The Equitable Life Assurance Society of the United States (financial services). |
* | This is the earliest date the Trustee began serving the funds advised by Morgan Stanley Investment Advisors Inc. (the “Investment Adviser”) (the “Retail Funds”) or the funds advised by Morgan Stanley Investment Management Inc. and Morgan Stanley AIP GP LP (the “Institutional Funds”). | |
** | The Fund Complex includes all open-end and closed-end funds (including all of their portfolios) advised by the Investment Adviser and any funds that have an investment adviser that is an affiliated person of the Investment Adviser (including, but not limited to, Morgan Stanley Investment Management Inc.). | |
*** | This includes any directorships at public companies and registered investment companies held by the Trustee at any time during the past five years. | |
† | For the period September 26, 2008 through February 5, 2009, W. Allen Reed was an Interested Trustee. At all other times covered by this report, Mr. Reed was an Independent Trustee. |
56
Morgan Stanley Balanced Fund
Trustee and Officer Information (unaudited) continued
Executive Officers:
Term of | ||||||
Office and | ||||||
Position(s) | Length of | |||||
Name, Age and Address of | Held with | Time | ||||
Executive Officer | Registrant | Served* | Principal Occupation(s) During Past 5 Years | |||
Randy Takian (35) 522 Fifth Avenue New York, NY 10036 | President and Principal Executive Officer | Since September 2008 | President and Principal Executive Officer (since September 2008) of funds in the Fund Complex; President and Chief Executive Officer of Morgan Stanley Services Company Inc. (since September 2008). President of the Investment Adviser (since July 2008). Managing Director and Head of Americas distribution, product and marketing for Morgan Stanley Investment Management (since July 2008). Head of Liquidity and Bank Trust business (since July 2008) and the Latin American franchise (since July 2008) at Morgan Stanley Investment Management. Managing Director, Director and/or Officer of the Investment Adviser and various entities affiliated with the Investment Adviser. Formerly, Head of Retail and Intermediary business, Head of Strategy and Product Development for the Alternatives Group and Senior Loan Investment Management. Formerly with Bank of America (July 1996-March 2006), most recently as Head of the Strategy, Mergers and Acquisitions team for Global Wealth and Investment Management. | |||
Kevin Klingert (47) 522 Fifth Avenue New York, NY 10036 | Vice President | Since June 2008 | Head, Chief Operating Officer and acting Chief Investment Officer of the Global Fixed Income Group of Morgan Stanley Investment Management Inc. and the Investment Adviser (since April 2008). Head of Global Liquidity Portfolio Management and co-Head of Liquidity Credit Research of Morgan Stanley Investment Management (since December 2007). Managing Director of Morgan Stanley Investment Management Inc. and the Investment Adviser (since December 2007). Previously, Managing Director on the Management Committee and head of Municipal Portfolio Management and Liquidity at BlackRock (October 1991 to January 2007). | |||
Carsten Otto (46) 522 Fifth Avenue New York, NY 10036 | Chief Compliance Officer | Since October 2004 | Managing Director and Global Head of Compliance for Morgan Stanley Investment Management (since April 2007) and Chief Compliance Officer of the Retail Funds and Institutional Funds (since October 2004). Formerly, U.S. Director of Compliance (October 2004-April 2007) and Assistant Secretary and Assistant General Counsel of the Retail Funds. | |||
Stefanie V. Chang Yu (43) 522 Fifth Avenue New York, NY 10036 | Vice President | Since December 1997 | Managing Director and Secretary of the Investment Adviser and various entities affiliated with the Investment Adviser; Vice President of the Retail Funds (since July 2002) and Institutional Funds (since December 1997). | |||
Francis J. Smith (44) c/o Morgan Stanley Trust Harborside Financial Center Plaza Two Jersey City, NJ 07311 | Treasurer and Chief Financial Officer | Treasurer since July 2003 and Chief Financial Officer since September 2002 | Executive Director of the Investment Adviser and various entities affiliated with the Investment Adviser; Treasurer and Chief Financial Officer of the Retail Funds (since July 2003) and the Institutional Funds (since March 2010). |
57
Morgan Stanley Balanced Fund
Trustee and Officer Information (unaudited) continued
Term of | ||||||
Office and | ||||||
Position(s) | Length of | |||||
Name, Age and Address of | Held with | Time | ||||
Executive Officer | Registrant | Served* | Principal Occupation(s) During Past 5 Years | |||
Mary E. Mullin (43) 522 Fifth Avenue New York, NY 10036 | Secretary | Since June 1999 | Executive Director of the Investment Adviser and various entities affiliated with the Investment Adviser; Secretary of the Retail Funds (since July 2003) and Institutional Funds (since June 1999). |
* | This is the earliest date the Officer began serving the Retail Funds or Institutional Funds. |
2010 Federal Tax Notice (unaudited)
For Federal income tax purposes, the following information is furnished with respect to the distributions paid by the Fund during its taxable year ended January 31, 2010. For corporate shareholders, 85.32% of the dividends qualified for the dividends received deduction. 7.09% of the Fund’s dividends were attributable to qualifying U.S. Government obligations. (Please consult your tax advisor to determine if any portion of the dividends you received is exempt from state income tax.)
For Federal income tax purposes, the following information is furnished with respect to the Fund’s earnings for its taxable year ended January 31, 2010. When distributed, certain earnings may be subject to a maximum tax rate of 15% as provided for by the Jobs and Growth Tax Relief Reconciliation Act of 2003. The Fund designated up to a maximum of $2,510,066, as taxable at this lower rate.
In January, the Fund provides tax information to shareholders for the preceding calendar year.
58
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Trustees
Michael Bozic
Kathleen A. Dennis
James F. Higgins
Dr. Manuel H. Johnson
Joseph J. Kearns
Michael F. Klein
Michael E. Nugent
W. Allen Reed
Fergus Reid
Officers
Chairperson of the Board
Randy Takian
President and Principal Executive Officer
Kevin Klingert
Vice President
Carsten Otto
Chief Compliance Officer
Stefanie V. Chang Yu
Vice President
Francis J. Smith
Treasurer and Chief Financial Officer
Mary E. Mullin
Secretary
Transfer Agent
Harborside Financial Center, Plaza Two
Jersey City, New Jersey 07311
Independent Registered Public Accounting Firm
Two World Financial Center
New York, New York 10281
Legal Counsel
1095 Avenue of the Americas
New York, New York 10036
Counsel to the Independent Trustees
1177 Avenue of the Americas
New York, New York 10036
Investment Adviser
522 Fifth Avenue
New York, New York 10036
This report is submitted for the general information of the shareholders of the Fund. For more detailed information about the Fund, its fees and expenses and other pertinent information, please read its Prospectus. The Fund’s Statement of Additional Information contains additional information about the Fund, including its trustees. It is available, without charge, by calling (800) 869-NEWS.
This report is not authorized for distribution to prospective investors in the Fund unless preceded or accompanied by an effective Prospectus. Read the Prospectus carefully before investing.
Morgan Stanley Distributors Inc., member FINRA.
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INVESTMENT MANAGEMENT
Morgan Stanley
Balanced Fund
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Annual Report
January 31, 2010
BGRANN
IU10-01178P-Y01/10
Item 2. Code of Ethics.
(a) The Fund has adopted a code of ethics (the “Code of Ethics”) that applies to its principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, regardless of whether these individuals are employed by the Fund or a third party.
(b) No information need be disclosed pursuant to this paragraph.
(c) Not applicable.
(d) Not applicable.
(e) Not applicable.
(f)
(1) | The Fund’s Code of Ethics is attached hereto as Exhibit 12 A. | ||
(2) | Not applicable. | ||
(3) | Not applicable. |
Item 3. Audit Committee Financial Expert.
The Fund’s Board of Trustees has determined that Joseph J. Kearns, an “independent” Trustee, is an “audit committee financial expert” serving on its audit committee. Under applicable securities laws, a person who is determined to be an audit committee financial expert will not be deemed an “expert” for any purpose, including without limitation for the purposes of Section 11 of the Securities Act of 1933, as a result of being designated or identified as an audit committee financial expert. The designation or identification of a person as an audit committee financial expert does not impose on such person any duties, obligations, or liabilities that are greater than the duties, obligations, and liabilities imposed on such person as a member of the audit committee and Board of Trustees in the absence of such designation or identification
2
Item 4. Principal Accountant Fees and Services.
(a)(b)(c)(d) and (g). Based on fees billed for the periods shown:
Registrant | Covered Entities(1) | |||||||
2010 | ||||||||
Audit Fees | $ | 46,700 | N/A | |||||
Non-Audit Fees | ||||||||
Audit-Related Fees | $ | 5,726 | (2) | $ | 6,909,000 | (2) | ||
Tax Fees | $ | — | (3) | $ | 1,013,000 | (4) | ||
All Other Fees | $ | $ | ||||||
Total Non-Audit Fees | $ | 5,726 | $ | 7,922,000 | ||||
Total | $ | 52,426 | $ | 7,922,000 | ||||
Registrant | Covered Entities(1) | |||||||
2009 | ||||||||
Audit Fees | $ | 47,900 | N/A | |||||
Non-Audit Fees | ||||||||
Audit-Related Fees | $ | 6,001 | (2) | $ | 6,418,000 | (2) | ||
Tax Fees | $ | — | (3) | $ | 881,000 | (4) | ||
All Other Fees | $ | $ | (5) | |||||
Total Non-Audit Fees | $ | 6,001 | $ | 7,299,000 | ||||
Total | $ | 53,901 | $ | 7,299,000 |
N/A- Not applicable, as not required by Item 4.
(1) | Covered Entities include the Adviser (excluding sub-advisors) and any entity controlling, controlled by or under common control with the Adviser that provides ongoing services to the Registrant. | |
(2) | Audit-Related Fees represent assurance and related services provided that are reasonably related to the performance of the audit of the financial statements of the Covered Entities’ and funds advised by the Adviser or its affiliates, specifically data verification and agreed-upon procedures related to asset securitizations and agreed-upon procedures engagements. | |
(3) | Tax Fees represent tax compliance, tax planning and tax advice services provided in connection with the preparation and review of the Registrant’s tax returns. | |
(4) | Tax Fees represent tax compliance, tax planning and tax advice services provided in connection with the review of Covered Entities’ tax returns. | |
(5) | All other fees represent project management for future business applications and improving business and operational processes. |
3
(e)(1) The audit committee’s pre-approval policies and procedures are as follows:
APPENDIX A
AUDIT COMMITTEE
AUDIT AND NON-AUDIT SERVICES
PRE-APPROVAL POLICY AND PROCEDURES
OF THE
MORGAN STANLEY RETAIL AND INSTITUTIONAL FUNDS
AUDIT AND NON-AUDIT SERVICES
PRE-APPROVAL POLICY AND PROCEDURES
OF THE
MORGAN STANLEY RETAIL AND INSTITUTIONAL FUNDS
AS ADOPTED AND AMENDED JULY 23, 2004,1
1. Statement of Principles
The Audit Committee of the Board is required to review and, in its sole discretion, pre-approve all Covered Services to be provided by the Independent Auditors to the Fund and Covered Entities in order to assure that services performed by the Independent Auditors do not impair the auditor’s independence from the Fund.
The SEC has issued rules specifying the types of services that an independent auditor may not provide to its audit client, as well as the audit committee’s administration of the engagement of the independent auditor. The SEC’s rules establish two different approaches to pre-approving services, which the SEC considers to be equally valid. Proposed services either: may be pre-approved without consideration of specific case-by-case services by the Audit Committee (“general pre-approval”); or require the specific pre-approval of the Audit Committee or its delegate (“specific pre-approval”). The Audit Committee believes that the combination of these two approaches in this Policy will result in an effective and efficient procedure to pre-approve services performed by the Independent Auditors. As set forth in this Policy, unless a type of service has received general pre-approval, it will require specific pre-approval by the Audit Committee (or by any member of the Audit Committee to which pre-approval authority has been delegated) if it is to be provided by the Independent Auditors. Any proposed services exceeding pre-approved cost levels or budgeted amounts will also require specific pre-approval by the Audit Committee.
The appendices to this Policy describe the Audit, Audit-related, Tax and All Other services that have the general pre-approval of the Audit Committee. The term of any general pre-approval is 12 months from the date of pre-approval, unless the Audit Committee considers and provides a different period and states otherwise. The Audit Committee will annually review and pre-approve the services that may be provided by the Independent Auditors without obtaining specific pre-approval from the Audit Committee. The Audit Committee will add to or subtract from the list of general pre-approved services from time to time, based on subsequent determinations.
1 | This Audit Committee Audit and Non-Audit Services Pre-Approval Policy and Procedures (the “Policy”), adopted as of the date above, supersedes and replaces all prior versions that may have been adopted from time to time. |
4
The purpose of this Policy is to set forth the policy and procedures by which the Audit Committee intends to fulfill its responsibilities. It does not delegate the Audit Committee’s responsibilities to pre-approve services performed by the Independent Auditors to management.
The Fund’s Independent Auditors have reviewed this Policy and believes that implementation of the Policy will not adversely affect the Independent Auditors’ independence.
2. Delegation
As provided in the Act and the SEC’s rules, the Audit Committee may delegate either type of pre-approval authority to one or more of its members. The member to whom such authority is delegated must report, for informational purposes only, any pre-approval decisions to the Audit Committee at its next scheduled meeting.
3. Audit Services
The annual Audit services engagement terms and fees are subject to the specific pre-approval of the Audit Committee. Audit services include the annual financial statement audit and other procedures required to be performed by the Independent Auditors to be able to form an opinion on the Fund’s financial statements. These other procedures include information systems and procedural reviews and testing performed in order to understand and place reliance on the systems of internal control, and consultations relating to the audit. The Audit Committee will approve, if necessary, any changes in terms, conditions and fees resulting from changes in audit scope, Fund structure or other items.
In addition to the annual Audit services engagement approved by the Audit Committee, the Audit Committee may grant general pre-approval to other Audit services, which are those services that only the Independent Auditors reasonably can provide. Other Audit services may include statutory audits and services associated with SEC registration statements (on Forms N-1A, N-2, N-3, N-4, etc.), periodic reports and other documents filed with the SEC or other documents issued in connection with securities offerings.
The Audit Committee has pre-approved the Audit services in Appendix B.1. All other Audit services not listed in Appendix B.1 must be specifically pre-approved by the Audit Committee (or by any member of the Audit Committee to which pre-approval has been delegated).
4. Audit-related Services
Audit-related services are assurance and related services that are reasonably related to the performance of the audit or review of the Fund’s financial statements and, to the extent they are Covered Services, the Covered Entities or that are traditionally performed by the Independent Auditors. Because the Audit Committee believes that the provision of Audit-related services does not impair the independence of the auditor and is consistent with the SEC’s rules on auditor independence, the Audit Committee may grant general pre-approval to Audit-related services. Audit-related services include, among others, accounting consultations related to accounting, financial reporting or disclosure matters
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not classified as “Audit services”; assistance with understanding and implementing new accounting and financial reporting guidance from rulemaking authorities; agreed-upon or expanded audit procedures related to accounting and/or billing records required to respond to or comply with financial, accounting or regulatory reporting matters; and assistance with internal control reporting requirements under Forms N-SAR and/or N-CSR.
The Audit Committee has pre-approved the Audit-related services in Appendix B.2. All other Audit-related services not listed in Appendix B.2 must be specifically pre-approved by the Audit Committee (or by any member of the Audit Committee to which pre-approval has been delegated).
5. Tax Services
The Audit Committee believes that the Independent Auditors can provide Tax services to the Fund and, to the extent they are Covered Services, the Covered Entities, such as tax compliance, tax planning and tax advice without impairing the auditor’s independence, and the SEC has stated that the Independent Auditors may provide such services.
Pursuant to the preceding paragraph, the Audit Committee has pre-approved the Tax Services in Appendix B.3. All Tax services in Appendix B.3 must be specifically pre-approved by the Audit Committee (or by any member of the Audit Committee to which pre-approval has been delegated).
6. All Other Services
The Audit Committee believes, based on the SEC’s rules prohibiting the Independent Auditors from providing specific non-audit services, that other types of non-audit services are permitted. Accordingly, the Audit Committee believes it may grant general pre-approval to those permissible non-audit services classified as All Other services that it believes are routine and recurring services, would not impair the independence of the auditor and are consistent with the SEC’s rules on auditor independence.
The Audit Committee has pre-approved the All Other services in Appendix B.4. Permissible All Other services not listed in Appendix B.4 must be specifically pre-approved by the Audit Committee (or by any member of the Audit Committee to which pre-approval has been delegated).
7. Pre-Approval Fee Levels or Budgeted Amounts
Pre-approval fee levels or budgeted amounts for all services to be provided by the Independent Auditors will be established annually by the Audit Committee. Any proposed services exceeding these levels or amounts will require specific pre-approval by the Audit Committee. The Audit Committee is mindful of the overall relationship of fees for audit and non-audit services in determining whether to pre-approve any such services.
8. Procedures
All requests or applications for services to be provided by the Independent Auditors that do not require specific approval by the Audit Committee will be submitted to the Fund’s Chief Financial Officer and must include a detailed description of the services to be
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rendered. The Fund’s Chief Financial Officer will determine whether such services are included within the list of services that have received the general pre-approval of the Audit Committee. The Audit Committee will be informed on a timely basis of any such services rendered by the Independent Auditors. Requests or applications to provide services that require specific approval by the Audit Committee will be submitted to the Audit Committee by both the Independent Auditors and the Fund’s Chief Financial Officer, and must include a joint statement as to whether, in their view, the request or application is consistent with the SEC’s rules on auditor independence.
The Audit Committee has designated the Fund’s Chief Financial Officer to monitor the performance of all services provided by the Independent Auditors and to determine whether such services are in compliance with this Policy. The Fund’s Chief Financial Officer will report to the Audit Committee on a periodic basis on the results of its monitoring. Both the Fund’s Chief Financial Officer and management will immediately report to the chairman of the Audit Committee any breach of this Policy that comes to the attention of the Fund’s Chief Financial Officer or any member of management.
9. Additional Requirements
The Audit Committee has determined to take additional measures on an annual basis to meet its responsibility to oversee the work of the Independent Auditors and to assure the auditor’s independence from the Fund, such as reviewing a formal written statement from the Independent Auditors delineating all relationships between the Independent Auditors and the Fund, consistent with Independence Standards Board No. 1, and discussing with the Independent Auditors its methods and procedures for ensuring independence.
10. Covered Entities
Covered Entities include the Fund’s investment adviser(s) and any entity controlling, controlled by or under common control with the Fund’s investment adviser(s) that provides ongoing services to the Fund(s). Beginning with non-audit service contracts entered into on or after May 6, 2003, the Fund’s audit committee must pre-approve non-audit services provided not only to the Fund but also to the Covered Entities if the engagements relate directly to the operations and financial reporting of the Fund. This list of Covered Entities would include:
Morgan Stanley Retail Funds
Morgan Stanley Investment Advisors Inc.
Morgan Stanley & Co. Incorporated
Morgan Stanley DW Inc.
Morgan Stanley Investment Management Inc.
Morgan Stanley Investment Management Limited
Morgan Stanley Investment Management Private Limited
Morgan Stanley Asset & Investment Trust Management Co., Limited
Morgan Stanley Investment Management Company
Van Kampen Asset Management
Morgan Stanley Services Company, Inc.
Morgan Stanley Distributors Inc.
Morgan Stanley Trust FSB
Morgan Stanley Investment Advisors Inc.
Morgan Stanley & Co. Incorporated
Morgan Stanley DW Inc.
Morgan Stanley Investment Management Inc.
Morgan Stanley Investment Management Limited
Morgan Stanley Investment Management Private Limited
Morgan Stanley Asset & Investment Trust Management Co., Limited
Morgan Stanley Investment Management Company
Van Kampen Asset Management
Morgan Stanley Services Company, Inc.
Morgan Stanley Distributors Inc.
Morgan Stanley Trust FSB
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Morgan Stanley Institutional Funds
Morgan Stanley Investment Management Inc.
Morgan Stanley Investment Advisors Inc.
Morgan Stanley Investment Management Limited
Morgan Stanley Investment Management Private Limited
Morgan Stanley Asset & Investment Trust Management Co., Limited
Morgan Stanley Investment Management Company
Morgan Stanley & Co. Incorporated
Morgan Stanley Distribution, Inc.
Morgan Stanley AIP GP LP
Morgan Stanley Alternative Investment Partners LP
Morgan Stanley Investment Management Inc.
Morgan Stanley Investment Advisors Inc.
Morgan Stanley Investment Management Limited
Morgan Stanley Investment Management Private Limited
Morgan Stanley Asset & Investment Trust Management Co., Limited
Morgan Stanley Investment Management Company
Morgan Stanley & Co. Incorporated
Morgan Stanley Distribution, Inc.
Morgan Stanley AIP GP LP
Morgan Stanley Alternative Investment Partners LP
(e)(2) Beginning with non-audit service contracts entered into on or after May 6, 2003, the audit committee also is required to pre-approve services to Covered Entities to the extent that the services are determined to have a direct impact on the operations or financial reporting of the Registrant. 100% of such services were pre-approved by the audit committee pursuant to the Audit Committee’s pre-approval policies and procedures (attached hereto).
(f) Not applicable.
(g) See table above.
(h) The audit committee of the Board of Trustees has considered whether the provision of services other than audit services performed by the auditors to the Registrant and Covered Entities is compatible with maintaining the auditors’ independence in performing audit services.
Item 5. Audit Committee of Listed Registrants.
(a) | The Fund has a separately-designated standing audit committee established in accordance with Section 3(a)(58)(A) of the Exchange Act whose members are: | ||
Joseph Kearns, Michael Nugent and Allen Reed. |
(b) Not applicable.
Item 6. Schedule of Investments
(a) Refer to Item 1.
(b) Not applicable.
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Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies.
Applicable only to reports filed by closed-end funds.
Item 8. Portfolio Managers of Closed-End Management Investment Companies
Applicable only to reports filed by closed-end funds.
Item 9. Closed-End Fund Repurchases
Applicable only to reports filed by closed-end funds.
Item 10. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 11. Controls and Procedures
(a) The Fund’s principal executive officer and principal financial officer have concluded that the Fund’s disclosure controls and procedures are sufficient to ensure that information required to be disclosed by the Fund in this Form N-CSR was recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, based upon such officers’ evaluation of these controls and procedures as of a date within 90 days of the filing date of the report.
(b) There were no changes in the registrant’s internal control over financial reporting that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.
Item 12. Exhibits
(a) The Code of Ethics for Principal Executive and Senior Financial Officers is attached hereto.
(b) A separate certification for each principal executive officer and principal financial officer of the registrant are attached hereto as part of EX-99.CERT.
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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 Balanced Fund
/s/ Randy Takian | ||
Principal Executive Officer | ||
March 23, 2010 |
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
/s/ Randy Takian | ||
Principal Executive Officer | ||
March 23, 2010 | ||
/s/ Francis Smith | ||
Principal Financial Officer | ||
March 23, 2010 |
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