UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 33-56853
Morgan Stanley Balanced Fund
(Exact name of registrant as specified in charter)
522 Fifth Avenue, New York, New York (Address of principal executive offices) | 10036 |
Ronald E. Robison
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, 2008
Date of reporting period: January 31, 2008
Item 1 - Report to Shareholders
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, 2008 | |
Total Return for the 12 Months Ended January 31, 2008
Class A | Class B | Class C | Class D | Russell 1000® Value Index1 | Lehman Brothers U.S. Govern- ment/ Credit Index2 | Lipper Mixed- Asset Target Allocation Growth Funds Index3 | ||||||||||||||||||||||||||||||||
–0.42 | % | –1.20 | % | –1.19 | % | –0.23 | % | –5.38 | % | 9.36 | % | 1.23 | % | |||||||||||||||||||||||||
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
Recession fears and the credit crisis kept financial markets volatile during the 12 months ended January 31, 2008. Early in the period, strong corporate earnings growth, robust merger and acquisition activity, and a generally positive outlook for the U.S. and global economies supported the stock and bond markets’ advance. The Federal Open Market Committee (the ‘‘Fed’’) had kept its target federal funds rate on hold since August 2006, giving confidence to investors that inflation was under control. However, pockets of turbulence erupted at several points throughout the first half of the year, notably in late February and again in June, as investors responded to volatility in China’s stock markets, concerns about a slowing U.S. economy, rising oil prices, and initial signs of distress in the subprime mortgage market.
While price volatility turned out to be short-lived in those occurrences, the underlying pressures continued to build. In the second half of 2007, the subprime market’s woes spread across the economy, causing the credit markets to significantly tighten. The Fed acted quickly to increase liquidity into the financial system in August, and also delivered a positive surprise to investors in the form of a larger-than-expected federal funds target rate cut in September. However, a host of other troubling signs, including higher oil prices, a weak housing market and declines in consumer spending, dampened investors’ economic outlooks going into year end. Moreover, in the third and fourth quarters, year-over-year corporat e earnings growth turned negative for the first time since 2002. In January 2008, economic data continued to show deteriorating economic conditions, adding more weight to recession concerns. Although the Fed continued to lower the target federal funds rate through year-end and into January in attempt to head off recession, the stock market ended the period lower.
Value stocks (which comprise the Russell 1000® Value Index and generally represent the Fund’s universe of investable stocks) underperformed the broad market during the period. Given the uncertainties about economic growth, investors turned away from value stocks toward growth stocks, which are perceived to have greater potential for above-average growth in less robust economic conditions. However, large cap stocks outperformed small and mid-cap stocks, providing some support to the Fund’s primarily large-cap oriented portfolio.
2
Within the fixed income market, investors grew increasingly risk averse in light of the subprime mortgage market debacle, which led to a ‘‘flight to quality’’ that helped U.S. Treasury securities outperform other areas of the fixed income market for the period under review. Widening credit spreads led corporate issues to underperform other major segments of the fixed income markets. Despite the widening, however, credit spreads still remained narrow by historical standards. Within the investment-grade corporate sector, higher-rated (AAA) issues outpaced the middle investment grade issues. The industrials and utilities sectors handily outpaced the financials sector, which was hit hardest by the recent l iquidity crisis. Overall, short-term issues outperformed intermediate- and long-dated issues.
Performance Analysis
All share classes of Morgan Stanley Balanced Fund outperformed the Russell 1000® Value Index, and underperformed the Lehman Brothers U.S. Government/Credit Index and the Lipper Mixed-Asset Target Allocation Growth Funds Index for the 12 months ended January 31, 2008, assuming no deduction of applicable sales charges.
Relative to the Russell 1000 Value Index, the Fund’s stock allocation for the period benefited primarily from an underweight to the financial sector (although we note that all sector weights are a result of our bottom-up stock selection process and are not intentional top-down allocations). Limited exposures to regional banks and diversified financial companies, and no holdings in real estate investment trusts, helped minimize the Fund’s exposure to the damage caused by the subprime mortgage collapse. The materials sector also bolstered relative performance, but this was primarily due to a single holding which generates a larger share of its business in the health care sector than in the materials sector. The posi tive influence of both an overweight allocation and strong stock selection in the consumer staples sector contributed to relative returns, as well.
Detractors from the stock allocation’s relative performance included an underweight in the energy sector for the period. The technology sector was another area of weakness, due to an overweight in the sector overall and weak stock selection especially in the hardware and equipment industry. Stock selection in the health care sector further hampered relative performance. Here, one of the Fund’s pharmaceutical holdings declined in value after the results of a comparative study between the company’s branded drug and a generic version of the drug revealed less than favorable results for the branded drug.
Within the fixed income portfolio, we employed a defensive interest rate strategy by keeping the Fund’s duration* shorter than that of the benchmark Lehman Brothers U.S. Government/Credit Index throughout the 12-month period. Although this strategy was beneficial early in the period when interest rates were rising, it detracted from performance for the overall reporting year as Fed easing in the latter months caused rates to decline significantly.
In March of this year, the Fund’s yield curve positioning was adjusted to underweight longer dated issues and
3
overweight intermediate dated issues. This was particularly additive to performance as the spread between intermediate- and long-dated yields widened and the curve steepened during the summer. Subsequently, the overall yield curve position was reduced in August, which further benefited relative performance.
During the majority of the period, we held an underweight position to agency mortgage-backed securities (MBS), with a focus on high-coupon, slow-prepaying agency issues, and an overweight to non-agency mortgages issued to high quality borrowers. With the recent turmoil in the mortgage market and the drying up of liquidity, all mortgage segments struggled during the period. As such, the underweight to agency mortgage-backed securities was beneficial, but the positive influence was more than offset by the poor price performance and relative overweight of the non-agency position. In November, the agency MBS position was increased from an underweight to a neutral allocation relative to the Lehman Brothers U.S. Government/Credit Index.
We have held an underweight corporate debt position for some time now, and this position benefited relative performance, with much of this positive contribution coming in later months of the period as credit spreads widened.
At the end of the period, the Fund held 66% in stocks and 34% in fixed income securities.
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.
* A measure of the sensitivity of a bond’s price to changes in interest rates, expressed in years. Each year of duration represents an expected 1 percent change in the price of a bond for every 1 percent change in interest rates. The longer a bond’s duration, the greater the effect of interest-rate movements on its price. Typically, funds with shorter durations perform better in rising interest-rate environments, while funds with longer durations perform better when rates decline.
4
TOP 10 HOLDINGS | ||||||
Federal National Mortgage Assoc. (non-equity securities) | 7.1 | % | ||||
U.S. Treasury Securities | 4.0 | |||||
Wal-Mart Stores, Inc. | 2.5 | |||||
JPMorgan Chase & Co. | 2.5 | |||||
Bayer AG (ADR) (Germany) | 2.2 | |||||
Abbott Laboratories | 2.0 | |||||
Verizon Communications, Inc. | 2.0 | |||||
Time Warner, Inc. | 1.9 | |||||
Marsh & McLennan Companies, Inc. | 1.8 | |||||
Schering-Plough Corp. | 1.6 | |||||
PORTFOLIO COMPOSITION** | ||||||
Common Stocks | 65.7 | % | ||||
U.S. Government Agencies & Obligations | 11.6 | |||||
Corporate Bonds | 8.5 | |||||
Collateralized Mortgage Obligations | 5.5 | |||||
Asset-Backed Securities | 3.7 | |||||
Short-Term Investments | 5.0 | |||||
** Does not include open long/short futures contracts with an underlying face amount of $60,321,184 with net unrealized appreciation of $470,106. Also does not include open swap contracts with net unrealized appreciation of $2,966,224. |
Data as of January 31, 2008. Subject to change daily. All percentages for top 10 holdings are as a percentage of net assets and all percentages for portfolio composition are as a percentage of total investments. These data are provided for informational purposes only and should not be deemed a recommendation to buy or sell the securities mentioned. Morgan Stanley is a full-service securities firm engaged in securities trading and brokerage activities, investment banking, research and analysis, financing and financial advisory services. |
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 f irst 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
5
materials, upon payment of a duplicating fee, by electronic request at the SEC’s e-mail address (publicinfo@sec.gov) or by writing the public reference section of the SEC, Washington, DC 20549-0102.
Proxy Voting Policy and Procedures and Proxy Voting Record
You may obtain a copy of the Fund’s Proxy Voting Policy and Procedures without charge, upon request, by calling toll free (800) 869-NEWS or by visiting the Mutual Fund Center on our Web site at www.morganstanley.com. It is also available on the Securities and Exchange Commission’s Web site at http://www.sec.gov.
You may obtain information regarding how the Fund voted proxies relating to portfolio securities during the most recent twelve-month period ended June 30 without charge by visiting the Mutual Fund Center on our Web site at www.morganstanley.com. This information is also available on the Securities and Exchange Commission’s Web site at http://www.sec.gov.
Householding Notice
To reduce printing and mailing costs, the Fund attempts to eliminate duplicate mailings to the same address. The Fund delivers a single copy of certain shareholder documents, including shareholder reports, prospectuses and proxy materials, to investors with the same last name who reside at the same address. Your participation in this program will continue for an unlimited period of time unless you instruct us otherwise. You can request multiple copies of these documents by calling (800) 869-NEWS, 8:00 a.m. to 8:00 p.m., ET. Once our Customer Service Center has received your instructions, we will begin sending individual copies for each account within 30 days.
6
(This page has been left blank intentionally.)
7
Performance Summary | |
Performance of $10,000 Investment — Class C
Over 10 Years
8
Average Annual Total Returns — Period Ended January 31, 2008
Class A Shares* (since 07/28/97) | Class B Shares** (since 07/28/97) | Class C Shares† (since 03/28/95) | Class D Shares†† (since 07/28/97) | |||||||||||||||||||||||
Symbol | BGRAX | BGRBX | BGRCX | BGRDX | ||||||||||||||||||||||
1 Year | (0.42)% | 4 | (1.20)% | 4 | (1.19)% | 4 | (0.23)% | 4 | ||||||||||||||||||
(5.64) | 5 | (5.84) | 5 | (2.11) | 5 | — | ||||||||||||||||||||
5 Years | 10.20 | 4 | 9.36 | 4 | 9.37 | 4 | 10.45 | 4 | ||||||||||||||||||
9.01 | 5 | 9.08 | 5 | 9.37 | 5 | — | ||||||||||||||||||||
10 Years | 5.88 | 4 | 5.22 | 4 | 5.08 | 4 | 6.12 | 4 | ||||||||||||||||||
5.31 | 5 | 5.22 | 5 | 5.08 | 5 | — | ||||||||||||||||||||
Since Inception | 6.05 | 4 | 5.44 | 4 | 8.12 | 4 | 6.30 | 4 | ||||||||||||||||||
5.51 | 5 | 5.44 | 5 | 8.12 | 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/msim 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 D shares will vary due to differences in sales charges and expenses.
* | The maximum front-end sales charge for Class A is 5.25%. |
** | The maximum contingent deferred sales charge (CDSC) for Class B is 5.0%. The CDSC declines to 0% after six years. 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 D has no sales charge. |
(1) | The Russell 1000® Value Index measures the performance of those companies in the Russell 1000® Index with lower price-to-book ratios and lower forecasted growth values. 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 Lehman Brothers 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 is 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, 2008. |
9
Expense Example | |
As a shareholder of the Fund, you incur two types of costs: (1) transaction costs, including sales charges (loads) on purchase payments and redemption fees; and (2) ongoing costs, including advisory fees; distribution and service (12b-1) fees; and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period 08/01/07 – 01/31/08.
Actual Expenses
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled ‘‘Expenses Paid During Period’’ to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table below provides information about hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing cost of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as sales charges (loads) and redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs, and will not help you determine the relative total cost of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Beginning Account Value | Ending Account Value | Expenses Paid During Period* | ||||||||||||
08/01/07 | 01/31/08 | 08/01/07 – 01/31/08 | ||||||||||||
Class A | ||||||||||||||
Actual (−2.24% return) | $ | 1,000.00 | $ | 977.60 | $ | 5.13 | ||||||||
Hypothetical (5% annual return before expenses) | $ | 1,000.00 | $ | 1,020.01 | $ | 5.24 | ||||||||
Class B | ||||||||||||||
Actual (−2.56% return) | $ | 1,000.00 | $ | 974.40 | $ | 8.86 | ||||||||
Hypothetical (5% annual return before expenses) | $ | 1,000.00 | $ | 1,016.23 | $ | 9.05 | ||||||||
Class C | ||||||||||||||
Actual (−2.62% return) | $ | 1,000.00 | $ | 973.80 | $ | 8.86 | ||||||||
Hypothetical (5% annual return before expenses) | $ | 1,000.00 | $ | 1,016.23 | $ | 9.05 | ||||||||
Class D | ||||||||||||||
Actual (−2.11% return) | $ | 1,000.00 | $ | 978.90 | $ | 3.89 | ||||||||
Hypothetical (5% annual return before expenses) | $ | 1,000.00 | $ | 1,021.27 | $ | 3.97 | ||||||||
* | Expenses are equal to the Fund’s annualized expense ratios of 1.03%, 1.78%, 1.78% and 0.78% for Class A, Class B, Class C and Class D shares, respectively, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period). |
10
Morgan Stanley Balanced Fund
Portfolio of Investments January 31, 2008
NUMBER OF SHARES | VALUE | |||||||||
Common Stocks (66.7%) | ||||||||||
Aerospace & Defense (1.2%) | ||||||||||
64,070 | Raytheon Co. | $ | 4,173,520 | |||||||
Beverages: Non-Alcoholic (1.3%) | ||||||||||
75,210 | Coca-Cola Co. (The) | 4,450,176 | ||||||||
Cable/Satellite TV (0.5%) | ||||||||||
98,989 | Comcast Corp. (Class A) | 1,797,640 | ||||||||
Casino/Gaming (0.0%) | ||||||||||
4,685 | Fitzgeralds Gaming Corp. (a)* | 0 | ||||||||
Chemicals: Major Diversified (2.6%) | ||||||||||
91,730 | Bayer AG (ADR) (Germany) | 7,490,241 | ||||||||
25,260 | Du Pont (E.I.) de Nemours & Co. | 1,141,247 | ||||||||
8,631,488 | ||||||||||
Computer Communications (0.5%) | ||||||||||
70,200 | Cisco Systems, Inc.* | 1,719,900 | ||||||||
Computer Peripherals (0.2%) | ||||||||||
30,400 | EMC Corp.* | 482,448 | ||||||||
Computer Processing Hardware (0.7%) | ||||||||||
54,392 | Hewlett-Packard Co. | 2,379,650 | ||||||||
Discount Stores (2.5%) | ||||||||||
168,460 | Wal-Mart Stores, Inc. | 8,571,245 | ||||||||
Drugstore Chains (0.2%) | ||||||||||
197,000 | Rite Aid Corp.* | 583,120 | ||||||||
Electric Utilities (3.9%) | ||||||||||
114,530 | American Electric Power Co., Inc. | 4,905,320 | ||||||||
40,820 | Entergy Corp. | 4,415,908 | ||||||||
46,900 | FirstEnergy Corp. | 3,340,218 | ||||||||
15,000 | NRG Energy, Inc.* | 578,850 | ||||||||
13,240,296 | ||||||||||
Electronics/Appliances (0.5%) | ||||||||||
33,000 | Sony Corp. (ADR) (Japan) | 1,567,170 | ||||||||
Finance/Rental/Leasing (0.7%) | ||||||||||
81,559 | Freddie Mac | 2,478,578 | ||||||||
Financial Conglomerates (3.6%) | ||||||||||
136,064 | Citigroup, Inc. | 3,839,726 | ||||||||
174,262 | JPMorgan Chase & Co. | 8,286,158 | ||||||||
12,125,884 | ||||||||||
See Notes to Financial Statements
11
Morgan Stanley Balanced Fund
Portfolio of Investments January 31, 2008 continued
NUMBER OF SHARES | VALUE | |||||||||
Food: Major Diversified (2.5%) | ||||||||||
56,600 | ConAgra Foods Inc. | $ | 1,218,598 | |||||||
98,167 | Kraft Foods Inc. (Class A) | 2,872,366 | ||||||||
136,370 | Unilever N.V. (NY Registered Shares) (Netherlands) | 4,434,752 | ||||||||
8,525,716 | ||||||||||
Food: Specialty/Candy (1.0%) | ||||||||||
77,340 | Cadbury Schweppes PLC (ADR) (United Kingdom) | 3,431,576 | ||||||||
Home Improvement Chains (0.4%) | ||||||||||
48,570 | Home Depot, Inc. (The)* | 1,489,642 | ||||||||
Household/Personal Care (1.6%) | ||||||||||
33,980 | Estee Lauder Companies, Inc. (The) (Class A) | 1,433,956 | ||||||||
20,180 | Kimberly-Clark Corp. | 1,324,817 | ||||||||
41,420 | Procter & Gamble Co. (The) | 2,731,649 | ||||||||
5,490,422 | ||||||||||
Industrial Conglomerates (3.6%) | ||||||||||
147,210 | General Electric Co. | 5,212,706 | ||||||||
38,070 | Siemens AG (ADR) (Germany) | 4,941,486 | ||||||||
50,577 | Tyco International Ltd. (Bermuda) | 1,990,711 | ||||||||
12,144,903 | ||||||||||
Insurance Brokers/Services (1.8%) | ||||||||||
218,286 | Marsh & McLennan Companies, Inc. | 6,024,694 | ||||||||
Integrated Oil (3.1%) | ||||||||||
27,666 | ConocoPhillips | 2,222,133 | ||||||||
36,310 | Exxon Mobil Corp. | 3,137,184 | ||||||||
12,700 | Marathon Oil Corp. | 594,995 | ||||||||
64,610 | Royal Dutch Shell PLC (ADR) (Class A) (United Kingdom) | 4,613,800 | ||||||||
10,568,112 | ||||||||||
Internet Software/Services (0.7%) | ||||||||||
128,808 | Yahoo! Inc.* | 2,470,537 | ||||||||
Investment Banks/Brokers (2.6%) | ||||||||||
35,449 | Bear Stearns Companies, Inc. (The) | 3,201,045 | ||||||||
111,680 | Charles Schwab Corp. (The) | 2,490,464 | ||||||||
18,995 | Lehman Brothers Holdings Inc. | 1,218,909 | ||||||||
33,694 | Merrill Lynch & Co., Inc. | 1,900,342 | ||||||||
8,810,760 | ||||||||||
Life/Health Insurance (0.4%) | ||||||||||
85,289 | Aegon N.V. (NY Registered Shares) (Netherlands) | 1,268,247 | ||||||||
See Notes to Financial Statements
12
Morgan Stanley Balanced Fund
Portfolio of Investments January 31, 2008 continued
NUMBER OF SHARES | VALUE | |||||||||
Major Banks (1.7%) | ||||||||||
71,573 | Bank of America Corp. | $ | 3,174,263 | |||||||
39,271 | PNC Financial Services Group, Inc. | 2,576,963 | ||||||||
5,751,226 | ||||||||||
Major Telecommunications (3.4%) | ||||||||||
27,406 | Embarq Corp. | 1,241,492 | ||||||||
79,320 | France Telecom S.A. (ADR) (France) | 2,804,755 | ||||||||
77,380 | Sprint Nextel Corp. | 814,811 | ||||||||
170,657 | Verizon Communications, Inc. | 6,628,318 | ||||||||
11,489,376 | ||||||||||
Managed Health Care (0.2%) | ||||||||||
15,990 | CIGNA Corp. | 786,068 | ||||||||
Media Conglomerates (3.3%) | ||||||||||
373,050 | Time Warner, Inc. | 5,871,807 | ||||||||
133,187 | Viacom Inc. (Class B)* | 5,162,328 | ||||||||
11,034,135 | ||||||||||
Medical Specialties (1.4%) | ||||||||||
37,160 | Applera Corp. – Applied Biosystems Group | 1,171,655 | ||||||||
124,170 | Boston Scientific Corp.* | 1,506,182 | ||||||||
44,797 | Covidien Ltd. | 1,999,290 | ||||||||
4,677,127 | ||||||||||
Motor Vehicles (0.3%) | ||||||||||
36,330 | Honda Motor Co., Ltd. (ADR) (Japan) | 1,145,848 | ||||||||
Multi-Line Insurance (0.7%) | ||||||||||
30,510 | Hartford Financial Services Group, Inc. (The) | 2,464,293 | ||||||||
Oil & Gas Pipelines (0.5%) | ||||||||||
49,370 | Williams Companies, Inc. (The) | 1,578,359 | ||||||||
Oil & Gas Production (1.4%) | ||||||||||
12,780 | Devon Energy Corp. | 1,086,044 | ||||||||
54,990 | Occidental Petroleum Corp. | 3,732,171 | ||||||||
4,818,215 | ||||||||||
Oilfield Services/Equipment (0.5%) | ||||||||||
22,700 | Schlumberger Ltd. (Netherlands Antilles) | 1,712,942 | ||||||||
Packaged Software (0.7%) | ||||||||||
30,800 | Oracle Corp.* | 632,940 | ||||||||
89,047 | Symantec Corp.* | 1,596,613 | ||||||||
2,229,553 | ||||||||||
See Notes to Financial Statements
13
Morgan Stanley Balanced Fund
Portfolio of Investments January 31, 2008 continued
NUMBER OF SHARES | VALUE | |||||||||
Pharmaceuticals: Major (7.6%) | ||||||||||
124,320 | Abbott Laboratories | $ | 6,999,216 | |||||||
182,270 | Bristol-Myers Squibb Co. | 4,226,841 | ||||||||
46,860 | Novartis AG (ADR) (Switzerland) | 2,371,585 | ||||||||
37,160 | Roche Holdings AG (ADR) (Switzerland) | 3,388,063 | ||||||||
271,600 | Schering-Plough Corp. | 5,315,212 | ||||||||
87,170 | Wyeth | 3,469,366 | ||||||||
25,770,283 | ||||||||||
Precious Metals (1.0%) | ||||||||||
59,350 | Newmont Mining Corp. | 3,225,079 | ||||||||
Property – Casualty Insurers (2.5%) | ||||||||||
77,610 | Chubb Corp. (The) | 4,019,422 | ||||||||
94,732 | Travelers Companies, Inc. (The) | 4,556,609 | ||||||||
8,576,031 | ||||||||||
Restaurants (0.4%) | ||||||||||
72,800 | Starbucks Corp.* | 1,376,648 | ||||||||
Semiconductors (0.8%) | ||||||||||
131,506 | Intel Corp. | 2,787,927 | ||||||||
Specialty Stores (0.4%) | ||||||||||
81,959 | Office Depot, Inc.* | 1,215,452 | ||||||||
Telecommunication Equipment (0.7%) | ||||||||||
378,280 | Alcatel – Lucent (ADR) (France) | 2,394,512 | ||||||||
Tobacco (1.0%) | ||||||||||
43,470 | Altria Group, Inc. | 3,295,894 | ||||||||
Investment Trusts/Mutual Funds (2.1%) | ||||||||||
161,268 | Financial Select Sector Spdr (ETF) | 4,699,350 | ||||||||
31,900 | iShares Russell 1000 Value Fund (ETF) | 2,451,834 | ||||||||
7,151,184 | ||||||||||
Total Common Stocks (Cost $215,648,044) | 225,905,876 | |||||||||
PRINCIPAL AMOUNT IN THOUSANDS | COUPON RATE | MATURITY DATE | ||||||||||||||||
Corporate Bonds (8.7%) | ||||||||||||||||||
Aerospace & Defense (0.1%) | ||||||||||||||||||
$ | 507 | Systems 2001 Asset Trust – 144A** (Cayman Islands) | 6.664 | % | 09/15/13 | 514,880 | ||||||||||||
Airlines (0.1%) | ||||||||||||||||||
424 | America West Airlines, Inc. (Series 01-1) | 7.10 | 04/02/21 | 419,889 | ||||||||||||||
See Notes to Financial Statements
14
Morgan Stanley Balanced Fund
Portfolio of Investments January 31, 2008 continued
PRINCIPAL AMOUNT IN THOUSANDS | COUPON RATE | MATURITY DATE | VALUE | |||||||||||||||
Beverages: Alcoholic (0.2%) | ||||||||||||||||||
$ | 350 | FBG Finance Ltd. – 144A** (Australia) | 5.125 | % | 06/15/15 | $ | 349,214 | |||||||||||
440 | Miller Brewing Co. – 144A** | 4.25 | 08/15/08 | 441,774 | ||||||||||||||
790,988 | ||||||||||||||||||
Cable/Satellite TV (0.1%) | ||||||||||||||||||
230 | Comcast Cable Communications, Inc. | 6.75 | 01/30/11 | 242,455 | ||||||||||||||
60 | Comcast LCI Holdings | 7.625 | 02/15/08 | 60,047 | ||||||||||||||
302,502 | ||||||||||||||||||
Chemicals: Major Diversified (0.1%) | ||||||||||||||||||
240 | ICI Wilmington Inc. | 4.375 | 12/01/08 | 241,416 | ||||||||||||||
Department Stores (0.0%) | ||||||||||||||||||
50 | Federated Department Stores, Inc. | 6.625 | 09/01/08 | 50,681 | ||||||||||||||
80 | May Department Stores Co. | 5.95 | 11/01/08 | 80,802 | ||||||||||||||
131,483 | ||||||||||||||||||
Drugstore Chains (0.1%) | ||||||||||||||||||
50 | CVS Caremark Corp. | 5.75 | 06/01/17 | 51,764 | ||||||||||||||
110 | CVS Corp. | 5.75 | 08/15/11 | 115,229 | ||||||||||||||
293 | CVS Lease Pass-Through – 144A** | 6.036 | 12/10/28 | 280,854 | ||||||||||||||
447,847 | ||||||||||||||||||
�� | Electric Utilities (0.8%) | |||||||||||||||||
320 | Arizona Public Service Co. | 5.80 | 06/30/14 | 326,642 | ||||||||||||||
360 | Carolina Power & Light Co. | 5.125 | 09/15/13 | 374,979 | ||||||||||||||
95 | CenterPoint Energy Resources, Corp. | 6.25 | 02/01/37 | 90,999 | ||||||||||||||
55 | CenterPoint Energy Resources, Corp. (Series B) | 7.875 | 04/01/13 | 62,151 | ||||||||||||||
125 | Consolidated Natural Gas Co. (Series C) | 6.25 | 11/01/11 | 132,741 | ||||||||||||||
200 | Consumers Energy Co. (Series H) | 4.80 | 02/17/09 | 201,315 | ||||||||||||||
165 | Detroit Edison Co. (The) | 6.125 | 10/01/10 | 174,628 | ||||||||||||||
145 | Entergy Gulf States, Inc. | 3.60 | 06/01/08 | 144,318 | ||||||||||||||
285 | Entergy Gulf States, Inc. | 5.524 | † | 12/01/09 | 278,718 | |||||||||||||
120 | Ohio Edison Co. | 6.40 | 07/15/16 | 126,707 | ||||||||||||||
330 | Ohio Power Company (Series K) | 6.00 | 06/01/16 | 341,739 | ||||||||||||||
205 | Public Service Electric & Gas Co. (Series B) | 5.00 | 01/01/13 | 210,530 | ||||||||||||||
180 | Texas Eastern Transmission | 7.00 | 07/15/32 | 199,821 | ||||||||||||||
2,665,288 | ||||||||||||||||||
See Notes to Financial Statements
15
Morgan Stanley Balanced Fund
Portfolio of Investments January 31, 2008 continued
PRINCIPAL AMOUNT IN THOUSANDS | COUPON RATE | MATURITY DATE | VALUE | |||||||||||||||
Electrical Products (0.1%) | ||||||||||||||||||
$ | 340 | Cooper Industries, Inc. | 5.25 | % | 11/15/12 | $ | 353,273 | |||||||||||
Electronics/Appliances (0.1%) | ||||||||||||||||||
260 | LG Electronics Inc. – 144A** (South Korea) | 5.00 | 06/17/10 | 258,828 | ||||||||||||||
Finance/Rental/Leasing (0.4%) | ||||||||||||||||||
280 | Capmark Financial Group Inc. – 144A** | 5.875 | 05/10/12 | 205,024 | ||||||||||||||
115 | Capmark Financial Group Inc. – 144A** | 6.30 | 05/10/17 | 80,693 | ||||||||||||||
290 | CIT Group Inc. (Series MTN) | 4.75 | 08/15/08 | 289,078 | ||||||||||||||
310 | Countrywide Home Loans, Inc. (Series L) | 3.25 | 05/21/08 | 299,657 | ||||||||||||||
385 | Nationwide Building Society – 144A** (United Kingdom) | 4.25 | 02/01/10 | 390,613 | ||||||||||||||
1,265,065 | ||||||||||||||||||
Financial Conglomerates (0.6%) | ||||||||||||||||||
1,000 | Associates Corp. of North America | 6.25 | 11/01/08 | 1,018,760 | ||||||||||||||
55 | Bank One Corp. (Series A) | 6.00 | 02/17/09 | 56,083 | ||||||||||||||
55 | Brookfield Asset Management Inc. (Canada) | 5.80 | 04/25/17 | 54,565 | ||||||||||||||
485 | Chase Manhattan Corp. | 6.00 | 02/15/09 | 494,459 | ||||||||||||||
215 | Citigroup Inc. | 5.875 | 05/29/37 | 203,238 | ||||||||||||||
175 | General Electric Capital Corp. (Series A) | 4.25 | 12/01/10 | 178,231 | ||||||||||||||
80 | Prudential Financial Inc. | 6.625 | 12/01/37 | 81,460 | ||||||||||||||
2,086,796 | ||||||||||||||||||
Food Retail (0.1%) | ||||||||||||||||||
330 | Fred Meyer, Inc. | 7.45 | 03/01/08 | 330,818 | ||||||||||||||
Food: Major Diversified (0.1%) | ||||||||||||||||||
170 | ConAgra Foods, Inc. | 7.00 | 10/01/28 | 181,073 | ||||||||||||||
105 | ConAgra Foods, Inc. | 8.25 | 09/15/30 | 126,247 | ||||||||||||||
307,320 | ||||||||||||||||||
Gas Distributors (0.1%) | ||||||||||||||||||
285 | NiSource Finance Corp. | 5.585 | 11/23/09 | 278,161 | ||||||||||||||
Home Improvement Chains (0.1%) | ||||||||||||||||||
460 | Home Depot Inc. | 5.116 | † | 12/16/09 | 450,335 | |||||||||||||
See Notes to Financial Statements
16
Morgan Stanley Balanced Fund
Portfolio of Investments January 31, 2008 continued
PRINCIPAL AMOUNT IN THOUSANDS | COUPON RATE | MATURITY DATE | VALUE | |||||||||||||||
Industrial Conglomerates (0.4%) | ||||||||||||||||||
$ | 975 | General Electric Co. | 5.25 | % | 12/06/17 | $ | 985,461 | |||||||||||
295 | Textron Financial Corp. | 4.125 | 03/03/08 | 295,217 | ||||||||||||||
180 | Textron Financial Corp. (Series MTN) | 5.125 | 02/03/11 | 185,082 | ||||||||||||||
1,465,760 | ||||||||||||||||||
Insurance Brokers/Services (0.2%) | ||||||||||||||||||
700 | Farmers Exchange Capital – 144A** | 7.05 | 07/15/28 | 663,076 | ||||||||||||||
Investment Banks/Brokers (0.4%) | ||||||||||||||||||
190 | Bear Stearns Co, Inc. | 6.40 | 10/02/17 | 180,684 | ||||||||||||||
205 | Bear Stearns Co, Inc. | 7.25 | 02/01/18 | 205,353 | ||||||||||||||
530 | Goldman Sachs Group Inc. | 6.75 | 10/01/37 | 521,599 | ||||||||||||||
470 | Lehman Brothers Holdings, Inc. | 6.875 | 07/17/37 | 458,710 | ||||||||||||||
1,366,346 | ||||||||||||||||||
Major Banks (0.8%) | ||||||||||||||||||
185 | Bank of America Corp. | 5.75 | 12/01/17 | 190,699 | ||||||||||||||
250 | Bank of New York Co., Inc. (The) (Series T) | 3.80 | 02/01/08 | 250,000 | ||||||||||||||
225 | HSBC Finance Corp. | 6.75 | 05/15/11 | 236,999 | ||||||||||||||
250 | Huntington National Bank (Series T) | 4.375 | 01/15/10 | 252,869 | ||||||||||||||
555 | MBNA Corp. (Series F) | 5.308 | † | 05/05/08 | 555,729 | |||||||||||||
175 | Popular North America, Inc. (Series F) | 5.65 | 04/15/09 | 173,952 | ||||||||||||||
585 | UniCredit Luxembourg Finance S.A. – 144A** (Luxembourg) | 3.768 | † | 10/24/08 | 584,107 | |||||||||||||
420 | Wells Fargo Company | 5.625 | 12/11/17 | 432,438 | ||||||||||||||
2,676,793 | ||||||||||||||||||
Major Telecommunications (0.8%) | ||||||||||||||||||
95 | AT&T Corp. | 8.00 | 11/15/31 | 114,661 | ||||||||||||||
385 | AT&T Inc. | 6.30 | 01/15/38 | 383,593 | ||||||||||||||
315 | France Telecom S.A. (France) | 8.50 | 03/01/31 | 402,480 | ||||||||||||||
230 | SBC Communications, Inc. | 6.15 | 09/15/34 | 224,773 | ||||||||||||||
255 | Sprint Capital Corp. | 8.75 | 03/15/32 | 250,765 | ||||||||||||||
210 | Telecom Italia Capital SA (Luxembourg) | 4.00 | 11/15/08 | 208,891 | ||||||||||||||
200 | Telecom Italia Capital SA (Luxembourg) | 4.00 | 01/15/10 | 197,817 | ||||||||||||||
325 | Telefonica Europe BV (Netherlands) | 8.25 | 09/15/30 | 399,589 | ||||||||||||||
400 | Verizon New England Inc. | 6.50 | 09/15/11 | 423,878 | ||||||||||||||
2,606,447 | ||||||||||||||||||
See Notes to Financial Statements
17
Morgan Stanley Balanced Fund
Portfolio of Investments January 31, 2008 continued
PRINCIPAL AMOUNT IN THOUSANDS | COUPON RATE | MATURITY DATE | VALUE | |||||||||||||||
Managed Health Care (0.1%) | ||||||||||||||||||
$ | 230 | UnitedHealth Group Inc. | 5.204 | †% | 03/02/09 | $ | 228,430 | |||||||||||
170 | UnitedHealth Group Inc. | 4.125 | 08/15/09 | 170,763 | ||||||||||||||
399,193 | ||||||||||||||||||
Media Conglomerates (0.3%) | ||||||||||||||||||
600 | Time Warner, Inc. | 5.109 | † | 11/13/09 | 582,621 | |||||||||||||
315 | Viacom, Inc. | 6.875 | 04/30/36 | 308,731 | ||||||||||||||
891,352 | ||||||||||||||||||
Motor Vehicles (0.1%) | ||||||||||||||||||
175 | DaimlerChrysler North American Holdings Co. | 8.50 | 01/18/31 | 219,508 | ||||||||||||||
Multi-Line Insurance (0.4%) | ||||||||||||||||||
740 | AIG SunAmerica Global Financing VI – 144A** | 6.30 | 05/10/11 | 784,100 | ||||||||||||||
290 | American General Finance Corp. (Series H) | 4.625 | 09/01/10 | 293,051 | ||||||||||||||
20 | American General Finance Corp. (Series I) | 4.625 | 05/15/09 | 20,180 | ||||||||||||||
195 | Equitable Co. | 6.50 | 04/01/08 | 196,063 | ||||||||||||||
1,293,394 | ||||||||||||||||||
Oil & Gas Pipelines (0.1%) | ||||||||||||||||||
290 | Plains All American Pipeline LP/PAA Finance Corp. | 6.70 | 05/15/36 | 290,510 | ||||||||||||||
Oil Refining/Marketing (0.1%) | ||||||||||||||||||
245 | Valero Energy Corp. | 3.50 | 04/01/09 | 245,106 | ||||||||||||||
Other Metals/Minerals (0.1%) | ||||||||||||||||||
405 | Brascan Corp. (Canada) | 7.125 | 06/15/12 | 412,408 | ||||||||||||||
Property – Casualty Insurers (0.4%) | ||||||||||||||||||
660 | Mantis Reef Ltd. – 144A** (Australia) | 4.692 | 11/14/08 | 663,554 | ||||||||||||||
135 | Platinum Underwriters Finance Inc. (Series B) | 7.50 | 06/01/17 | 144,651 | ||||||||||||||
630 | Xlliac Global Funding – 144A** | 4.80 | 08/10/10 | 627,922 | ||||||||||||||
1,436,127 | ||||||||||||||||||
Railroads (0.1%) | ||||||||||||||||||
210 | Burlington Santa Fe Corp. | 6.125 | 03/15/09 | 214,516 | ||||||||||||||
95 | Union Pacific Corp. | 6.625 | 02/01/08 | 95,000 | ||||||||||||||
309,516 | ||||||||||||||||||
See Notes to Financial Statements
18
Morgan Stanley Balanced Fund
Portfolio of Investments January 31, 2008 continued
PRINCIPAL AMOUNT IN THOUSANDS | COUPON RATE | MATURITY DATE | VALUE | |||||||||||||||
Real Estate Development (0.3%) | ||||||||||||||||||
$ | 568 | World Financial Properties – 144A** | 6.91 | % | 09/01/13 | $ | 583,663 | |||||||||||
306 | World Financial Properties – 144A** | 6.95 | 09/01/13 | 307,500 | ||||||||||||||
891,163 | ||||||||||||||||||
Real Estate Investment Trusts (0.1%) | ||||||||||||||||||
465 | iStar Financial Inc. | 5.496 | † | 03/09/10 | 414,200 | |||||||||||||
Regional Banks (0.2%) | ||||||||||||||||||
660 | Marshall & Ilsley Bank (Series T) | 3.80 | 02/08/08 | 659,999 | ||||||||||||||
Restaurants (0.1%) | ||||||||||||||||||
255 | Tricon Global Restaurants, Inc. | 8.875 | 04/15/11 | 284,107 | ||||||||||||||
Savings Banks (0.6%) | ||||||||||||||||||
60 | Household Finance Corp. | 4.125 | 12/15/08 | 60,194 | ||||||||||||||
175 | Household Finance Corp. | 5.875 | 02/01/09 | 178,455 | ||||||||||||||
135 | Household Finance Corp. | 6.375 | 10/15/11 | 141,513 | ||||||||||||||
255 | Household Finance Corp. | 6.40 | 06/17/08 | 257,382 | ||||||||||||||
580 | Sovereign Bancorp, Inc. | 5.114 | † | 03/23/10 | 555,088 | |||||||||||||
200 | Sovereign Bank (Series CD) | 4.00 | 02/01/08 | 200,000 | ||||||||||||||
290 | Washington Mutual Bank | 5.50 | 01/15/13 | 269,266 | ||||||||||||||
225 | Washington Mutual Inc. | 8.25 | 04/01/10 | 214,067 | ||||||||||||||
1,875,965 | ||||||||||||||||||
Total Corporate Bonds (Cost $29,285,903) | 29,245,859 | |||||||||||||||||
U.S. Government Obligations (4.0%) | ||||||||||||||||||
7,450 | U.S. Treasury Note | 5.375 | 02/15/31 | 8,540,151 | ||||||||||||||
4,755 | U.S. Treasury Note ## | 4.25 | 08/15/13 | 5,075,506 | ||||||||||||||
Total U.S. Government Obligations (Cost $12,895,101) | 13,615,657 | |||||||||||||||||
Mortgage-Backed Securities (7.7%) | ||||||||||||||||||
Federal Home Loan Mortgage Corp. Gold | ||||||||||||||||||
118 | 6.50 | 01/01/31 | 123,932 | |||||||||||||||
271 | 7.50 | 08/01/11 – 06/01/32 | 292,197 | |||||||||||||||
Federal Home Loan Mortgage Corp. (ARM) | ||||||||||||||||||
566 | 5.613 | 04/01/37 | 581,518 | |||||||||||||||
801 | 5.718 | 01/01/37 | 817,835 | |||||||||||||||
See Notes to Financial Statements
19
Morgan Stanley Balanced Fund
Portfolio of Investments January 31, 2008 continued
PRINCIPAL AMOUNT IN THOUSANDS | COUPON RATE | MATURITY DATE | VALUE | |||||||||||||||
Federal National Mortgage Assoc. | ||||||||||||||||||
$ | 573 | 6.50 | % | 07/01/32 – 08/01/32 | $ | 598,155 | ||||||||||||
2,125 | 7.00 | 07/01/18 – 11/01/34 | 2,269,229 | |||||||||||||||
450 | 7.00 | ### | 472,922 | |||||||||||||||
1,525 | 7.50 | 08/01/23 – 09/01/35 | 1,650,202 | |||||||||||||||
489 | 8.00 | 05/01/24 – 02/01/32 | 532,150 | |||||||||||||||
7 | 9.50 | 12/01/20 | 8,113 | |||||||||||||||
Federal National Mortgage Assoc. (ARM) | ||||||||||||||||||
2,192 | 6.766 | 01/01/36 | 2,233,855 | |||||||||||||||
205 | 6.801 | 07/01/33 | 209,249 | |||||||||||||||
1,036 | 7.24 | 05/01/36 | 1,068,895 | |||||||||||||||
962 | 7.251 | 05/01/36 | 984,187 | |||||||||||||||
817 | 7.259 | 05/01/36 | 837,596 | |||||||||||||||
891 | 6.861 | 03/01/36 | 908,546 | |||||||||||||||
993 | 6.782 | 03/01/36 | 1,012,081 | |||||||||||||||
718 | 7.298 | 07/01/36 | 735,282 | |||||||||||||||
1,082 | 6.829 | 10/01/35 | 1,120,840 | |||||||||||||||
925 | 6.829 | 11/01/35 | 957,437 | |||||||||||||||
1,075 | 6.824 | 12/01/35 | 1,113,096 | |||||||||||||||
554 | 5.97 | 04/01/37 | 573,992 | |||||||||||||||
2,136 | 6.774 | 01/01/36 | 2,177,541 | |||||||||||||||
2,145 | 7.247 | 04/01/36 | 2,194,958 | |||||||||||||||
1,037 | 7.283 | 07/01/36 | 1,068,583 | |||||||||||||||
1,307 | 7.293 | 04/01/36 | 1,338,240 | |||||||||||||||
Federal National Mortgage Assoc. (Dwarf) | ||||||||||||||||||
81 | 7.00 | 07/01/11 – 06/01/12 | 84,779 | |||||||||||||||
Government National Mortgage Assoc. | ||||||||||||||||||
103 | 7.50 | 08/15/25 – 06/15/27 | 110,881 | |||||||||||||||
88 | 8.00 | 04/15/26 – 08/15/26 | 96,446 | |||||||||||||||
Total Mortgage-Backed Securities (Cost $26,060,941) | 26,172,737 | |||||||||||||||||
See Notes to Financial Statements
20
Morgan Stanley Balanced Fund
Portfolio of Investments January 31, 2008 continued
PRINCIPAL AMOUNT IN THOUSANDS | COUPON RATE | MATURITY DATE | VALUE | |||||||||||||||
Collateralized Mortgage Obligations (5.6%) | ||||||||||||||||||
U.S. Government Agencies (1.0%) | ||||||||||||||||||
$ | 593 | Federal Home Loan Mortgage Corp. | ||||||||||||||||
Whole Loan 2005-S001 2A2 | 3.526 | †% | 09/25/45 | $ | 586,199 | |||||||||||||
Federal National Mortgage Assoc. | ||||||||||||||||||
1,018 | 2006-118 A2 | 3.436 | † | 12/25/36 | 996,226 | |||||||||||||
846 | 2006-28 1A1 | 3.486 | † | 03/25/36 | 839,223 | |||||||||||||
9,038 | 2006-59 IP (IO) | 3.584 | † | 07/25/36 | 330,431 | |||||||||||||
2,142 | 2005-68 XI (IO) | 6.00 | 08/25/35 | 474,619 | ||||||||||||||
9,879 | 2006-28 1P (IO) | 3.003 | † | 03/25/36 | 265,503 | |||||||||||||
Total U.S. Government Agencies | 3,492,201 | |||||||||||||||||
Private Issues (4.6%) | ||||||||||||||||||
591 | Adjustable Rate Mortgage Trust 2005-6A 2A1 | 3.686 | † | 11/25/35 | 561,280 | |||||||||||||
688 | Alliance Bancorp Trust 2007-0A1 A1 | 3.616 | † | 07/25/37 | 648,513 | |||||||||||||
American Home Mortgage Assets | ||||||||||||||||||
381 | 2007-5 A3 | 3.676 | † | 06/25/47 | 290,323 | |||||||||||||
558 | 2006-5 A2 | 5.632 | † | 11/25/46 | 529,412 | |||||||||||||
571 | 2007-5 A2 | 3.616 | † | 06/25/47 | 484,667 | |||||||||||||
647 | 2006-2 2A2 | 3.606 | † | 09/25/46 | 580,421 | |||||||||||||
American Home Mortgage Investment Trust | ||||||||||||||||||
843 | 2007-1 GA1C | 3.566 | † | 05/25/47 | 785,286 | |||||||||||||
292 | 2006-1 1A2 | 3.566 | † | 03/25/46 | 264,458 | |||||||||||||
300 | 2006-1 1M1 | 3.756 | † | 03/25/46 | 211,591 | |||||||||||||
Bear Stearns Mortgage Funding Trust | ||||||||||||||||||
594 | 2006-AR4 A1 | 3.586 | † | 12/25/36 | 559,400 | |||||||||||||
598 | 2006-AR5 1A1 | 3.536 | † | 12/25/36 | 567,128 | |||||||||||||
597 | 2007-AR1 1A2 | 3.586 | † | 01/25/37 | 541,619 | |||||||||||||
693 | 2006-AR5 1A2 | 3.586 | † | 12/25/36 | 634,226 | |||||||||||||
Countrywide Alternative Loan Trust | ||||||||||||||||||
896 | 2007-0A8 2A2 | 3.606 | † | 06/25/47 | 808,110 | |||||||||||||
554 | 2005-56 2A3 | 6.162 | † | 11/25/35 | 542,462 | |||||||||||||
363 | 2006-0A17 1A3 | 4.234 | † | 12/20/46 | 278,581 | |||||||||||||
257 | 2006-0A21 A3 | 4.214 | † | 03/20/47 | 200,695 | |||||||||||||
599 | 2007-0A10 2A1 | 3.626 | † | 09/25/47 | 561,647 | |||||||||||||
3,542 | 2006-OA17 1XP (IO) | 3.473 | † | 12/20/46 | 189,603 | |||||||||||||
2,632 | 2004-25 2X (IO) | 3.209 | † | 02/25/35 | 49,349 | |||||||||||||
4,724 | 2006-0A21 X (IO) | 3.639 | † | 03/20/47 | 269,059 | |||||||||||||
See Notes to Financial Statements
21
Morgan Stanley Balanced Fund
Portfolio of Investments January 31, 2008 continued
PRINCIPAL AMOUNT IN THOUSANDS | COUPON RATE | MATURITY DATE | VALUE | |||||||||||||||
$ | 591 | DSLA Mortgage Loan Trust 2007-AR1 2A1A | 4.074 | †% | 04/19/38 | $ | 552,036 | |||||||||||
1,235 | GS Mortgage Securities Corp. 2006-0A1R A (IO) | 3.816 | † | 08/25/35 | 48,642 | |||||||||||||
Harborview Mortgage Loan Trust | ||||||||||||||||||
819 | 2006-14 2A1A | 4.084 | † | 03/19/38 | 763,740 | |||||||||||||
148 | 2005-16 B2 | 4.634 | † | 01/19/36 | 106,103 | |||||||||||||
200 | 2006-SB1 M1 | 4.339 | † | 12/19/36 | 120,000 | |||||||||||||
325 | Master Adjustable Rate Mortgages Trust 2007-3 1M1 | 4.226 | † | 05/25/47 | 132,971 | |||||||||||||
Residential Accredited Loans, Inc. | ||||||||||||||||||
333 | 2007-Q04 A1 | 3.576 | † | 05/25/47 | 312,092 | |||||||||||||
524 | 2007-Q04 A2 | 3.636 | † | 05/25/47 | 477,330 | |||||||||||||
310 | 2007-Q04 A3 | 3.676 | † | 05/25/47 | 241,366 | |||||||||||||
661 | 2007-Q03 A3 | 3.636 | † | 03/25/47 | 504,602 | |||||||||||||
521 | Structured Adjustable Mortgage Rate Loan 2005-16XS A1 | 3.716 | † | 08/25/35 | 492,495 | |||||||||||||
Structured Asset Mortgage Investments Inc. | ||||||||||||||||||
667 | 2006-AR6 2A2 | 3.606 | † | 07/25/46 | 591,439 | |||||||||||||
225 | 2006-AR7 B1 | 3.746 | † | 08/25/36 | 160,624 | |||||||||||||
WAMU Mortgage Pass-Through Certificates | ||||||||||||||||||
930 | 2007-OA6 CA1B | 3.606 | † | 07/25/47 | 843,838 | |||||||||||||
425 | 2005-AR13 A1A2 | 6.238 | † | 10/25/45 | 410,760 | |||||||||||||
150 | 2006-AR5 A1B3 | 3.726 | † | 06/25/46 | 114,101 | |||||||||||||
Total Private Issues | 15,429,969 | |||||||||||||||||
Total Collateralized Mortgage Obligations (Cost $20,023,050) | 18,922,170 | |||||||||||||||||
Asset-Backed Securities (3.7%) | ||||||||||||||||||
214 | Banc of America Securities Auto Trust 2005-WF1 A3 | 3.99 | 08/18/09 | 214,775 | ||||||||||||||
189 | Capital Auto Receivables Asset Trust 2005-1 A4 | 4.05 | 07/15/09 | 188,896 | ||||||||||||||
975 | Capital Auto Receivables Asset Trust 2006-2 A3A | 4.98 | 05/15/11 | 988,849 | ||||||||||||||
250 | Capital Auto Receivables Asset Trust 2006-SN1A A3 | 5.31 | 10/20/09 | 251,427 | ||||||||||||||
875 | Capital Auto Receivables Asset Trust 2007-SN1 A3B | 5.088 | † | 07/15/10 | 867,695 | |||||||||||||
323 | Caterpillar Financial Asset Trust 2006-A A3 | 5.57 | 05/25/10 | 326,481 | ||||||||||||||
825 | Citibank Credit Card Issuance Trust 2007-A1 A1 | 4.874 | † | 03/22/12 | 818,262 | |||||||||||||
525 | Citibank Credit Card Issuance Trust 2007-A8 A8 | 5.65 | 09/20/19 | 533,859 | ||||||||||||||
11 | CNH Equipment Trust 2005-A A3 | 4.02 | 04/15/09 | 10,891 | ||||||||||||||
468 | CNH Equipment Trust 2005-B A3 | 4.27 | 01/15/10 | 468,629 | ||||||||||||||
154 | DaimlerChrysler Auto Trust 2005-B A3 | 4.04 | 09/08/09 | 154,145 | ||||||||||||||
417 | Ford Credit Auto Owner Trust 2006-A A3 | 5.05 | 03/15/10 | 420,396 | ||||||||||||||
567 | GE Equipment Small Ticket LLC 2005-2A A3 – 144A** | 4.88 | 10/22/09 | 571,063 | ||||||||||||||
250 | GS Auto Loan Trust 2006-1 A3 | 5.37 | 12/15/10 | 253,098 | ||||||||||||||
See Notes to Financial Statements
22
Morgan Stanley Balanced Fund
Portfolio of Investments January 31, 2008 continued
PRINCIPAL AMOUNT IN THOUSANDS | COUPON RATE | MATURITY DATE | VALUE | |||||||||||||||
$ | 150 | Harley-Davidson Motorcycle Trust 2005-3 A2 | 4.41 | % | 06/15/12 | $ | 151,466 | |||||||||||
1,032 | Harley-Davidson Motorcycle Trust 2005-1 A2 | 3.76 | 12/17/12 | 1,035,871 | ||||||||||||||
727 | Harley-Davidson Motorcycle Trust 2005-2 A2 | 4.07 | 02/15/12 | 730,782 | ||||||||||||||
650 | Hertz Vehicle Financing LLC 2005-2A A2 – 144A** | 4.93 | 02/25/10 | 639,837 | ||||||||||||||
17 | Honda Auto Receivables Owner Trust 2005-2 A3 | 3.93 | 01/15/09 | 17,036 | ||||||||||||||
204 | Honda Auto Receivables Owner Trust 2005-3 A3 | 3.87 | 04/20/09 | 204,636 | ||||||||||||||
511 | Honda Auto Receivables Owner Trust 2005-6 A3 | 4.85 | 10/19/09 | 513,473 | ||||||||||||||
237 | Hyundai Auto Receivables Trust 2005-A A3 | 3.98 | 11/16/09 | 237,235 | ||||||||||||||
150 | Lehman XS Trust 2006-16N M2 | 3.776 | † | 11/25/46 | 103,565 | |||||||||||||
290 | MBNA Master Credit Card Trust 1999-B A | 5.90 | 08/15/11 | 298,572 | ||||||||||||||
219 | Merrill Auto Trust Securitization 2005-1 A3 | 4.10 | 08/25/09 | 219,354 | ||||||||||||||
336 | National City Auto Receivables Trust 2004-A A4 | 2.88 | 05/15/11 | 335,761 | ||||||||||||||
306 | Nissan Auto Receivables Owner Trust 2005-B A3 | 3.99 | 07/15/09 | 306,820 | ||||||||||||||
250 | TXU Electric Delivery Transition Bond Co. LLC 2004-1 A2 | 4.81 | 11/17/14 | 254,614 | ||||||||||||||
511 | USAA Auto Owner Trust 2004-2 A4 | 3.58 | 02/15/11 | 510,952 | ||||||||||||||
70 | USAA Auto Owner Trust 2005-1 A3 | 3.90 | 07/15/09 | 70,337 | ||||||||||||||
339 | Volkswagen Auto Loan Enhanced Trust 2005-1 A3 | 4.80 | 07/20/09 | 339,996 | ||||||||||||||
133 | Wachovia Auto Owner Trust 2005-A A3 | 4.06 | 09/21/09 | 132,987 | ||||||||||||||
446 | Wachovia Auto Owner Trust 2005-B A3 | 4.79 | 04/20/10 | 447,427 | ||||||||||||||
Total Asset-Backed Securities (Cost $12,583,565) | 12,619,187 | |||||||||||||||||
NUMBER OF CONTRACTS | ||||||||||
Put Option Purchased (0.0%) | ||||||||||
168 | 90 day Euro $ March/2008 @94.50 (Cost $9,672) | 0 | ||||||||
PRINCIPAL AMOUNT IN THOUSANDS | ||||||||||||||||||
Short-Term Investments (5.2%) | ||||||||||||||||||
U.S. Government Obligation (b) (0.2%) | ||||||||||||||||||
$ | 650 | U.S. Treasury Bill # (Cost $646,076) | 3.15 | 04/10/08 | 646,076 | |||||||||||||
NUMBER OF SHARES (000) | ||||||||||
Investment Company (c) (5.0%) | ||||||||||
16,788 | Morgan Stanley Institutional Liquidity Money Market Portfolio – Institutional Class (Cost $16,787,782) | 16,787,782 | ||||||||
Total Short-Term Investments (Cost $17,433,858) | 17,433,858 | |||||||||
See Notes to Financial Statements
23
Morgan Stanley Balanced Fund
Portfolio of Investments January 31, 2008 continued
VALUE | ||||||||||||||||||
Total Investments (Cost $333,940,134) (d) (e) | 101.6 | % | $ | 343,915,344 | ||||||||||||||
Liabilities in Excess of Other Assets | (1.6 | ) | (5,432,792 | ) | ||||||||||||||
Net Assets | 100.0 | % | $ | 338,482,552 | ||||||||||||||
ADR | American Depositary Receipt. |
ARM | Adjustable Rate Mortgage. Interest rate in effect as of January 31, 2008. |
ETF | Exchange Traded Fund. |
IO | Interest Only Security. |
MTN | Medium Term Note. |
* | Non-income producing security. |
** | Resale is restricted to qualified institutional investors. |
# | A portion of this security has been physically segregated in connection with open futures contracts in an amount equal to $61,527. |
## | Securities purchased on a forward commitment basis. |
### | Security was purchased on a forward commitment basis with an approximate principal amount and no definite maturity date; the actual principal amount and maturity date will be determined upon settlement. |
† | Floating rate security, rate shown is the rate in effect at January 31, 2008. |
(a) | A security with a total market value equal to $0 has been valued at its fair value as determined in good faith under procedures established by and under the general supervision of the Fund’s Trustees. |
(b) | Purchased on a discount basis. The interest rate shown has been adjusted to reflect a money market equivalent yield. |
(c) | See Note 4 to the financial statements regarding investments in Morgan Stanley Institutional Liquidity Money Market Portfolio – Institutional Class. |
(d) | Securities have been designated as collateral in an amount equal to $45,542,033 in connection with open futures contracts, securities purchased on a forward commitment basis and open swap contracts. |
(e) | The aggregate cost for federal income tax purposes is $335,460,475. The aggregate gross unrealized appreciation is $32,014,336 and the aggregate gross unrealized depreciation is $23,559,467 resulting in net unrealized appreciation of $8,454,869. |
See Notes to Financial Statements
24
Morgan Stanley Balanced Fund
Portfolio of Investments January 31, 2008 continued
Futures Contracts Open at January 31, 2008:
NUMBER OF CONTRACTS | LONG/ SHORT | DESCRIPTION, DELIVERY MONTH AND YEAR | UNDERLYING FACE AMOUNT AT VALUE | UNREALIZED APPRECIATION (DEPRECIATION) | ||||||||||||||
136 | Long | U.S. Treasury Note 5 Year, | $ | 15,368,000 | $ | 392,378 | ||||||||||||
March 2008 | ||||||||||||||||||
25 | Long | 90 Day Euro$ | 6,068,438 | 99,654 | ||||||||||||||
March 2008 | ||||||||||||||||||
15 | Long | U.S. Treasury Note 2 Year, | 3,198,281 | 44,893 | ||||||||||||||
March 2008 | ||||||||||||||||||
13 | Long | 90 Day Euro$ | 3,154,613 | 47,842 | ||||||||||||||
June 2009 | ||||||||||||||||||
11 | Long | 90 Day Euro$ | 2,674,788 | 59,580 | ||||||||||||||
March 2009 | ||||||||||||||||||
10 | Long | 90 Day Euro$ | 2,438,875 | 59,789 | ||||||||||||||
September 2008 | ||||||||||||||||||
10 | Long | 90 Day Euro$ | 2,435,875 | 57,289 | ||||||||||||||
December 2008 | ||||||||||||||||||
9 | Long | 90 Day Euro$ | 2,193,975 | 53,247 | ||||||||||||||
June 2008 | ||||||||||||||||||
16 | Long | U.S. Treasury Note 5 Year, | 1,801,250 | (2,101 | ) | |||||||||||||
June 2008 | ||||||||||||||||||
1 | Short | 90 Day Euro$ | (241,075 | ) | (3,128 | ) | ||||||||||||
June 2010 | ||||||||||||||||||
3 | Short | 90 Day Euro$ | (724,388 | ) | (10,021 | ) | ||||||||||||
March 2010 | ||||||||||||||||||
6 | Short | 90 Day Euro$ | (1,451,025 | ) | (22,114 | ) | ||||||||||||
December 2009 | ||||||||||||||||||
7 | Short | 90 Day Euro$ | (1,695,663 | ) | (26,751 | ) | ||||||||||||
September 2009 | ||||||||||||||||||
26 | Short | U.S. Treasury Bond 20 Year, | (3,102,125 | ) | (50,951 | ) | ||||||||||||
March 2008 | ||||||||||||||||||
118 | Short | U.S. Treasury Note 10 Year, | (13,772,813 | ) | (229,500 | ) | ||||||||||||
March 2008 | ||||||||||||||||||
Net Unrealized Appreciation | $ | 470,106 | ||||||||||||||||
See Notes to Financial Statements
25
Morgan Stanley Balanced Fund
Portfolio of Investments January 31, 2008 continued
Credit Default Swap Contracts Open at January 31, 2008:
SWAP COUNTERPARTY & REFERENCE OBLIGATION | BUY/SELL PROTECTION | NOTIONAL AMOUNT (000’S) | INTEREST RATE | TERMINATION DATE | UNREALIZED APPRECIATION (DEPRECIATION) | |||||||||||||||||
Goldman Sachs International | ||||||||||||||||||||||
Hartford Financial Services Group Inc. | Buy | $ | 650 | 0.12 | % | December 20, 2011 | $ | 11,706 | ||||||||||||||
Goldman Sachs International | ||||||||||||||||||||||
Motorola, Inc. | Buy | 220 | 0.15 | December 20, 2011 | 10,177 | |||||||||||||||||
Goldman Sachs International | ||||||||||||||||||||||
Motorola, Inc. | Buy | 450 | 0.157 | December 20, 2011 | 20,703 | |||||||||||||||||
Goldman Sachs International | ||||||||||||||||||||||
Union Pacific Corp. | Buy | 325 | 0.20 | December 20, 2011 | 4,115 | |||||||||||||||||
Goldman Sachs International | ||||||||||||||||||||||
Chubb Corp. | Buy | 650 | 0.10 | March 20, 2012 | 8,209 | |||||||||||||||||
Goldman Sachs International | ||||||||||||||||||||||
Dell Inc. | Buy | 330 | 0.22 | March 20, 2012 | 3,626 | |||||||||||||||||
Citibank, N.A. New York | ||||||||||||||||||||||
Covidien Ltd. | Buy | 133 | 0.43 | March 20, 2012 | (366 | ) | ||||||||||||||||
Citibank, N.A. New York | ||||||||||||||||||||||
Covidien Ltd. | Buy | 260 | 0.43 | March 20, 2012 | (713 | ) | ||||||||||||||||
Citibank, N.A. New York | ||||||||||||||||||||||
Tyco Electronics Ltd. | Buy | 133 | 0.43 | March 20, 2012 | 1,548 | |||||||||||||||||
Citibank, N.A. New York | ||||||||||||||||||||||
Tyco Electronics Ltd. | Buy | 260 | 0.43 | March 20, 2012 | 3,019 | |||||||||||||||||
Citibank, N.A. New York | ||||||||||||||||||||||
Tyco International Ltd. | Buy | 133 | 0.43 | March 20, 2012 | 1,548 | |||||||||||||||||
Citibank, N.A. New York | ||||||||||||||||||||||
Tyco International Ltd. | Buy | 260 | 0.43 | March 20, 2012 | 3,019 | |||||||||||||||||
Bank of America, N.A. | ||||||||||||||||||||||
Yum Brands | Buy | 255 | 1.18 | March 20, 2013 | (3,651 | ) | ||||||||||||||||
Credit Suisse Group | ||||||||||||||||||||||
Arrow Electronics | Buy | 280 | 1.00 | March 20, 2015 | (731 | ) | ||||||||||||||||
Bank of America, N.A. | ||||||||||||||||||||||
Sealed Air | Buy | 75 | 1.08 | March 20, 2018 | — | |||||||||||||||||
Goldman Sachs International | ||||||||||||||||||||||
Sealed Air | Buy | 105 | 1.08 | March 20, 2018 | (221 | ) | ||||||||||||||||
Bank of America, N.A. | ||||||||||||||||||||||
Sealed Air | Buy | 155 | 1.12 | March 20, 2018 | — | |||||||||||||||||
See Notes to Financial Statements
26
Morgan Stanley Balanced Fund
Portfolio of Investments January 31, 2008 continued
SWAP COUNTERPARTY & REFERENCE OBLIGATION | BUY/SELL PROTECTION | NOTIONAL AMOUNT (000’S) | INTEREST RATE | TERMINATION DATE | UNREALIZED APPRECIATION (DEPRECIATION) | |||||||||||||||||
Goldman Sachs International | ||||||||||||||||||||||
Sealed Air | Buy | $ | 50 | 1.24 | % | March 20, 2018 | $ | (737 | ) | |||||||||||||
Bank of America, N.A. | ||||||||||||||||||||||
Nordstrom | Buy | 140 | 1.03 | March 20, 2018 | (395 | ) | ||||||||||||||||
JP Morgan Chase Bank, N.A. | ||||||||||||||||||||||
Nordstrom | Buy | 135 | 1.07 | March 20, 2018 | (810 | ) | ||||||||||||||||
JP Morgan Chase Bank, N.A. | ||||||||||||||||||||||
Nordstrom | Buy | 135 | 1.15 | March 20, 2018 | (1,667 | ) | ||||||||||||||||
Lehman Brothers | ||||||||||||||||||||||
Goodrich | Buy | 150 | 0.45 | March 20, 2018 | 24 | |||||||||||||||||
Lehman Brothers | ||||||||||||||||||||||
Goodrich | Buy | 105 | 0.46 | March 20, 2018 | (70 | ) | ||||||||||||||||
Goldman Sachs International | ||||||||||||||||||||||
Goodrich | Buy | 150 | 0.47 | March 20, 2018 | — | |||||||||||||||||
Goldman Sachs International | ||||||||||||||||||||||
Dow Jones Index | Sell | 235 | 0.60 | December 20, 2012 | — | |||||||||||||||||
Lehman Brothers | ||||||||||||||||||||||
Dow Jones Index | Sell | 465 | 0.60 | December 20, 2012 | (561 | ) | ||||||||||||||||
Lehman Brothers | ||||||||||||||||||||||
Dow Jones Index | Sell | 230 | 0.60 | December 20, 2012 | 363 | |||||||||||||||||
Net Unrealized Appreciation | $ | 58,135 | ||||||||||||||||||||
Interest Rate Swap Contracts Open at January 31, 2008:
COUNTERPARTY | NOTIONAL AMOUNT (000’S) | PAYMENTS RECEIVED BY FUND | PAYMENTS MADE BY FUND† | TERMINATION DATE | UNREALIZED APPRECIATION | |||||||||||||||||
Citibank N.A. New York | $2,900 | Fixed Rate 5.337% | Floating Rate 5.498% | May 24, 2017 | $ | 256,012 | ||||||||||||||||
JPMorgan Chase N.A. New York | 8,500 | Fixed Rate 5.34 | Floating Rate 5.498 | May 24, 2017 | 752,080 | |||||||||||||||||
Deutsche Bank AG, New York | 3,600 | Fixed Rate 5.388 | Floating Rate 5.030 | May 25, 2017 | 332,208 | |||||||||||||||||
JPMorgan Chase N.A. New York | 4,300 | Fixed Rate 5.448 | Floating Rate 5.062 | May 29, 2017 | 415,595 | |||||||||||||||||
Citibank N.A. New York | 3,500 | Fixed Rate 5.448 | Floating Rate 5.36 | August 9, 2017 | 341,215 | |||||||||||||||||
JPMorgan Chase N.A. New York | 3,900 | Fixed Rate 5.088 | Floating Rate 5.725 | September 11, 2017 | 261,339 | |||||||||||||||||
Citibank N.A. New York | 7,000 | Fixed Rate 5.238 | Floating Rate 5.20 | September 27, 2017 | 549,640 | |||||||||||||||||
Total Unrealized Appreciation | $ | 2,908,089 | ||||||||||||||||||||
† | Floating rate represents USD-3 months LIBOR. |
See Notes to Financial Statements
27
Morgan Stanley Balanced Fund
Financial Statements
Statement of Assets and Liabilities
January 31, 2008
Assets: | ||||||
Investments in securities, at value (cost $317,152,352) | $ | 327,127,562 | ||||
Investment in affiliate, at value (cost $16,787,782) | 16,787,782 | |||||
Unrealized appreciation on open swap contracts | 2,976,146 | |||||
Receivable for: | ||||||
Investments sold | 1,197,903 | |||||
Interest | 963,857 | |||||
Periodic interest on open swap contracts | 490,573 | |||||
Dividends | 396,368 | |||||
Dividends from affiliate | 60,972 | |||||
Shares of beneficial interest sold | 60,056 | |||||
Principal paydowns | 18,693 | |||||
Prepaid expenses and other assets | 31,254 | |||||
Total Assets | 350,111,166 | |||||
Liabilities: | ||||||
Unrealized depreciation on open swap contracts | 9,922 | |||||
Payable for: | ||||||
Investments purchased | 6,464,782 | |||||
Swap contracts collateral due to broker | 3,940,000 | |||||
Shares of beneficial interest redeemed | 313,893 | |||||
Periodic interest on open swap contracts | 306,860 | |||||
Distribution fee | 219,605 | |||||
Investment advisory fee | 149,624 | |||||
Variation margin | 31,890 | |||||
Administration fee | 23,541 | |||||
Premium received on open swap contracts | 20,659 | |||||
Transfer agent fee | 13,613 | |||||
Accrued expenses and other payables | 134,225 | |||||
Total Liabilities | 11,628,614 | |||||
Net Assets | $ | 338,482,552 | ||||
Composition of Net Assets: | ||||||
Paid-in-capital | $ | 320,796,568 | ||||
Net unrealized appreciation | 13,411,540 | |||||
Accumulated undistributed net investment income | 964,069 | |||||
Accumulated undistributed net realized gain | 3,310,375 | |||||
Net Assets | $ | 338,482,552 | ||||
Class A Shares: | ||||||
Net Assets | $ | 114,929,268 | ||||
Shares Outstanding (unlimited authorized, $.01 par value) | 8,310,408 | |||||
Net Asset Value Per Share | $ | 13.83 | ||||
Maximum Offering Price Per Share, (net asset value plus 5.54% of net asset value) | $ | 14.60 | ||||
Class B Shares: | ||||||
Net Assets | $ | 123,950,591 | ||||
Shares Outstanding (unlimited authorized, $.01 par value) | 8,957,072 | |||||
Net Asset Value Per Share | $ | 13.84 | ||||
Class C Shares: | ||||||
Net Assets | $ | 99,121,274 | ||||
Shares Outstanding (unlimited authorized, $.01 par value) | 7,161,350 | |||||
Net Asset Value Per Share | $ | 13.84 | ||||
Class D Shares: | ||||||
Net Assets | $ | 481,419 | ||||
Shares Outstanding (unlimited authorized, $.01 par value) | 34,831 | |||||
Net Asset Value Per Share | $ | 13.82 | ||||
See Notes to Financial Statements
28
Morgan Stanley Balanced Fund
Financial Statements continued
Statement of Operations
For the year ended January 31, 2008
Net Investment Income: | ||||||
Income | ||||||
Interest | $ | 5,884,536 | ||||
Dividends (net of $152,184 foreign withholding tax) | 6,244,592 | |||||
Dividends from affiliate | 364,626 | |||||
Total Income | 12,493,754 | |||||
Expenses | ||||||
Investment advisory fee | 2,072,030 | |||||
Distribution fee (Class A shares) | 310,433 | |||||
Distribution fee (Class B shares) | 1,588,215 | |||||
Distribution fee (Class C shares) | 1,139,546 | |||||
Transfer agent fees and expenses | 465,542 | |||||
Administration fee | 318,774 | |||||
Professional fees | 82,833 | |||||
Custodian fees | 75,440 | |||||
Registration fees | 47,756 | |||||
Shareholder reports and notices | 43,385 | |||||
Trustees’ fees and expenses | 6,721 | |||||
Other | 52,062 | |||||
Total Expenses | 6,202,737 | |||||
Less: amounts waived/reimbursed | (7,862 | ) | ||||
Less: expense offset | (3,088 | ) | ||||
Net Expenses | 6,191,787 | |||||
Net Investment Income | 6,301,967 | |||||
Net Realized and Unrealized Gain (Loss): | ||||||
Net Realized Gain (Loss) on: | ||||||
Investments | 36,168,601 | |||||
Futures contracts | (638,992 | ) | ||||
Option contracts | (125,659 | ) | ||||
Swap contracts | 320,731 | |||||
Net Realized Gain | 35,724,681 | |||||
Net Change in Unrealized Appreciation/Depreciation on: | ||||||
Investments | (46,742,644 | ) | ||||
Futures contracts | 725,356 | |||||
Swap contracts | 2,954,864 | |||||
Option contracts | 108,673 | |||||
Net Change in Unrealized Appreciation/Depreciation | (42,953,751 | ) | ||||
Net Loss | (7,229,070 | ) | ||||
Net Decrease | $ | (927,103 | ) | |||
See Notes to Financial Statements
29
Morgan Stanley Balanced Fund
Financial Statements continued
Statements of Changes in Net Assets
FOR THE YEAR ENDED JANUARY 31, 2008 | FOR THE YEAR ENDED JANUARY 31, 2007 | |||||||||
Increase (Decrease) in Net Assets: | ||||||||||
Operations: | ||||||||||
Net investment income | $ | 6,301,967 | $ | 4,250,794 | ||||||
Net realized gain | 35,724,681 | 22,330,301 | ||||||||
Net change in unrealized appreciation/depreciation | (42,953,751 | ) | 7,806,685 | |||||||
Net Increase (Decrease) | (927,103 | ) | 34,387,780 | |||||||
Dividends and Distributions to Shareholders from: | ||||||||||
Net investment income | ||||||||||
Class A shares | (2,865,762 | ) | (1,292,653 | ) | ||||||
Class B shares | (2,419,414 | ) | (1,456,409 | ) | ||||||
Class C shares | (1,753,500 | ) | (1,159,994 | ) | ||||||
Class D shares | (39,533 | ) | (31,820 | ) | ||||||
Net realized gain | ||||||||||
Class A shares | (5,466,736 | ) | (4,941,049 | ) | ||||||
Class B shares | (6,246,619 | ) | (8,342,064 | ) | ||||||
Class C shares | (4,782,146 | ) | (6,103,928 | ) | ||||||
Class D shares | (25,315 | ) | (100,627 | ) | ||||||
Total Dividends and Distributions | (23,599,025 | ) | (23,428,544 | ) | ||||||
Net increase (decrease) from transactions in shares of beneficial interest | (73,394,430 | ) | 225,411,146 | |||||||
Net Increase (Decrease) | (97,920,558 | ) | 236,370,382 | |||||||
Net Assets: | ||||||||||
Beginning of period | 436,403,110 | 200,032,728 | ||||||||
End of Period (Including accumulated undistributed net investment income of $964,069 and dividends in excess of net investment income of $26,810, respectively) | $ | 338,482,552 | $ | 436,403,110 | ||||||
See Notes to Financial Statements
30
Morgan Stanley Balanced Fund
Notes to Financial Statements January 31, 2008
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 D shares. The four classes are substantially the same except that most Class A shares are subject to a sales charge imposed at the time of purchase and some Class A shares, and most Class B shares and Class C shares are subject to a contingent deferred sales charge imposed on shares redeemed within eighteen months, six years and one year, respectively. Class D shares are not subject to a sales charge. Additionally, Class A shares, Class B shares and Class C shares incur distribution expenses.
The Fund will assess a 2% redemption fee, on Class A shares, Class B shares, Class C shares, and Class D shares, which is paid directly to the Fund, for shares redeemed or exchanged within seven days of purchase, subject to certain exceptions. The redemption fee is designed to protect the Fund and its remaining shareholders from the effects of short-term trading.
The following is a summary of significant accounting policies:
A. Valuation of Investments — (1) an equity portfolio security listed or traded on the New York Stock Exchange (‘‘NYSE’’) or American Stock Exchange or other exchange is valued at its latest sale price prior to the time when assets are valued; if there were no sales that day, the security is valued at the mean between the last reported bid and asked price; (2) an equity portfolio security listed or traded on the Nasdaq is valued at the Nasdaq Official Closing Price; if there were no sales that day, the security is valued at the mean between the last reported bid and asked price; (3) all other portfolio securities for which over-the-counter market quotations are readily available are valued at the mean between the last reported bid and asked price. In cases where a security is traded on more than one exchange, the security is valued on the exchange designated as th e 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 sale 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 have taken place that day, in which case they are valued at the mean between their latest bid and asked price; (6) futures are valued at the latest price published by the commodities exchange on which they trade; (7) credit default/interest rate 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 asked price do not reflect a security’s market value, portfolio
31
Morgan Stanley Balanced Fund
Notes to Financial Statements January 31, 2008 continued
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; (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.
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.
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 Contracts — 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 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 recorded as a liability which is subsequently marked-to-market to reflect the current market value. 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
32
Morgan Stanley Balanced Fund
Notes to Financial Statements January 31, 2008 continued
is extinguished. If a written call option is exercised, the Fund realizes a gain or loss from the sale of the underlying security 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.
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 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.
F. Credit Default Swaps — A credit default swap is an agreement between two parties to exchange the credit risk of an issuer. The Fund may purchase credit protection on the referenced obligation of the credit default swap (‘‘Buy Contract’’), or provide credit protection on the referenced obligation of the credit default swap (‘‘Sale Contract’’). 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, 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. If a credit event occurs, th e seller pays to the buyer the maximum payout amount limited to the notional amount of the swap contract as disclosed in the table following the Portfolio of Investments. During the term of the swap agreement, the Fund receives or pays periodic fixed payments from or to the respective counterparty calculated at the agreed upon interest rate applied to the notional amount. These periodic payments are accrued daily and recorded as realized gains or losses in the Statement of Operations. In addition, upon termination of the swap contract, gains and losses are also realized. Any upfront payment received or paid by the Fund is recorded as assets/liabilities on the Fund’s books. The Fund may pay or receive cash to collateralize credit default swap contracts. This cash collateral is recorded as assets/liabilities on the Fund’s books. Any cash received may be invested in Morgan Stanley Institutional Liquidity Funds.
G. Interest Rate Swaps — Interest rate swaps involve the exchange of commitments to pay and receive interest based on a notional principal amount. Net periodic interest payments to be received or paid are accrued daily and are recorded as realized gains or losses in the Statement of Operations. The Fund may pay or receive cash to collateralize interest rate swap contracts. This cash collateral is recorded as assets/liabilities on the Fund’s books. Any cash received may be invested in Morgan Stanley Institutional Liquidity Funds.
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
33
Morgan Stanley Balanced Fund
Notes to Financial Statements January 31, 2008 continued
its taxable income to its shareholders. Therefore, no provision for federal income taxes is required. The Fund files tax returns with the U.S. Internal Revenue Service, New York State and New York City. The Fund adopted the provisions of the Financial Accounting Standards Board (‘‘FASB’’) Interpretation No. 48 (‘‘FIN 48’’) Accounting for Uncertainty in Income Taxes on June 29, 2007. FIN 48 sets forth a minimum threshold for financial statement recognition of the benefit of a tax position taken or expected to be taken in a tax return. The implementation of FIN 48 did not result in any unrecognized tax benefits in the accompanying financial statements. If applicable, the Fund recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in other expenses in the Statement of Operations. Each of the tax years in the four year period ended January 31, 2008, 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 requires management to make estimates and assumptions that affect the reported amounts and disclosures. Actual results could differ from those estimates.
2. Investment Advisory/Administration Agreements
Pursuant to an Investment Advisory Agreement, Fund pays the Investment Adviser 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 in excess of $500 million.
Pursuant to an Administration Agreement with Morgan Stanley Services Company Inc. (the ‘‘Administrator’’), an affiliate of the Investments 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.
3. Plan of Distribution
Shares of the Fund are distributed by Morgan Stanley Distributors Inc. (the ‘‘Distributor’’), an affiliate of the Investment Adviser and Administrator. The Fund has adopted a Plan of Distribution (the ‘‘Plan’’) pursuant to Rule 12b-1 under the Act. The Plan provides that the Fund will pay the Distributor a fee which is accrued daily and paid monthly at the following annual rates: (i) Class A − up to 0.25% of the average daily net assets of Class A 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.
34
Morgan Stanley Balanced Fund
Notes to Financial Statements January 31, 2008 continued
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 Fu nd that such excess amounts totaled $21,399,263 at January 31, 2008.
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, 2008, the distribution fee was accrued for Class A shares and Class C shares at the annual rate of 0.25% and 1.00%, respectively.
The Distributor has informed the Fund that for the year ended January 31, 2008, it received contingent deferred sales charges from certain redemptions of the Fund’s Class A shares, Class B shares and Class C shares of $179, $287,998 and $7,518, respectively and received $54,477 in front-end sales charges from sales of the Fund’s Class A shares. The respective shareholders pay such charges which are not an expense of the Fund.
4. Security Transactions and Transactions with Affiliates
The Fund invests in Morgan Stanley Institutional Liquidity Money Market Portfolio – Institutional Class, an open-end management investment company managed by 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 Money Market Portfolio – Institutional Class with respect to assets invested by the Fund in Morgan Stanley Institutional Liquidity Money Market Portfolio – Institutional Class. For the year ended January 31, 2008, advisory fees paid were reduced by $7,862 relating to the Fund’s investment in Morgan Stanley Institutional Liquidity Money Market Portfolio – Institutional Class. Income distributions earned by the Fund are recorded as dividends from affiliate in the Statement of Operations and totaled $364,626 for the year ended January 31, 2008. During the year ended January 31, 2008, the cost of purchases and sales of investments in Morgan Stanley Institutional Liquidity Money Market Portfolio – Institutional Class aggregated $90,178,677 and $73,390,895, respectively.
The cost of purchases and proceeds from sales/prepayments/maturities of portfolio securities, excluding short-term investments, for the year ended January 31, 2008 aggregated $235,121,768 and
35
Morgan Stanley Balanced Fund
Notes to Financial Statements January 31, 2008 continued
$323,417,332, respectively. Included in the aforementioned are purchases and sales of U.S. Government securities in the amount of $124,430,088 and $150,297,027, respectively. The Fund had purchases and a sale of $1,099,594 and $9,000, respectively, with other Morgan Stanley funds, including a net realized loss of $609.
For the year ended January 31, 2008, the Fund incurred brokerage commissions of $2,161 with Morgan Stanley & Co., Inc., an affiliate of the Investment Adviser, Administrator and Distributor, for portfolio transactions executed on behalf of the Fund.
Morgan Stanley Trust, an affiliate of the Investment Adviser, Administrator and Distributor, is the Fund’s transfer agent.
The Fund has an unfunded Deferred Compensation Plan (the ‘‘Compensation Plan’’) which allows each independent Trustee to defer payment of all, or a portion, of the fees he 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.
5. Purposes of and Risks Relating to Certain Financial Instruments
The Fund may purchase and sell interest rate and index futures (‘‘futures contracts’’) 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.
For hedging and investment purposes, the Fund may also engage in transactions in listed and over-the-counter options.
These futures and option 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. Risk also may arise from the potential inability of the counterparties to meet the terms of their contracts.
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 a 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 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.
36
Morgan Stanley Balanced Fund
Notes to Financial Statements January 31, 2008 continued
The Fund may enter into interest rate 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. Interest rate 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 invest in mortgage securities. 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 a Fund. The risk of such defaults is generally higher in the case of mortgage pools that include sub-prime mortgages. Sub-prime mortgages refer to loans made to borrowers with weakened credit histories or with a lower capacity to make timely payments on their mortgages.
6. Expense Offset
The expense offset represents a reduction of the fees and expenses for interest earned on cash balances maintained by the Fund with the transfer agent.
37
Morgan Stanley Balanced Fund
Notes to Financial Statements January 31, 2008 continued
7. Shares of Beneficial Interest
Transactions in shares of beneficial interest were as follows:
FOR THE YEAR ENDED JANUARY 31, 2008 | FOR THE YEAR ENDED JANUARY 31, 2007 | |||||||||||||||||
SHARES | AMOUNT | SHARES | AMOUNT | |||||||||||||||
CLASS A SHARES | ||||||||||||||||||
Sold | 403,287 | $ | 6,100,480 | 541,360 | $ | 7,983,706 | ||||||||||||
Conversion from Class B | 1,058,842 | 15,913,904 | 767,806 | 11,274,673 | ||||||||||||||
Shares issued in connection with the acquisition of Morgan Stanley Balanced Income Fund and Morgan Stanley Income Builder Fund | — | — | 5,761,145 | 83,647,510 | ||||||||||||||
Reinvestment of dividends & distributions | 475,537 | 6,895,607 | 360,793 | 5,266,799 | ||||||||||||||
Redeemed | (2,031,934 | ) | (30,548,427 | ) | (1,306,418 | ) | (19,217,810 | ) | ||||||||||
Net increase (decrease) – Class A | (94,268 | ) | (1,638,436 | ) | 6,124,686 | 88,954,878 | ||||||||||||
CLASS B SHARES | ||||||||||||||||||
Sold | 423,406 | 6,372,359 | 513,859 | 7,552,220 | ||||||||||||||
Conversion to Class A | (1,058,215 | ) | (15,913,904 | ) | (767,637 | ) | (11,274,673 | ) | ||||||||||
Shares issued in connection with the acquisition of Morgan Stanley Balanced Income Fund and Morgan Stanley Income Builder Fund | — | — | 8,934,572 | 129,834,129 | ||||||||||||||
Reinvestment of dividends | 485,643 | 7,033,796 | 545,524 | 7,933,329 | ||||||||||||||
Redeemed | (3,348,307 | ) | (50,349,624 | ) | (2,578,346 | ) | (37,928,547 | ) | ||||||||||
Net increase (decrease) – Class B | (3,497,473 | ) | (52,857,373 | ) | 6,647,972 | 96,116,458 | ||||||||||||
CLASS C SHARES | ||||||||||||||||||
Sold | 247,524 | 3,751,403 | 263,940 | 3,873,577 | ||||||||||||||
Shares issued in connection with the acquisition of Morgan Stanley Balanced Income Fund and Morgan Stanley Income Builder Fund | — | — | 3,602,466 | 52,383,187 | ||||||||||||||
Reinvestment of dividends | 394,785 | 5,713,176 | 447,816 | 6,483,127 | ||||||||||||||
Redeemed | (1,769,134 | ) | (26,647,806 | ) | (1,608,685 | ) | (23,604,763 | ) | ||||||||||
Net increase (decrease) – Class C | (1,126,825 | ) | (17,183,227 | ) | 2,705,537 | 39,135,128 | ||||||||||||
CLASS D SHARES | ||||||||||||||||||
Sold | 11,888 | 182,713 | 28,513 | 413,318 | ||||||||||||||
Shares issued in connection with the acquisition of Morgan Stanley Balanced Income Fund and Morgan Stanley Income Builder Fund | — | — | 114,117 | 1,655,608 | ||||||||||||||
Reinvestment of dividends | 2,915 | 43,209 | 8,286 | 120,209 | ||||||||||||||
Redeemed | (126,497 | ) | (1,941,316 | ) | (66,814 | ) | (984,453 | ) | ||||||||||
Net increase (decrease) – Class D | (111,694 | ) | (1,715,394 | ) | 84,102 | 1,204,682 | ||||||||||||
Net increase (decrease) in Fund | (4,830,260 | ) | $ | (73,394,430 | ) | 15,562,297 | $ | 225,411,146 | ||||||||||
8. Federal Income Tax Status
The amount of dividends and distributions from net investment income and net realized capital gains are determined in accordance with federal income tax regulations which may differ from generally accepted accounting principles. These ‘‘book/tax’’ differences are either considered temporary or permanent in nature.
38
Morgan Stanley Balanced Fund
Notes to Financial Statements January 31, 2008 continued
To the extent these differences are permanent in nature, such amounts are reclassified within the capital accounts based on their federal tax-basis treatment; temporary differences do not require reclassification. Dividends and distributions which exceed net investment income and net realized capital gains for tax purposes are reported as distributions of paid-in-capital.
The tax character of distributions paid was as follows:
FOR THE YEAR ENDED JANUARY 31, 2008 | FOR THE YEAR ENDED JANUARY 31, 2007 | |||||||||
Ordinary income | $ | 7,078,209 | $ | 3,940,876 | ||||||
Long-term capital gains | 16,520,816 | 19,487,668 | ||||||||
Total distributions | $ | 23,599,025 | $ | 23,428,544 | ||||||
As of January 31, 2008, the tax-basis components of accumulated earnings were as follows:
Undistributed ordinary income | $ | 1,268,323 | ||||||||
Undistributed long-term gains | 11,928,288 | |||||||||
Net accumulated earnings | 13,196,611 | |||||||||
Capital loss carryforward* | (6,938,169 | ) | ||||||||
Temporary differences | (3,223 | ) | ||||||||
Net unrealized appreciation | 11,430,765 | |||||||||
Total accumulated earnings | $ | 17,685,984 | ||||||||
* During the year ended January 31, 2008, the Fund utilized $5,875,190 of its net capital loss carryforward. As of January 31, 2008, the Fund had a net capital loss carryforward of $6,938,169, which will expire on January 31, 2011 to offset future capital gains to the extent provided by regulations.
As part of the Fund’s acquisition of the assets of Morgan Stanley Income Builder Fund (‘‘Income Builder’’), the Fund obtained a net capital loss carryforward of $18,951,808 from Income Builder. Utilization of this carryforward is subject to limitations imposed by the Internal Revenue Code and Treasury Regulations, reducing the total carryforward available.
As of January 31, 2008, the Fund had temporary book/tax differences primarily attributable to mark-to-market of open futures and options contracts, capital loss deferrals on straddles and wash sales and book amortization of premiums on debt securities.
39
Morgan Stanley Balanced Fund
Notes to Financial Statements January 31, 2008 continued
Permanent differences, primarily due to losses on paydowns 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, 2008:
ACCUMULATED UNDISTRIBUTED NET INVESTMENT INCOME | ACCUMULATED UNDISTRIBUTED NET REALIZED GAIN | PAID-IN-CAPITAL | ||||||||
$1,767,121 | $ | (1,767,121 | ) | — | ||||||
9. Accounting Pronouncement
In September 2006, Statement of Financial Accounting Standards No. 157, Fair Value Measurements (SFAS 157), was issued and is effective for fiscal years beginning after November 15, 2007. SFAS 157 defines fair value, established a framework for measuring fair value and expands disclosures about fair value measurements. Management is currently evaluating the impact the adoption of SFAS 157 will have on the Fund’s financial statement disclosures.
10. Fund Acquisitions
On September 18, 2006, the Fund acquired all the net assets of the Morgan Stanley Balanced Income Fund (‘‘Balanced Income’’) based on the respective valuations as of the close of business on September 15, 2006 pursuant to a plan of reorganization approved by the shareholders of Balanced Income on August 23, 2006. The acquisition was accomplished by a tax-free exchange of 1,501,467 Class A shares of the Fund at a net asset value of $14.52 per share for 1,812,244 Class A shares of Balanced Income; 5,588,566 Class B shares of the Fund at a net asset value of $14.53 per share for 6,778,119 Class B shares of Balanced Income; 2,321,112 Class C shares of the Fund at a net asset value of $14.54 per share for 2,812,414 Class C shares of Balanced Income; and 59,403 Class D shares of the Fund at a net asset value of $14.51 per share for 71,888 Class D shares of Balanced Income. The net assets of the Fund and Balanced Income immediately before the acquisition were $180,346,678 and $137,644,097, respectively, including unrealized appreciation of $7,514,281 for Balanced Income.
On September 18, 2006, the Fund acquired all the net assets of Income Builder based on the respective valuations as of the close of business on September 15, 2006 pursuant to a plan of reorganization approved by the shareholders of Income Builder on July 17, 2006. The acquisition was accomplished by a tax-free exchange of 4,259,678 Class A shares of the Fund at a net asset value of $14.52 per share for 5,120,077 Class A shares of Income Builder; 3,346,006 Class B shares of the Fund at a net asset value of $14.53 per share for 4,014,655 Class B shares of Income Builder; 1,281,354 Class C shares of the Fund at a net asset value of $14.54 per share for 1,544,850 Class C shares of Income Builder; and 54,714 Class D shares of th e Fund at a net asset value of $14.51 per share for 65,721 Class D shares of Income Builder. The net assets of the Fund and Income Builder immediately before the acquisition were $180,346,678 and $129,876,337, respectively, including unrealized appreciation of $12,705,752 for Income Builder.
Immediately after both acquisitions, the combined net assets of the Fund amounted to $447,867,112.
40
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, | ||||||||||||||||||||||
2008 | 2007 | 2006 | 2005 | 2004 | ||||||||||||||||||
Class A Shares | ||||||||||||||||||||||
Selected Per Share Data: | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 14.89 | $ | 14.57 | $ | 13.76 | $ | 12.98 | $ | 10.73 | ||||||||||||
Income (loss) from investment operations: | ||||||||||||||||||||||
Net investment income‡ | 0.32 | 0.30 | 0.24 | 0.21 | 0.18 | |||||||||||||||||
Net realized and unrealized gain (loss) | (0.35 | ) | 1.20 | 1.21 | 0.79 | 2.30 | ||||||||||||||||
Total income (loss) from investment operations | (0.03 | ) | 1.50 | 1.45 | 1.00 | 2.48 | ||||||||||||||||
Less dividends and distributions from: | ||||||||||||||||||||||
Net investment income | (0.35 | ) | (0.29 | ) | (0.27 | ) | (0.22 | ) | (0.23 | ) | ||||||||||||
Net realized gain | (0.68 | ) | (0.89 | ) | (0.37 | ) | — | — | ||||||||||||||
Total dividends and distributions | (1.03 | ) | (1.18 | ) | (0.64 | ) | (0.22 | ) | (0.23 | ) | ||||||||||||
Net asset value, end of period | $ | 13.83 | $ | 14.89 | $ | 14.57 | $ | 13.76 | $ | 12.98 | ||||||||||||
Total Return† | (0.42 | )% | 10.54 | % | 10.99 | % | 7.80 | % | 23.37 | % | ||||||||||||
Ratios to Average Net Assets(1): | ||||||||||||||||||||||
Total expenses (before expense offset) | 1.04 | %(2) | 1.14 | % | 1.13 | % | 1.13 | % | 1.12 | % | ||||||||||||
Net investment income | 2.10 | %(2) | 2.06 | % | 1.70 | % | 1.61 | % | 1.58 | % | ||||||||||||
Supplemental Data: | ||||||||||||||||||||||
Net assets, end of period, in thousands | $ | 114,929 | $ | 125,180 | $ | 33,217 | $ | 7,017 | $ | 6,663 | ||||||||||||
Portfolio turnover rate | 64 | % | 56 | % | 52 | % | 64 | % | 117 | % | ||||||||||||
‡ | The per share amounts were computed using an average number of shares outstanding during the period. |
† | Does not reflect the deduction of sales charge. Calculated based on the net asset value as of the last business day of the period. |
(1) | Reflects overall Fund ratios for investment income and non-class specific expenses. |
(2) | Reflects waivers of certain Fund expenses in connection with the investments in Morgan Stanley Institutional Liquidity Money Market Portfolio – Institutional Class during the period. As a result of such waivers the expenses as a percentage of its net assets had an effect of less than 0.005%. |
See Notes to Financial Statements
41
Morgan Stanley Balanced Fund
Financial Highlights continued
FOR THE YEAR ENDED JANUARY 31, | ||||||||||||||||||||||
2008 | 2007 | 2006 | 2005 | 2004 | ||||||||||||||||||
Class B Shares | ||||||||||||||||||||||
Selected Per Share Data: | ||||||||||||||||||||||
Net asset value, beginning of period. | $ | 14.90 | $ | 14.56 | $ | 13.75 | $ | 12.97 | $ | 10.73 | ||||||||||||
Income (loss) from investment operations: | ||||||||||||||||||||||
Net investment income‡ | 0.20 | 0.19 | 0.14 | 0.11 | 0.10 | |||||||||||||||||
Net realized and unrealized gain (loss) | (0.35 | ) | 1.22 | 1.20 | 0.79 | 2.28 | ||||||||||||||||
Total income (loss) from investment operations | (0.15 | ) | 1.41 | 1.34 | 0.90 | 2.38 | ||||||||||||||||
Less dividends and distributions from: | ||||||||||||||||||||||
Net investment income | (0.23 | ) | (0.18 | ) | (0.16 | ) | (0.12 | ) | (0.14 | ) | ||||||||||||
Net realized gain | (0.68 | ) | (0.89 | ) | (0.37 | ) | — | — | ||||||||||||||
Total dividends and distributions | (0.91 | ) | (1.07 | ) | (0.53 | ) | (0.12 | ) | (0.14 | ) | ||||||||||||
Net asset value, end of period | $ | 13.84 | $ | 14.90 | $ | 14.56 | $ | 13.75 | $ | 12.97 | ||||||||||||
Total Return† | (1.20 | )% | 9.80 | % | 10.12 | % | 6.99 | % | 22.37 | % | ||||||||||||
Ratios to Average Net Assets(1): | ||||||||||||||||||||||
Total expenses (before expense offset) | 1.79 | %(2) | 1.89 | % | 1.89 | % | 1.89 | % | 1.88 | % | ||||||||||||
Net investment income | 1.35 | %(2) | 1.31 | % | 0.94 | % | 0.85 | % | 0.82 | % | ||||||||||||
Supplemental Data: | ||||||||||||||||||||||
Net assets, end of period, in thousands | $ | 123,951 | $ | 185,534 | $ | 84,568 | $ | 110,875 | $ | 114,960 | ||||||||||||
Portfolio turnover rate | 64 | % | 56 | % | 52 | % | 64 | % | 117 | % | ||||||||||||
‡ | The per share amounts were computed using an average number of shares outstanding during the period. |
† | Does not reflect the deduction of sales charge. Calculated based on the net asset value as of the last business day of the period. |
(1) | Reflects overall Fund ratios for investment income and non-class specific expenses. |
(2) | Reflects waivers of certain Fund expenses in connection with the investments in Morgan Stanley Institutional Liquidity Money Market Portfolio – Institutional Class during the period. As a result of such waivers the expenses as a percentage of its net assets had an effect of less than 0.005%. |
See Notes to Financial Statements
42
Morgan Stanley Balanced Fund
Financial Highlights continued
FOR THE YEAR ENDED JANUARY 31, | ||||||||||||||||||||||
2008 | 2007 | 2006 | 2005 | 2004 | ||||||||||||||||||
Class C Shares | ||||||||||||||||||||||
Selected Per Share Data: | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 14.90 | $ | 14.57 | $ | 13.76 | $ | 12.98 | $ | 10.73 | ||||||||||||
Income (loss) from investment operations: | ||||||||||||||||||||||
Net investment income‡ | 0.20 | 0.19 | 0.14 | 0.11 | 0.10 | |||||||||||||||||
Net realized and unrealized gain (loss) | (0.34 | ) | 1.21 | 1.20 | 0.79 | 2.29 | ||||||||||||||||
Total income (loss) from investment operations | (0.14 | ) | 1.40 | 1.34 | 0.90 | 2.39 | ||||||||||||||||
Less dividends and distributions from: | ||||||||||||||||||||||
Net investment income | (0.24 | ) | (0.18 | ) | (0.16 | ) | (0.12 | ) | (0.14 | ) | ||||||||||||
Net realized gain. | (0.68 | ) | (0.89 | ) | (0.37 | ) | — | — | ||||||||||||||
Total dividends and distributions | (0.92 | ) | (1.07 | ) | (0.53 | ) | (0.12 | ) | (0.14 | ) | ||||||||||||
Net asset value, end of period | $ | 13.84 | $ | 14.90 | $ | 14.57 | $ | 13.76 | $ | 12.98 | ||||||||||||
Total Return† | (1.19 | )% | 9.75 | % | 10.15 | % | 6.98 | % | 22.43 | % | ||||||||||||
Ratios to Average Net Assets(1): | ||||||||||||||||||||||
Total expenses (before expense offset) | 1.79 | %(2) | 1.89 | % | 1.89 | % | 1.87 | % | 1.88 | % | ||||||||||||
Net investment income | 1.35 | %(2) | 1.31 | % | 0.94 | % | 0.87 | % | 0.82 | % | ||||||||||||
Supplemental Data: | ||||||||||||||||||||||
Net assets, end of period, in thousands | $ | 99,121 | $ | 123,508 | $ | 81,339 | $ | 81,606 | $ | 84,840 | ||||||||||||
Portfolio turnover rate | 64 | % | 56 | % | 52 | % | 64 | % | 117 | % | ||||||||||||
‡ | The per share amounts were computed using an average number of shares outstanding during the period. |
† | Does not reflect the deduction of sales charge. Calculated based on the net asset value as of the last business day of the period. |
(1) | Reflects overall Fund ratios for investment income and non-class specific expenses. |
(2) | Reflects waivers of certain Fund expenses in connection with the investments in Morgan Stanley Institutional Liquidity Money Market Portfolio – Institutional Class during the period. As a result of such waivers the expenses as a percentage of its net assets had an effect of less than 0.005%. |
See Notes to Financial Statements
43
Morgan Stanley Balanced Fund
Financial Highlights continued
FOR THE YEAR ENDED JANUARY 31, | ||||||||||||||||||||||
2008 | 2007 | 2006 | 2005 | 2004 | ||||||||||||||||||
Class D Shares | ||||||||||||||||||||||
Selected Per Share Data: | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 14.89 | $ | 14.56 | $ | 13.76 | $ | 12.97 | $ | 10.73 | ||||||||||||
Income (loss) from investment operations: | ||||||||||||||||||||||
Net investment income‡ | 0.36 | 0.34 | 0.28 | 0.24 | 0.22 | |||||||||||||||||
Net realized and unrealized gain (loss) | (0.36 | ) | 1.21 | 1.19 | 0.80 | 2.28 | ||||||||||||||||
Total income (loss) from investment operations | 0.00 | 1.55 | 1.47 | 1.04 | 2.50 | |||||||||||||||||
Less dividends and distributions from: | ||||||||||||||||||||||
Net investment income | (0.39 | ) | (0.33 | ) | (0.30 | ) | (0.25 | ) | (0.26 | ) | ||||||||||||
Net realized gain | (0.68 | ) | (0.89 | ) | (0.37 | ) | — | — | ||||||||||||||
Total dividends and distributions | (1.07 | ) | (1.22 | ) | (0.67 | ) | (0.25 | ) | (0.26 | ) | ||||||||||||
Net asset value, end of period | $ | 13.82 | $ | 14.89 | $ | 14.56 | $ | 13.76 | $ | 12.97 | ||||||||||||
Total Return† | (0.23 | )% | 10.89 | % | 11.17 | % | 8.14 | % | 23.56 | % | ||||||||||||
Ratios to Average Net Assets(1): | ||||||||||||||||||||||
Total expenses (before expense offset) | 0.79 | %(2) | 0.89 | % | 0.89 | % | 0.89 | % | 0.88 | % | ||||||||||||
Net investment income | 2.35 | %(2) | 2.31 | % | 1.94 | % | 1.85 | % | 1.82 | % | ||||||||||||
Supplemental Data: | ||||||||||||||||||||||
Net assets, end of period, in thousands | $ | 481 | $ | 2,181 | $ | 909 | $ | 1,083 | $ | 1,151 | ||||||||||||
Portfolio turnover rate | 64 | % | 56 | % | 52 | % | 64 | % | 117 | % | ||||||||||||
‡ | The per share amounts were computed using an average number of shares outstanding during the period. |
† | Calculated based on the net asset value as of the last business day of the period. |
(1) | Reflects overall Fund ratios for investment income and non-class specific expenses. |
(2) | Reflects waivers of certain Fund expenses in connection with the investments in Morgan Stanley Institutional Liquidity Money Market Portfolio – Institutional Class during the period. As a result of such waivers the expenses as a percentage of its net assets had an effect of less than 0.005%. |
See Notes to Financial Statements
44
Morgan Stanley Balanced Fund
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Trustees of
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, 2008, and the related statements of operations for the year then ended and 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. Ac cordingly, 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, 2008, 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, 2008, 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 26, 2008
45
Morgan Stanley Balanced Fund
Trustee and Officer Information (unaudited)
Independent Trustees:
Name, Age and Address of Independent Trustee | Position(s) Held with Registrant | Term of Office and Length of Time Served* | Principal Occupation(s) During Past 5 Years | Number of Portfolios in Fund Complex Overseen by Independent Trustee** | Other Directorships Held by Independent Trustee | |||||||||||||||||
Frank L. Bowman (63) 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 and Chief Executive Officer, Nuclear Energy Institute (policy organization) (since February 2005); Director or Trustee of various Retail Funds and Institutional Funds (since August 2006); Chairperson of the Insurance Sub-Committee of the Insurance, Valuation and Compliance Committee (since February 2007); formerly, variously, Admiral in the U.S. Navy, Director of Naval Nuclear Propulsion Program and Deputy Administrator—Naval Reactors in the National Nuclear Security Administration at the U.S. Department of Energy (1996-2004). Honorary Knight Commander of the Most Excellent Order of the British Empire. | 180 | Director of the National Energy Foundation, the U.S. Energy Association, the American Council for Capital Formation and the Armed Services YMCA of the USA. | |||||||||||||||||
Michael Bozic (67) 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 Insurance, Valuation and Compliance Committee (since October 2006); Director or Trustee of the Retail Funds (since April 1994) and the 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. | 182 | Director of various business organizations. | |||||||||||||||||
46
Morgan Stanley Balanced Fund
Trustee and Officer Information (unaudited) continued
Name, Age and Address of Independent Trustee | Position(s) Held with Registrant | Term of Office and Length of Time Served* | Principal Occupation(s) During Past 5 Years | Number of Portfolios in Fund Complex Overseen by Independent Trustee** | Other Directorships Held by Independent Trustee | |||||||||||||||||
Kathleen A. Dennis (54) 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) (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). | 180 | Director of various non-profit organizations. | |||||||||||||||||
Dr. Manuel H. Johnson (59) 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 the 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. | 182 | Director of NVR, Inc. (home construction); Director of Evergreen Energy. | |||||||||||||||||
Joseph J. Kearns (65) 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 the Institutional Funds (since August 1994); formerly, Deputy Chairperson of the Audit Committee (July 2003- September 2006) and Chairperson of the Audit Committee of the Institutional Funds (October 2001-July 2003); CFO of the J. Paul Getty Trust. | 183 | Director of Electro Rent Corporation (equipment leasing) and The Ford Family Foundation. | |||||||||||||||||
47
Morgan Stanley Balanced Fund
Trustee and Officer Information (unaudited) continued
Name, Age and Address of Independent Trustee | Position(s) Held with Registrant | Term of Office and Length of Time Served* | Principal Occupation(s) During Past 5 Years | Number of Portfolios in Fund Complex Overseen by Independent Trustee** | Other Directorships Held by Independent Trustee | |||||||||||||||||
Michael F. Klein (49) 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). | 180 | 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 (71) 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 the Institutional Funds (since July 2001); formerly, Chairperson of the Insurance Committee (until July 2006). | 182 | None. | |||||||||||||||||
W. Allen Reed (60) 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). | 180 | Director of Temple-Inland Industries (packaging and forest products); Director of Legg Mason, Inc. and Director of the Auburn University Foundation. | |||||||||||||||||
Fergus Reid (75) c/o Lumelite Plastics Corporation 85 Charles Colman Blvd. Pawling, NY 12564 | Trustee | Since June 1992 | Chairman of Lumelite Plastics Corporation; Chairperson of the Governance Committee and Director or Trustee of the Retail Funds (since July 2003) and the Institutional Funds (since June 1992). | 183 | Trustee and Director of certain investment companies in the JPMorgan Funds complex managed by J.P. Morgan Investment Management Inc. | |||||||||||||||||
48
Morgan Stanley Balanced Fund
Trustee and Officer Information (unaudited) continued
Interested Trustee:
Name, Age and Address of Interested Trustee | Position(s) Held with Registrant | Term of Office and Length of Time Served* | Principal Occupation(s) During Past 5 Years | Number of Portfolios in Fund Complex Overseen by Interested Trustee** | Other Directorships Held by Interested Trustee | |||||||||||||||||
James F. Higgins (60) 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 the Institutional Funds (since July 2003); Senior Advisor of Morgan Stanley (since August 2000). | 181 | 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.). |
49
Morgan Stanley Balanced Fund
Trustee and Officer Information (unaudited) continued
Executive Officers:
Name, Age and Address of Executive Officer | Position(s) Held with Registrant | Term of Office and Length of Time Served* | Principal Occupation(s) During Past 5 Years | |||||||||||
Ronald E. Robison (69) 522 Fifth Avenue New York, NY 10036 | President and Principal Executive Officer | President since September 2005 and Principal Executive Officer since May 2003 | President (since September 2005) and Principal Executive Officer (since May 2003) of funds in the Fund Complex; President (since September 2005) and Principal Executive Officer (since May 2003) of the Van Kampen Funds; Managing Director, Director and/or Officer of the Investment Adviser and various entities affiliated with the Investment Adviser; Director of Morgan Stanley SICAV (since May 2004). Formerly, Executive Vice President (July 2003-September 2005) of funds in the Fund Complex and the Van Kampen Funds; President and Director of the Institutional Funds (March 2001-July 2003); Chief Administrative Officer of the Investment Adviser; Chief Administrative Officer of Morgan Stanley Services Company Inc. | |||||||||||
J. David Germany (53) Morgan Stanley Investment Management Limited 20 Bank Street Canary Wharf, London, England E14 4AD | Vice President | Since February 2006 | Managing Director and (since December 2005) Chief Investment Officer – Global Fixed Income of Morgan Stanley Investment Management; Managing Director and Director of Morgan Stanley Investment Management Limited; Vice President of the Retail Funds and Institutional Funds (since February 2006). | |||||||||||
Dennis F. Shea (54) 522 Fifth Avenue New York, NY 10036 | Vice President | Since February 2006 | Managing Director and (since February 2006) Chief Investment Officer – Global Equity of Morgan Stanley Investment Management; Vice President of the Retail Funds and Institutional Funds (since February 2006). Formerly, Managing Director and Director of Global Equity Research at Morgan Stanley. | |||||||||||
Amy R. Doberman (45) 522 Fifth Avenue New York, NY 10036 | Vice President | Since July 2004 | Managing Director and General Counsel, U.S. Investment Management of Morgan Stanley Investment Management (since July 2004); Vice President of the Retail Funds and Institutional Funds (since July 2004); Vice President of the Van Kampen Funds (since August 2004); Secretary (since February 2006) and Managing Director (since July 2004) of the Investment Adviser and various entities affiliated with the Investment Adviser. Formerly, Managing Director and General Counsel – Americas, UBS Global Asset Management (July 2000-July 2004). | |||||||||||
Carsten Otto (44) 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 Morgan Stanley 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 (41) 522 Fifth Avenue New York, NY 10036 | Vice President | Since December 1997 | Managing Director of the Investment Adviser and various entities affiliated with the Investment Adviser; Vice President of the Retail Funds (since July 2002) and the Institutional Funds (since December 1997). Formerly, Secretary of various entities affiliated with the Investment Adviser. | |||||||||||
50
Morgan Stanley Balanced Fund
Trustee and Officer Information (unaudited) continued
Name, Age and Address of Executive Officer | Position(s) Held with Registrant | Term of Office and Length of Time Served* | Principal Occupation(s) During Past 5 Years | |||||||||||
Francis J. Smith (42) 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). Formerly, Vice President of the Retail Funds (September 2002 to July 2003). | |||||||||||
Mary E. Mullin (40) 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 the Institutional Funds (since June 1999). | |||||||||||
* | This is the earliest date the Officer began serving the Retail Funds or Institutional Funds. |
2008 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, 2008. For corporate shareholders, 70.17% of the dividends qualified for the dividend received deduction. The Fund designated and paid $17,200,000 as a long-term capital gain distribution. 10.55% of the Fund’s dividends was 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, 2008. 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 $6,016,246 as taxable at this lower rate.
In January, the Fund provides tax information to shareholders for the preceding calendar year.
51
Trustees Frank L. Bowman Officers Michael E. Nugent Ronald E. Robison J. David Germany Dennis F. Shea Amy R. Doberman Carsten Otto Stefanie V. Chang Yu Francis J. Smith Mary E. Mullin Transfer Agent Morgan Stanley Trust Independent Registered Public Accounting Firm Deloitte & Touche LLP Legal Counsel Clifford Chance US LLP Counsel to the Independent Trustees Kramer Levin Naftalis & Frankel LLP Investment Adviser Morgan Stanley Investment Advisors Inc. 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. © 2008 Morgan Stanley BGRANN IU08-01426P-Y01/08 | MORGAN STANLEY FUNDS | |
Morgan Stanley Balanced Fund Annual Report January 31, 2008 | ||
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:
2008
|
| Registrant |
| Covered |
| ||
Audit Fees |
| $ | 42,150 |
|
| N/A |
|
Non-Audit Fees |
|
|
|
|
|
|
|
Audit-Related Fees |
| $ | — | (2) | $ | 6,164,000 | (2) |
Tax Fees |
| $ | 5,803 | (3) | $ | 1,002,000 | (4) |
All Other Fees |
| $ | — |
| $ | — |
|
Total Non-Audit Fees |
| $ | 5,803 |
| $ | 7,166,000 |
|
Total |
| $ | 47,953 |
| $ | 7,166,000 |
|
2007
|
| Registrant |
| Covered |
| ||
Audit Fees |
| $ | 41,200 |
|
| N/A |
|
Non-Audit Fees |
|
|
|
|
|
|
|
Audit-Related Fees |
| $ | 8,031 | (2) | $ | 5,200,002 | (2) |
Tax Fees |
| $ | 5,780 | (3) | $ | 809,670 | (4) |
All Other Fees |
| $ | — |
| $ | — | (5) |
Total Non-Audit Fees |
| $ | 13,811 |
| $ | 6,009,672 |
|
Total |
| $ | 55,011 |
| $ | 6,009,672 |
|
N/A- Not applicable, as not required by Item 4.
(1) | Covered Entities include the Adviser (excluding sub-advisors) and any entity controlling, controlled by or under common control with the Adviser that provides ongoing services to the Registrant. |
(2) | Audit-Related Fees represent assurance and related services provided that are reasonably related to the performance of the audit of the financial statements of the Covered Entities’ and funds advised by the Adviser or its affiliates, specifically data verification and agreed-upon procedures related to asset securitizations and agreed-upon procedures engagements. |
(3) | Tax Fees represent tax compliance, tax planning and tax advice services provided in connection with the preparation and review of the Registrant’s tax returns. |
(4) | Tax Fees represent tax compliance, tax planning and tax advice services provided in connection with the review of Covered Entities’ tax returns. |
(5) | All other fees represent project management for future business applications and improving business and operational processes. |
3
(e)(1) The audit committee’s pre-approval policies and procedures are as follows:
APPENDIX A
AUDIT COMMITTEE
AUDIT AND NON-AUDIT SERVICES
PRE-APPROVAL POLICY AND PROCEDURES
OF THE
MORGAN STANLEY RETAIL AND INSTITUTIONAL FUNDS
AS ADOPTED AND AMENDED JULY 23, 2004,1
1. Statement of Principles
The Audit Committee of the Board is required to review and, in its sole discretion, pre-approve all Covered Services to be provided by the Independent Auditors to the Fund and Covered Entities in order to assure that services performed by the Independent Auditors do not impair the auditor’s independence from the Fund.
The SEC has issued rules specifying the types of services that an independent auditor may not provide to its audit client, as well as the audit committee’s administration of the engagement of the independent auditor. The SEC’s rules establish two different approaches to pre-approving services, which the SEC considers to be equally valid. Proposed services either: may be pre-approved without consideration of specific case-by-case services by the Audit Committee (“general pre-approval”); or require the specific pre-approval of the Audit Committee or its delegate (“specific pre-approval”). The Audit Committee believes that the combination of these two approaches in this Policy will result in an effective and efficient procedure to pre-approve services performed by the Independent Auditors. As set forth in this Policy, unless a type of service has received general pre-approval, it will require specific pre-approval by the Audit Committee (or by any member of the Audit Committee to which pre-approval authority has been delegated) if it is to be provided by the Independent Auditors. Any proposed services exceeding pre-approved cost levels or budgeted amounts will also require specific pre-approval by the Audit Committee.
The appendices to this Policy describe the Audit, Audit-related, Tax and All Other services that have the general pre-approval of the Audit Committee. The term of any general pre-approval is 12 months from the date of pre-approval, unless the Audit Committee considers and provides a different period and states otherwise. The Audit Committee will annually review and pre-approve the services that may be provided by the Independent Auditors without obtaining specific pre-approval from the Audit Committee. The Audit Committee will add to or subtract from the list of general pre-approved services from time to time, based on subsequent determinations.
______________1 | This Audit Committee Audit and Non-Audit Services Pre-Approval Policy and Procedures (the “Policy”), adopted as of the date above, supersedes and replaces all prior versions that may have been adopted from time to time. |
4
The purpose of this Policy is to set forth the policy and procedures by which the Audit Committee intends to fulfill its responsibilities. It does not delegate the Audit Committee’s responsibilities to pre-approve services performed by the Independent Auditors to management.
The Fund’s Independent Auditors have reviewed this Policy and believes that implementation of the Policy will not adversely affect the Independent Auditors’ independence.
2. Delegation
As provided in the Act and the SEC’s rules, the Audit Committee may delegate either type of pre-approval authority to one or more of its members. The member to whom such authority is delegated must report, for informational purposes only, any pre-approval decisions to the Audit Committee at its next scheduled meeting.
3. Audit Services
The annual Audit services engagement terms and fees are subject to the specific pre-approval of the Audit Committee. Audit services include the annual financial statement audit and other procedures required to be performed by the Independent Auditors to be able to form an opinion on the Fund’s financial statements. These other procedures include information systems and procedural reviews and testing performed in order to understand and place reliance on the systems of internal control, and consultations relating to the audit. The Audit Committee will approve, if necessary, any changes in terms, conditions and fees resulting from changes in audit scope, Fund structure or other items.
In addition to the annual Audit services engagement approved by the Audit Committee, the Audit Committee may grant general pre-approval to other Audit services, which are those services that only the Independent Auditors reasonably can provide. Other Audit services may include statutory audits and services associated with SEC registration statements (on Forms N-1A, N-2, N-3, N-4, etc.), periodic reports and other documents filed with the SEC or other documents issued in connection with securities offerings.
The Audit Committee has pre-approved the Audit services in Appendix B.1. All other Audit services not listed in Appendix B.1 must be specifically pre-approved by the Audit Committee (or by any member of the Audit Committee to which pre-approval has been delegated).
4. Audit-related Services
Audit-related services are assurance and related services that are reasonably related to the performance of the audit or review of the Fund’s financial statements and, to the extent they are Covered Services, the Covered Entities or that are traditionally performed by the Independent Auditors. Because the Audit Committee believes that the provision of Audit-related services does not impair the independence of the auditor and is consistent with the SEC’s rules on auditor independence, the Audit Committee may grant general pre-approval to Audit-related services. Audit-related services include, among others, accounting consultations related to accounting, financial reporting or disclosure matters
5
not classified as “Audit services”; assistance with understanding and implementing new accounting and financial reporting guidance from rulemaking authorities; agreed-upon or expanded audit procedures related to accounting and/or billing records required to respond to or comply with financial, accounting or regulatory reporting matters; and assistance with internal control reporting requirements under Forms N-SAR and/or N-CSR.
The Audit Committee has pre-approved the Audit-related services in Appendix B.2. All other Audit-related services not listed in Appendix B.2 must be specifically pre-approved by the Audit Committee (or by any member of the Audit Committee to which pre-approval has been delegated).
5. Tax Services
The Audit Committee believes that the Independent Auditors can provide Tax services to the Fund and, to the extent they are Covered Services, the Covered Entities, such as tax compliance, tax planning and tax advice without impairing the auditor’s independence, and the SEC has stated that the Independent Auditors may provide such services.
Pursuant to the preceding paragraph, the Audit Committee has pre-approved the Tax Services in Appendix B.3. All Tax services in Appendix B.3 must be specifically pre-approved by the Audit Committee (or by any member of the Audit Committee to which pre-approval has been delegated).
6. All Other Services
The Audit Committee believes, based on the SEC’s rules prohibiting the Independent Auditors from providing specific non-audit services, that other types of non-audit services are permitted. Accordingly, the Audit Committee believes it may grant general pre-approval to those permissible non-audit services classified as All Other services that it believes are routine and recurring services, would not impair the independence of the auditor and are consistent with the SEC’s rules on auditor independence.
The Audit Committee has pre-approved the All Other services in Appendix B.4. Permissible All Other services not listed in Appendix B.4 must be specifically pre-approved by the Audit Committee (or by any member of the Audit Committee to which pre-approval has been delegated).
7. Pre-Approval Fee Levels or Budgeted Amounts
Pre-approval fee levels or budgeted amounts for all services to be provided by the Independent Auditors will be established annually by the Audit Committee. Any proposed services exceeding these levels or amounts will require specific pre-approval by the Audit Committee. The Audit Committee is mindful of the overall relationship of fees for audit and non-audit services in determining whether to pre-approve any such services.
8. Procedures
All requests or applications for services to be provided by the Independent Auditors that do not require specific approval by the Audit Committee will be submitted to the Fund’s Chief Financial Officer and must include a detailed description of the services to be
6
rendered. The Fund’s Chief Financial Officer will determine whether such services are included within the list of services that have received the general pre-approval of the Audit Committee. The Audit Committee will be informed on a timely basis of any such services rendered by the Independent Auditors. Requests or applications to provide services that require specific approval by the Audit Committee will be submitted to the Audit Committee by both the Independent Auditors and the Fund’s Chief Financial Officer, and must include a joint statement as to whether, in their view, the request or application is consistent with the SEC’s rules on auditor independence.
The Audit Committee has designated the Fund’s Chief Financial Officer to monitor the performance of all services provided by the Independent Auditors and to determine whether such services are in compliance with this Policy. The Fund’s Chief Financial Officer will report to the Audit Committee on a periodic basis on the results of its monitoring. Both the Fund’s Chief Financial Officer and management will immediately report to the chairman of the Audit Committee any breach of this Policy that comes to the attention of the Fund’s Chief Financial Officer or any member of management.
9. Additional Requirements
The Audit Committee has determined to take additional measures on an annual basis to meet its responsibility to oversee the work of the Independent Auditors and to assure the auditor’s independence from the Fund, such as reviewing a formal written statement from the Independent Auditors delineating all relationships between the Independent Auditors and the Fund, consistent with Independence Standards Board No. 1, and discussing with the Independent Auditors its methods and procedures for ensuring independence.
10. Covered Entities
Covered Entities include the Fund’s investment adviser(s) and any entity controlling, controlled by or under common control with the Fund’s investment adviser(s) that provides ongoing services to the Fund(s). Beginning with non-audit service contracts entered into on or after May 6, 2003, the Fund’s audit committee must pre-approve non-audit services provided not only to the Fund but also to the Covered Entities if the engagements relate directly to the operations and financial reporting of the Fund. This list of Covered Entities would include:
Morgan Stanley Retail Funds
Morgan Stanley Investment Advisors Inc.
Morgan Stanley & Co. Incorporated
Morgan Stanley DW Inc.
Morgan Stanley Investment Management Inc.
Morgan Stanley Investment Management Limited
Morgan Stanley Investment Management Private Limited
Morgan Stanley Asset & Investment Trust Management Co., Limited
Morgan Stanley Investment Management Company
Van Kampen Asset Management
Morgan Stanley Services Company, Inc.
Morgan Stanley Distributors Inc.
Morgan Stanley Trust FSB
7
Morgan Stanley Institutional Funds
Morgan Stanley Investment Management Inc.
Morgan Stanley Investment Advisors Inc.
Morgan Stanley Investment Management Limited
Morgan Stanley Investment Management Private Limited
Morgan Stanley Asset & Investment Trust Management Co., Limited
Morgan Stanley Investment Management Company
Morgan Stanley & Co. Incorporated
Morgan Stanley Distribution, Inc.
Morgan Stanley AIP GP LP
Morgan Stanley Alternative Investment Partners LP
(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
Refer to Item 1.
8
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies.
Applicable only to reports filed by closed-end funds.
Item 8. Portfolio Managers of Closed-End Management Investment Companies
Applicable only to reports filed by closed-end funds.
Item 9. Closed-End Fund Repurchases
Applicable only to reports filed by closed-end funds.
Item 10. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 11. Controls and Procedures
(a) The Fund’s principal executive officer and principal financial officer have concluded that the Fund’s disclosure controls and procedures are sufficient to ensure that information required to be disclosed by the Fund in this Form N-CSR was recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, based upon such officers’ evaluation of these controls and procedures as of a date within 90 days of the filing date of the report.
(b) There were no changes in the registrant’s internal control over financial reporting that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.
Item 12. Exhibits
(a) The Code of Ethics for Principal Executive and Senior Financial Officers is attached hereto.
(b) A separate certification for each principal executive officer and principal financial officer of the registrant are attached hereto as part of EX-99.CERT.
9
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Morgan Stanley Balanced Fund
/s/ Ronald E. Robison |
|
| |
Ronald E. Robison |
|
|
|
Principal Executive Officer |
|
|
|
March 20, 2008 |
|
|
|
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
/s/ Ronald E. Robison |
|
| |
Ronald E. Robison |
|
|
|
Principal Executive Officer |
|
|
|
March 20, 2008 |
|
|
|
|
|
| |
Francis Smith |
|
|
|
Principal Financial Officer |
|
|
|
March 20, 2008 |
|
|
|
10
EXHIBIT 12 A
CODE OF ETHICS FOR PRINCIPAL EXECUTIVE AND SENIOR FINANCIAL OFFICERS
ADOPTED SEPTEMBER 28, 2004, AS AMENDED SEPTEMBER 20, 2005
I. | This Code of Ethics (the “Code”) for the investment companies within the Morgan Stanley complex identified in Exhibit A (collectively, “Funds” and each, a “Fund”) applies to each Fund’s Principal Executive Officer, President, Principal Financial Officer and Treasurer (or persons performing similar functions) (“Covered Officers” each of whom are set forth in Exhibit B) for the purpose of promoting: |
| • | honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships. |
| • | full, fair, accurate, timely and understandable disclosure in reports and documents that a company files with, or submits to, the Securities and Exchange Commission (“SEC”) and in other public communications made by the Fund; |
| • | compliance with applicable laws and governmental rules and regulations; |
| • | prompt internal reporting of violations of the Code to an appropriate person or persons identified in the Code; and |
| • | accountability for adherence to the Code. |
Each Covered Officer should adhere to a high standard of business ethics and should be sensitive to situations that may give rise to actual as well as apparent conflicts of interest. Any question about the application of the Code should be referred to the General Counsel or his/her designee (who is set forth in Exhibit C).
II. | Covered Officers Should Handle Ethically Actual and Apparent Conflicts of Interest |
Overview. A “conflict of interest” occurs when a Covered Officer’s private interest interferes, or appears to interfere, with the interests of, or his service to, the Fund. For example, a conflict of interest would arise if a Covered Officer, or a member of his family, receives improper personal benefits as a result of his position with the Fund.
Certain conflicts of interest arise out of the relationships between Covered Officers and the Fund and already are subject to conflict of interest provisions in the
11
Investment Company Act of 1940 (“Investment Company Act”) and the Investment Advisers Act of 1940 (“Investment Advisers Act”). For example, Covered Officers may not individually engage in certain transactions (such as the purchase or sale of securities or other property) with the Fund because of their status as “affiliated persons” (as defined in the Investment Company Act) of the Fund. The Fund’s and its investment adviser’s compliance programs and procedures are designed to prevent, or identify and correct, violations of these provisions. This Code does not, and is not intended to, repeat or replace these programs and procedures, and such conflicts fall outside the parameters of this Code, unless or until the General Counsel determines that any violation of such programs and procedures is also a violation of this Code.
Although typically not presenting an opportunity for improper personal benefit, conflicts may arise from, or as a result of, the contractual relationship between the Fund and its investment adviser of which the Covered Officers are also officers or employees. As a result, this Code recognizes that the Covered Officers will, in the normal course of their duties (whether formally for the Fund or for the investment adviser, or for both), be involved in establishing policies and implementing decisions that will have different effects on the Fund and its investment adviser. The participation of the Covered Officers in such activities is inherent in the contractual relationship between the Fund and the investment adviser and is consistent with the performance by the Covered Officers of their duties as officers of the Fund. Thus, if performed in conformity with the provisions of the Investment Company Act and the Investment Advisers Act, such activities will be deemed to have been handled ethically. In addition, it is recognized by the Funds’ Boards of Directors/Trustees (“Boards”) that the Covered Officers may also be officers or employees of one or more other investment companies covered by this or other codes.
Other conflicts of interest are covered by the Code, even if such conflicts of interest are not subject to provisions in the Investment Company Act and the Investment Advisers Act. The following list provides examples of conflicts of interest under the Code, but Covered Officers should keep in mind that these examples are not exhaustive. The overarching principle is that the personal interest of a Covered Officer should not be placed improperly before the interest of the Fund.
Each Covered Officer must not:
| • | use his personal influence or personal relationships improperly to influence investment decisions or financial reporting by the Fund whereby the Covered Officer would benefit personally (directly or indirectly); |
| • | cause the Fund to take action, or fail to take action, for the individual personal benefit of the Covered Officer rather than the benefit of the Fund; or |
| • | use material non-public knowledge of portfolio transactions made or contemplated for, or actions proposed to be taken by, the Fund to trade personally or cause others to trade personally in contemplation of the market effect of such transactions. |
12
Each Covered Officer must, at the time of signing this Code, report to the General Counsel all affiliations or significant business relationships outside the Morgan Stanley complex and must update the report annually.
Conflict of interest situations should always be approved by the General Counsel and communicated to the relevant Fund or Fund’s Board. Any activity or relationship that would present such a conflict for a Covered Officer would likely also present a conflict for the Covered Officer if an immediate member of the Covered Officer’s family living in the same household engages in such an activity or has such a relationship. Examples of these include:
| • | service or significant business relationships as a director on the board of any public or private company; |
| • | accepting directly or indirectly, anything of value, including gifts and gratuities in excess of $100 per year from any person or entity with which the Fund has current or prospective business dealings, not including occasional meals or tickets for theatre or sporting events or other similar entertainment; provided it is business-related, reasonable in cost, appropriate as to time and place, and not so frequent as to raise any question of impropriety; |
| • | any ownership interest in, or any consulting or employment relationship with, any of the Fund’s service providers, other than its investment adviser, principal underwriter, or any affiliated person thereof; and |
| • | a direct or indirect financial interest in commissions, transaction charges or spreads paid by the Fund for effecting portfolio transactions or for selling or redeeming shares other than an interest arising from the Covered Officer’s employment, such as compensation or equity ownership. |
III. | Disclosure and Compliance |
| • | Each Covered Officer should familiarize himself/herself with the disclosure and compliance requirements generally applicable to the Funds; |
| • | each Covered Officer must not knowingly misrepresent, or cause others to misrepresent, facts about the Fund to others, whether within or outside the Fund, including to the Fund’s Directors/Trustees and auditors, or to governmental regulators and self-regulatory organizations; |
| • | each Covered Officer should, to the extent appropriate within his area of responsibility, consult with other officers and employees of the Funds and their investment advisers with the goal of promoting full, fair, accurate, timely and understandable disclosure in the reports and documents the Funds file with, or submit to, the SEC and in other public communications made by the Funds; and |
13
| • | it is the responsibility of each Covered Officer to promote compliance with the standards and restrictions imposed by applicable laws, rules and regulations. |
IV. | Reporting and Accountability |
Each Covered Officer must:
| • | upon adoption of the Code (thereafter as applicable, upon becoming a Covered Officer), affirm in writing to the Boards that he has received, read and understands the Code; |
| • | annually thereafter affirm to the Boards that he has complied with the requirements of the Code; |
| • | not retaliate against any other Covered Officer, other officer or any employee of the Funds or their affiliated persons for reports of potential violations that are made in good faith; and |
| • | notify the General Counsel promptly if he/she knows or suspects of any violation of this Code. Failure to do so is itself a violation of this Code. |
The General Counsel is responsible for applying this Code to specific situations in which questions are presented under it and has the authority to interpret this Code in any particular situation. However, any waivers2 sought by a Covered Officer must be considered by the Board of the relevant Fund or Funds.
The Funds will follow these procedures in investigating and enforcing this Code:
| • | the General Counsel will take all appropriate action to investigate any potential violations reported to him; |
| • | if, after such investigation, the General Counsel believes that no violation has occurred, the General Counsel is not required to take any further action; |
| • | any matter that the General Counsel believes is a violation will be reported to the relevant Fund’s Audit Committee; |
| • | if the directors/trustees/managing general partners who are not “interested persons” as defined by the Investment Company Act (the “Independent Directors/Trustees/Managing General Partners”) of the relevant Fund concur that a violation has occurred, they will consider appropriate action, which may include review of, and appropriate modifications to, applicable |
2 | Item 2 of Form N-CSR defines “waiver” as “the approval by the registrant of a material departure from a provision of the code of ethics.” |
14
policies and procedures; notification to appropriate personnel of the investment adviser or its board; or a recommendation to dismiss the Covered Officer or other appropriate disciplinary actions;
| • | the Independent Directors/Trustees/Managing General Partners of the relevant Fund will be responsible for granting waivers of this Code, as appropriate; and |
| • | any changes to or waivers of this Code will, to the extent required, be disclosed as provided by SEC rules. |
V. | Other Policies and Procedures |
This Code shall be the sole code of ethics adopted by the Funds for purposes of Section 406 of the Sarbanes-Oxley Act of 2002 and the rules and forms applicable to registered investment companies thereunder. Insofar as other policies or procedures of the Funds, the Funds’ investment advisers, principal underwriters, or other service providers govern or purport to govern the behavior or activities of the Covered Officers who are subject to this Code, they are superseded by this Code to the extent that they overlap or conflict with the provisions of this Code unless any provision of this Code conflicts with any applicable federal or state law, in which case the requirements of such law will govern. The Funds’ and their investment advisers’ and principal underwriters’ codes of ethics under Rule 17j-1 under the Investment Company Act and Morgan Stanley’s Code of Ethics are separate requirements applying to the Covered Officers and others, and are not part of this Code.
VI. | Amendments |
Any amendments to this Code, other than amendments to Exhibits A, B or C, must be approved or ratified by a majority vote of the Board of each Fund, including a majority of Independent Directors/Trustees/Managing General Partners.
VII. | Confidentiality |
All reports and records prepared or maintained pursuant to this Code will be considered confidential and shall be maintained and protected accordingly. Except as otherwise required by law or this Code, such matters shall not be disclosed to anyone other than the Independent Directors/Trustees/Managing General Partners of the relevant Fund or Funds and their counsel, the relevant Fund or Funds and their counsel and the relevant investment adviser and its counsel.
15
VIII. | Internal Use |
The Code is intended solely for the internal use by the Funds and does not constitute an admission, by or on behalf of any Fund, as to any fact, circumstance, or legal conclusion
I have read and understand the terms of the above Code. I recognize the responsibilities and obligations incurred by me as a result of my being subject to the Code. I hereby agree to abide by the above Code.
__________________________
Date: _____________________
16
Exhibit A
Fund List
at
February 29, 2008
RETAIL FUNDS
Open-End Retail Funds
Taxable Money Market Funds
| 1. | Active Assets Government Securities Trust (“AA Government”) |
| 2. | Active Assets Institutional Government Securities Trust (“AA Institutional Government”) |
| 3. | Active Assets Institutional Money Trust (“AA Institutional Money”) |
| 4. | Active Assets Money Trust (“AA Money”) |
| 5. | Morgan Stanley Liquid Asset Fund Inc. (“Liquid Asset”) |
| 6. | Morgan Stanley U.S. Government Money Market Trust (“Government Money”) |
Tax-Exempt Money Market Funds
| 7. | Active Assets California Tax-Free Trust (“AA California”) |
| 8. | Active Assets Tax-Free Trust (“AA Tax-Free”) |
| 9. | Morgan Stanley California Tax-Free Daily Income Trust (“California Tax-Free Daily”) |
| 10. | Morgan Stanley New York Municipal Money Market Trust (“New York Money”) |
| 11. | Morgan Stanley Tax-Free Daily Income Trust (“Tax-Free Daily”) |
Equity Funds
| 12. | Morgan Stanley Allocator Fund (“Allocator Fund”)+ |
| 13. | Morgan Stanley Capital Opportunities Trust (“Capital Opportunities”)+ |
| 14. | Morgan Stanley Diversified International Equity Fund (“Diversified International Equity”)+ |
| 15. | Morgan Stanley Diversified Large Cap Equity Fund (“Diversified Large Cap Equity”) |
| 16. | Morgan Stanley Dividend Growth Securities Inc. (“Dividend Growth”)+ |
| 17. | Morgan Stanley Equally-Weighted S&P 500 Fund (“Equally-Weighted S&P 500”)+ |
| 18. | Morgan Stanley European Equity Fund Inc. (“European Equity”)+ |
| 19. | Morgan Stanley Financial Services Trust (“Financial Services”)+ |
| 20. | Morgan Stanley Focus Growth Fund (“Focus Growth”)+ |
| 21. | Morgan Stanley Fundamental Value Fund (“Fundamental Value”)+ |
17
| 22. | Morgan Stanley FX Series – FX Alpha Plus Strategy Portfolio (“Alpha Plus”)+ |
| 23. | Morgan Stanley FX Series – FX Alpha Strategy Portfolio (“Alpha”)+ |
| 24. | Morgan Stanley Global Advantage Fund (“Global Advantage”)+ |
| 25. | Morgan Stanley Global Dividend Growth Securities (“Global Dividend Growth”)+ |
| 26. | Morgan Stanley Health Sciences Trust (“Health Sciences”)+ |
| 27. | Morgan Stanley Institutional Strategies Fund (“Institutional Strategies”)+ |
| 28. | Morgan Stanley International Fund (“International Fund”)+ |
| 29. | Morgan Stanley International SmallCap Fund (“International SmallCap”)+ |
| 30. | Morgan Stanley International Value Equity Fund (“International Value”)+ |
| 31. | Morgan Stanley Japan Fund (“Japan Fund”)+ |
| 32. | Morgan Stanley Mid Cap Growth Fund (“Mid Cap Growth”)+ |
| 33. | Morgan Stanley Mid-Cap Value Fund (“Mid-Cap Value”)+ |
| 34. | Morgan Stanley Multi-Asset Class Fund (“Multi-Asset Class”)+ |
| 35. | Morgan Stanley Nasdaq-100 Index Fund (“Nasdaq-100”)+ |
| 36. | Morgan Stanley Natural Resource Development Securities Inc. (“Natural Resource”)+ |
| 37. | Morgan Stanley Pacific Growth Fund Inc. (“Pacific Growth”)+ |
| 38. | Morgan Stanley Real Estate Fund (“Real Estate”)+ |
| 39. | Morgan Stanley Small-Mid Special Value Fund (Small-Mid Special Value”)+ |
| 40. | Morgan Stanley S&P 500 Index Fund (“S&P500 Index”)+ |
| 41. | Morgan Stanley Special Growth Fund (“Special Growth”)+ |
| 42. | Morgan Stanley Special Value Fund (“Special Value”)+ |
| 43. | Morgan Stanley Technology Fund (“Technology”)+ |
| 44. | Morgan Stanley Total Market Index Fund (“Total Market Index”)+ |
| 45. | Morgan Stanley Utilities Fund (“Utilities Fund”)+ |
| 46. | Morgan Stanley Value Fund (“Value Fund”)+ |
Balanced Funds
| 47. | Morgan Stanley Balanced Fund (“Balanced”)+ |
Asset Allocation Fund
| 48. | Morgan Stanley Strategist Fund (“Strategist Fund”)+ |
Taxable Fixed-Income Funds
| 49. | Morgan Stanley Convertible Securities Trust (“Convertible Securities”)+ |
| 50. | Morgan Stanley Flexible Income Trust (“Flexible Income”)+ |
| 51. | Morgan Stanley Income Trust (“Income Trust”)+ |
| 52. | Morgan Stanley High Yield Securities Inc. (“High Yield Securities”)+ |
| 53. | Morgan Stanley Limited Duration Fund (“Limited Duration Fund”) |
| 54. | Morgan Stanley Limited Duration U.S. Treasury Trust (“Limited Duration Treasury”) |
| 55. | Morgan Stanley Mortgage Securities Trust (“Mortgage Securities”)+ |
18
| 56. | Morgan Stanley U.S. Government Securities Trust (“Government Securities”)+ |
Tax-Exempt Fixed-Income Funds
| 57. | Morgan Stanley California Tax-Free Income Fund (“California Tax-Free”)+ |
| 58. | Morgan Stanley Limited Term Municipal Trust (“Limited Term Municipal”) |
| 59. | Morgan Stanley New York Tax-Free Income Fund (“New York Tax-Free”)+ |
| 60. | Morgan Stanley Tax-Exempt Securities Trust (“Tax-Exempt Securities”)+ |
Special Purpose Funds
| 61. | Morgan Stanley Select Dimensions Investment Series (“Select Dimensions”) |
| • | Balanced Portfolio |
| • | Capital Opportunities Portfolio |
| • | Developing Growth Portfolio |
| • | Dividend Growth Portfolio |
| • | Equally-Weighted S&P 500 Portfolio |
| • | Flexible Income Portfolio |
| • | Focus Growth Portfolio |
| • | Global Equity Portfolio |
| • | Growth Portfolio |
| • | Money Market Portfolio |
| • | Utilities Portfolio |
| 62. | Morgan Stanley Variable Investment Series (“Variable Investment”) |
| • | Aggressive Equity Portfolio |
| • | Dividend Growth Portfolio |
| • | Equity Portfolio |
| • | European Growth Portfolio |
| • | Global Advantage Portfolio |
| • | Global Dividend Growth Portfolio |
| • | High Yield Portfolio |
| • | Income Builder Portfolio |
| • | Limited Duration Portfolio |
| • | Money Market Portfolio |
| • | Income Plus Portfolio |
| • | S&P 500 Index Portfolio |
| • | Strategist Portfolio |
| • | Utilities Portfolio |
19
Closed-End Retail Funds
Taxable Fixed-Income Closed-End Funds
| 63. | Morgan Stanley Income Securities Inc. (“Income Securities”) |
| 64. | Morgan Stanley Prime Income Trust (“Prime Income”) |
Tax-Exempt Fixed-Income Closed-End Funds
| 65. | Morgan Stanley California Insured Municipal Income Trust (“California Insured Municipal”) |
| 66. | Morgan Stanley California Quality Municipal Securities (“California Quality Municipal”) |
| 67. | Morgan Stanley Insured California Municipal Securities (“Insured California Securities”) |
| 68. | Morgan Stanley Insured Municipal Bond Trust (“Insured Municipal Bond”) |
| 69. | Morgan Stanley Insured Municipal Income Trust (“Insured Municipal Income”) |
| 70. | Morgan Stanley Insured Municipal Securities (“Insured Municipal Securities”) |
| 71. | Morgan Stanley Insured Municipal Trust (“Insured Municipal Trust”) |
| 72. | Morgan Stanley Municipal Income Opportunities Trust (“Municipal Opportunities”) |
| 73. | Morgan Stanley Municipal Income Opportunities Trust II (“Municipal Opportunities II”) |
| 74. | Morgan Stanley Municipal Income Opportunities Trust III (“Municipal Opportunities III”) |
| 75. | Morgan Stanley Municipal Premium Income Trust (“Municipal Premium”) |
| 76. | Morgan Stanley New York Quality Municipal Securities (“New York Quality Municipal”) |
| 77. | Morgan Stanley Quality Municipal Income Trust (“Quality Municipal Income”) |
| 78. | Morgan Stanley Quality Municipal Investment Trust (“Quality Municipal Investment”) |
| 79. | Morgan Stanley Quality Municipal Securities (“Quality Municipal Securities”) |
+- Denotes Retail Multi-Class Fund
INSTITUTIONAL FUNDS
Open-End Institutional Funds
1. | Morgan Stanley Institutional Fund, Inc. (“Institutional Fund Inc.”) |
Active Portfolios:
| • | Active International Allocation Portfolio |
| • | Emerging Markets Portfolio |
| • | Emerging Markets Debt Portfolio |
| • | Focus Equity Portfolio |
| • | Global Franchise Portfolio |
| • | Global Real Estate Portfolio |
20
| • | Global Value Equity Portfolio |
| • | International Equity Portfolio |
| • | International Growth Equity Portfolio |
| • | International Magnum Portfolio |
| • | International Real Estate Portfolio |
| • | International Small Cap Portfolio |
| • | Large Cap Relative Value Portfolio |
| • | Money Market Portfolio |
| • | Municipal Money Market Portfolio |
| • | Small Company Growth Portfolio |
| • | Systematic Active large Cap Core Portfolio |
| • | Systematic Active Small Cap Core Portfolio |
| • | Systematic Active Small Cap Growth Portfolio |
| • | Systematic Active Small Cap Value Portfolio |
| • | U.S. Large Cap Growth Portfolio |
| • | U.S. Real Estate Portfolio |
Inactive Portfolios*:
| • | China Growth Portfolio |
| • | Gold Portfolio |
| • | Large Cap Relative Value Portfolio |
| • | MicroCap Portfolio |
| • | Mortgage-Backed Securities Portfolio |
| • | Municipal Bond Portfolio |
| • | U.S. Equity Plus Portfolio |
2. | Morgan Stanley Institutional Fund Trust (“Institutional Fund Trust”) |
Active Portfolios:
| • | Advisory Portfolio |
| • | Advisory Foreign Fixed Income II Portfolio |
| • | Advisory Foreign Fixed Income Portfolio |
| • | Balanced Portfolio |
| • | Core Fixed Income Portfolio |
| • | Core Plus Fixed Income Portfolio |
| • | Equity Portfolio |
| • | Equity Plus Portfolio |
| • | High Yield Portfolio |
| • | Intermediate Duration Portfolio |
* | Have not commenced or have ceased operations |
21
| • | International Fixed Income Portfolio |
| • | Investment Grade Fixed Income Portfolio |
| • | Limited Duration Portfolio |
| • | Long Duration Fixed Income Portfolio |
| • | Mid-Cap Growth Portfolio |
| • | Municipal Portfolio |
| • | U.S. Mid-Cap Value Portfolio |
| • | U.S. Small-Cap Value Portfolio |
| • | Value Portfolio |
Inactive Portfolios*:
| • | Balanced Plus Portfolio |
| • | Growth Portfolio |
| • | Investment Grade Credit Advisory Portfolio |
| • | Mortgage Advisory Portfolio |
| • | New York Municipal Portfolio |
| • | Targeted Duration Portfolio |
| • | Value II Portfolio |
3. | The Universal Institutional Funds, Inc. (“Universal Funds”) |
Active Portfolios:
| • | Core Plus Fixed Income Portfolio |
| • | Emerging Markets Debt Portfolio |
| • | Emerging Markets Equity Portfolio |
| • | Equity and Income Portfolio |
| • | Equity Growth Portfolio |
| • | Global Franchise Portfolio |
| • | Global Real Estate Portfolio |
| • | Global Value Equity Portfolio |
| • | High Yield Portfolio |
| • | International Growth Equity Portfolio |
| • | International Magnum Portfolio |
| • | Mid-Cap Growth Portfolio |
| • | Small Company Growth Portfolio |
| • | U.S. Mid-Cap Value Portfolio |
| • | U.S. Real Estate Portfolio |
| • | Value Portfolio |
Inactive Portfolios*:
| • | Balanced Portfolio |
22
| • | Capital Preservation Portfolio |
| • | Core Equity Portfolio |
| • | International Fixed Income Portfolio |
| • | Investment Grade Fixed Income Portfolio |
| • | Latin American Portfolio |
| • | Multi-Asset Class Portfolio |
| • | Targeted Duration Portfolio |
4. | Morgan Stanley Institutional Liquidity Funds (“Liquidity Funds”) |
Active Portfolios:
| • | Government Portfolio |
| • | Money Market Portfolio |
| • | Prime Portfolio |
| • | Tax-Exempt Portfolio |
| • | Treasury Portfolio |
Inactive Portfolios*:
| • | Government Securities Portfolio |
| • | Treasury Securities Portfolio |
Closed-End Institutional Funds
5. | Morgan Stanley Asia-Pacific Fund, Inc. (“Asia-Pacific Fund”) |
6. | Morgan Stanley Eastern Europe Fund, Inc. (“Eastern Europe”) |
7. | Morgan Stanley Emerging Markets Debt Fund, Inc. (“Emerging Markets Debt”) |
8. | Morgan Stanley Emerging Markets Fund, Inc. (“Emerging Markets Fund”) |
9. | Morgan Stanley Global Opportunity Bond Fund, Inc. (“Global Opportunity”) |
10. | Morgan Stanley High Yield Fund, Inc. (“High Yield Fund”) |
11. | The Latin American Discovery Fund, Inc. (“Latin American Discovery”) |
12. | The Malaysia Fund, Inc. (“Malaysia Fund”) |
13. | The Thai Fund, Inc. (“Thai Fund”) |
14. | The Turkish Investment Fund, Inc. (“Turkish Investment”) |
15. | India Investment Fund (“India Investment”) |
Closed-End Fund of Hedge Funds
16. | Morgan Stanley Institutional Fund of Hedge Funds (“Fund of Hedge Funds”) |
* | Have not commenced or have ceased operations |
23
In Registration
Morgan Stanley Retail Funds
1. | Morgan Stanley American Franchise Fund |
Funds of Hedge Funds
1. | Morgan Stanley Absolute Return Fund |
2. | Morgan Stanley Institutional Fund of Hedge Funds II |
24
EXHIBIT B
Institutional Funds
Covered Officers
Ronald E. Robison – President and Principal Executive Officer
James W. Garrett – Chief Financial Officer and Treasurer
Retail Funds
Covered Officers
Ronald E. Robison – President and Principal Executive Officer
Francis Smith – Chief Financial Officer and Treasurer
Morgan Stanley India Investment Fund, Inc.
Covered Officers
Ronald E. Robison – President and Principal Executive Officer
James W. Garrett – Chief Financial Officer and Treasurer
25
EXHIBIT C
General Counsel
Arthur Lev
26
EXHIBIT 12 B1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
CERTIFICATIONS
I, Ronald E. Robison, certify that:
1. | I have reviewed this report on Form N-CSR of Morgan Stanley Balanced Fund; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; |
4. | The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: |
a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and |
d) | disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the 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; and |
5. | The registrant’s other certifying officer(s) and I have disclosed to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
27
a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and |
b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting. |
Date: March 20, 2008 |
|
|
|
|
|
| |
|
|
| Ronald E. Robison |
|
|
| Principal Executive Officer |
28
EXHIBIT 12 B2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
CERTIFICATIONS
I, Francis Smith, certify that:
1. | I have reviewed this report on Form N-CSR of Morgan Stanley Balanced Fund; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; |
4. | The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: |
a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and |
d) | disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the 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; and |
5. | The registrant’s other certifying officer(s) and I have disclosed to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
29
a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and |
b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting. |
Date: March 20, 2008 |
|
|
|
|
|
| |
|
|
| Francis Smith |
|
|
| Principal Financial Officer |
30
SECTION 906 CERTIFICATION
Certification Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Morgan Stanley Balanced Fund
In connection with the Report on Form N-CSR (the “Report”) of the above-named issuer for the period ended January 31, 2008 that is accompanied by this certification, the undersigned hereby certifies that:
1. | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
2. | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Issuer. |
Date: March 20, 2008 |
|
| /s/ Ronald E. Robison |
|
|
| Ronald E. Robison |
|
|
| Principal Executive Officer |
A signed original of this written statement required by Section 906 has been provided to Morgan Stanley Balanced Fund and will be retained by Morgan Stanley Balanced Fund and furnished to the Securities and Exchange Commission or its staff upon request.
31
SECTION 906 CERTIFICATION
Certification Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Morgan Stanley Balanced Fund
In connection with the Report on Form N-CSR (the “Report”) of the above-named issuer for the period ended January 31, 2008 that is accompanied by this certification, the undersigned hereby certifies that:
1. | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
2. | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Issuer. |
Date: March 20, 2008 |
|
| /s/ Francis Smith |
|
|
| Francis Smith |
|
|
| Principal Financial Officer |
A signed original of this written statement required by Section 906 has been provided to Morgan Stanley Balanced Fund and will be retained by Morgan Stanley Balanced Fund and furnished to the Securities and Exchange Commission or its staff upon request.
32