UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSRS
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 811-07119
Morgan Stanley Global Utilities Fund
(Exact name of registrant as specified in charter)
1221 Avenue of the Americas, New York, New York 10020
(Address of principal executive offices) (Zip code)
Ronald E. Robison
1221 Avenue of the Americas, New York, New York 10020
(Name and address of agent for service)
Registrant's telephone number, including area code: 212-762-4000
Date of fiscal year end: February 29, 2004
Date of reporting period: August 31, 2003
Item 1 - Report to Shareholders
Welcome, Shareholder:
In this report, you'll learn about how your investment in Morgan Stanley Global
Utilities Fund performed during the semiannual period. We will provide an
overview of the market conditions, and discuss some of the factors that affected
performance during the reporting period. In addition, this report includes the
Fund's financial statements and a list of Fund investments.
This material must be preceded or accompanied by a prospectus for the fund being
offered. Market forecasts provided in this report may not necessarily come to
pass. There is no assurance that the Fund will achieve its investment objective.
The Fund is subject to market risk, which is the possibility that the market
values of securities owned by the Fund will decline and, therefore, the value of
the Fund shares may be less than what you paid for them. Accordingly, you can
lose money investing in this Fund.
FUND REPORT
For the six-month period ended August 31, 2003
TOTAL RETURN FOR THE SIX-MONTH PERIOD ENDED AUGUST 31, 2003
<Table>
<Caption>
MSCI WORLD LIPPER UTILITY
CLASS A CLASS B CLASS C CLASS D INDEX(1) FUNDS INDEX(2)
12.83% 12.39% 12.30% 12.92% 21.56% 15.97%
</Table>
The performance of the Fund's four share classes varies because each has
different expenses. The Fund's total return figures assume the reinvestment of
all distributions but do not reflect the deduction of any applicable sales
charges. Such costs would lower performance. Past performance is no guarantee of
future results. See Performance Summary for standardized performance
information.
MARKET CONDITIONS
The six months ended August 31, 2003, were a very positive period for global
equities. The coalition's war with Iraq developed speedily, and there were signs
of improving economies, particularly in the United States. Global equity markets
rallied sharply from their mid-March lows to end the period with solid gains.
The strongest-performing segments of the market in the rally were generally the
more-aggressive and lower-quality sectors and securities that had lagged in the
bear market.
In line with their generally defensive nature, global utilities stocks improved
during the six months but lagged the rising broader markets. A particularly
positive factor for U.S. dividend-paying utilities and telecommunications stocks
was the reduction of the federal income tax rate on dividends. While the U.S.
dollar was weak in the early part of this six months, it strengthened against
most foreign currencies later as a result of the strengthening U.S. economy.
PERFORMANCE ANALYSIS
Performance within the utilities sector reflected broader market trends in that
lower-quality stocks tended to outperform, in both utilities/ telecommunications
and other industries. Its focus on relatively high-quality companies caused the
Fund to lag in the rally's more-aggressive environment. During this period we
increased the Fund's exposure to more growth-oriented equities, including
selected telecommunications and power stocks, in order to participate in the
improving performance of these companies. We also trimmed the Fund's foreign
holdings, out of concern over the potential impact of the strengthening dollar
on non-U.S. stocks.
2
<Table>
<Caption>
TOP 10 HOLDINGS
Cinergy 4.3%
Entergy 4.0
FPL Group 4.0
Dominion Resources 4.0
Energy East 3.7
Southern Co. 3.7
BellSouth 3.7
Keyspan 3.6
Ameren 3.5
Exelon 3.5
</Table>
<Table>
<Caption>
LARGEST COUNTRIES
U.S.A. 75.2%
Canada 6.0
United Kingdom 5.5
Germany 4.2
Australia 1.8
</Table>
Subject to change daily. All percentages are as a percentage of net assets.
Provided for informational purposes only and should not be deemed as a
recommendation to buy 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 advisor
services.
INVESTMENT STRATEGY
1. THE FUND WILL NORMALLY INVEST AT LEAST 80 PERCENT OF ITS ASSETS IN SECURITIES
OF COMPANIES FROM AROUND THE WORLD THAT ARE PRIMARILY ENGAGED IN THE
UTILITIES INDUSTRY.
2. A COMPANY WILL BE CONSIDERED PRIMARILY ENGAGED IN THE UTILITIES INDUSTRY IF
IT DERIVES AT LEAST 50 PERCENT OF ITS REVENUES OR EARNINGS FROM THE UTILITIES
INDUSTRY OR DEVOTES 50 PERCENT OF ITS ASSETS TO ACTIVITIES IN THE INDUSTRY.
3. THESE MAY INCLUDE COMPANIES INVOLVED IN, AMONG OTHER AREAS:
TELECOMMUNICATIONS, COMPUTERS AND OTHER NEW OR EMERGING TECHNOLOGY COMPANIES,
GAS AND ELECTRIC ENERGY, WATER DISTRIBUTION, THE INTERNET AND INTERNET
RELATED SERVICES. THE COMPANIES MAY BE TRADITIONALLY REGULATED PUBLIC
UTILITIES AS WELL AS FULLY OR PARTIALLY DEREGULATED AND UNREGULATED UTILITY
COMPANIES.
PROXY VOTING POLICIES AND PROCEDURES
A DESCRIPTION OF THE FUND'S POLICIES AND PROCEDURES WITH RESPECT TO THE VOTING
OF PROXIES RELATING TO THE FUND'S PORTFOLIO SECURITIES IS AVAILABLE WITHOUT
CHARGE, UPON REQUEST, BY CALLING (800) 869-NEWS (6397). THIS INFORMATION IS ALSO
AVAILABLE ON THE SECURITIES AND EXCHANGE COMMISSION'S WEB SITE AT
HTTP://WWW.SEC.GOV.
3
PERFORMANCE SUMMARY
AVERAGE ANNUAL TOTAL RETURNS -- PERIOD ENDED AUGUST 31, 2003
<Table>
<Caption>
CLASS A SHARES* CLASS B SHARES** CLASS C SHARES(+) CLASS D SHARES(++)
07/28/97 05/31/94 07/28/97 07/28/97
SYMBOL GUTAX GUTBX GUTCX GUTDX
1 YEAR 3.94%(3) 3.12%(3) 3.17%(3) 4.15%(3)
(1.52)(4) (1.88)(4) 2.17(4)
5 YEARS 1.14(3) 0.41(3) 0.42(3) 1.40(3)
0.05(4) 0.15(4) 0.42(4)
SINCE INCEPTION 4.07(3) 6.61(3) 3.32(3) 4.35(3)
3.16(4) 6.61(4) 3.32(4)
</Table>
Past performance is not predictive of future returns. Investment return and
principal value will fluctuate. When you sell fund shares, they may be worth
less than their original cost. The table does not reflect the deduction of taxes
that a shareholder would pay on fund distributions or the redemption of fund
shares. Performance for Class A, Class B, Class C, and Class D shares will vary
due to differences in sales charges and expenses.
- --------------------------------------------------------------------------------
Notes on Performance
(1) The Morgan Stanley Capital International (MSCI) World Index measures
performance from a diverse range of global stock markets including
securities representative of the market structure of 22 developed market
countries in North America, Europe, and the Asia/Pacific region. The
performance of the Index is listed in U.S. dollars and assumes reinvestment
of net dividends. "Net dividends" reflects a reduction in dividends after
taking into account withholding of taxes by certain foreign countries
represented in the Index. Indexes are unmanaged and their returns do not
include any sales charges or fees. Such costs would lower performance. It
is not possible to invest directly in an index.
(2) The Lipper Utility Funds Index is an equally weighted performance index of
the largest qualifying funds (based on net assets) in the Lipper Utility
Funds classification. The Index, which is adjusted for capital gains
distributions and income dividends, is unmanaged and should not be
considered an investment. There are currently 10 funds represented in this
Index.
(3) Figure shown assumes reinvestment of all distributions and does not reflect
the deduction of any sales charges.
(4) Figure shown assumes reinvestment of all distributions and the deduction of
the maximum applicable sales charge. See the Fund's current prospectus for
complete details on fees and sales charges.
* The maximum front-end sales charge for Class A is 5.25%.
** The maximum contingent deferred sales charge (CDSC) for Class B is 5.0%. The
CDSC declines to 0% after six years.
+ The maximum CDSC for Class C is 1% for shares redeemed within one year of
purchase.
++ Class D has no sales charge.
4
Morgan Stanley Global Utilities Fund
PORTFOLIO OF INVESTMENTS - AUGUST 31, 2003 (UNAUDITED)
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ------------------------------------------------------
Common Stocks (93.8%)
Australia (1.8%)
Energy
815,300 Australian Gas Light
Company Ltd. ........... $ 5,678,522
------------
Canada (6.0%)
Energy
252,000 Enbridge Inc. ........... 9,283,157
------------
Telecommunications
441,800 BCE Inc. ................ 9,573,715
------------
Total Canada............. 18,856,872
------------
Germany (4.2%)
Electric Utilities
148,300 E. ON AG................. 7,671,549
206,600 RWE AG................... 5,566,072
------------
Total Germany............ 13,237,621
------------
Spain (1.1%)
Telecommunications
277,700 Telefonica S.A.*......... 3,269,578
------------
United Kingdom (5.5%)
Energy
2,373,900 Centrica PLC............. 6,647,991
------------
Telecommunications
580,900 Vodafone Group PLC
(ADR)................... 10,630,470
------------
Total United Kingdom..... 17,278,461
------------
United States (75.2%)
Electric Utilities
261,700 Ameren Corp. ............ 11,122,250
396,900 Cinergy Corp. ........... 13,581,918
275,400 Consolidated Edison,
Inc. ................... 10,886,562
300,000 Constellation Energy
Group, Inc. ............ 10,917,000
205,900 Dominion Resources,
Inc. ................... 12,473,422
</Table>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ------------------------------------------------------
140,600 DTE Energy Co. .......... $ 4,908,346
537,500 Energy East Corp. ....... 11,604,625
242,300 Entergy Corp. ........... 12,708,635
188,000 Exelon Corp. ............ 11,073,200
205,000 FPL Group, Inc. ......... 12,681,300
85,000 PG&E Corp.*.............. 1,884,450
186,500 PPL Corp. ............... 7,398,455
244,600 Public Service Enterprise
Group, Inc. ............ 10,356,364
323,900 Puget Energy, Inc. ...... 7,061,020
293,900 SCANA Corp. ............. 9,992,600
408,900 Southern Co. (The)....... 11,604,582
------------
160,254,729
------------
Energy
172,200 AGL Resources, Inc. ..... 4,792,326
339,300 KeySpan Corp. ........... 11,451,375
353,600 NiSource Inc. ........... 6,838,624
------------
23,082,325
------------
Telecommunications
115,000 ALLTEL Corp. ............ 5,267,000
852,100 AT&T Wireless Services
Inc.*................... 7,345,102
460,000 BellSouth Corp. ......... 11,592,000
115,000 CenturyTel, Inc. ........ 3,997,400
106,680 Comcast Corp. (Class
A)*..................... 3,173,730
50,700 Cox Communications, Inc.
(Class A)*.............. 1,658,904
430,000 SBC Communications,
Inc. ................... 9,670,700
280,100 Verizon Communications
Inc. ................... 9,893,132
------------
52,597,968
------------
Total United States...... 235,935,022
------------
Total Common Stocks
(Cost $280,182,705)...... 294,256,076
------------
</Table>
See Notes to Financial Statements
5
Morgan Stanley Global Utilities Fund
PORTFOLIO OF INVESTMENTS - AUGUST 31, 2003 (UNAUDITED) continued
<Table>
<Caption>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
- ------------------------------------------------------
Short-Term Investment (5.8%)
Repurchase Agreement
$18,124 Joint repurchase
agreement account 1.05%
due 09/02/03 (dated
08/29/03; proceeds
$18,126,114) (a)
(Cost $18,124,000)...... $ 18,124,000
------------
</Table>
<Table>
Total Investments
(Cost $298,306,705) (b)..... 99.6% 312,380,076
Other Assets in Excess of
Liabilities................. 0.4 1,276,998
----- ------------
Net Assets.................. 100.0% $313,657,074
===== ============
</Table>
- ---------------------------------------------------
<Table>
ADR American Depository Receipt.
* Non-income producing security.
(a) Collateralized by federal agency and U.S. Treasury
obligations.
(b) The aggregate cost for federal income tax purposes
approximates the aggregate cost for book purposes.
The aggregate gross unrealized appreciation is
$31,621,807 and the aggregate gross unrealized
depreciation is $17,548,436, resulting in net
unrealized appreciation of $14,073,371.
</Table>
SUMMARY OF INVESTMENTS
<Table>
<Caption>
PERCENT OF
INDUSTRY VALUE NET ASSETS
- ---------------------------------------------------------
Electric Utilities........... $173,492,350 55.3%
Energy....................... 44,691,995 14.2
Repurchase Agreement......... 18,124,000 5.8
Telecommunications........... 76,071,731 24.3
------------ ----
$312,380,076 99.6%
============ ====
</Table>
See Notes to Financial Statements
6
Morgan Stanley Global Utilities Fund
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
August 31, 2003 (unaudited)
<Table>
Assets:
Investments in securities, at value
(cost $298,306,705)....................................... $312,380,076
Receivable for:
Investments sold........................................ 1,434,968
Dividends............................................... 913,136
Foreign withholding taxes reclaimed..................... 203,823
Shares of beneficial interest sold...................... 81,683
Prepaid expenses and other assets........................... 34,769
-------------
Total Assets............................................ 315,048,455
-------------
Liabilities:
Payable for:
Shares of beneficial interest redeemed.................. 453,049
Investments purchased................................... 391,913
Distribution fee........................................ 263,164
Investment management fee............................... 173,853
Accrued expenses and other payables......................... 109,402
-------------
Total Liabilities....................................... 1,391,381
-------------
Net Assets.............................................. $313,657,074
=============
Composition of Net Assets:
Paid-in-capital............................................. $427,349,722
Net unrealized appreciation................................. 14,087,699
Accumulated undistributed net investment income............. 3,626,511
Accumulated net realized loss............................... (131,406,858)
-------------
Net Assets.............................................. $313,657,074
=============
Class A Shares:
Net Assets.................................................. $4,755,367
Shares Outstanding (unlimited authorized, $.01 par value)... 451,294
Net Asset Value Per Share............................... $10.54
=============
Maximum Offering Price Per Share,
(net asset value plus 5.54% of net asset value)....... $11.12
=============
Class B Shares:
Net Assets.................................................. $301,765,098
Shares Outstanding (unlimited authorized, $.01 par value)... 28,554,218
Net Asset Value Per Share............................... $10.57
=============
Class C Shares:
Net Assets.................................................. $5,579,662
Shares Outstanding (unlimited authorized, $.01 par value)... 532,965
Net Asset Value Per Share............................... $10.47
=============
Class D Shares:
Net Assets.................................................. $1,556,947
Shares Outstanding (unlimited authorized, $.01 par value)... 147,622
Net Asset Value Per Share............................... $10.55
=============
</Table>
See Notes to Financial Statements
7
Morgan Stanley Global Utilities Fund
FINANCIAL STATEMENTS continued
Statement of Operations
For the six months ended August 31, 2003 (unaudited)
<Table>
Net Investment Income:
Income
Dividends (net of $208,131 foreign withholding tax)......... $ 6,689,682
Interest.................................................... 97,141
-----------
Total Income............................................ 6,786,823
-----------
Expenses
Distribution fee (Class A shares)........................... 5,802
Distribution fee (Class B shares)........................... 1,579,873
Distribution fee (Class C shares)........................... 28,827
Investment management fee................................... 1,065,495
Transfer agent fees and expenses............................ 350,186
Shareholder reports and notices............................. 42,598
Professional fees........................................... 32,503
Registration fees........................................... 23,268
Custodian fees.............................................. 15,773
Trustees' fees and expenses................................. 6,807
Other....................................................... 9,169
-----------
Total Expenses.......................................... 3,160,301
-----------
Net Investment Income................................... 3,626,522
-----------
Net Realized and Unrealized Gain (Loss):
Net Realized Gain/Loss on:
Investments............................................... 7,858,395
Foreign exchange transactions............................. (488)
-----------
Net Realized Gain....................................... 7,857,907
-----------
Net Change in Unrealized Appreciation/Depreciation on:
Investments............................................... 26,507,726
Translation of other assets and liabilities denominated in
foreign currencies...................................... (21,781)
-----------
Net Appreciation........................................ 26,485,945
-----------
Net Gain................................................ 34,343,852
-----------
Net Increase................................................ $37,970,374
===========
</Table>
See Notes to Financial Statements
8
Morgan Stanley Global Utilities Fund
FINANCIAL STATEMENTS continued
Statement of Changes in Net Assets
<Table>
<Caption>
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
AUGUST 31, 2003 FEBRUARY 28, 2003
--------------- -----------------
(unaudited)
Increase (Decrease) in Net Assets:
Operations:
Net investment income....................................... $ 3,626,522 $ 9,507,845
Net realized gain (loss).................................... 7,857,907 (86,890,416)
Net change in unrealized appreciation/depreciation.......... 26,485,945 (23,704,308)
------------ -------------
Net Increase (Decrease)................................. 37,970,374 (101,086,879)
------------ -------------
Dividends to Shareholders from Net Investment Income:
Class A shares.............................................. (182,402) (203,097)
Class B shares.............................................. (9,102,987) (9,693,522)
Class C shares.............................................. (175,267) (186,203)
Class D shares.............................................. (60,665) (70,941)
------------ -------------
Total Dividends......................................... (9,521,321) (10,153,763)
------------ -------------
Net decrease from transactions in shares of beneficial
interest.................................................. (32,606,803) (152,692,577)
------------ -------------
Net Decrease............................................ (4,157,750) (263,933,219)
Net Assets:
Beginning of period......................................... 317,814,824 581,748,043
------------ -------------
End of Period
(Including accumulated undistributed net investment income
of $3,626,511 and $9,521,310, respectively)................. $313,657,074 $ 317,814,824
============ =============
</Table>
See Notes to Financial Statements
9
Morgan Stanley Global Utilities Fund
NOTES TO FINANCIAL STATEMENTS - AUGUST 31, 2003 (UNAUDITED)
1. Organization and Accounting Policies
Morgan Stanley Global Utilities 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 to
seek both capital appreciation and current income. The Fund seeks to achieve its
objective by investing in equity and fixed income securities of issuers
worldwide, which are primarily engaged in the utilities industry. The Fund was
organized as a Massachusetts business trust on October 22, 1993 and commenced
operations on May 31, 1994. 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 one year, six
years and one year, respectively. Class D shares are not subject to a sales
charge. Additionally, Class A shares, Class B shares and Class C shares incur
distribution expenses.
The following is a summary of significant accounting policies:
A. Valuation of Investments -- (1) an equity portfolio security listed or traded
on the New York 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 equity portfolio securities for which over-the-counter
market quotations are readily available are valued at the mean between the last
reported bid and asked price. In cases where a security is traded on more than
one exchange, the security is valued on the exchange designated as the primary
market; (4) for equity securities traded on foreign exchanges, the last reported
sale price or the latest bid price may be used if there were no sales on a
particular day; (5) when market quotations are not readily available or Morgan
Stanley Investment Advisors Inc. (the "Investment Manager") determines that the
latest sale price, the bid price or the mean between the last reported bid and
asked price do not reflect a security's market value, portfolio securities are
valued at their fair value as determined in good faith under procedures
established by and under the general supervision of the Fund's Trustees; (6)
certain portfolio securities may be valued by an outside pricing service
approved by the Fund's Trustees; and (7) short-term debt securities having a
maturity date of more than sixty days at time of purchase are valued on a
mark-to-market basis until sixty days prior to maturity and thereafter at
10
Morgan Stanley Global Utilities Fund
NOTES TO FINANCIAL STATEMENTS - AUGUST 31, 2003 (UNAUDITED) continued
amortized cost based on their value on the 61st day. Short-term debt securities
having a maturity date of sixty days or less at the time of purchase are valued
at amortized cost.
B. Accounting for Investments -- Security transactions are accounted for on the
trade date (date the order to buy or sell is executed). Realized gains and
losses on security transactions are determined by the identified cost method.
Dividend income and other distributions are recorded on the ex-dividend date
except for certain dividends on foreign securities which are recorded as soon as
the Fund is informed after the ex-dividend date. Discounts are accreted and
premiums are amortized over the life of the respective securities. Interest
income is accrued daily.
C. Repurchase Agreements -- Pursuant to an Exemptive Order issued by the
Securities and Exchange Commission, the Fund, along with other affiliated
entities managed by the Investment Manager, may transfer uninvested cash
balances into one or more joint repurchase agreement accounts. These balances
are invested in one or more repurchase agreements and are collateralized by
cash, U.S. Treasury or federal agency obligations. The Fund may also invest
directly with institutions in repurchase agreements. The Fund's custodian
receives the collateral, which is marked-to-market daily to determine that the
value of the collateral does not decrease below the repurchase price plus
accrued interest.
D. Multiple Class Allocations -- Investment income, expenses (other than
distribution fees), and realized and unrealized gains and losses are allocated
to each class of shares based upon the relative net asset value on the date such
items are recognized. Distribution fees are charged directly to the respective
class.
E. Foreign Currency Translation and Forward Foreign Currency Contracts -- The
books and records of the Fund are maintained in U.S. dollars as follows: (1) the
foreign currency market value of investment securities, other assets and
liabilities and forward foreign currency contracts ("forward contracts") are
translated at the exchange rates prevailing at the end of the period; and (2)
purchases, sales, income and expenses are translated at the exchange rates
prevailing on the respective dates of such transactions. The resultant exchange
gains and losses are recorded as realized and unrealized gain/loss on foreign
exchange transactions. Pursuant to U.S. Federal income tax regulations, certain
foreign exchange gains/losses included in realized and unrealized gain/loss are
included in or are a reduction of ordinary income for federal income tax
purposes. The Fund does not isolate that portion of the results of operations
arising as a result of changes in the foreign exchange rates from the changes in
the market prices of the securities. Forward contracts are valued daily at the
appropriate exchange rates. The resultant unrealized exchange gains and losses
are recorded as unrealized foreign currency gain or loss. The Fund records
realized gains or losses
11
Morgan Stanley Global Utilities Fund
NOTES TO FINANCIAL STATEMENTS - AUGUST 31, 2003 (UNAUDITED) continued
on delivery of the currency or at the time the forward contract is extinguished
(compensated) by entering into a closing transaction prior to delivery.
F. Federal Income Tax Policy -- It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute substantially all of its taxable income to its
shareholders. Accordingly, no federal income tax provision is required.
G. Dividends and Distributions to Shareholders -- Dividends and distributions to
shareholders are recorded on the ex-dividend date. The amount of dividends and
distributions from net investment income and net realized capital gains are
determined in accordance with federal income tax regulations which may differ
from generally accepted accounting principles. These "book/tax" differences are
either considered temporary or permanent in nature. To the extent these
differences are permanent in nature, such amounts are reclassified within the
capital accounts based on their federal tax-basis treatment; temporary
differences do not require reclassification. Dividends and distributions which
exceed net investment income and net realized capital gains for financial
reporting purposes but not for tax purposes are reported as dividends in excess
of net investment income or distributions in excess of net realized capital
gains. To the extent they exceed net investment income and net realized capital
gains for tax purposes, they are reported as distributions of paid-in-capital.
H. Use of Estimates -- The preparation of financial statements in accordance
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures.
Actual results could differ from those estimates.
2. Investment Management Agreement
Pursuant to an Investment Management Agreement, the Fund pays the Investment
Manager a management 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: 0.65% to the portion of the daily net assets not exceeding
$500 million; 0.625% to the portion of the daily net assets exceeding $500
million but not exceeding $1 billion; 0.60% to the portion of daily net assets
exceeding $1 billion but not exceeding $1.5 billion; and 0.575% to the portion
of daily net assets exceeding $1.5 billion.
3. Plan of Distribution
Shares of the Fund are distributed by Morgan Stanley Distributors Inc. (the
"Distributor"), an affiliate of the Investment Manager. 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
12
Morgan Stanley Global Utilities Fund
NOTES TO FINANCIAL STATEMENTS - AUGUST 31, 2003 (UNAUDITED) continued
accrued daily and paid monthly at the following annual rates: (i) Class A - up
to 0.25% of the average daily net assets of Class A; (ii) Class B - 1.0% of the
lesser of: (a) the average daily aggregate gross sales of the Class B shares
since the inception of the Fund (not including reinvestment of dividend or
capital gain distributions) less the average daily aggregate net asset value of
the Class B shares redeemed since the Fund's inception upon which a contingent
deferred sales charge has been imposed or waived; or (b) the average daily net
assets of Class B; and (iii) Class C - up to 1.0% of the average daily net
assets of Class C.
In the case of Class B shares, provided that the Plan continues in effect, any
cumulative expenses incurred by the Distributor but not yet recovered may be
recovered through the payment of future distribution fees from the Fund pursuant
to the Plan and contingent deferred sales charges paid by investors upon
redemption of Class B shares. Although there is no legal obligation for the Fund
to pay expenses incurred in excess of payments made to the Distributor under the
Plan and the proceeds of contingent deferred sales charges paid by investors
upon redemption of shares, if for any reason the Plan is terminated, the
Trustees will consider at that time the manner in which to treat such expenses.
The Distributor has advised the Fund that such excess amounts totaled
$11,417,983 at August 31, 2003.
In the case of Class A shares and Class C shares, expenses incurred pursuant to
the Plan in any calendar year in excess of 0.25% or 1.0% of the average daily
net assets of Class A or Class C, respectively, will not be reimbursed by the
Fund through payments in any subsequent year, except that expenses representing
a gross sales credit to Morgan Stanley Financial Advisors or other selected
broker-dealer representatives may be reimbursed in the subsequent calendar year.
For the six months ended August 31, 2003, the distribution fee was accrued for
Class A shares and Class C shares at the annual rate of 0.25% and 1.0%,
respectively.
The Distributor has informed the Fund that for the six months ended August 31,
2003, it received contingent deferred sales charges from certain redemptions of
the Fund's Class B shares and Class C shares of $132,140 and $167, respectively
and received $21,285 in front-end sales charges from sales of the Fund's Class A
shares. The respective shareholders pay such charges which are not an expense of
the Fund.
4. Security Transactions and Transactions with Affiliates
The cost of purchases and proceeds from sales of portfolio securities, excluding
short-term investments, for the six months ended August 31, 2003 aggregated
$29,245,225 and $71,441,181, respectively.
13
Morgan Stanley Global Utilities Fund
NOTES TO FINANCIAL STATEMENTS - AUGUST 31, 2003 (UNAUDITED) continued
For the six months ended August 31, 2003, the Fund incurred brokerage
commissions of $22,714 with Morgan Stanley & Co. Inc., an affiliate of the
Investment Manager and Distributor, for portfolio transactions executed on
behalf of the Fund.
Morgan Stanley Trust, an affiliate of the Investment Manager and Distributor, is
the Fund's transfer agent. At August 31, 2003, the Fund had transfer agent fees
and expenses payable of approximately $27,000.
5. Shares of Beneficial Interest
Transactions in shares of beneficial interest were as follows:
<Table>
<Caption>
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
AUGUST 31, 2003 FEBRUARY 28, 2003
------------------------- ---------------------------
(unaudited)
SHARES AMOUNT SHARES AMOUNT
---------- ------------ ----------- -------------
CLASS A SHARES
Sold............................................... 60,441 $ 652,672 71,591 $ 811,409
Reinvestment of dividends.......................... 12,577 138,350 13,962 162,659
Redeemed........................................... (73,800) (764,474) (252,576) (2,822,338)
---------- ------------ ----------- -------------
Net increase (decrease) - Class A.................. (782) 26,548 (167,023) (1,848,270)
---------- ------------ ----------- -------------
CLASS B SHARES
Sold............................................... 441,455 4,665,519 1,113,955 12,401,588
Reinvestment of dividends.......................... 706,639 7,808,361 719,502 8,396,588
Redeemed........................................... (4,282,073) (44,782,195) (15,503,437) (169,176,749)
---------- ------------ ----------- -------------
Net decrease - Class B............................. (3,133,979) (32,308,315) (13,669,980) (148,378,573)
---------- ------------ ----------- -------------
CLASS C SHARES
Sold............................................... 23,786 249,589 63,651 682,797
Reinvestment of dividends.......................... 14,518 158,968 14,970 173,348
Redeemed........................................... (78,640) (814,001) (265,665) (2,857,946)
---------- ------------ ----------- -------------
Net decrease - Class C............................. (40,336) (405,444) (187,044) (2,001,801)
---------- ------------ ----------- -------------
CLASS D SHARES
Sold............................................... 25,830 275,550 49,806 557,019
Reinvestment of dividends.......................... 4,910 54,061 5,558 64,802
Redeemed........................................... (24,062) (249,203) (98,541) (1,085,754)
---------- ------------ ----------- -------------
Net increase (decrease) - Class D.................. 6,678 80,408 (43,177) (463,933)
---------- ------------ ----------- -------------
Net decrease in Fund............................... (3,168,419) $(32,606,803) (14,067,224) $(152,692,577)
========== ============ =========== =============
</Table>
14
Morgan Stanley Global Utilities Fund
NOTES TO FINANCIAL STATEMENTS - AUGUST 31, 2003 (UNAUDITED) continued
6. Federal Income Tax Status
The amount of dividends and distributions from net investment income and net
realized capital gains are determined in accordance with federal income tax
regulations which may differ from generally accepted accounting principles.
These "book/tax" differences are either considered temporary or permanent in
nature. To the extent these differences are permanent in nature, such amounts
are reclassified within the capital accounts based on their federal tax-basis
treatment; temporary differences do not require reclassification. Dividends and
distributions which exceed net investment income and net realized capital gains
for tax purposes are reported as distributions of paid-in-capital.
As of February 28, 2003, the Fund had a net capital loss carryforward of
$118,833,345 of which $40,996,456 will expire on February 28, 2010 and
$77,836,889 will expire on February 28, 2011 to offset future capital gains to
the extent provided by regulations.
As of February 28, 2003, the Fund had temporary book/tax differences
attributable to post-October losses (capital losses incurred after October 31
within the taxable year which are deemed to arise on the first business day of
the Fund's next taxable year) and capital loss deferrals on wash sales.
7. Purposes Of And Risks Relating To Certain Financial Instruments
The Fund may enter into forward foreign currency contracts ("forward contracts")
to facilitate settlement of foreign currency denominated portfolio transactions
or to manage foreign currency exposure associated with foreign currency
denominated securities.
Forward contracts involve elements of market risk in excess of the amounts
reflected in the Statement of Assets and Liabilities. The Fund bears the risk of
an unfavorable change in the foreign exchange rates underlying the forward
contracts. Risks may also arise upon entering into these contracts from the
potential inability of the counterparties to meet the terms of their contracts.
At August 31, 2003, there were no outstanding forward contracts.
15
Morgan Stanley Global Utilities Fund
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:
<Table>
<Caption>
FOR THE SIX FOR THE YEAR ENDED FEBRUARY 28,
MONTHS ENDED ---------------------------------------------------------
AUGUST 31, 2003 2003 2002 2001 2000* 1999
--------------- ------- ------ ------- ------- ------
(unaudited)
Class A Shares
Selected Per Share Data:
Net asset value, beginning of period......... $ 9.70 $12.47 $16.51 $20.02 $17.16 $15.10
------ ------ ------ ------ ------ ------
Income (loss) from investment operations:
Net investment income++.................. 0.15 0.32 0.31 0.29 0.23 0.21
Net realized and unrealized gain
(loss)................................... 1.11 (2.73) (3.91) (1.22) 4.78 4.02
------ ------ ------ ------ ------ ------
Total income (loss) from investment
operations.................................. 1.26 (2.41) (3.60) (0.93) 5.01 4.23
------ ------ ------ ------ ------ ------
Less dividends and distributions from:
Net investment income.................... (0.42) (0.36) (0.08) (0.26) (0.20) (0.21)
Net realized gain........................ -- -- (0.36) (2.32) (1.95) (1.96)
------ ------ ------ ------ ------ ------
Total dividends and distributions............ (0.42) (0.36) (0.44) (2.58) (2.15) (2.17)
------ ------ ------ ------ ------ ------
Net asset value, end of period............... $10.54 $ 9.70 $12.47 $16.51 $20.02 $17.16
====== ====== ====== ====== ====== ======
Total Return+................................ 12.83%(1) (19.79)% (22.21)% (5.05)% 30.68% 28.37%
Ratios to Average Net Assets(3):
Expenses..................................... 1.19%(2) 1.15% 1.06% 1.00% 1.06% 1.10%
Net investment income........................ 2.94%(2) 2.91% 2.06% 1.54% 1.25% 1.30%
Supplemental Data:
Net assets, end of period, in thousands...... $4,755 $4,387 $7,723 $16,970 $13,313 $4,892
Portfolio turnover rate...................... 10%(1) 18% 19% 31% 52% 40%
</Table>
- ---------------------
<Table>
* Year ended February 29.
++ The per share amounts were computed using an average number
of shares outstanding during the period.
+ Does not reflect the deduction of sales charge. Calculated
based on the net asset value as of the last business day of
the period.
(1) Not annualized.
(2) Annualized.
(3) Reflects overall Fund ratios for investment income and
non-class specific expenses.
</Table>
See Notes to Financial Statements
16
Morgan Stanley Global Utilities Fund
FINANCIAL HIGHLIGHTS continued
<Table>
<Caption>
FOR THE SIX FOR THE YEAR ENDED FEBRUARY 28,
MONTHS ENDED ----------------------------------------------------------------
AUGUST 31, 2003 2003 2002 2001 2000* 1999
--------------- -------- -------- -------- -------- --------
(unaudited)
Class B Shares
Selected Per Share Data:
Net asset value, beginning of
period............................. $ 9.67 $12.40 $16.50 $20.01 $17.15 $15.09
------ ------ ------ ------ ------ ------
Income (loss) from investment
operations:
Net investment income++......... 0.12 0.24 0.20 0.15 0.11 0.12
Net realized and unrealized gain
(loss).......................... 1.09 (2.73) (3.89) (1.22) 4.78 4.01
------ ------ ------ ------ ------ ------
Total income (loss) from investment
operations......................... 1.21 (2.49) (3.69) (1.07) 4.89 4.13
------ ------ ------ ------ ------ ------
Less dividends and distributions
from:
Net investment income........... (0.31) (0.24) (0.05) (0.12) (0.08) (0.11)
Net realized gain............... -- -- (0.36) (2.32) (1.95) (1.96)
------ ------ ------ ------ ------ ------
Total dividends and distributions... (0.31) (0.24) (0.41) (2.44) (2.03) (2.07)
------ ------ ------ ------ ------ ------
Net asset value, end of period...... $10.57 $ 9.67 $12.40 $16.50 $20.01 $17.15
====== ====== ====== ====== ====== ======
Total Return+....................... 12.39%(1) (20.43)% (22.75)% (5.76)% 29.81% 27.60%
Ratios to Average Net Assets(3):
Expenses............................ 1.94%(2) 1.90% 1.82% 1.74% 1.74% 1.71%
Net investment income............... 2.19%(2) 2.16% 1.30% 0.80% 0.57% 0.69%
Supplemental Data:
Net assets, end of period, in
thousands.......................... $301,765 $306,554 $562,343 $914,995 $944,600 $540,820
Portfolio turnover rate............. 10%(1) 18% 19% 31% 52% 40%
</Table>
- ---------------------
<Table>
* Year ended February 29.
++ The per share amounts were computed using an average number
of shares outstanding during the period.
+ Does not reflect the deduction of sales charge. Calculated
based on the net asset value as of the last business day of
the period.
(1) Not annualized.
(2) Annualized.
(3) Reflects overall Fund ratios for investment income and
non-class specific expenses.
</Table>
See Notes to Financial Statements
17
Morgan Stanley Global Utilities Fund
FINANCIAL HIGHLIGHTS continued
<Table>
<Caption>
FOR THE SIX FOR THE YEAR ENDED FEBRUARY 28,
MONTHS ENDED ---------------------------------------------------------
AUGUST 31, 2003 2003 2002 2001 2000* 1999
--------------- ------- ------ ------- ------- ------
(unaudited)
Class C Shares
Selected Per Share Data:
Net asset value, beginning of period......... $ 9.60 $12.33 $16.38 $19.90 $17.08 $15.07
------ ------ ------ ------ ------ ------
Income (loss) from investment operations:
Net investment income++.................. 0.11 0.24 0.22 0.14 0.09 0.07
Net realized and unrealized gain
(loss)................................... 1.09 (2.70) (3.85) (1.21) 4.76 4.02
------ ------ ------ ------ ------ ------
Total income (loss) from investment
operations.................................. 1.20 (2.46) (3.63) (1.07) 4.85 4.09
------ ------ ------ ------ ------ ------
Less dividends and distributions from:
Net investment income.................... (0.33) (0.27) (0.06) (0.13) (0.08) (0.12)
Net realized gain........................ -- -- (0.36) (2.32) (1.95) (1.96)
------ ------ ------ ------ ------ ------
Total dividends and distributions............ (0.33) (0.27) (0.42) (2.45) (2.03) (2.08)
------ ------ ------ ------ ------ ------
Net asset value, end of period............... $10.47 $ 9.60 $12.33 $16.38 $19.90 $17.08
====== ====== ====== ====== ====== ======
Total Return+................................ 12.30%(1) (20.15)% (22.78)% (5.81)% 29.73% 27.36%
Ratios to Average Net Assets(3):
Expenses..................................... 1.94%(2) 1.87% 1.67% 1.78% 1.81% 1.85%
Net investment income........................ 2.19%(2) 2.19% 1.45% 0.76% 0.50% 0.55%
Supplemental Data:
Net assets, end of period, in thousands...... $5,580 $5,502 $9,374 $15,266 $10,156 $3,386
Portfolio turnover rate...................... 10%(1) 18% 19% 31% 52% 40%
</Table>
- ---------------------
<Table>
* Year ended February 29.
++ The per share amounts were computed using an average number
of shares outstanding during the period.
+ Does not reflect the deduction of sales charge. Calculated
based on the net asset value as of the last business day of
the period.
(1) Not annualized.
(2) Annualized.
(3) Reflects overall Fund ratios for investment income and
non-class specific expenses.
</Table>
See Notes to Financial Statements
18
Morgan Stanley Global Utilities Fund
FINANCIAL HIGHLIGHTS continued
<Table>
<Caption>
FOR THE SIX FOR THE YEAR ENDED FEBRUARY 28,
MONTHS ENDED --------------------------------------------------------
AUGUST 31, 2003 2003 2002 2001 2000* 1999
--------------- ------- ------- ------ ------ ------
(unaudited)
Class D Shares
Selected Per Share Data:
Net asset value, beginning of period.......... $ 9.73 $12.53 $16.54 $20.06 $17.18 $15.11
------ ------ ------ ------ ------ ------
Income (loss) from investment operations:
Net investment income++................... 0.17 0.35 0.35 0.29 0.32 0.25
Net realized and unrealized gain (loss)... 1.11 (2.73) (3.91) (1.18) 4.76 4.03
------ ------ ------ ------ ------ ------
Total income (loss) from investment
operations................................... 1.28 (2.38) (3.56) (0.89) 5.08 4.28
------ ------ ------ ------ ------ ------
Less dividends and distributions from:
Net investment income..................... (0.46) (0.42) (0.09) (0.31) (0.25) (0.25)
Net realized gain......................... -- -- (0.36) (2.32) (1.95) (1.96)
------ ------ ------ ------ ------ ------
Total dividends and distributions............. (0.46) (0.42) (0.45) (2.63) (2.20) (2.21)
------ ------ ------ ------ ------ ------
Net asset value, end of period................ 10.55 9.73 12.53 16.54 20.06 17.18
====== ====== ====== ====== ====== ======
Total Return+................................. 12.92%(1) (19.56)% (21.98)% (4.85)% 31.08% 28.70%
Ratios to Average Net Assets(3):
Expenses...................................... 0.94%(2) 0.90% 0.82% 0.78% 0.81% 0.85%
Net investment income......................... 3.19%(2) 3.16% 2.30% 1.76% 1.50% 1.55%
Supplemental Data:
Net assets, end of period, in thousands....... $1,557 $1,371 $2,308 $2,750 $166 $117
Portfolio turnover rate....................... 10%(1) 18% 19% 31% 52% 40%
</Table>
- ---------------------
<Table>
* Year ended February 29.
++ The per share amounts were computed using an average number
of shares outstanding during the period.
+ Calculated based on the net asset value as of the last
business day of the period.
(1) Not annualized.
(2) Annualized.
(3) Reflects overall Fund ratios for investment income and
non-class specific expenses.
</Table>
See Notes to Financial Statements
19
TRUSTEES
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
Wayne E. Hedien
James F. Higgins
Dr. Manuel H. Johnson
Joseph J. Kearns
Michael E. Nugent
Philip J. Purcell
Fergus Reid
OFFICERS
Charles A. Fiumefreddo
Chairman of the Board
Mitchell M. Merin
President
Ronald E. Robison
Executive Vice President and Principal Executive Officer
Barry Fink
Vice President and General Counsel
Joseph J. McAlinden
Vice President
Stefanie V. Chang
Vice President
Francis Smith
Treasurer and Chief Financial Officer
Thomas F. Caloia
Vice President
Mary E. Mullin
Secretary
TRANSFER AGENT
Morgan Stanley Trust
Harborside Financial Center, Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT AUDITORS
Deloitte & Touche LLP
Two World Financial Center
New York, New York 10281
INVESTMENT MANAGER
Morgan Stanley Investment Advisors Inc.
1221 Avenue of the Americas
New York, New York 10020
The financial statements included herein have been taken from the records of the
Fund without examination by the independent auditors and accordingly they do not
express an opinion thereon.
This report is submitted for the general information of shareholders of the
Fund. For more detailed information about the Fund, its fees and expenses and
other pertinent information, please read its Prospectus. The Fund's Statement of
Additional Information contains additional information about the Fund, including
its trustees. It is available, without charge, by calling (800) 869-NEWS.
This report is not authorized for distribution to prospective investors in the
Fund unless preceded or accompanied by an effective Prospectus. Read the
Prospectus carefully before investing.
Investments and services offered through Morgan Stanley DW Inc., member SIPC.
Morgan Stanley Distributors Inc., member NASD.
(c) 2003 Morgan Stanley
[MORGAN STANLEY LOGO]
MORGAN STANLEY FUNDS
Morgan Stanley
Global Utilities Fund
Semiannual Report
August 31, 2003
[MORGAN STANLEY LOGO]
37873RPT-12361J03-OP-10/03
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) The Fund has amended its Code of Ethics during the period covered by the
shareholder report presented in Item 1 hereto
(d) The Fund has granted a waiver or an implicit waiver from a provision of its
Code of Ethics.
(e) Not applicable.
(f)
(1) The Fund's Code of Ethics is attached hereto as Exhibit A.
(2) Not applicable.
(3) Not applicable.
Item 3. Audit Committee Financial Expert.
The Fund's Board of Trustees has determined that it has two "audit committee
financial experts" serving on its audit committee, each of whom are
"independent" Trustees: Dr. Manuel H. Johnson and Joseph J. Kearns. 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.
Item 9 - Controls and Procedures
(a) The Fund's principal executive officer and principal financial officer have
concluded that the Fund's disclosure controls and procedures are sufficient to
ensure that information required to be disclosed by the Fund in this Form N-CSR
was recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms, based
upon such officers' evaluation of these controls and procedures as of a date
within 90 days of the filing date of the report.
There were no significant changes or corrective actions with regard to
significant deficiencies or material weaknesses in the Fund's internal controls
or in other factors that could significantly affect the Fund's internal controls
subsequent to the date of their evaluation.
(b) There were no changes in the registrant's internal control over financial
reporting that occurred during the registrant's most recent fiscal half-year
(the registrant's second fiscal half-year in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.
2
Item 10 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.
Items 4 - 8 are not applicable
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 Global Utilities Fund
Ronald E. Robison
Principal Executive Officer
October 20, 2003
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.
Ronald E. Robison
Principal Executive Officer
October 20, 2003
Francis Smith
Principal Financial Officer
October 20, 2003
3