UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 811-08600
Morgan Stanley Total Return Trust
(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: July 31, 2004
Date of reporting period: January 31, 2004
Item 1 - Report to Shareholders
Welcome, Shareholder:
In this report, you'll learn about how your investment in Morgan Stanley Total
Return Trust performed during the semiannual period. We will provide an overview
of the market conditions, and discuss some of the factors that affected
performance during the reporting period. In addition, this report includes the
Fund's financial statements and a list of Fund investments.
This material must be preceded or accompanied by a prospectus for the fund being
offered. Market forecasts provided in this report may not necessarily come to
pass. There is no assurance that the Fund will achieve its investment objective.
The Fund is subject to market risk, which is the possibility that market values
of securities owned by the Fund will decline and, therefore, the value of the
Fund's shares may be less than what you paid for them. Accordingly, you can lose
money investing in this Fund.
FUND REPORT
For the six-month period ended January 31, 2004
TOTAL RETURN FOR THE SIX MONTHS ENDED JANUARY 31, 2004
<Table>
<Caption>
LIPPER MULTI-
S&P 500 CAP CORE
CLASS A CLASS B CLASS C CLASS D INDEX(1) FUNDS INDEX(2)
10.58% 10.18% 10.12% 10.73% 15.22% 16.48%
</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 OVERVIEW
The six-month period ended January 31, 2004, saw a continuation of several
themes that had emerged in the months prior to the period. The equity markets
gained strongly through the end of the period, with positive returns in every
month except September. Strong GDP growth, improving corporate profit results
and continued robust consumer spending, combined to push equity benchmarks
higher. This strength remained through the end of the period, though more mixed
signals in January moderated the market's gains. By the end of the period,
market leadership had shifted from deeply cyclical companies in such sectors as
technology, industrials and basic materials to companies with more-concrete
earnings visibility.
Performance in the bond market was more mixed. Bonds began the period in the red
as investors bid up interest rates in anticipation of economic recovery. After
peaking in September, interest rates fell steadily through the end of the period
as the bond market began signaling less confidence in the strength of the
impending economic recovery. The bond market rallied sharply in the last weeks
of the period to end with yields well below their September highs.
PERFORMANCE ANALYSIS
Morgan Stanley Total Return Trust underperformed both the S&P 500 Index and the
Lipper Multi-Cap Core Funds Index for the six-month period under review. The
Fund's relative performance was driven largely by cautious positioning regarding
large- versus small-cap companies. In July we shifted a portion of the Fund's
holdings out of underperforming large-capitalization stocks in an effort to
increase exposure to smaller ones that appeared to offer more competitive value.
Unfortunately, the Fund's allocation to small-cap companies was not large enough
to reap the full benefits of the rally, and its relative performance suffered.
Toward the end of 2003, investors began anticipating that the U.S. equity market
was due for a slowdown after sharp gains throughout the second and third
quarters. The Fund therefore shifted to a more conservative stance in an effort
to avoid exposure to a market pullback, taking on an overweighted position
relative to the benchmarks in defensive sectors and adding to our cash position.
While equities prices stagnated in mid January, the slowdown occurred too late
in the period for the Fund to benefit. Thus, our decision to trim positions in
high-beta, low-quality companies hurt returns.
On a positive note, several of the Fund's holdings performed well. An
overweighted stance in financials relative to the S&P 500 Index proved to be one
of the Fund's strongest positions. This sector found itself among the top
performers in the second half of 2003, as these companies benefited from an
improved economic outlook and increased financial activity. The Fund was also
helped by our stock selection in consumer cyclicals, which rallied as consumer
spending remained strong throughout the period.
2
<Table>
<Caption>
TOP 10 HOLDINGS
Citigroup 3.7%
Merrill Lynch & Co. 3.4
Cisco Systems 2.9
American Express 2.7
UBS 2.7
Intel Corp. 2.6
Impac Mortgage Holdings 2.5
Zimmer Holdings 2.4
Bard (C.R.) Inc. 2.4
Walt Disney 2.3
</Table>
<Table>
<Caption>
TOP FIVE INDUSTRIES
Financial Conglomerates 11.3%
Medical Specialties 8.8
Investment Banks/Brokers 7.2
Household/Personal Care 6.0
Apparel/Footwear Retail 5.7
</Table>
Subject to change daily. All percentages are a percentage of net assets.
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
1. THE FUND WILL NORMALLY INVEST AT LEAST 65 PERCENT OF ITS ASSETS IN COMMON
STOCKS (INCLUDING DEPOSITARY RECEIPTS) AND CONVERTIBLE SECURITIES OF DOMESTIC
AND FOREIGN COMPANIES.
2. IN SELECTING INVESTMENTS TO BUY, HOLD OR SELL, THE FUND'S INVESTMENT MANAGER,
MORGAN STANLEY INVESTMENT ADVISORS INC., TYPICALLY USES A TOP-DOWN INVESTMENT
PROCESS THAT CONSIDERS THE OVERALL ECONOMIC OUTLOOK, THE DEVELOPMENT OF
INDUSTRY/SECTOR PREFERENCES, AND, LASTLY, SPECIFIC STOCK SELECTIONS.
3. GENERALLY, THE FUND WILL INVEST IN COMPANIES THAT: (I) HAVE A MARKET
CAPITALIZATION OF AT LEAST $1 BILLION, AND (II) IN THE VIEW OF THE INVESTMENT
MANAGER, ARE EXPECTED TO PAY DIVIDENDS OR INTEREST INCOME.
4. UP TO 35 PERCENT OF THE FUND'S NET ASSETS MAY BE INVESTED IN FOREIGN
SECURITIES (INCLUDING DEPOSITARY RECEIPTS).
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 JANUARY 31, 2004
<Table>
<Caption>
CLASS A SHARES* CLASS B SHARES** CLASS C SHARES(+) CLASS D SHARES(++)
(since 07/28/97) (since 11/30/94) (since 07/28/97) (since 07/28/97)
SYMBOL TRFAX TRFBX TRFCX TRFDX
1 YEAR 25.90%(3) 24.87%(3) 24.82%(3) 26.15%(3)
19.29(4) 19.87(4) 23.82(4) --
5 YEARS (2.69)(3) (3.38)(3) (3.38)(3) (2.47)(3)
(3.73)(4) (3.74)(4) (3.38)(4) --
SINCE INCEPTION 1.63(3) 7.91(3) 0.90(3) 1.86(3)
0.79(4) 7.91(4) 0.90(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 Standard & Poor's 500 Index (S&P 500(R)) is a broad-based index, the
performance of which is based on the performance of 500 widely-held common
stocks chosen for market size, liquidity and industry group representation.
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 Multi-Cap Core Funds Index is an equally weighted performance
index of the largest qualifying funds (based on net assets) in the Lipper
Multi-Cap Core Funds classification. The Index, which is adjusted for
capital gains distributions and income dividends, is unmanaged and should
not be considered an investment. There are currently 30 funds represented
in this Index.
(3) Figure shown assumes reinvestment of all distributions and does not reflect
the deduction of any sales charges.
(4) Figure shown assumes reinvestment of all distributions and the deduction of
the maximum applicable sales charge. See the Fund's current prospectus for
complete details on fees and sales charges.
* The maximum front-end sales charge for Class A is 5.25%.
** The maximum contingent deferred sales charge (CDSC) for Class B is 5.0%. The
CDSC declines to 0% after six years.
+ The maximum contingent deferred sales charge for Class C is 1% for shares
redeemed within one year of purchase.
++ Class D has no sales charge.
4
Morgan Stanley Total Return Trust
PORTFOLIO OF INVESTMENTS - JANUARY 31, 2004 (UNAUDITED)
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ------------------------------------------------------
Common Stocks (89.6%)
Agricultural Commodities/
Milling (1.3%)
200,000 Archer-Daniels-Midland
Co. .................... $ 3,132,000
------------
Apparel/Footwear (1.1%)
70,000 Liz Claiborne, Inc. ..... 2,503,900
------------
Apparel/Footwear Retail
(5.7%)
90,000 Chico's FAS, Inc.*....... 3,315,600
110,000 Hot Topic, Inc.*......... 3,351,700
150,000 Pacific Sunwear of
California, Inc.*....... 3,439,500
150,000 TJX Companies, Inc.
(The)................... 3,448,500
------------
13,555,300
------------
Biotechnology (4.4%)
50,000 Cephalon, Inc.*.......... 2,741,000
20,000 Genentech, Inc.*......... 1,910,000
30,000 Gilead Sciences, Inc.*... 1,646,100
85,000 IDEXX Laboratories,
Inc.*................... 4,167,550
------------
10,464,650
------------
Cable/Satellite TV (1.9%)
135,000 Comcast Corp. Special
(Class A)*.............. 4,448,250
------------
Chemicals: Major
Diversified (1.4%)
80,000 Dow Chemical Co. (The)... 3,356,000
------------
Computer Communications
(2.9%)
270,000 Cisco Systems, Inc.*..... 6,922,800
------------
Computer Peripherals
(1.8%)
65,000 Zebra Technologies Corp.
(Class A)*.............. 4,199,000
------------
Contract Drilling (0.9%)
50,000 Nabors Industries, Ltd.
(Bermuda)*.............. 2,200,000
------------
Drugstore Chains (1.3%)
90,000 Walgreen Co. ............ 3,109,500
------------
</Table>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ------------------------------------------------------
Electrical Products
(2.7%)
100,000 American Power Conversion
Corp. .................. $ 2,479,000
110,000 Molex Inc. .............. 3,821,400
------------
6,300,400
------------
Financial Conglomerates
(11.3%)
125,000 American Express Co. .... 6,480,000
175,000 Citigroup Inc. .......... 8,659,000
130,000 J.P. Morgan Chase &
Co. .................... 5,055,700
90,000 UBS AG (ADR)
(Switzerland)*.......... 6,450,300
------------
26,645,000
------------
Household/Personal Care
(6.0%)
115,000 Estee Lauder Companies,
Inc. (The) (Class A).... 4,711,550
125,000 Gillette Co. (The)....... 4,531,250
50,000 Procter & Gamble Co.
(The)................... 5,054,000
------------
14,296,800
------------
Industrial Conglomerates
(2.3%)
160,000 General Electric Co. .... 5,380,800
------------
Information Technology
Services (2.2%)
80,000 Anteon International
Corp.*.................. 2,327,200
65,000 CACI International Inc.
(Class A)*.............. 2,874,950
------------
5,202,150
------------
Internet Software/
Services (2.0%)
100,000 Yahoo! Inc.*............. 4,685,000
------------
Investment Banks/ Brokers
(7.2%)
50,000 Goldman Sachs Group, Inc.
(The)................... 4,977,500
50,000 Lehman Brothers Holdings
Inc. ................... 4,105,000
135,000 Merrill Lynch & Co.,
Inc. ................... 7,936,650
------------
17,019,150
------------
</Table>
5
See Notes to Financial Statements
Morgan Stanley Total Return Trust
PORTFOLIO OF INVESTMENTS - JANUARY 31, 2004 (UNAUDITED) continued
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ------------------------------------------------------
Major Banks (1.5%)
60,000 Wells Fargo & Co. ....... $ 3,444,600
------------
Media Conglomerates
(2.3%)
225,000 Disney (Walt) Co.
(The)................... 5,400,000
------------
Medical Specialties
(8.8%)
60,000 Bard (C.R.), Inc. ....... 5,652,000
85,000 Respironics, Inc.*....... 4,185,400
60,000 Stryker Corp. ........... 5,324,400
75,000 Zimmer Holdings, Inc.*... 5,737,500
------------
20,899,300
------------
Miscellaneous
Manufacturing (1.9%)
50,000 Danaher Corp. ........... 4,577,500
------------
Oil & Gas Production
(3.7%)
115,000 Apache Corp. ............ 4,425,200
40,000 Burlington Resources
Inc. ................... 2,189,600
50,000 Occidental Petroleum
Corp. .................. 2,202,500
------------
8,817,300
------------
Oilfield Services/
Equipment (2.1%)
60,000 BJ Services Co.*......... 2,348,400
55,000 Smith International,
Inc.*................... 2,665,300
------------
5,013,700
------------
Packaged Software (3.6%)
190,000 Microsoft Corp. ......... 5,253,500
100,000 VERITAS Software
Corp.*.................. 3,286,000
------------
8,539,500
------------
Real Estate Investment
Trusts (2.5%)
300,000 Impac Mortgage Holdings,
Inc. ................... 6,030,000
------------
Restaurants (2.2%)
135,000 Applebee's International,
Inc. ................... 5,146,200
------------
</Table>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ------------------------------------------------------
Semiconductors (4.6%)
100,000 Analog Devices, Inc. .... $ 4,785,000
200,000 Intel Corp. ............. 6,120,000
------------
10,905,000
------------
Total Common Stocks
(Cost $175,761,216)...... 212,193,800
------------
<Caption>
PRINCIPAL
AMOUNT IN
THOUSANDS
- -----------
Short-Term Investment (3.4%)
Repurchase Agreement
$ 7,940 Joint repurchase
agreement account 1.02%
due 02/02/04 (dated
01/30/04; proceeds
$7,940,675) (a)
(Cost $7,940,000)....... 7,940,000
------------
</Table>
<Table>
Total Investments
(Cost $183,701,216) (b)..... 93.0% 220,133,800
Other Assets in Excess of
Liabilities................. 7.0 16,667,334
----- ------------
Net Assets.................. 100.0% $236,801,134
===== ============
</Table>
- ---------------------
<Table>
* 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
$38,573,440 and the aggregate gross unrealized
depreciation is $2,140,856, resulting in net
unrealized appreciation of $36,432,584.
</Table>
6
See Notes to Financial Statements
Morgan Stanley Total Return Trust
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
January 31, 2004 (unaudited)
<Table>
Assets:
Investments in securities, at value
(cost $183,701,216)....................................... $220,133,800
Receivable for:
Investments sold........................................ 18,981,529
Dividends............................................... 209,662
Shares of beneficial interest sold...................... 113,562
Prepaid expenses and other assets........................... 49,272
------------
Total Assets............................................ 239,487,825
------------
Liabilities:
Payable for:
Investments purchased................................... 1,906,220
Shares of beneficial interest redeemed.................. 386,907
Distribution fee........................................ 181,476
Investment management fee............................... 154,179
Accrued expenses and other payables......................... 57,909
------------
Total Liabilities....................................... 2,686,691
------------
Net Assets.............................................. $236,801,134
============
Composition of Net Assets:
Paid-in-capital............................................. $510,104,715
Net unrealized appreciation................................. 36,432,584
Net investment loss......................................... (846,814)
Accumulated net realized loss............................... (308,889,351)
------------
Net Assets.............................................. $236,801,134
============
Class A Shares:
Net Assets.................................................. $11,918,703
Shares Outstanding (unlimited authorized, $.01 par value)... 814,746
Net Asset Value Per Share............................... $14.63
============
Maximum Offering Price Per Share,
(net asset value plus 5.54% of net asset value)....... $15.44
============
Class B Shares:
Net Assets.................................................. $195,839,394
Shares Outstanding (unlimited authorized, $.01 par value)... 14,033,630
Net Asset Value Per Share............................... $13.96
============
Class C Shares:
Net Assets.................................................. $10,301,692
Shares Outstanding (unlimited authorized, $.01 par value)... 739,392
Net Asset Value Per Share............................... $13.93
============
Class D Shares:
Net Assets.................................................. $18,741,345
Shares Outstanding (unlimited authorized, $.01 par value)... 1,261,566
Net Asset Value Per Share............................... $14.86
============
</Table>
7
See Notes to Financial Statements
Morgan Stanley Total Return Trust
FINANCIAL STATEMENTS continued
Statement of Operations
For the six months ended January 31, 2004 (unaudited)
<Table>
Net Investment Loss:
Income
Dividends (net of $1,125 foreign withholding tax)........... $ 1,382,350
Interest.................................................... 146,193
-----------
Total Income............................................ 1,528,543
-----------
Expenses
Distribution fee (Class A shares)........................... 15,018
Distribution fee (Class B shares)........................... 1,017,276
Distribution fee (Class C shares)........................... 53,668
Investment management fee................................... 919,738
Transfer agent fees and expenses............................ 261,278
Shareholder reports and notices............................. 38,560
Registration fees........................................... 32,803
Professional fees........................................... 25,906
Custodian fees.............................................. 6,408
Other....................................................... 4,702
-----------
Total Expenses.......................................... 2,375,357
-----------
Net Investment Loss..................................... (846,814)
-----------
Net Realized and Unrealized Gain:
Net realized gain........................................... 15,670,967
Net change in unrealized appreciation....................... 8,913,806
-----------
Net Gain................................................ 24,584,773
-----------
Net Increase................................................ $23,737,959
===========
</Table>
8
See Notes to Financial Statements
Morgan Stanley Total Return Trust
FINANCIAL STATEMENTS continued
Statement of Changes in Net Assets
<Table>
<Caption>
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
JANUARY 31, 2004 JULY 31, 2003
---------------- -------------
(unaudited)
Increase (Decrease) in Net Assets:
Operations:
Net investment loss......................................... $ (846,814) $ (265,722)
Net realized gain (loss).................................... 15,670,967 (66,259,581)
Net change in unrealized appreciation/depreciation.......... 8,913,806 57,740,675
------------ ------------
Net Increase (Decrease)................................. 23,737,959 (8,784,628)
Net decrease from transactions in shares of beneficial
interest.................................................. (37,810,718) (95,839,948)
------------ ------------
Net Decrease............................................ (14,072,759) (104,624,576)
Net Assets:
Beginning of Period......................................... 250,873,893 355,498,469
------------ ------------
End of Period
(Including a net investment loss of $846,814 and $0,
respectively)............................................... $236,801,134 $250,873,893
============ ============
</Table>
9
See Notes to Financial Statements
Morgan Stanley Total Return Trust
NOTES TO FINANCIAL STATEMENTS - JANUARY 31, 2004 (UNAUDITED)
1. Organization and Accounting Policies
Morgan Stanley Total Return Trust (the "Fund") is registered under the
Investment Company Act of 1940, as amended (the "Act"), as a non-diversified,
open-end management investment company. The Fund's investment objective is high
total return from capital growth and income. The Fund seeks to achieve its
objective by investing primarily in equity and equity-related securities issued
by domestic and foreign companies. The Fund was organized as a Massachusetts
business trust on June 29, 1994 and commenced operations on November 30, 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 Stock Exchange ("NYSE") or American Stock Exchange or other
exchange is valued at its latest sale price prior to the time when assets are
valued; if there were no sales that day, the security is valued at the mean
between the last reported bid and asked price; (2) an equity portfolio security
listed or traded on the Nasdaq is valued at the Nasdaq Official Closing Price;
if there were no sales that day, the security is valued at the mean between the
last reported bid and asked price; (3) all other portfolio securities for which
over-the-counter market quotations are readily available are valued at the mean
between the last reported bid and asked price. In cases where a security is
traded on more than one exchange, the security is valued on the exchange
designated as the primary market; (4) for equity securities traded on foreign
exchanges, the last reported sale price or the latest bid price may be used if
there were no sales on a particular day; (5) when market quotations are not
readily available or Morgan Stanley Investment Advisors Inc. (the "Investment
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. 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
10
Morgan Stanley Total Return Trust
NOTES TO FINANCIAL STATEMENTS - JANUARY 31, 2004 (UNAUDITED) continued
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 Manager using a pricing service and/or
procedures approved by the Trustees of the Fund; and (6) certain portfolio
securities may be valued by an outside pricing service approved by the Fund's
Trustees; and (7) short-term debt securities having a maturity date of more than
sixty days at time of purchase are valued on a mark-to-market basis until sixty
days prior to maturity and thereafter at amortized cost based on their value on
the 61st day. Short-term debt securities having a maturity date of sixty days or
less at the time of purchase are valued at amortized cost.
B. Accounting for Investments -- Security transactions are accounted for on the
trade date (date the order to buy or sell is executed). Realized gains and
losses on security transactions are determined by the identified cost method.
Dividend income and other distributions are recorded on the ex-dividend date.
Discounts are accreted and premiums are amortized over the life of the
respective securities. Interest income is accrued daily.
C. Repurchase Agreements -- Pursuant to an Exemptive Order issued by the
Securities and Exchange Commission, the Fund, along with other affiliated
entities managed by the Investment 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. Federal Income Tax Policy -- It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute substantially all of its taxable income to its
shareholders. Accordingly, no federal income tax provision is required.
F. Dividends and Distributions to Shareholders -- Dividends and distributions to
shareholders are recorded on the ex-dividend date.
G. Use of Estimates -- The preparation of financial statements in accordance
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures.
Actual results could differ from those estimates.
11
Morgan Stanley Total Return Trust
NOTES TO FINANCIAL STATEMENTS - JANUARY 31, 2004 (UNAUDITED) continued
2. Investment Management
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: 0.75% to the portion of daily net assets not exceeding
$500 million; 0.725% to the portion of daily net assets exceeding $500 million,
but not exceeding $1 billion; and 0.70% to the portion of daily net assets in
excess of $1 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 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
$11,103,692 at January 31, 2004.
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
12
Morgan Stanley Total Return Trust
NOTES TO FINANCIAL STATEMENTS - JANUARY 31, 2004 (UNAUDITED) continued
six months ended January 31, 2004, 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 January 31,
2004, it received contingent deferred sales charges from certain redemptions of
the Fund's Class B shares and Class C shares of $166,398 and $175, respectively
and received $1,954 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 January 31, 2004 aggregated
$106,418,258 and $134,553,581, respectively. Also included are purchases with
other Morgan Stanley funds of $2,100,000.
For the six months ended January 31, 2004, the Fund incurred brokerage
commissions of $37,438 with Morgan Stanley & Co., Inc., an affiliate of the
Investment Manager and Distributor, for portfolio transactions executed on
behalf of the Fund. At January 31, 2004, the Fund's receivable for investments
sold included unsettled trades with Morgan Stanley & Co., Inc. of $2,286,028.
Morgan Stanley Trust, an affiliate of the Investment Manager and Distributor, is
the Fund's transfer agent. At January 31, 2004, the Fund had transfer agent fees
and expenses payable of approximately $1,000.
5. 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 July 31, 2003, the Fund had a net capital loss carryforward of
$315,965,727 of which $10,380,649 will expire on July 31, 2009, $206,714,352
will expire on July 31, 2010 and $98,870,726 will expire on July 31, 2011 to
offset future capital gains to the extent provided by regulations.
13
Morgan Stanley Total Return Trust
NOTES TO FINANCIAL STATEMENTS - JANUARY 31, 2004 (UNAUDITED) continued
As of July 31, 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 arise on the first day of the Fund's next taxable year)
and capital loss deferrals on wash sales.
6. Shares of Beneficial Interest
Transactions in shares of beneficial interest were as follows:
<Table>
<Caption>
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
JANUARY 31, 2004 JULY 31, 2003
------------------------- -------------------------
(unaudited)
SHARES AMOUNT SHARES AMOUNT
---------- ------------ ---------- ------------
CLASS A SHARES
Sold.............................................. 43,686 $ 609,709 240,033 $ 2,940,405
Redeemed.......................................... (140,926) (1,948,886) (390,249) (4,779,669)
---------- ------------ ---------- ------------
Net decrease - Class A............................ (97,240) (1,339,177) (150,216) (1,839,264)
---------- ------------ ---------- ------------
CLASS B SHARES
Sold.............................................. 271,683 3,605,537 800,117 9,497,209
Redeemed.......................................... (2,740,112) (36,436,681) (8,064,626) (94,788,916)
---------- ------------ ---------- ------------
Net decrease - Class B............................ (2,468,429) (32,831,144) (7,264,509) (85,291,707)
---------- ------------ ---------- ------------
CLASS C SHARES
Sold.............................................. 15,040 199,776 135,937 1,596,791
Redeemed.......................................... (148,506) (1,968,731) (451,368) (5,285,514)
---------- ------------ ---------- ------------
Net decrease - Class C............................ (133,466) (1,768,955) (315,431) (3,688,723)
---------- ------------ ---------- ------------
CLASS D SHARES
Sold.............................................. 92,362 1,290,294 287,375 3,575,059
Redeemed.......................................... (222,600) (3,161,736) (695,706) (8,595,313)
---------- ------------ ---------- ------------
Net decrease - Class D............................ (130,238) (1,871,442) (408,331) (5,020,254)
---------- ------------ ---------- ------------
Net decrease in Fund.............................. (2,829,373) $(37,810,718) (8,138,487) $(95,839,948)
========== ============ ========== ============
</Table>
7. Legal Matters
The Investment Manager, certain affiliates of the Investment Manager and certain
investment companies advised by the Investment Manager or its affiliates,
including the Fund, are named as defendants in a number of recently filed,
similar class action complaints. These complaints generally allege that
defendants, including the Fund, violated their statutory disclosure obligations
and fiduciary duties by failing properly to disclose (i) that the Investment
Manager and certain affiliates of the Investment Manager allegedly offered
economic incentives to brokers and others to steer investors to the funds
advised by the Investment Manager or its affiliates rather than funds managed by
other companies, and (ii) that the funds advised by the Investment Manager or
its affiliates, including the
14
Morgan Stanley Total Return Trust
NOTES TO FINANCIAL STATEMENTS - JANUARY 31, 2004 (UNAUDITED) continued
Fund, allegedly paid excessive commissions to brokers in return for their
alleged efforts to steer investors to these funds. The complaints seek, among
other things, unspecified compensatory damages, rescissionary damages, fees and
costs. The defendants intend to move to dismiss these actions and otherwise
vigorously to defend them. While the Fund believes that it has meritorious
defenses, the ultimate outcome of these matters is not presently determinable at
this early stage of the litigation, and no provision has been made in the Fund's
financial statements for the effect, if any, of these matters.
15
Morgan Stanley Total Return Trust
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 JULY 31,
MONTHS ENDED ----------------------------------------------
JANUARY 31, 2004 2003 2002 2001 2000 1999
---------------- ------- ------- ------- ------- ------
(unaudited)
Class A Shares
Selected Per Share Data:
Net asset value, beginning of period........... $13.23 $13.18 $17.26 $23.88 $20.36 $16.78
------ ------ ------ ------ ------ ------
Income (loss) from investment operations:
Net investment income (loss)++............. 0.00 0.07 (0.02) (0.07) (0.01) 0.00
Net realized and unrealized gain (loss).... 1.40 (0.02) (4.06) (6.16) 4.72 4.47
------ ------ ------ ------ ------ ------
Total income (loss) from investment
operations.................................... 1.40 0.05 (4.08) (6.23) 4.71 4.47
------ ------ ------ ------ ------ ------
Less distributions from net realized gain...... -- -- -- (0.39) (1.19) (0.89)
------ ------ ------ ------ ------ ------
Net asset value, end of period................. $14.63 $13.23 $13.18 $17.26 $23.88 $20.36
====== ====== ====== ====== ====== ======
Total Return+.................................. 10.58 %(1) 0.38% (23.64)% (26.31)% 23.77% 27.78%
Ratios to Average Net Assets(3):
Expenses....................................... 1.30 %(2) 1.26% 1.22% 1.12% 1.18% 1.30%
Net investment income (loss)................... (0.05)%(2) 0.58% (0.14)% (0.34)% (0.06)% (0.10)%
Supplemental Data:
Net assets, end of period, in thousands........ $11,919 $12,068 $14,003 $22,074 $16,211 $4,079
Portfolio turnover rate........................ 50 %(1) 131% 54% 107% 71% 79%
</Table>
- ---------------------
<Table>
++ 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 purposes.
</Table>
16
See Notes to Financial Statements
Morgan Stanley Total Return Trust
FINANCIAL HIGHLIGHTS continued
<Table>
<Caption>
FOR THE SIX FOR THE YEAR ENDED JULY 31,
MONTHS ENDED ----------------------------------------------------
JANUARY 31, 2004 2003 2002 2001 2000 1999
---------------- -------- -------- -------- -------- --------
(unaudited)
Class B Shares
Selected Per Share Data:
Net asset value, beginning of period.... $12.67 $12.72 $16.78 $23.41 $20.10 $16.68
------ ------ ------ ------ ------ ------
Income (loss) from investment
operations:
Net investment loss++............... (0.05) (0.02) (0.14) (0.22) (0.14) (0.12)
Net realized and unrealized gain
(loss).............................. 1.34 (0.03) (3.92) (6.02) 4.64 4.43
------ ------ ------ ------ ------ ------
Total income (loss) from investment
operations............................. 1.29 (0.05) (4.06) (6.24) 4.50 4.31
------ ------ ------ ------ ------ ------
Less distributions from net realized
gain................................... -- -- -- (0.39) (1.19) (0.89)
------ ------ ------ ------ ------ ------
Net asset value, end of period.......... $13.96 $12.67 $12.72 $16.78 $23.41 $20.10
====== ====== ====== ====== ====== ======
Total Return+........................... 10.18 %(1) (0.39)% (24.20)% (26.89)% 23.01% 27.04%
Ratios to Average Net Assets(3):
Expenses................................ 2.05 %(2) 2.04% 1.98% 1.91% 1.75% 1.90%
Net investment loss..................... (0.80)%(2) (0.20)% (0.90)% (1.13)% (0.63)% (0.70)%
Supplemental Data:
Net assets, end of period, in
thousands.............................. $195,839 $209,086 $302,387 $569,589 $551,685 $194,763
Portfolio turnover rate................. 50 %(1) 131% 54% 107% 71% 79%
</Table>
- ---------------------
<Table>
++ 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 purposes.
</Table>
17
See Notes to Financial Statements
Morgan Stanley Total Return Trust
FINANCIAL HIGHLIGHTS continued
<Table>
<Caption>
FOR THE SIX FOR THE YEAR ENDED JULY 31,
MONTHS ENDED ----------------------------------------------
JANUARY 31, 2004 2003 2002 2001 2000 1999
---------------- ------- ------- ------- ------- ------
(unaudited)
Class C Shares
Selected Per Share Data:
Net asset value, beginning of period........... $12.65 $12.70 $16.77 $23.40 $20.12 $16.66
------ ------ ------ ------ ------ ------
Income (loss) from investment operations:
Net investment loss++...................... (0.05) (0.02) (0.14) (0.22) (0.20) (0.09)
Net realized and unrealized gain (loss).... 1.33 (0.03) (3.93) (6.02) 4.67 4.44
------ ------ ------ ------ ------ ------
Total income (loss) from investment
operations.................................... 1.28 (0.05) (4.07) (6.24) 4.47 4.35
------ ------ ------ ------ ------ ------
Less distributions from net realized gain...... -- -- -- (0.39) (1.19) (0.89)
------ ------ ------ ------ ------ ------
Net asset value, end of period................. $13.93 $12.65 $12.70 $16.77 $23.40 $20.12
====== ====== ====== ====== ====== ======
Total Return+.................................. 10.12 %(1) (0.86)% (23.91)% (26.87)% 22.78% 27.33%
Ratios to Average Net Assets(3):
Expenses....................................... 2.05 %(2) 2.03% 1.98% 1.91% 1.93% 1.72%
Net investment loss............................ (0.80)%(2) (0.19)% (0.90)% (1.13)% (0.81)% (0.52)%
Supplemental Data:
Net assets, end of period, in thousands........ $10,302 $11,042 $15,091 $25,906 $21,997 $1,609
Portfolio turnover rate........................ 50 %(1) 131% 54% 107% 71% 79%
</Table>
- ---------------------
<Table>
++ 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 purposes.
</Table>
18
See Notes to Financial Statements
Morgan Stanley Total Return Trust
FINANCIAL HIGHLIGHTS continued
<Table>
<Caption>
FOR THE SIX FOR THE YEAR ENDED JULY 31,
MONTHS ENDED ----------------------------------------------
JANUARY 31, 2004 2003 2002 2001 2000 1999
---------------- ------- ------- ------- ------- ------
(unaudited)
Class D Shares
Selected Per Share Data:
Net asset value, beginning of period........... $13.42 $13.34 $17.43 $24.05 $20.46 $16.83
------ ------ ------ ------ ------ ------
Income (loss) from investment operations:
Net investment income (loss)++............. 0.01 0.10 0.02 (0.03) 0.03 0.02
Net realized and unrealized gain (loss).... 1.43 (0.02) (4.11) (6.20) 4.75 4.50
------ ------ ------ ------ ------ ------
Total income (loss) from investment
operations.................................... 1.44 0.08 (4.09) (6.23) 4.78 4.52
------ ------ ------ ------ ------ ------
Less distributions from net realized gain...... -- -- -- (0.39) (1.19) (0.89)
------ ------ ------ ------ ------ ------
Net asset value, end of period................. $14.86 $13.42 $13.34 $17.43 $24.05 $20.46
====== ====== ====== ====== ====== ======
Total Return+.................................. 10.73%(1) 0.60% (23.47)% (26.12)% 24.00% 28.08%
Ratios to Average Net Assets(3):
Expenses....................................... 1.05%(2) 1.04% 0.98% 0.91% 0.93% 1.06%
Net investment income (loss)................... 0.20%(2) 0.80% 0.10% (0.13)% 0.19% 0.14%
Supplemental Data:
Net assets, end of period, in thousands........ $18,741 $18,679 $24,018 $36,105 $24,407 $1,990
Portfolio turnover rate........................ 50%(1) 131% 54% 107% 71% 79%
</Table>
- ---------------------
<Table>
++ 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 purposes.
</Table>
19
See Notes to Financial Statements
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 J. 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) 2004 Morgan Stanley
[MORGAN STANLEY LOGO]
MORGAN STANLEY FUNDS
Morgan Stanley
Total Return Trust
Semiannual Report
January 31, 2004
[MORGAN STANLEY LOGO]
38588RPT-00-13959CO4-AP-3/04
Item 2. Code of Ethics.
Not applicable for semiannual reports.
Item 3. Audit Committee Financial Expert.
Not applicable for semiannual reports.
Item 4. Principal Accountant Fees and Services
Not applicable for semiannual reports.
Item 5. Audit Committee of Listed Registrants.
Not applicable for semiannual reports.
Item 6. [Reserved.]
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies.
Not applicable for semiannual reports.
Item 8. [Reserved.]
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.
Item 10 Exhibits
(a) Code of Ethics - Not applicable for semiannual reports.
(b) A separate certification for each principal executive officer and principal
financial officer of the registrant are attached hereto as part of EX-99.CERT.
2
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
Morgan Stanley Total Return Trust
/s/ Ronald E. Robison
Ronald E. Robison
Principal Executive Officer
March 19, 2004
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 19, 2004
/s/ Francis Smith
Francis Smith
Principal Financial Officer
March 19, 2004
3