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: 811-07245
Morgan Stanley Balanced Growth Fund
(Exact name of registrant as specified in charter)
1221 Avenue of the Americas, New York, New York 10020
(Address of principal executive offices) (Zip code)
Ronald E. Robison
1221 Avenue of the Americas, New York, New York 10020
(Name and address of agent for service)
Registrant's telephone number, including area code: 212-762-4000
Date of fiscal year end: January 31, 2005
Date of reporting period: July 31, 2004
Item 1 - Report to Shareholders
Welcome, Shareholder:
In this report, you'll learn about how your investment in Morgan Stanley
Balanced Growth Fund performed during the semiannual period. We will provide an
overview of the market conditions, and discuss some of the factors that affected
performance during the reporting period. In addition, this report includes the
Fund's financial statements and a list of Fund investments.
This material must be preceded or accompanied by a prospectus for the fund being
offered. Market forecasts provided in this report may not necessarily come to
pass. There is no assurance that the Fund will achieve its investment objective.
The Fund is subject to market risk, which is the possibility that market values
of securities owned by the Fund will decline and, therefore, the value of the
Fund's shares may be less than what you paid for them. Accordingly, you can lose
money investing in this Fund.
FUND REPORT
For the six-month period ended July 31, 2004
TOTAL RETURN FOR THE SIX-MONTH PERIOD ENDED JULY 31, 2004
<Table>
<Caption>
LEHMAN
BROTHERS
RUSSELL U.S. LIPPER
1000 GOVERNMENT/ BALANCED
VALUE CREDIT FUNDS
CLASS A CLASS B CLASS C CLASS D INDEX(1) INDEX(2) INDEX(3)
-0.30% -0.61% -0.69% -0.11% 0.70% -0.04% -1.15%
</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
After having expanded appreciably in 2003, the U.S. economy slowed considerably
in the six-month period ended July 31, 2004. The domestic equity market suffered
from the more mixed economic news that marked the period as investors lost
confidence in the momentum of economic recovery and faced mounting uncertainties
related to the market. While concern that the Federal Reserve would soon move to
raise interest rates was a major factor hindering equities, investors were also
affected by anxieties over rising oil prices and geopolitical difficulties such
as the threat of terrorism.
Value stocks generally outperformed growth securities for the six months, as
small and mid-cap companies outpaced their larger counterparts. The energy
sector was the strongest-performing over the period as oil prices continued to
rise. Technology stocks suffered greatly as the market continued to slow, and
the technology sector was the period's worst-performing as the market's
expectations for increased spending in information technology were not realized.
The bond market was hampered over the period by rising interest rates, which in
turn raised yields and lowered bond prices.
PERFORMANCE ANALYSIS
Morgan Stanley Balanced Growth Fund underperformed the Russell 1000 Value Index
and the Lehman Brothers U.S. Government/Credit Index, while outperforming the
Lipper Balanced Funds Index for the six months ended July 31, 2004. The Fund's
overall performance was hampered primarily by stock selection within the health
care, industrials and financial services sectors. The stock selection in health
care led to the Fund's having an overweighted position in pharmaceuticals
relative to the Russell 1000 Value Index, which proved detrimental, as these
stocks generally suffered over this six-month period from an unfavorable
environment.
One of the Fund's largest holdings, Bristol-Myers, also became the period's
worst performer; while the pharmaceutical company had made efforts to resolve
problems with its financial statements, lingering fears among investors about
the prospects of drug reimportation and the expectation of continuing
competition from generic brands greatly hurt the security. Similarly, several
names within the industrials sector also hurt the Fund. Equifax, a
credit-reporting company, experienced losses as the jobless data failed to
improve significantly during the period and rising interest rates contributed to
lower numbers of mortgage and loan applications. Union Pacific was hurt by
rising oil prices as well as by complications
2
surrounding the organization of its distribution network and scheduling. While
we maintained an underweighted position in the financial services sector
relative to the Russell 1000 Value Index, stock selection within that sector
also hurt performance as the brokerage companies Merrill Lynch and Lehman
Brothers underperformed.
Within other sectors, stock selection contributed positively to performance. The
Fund maintained an overweighted position relative to the Russell 1000 Value
Index in the consumer discretionary sector and benefited greatly from gains made
by hotel and leisure stocks, as both recreational and business travel picked up
and aided the hotel industry. Two of the top-performing securities included
Starwood Hotels & Resorts, which owns both the Sheraton and Westin Hotels
companies, and Hilton Hotels. Holdings in automakers and parts companies were
also gainers within the consumer discretionary sector, with Honda Motor, for
instance, performing strongly because of improvements in its product line and
increasing market share. Although holdings within the technology sector provided
negative returns, stock selection within technologies was beneficial relative to
benchmark performance, as the Fund did not hold a number of underperforming
securities, such as Sun Microsystems, Agilent Technology and Electronic Data
Systems. Holdings in telecommunications services companies also had a positive
impact on performance, as gains were made by Sprint when that company saw a
return of growth in wireless services.
INVESTMENT STRATEGY
THE FUND WILL NORMALLY INVEST AT LEAST 60% OF ITS ASSETS IN DIVIDEND PAYING
COMMON STOCKS AND SECURITIES CONVERTIBLE INTO COMMON STOCKS AND AT LEAST 25% OF
ITS ASSETS IN FIXED-INCOME SECURITIES. WITHIN THESE LIMITATIONS, THE FUND'S
"INVESTMENT MANAGER," MORGAN STANLEY INVESTMENT ADVISORS INC., MAY PURCHASE OR
SELL SECURITIES IN ANY PROPORTION IT BELIEVES DESIRABLE BASED ON ITS ASSESSMENT
OF BUSINESS, ECONOMIC AND INVESTMENT CONDITIONS.
FOR MORE INFORMATION ABOUT PORTFOLIO HOLDINGS
EACH MORGAN STANLEY FUND PROVIDES A COMPLETE SCHEDULE OF PORTFOLIO HOLDINGS IN
ITS SEMIANNUAL AND ANNUAL REPORTS WITHIN 60 DAYS OF THE END OF THE FUND'S SECOND
AND FOURTH FISCAL QUARTERS BY FILING THE SCHEDULE ELECTRONICALLY WITH THE
SECURITIES AND EXCHANGE COMMISSION (SEC). THE SEMIANNUAL REPORTS ARE FILED ON
FORM N-CSRS AND THE ANNUAL REPORTS ARE FILED ON FORM N-CSR. MORGAN STANLEY ALSO
DELIVERS THE SEMIANNUAL AND ANNUAL REPORTS TO FUND SHAREHOLDERS, AND MAKES THESE
REPORTS AVAILABLE ON ITS PUBLIC WEB SITE, WWW.MORGANSTANLEY.COM. EACH MORGAN
STANLEY FUND ALSO FILES A COMPLETE SCHEDULE OF PORTFOLIO HOLDINGS WITH THE SEC
FOR THE FUND'S FIRST AND THIRD FISCAL QUARTERS ON FORM N-Q. MORGAN STANLEY DOES
NOT DELIVER THE REPORTS FOR THE FIRST AND THIRD FISCAL QUARTERS TO SHAREHOLDERS,
NOR ARE THE REPORTS POSTED TO THE MORGAN STANLEY PUBLIC WEB SITE. YOU MAY,
HOWEVER, OBTAIN THE FORM N-Q FILINGS (AS WELL AS THE FORM N-CSR AND N-CSRS
FILINGS) BY ACCESSING THE SEC'S WEB SITE, HTTP://WWW.SEC.GOV. YOU MAY ALSO
REVIEW AND COPY THEM AT THE SEC'S PUBLIC REFERENCE ROOM IN WASHINGTON, DC.
INFORMATION ON THE OPERATION OF THE SEC'S PUBLIC REFERENCE ROOM MAY BE OBTAINED
BY CALLING THE SEC AT 1-800-SEC-0330. YOU CAN ALSO REQUEST COPIES OF THESE
MATERIALS, UPON PAYMENT OF A
3
<Table>
<Caption>
TOP 10 HOLDINGS
U.S. Treasury Securities 15.0%
Federal Natl. Mtge. Assoc. 4.1%
Bristol Myers Squibb 2.3%
BP PLC -- ADR 2.2%
JP Morgan Chase & Co. 2.1%
Time Warner Inc. 2.0%
Schlumberger LTD 1.9%
Bayer AG -- ADR 1.6%
Chubb Corp. 1.6%
Honda Motor Co., Ltd. (ADR) (Japan) 1.5%
</Table>
<Table>
<Caption>
PORTFOLIO COMPOSITION*
Common Stocks 63.9%
US Government Agencies & Obligations 16.7%
Corporate Bonds 9.0%
Short-Term 6.7%
Mortgage-Backed 3.0%
Asset-Backed 0.6%
Foreign Government Bonds 0.1%
</Table>
Data as of July 31, 2004. Subject to change daily. All percentages for top 10
holdings are as a percentage of net assets and all percentages for portfolio
composition are as a percentage of total investments. 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.
* The Fund has outstanding short futures contracts with an underlying face
amount of $14,682,469 with unrealized depreciation of $531,700 and outstanding
long futures contracts with an underlying face amount of $1,055,625 with
unrealized depreciation of $1,264.
DUPLICATING FEE, BY ELECTRONIC REQUEST AT THE SEC'S E-MAIL ADDRESS
(PUBLICINFO@SEC.GOV) OR BY WRITING THE PUBLIC REFERENCE SECTION OF THE SEC,
WASHINGTON, DC 20549-0102. YOU MAY OBTAIN COPIES OF A FUND'S FISCAL QUARTER
FILINGS BY CONTACTING MORGAN STANLEY CLIENT RELATIONS AT (800) 847-2424.
PROXY VOTING POLICIES AND PROCEDURES
A DESCRIPTION OF (1) THE FUND'S POLICIES AND PROCEDURES WITH RESPECT TO THE
VOTING OF PROXIES RELATING TO THE FUND'S PORTFOLIO SECURITIES; AND (2) HOW THE
FUND VOTED PROXIES RELATING TO PORTFOLIO SECURITIES DURING THE MOST RECENT
TWELVE-MONTH PERIOD ENDED JULY 31 IS AVAILABLE WITHOUT CHARGE, UPON REQUEST, BY
CALLING (800) 869-NEWS OR BY VISITING THE MUTUAL FUND CENTER ON OUR WEBSITE AT
WWW.MORGANSTANLEY.COM. THIS INFORMATION IS ALSO AVAILABLE ON THE SECURITIES AND
EXCHANGE COMMISSION'S WEBSITE AT HTTP://WWW.SEC.GOV.
4
PERFORMANCE SUMMARY
AVERAGE ANNUAL TOTAL RETURNS -- PERIOD ENDED JULY 31, 2004
<Table>
<Caption>
CLASS A SHARES* CLASS B SHARES** CLASS C SHARES(+) CLASS D SHARES(++)
(since 07/28/97) (since 07/28/97) (since 03/28/95) (since 07/28/97)
SYMBOL BGRAX BGRBX BGRCX BGRDX
1 YEAR 11.04%(4) 10.21%(4) 10.19%(4) 11.30%(4)
5.21(5) 5.21(5) 9.19(5) --
5 YEARS 2.18(4) 1.41(4) 1.40(4) 2.44(4)
1.08(5) 1.08(5) 1.40(5) --
SINCE INCEPTION 4.96(4) 4.16(4) 8.36(4) 5.20(4)
4.15(5) 4.16(5) 8.36(5) --
</Table>
Performance data quoted represents past performance, which is no guarantee of
future results and current performance may be lower or higher than the figures
shown. For the most recent month-end performance figures, please visit
morganstanley.com or speak with your financial advisor. Investment returns and
principal value will fluctuate and fund shares, when redeemed, may be worth more
or less than their original cost. The table does not reflect the deduction of
taxes that a shareholder would pay on fund distributions or the redemption of
fund shares. Performance for Class A, Class B, Class C, and Class D shares will
vary due to differences in sales charges and expenses.
* The maximum front-end sales charge for Class A is 5.25%.
** The maximum contingent deferred sales charge (CDSC) for Class B is 5.0%. The
CDSC declines to 0% after six years.
+ The maximum contingent deferred sales charge for Class C is 1% for shares
redeemed within one year of purchase.
++ Class D has no sales charge.
(1) The Russell 1000 Value Index measures the performance of those companies in
the Russell 1000 Index with lower price-to-book ratios and lower forecasted
growth values. 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 Lehman Brothers U.S. Government/Credit Index tracks the performance of
government and corporate obligations, including U.S. government agency and
Treasury securities and corporate and Yankee bonds. 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.
(3) The Lipper Balanced Funds Index is an equally-weighted performance index of
the largest qualifying funds (based on net assets) in the Lipper Balanced
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 fund represented in this
Index.
(4) Figure shown assumes reinvestment of all distributions and does not reflect
the deduction of any sales charges.
(5) Figure shown assumes reinvestment of all distributions and the deduction of
the maximum applicable sales charge. See the Fund's current prospectus for
complete details on fees and sales charges.
5
EXPENSE EXAMPLE
As a shareholder of the Fund, you incur ongoing costs, including management
fees; distribution and service (12b-1) fees; and other Fund expenses. This
example is intended to help you understand your ongoing costs (in dollars) of
investing in the Fund and to compare these costs with the ongoing costs of
investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the
period and held for the entire period 02/01/04 - 07/31/04.
ACTUAL EXPENSES
The first line of the table below provides information about actual account
values and actual expenses. You may use the information in this line, together
with the amount you invested, to estimate the expenses that you paid over the
period. Simply divide your account value by $1,000 (for example, an $8,600
account value divided by $1,000 = 8.6), then multiply the result by the number
in the first line under the heading entitled "Expenses Paid During Period" to
estimate the expenses you paid on your account during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second line of the table below provides information about hypothetical
expenses based on the Fund's actual expense ratio and an assumed rate of return
of 5% per year before expenses, which is not the Fund's actual return. The
hypothetical account values and expenses may not be used to estimate the actual
ending account balance or expenses you paid for the period. You may use this
information to compare the ongoing cost of investing in the Fund and other
funds. To do so, compare this 5% hypothetical example with the 5% hypothetical
examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only. Therefore, the second line of the table is useful in
comparing ongoing costs, and will not help you determine the relative total cost
of owning different funds that have transactional costs, such as sales charges
(loads), and redemption fees, or exchange fees.
<Table>
<Caption>
BEGINNING ENDING EXPENSES PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD *
------------- ------------- ---------------
02/01/04 -
02/01/04 07/31/04 07/31/04
------------- ------------- ---------------
CLASS A
Actual...................................................... $1,000.00 $ 996.96 $5.61
Hypothetical (5% return before expenses).................... $1,000.00 $1,019.24 $5.67
CLASS B
Actual...................................................... $1,000.00 $ 993.87 $9.32
Hypothetical (5% return before expenses).................... $1,000.00 $1,015.51 $9.42
CLASS C
Actual...................................................... $1,000.00 $ 993.10 $9.32
Hypothetical (5% return before expenses).................... $1,000.00 $1,015.51 $9.42
CLASS D
Actual...................................................... $1,000.00 $ 998.90 $4.37
Hypothetical (5% return before expenses).................... $1,000.00 $1,020.49 $4.42
</Table>
- ------------------
* Expenses are equal to the Fund's annualized expense ratio of 1.13%, 1.88%,
1.88% and 0.88% respectively, multiplied by the average account value over
the period, multiplied by 182/366 (to reflect the one-half year period).
6
Morgan Stanley Balanced Growth Fund
PORTFOLIO OF INVESTMENTS - JULY 31, 2004 (UNAUDITED)
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------------------------------
Common Stocks (64.7%)
Advertising/Marketing Services (0.4%)
67,980 Interpublic Group of Companies, Inc. (The)*.................................. $ 869,464
------------
Aerospace & Defense (0.7%)
26,060 Northrop Grumman Corp. ...................................................... 1,370,756
------------
Auto Parts: O.E.M. (1.1%)
27,940 Magna International Inc. (Class A) (Canada).................................. 2,249,170
------------
Broadcasting (1.1%)
61,830 Clear Channel Communications, Inc. .......................................... 2,207,331
------------
Chemicals: Major Diversified (2.4%)
119,170 Bayer AG (ADR) (Germany)..................................................... 3,215,207
36,530 Dow Chemical Co. (The)....................................................... 1,457,182
------------
4,672,389
------------
Computer Processing Hardware (0.6%)
62,260 Hewlett-Packard Co. ......................................................... 1,254,539
------------
Containers/Packaging (0.7%)
21,160 Temple-Inland, Inc. ......................................................... 1,444,170
------------
Data Processing Services (1.9%)
30,750 Automatic Data Processing, Inc. ............................................. 1,290,885
35,950 First Data Corp. ............................................................ 1,603,729
37,000 SunGard Data Systems Inc.*................................................... 862,470
------------
3,757,084
------------
Discount Stores (0.9%)
40,380 Target Corp. ................................................................ 1,760,568
------------
Electric Utilities (2.8%)
20,340 Consolidated Edison, Inc. ................................................... 833,330
27,220 Edison International......................................................... 729,496
25,150 Entergy Corp. ............................................................... 1,446,125
</Table>
See Notes to Financial Statements
7
Morgan Stanley Balanced Growth Fund
PORTFOLIO OF INVESTMENTS - JULY 31, 2004 (UNAUDITED) continued
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------------------------------
41,240 Exelon Corp. ................................................................ $ 1,439,276
30,200 FirstEnergy Corp. ........................................................... 1,180,820
------------
5,629,047
------------
Finance/Rental/Leasing (1.1%)
32,900 Freddie Mac.................................................................. 2,115,799
------------
Financial Conglomerates (3.9%)
51,000 Citigroup, Inc. ............................................................. 2,248,590
109,394 J.P. Morgan Chase & Co. ..................................................... 4,083,678
31,930 Prudential Financial, Inc. .................................................. 1,486,661
------------
7,818,929
------------
Financial Publishing/Services (0.9%)
71,330 Equifax, Inc. ............................................................... 1,720,480
------------
Food: Major Diversified (2.0%)
43,950 Kraft Foods Inc. (Class A)................................................... 1,342,672
14,830 Nestle SA (ADR) (Registered Shares) (Switzerland)............................ 950,603
32,400 PepsiCo, Inc. ............................................................... 1,620,000
------------
3,913,275
------------
Food: Specialty/Candy (0.8%)
46,160 Cadbury Scweppes PLC (ADR) (United Kingdom).................................. 1,525,126
------------
Hotels/Resorts/Cruiselines (1.6%)
39,440 Hilton Hotels Corp. ......................................................... 703,215
23,540 Marriott International, Inc. (Class A)....................................... 1,148,752
27,710 Starwood Hotels & Resorts Worldwide, Inc. ................................... 1,246,950
------------
3,098,917
------------
Household/Personal Care (1.3%)
40,630 Kimberly-Clark Corp. ........................................................ 2,603,164
------------
Industrial Conglomerates (1.4%)
51,600 General Electric Co. ........................................................ 1,715,700
14,340 Ingersoll-Rand Co. Ltd. (Class A) (Bermuda).................................. 985,015
------------
2,700,715
------------
Industrial Machinery (0.6%)
21,940 Parker-Hannifin Corp. ....................................................... 1,258,917
------------
</Table>
See Notes to Financial Statements
8
Morgan Stanley Balanced Growth Fund
PORTFOLIO OF INVESTMENTS - JULY 31, 2004 (UNAUDITED) continued
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------------------------------
Information Technology Services (1.3%)
59,950 Accenture Ltd. (Class A) (ADR) (Bermuda)*.................................... $ 1,476,568
11,900 International Business Machines Corp. ....................................... 1,036,133
------------
2,512,701
------------
Integrated Oil (6.1%)
78,620 BP PLC (ADR) (United Kingdom)................................................ 4,431,023
31,050 ConocoPhillips............................................................... 2,445,808
59,710 Exxon Mobil Corp. ........................................................... 2,764,573
49,820 Royal Dutch Petroleum Co. (NY Registered Shares) (Netherlands)............... 2,505,946
------------
12,147,350
------------
Investment Banks/Brokers (2.2%)
32,000 Lehman Brothers Holdings Inc. ............................................... 2,243,200
43,180 Merrill Lynch & Co., Inc. ................................................... 2,146,910
------------
4,390,110
------------
Life/Health Insurance (0.7%)
38,530 MetLife, Inc. ............................................................... 1,374,365
------------
Major Banks (1.4%)
21,650 Bank of America Corp. ....................................................... 1,840,467
17,760 PNC Financial Services Group................................................. 898,656
------------
2,739,123
------------
Major Telecommunications (2.4%)
33,370 SBC Communications, Inc. .................................................... 845,596
105,960 Sprint Corp. (FON Group)..................................................... 1,979,333
51,120 Verizon Communications Inc. ................................................. 1,970,165
------------
4,795,094
------------
Managed Health Care (0.7%)
23,000 CIGNA Corp. ................................................................. 1,426,230
------------
Media Conglomerates (3.3%)
120,420 Disney (Walt) Co. (The)...................................................... 2,780,498
225,170 Time Warner Inc.*............................................................ 3,749,081
------------
6,529,579
------------
Medical Specialties (1.1%)
35,750 Bausch & Lomb, Inc. ......................................................... 2,201,843
------------
</Table>
See Notes to Financial Statements
9
Morgan Stanley Balanced Growth Fund
PORTFOLIO OF INVESTMENTS - JULY 31, 2004 (UNAUDITED) continued
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------------------------------
Motor Vehicles (1.5%)
124,220 Honda Motor Co., Ltd. (ADR) (Japan).......................................... $ 3,014,819
------------
Multi-Line Insurance (1.1%)
32,490 Hartford Financial Services Group, Inc. (The)................................ 2,115,099
------------
Oil Refining/Marketing (0.7%)
18,170 Valero Energy Corp. ......................................................... 1,361,296
------------
Oilfield Services/Equipment (1.9%)
59,800 Schlumberger Ltd. (Netherlands).............................................. 3,846,336
------------
Packaged Software (1.3%)
41,000 Computer Associates International, Inc. ..................................... 1,034,840
53,590 Microsoft Corp. ............................................................. 1,525,171
------------
2,560,011
------------
Pharmaceuticals: Major (5.5%)
12,600 AstraZeneca PLC (ADR) (United Kingdom)....................................... 565,992
197,120 Bristol-Myers Squibb Co. .................................................... 4,514,048
24,260 Roche Holdings Ltd. (ADR) (Switzerland)...................................... 2,400,770
119,280 Schering-Plough Corp. ....................................................... 2,321,189
30,600 Wyeth........................................................................ 1,083,240
------------
10,885,239
------------
Precious Metals (0.7%)
33,390 Newmont Mining Corp. ........................................................ 1,351,293
------------
Property -- Casualty Insurers (2.4%)
45,050 Chubb Corp. (The)............................................................ 3,098,539
45,878 St. Paul Travelers Companies, Inc. (The)..................................... 1,700,697
------------
4,799,236
------------
Railroads (1.9%)
95,270 Norfolk Southern Corp. ...................................................... 2,542,756
23,090 Union Pacific Corp. ......................................................... 1,300,891
------------
3,843,647
------------
Restaurants (0.6%)
39,880 McDonald's Corp. ............................................................ 1,096,700
------------
</Table>
See Notes to Financial Statements
10
Morgan Stanley Balanced Growth Fund
PORTFOLIO OF INVESTMENTS - JULY 31, 2004 (UNAUDITED) continued
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------------------------------
Semiconductors (0.6%)
48,960 Intel Corp. ................................................................. $ 1,193,645
------------
Tobacco (0.5%)
19,910 Altria Group, Inc. .......................................................... 947,716
------------
Wireless Telecommunications (0.5%)
74,810 AT&T Wireless Services, Inc.*................................................ 1,080,256
------------
Total Common Stocks (Cost $105,259,586)...................................... 128,181,528
------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE
- --------- ------ --------
Corporate Bonds (9.2%)
Advertising/Marketing Services (0.1%)
$ 155 WPP Finance (UK) Corp. - 144A** (United Kingdom).......... 5.875% 06/15/14 157,543
------------
Aerospace & Defense (0.2%)
90 Raytheon Co. ............................................. 4.85 01/15/11 90,258
234 Systems 2001 Asset Trust - 144A**......................... 6.664 09/15/13 253,073
------------
343,331
------------
Air Freight/Couriers (0.0%)
95 Fedex Corp. - 144A**...................................... 2.65 04/01/07 92,715
------------
Airlines (0.2%)
122 American West Airlines, (Series 01-1)..................... 7.10 04/02/21 129,597
268 Continental Airlines, Inc. (Series 974A).................. 6.90 01/02/18 253,836
75 Southwest Airlines Co. (Series 01-1)...................... 5.496 11/01/06 77,992
------------
461,425
------------
Beverages: Alcoholic (0.0%)
95 Miller Brewing Co. - 144A**............................... 4.25 08/15/08 95,261
------------
Broadcasting (0.1%)
95 Clear Channel Communications, Inc. ....................... 7.65 09/15/10 107,575
------------
</Table>
See Notes to Financial Statements
11
Morgan Stanley Balanced Growth Fund
PORTFOLIO OF INVESTMENTS - JULY 31, 2004 (UNAUDITED) continued
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------------------
Cable/Satellite TV (0.2%)
$ 40 Comcast Cable Communications Inc. ........................ 6.75 % 01/30/11 $ 43,628
20 Comcast Corp. ............................................ 5.30 01/15/14 19,548
120 Comcast Corp. ............................................ 6.50 01/15/15 126,498
20 Comcast Corp. ............................................ 7.625 02/15/08 21,994
80 TCI Communications, Inc. ................................. 7.875 02/15/26 91,628
------------
303,296
------------
Chemicals: Major Diversified (0.0%)
70 ICI Wilmington Inc. ...................................... 4.375 12/01/08 69,263
------------
Containers/Packaging (0.1%)
145 Sealed Air Corp - 144A**.................................. 5.625 07/15/13 144,692
------------
Department Stores (0.2%)
115 Federated Department Stores, Inc. ........................ 6.90 04/01/29 121,701
25 Federated Department Stores, Inc. ........................ 7.00 02/15/28 26,731
260 May Department Stores Co., Inc. .......................... 6.70 09/15/28 262,580
35 May Department Stores Co., Inc. .......................... 7.875 03/01/30 40,374
------------
451,386
------------
Drugstore Chains (0.2%)
275 CVS Corp. ................................................ 5.625 03/15/06 286,959
25 CVS Corp. - 144A**........................................ 6.204 10/10/25 25,044
------------
312,003
------------
Electric Utilities (0.8%)
55 Appalachian Power Co. (Series H).......................... 5.95 05/15/33 52,102
155 Arizona Public Service Co. ............................... 5.80 06/30/14 157,076
130 Carolina Power & Light Co. ............................... 5.125 09/15/13 129,283
75 Cincinnati Gas & Electric Co. ............................ 5.70 09/15/12 77,447
40 Cincinnati Gas & Electric Co. (Series A).................. 5.40 06/15/33 35,236
40 Cincinnati Gas & Electric Co. (Series B).................. 5.375 06/15/33 35,104
55 Columbus Southern Power Co. (Series D).................... 6.60 03/01/33 57,470
110 Consolidated Natural Gas Co. ............................. 6.25 11/01/11 117,906
25 Consolidated Natural Gas Co. (Series A)................... 5.00 03/01/14 24,275
70 Detroit Edison Co. ....................................... 6.125 10/01/10 75,233
90 Duke Energy Corp. ........................................ 3.75 03/05/08 89,413
85 Duke Energy Corp. ........................................ 4.50 04/01/10 84,798
55 Entergy Gulf States, Inc. ................................ 3.60 06/01/08 53,650
90 Exelon Corp. ............................................. 6.75 05/01/11 98,529
95 Ohio Power Co. (Series G)................................. 6.60 02/15/33 98,879
150 Pacific Gas & Electric Co. ............................... 6.05 03/01/34 144,989
</Table>
See Notes to Financial Statements
12
Morgan Stanley Balanced Growth Fund
PORTFOLIO OF INVESTMENTS - JULY 31, 2004 (UNAUDITED) continued
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------------------
$ 100 Public Service Electric & Gas Co. (Series MTNB)........... 5.00 % 01/01/13 $ 99,785
35 South Carolina Electric & Gas Co. ........................ 5.30 05/15/33 31,791
20 Southern California Edison Co. ........................... 5.00 01/15/14 19,790
65 Texas Eastern Transmission, L.P. ......................... 7.00 07/15/32 70,626
80 TXU Energy Co. ........................................... 7.00 03/15/13 88,018
15 Wisconsin Electric Power Co. ............................. 5.625 05/15/33 14,271
------------
1,655,671
------------
Electrical Products (0.1%)
125 Cooper Industries Inc. ................................... 5.25 07/01/07 130,799
------------
Environmental Services (0.1%)
45 Waste Management, Inc. ................................... 5.00 03/15/14 43,546
180 Waste Management, Inc. ................................... 6.875 05/15/09 198,799
------------
242,345
------------
Finance/Rental/Leasing (0.5%)
100 CIT Group Inc. ........................................... 2.875 09/29/06 99,009
50 CIT Group Inc. ........................................... 7.375 04/02/07 54,769
210 Countrywide Home Loans, Inc. (Series MTN)................. 3.25 05/21/08 203,542
75 Ford Motor Credit Co. .................................... 7.25 10/25/11 78,987
70 Ford Motor Credit Co. .................................... 7.375 10/28/09 75,184
230 MBNA Corp. ............................................... 6.125 03/01/13 240,111
160 SLM Corp. ................................................ 5.00 10/01/13 156,200
------------
907,802
------------
Financial Conglomerates (1.3%)
500 Associates Corp. of North America......................... 6.25 11/01/08 540,752
180 Bank One Corp. (Series MTNA).............................. 6.00 02/17/09 192,030
170 Chase Manhattan Corp. .................................... 6.00 02/15/09 181,532
100 General Electric Capital Corp. ........................... 4.25 12/01/10 98,307
255 General Electric Capital Corp. (Series MTNA).............. 6.75 03/15/32 279,339
55 General Motors Acceptance Corp. .......................... 4.50 07/15/06 55,795
410 General Motors Acceptance Corp. .......................... 6.875 09/15/11 421,481
185 General Motors Acceptance Corp. .......................... 8.00 11/01/31 188,380
425 Prudential Holdings, LLC (Series B) (FSA) - 144A**........ 7.245 12/18/23 484,880
100 Prudential Holdings, LLC (Series C) - 144A**.............. 8.695 12/18/23 122,837
------------
2,565,333
------------
Food Retail (0.1%)
75 Albertson's, Inc. ........................................ 7.50 02/15/11 85,049
180 Kroger Co. ............................................... 6.80 04/01/11 197,941
------------
282,990
------------
</Table>
See Notes to Financial Statements
13
Morgan Stanley Balanced Growth Fund
PORTFOLIO OF INVESTMENTS - JULY 31, 2004 (UNAUDITED) continued
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------------------
Food: Major Diversified (0.2%)
$ 210 Kraft Foods Inc. ......................................... 5.625% 11/01/11 $ 217,007
85 Kraft Foods Inc. ......................................... 6.25 06/01/12 90,873
------------
307,880
------------
Forest Products (0.2%)
45 Weyerhaeuser Co. ......................................... 6.00 08/01/06 47,379
290 Weyerhaeuser Co. ......................................... 6.75 03/15/12 317,541
------------
364,920
------------
Gas Distributors (0.1%)
120 Ras Laffan Liquid Natural Gas Co. Ltd. - 144A** (Qatar)... 8.294 03/15/14 136,800
------------
Home Furnishings (0.0%)
75 Mohawk Industries, Inc. .................................. 7.20 04/15/12 84,017
------------
Home Improvement Chains (0.0%)
35 Lowe's Companies, Inc. ................................... 6.50 03/15/29 37,303
15 Lowe's Companies, Inc. ................................... 6.875 02/15/28 16,660
------------
53,963
------------
Hotels/Resorts/Cruiselines (0.2%)
120 Hyatt Equities LLC - 144A**............................... 6.875 06/15/07 127,935
200 Marriott International, Inc. (Series E)................... 7.00 01/15/08 218,099
------------
346,034
------------
Industrial Conglomerates (0.2%)
145 Honeywell International, Inc. ............................ 6.125 11/01/11 156,647
165 Hutchison Whampoa International Ltd. - 144A** (Virgin
Islands)................................................ 6.50 02/13/13 166,974
------------
323,621
------------
Information Technology Services (0.0%)
55 Electronic Data Systems Corp. ............................ 7.125 10/15/09 57,507
------------
Insurance Brokers/Services (0.2%)
355 Farmers Exchange Capital - 144A**......................... 7.05 07/15/28 348,719
------------
Integrated Oil (0.1%)
105 Amerada Hess Corp. ....................................... 7.875 10/01/29 115,985
95 Petro-Canada (Canada)..................................... 5.35 07/15/33 82,373
------------
198,358
------------
</Table>
See Notes to Financial Statements
14
Morgan Stanley Balanced Growth Fund
PORTFOLIO OF INVESTMENTS - JULY 31, 2004 (UNAUDITED) continued
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------------------
Investment Banks/Brokers (0.2%)
$ 90 Goldman Sachs Group Inc. ................................. 5.25 % 10/15/13 $ 88,679
115 Goldman Sachs Group Inc. ................................. 6.60 01/15/12 125,231
160 Goldman Sachs Group Inc. ................................. 6.875 01/15/11 177,280
------------
391,190
------------
Major Banks (0.4%)
50 Bank of New York (The).................................... 5.20 07/01/07 52,366
10 Chase Manhattan Corp. .................................... 7.00 11/15/09 11,201
70 Citicorp.................................................. 6.75 08/15/05 73,034
120 FleetBoston Financial Corp. .............................. 7.25 09/15/05 126,165
85 Household Finance Corp. .................................. 4.125 12/15/08 84,537
105 Household Finance Corp. .................................. 5.875 02/01/09 111,765
45 Household Finance Corp. .................................. 6.375 10/15/11 48,573
115 Household Finance Corp. .................................. 6.40 06/17/08 124,574
65 Household Finance Corp. .................................. 6.75 05/15/11 71,703
------------
703,918
------------
Major Telecommunications (0.4%)
170 Deutsche Telekom International Finance Corp. NV
(Netherlands)........................................... 8.75 06/15/30 211,791
70 France Telecom S.A. (France).............................. 9.50 03/01/31 89,383
40 Sprint Capital Corp. ..................................... 8.75 03/15/32 48,613
85 Telecom Italia Capital SpA - 144A** (Luxembourg).......... 4.00 11/15/08 84,087
85 Verizon Global Funding Corp. ............................. 7.75 12/01/30 97,824
275 Verizon New England Inc. ................................. 6.50 09/15/11 296,844
------------
828,542
------------
Managed Health Care (0.3%)
260 Aetna, Inc. .............................................. 7.875 03/01/11 302,468
75 Anthem Insurance Companies, Inc. - 144A**................. 9.125 04/01/10 92,574
100 Wellpoint Health Network, Inc. ........................... 6.375 06/15/06 105,691
------------
500,733
------------
Media Conglomerates (0.3%)
60 AOL Time Warner Inc. ..................................... 7.70 05/01/32 66,851
140 News America Holdings, Inc. .............................. 7.28 06/30/28 153,584
60 News America Holdings, Inc. .............................. 7.75 02/01/24 68,514
20 News America Inc. ........................................ 7.125 04/08/28 21,553
65 Time Warner, Inc. ........................................ 6.625 05/15/29 64,328
140 Time Warner, Inc. ........................................ 7.625 04/15/31 154,485
------------
529,315
------------
</Table>
See Notes to Financial Statements
15
Morgan Stanley Balanced Growth Fund
PORTFOLIO OF INVESTMENTS - JULY 31, 2004 (UNAUDITED) continued
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------------------
Motor Vehicles (0.4%)
$ 40 DaimlerChrysler North American Holdings Co. .............. 7.20 % 09/01/09 $ 43,996
210 DaimlerChrysler North American Holdings Co. .............. 7.30 01/15/12 231,787
105 DaimlerChrysler North American Holdings Co. .............. 8.50 01/18/31 123,634
35 Ford Motor Co. ........................................... 6.625 10/01/28 30,707
230 Ford Motor Co. ........................................... 7.45 07/16/31 219,367
200 General Motors Corp. ..................................... 8.10 06/15/24 204,527
------------
854,018
------------
Multi-Line Insurance (0.5%)
355 AIG SunAmerica Global Finance VI - 144A**................. 6.30 05/10/11 385,496
170 American General Finance Corp. (Series MTNH).............. 4.625 09/01/10 169,466
20 American General Finance Corp. ........................... 4.625 05/15/09 20,197
30 AXA Financial Inc. ....................................... 6.50 04/01/08 32,775
50 Hartford Financial Services Group, Inc. .................. 2.375 06/01/06 49,355
180 Hartford Financial Services Group, Inc. .................. 7.90 06/15/10 210,034
55 International Lease Finance Corp. ........................ 3.75 08/01/07 55,006
100 Nationwide Mutual Insurance Co. - 144A**.................. 8.25 12/01/31 119,657
------------
1,041,986
------------
Oil & Gas Production (0.5%)
85 Kerr-McGee Corp. ......................................... 6.875 09/15/11 92,471
95 Nexen Inc. (Canada)....................................... 5.05 11/20/13 92,243
125 Pemex Project Funding Master Trust........................ 7.375 12/15/14 131,250
160 Pemex Project Funding Master Trust........................ 8.00 11/15/11 176,400
395 Pemex Project Funding Master Trust........................ 8.625 02/01/22 427,587
------------
1,002,324
------------
Oil & Gas Pipelines (0.0%)
30 Panhandle Eastern Pipe Line Co. (Series B)................ 2.75 03/15/07 28,943
------------
Other Metals/Minerals (0.1%)
175 Inco Ltd. (Canada)........................................ 7.20 09/15/32 186,805
45 Inco Ltd. (Canada)........................................ 7.75 05/15/12 51,446
------------
238,251
------------
Pharmaceuticals: Major (0.0%)
35 Schering-Plough Corp. .................................... 5.30 12/01/13 35,058
------------
Property -- Casualty Insurers (0.1%)
200 Mantis Reef Ltd. - 144A** (Australia)..................... 4.692 11/14/08 198,657
------------
</Table>
See Notes to Financial Statements
16
Morgan Stanley Balanced Growth Fund
PORTFOLIO OF INVESTMENTS - JULY 31, 2004 (UNAUDITED) continued
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------------------
Pulp & Paper (0.1%)
$ 100 International Paper Co. .................................. 4.25 % 01/15/09 $ 98,822
95 Sappi Papier Holding AG - 144A** (Austria)................ 6.75 06/15/12 102,170
------------
200,992
------------
Real Estate Development (0.2%)
372 World Financial Properties - 144A**....................... 6.91 09/01/13 409,468
------------
Real Estate Investment Trusts (0.1%)
10 EOP Operating L.P. ....................................... 4.75 03/15/14 9,347
130 EOP Operating L.P. ....................................... 7.25 06/15/28 135,976
60 Rouse Co. (The)........................................... 3.625 03/15/09 57,531
25 Rouse Co. (The)........................................... 5.375 11/26/13 24,532
------------
227,386
------------
Savings Banks (0.1%)
95 Washington Mutual Inc..................................... 5.50 01/15/13 96,503
80 Washington Mutual Inc. ................................... 8.25 04/01/10 93,718
------------
190,221
------------
Tobacco (0.1%)
120 Altria Group, Inc. ....................................... 7.00 11/04/13 124,081
90 Altria Group, Inc. ....................................... 7.75 01/15/27 92,874
------------
216,955
------------
Wireless Telecommunications (0.0%)
70 AT&T Wireless Services, Inc. ............................. 8.75 03/01/31 87,386
------------
Total Corporate Bonds (Cost $17,533,367)..................................... 18,148,219
------------
Foreign Government Obligations (0.1%)
180 United Mexican States Corp. (Mexico)...................... 8.30 08/15/31 194,850
20 United Mexican States Corp. (Mexico)...................... 8.00 09/24/22 21,450
------------
Total Foreign Government Obligations (Cost $229,406)......................... 216,300
------------
U.S. Government and Agency Obligations (16.9%)
540 Federal Home Loan Mortgage Corp. ......................... 5.125 11/07/13 536,730
Federal National Mortgage Assoc.
3,150 .......................................................... 4.25 05/15/09 3,177,493
U.S. Treasury Bond
2,850 .......................................................... 5.50 08/15/28 2,927,708
1,800 .......................................................... 6.125 08/15/29 2,007,915
5,100 .......................................................... 7.625 02/15/25 6,626,216
1,075 .......................................................... 8.125 08/15/19 1,424,460
3,150 .......................................................... 8.125 08/15/21 4,216,817
</Table>
See Notes to Financial Statements
17
Morgan Stanley Balanced Growth Fund
PORTFOLIO OF INVESTMENTS - JULY 31, 2004 (UNAUDITED) continued
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------------------
U.S. Treasury Note
$ 1,850 .......................................................... 3.875% 02/15/13 $ 1,788,357
5,800 .......................................................... 3.50 11/15/06 5,887,006
2,900 .......................................................... 6.50 02/15/10 3,283,457
U.S. Treasury Strip
2,425 .......................................................... 0.00 02/15/25 776,951
2,500 .......................................................... 0.00 02/15/25 804,185
------------
Total U.S. Government and Agency Obligations (Cost $33,350,691).............. 33,457,295
------------
Mortgage Backed Securities (3.0%)
Federal Home Loan Mortgage Corp.
388 .......................................................... 6.50 08/01/33 406,051
172 .......................................................... 7.50 01/01/30 -
08/01/11 183,137
Federal National Mortgage Assoc.
1,647 .......................................................... 6.50 09/01/31 -
01/01/33 1,721,748
873 .......................................................... 7.00 03/01/12 -
06/01/32 925,892
1,452 .......................................................... 7.50 08/01/25 -
07/01/32 1,556,411
619 .......................................................... 8.00 05/01/24 -
02/01/32 672,660
34 .......................................................... 9.50 12/01/20 37,999
Government National Mortgage Assoc
172 .......................................................... 7.50 09/15/25 -
06/15/27 185,849
216 .......................................................... 8.00 04/15/26 -
08/15/26 237,085
------------
Total Mortgage Backed Securities (Cost $5,779,715)........................... 5,926,832
------------
Asset-Backed Securities (0.5%)
335 Chase Credit Card Master Trust 2001-4 A................... 5.50 11/17/08 350,529
350 Citibank Credit Issuance Trust 2001-A1 A1................. 6.90 10/15/07 368,143
13 Harley-Davidson Motorcycle Trust 2002-1................... 3.02 09/15/06 12,806
150 MBNA Master Credit Card Trust............................. 5.90 08/15/11 161,492
133 Nissan Auto Receivables Owner Trust 2001-C A4............. 4.80 02/15/07 133,968
75 TXU Electric Delivery Transition Bond Company LLC 2004-1
A2...................................................... 4.81 11/15/12 75,565
------------
Total Asset-Backed Securities (Cost $1,068,660).............................. 1,102,503
------------
</Table>
See Notes to Financial Statements
18
Morgan Stanley Balanced Growth Fund
PORTFOLIO OF INVESTMENTS - JULY 31, 2004 (UNAUDITED) continued
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------------------
Short-Term Investments (6.8%)
U.S. Government Obligations (a) (0.1%)
U.S. Treasury Bill
$ 250 ***....................................................... 0.98 % 09/23/04 $ 249,633
25 ***....................................................... 1.645 01/13/05 24,812
------------
Total U.S. Government Obligations (Cost $274,445)............................ 274,445
------------
Repurchase Agreement (6.7%)
13,257 Joint repurchase agreement account (dated 07/30/04;
proceeds $13,258,497) (b) (Cost $13,257,000)............ 1.355 08/02/04 13,257,000
------------
Total Short-Term Investments (Cost $13,531,445).............................. 13,531,445
------------
</Table>
<Table>
Total Investments (Cost $176,752,870) (c) (d)...................... 101.2% 200,564,122
Liabilities in Excess of Other Assets.............................. (1.2) (2,420,134)
----- ------------
Net Assets......................................................... 100.0% $198,143,988
===== ============
</Table>
- ---------------------
<Table>
ADR American Depository Receipt.
FSA Financial Security Assurance.
* Non-income producing security.
** Resale is restricted to qualified institutional investors.
*** All or a portion of these securities have been segregated in
connection with open futures contracts in the amount of
$181,650.
(a) Purchased on a discount basis. The interest rate shown has
been adjusted to reflect a money market equivalent yield.
(b) Collateralized by federal agency and U.S. Treasury
obligations.
(c) Securities have been designated as collateral in a amount
equal to $15,026,365 in connection with open futures
contracts.
(d) The aggregate cost for federal income tax purposes
approximates the aggregate cost for book purposes. The
aggregate gross unrealized appreciation is $26,882,552 and
the aggregate gross unrealized depreciation is $3,071,300,
resulting in net unrealized appreciation of $23,811,252.
</Table>
See Notes to Financial Statements
19
Morgan Stanley Balanced Growth Fund
PORTFOLIO OF INVESTMENTS - JULY 31, 2004 (UNAUDITED) continued
Futures Contracts Open at July 31, 2004:
<Table>
<Caption>
NUMBER OF DESCRIPTION, DELIVERY UNDERLYING FACE UNREALIZED
CONTRACTS LONG/SHORT MONTH, AND YEAR AMOUNT AT VALUE DEPRECIATION
- --------- ---------- ---------------------------- ------------------------ --------------
99 Short U.S. Treasury Bonds 20 year, $(10,713,656) $(444,440)
September 2004
22 Short U.S. Treasury Notes 10 year, (2,435,813) (63,815)
September 2004
14 Short U.S. Treasury Notes 5 year, (1,533,000) (23,445)
September 2004
5 Long U.S. Treasury Notes 2 year, 1,055,625 (1,264)
September 2004
---------
Total unrealized depreciation.......................... $(532,964)
=========
</Table>
See Notes to Financial Statements
20
Morgan Stanley Balanced Growth Fund
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
July 31, 2004 (unaudited)
<Table>
Assets:
Investments in securities, at value
(cost $176,752,870)....................................... $200,564,122
Receivable for:
Interest................................................ 996,786
Investments sold........................................ 402,559
Dividends............................................... 144,486
Shares of beneficial interest sold...................... 109,813
Prepaid expenses and other assets........................... 57,718
------------
Total Assets............................................ 202,275,484
------------
Liabilities:
Payable for:
Investments purchased................................... 3,520,404
Distribution fee........................................ 163,312
Shares of beneficial interest redeemed.................. 148,770
Investment management fee............................... 101,004
Variation margin........................................ 145,047
Accrued expenses and other payables......................... 52,959
------------
Total Liabilities....................................... 4,131,496
------------
Net Assets.............................................. $198,143,988
============
Composition of Net Assets:
Paid-in-capital............................................. $192,340,965
Net unrealized appreciation................................. 23,278,288
Dividends in excess net investment income................... (164,677)
Accumulated net realized loss............................... (17,310,588)
------------
Net Assets.............................................. $198,143,988
============
Class A Shares:
Net Assets.................................................. $6,804,060
Shares Outstanding (unlimited authorized, $.01 par value)... 530,169
Net Asset Value Per Share............................... $12.83
============
Maximum Offering Price Per Share,
(net asset value plus 5.54% of net asset value)......... $13.54
============
Class B Shares:
Net Assets.................................................. $110,317,411
Shares Outstanding (unlimited authorized, $.01 par value)... 8,600,550
Net Asset Value Per Share............................... $12.83
============
Class C Shares:
Net Assets.................................................. $80,086,545
Shares Outstanding (unlimited authorized, $.01 par value)... 6,240,388
Net Asset Value Per Share............................... $12.83
============
Class D Shares:
Net Assets.................................................. $935,972
Shares Outstanding (unlimited authorized, $.01 par value)... 72,963
Net Asset Value Per Share............................... $12.83
============
</Table>
See Notes to Financial Statements
21
Morgan Stanley Balanced Growth Fund
FINANCIAL STATEMENTS continued
Statement of Operations
For the six months ended July 31, 2004 (unaudited)
<Table>
Net Investment Income:
Income
Interest.................................................... $ 1,491,948
Dividends (net of $40,615 foreign withholding tax).......... 1,235,394
-----------
Total Income............................................ 2,727,343
-----------
Expenses
Distribution fee (Class A shares)........................... 8,442
Distribution fee (Class B shares)........................... 568,392
Distribution fee (Class C shares)........................... 410,875
Investment management fee................................... 610,798
Transfer agent fees and expenses............................ 134,529
Registration fees........................................... 52,579
Professional fees........................................... 44,166
Shareholder reports and notices............................. 27,768
Custodian fees.............................................. 19,720
Trustees' fees and expenses................................. 1,341
Other....................................................... 9,507
-----------
Total Expenses.......................................... 1,888,117
-----------
Net Investment Income................................... 839,226
-----------
Net Realized and Unrealized Gain (Loss):
Net Realized Gain on:
Investments................................................. 5,117,636
Futures contracts........................................... 233,034
-----------
Net Realized Gain....................................... 5,350,670
-----------
Net Change in Unrealized Appreciation/Depreciation on:
Investments................................................. (7,256,240)
Futures contracts........................................... (260,271)
-----------
Net Depreciation........................................ (7,516,511)
-----------
Net Loss................................................ (2,165,841)
-----------
Net Decrease................................................ $(1,326,615)
===========
</Table>
See Notes to Financial Statements
22
Morgan Stanley Balanced Growth Fund
FINANCIAL STATEMENTS continued
Statement of Changes in Net Assets
<Table>
<Caption>
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
JULY 31, 2004 JANUARY 31, 2004
------------------ ----------------
(unaudited)
Increase (Decrease) in Net Assets:
Operations:
Net investment income....................................... $ 839,226 $ 1,531,154
Net realized gain........................................... 5,350,670 10,474,766
Net change in unrealized appreciation....................... (7,516,511) 24,685,664
------------ ------------
Net Increase (Decrease)................................. (1,326,615) 36,691,584
------------ ------------
Dividends to Shareholders from Net Investment Income:
Class A shares.............................................. (57,391) (122,044)
Class B shares.............................................. (534,258) (1,150,686)
Class C shares.............................................. (381,757) (934,123)
Class D shares.............................................. (9,584) (18,207)
------------ ------------
Total Dividends......................................... (982,990) (2,225,060)
------------ ------------
Net increase (decrease) from transactions in shares of
beneficial interest....................................... (7,160,400) 10,998,503
------------ ------------
Net Increase (Decrease)................................. (9,470,005) 45,465,027
Net Assets:
Beginning of period......................................... 207,613,993 162,148,966
------------ ------------
End of Period
(Including dividends in excess of net investment income of
$164,677 and $20,913, respectively)......................... $198,143,988 $207,613,993
============ ============
</Table>
See Notes to Financial Statements
23
Morgan Stanley Balanced Growth Fund
NOTES TO FINANCIAL STATEMENTS - JULY 31, 2004 (UNAUDITED)
1. Organization and Accounting Policies
Morgan Stanley Balanced Growth Fund (the "Fund") is registered under the
Investment Company Act of 1940, as amended (the "Act"), as a diversified,
open-end management investment company. The Fund's investment objective is
capital growth with reasonable current income. The Fund was organized as a
Massachusetts business trust on November 23, 1994 and commenced operations on
March 28, 1995. On July 28, 1997, the Fund converted to a multiple class share
structure.
The Fund offers Class A shares, Class B shares, Class C shares and Class D
shares. The four classes are substantially the same except that most Class A
shares are subject to a sales charge imposed at the time of purchase and some
Class A shares, and most Class B shares and Class C shares are subject to a
contingent deferred sales charge imposed on shares redeemed within 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) futures are valued at the latest
price published by the commodities exchange on which they trade; (6) 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 securities, such valuations may be adjusted to reflect
the estimated fair value of such securities as
24
Morgan Stanley Balanced Growth Fund
NOTES TO FINANCIAL STATEMENTS - JULY 31, 2004 (UNAUDITED) continued
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; (7) certain portfolio securities may be valued by an
outside pricing service approved by the Fund's Trustees; and (8) 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. Futures Contracts -- A futures contract is an agreement between two parties
to buy and sell financial instruments or contracts based on financial indices at
a set price on a future date. Upon entering into such a contract, the Fund is
required to pledge to the broker cash, U.S. Government securities or other
liquid portfolio securities equal to the minimum initial margin requirements of
the applicable futures exchange. Pursuant to the contract, the Fund agrees to
receive from or pay to the broker an amount of cash equal to the daily
fluctuation in the value of the contract. Such receipts or payments known as
variation margin are recorded by the Fund as unrealized gains and losses. Upon
closing of the contract, the Fund realizes a gain or loss equal to the
difference between the value of the contract at the time it was opened and the
value at the time it was closed.
25
Morgan Stanley Balanced Growth Fund
NOTES TO FINANCIAL STATEMENTS - JULY 31, 2004 (UNAUDITED) continued
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.
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: 0.60% to the portion of daily net assets not exceeding
$500 million and 0.575% to the portion of daily net assets in excess of $500
million.
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 -- up to 1.0% of 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 $3,387,949
at July 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,
26
Morgan Stanley Balanced Growth Fund
NOTES TO FINANCIAL STATEMENTS - JULY 31, 2004 (UNAUDITED) continued
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 July 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 July 31,
2004, it received contingent deferred sales charges from certain redemptions of
the Fund's Class B shares and Class C shares of $135,729 and $2,372,
respectively and received $20,423 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/prepayments of portfolio
securities, excluding short-term investments, for the six months ended July 31,
2004 aggregated $48,185,254 and $55,314,069, respectively. Included in the
aforementioned are purchases and sales of U.S. Government securities in the
amount of $6,045,086 and $303,270, respectively.
For the six months ended July 31, 2004, the Fund incurred brokerage commissions
of $811 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 July 31, 2004, the Fund had transfer agent fees
and expenses payable of approximately $1,300.
Effective April 1, 2004, the Fund began an unfunded Deferred Compensation Plan
(the "Compensation Plan") which allows each independent Trustee to defer payment
of all, or a portion, of the fees he receives for serving on the Board of
Trustees. Each eligible Trustee generally may elect to have the deferred amounts
credited with a return equal to the total return on one or more of the Morgan
Stanley funds that are offered as investment options under the Compensation
Plan. Appreciation/depreciation and distributions received from these
investments are recorded with an offsetting increase/decrease in the deferred
compensation obligation and do not affect the net asset value of the Fund.
27
Morgan Stanley Balanced Growth Fund
NOTES TO FINANCIAL STATEMENTS - JULY 31, 2004 (UNAUDITED) continued
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
JULY 31, 2004 JANUARY 31, 2004
------------------------- -------------------------
(unaudited)
SHARES AMOUNT SHARES AMOUNT
---------- ------------ ---------- ------------
CLASS A SHARES
Sold................................................. 81,613 $ 1,053,626 165,027 $ 1,934,063
Reinvestment of dividends............................ 3,729 47,917 8,744 101,664
Redeemed............................................. (68,529) (886,832) (205,351) (2,406,092)
---------- ------------ ---------- ------------
Net increase (decrease) - Class A.................... 16,813 214,711 (31,580) (370,365)
---------- ------------ ---------- ------------
CLASS B SHARES
Sold................................................. 1,127,706 14,629,100 3,818,304 44,864,647
Reinvestment of dividends............................ 34,047 437,771 80,401 938,630
Redeemed............................................. (1,424,899) (18,398,247) (2,459,190) (28,680,508)
---------- ------------ ---------- ------------
Net increase (decrease) - Class B.................... (263,146) (3,331,376) 1,439,515 17,122,769
---------- ------------ ---------- ------------
CLASS C SHARES
Sold................................................. 245,277 3,179,273 850,962 10,125,875
Reinvestment of dividends............................ 26,102 335,753 71,167 827,488
Redeemed............................................. (569,184) (7,351,924) (1,404,932) (16,354,709)
---------- ------------ ---------- ------------
Net decrease - Class C............................... (297,805) (3,836,898) (482,803) (5,401,346)
---------- ------------ ---------- ------------
CLASS D SHARES
Sold................................................. 14,289 186,118 108,057 1,280,476
Reinvestment of dividends............................ 642 8,253 1,369 16,182
Redeemed............................................. (30,721) (401,208) (146,308) (1,649,213)
---------- ------------ ---------- ------------
Net decrease - Class D............................... (15,790) (206,837) (36,882) (352,555)
---------- ------------ ---------- ------------
Net increase (decrease) in Fund...................... (559,928) $ (7,160,400) 888,250 $ 10,998.503
========== ============ ========== ============
</Table>
6. Federal Income Tax Status
The amount of dividends distributions from net investment income and net
realized capital gains are determined in accordance with federal income tax
regulations which may differ from generally accepting 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 account 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.
28
Morgan Stanley Balanced Growth Fund
NOTES TO FINANCIAL STATEMENTS - JULY 31, 2004 (UNAUDITED) continued
As of January 31, 2004, the Fund had a net capital loss carryforward of
$21,701,315 which will expire on January 31, 2011 to offset future capital gains
to the extent provided by regulation.
As of January 31, 2004, the Fund had temporary book/tax differences primarily
attributable to capital loss deferrals on wash sales and book amortization of
premiums on debt securities.
7. Purposes of and Risks Relating to Certain Financial Instruments
The Fund may invest in futures with respect to financial instruments and
interest rate indexes ("futures contracts").
These future contracts involve elements of market risk in excess of the amount
reflected in the Statement of Assets and Liabilities. The Fund bears the risk of
an unfavorable change in the value of the underlying securities. Risks also may
arise from the potential inability of the counterparties to meet the terms of
their contracts.
8. Legal Matters
The Investment Manager, certain affiliates of the Investment Manager, certain
officers of such affiliates and certain investment companies advised by the
Investment Manager or its affiliates, including the Fund, are named as
defendants in a number of similar class action complaints which were recently
consolidated. This consolidated action also names as defendants certain
individual Trustees and Directors of the Morgan Stanley funds. The consolidated
amended complaint generally alleges 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 recommend the funds advised by the Investment Manager or its
affiliates to investors rather than funds managed by other companies, and (ii)
that the funds advised by the Investment Manager or its affiliates, including
the Fund, allegedly paid excessive commissions to brokers in return for their
efforts to recommend these funds to investors. The complaint seeks, among other
things, unspecified compensatory damages, rescissionary damages, fees and costs.
The defendants have moved to dismiss the action and intend to otherwise
vigorously defend it. While the Fund believes that it has meritorious defenses,
the ultimate outcome of this matter is not presently determinable at this early
stage of the litigation, and no provision has been made in the Fund's financial
statements for the effect, if any, of this matter.
29
Morgan Stanley Balanced Growth 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 JANUARY 31
MONTHS ENDED ----------------------------------------------------------
JULY 31, 2004 2004 2003 2002 2001 2000
------------- ------ ------ ------ ------ ------
(unaudited)
Class A Shares
Selected Per Share Data:
Net asset value, beginning of period....... $12.98 $10.73 $12.82 $13.29 $13.11 $15.01
------ ------ ------ ------ ------ ------
Income (loss) from investment operations:
Net investment income++................ 0.10 0.18 0.25 0.33 0.37 0.41
Net realized and unrealized gain
(loss)................................. (0.14) 2.30 (2.06) (0.42) 0.87 (0.59)
------ ------ ------ ------ ------ ------
Total income (loss) from investment
operations................................ (0.04) 2.48 (1.81) (0.09) 1.24 (0.18)
------ ------ ------ ------ ------ ------
Less dividends and distributions from:
Net investment income.................. (0.11) (0.23) (0.28) (0.38) (0.38) (0.40)
Net realized gain...................... -- -- -- -- (0.68) (1.32)
------ ------ ------ ------ ------ ------
Total dividends and distributions.......... (0.11) (0.23) (0.28) (0.38) (1.06) (1.72)
------ ------ ------ ------ ------ ------
Net asset value, end of period............. $12.83 $12.98 $10.73 $12.82 $13.29 $13.11
====== ====== ====== ====== ====== ======
Total Return+.............................. (0.30)%(1) 23.37% (14.27)% (0.53)% 10.65% (1.35)%
Ratios to Average Net Assets(3):
Expenses................................... 1.13 %(2) 1.12% 1.10% 1.07% 1.03% 1.04%
Net investment income...................... 1.54 %(2) 1.58% 2.14% 2.56% 2.95% 2.81%
Supplemental Data:
Net assets, end of period, in thousands.... $6,804 $6,663 $5,848 $6,259 $7,440 $6,308
Portfolio turnover rate.................... 25 %(1) 117% 145% 67% 33% 48%
</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 expenses.
</Table>
See Notes to Financial Statements
30
Morgan Stanley Balanced Growth Fund
FINANCIAL HIGHLIGHTS continued
<Table>
<Caption>
FOR THE SIX FOR THE YEAR ENDED JANUARY 31
MONTHS ENDED ------------------------------------------------------------
JULY 31, 2004 2004 2003 2002 2001 2000
------------- -------- ------- ------- ------- -------
(unaudited)
Class B Shares
Selected Per Share Data:
Net asset value, beginning of period...... $ 12.97 $10.73 $12.81 $13.28 $13.09 $14.99
-------- ------ ------ ------ ------ ------
Income (loss) from investment operations:
Net investment income++............... 0.05 0.10 0.16 0.23 0.27 0.30
Net realized and unrealized gain
(loss)................................ (0.13) 2.28 (2.05) (0.42) 0.88 (0.60)
-------- ------ ------ ------ ------ ------
Total income (loss) from investment
operations............................... (0.08) 2.38 (1.89) (0.19) 1.15 (0.30)
-------- ------ ------ ------ ------ ------
Less dividends and distributions from:
Net investment income................. (0.06) (0.14) (0.19) (0.28) (0.28) (0.28)
Net realized gain..................... -- -- -- -- (0.68) (1.32)
-------- ------ ------ ------ ------ ------
Total dividends and distributions......... (0.06) (0.14) (0.19) (0.28) (0.96) (1.60)
-------- ------ ------ ------ ------ ------
Net asset value, end of period............ $ 12.83 $12.97 $10.73 $12.81 $13.28 $13.09
======== ====== ====== ====== ====== ======
Total Return+............................. (0.61)%(1) 22.37% (14.86)% (1.32)% 9.83% (2.15)%
Ratios to Average Net Assets(3):
Expenses.................................. 1.88 %(2) 1.88% 1.87% 1.83% 1.83% 1.80%
Net investment income..................... 0.79 %(2) 0.82% 1.37% 1.80% 2.15% 2.05%
Supplemental Data:
Net assets, end of period, in thousands... $110,317 $114,960 $79,631 $92,009 $57,490 $87,554
Portfolio turnover rate................... 25 %(1) 117% 145% 67% 33% 48%
</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 expenses.
</Table>
See Notes to Financial Statements
31
Morgan Stanley Balanced Growth Fund
FINANCIAL HIGHLIGHTS continued
<Table>
<Caption>
FOR THE SIX FOR THE YEAR ENDED JANUARY 31
MONTHS ENDED --------------------------------------------------------------
JULY 31, 2004 2004 2003 2002 2001 2000
------------- ------- ------- -------- -------- --------
(unaudited)
Class C Shares
Selected Per Share Data:
Net asset value, beginning of period.... $12.98 $10.73 $12.81 $13.28 $13.09 $14.99
------ ------ ------ ------ ------ ------
Income (loss) from investment
operations:
Net investment income++............. 0.05 0.10 0.16 0.23 0.27 0.30
Net realized and unrealized gain
(loss).............................. (0.14) 2.29 (2.05) (0.42) 0.88 (0.60)
------ ------ ------ ------ ------ ------
Total income (loss) from investment
operations............................. (0.09) 2.39 (1.89) (0.19) 1.15 (0.30)
------ ------ ------ ------ ------ ------
Less dividends and distributions from:
Net investment income............... (0.06) (0.14) (0.19) (0.28) (0.28) (0.28)
Net realized gain................... -- -- -- -- (0.68) (1.32)
------ ------ ------ ------ ------ ------
Total dividends and distributions....... (0.06) (0.14) (0.19) (0.28) (0.96) (1.60)
------ ------ ------ ------ ------ ------
Net asset value, end of period.......... $12.83 $12.98 $10.73 $12.81 $13.28 $13.09
====== ====== ====== ====== ====== ======
Total Return+........................... (0.69)%(1) 22.43% (14.88)% (1.34)% 9.86% (2.14)%
Ratios to Average Net Assets(3):
Expenses................................ 1.88 %(2) 1.88% 1.87% 1.83% 1.80% 1.79%
Net investment income................... 0.79 %(2) 0.82% 1.37% 1.80% 2.18% 2.06%
Supplemental Data:
Net assets, end of period, in
thousands.............................. $80,087 $84,840 $75,323 $106,002 $117,927 $163,953
Portfolio turnover rate................. 25 %(1) 117% 145% 67% 33% 48%
</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 expenses.
</Table>
See Notes to Financial Statements
32
Morgan Stanley Balanced Growth Fund
FINANCIAL HIGHLIGHTS continued
<Table>
<Caption>
FOR THE SIX FOR THE YEAR ENDED JANUARY 31
MONTHS ENDED ------------------------------------------------------
JULY 31, 2004 2004 2003 2002 2001 2000
------------- ------ ------ ------ ------ ------
(unaudited)
Class D Shares
Selected Per Share Data:
Net asset value, beginning of period............ $12.97 $10.73 $12.81 $13.28 $13.10 $15.01
------ ------ ------ ------ ------ ------
Income (loss) from investment operations:
Net investment income++..................... 0.12 0.22 0.27 0.37 0.39 0.44
Net realized and unrealized gain (loss)..... (0.13) 2.28 (2.04) (0.43) 0.88 (0.60)
------ ------ ------ ------ ------ ------
Total income (loss) from investment
operations..................................... (0.01) 2.50 (1.77) (0.06) 1.27 (0.16)
------ ------ ------ ------ ------ ------
Less dividends and distributions from:
Net investment income....................... (0.13) (0.26) (0.31) (0.41) (0.41) (0.43)
Net realized gain........................... -- -- -- -- (0.68) (1.32)
------ ------ ------ ------ ------ ------
Total dividends and distributions............... (0.13) (0.26) (0.31) (0.41) (1.09) (1.75)
------ ------ ------ ------ ------ ------
Net asset value, end of period.................. $12.83 $12.97 $10.73 $12.81 $13.28 $13.10
====== ====== ====== ====== ====== ======
Total Return+................................... (0.11)%(1) 23.56% (13.99)% (0.32)% 10.93% (1.20)%
Ratios to Average Net Assets(3):
Expenses........................................ 0.88 %(2) 0.88% 0.87% 0.83% 0.83% 0.80%
Net investment income........................... 1.79 %(2) 1.82% 2.37% 2.80% 3.15% 3.05%
Supplemental Data:
Net assets, end of period, in thousands......... $936 $1,151 $1,347 $1,244 $2,702 $3,188
Portfolio turnover rate......................... 25 %(1) 117% 145% 67% 33% 48%
</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 expenses.
</Table>
See Notes to Financial Statements
33
(This Page Intentionally Left Blank)
(This Page Intentionally Left Blank)
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
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
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 REGISTERED PUBLIC ACCOUNTING FIRM
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 the shareholders of the
Fund. For more detailed information about the Fund, its fees and expenses and
other pertinent information, please read its Prospectus. The Fund's Statement of
Additional Information contains additional information about the Fund, including
its trustees. It is available, without charge, by calling (800) 869-NEWS.
This report is not authorized for distribution to prospective investors in the
Fund unless preceded or accompanied by an effective Prospectus. Read the
Prospectus carefully before investing.
Investments and services offered through Morgan Stanley DW Inc., member SIPC.
Morgan Stanley Distributors Inc., member NASD.
(c) 2004 Morgan Stanley
[MORGAN STANLEY LOGO]
MORGAN STANLEY FUNDS
Morgan Stanley
Balanced Growth Fund
Semiannual Report
July 31, 2004
[MORGAN STANLEY LOGO]
37896RPT-RA04-00541P-Y07/04
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 Balanced Growth Fund
/s/ Ronald E. Robison
Ronald E. Robison
Principal Executive Officer
September 20, 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
September 20, 2004
/s/ Francis Smith
Francis Smith
Principal Financial Officer
September 20, 2004
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