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, 2005
Date of reporting period: January 31, 2005
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, 2005
TOTAL RETURN FOR THE 6 MONTHS ENDED JANUARY 31, 2005
<Table>
<Caption>
S&P LIPPER
500 MULTI-CAP CORE
CLASS A CLASS B CLASS C CLASS D INDEX(1) FUNDS INDEX(2)
8.28% 7.84% 7.85% 8.41% 8.16% 10.07%
</Table>
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE, WHICH IS NO GUARANTEE OF
FUTURE RESULTS. 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 performance of the Fund's four share classes varies because each has
different expenses. The Fund's total returns assume the reinvestment of all
distributions but do not reflect the deduction of any applicable sales charges.
Such costs would lower performance. See Performance Summary for standardized
performance information.
MARKET CONDITIONS
From late summer to the early fall of 2004, both equity and fixed income markets
traded within narrow ranges, reflecting a number of geopolitical uncertainties
simmering around the world. Investor preoccupation centered on Iraq's future
sovereignty, the sustained growth of China and other developing markets and
global pressures on the world's resources and commodity supplies. In the U.S.,
concerns over the sluggishness of the economic recovery and the possibility of a
protracted presidential election held risk tolerances in check. The stock and
bond markets during these months mimicked trends that had developed in prior
months, with small- and mid-capitalization stocks outperforming larger
capitalization equities, cyclical industries outperforming staples and long
bonds marking time in a 4 to 4 1/2 percent trading range.
The backdrop shifted dramatically in the post-election period, as the reelection
of President Bush and a Republican tilt to both Senate and House races reduced
the possibility of major changes in domestic policy. At the same time, oil,
which had peaked above $50 per barrel, corrected back to the low forties.
Equities rallied in November and December, posting returns (as measured by the
S&P 500) in excess of 7 percent for the two-month period alone. At the same
time, diminishing concerns over inflation and run-away growth led to a modest
rally in the long end of the U.S. Treasury market.
Underlying this entire period, and somewhat ignored by the markets as a whole,
was the Federal Open Market Committee's (the "Fed's") policy shift, which began
in June with a 25 basis point hike in the federal funds rate. By January, 2005,
investors grew increasingly aware of the Fed's policy of gradual tightening, and
became somewhat more concerned with the extent and duration of the ongoing
increases in short-term rates. By the end of January, the Fed had increased
short rates by a combined 125 basis points, with no sign of slowing or
moderating in the pace of rate increases. Stock markets corrected a bit in
January, as investor concern surrounding the uncertainty of this policy shift,
as well as the impact higher rates might have on the consumer and corporate
profits, began to filter into asset class valuations.
2
PERFORMANCE ANALYSIS
Morgan Stanley Total Return Trust's class A and D shares outperformed the S&P
500 Index -- assuming no deduction of applicable sales charges -- while its
class B and C shares underperformed that benchmark. All share classes
underperformed the Lipper Multi-Cap Core Funds Index for the six months ended
January 31, 2005. Much of the Fund's relative performance for the period was
driven by its conservative positioning. During the review period, our analysis
indicated that the greatest value in the marketplace existed among higher cash
flow, income producing sectors which we felt would provide lower risk total
return than the market as a whole. As a result, these sectors represented
significant positions within our portfolio relative to their weightings within
the S&P 500 Index. This stance hindered the Fund's returns in the post-election
rally, when stocks in higher-volatility sectors such as technology tended to
outperform.
The Fund also shifted to a larger capitalization portfolio during the early
months of 2004, again seeking to reduce volatility and also to leverage the
valuation disparity that we felt emerged among small, mid and large
capitalization stocks throughout the year. For the past six years, small and
mid-size companies have enjoyed outstanding performance, and our analysis
indicated that valuations appeared more attractive within the large
capitalization, total-return sectors of the equity market. This shift proved
early, as small and mid capitalization stocks continued to outperform.
Within the Fund's portfolio, the majority of total return is attributable to the
energy, industrial, consumer staple, health care and transportation sectors. We
reduced holdings in technology and financials throughout the period under
review. At the end of the six-month period, the Fund held 43 positions in nine
of the 10 major Standard & Poor's 500 sectors, with only utilities not
represented within the portfolio.
There is no guarantee that any sectors mentioned will continue to perform well
or be held by the Fund in the future.
<Table>
<Caption>
TOP 10 HOLDINGS
Gillette Co. (The) 3.7%
General Electric Co. 3.4
Johnson & Johnson 3.1
Dow Chemical Co. (The) 3.0
McGraw-Hill Companies, Inc. (The) 3.0
Bard (C.R.), Inc. 3.0
Exxon Mobil Corp. 3.0
Norfolk Southern Corp. 2.9
Danaher Corp. 2.7
Microsoft Corp. 2.7
</Table>
<Table>
<Caption>
TOP FIVE INDUSTRIES
Industrial Conglomerates 8.2%
Household/Personal Care 7.9
Major Banks 6.5
Biotechnology 4.6
Financial Conglomerates 4.6
</Table>
Data as of January 31, 2005. Subject to change daily. All percentages for top 10
holdings and top five industries are as a percentage of net assets. These data
are provided for informational purposes only and should not be deemed a
recommendation to buy or sell the securities mentioned. Morgan Stanley is a
full-service securities firm engaged in securities trading and brokerage
activities, investment banking, research and analysis, financing and financial
advisory services.
3
INVESTMENT STRATEGY
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. IN SELECTING INVESTMENTS TO BUY, HOLD OR SELL, THE FUND'S
"INVESTMENT ADVISER," 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. 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
ADVISER, ARE EXPECTED TO PAY DIVIDENDS OR INTEREST INCOME. UP TO 35 PERCENT OF
THE FUND'S NET ASSETS MAY BE INVESTED IN FOREIGN SECURITIES (INCLUDING
DEPOSITARY RECEIPTS).
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 (800) SEC-0330. YOU CAN ALSO REQUEST COPIES OF THESE
MATERIALS, UPON PAYMENT OF A DUPLICATING FEE, BY ELECTRONIC REQUEST AT THE SEC'S
E-MAIL ADDRESS (PUBLICINFO@SEC.GOV) OR BY WRITING THE PUBLIC REFERENCE SECTION
OF THE SEC, WASHINGTON, DC 20549-0102. YOU MAY OBTAIN COPIES OF A FUND'S FISCAL
QUARTER FILINGS BY CONTACTING MORGAN STANLEY CLIENT RELATIONS AT (800) 869-NEWS.
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
12-MONTH PERIOD ENDED JUNE 30, 2004, IS AVAILABLE WITHOUT CHARGE, UPON REQUEST,
BY CALLING (800) 869-NEWS OR BY VISITING THE MUTUAL FUND CENTER ON OUR WEB SITE
AT WWW.MORGANSTANLEY.COM. THIS INFORMATION IS ALSO AVAILABLE ON THE SECURITIES
AND EXCHANGE COMMISSION'S WEB SITE AT HTTP://WWW.SEC.GOV.
HOUSEHOLDING NOTICE
TO REDUCE PRINTING AND MAILING COSTS, THE FUND ATTEMPTS TO ELIMINATE DUPLICATE
MAILINGS TO THE SAME ADDRESS. THE FUND DELIVERS A SINGLE COPY OF CERTAIN
SHAREHOLDER DOCUMENTS, INCLUDING SHAREHOLDER REPORTS, PROSPECTUSES AND PROXY
MATERIALS, TO INVESTORS WITH THE SAME LAST NAME WHO RESIDE AT THE SAME ADDRESS.
YOUR PARTICIPATION IN THIS PROGRAM WILL CONTINUE FOR AN UNLIMITED PERIOD OF TIME
UNLESS YOU INSTRUCT US OTHERWISE. YOU CAN REQUEST MULTIPLE COPIES OF THESE
DOCUMENTS BY CALLING (800) 350-6414, 8:00 A.M. TO 8:00 P.M., ET. ONCE OUR
CUSTOMER SERVICE CENTER HAS RECEIVED YOUR INSTRUCTIONS, WE WILL BEGIN SENDING
INDIVIDUAL COPIES FOR EACH ACCOUNT WITHIN 30 DAYS.
4
PERFORMANCE SUMMARY
AVERAGE ANNUAL TOTAL RETURNS -- PERIOD ENDED JANUARY 31, 2005
<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 7.31%(3) 6.45%(3) 6.53%(3) 7.54%(3)
1.68(4) 1.45(4) 5.53(4) --
5 YEARS (5.69)(3) (6.40)(3) (6.43)(3) (5.48)(3)
(6.70)(4) (6.77)(4) (6.43)(4) --
10 YEARS -- 7.83(3) -- --
-- 7.83(4) -- --
SINCE INCEPTION 2.37(3) 7.77(3) 1.63(3) 2.60(3)
1.64(4) 7.77(4) 1.63(4) --
</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 1.0% for shares
redeemed within one year of purchase.
++ Class D has no sales charge.
(1) The Standard and 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.
The Index does not include any expenses, 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.
5
EXPENSE EXAMPLE
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, including sales charges (loads) on purchase payments and redemption fees;
and (2) ongoing costs, including 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 08/01/04 - 01/31/05.
ACTUAL EXPENSES
The first line of the table below provides information about actual account
values and actual expenses. You may use the information in this line, together
with the amount you invested, to estimate the expenses that you paid over the
period. Simply divide your account value by $1,000 (for example, an $8,600
account value divided by $1,000 = 8.6), then multiply the result by the number
in the first line under the heading entitled "Expenses Paid During Period" to
estimate the expenses you paid on your account during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second line of the table below provides information about hypothetical
expenses based on the Fund's actual expense ratio and an assumed rate of return
of 5% per year before expenses, which is not the Fund's actual return. The
hypothetical account values and expenses may not be used to estimate the actual
ending account balance or expenses you paid for the period. You may use this
information to compare the ongoing cost of investing in the Fund and other
funds. To do so, compare this 5% hypothetical example with the 5% hypothetical
examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as sales
charges (loads) and redemption fees. Therefore, the second line of the table is
useful in comparing ongoing costs, and will not help you determine the relative
total cost of owning different funds. In addition, if these transactional costs
were included, your costs would have been higher.
<Table>
<Caption>
BEGINNING ENDING EXPENSES PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD *
------------- ------------- ---------------
08/01/04 -
08/01/04 01/31/05 01/31/05
------------- ------------- ---------------
CLASS A
Actual (8.28% return)....................................... $1,000.00 $1,082.80 $ 6.98
Hypothetical (5% annual return before expenses)............. $1,000.00 $1,018.50 $ 6.77
CLASS B
Actual (7.84% return)....................................... $1,000.00 $1,078.40 $10.90
Hypothetical (5% annual return before expenses)............. $1,000.00 $1,014.72 $10.56
CLASS C
Actual (7.85% return)....................................... $1,000.00 $1,078.50 $10.90
Hypothetical (5% annual return before expenses)............. $1,000.00 $1,014.72 $10.56
CLASS D
Actual (8.41% return)....................................... $1,000.00 $1,084.10 $ 5.67
Hypothetical (5% annual return before expenses)............. $1,000.00 $1,019.76 $ 5.50
</Table>
- ------------------
* Expenses are equal to the Fund's annualized expense ratio of 1.33%, 2.08%,
2.08% and 1.08% respectively, multiplied by the average account value over
the period, multiplied by 184/365 (to reflect the one-half year period).
6
Morgan Stanley Total Return Trust
PORTFOLIO OF INVESTMENTS - JANUARY 31, 2005 (UNAUDITED)
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ------------------------------------------------------
Common Stocks (96.0%)
Aerospace & Defense
(1.7%)
60,000 Northrop Grumman
Corp. .................. $ 3,112,800
------------
Agricultural Commodities/
Milling (2.0%)
150,000 Archer-Daniels-Midland
Co. .................... 3,630,000
------------
Biotechnology (4.6%)
65,000 Amgen Inc.*.............. 4,045,600
65,000 Biogen Idec Inc.*........ 4,222,400
------------
8,268,000
------------
Building Products (2.2%)
110,000 Masco Corp. ............. 4,048,000
------------
Chemicals: Major
Diversified (3.1%)
110,000 Dow Chemical Co. (The)... 5,467,000
------------
Chemicals: Specialty
(2.4%)
100,000 Praxair, Inc. ........... 4,315,000
------------
Computer Peripherals
(1.1%)
40,000 Zebra Technologies Corp.
(Class A)*.............. 2,037,200
------------
Computer Processing
Hardware (4.3%)
55,000 Apple Computer, Inc.*.... 4,229,500
85,000 Dell Inc.*............... 3,549,600
------------
7,779,100
------------
Contract Drilling (1.3%)
80,000 Rowan Companies, Inc. ... 2,252,800
------------
Financial Conglomerates
(4.6%)
85,000 American Express Co. .... 4,534,750
45,000 UBS AG (ADR)
(Switzerland)*.......... 3,662,100
------------
8,196,850
------------
</Table>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ------------------------------------------------------
Financial Publishing/
Services (3.0%)
60,000 McGraw-Hill Companies,
Inc. (The).............. $ 5,430,000
------------
Home Improvement Chains
(2.4%)
100,000 Sherwin-Williams Co. .... 4,320,000
------------
Hotels/Resorts/
Cruiselines (2.5%)
70,000 Marriott International,
Inc. (Class A).......... 4,422,600
------------
Household/Personal Care
(7.9%)
130,000 Gillette Co. (The)....... 6,593,600
85,000 International Flavors &
Fragrances, Inc. ....... 3,588,700
75,000 Procter & Gamble Co.
(The)................... 3,992,250
------------
14,174,550
------------
Industrial Conglomerates
(8.2%)
90,000 Danaher Corp. ........... 4,939,200
170,000 General Electric Co. .... 6,142,100
50,000 Ingersoll-Rand Co. Ltd.
(Class A) (Bermuda)..... 3,719,000
------------
14,800,300
------------
Integrated Oil (3.0%)
105,000 Exxon Mobil Corp. ....... 5,418,000
------------
Investment Banks/ Brokers
(4.1%)
35,000 Goldman Sachs Group, Inc.
(The)................... 3,774,750
60,000 Merrill Lynch & Co.,
Inc. ................... 3,604,200
------------
7,378,950
------------
</Table>
7
See Notes to Financial Statements
Morgan Stanley Total Return Trust
PORTFOLIO OF INVESTMENTS - JANUARY 31, 2005 (UNAUDITED) continued
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ------------------------------------------------------
Major Banks (6.5%)
90,000 Bank of America Corp. ... $ 4,173,300
35,000 HSBC Holdings PLC --
Spons ADR (United
Kingdom)................ 2,906,050
75,000 Wells Fargo & Co. ....... 4,597,500
------------
11,676,850
------------
Major Telecommunications
(2.4%)
80,000 ALLTEL Corp. ............ 4,403,200
------------
Media Conglomerates
(2.4%)
150,000 Disney (Walt) Co.
(The)................... 4,294,500
------------
Medical Specialties
(3.0%)
80,000 Bard (C.R.), Inc. ....... 5,424,000
------------
Miscellaneous Commercial
Services (2.1%)
60,000 Corporate Executive Board
Co. (The)............... 3,834,000
------------
Oil & Gas Production
(1.9%)
60,000 Occidental Petroleum
Corp. .................. 3,502,800
------------
Oilfield Services/
Equipment (1.8%)
50,000 Varco International,
Inc.*................... 1,530,500
30,000 Weatherford International
Ltd. (Bermuda)*......... 1,628,100
------------
3,158,600
------------
</Table>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ------------------------------------------------------
Packaged Software (4.3%)
75,000 Cognos, Inc. (Canada)*... $ 3,102,750
175,000 Microsoft Corp. ......... 4,599,000
------------
7,701,750
------------
Pharmaceuticals: Major
(3.1%)
85,000 Johnson & Johnson........ 5,499,500
------------
Property -- Casualty
Insurers (2.0%)
70,000 Allstate Corp. (The)..... 3,530,800
------------
Railroads (2.9%)
150,000 Norfolk Southern
Corp. .................. 5,238,000
------------
Real Estate Investment
Trusts (1.5%)
120,000 Impac Mortgage Holdings,
Inc. ................... 2,740,800
------------
Regional Banks (1.7%)
65,000 Compass Bancshares,
Inc. ................... 3,043,950
------------
Semiconductors (2.0%)
110,000 Marvell Technology Group
Ltd. (Bermuda)*......... 3,679,500
------------
Total Common Stocks
(Cost $145,735,198)...... 172,779,400
------------
</Table>
8
See Notes to Financial Statements
Morgan Stanley Total Return Trust
PORTFOLIO OF INVESTMENTS - JANUARY 31, 2005 (UNAUDITED) continued
<Table>
<Caption>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
- ------------------------------------------------------
Short-Term Investment (2.7%)
Repurchase Agreement
$ 4,910 Joint repurchase
agreement account 2.485%
due 02/01/05 (dated
01/31/05; proceeds
$4,910,339) (a)
(Cost $4,910,000)....... 4,910,000
------------
</Table>
<Table>
Total Investments
(Cost $150,645,198) (b)..... 98.7% 177,689,400
Other Assets in Excess of
Liabilities................. 1.3 2,295,606
----- ------------
Net Assets.................. 100.0% $179,985,006
===== ============
</Table>
- ---------------------------------------------------
<Table>
ADR American Depository Receipt.
* Non-income producing security.
(a) Collateralized by federal agency and U.S. Treasury
obligations.
(b) The aggregate cost for federal income tax purposes
approximates the aggregate cost for book purposes.
The aggregate gross unrealized appreciation is
$27,559,354 and the aggregate gross unrealized
depreciation is $515,152, resulting in net
unrealized depreciation of $27,044,202.
</Table>
9
See Notes to Financial Statements
Morgan Stanley Total Return Trust
SUMMARY OF INVESTMENTS JANUARY 31, 2005 (UNAUDITED)
<Table>
<Caption>
PERCENT OF
INDUSTRY VALUE NET ASSETS
- ---------------------------------------------------------------------------------------
Industrial Conglomerates.................................... 14,800,300 8.2%
Household/Personal Care..................................... 14,174,550 7.9
Major Banks................................................. 11,676,850 6.5
Biotechnology............................................... 8,268,000 4.6
Financial Conglomerates..................................... 8,196,850 4.6
Computer Processing Hardware................................ 7,779,100 4.3
Packaged Software........................................... 7,701,750 4.3
Investment Banks/Brokers.................................... 7,378,950 4.1
Pharmaceuticals: Major...................................... 5,499,500 3.1
Chemicals: Major Diversified................................ 5,467,000 3.1
Financial Publishing/Services............................... 5,430,000 3.0
Medical Specialties......................................... 5,424,000 3.0
Integrated Oil.............................................. 5,418,000 3.0
Railroads................................................... 5,238,000 2.9
Repurchase Agreement........................................ 4,910,000 2.7
Hotels/Resorts/Cruiselines.................................. 4,422,600 2.5
Major Telecommunications.................................... 4,403,200 2.4
Home Improvement Chains..................................... 4,320,000 2.4
Chemicals: Specialty........................................ 4,315,000 2.4
Media Conglomerates......................................... 4,294,500 2.4
Building Products........................................... 4,048,000 2.2
Miscellaneous Commercial Services........................... 3,834,000 2.1
Semiconductors.............................................. 3,679,500 2.0
Agricultural Commodities/Milling............................ 3,630,000 2.0
Property -- Casualty Insurers............................... 3,530,800 2.0
Oil & Gas Production........................................ 3,502,800 1.9
Oilfield Services/Equipment................................. 3,158,600 1.8
Aerospace & Defense......................................... 3,112,800 1.7
Regional Banks.............................................. 3,043,950 1.7
Real Estate Investment Trusts............................... 2,740,800 1.5
Contract Drilling........................................... 2,252,800 1.3
Computer Peripherals........................................ 2,037,200 1.1
------------ ----
$177,689,400 98.7%
============ ====
</Table>
10
See Notes to Financial Statements
Morgan Stanley Total Return Trust
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
January 31, 2005 (unaudited)
<Table>
Assets:
Investments in securities, at value
(cost $150,645,198)....................................... $177,689,400
Receivable for:
Investments sold........................................ 3,265,088
Dividends............................................... 87,575
Shares of beneficial interest sold...................... 21,375
Prepaid expenses and other assets........................... 41,352
-------------
Total Assets............................................ 181,104,790
-------------
Liabilities:
Payable for:
Investments purchased................................... 621,637
Shares of beneficial interest redeemed.................. 203,604
Distribution fee........................................ 133,716
Investment advisory fee................................. 103,327
Administration fee...................................... 12,338
Accrued expenses and other payables......................... 45,162
-------------
Total Liabilities....................................... 1,119,784
-------------
Net Assets.............................................. $179,985,006
=============
Composition of Net Assets:
Paid-in-capital............................................. $439,098,012
Net unrealized appreciation................................. 27,044,202
Accumulated undistributed net investment income............. 143,195
Accumulated net realized loss............................... (286,300,403)
-------------
Net Assets.............................................. $179,985,006
=============
Class A Shares:
Net Assets.................................................. $11,002,296
Shares Outstanding (unlimited authorized, $.01 par value)... 700,993
Net Asset Value Per Share............................... $15.70
=============
Maximum Offering Price Per Share,
(net asset value plus 5.54% of net asset value)....... $16.57
=============
Class B Shares:
Net Assets.................................................. $144,973,728
Shares Outstanding (unlimited authorized, $.01 par value)... 9,755,844
Net Asset Value Per Share............................... $14.86
=============
Class C Shares:
Net Assets.................................................. $8,166,620
Shares Outstanding (unlimited authorized, $.01 par value)... 550,371
Net Asset Value Per Share............................... $14.84
=============
Class D Shares:
Net Assets.................................................. $15,842,362
Shares Outstanding (unlimited authorized, $.01 par value)... 991,480
Net Asset Value Per Share............................... $15.98
=============
</Table>
11
See Notes to Financial Statements
Morgan Stanley Total Return Trust
FINANCIAL STATEMENTS continued
Statement of Operations
For the six months ended January 31, 2005 (unaudited)
<Table>
Net Investment Income:
Income
Dividends................................................... $ 1,926,700
Interest.................................................... 85,013
-----------
Total Income............................................ 2,011,713
-----------
Expenses
Distribution fee (Class A shares)........................... 13,759
Distribution fee (Class B shares)........................... 780,093
Distribution fee (Class C shares)........................... 42,620
Investment advisory fee..................................... 681,448
Transfer agent fees and expenses............................ 203,911
Administration fee.......................................... 37,932
Professional fees........................................... 33,952
Shareholder reports and notices............................. 32,584
Registration fees........................................... 24,614
Custodian fees.............................................. 7,961
Trustees' fees and expenses................................. 1,269
Other....................................................... 8,631
-----------
Total Expenses.......................................... 1,868,774
-----------
Net Investment Income................................... 142,939
-----------
Net Realized and Unrealized Gain:
Net realized gain........................................... 8,812,700
Net change in unrealized appreciation....................... 5,587,909
-----------
Net Gain................................................ 14,400,609
-----------
Net Increase................................................ $14,543,548
===========
</Table>
12
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, 2005 JULY 31, 2004
---------------- -------------
(unaudited)
Increase (Decrease) in Net Assets:
Operations:
Net investment income (loss)................................ $ 142,939 $ (1,679,052)
Net realized gain........................................... 8,812,700 29,446,323
Net change in unrealized appreciation....................... 5,587,909 (6,062,485)
------------ ------------
Net Increase............................................ 14,543,548 21,704,786
Net decrease from transactions in shares of beneficial
interest.................................................. (34,589,122) (72,548,099)
------------ ------------
Net Decrease............................................ (20,045,574) (50,843,313)
Net Assets:
Beginning of period......................................... 200,030,580 250,873,893
------------ ------------
End of Period
(Including accumulated undistributed net investment income
of $143,195 and $256, respectively)......................... $179,985,006 $200,030,580
============ ============
</Table>
13
See Notes to Financial Statements
Morgan Stanley Total Return Trust
NOTES TO FINANCIAL STATEMENTS - JANUARY 31, 2005 (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 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
Adviser") determines that the latest sale price, the bid price or the mean
between the last reported bid and asked price do not reflect a security's market
value, portfolio securities are valued at their fair value as determined in good
faith under procedures established by and under the general supervision of the
Fund's Trustees. Occasionally, developments affecting the closing prices of
securities and other assets may occur between the times at which valuations of
such securities are determined (that is, close of the foreign market on which
the securities trade) and the close of business on the NYSE. If developments
occur during such periods that are expected to materially affect the value of
such securities, such valuations may be adjusted to reflect the estimated fair
value of such securities as of the close of the NYSE, as determined in good
faith by the Fund's Trustees or by the Investment
14
Morgan Stanley Total Return Trust
NOTES TO FINANCIAL STATEMENTS - JANUARY 31, 2005 (UNAUDITED) continued
Adviser using a pricing service and/or procedures approved by the Trustees of
the Fund; (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 Adviser, 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.
15
Morgan Stanley Total Return Trust
NOTES TO FINANCIAL STATEMENTS - JANUARY 31, 2005 (UNAUDITED) continued
2. Investment Advisory/Administration Agreements
Effective November 1, 2004, pursuant to an Investment Advisory Agreement, the
Fund pays the Investment Adviser an advisory fee, accrued daily and payable
monthly, by applying the following annual rates to the net assets of the Fund
determined as of the close of each business day: 0.67% to the portion of daily
net assets not exceeding $500 million; 0.645% to the portion of daily net assets
exceeding $500 million but not exceeding $1 billion; and 0.62% to the portion of
daily net assets in excess of $1 billion.
Effective November 1, 2004, pursuant to an Administration Agreement with Morgan
Stanley Services Company Inc. (the "Administrator"), an affiliate of the
Investment Adviser, the Fund pays an administration fee, accrued daily and
payable monthly, by applying the annual rate of 0.08% to the Fund's daily net
assets.
Prior to November 1, 2004, the Fund retained the Investment Adviser to provide
administrative services and to manage the investment of the Fund's assets
pursuant to an investment management agreement pursuant to which the Fund paid
the Investment Adviser a monthly management fee accrued daily and payable
monthly, by applying the following annual rates to the net assets of 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 Adviser. 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 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
16
Morgan Stanley Total Return Trust
NOTES TO FINANCIAL STATEMENTS - JANUARY 31, 2005 (UNAUDITED) continued
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 $9,607,882
at January 31, 2005.
In the case of Class A shares and Class C shares, expenses incurred pursuant to
the Plan in any calendar year in excess of 0.25% or 1.0% of the average daily
net assets of Class A or Class C, respectively, will not be reimbursed by the
Fund through payments in any subsequent year, except that expenses representing
a gross sales credit to Morgan Stanley Financial Advisors or other selected
broker-dealer representatives may be reimbursed in the subsequent calendar year.
For the six months ended January 31, 2005, 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,
2005, it received contingent deferred sales charges from certain redemptions of
the Fund's Class B shares and Class C shares of $150,291 and $61, respectively,
and received $569 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, 2005 aggregated
$95,432,571 and $116,502,780, respectively. Included in the aforementioned are
purchases and sales of 79,531 and $2,475,800, respectively, with other Morgan
Stanley funds, including a net realized gain of $361,720.
For the six months ended January 31, 2005, the Fund incurred brokerage
commissions of $36,218 with Morgan Stanley & Co., Inc., an affiliate of the
Investment Adviser, Administrator and Distributor, for portfolio transactions
executed on behalf of the Fund. At January 31, 2005, the Fund's payable for
investments purchased included unsettled trades with Morgan Stanley & Co., Inc.
of $621,638.
Morgan Stanley Trust, an affiliate of the Investment Adviser, Administrator and
Distributor, is the Fund's transfer agent. At January 31, 2005, the Fund had
transfer agent fees and expenses payable of approximately $3,500.
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,
17
Morgan Stanley Total Return Trust
NOTES TO FINANCIAL STATEMENTS - JANUARY 31, 2005 (UNAUDITED) continued
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.
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, 2004, the Fund had a net capital loss carryforward of
$295,075,938 of which $196,205,212 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.
As of July 31, 2004, the Fund had temporary book/tax differences primarily
attributable to capital loss deferrals on wash sales and tax adjustments on real
estate investment trusts held by the Fund.
6. Legal Matters
The Investment Adviser, certain affiliates of the Investment Adviser, certain
officers of such affiliates and certain investment companies advised by the
Investment Adviser or its affiliates, including the Fund, are named as
defendants in a consolidated class action. 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 Adviser
and certain affiliates of the Investment Adviser allegedly offered economic
incentives to brokers and others to recommend the funds advised by the
Investment Adviser or its affiliates to investors rather than funds managed by
other companies, and (ii) that the funds advised by the Investment Adviser 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. On
18
Morgan Stanley Total Return Trust
NOTES TO FINANCIAL STATEMENTS - JANUARY 31, 2005 (UNAUDITED) continued
March 10, 2005, Plaintiffs sought leave to supplement their complaint to assert
claims on behalf of other investors. While the Fund and Adviser believe that
each 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.
7. 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, 2005 JULY 31, 2004
------------------------- -------------------------
(unaudited)
SHARES AMOUNT SHARES AMOUNT
---------- ------------ ---------- ------------
CLASS A SHARES
Sold................................................. 23,433 $ 346,992 96,086 $ 1,387,377
Redeemed............................................. (68,675) (1,028,122) (261,837) (3,749,296)
---------- ------------ ---------- ------------
Net decrease -- Class A.............................. (45,242) (681,130) (165,751) (2,361,919)
---------- ------------ ---------- ------------
CLASS B SHARES
Sold................................................. 108,221 1,552,035 440,636 5,991,541
Redeemed............................................. (2,272,114) (32,513,597) (5,022,958) (68,688,441)
---------- ------------ ---------- ------------
Net decrease -- Class B.............................. (2,163,893) (30,961,562) (4,582,322) (62,696,900)
---------- ------------ ---------- ------------
CLASS C SHARES
Sold................................................. 10,321 150,474 26,523 362,291
Redeemed............................................. (99,615) (1,422,900) (259,716) (3,532,162)
---------- ------------ ---------- ------------
Net decrease -- Class C.............................. (89,294) (1,272,426) (233,193) (3,169,871)
---------- ------------ ---------- ------------
CLASS D SHARES
Sold................................................. 61,036 921,496 182,669 2,648,378
Redeemed............................................. (168,562) (2,595,500) (475,467) (6,967,787)
---------- ------------ ---------- ------------
Net decrease -- Class D.............................. (107,526) (1,674,004) (292,798) (4,319,409)
---------- ------------ ---------- ------------
Net decrease in Fund................................. (2,405,955) $(34,589,122) (5,274,064) $(72,548,099)
========== ============ ========== ============
</Table>
19
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, 2005 2004 2003 2002 2001 2000
---------------- ------- ------- ------- ------- -------
(unaudited)
Class A Shares
Selected Per Share Data:
Net asset value, beginning of period.......... $14.50 $13.23 $13.18 $17.26 $23.88 $20.36
------ ------ ------ ------ ------ ------
Income (loss) from investment operations:
Net investment income (loss)++............ 0.06 (0.01) 0.07 (0.02) (0.07) (0.01)
Net realized and unrealized gain (loss)... 1.14 1.28 (0.02) (4.06) (6.16) 4.72
------ ------ ------ ------ ------ ------
Total income (loss) from investment
operations................................... 1.20 1.27 0.05 (4.08) (6.23) 4.71
------ ------ ------ ------ ------ ------
Less distributions from net realized gain..... -- -- -- -- (0.39) (1.19)
------ ------ ------ ------ ------ ------
Net asset value, end of period................ $15.70 $14.50 $13.23 $13.18 $17.26 $23.88
====== ====== ====== ====== ====== ======
Total Return+................................. 8.28%(1) 9.60% 0.38% (23.64)% (26.31)% 23.77%
Ratios to Average Net Assets(3):
Expenses...................................... 1.33%(2) 1.30% 1.26% 1.22% 1.12% 1.18%
Net investment income (loss).................. 0.77%(2) (0.09)% 0.58% (0.14)% (0.34)% (0.06)%
Supplemental Data:
Net assets, end of period, in thousands....... $11,002 $10,817 $12,068 $14,003 $22,074 $16,211
Portfolio turnover rate....................... 53%(1) 88% 131% 54% 107% 71%
</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>
20
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, 2005 2004 2003 2002 2001 2000
---------------- --------- --------- --------- --------- ---------
(unaudited)
Class B Shares
Selected Per Share Data:
Net asset value, beginning of period.... $13.78 $12.67 $12.72 $16.78 $23.41 $20.10
------ -------- -------- -------- -------- --------
Income (loss) from investment
operations:
Net investment loss++............... 0.00 (0.11) (0.02) (0.14) (0.22) (0.14)
Net realized and unrealized gain
(loss).............................. 1.08 1.22 (0.03) (3.92) (6.02) 4.64
------ -------- -------- -------- -------- --------
Total income (loss) from investment
operations............................. 1.08 1.11 (0.05) (4.06) (6.24) 4.50
------ -------- -------- -------- -------- --------
Less distributions from net realized
gain................................... -- -- -- -- (0.39) (1.19)
------ -------- -------- -------- -------- --------
Net asset value, end of period.......... $14.86 $13.78 $12.67 $12.72 $16.78 $23.41
====== ======== ======== ======== ======== ========
Total Return+........................... 7.84%(1) 8.76% (0.39)% (24.20)% (26.89)% 23.01%
Ratios to Average Net Assets(3):
Expenses................................ 2.08%(2) 2.05% 2.04% 1.98% 1.91% 1.75%
Net investment income (loss)............ 0.02%(2) (0.84)% (0.20)% (0.90)% (1.13)% (0.63)%
Supplemental Data:
Net assets, end of period, in
thousands.............................. $144,974 $164,215 $209,086 $302,387 $569,589 $551,685
Portfolio turnover rate................. 53%(1) 88% 131% 54% 107% 71%
</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>
21
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, 2005 2004 2003 2002 2001 2000
---------------- -------- -------- -------- -------- --------
(unaudited)
Class C Shares
Selected Per Share Data:
Net asset value, beginning of
period............................. $13.76 $12.65 $12.70 $16.77 $23.40 $20.12
------ ------ ------ ------ ------ ------
Income (loss) from investment
operations:
Net investment loss++........... 0.00 (0.11) (0.02) (0.14) (0.22) (0.20)
Net realized and unrealized gain
(loss).......................... 1.08 1.22 (0.03) (3.93) (6.02) 4.67
------ ------ ------ ------ ------ ------
Total income (loss) from investment
operations......................... 1.08 1.11 (0.05) (4.07) (6.24) 4.47
------ ------ ------ ------ ------ ------
Less distributions from net realized
gain............................... -- -- -- -- (0.39) (1.19)
------ ------ ------ ------ ------ ------
Net asset value, end of period...... $14.84 $13.76 $12.65 $12.70 $16.77 $23.40
====== ====== ====== ====== ====== ======
Total Return+....................... 7.85%(1) 8.77% (0.86)% (23.91)% (26.87)% 22.78%
Ratios to Average Net Assets(3):
Expenses............................ 2.08%(2) 2.04% 2.03% 1.98% 1.91% 1.93%
Net investment income (loss)........ 0.02%(2) (0.83)% (0.19)% (0.90)% (1.13)% (0.81)%
Supplemental Data:
Net assets, end of period, in
thousands.......................... $8,167 $8,800 $11,042 $15,091 $25,906 $21,997
Portfolio turnover rate............. 53%(1) 88% 131% 54% 107% 71%
</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>
22
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, 2005 2004 2003 2002 2001 2000
---------------- -------- -------- -------- -------- --------
(unaudited)
Class D Shares
Selected Per Share Data:
Net asset value, beginning of
period............................. $14.74 $13.42 $13.34 $17.43 $24.05 $20.46
------ ------ ------ ------ ------ ------
Income (loss) from investment
operations:
Net investment income
(loss)++........................ 0.08 0.02 0.10 0.02 (0.03) 0.03
Net realized and unrealized gain
(loss).......................... 1.16 1.30 (0.02) (4.11) (6.20) 4.75
------ ------ ------ ------ ------ ------
Total income (loss) from investment
operations......................... 1.24 1.32 0.08 (4.09) (6.23) 4.78
------ ------ ------ ------ ------ ------
Less distributions from net realized
gain............................... -- -- -- -- (0.39) (1.19)
------ ------ ------ ------ ------ ------
Net asset value, end of period...... $15.98 $14.74 $13.42 $13.34 $17.43 $24.05
====== ====== ====== ====== ====== ======
Total Return+....................... 8.41%(1) 9.84% 0.60% (23.47)% (26.12)% 24.00%
Ratios to Average Net Assets(3):
Expenses............................ 1.08%(2) 1.05% 1.04% 0.98% 0.91% 0.93%
Net investment income (loss)........ 1.02%(2) 0.16% 0.80% 0.10% (0.13)% 0.19%
Supplemental Data:
Net assets, end of period, in
thousands.......................... $15,842 $16,198 $18,679 $24,018 $36,105 $24,407
Portfolio turnover rate............. 53%(1) 88% 131% 54% 107% 71%
</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>
23
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
Fergus Reid
OFFICERS
Charles A. Fiumefreddo
Chairman of the Board
Mitchell M. Merin
President
Ronald E. Robison
Executive Vice President and Principal Executive Officer
Joseph J. McAlinden
Vice President
Barry Fink
Vice President
Amy R. Doberman
Vice President
Carsten Otto
Chief Compliance Officer
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 ADVISER
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) 2005 Morgan Stanley
[MORGAN STANLEY LOGO]
MORGAN STANLEY FUNDS
Morgan Stanley
Total Return Trust
Semiannual Report
January 31, 2005
[MORGAN STANLEY LOGO]
38588RPT-RA05-0019IP-Y01/05
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.
Refer to Item 1.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies.
Not applicable for semiannual reports.
Item 8. Portfolio Managers of Closed-End Management Investment Companies
Applicable only to reports filed by closed-end funds.
Item 9. Closed-End Fund Repurchases
Applicable to reports filed by closed-end funds.
Item 10. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 11. Controls and Procedures
(a) The Fund's principal executive officer and principal financial officer have
concluded that the Fund's disclosure controls and procedures are sufficient to
ensure that information required to be disclosed by the Fund in this Form N-CSR
was recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission's
rules and forms, based upon such officers' evaluation of these controls and
procedures as of a date within 90 days of the filing date of the report.
(b) There were no changes in the registrant's internal control over financial
reporting that occurred during the 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 12. 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.
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 22, 2005
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 22, 2005
/s/ Francis Smith
Francis Smith
Principal Financial Officer
March 22, 2005