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: 811-07117
Morgan Stanley Limited Duration 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: April 30, 2006
Date of reporting period: October 31, 2005
Item 1 - Report to Shareholders
Welcome, Shareholder:
In this report, you'll learn about how your investment in Morgan Stanley Limited
Duration 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. PLEASE SEE THE PROSPECTUS FOR MORE COMPLETE
INFORMATION ON INVESTMENT RISKS.
FUND REPORT
For the six months ended October 31, 2005
TOTAL RETURN FOR THE 6 MONTHS ENDED OCTOBER 31, 2005
<Table>
<Caption>
LIPPER
MORGAN STANLEY LEHMAN BROTHERS SHORT INVESTMENT
LIMITED DURATION U.S. CREDIT INDEX GRADE BOND
FUND (1-5 YEAR)(1) FUNDS INDEX(2)
0.66%........... 0.65% 0.79%
</Table>
The Fund's total return assumes the reinvestment of all distributions. Such
costs would lower performance. See Performance Summary for standardized
performance and benchmark information.
MARKET CONDITIONS
As many investors expected, the Federal Open Market Committee (the Fed)
increased the federal funds target rate at each of its four meetings during the
semiannual period. These actions moved the target rate from 2.75 percent at the
beginning of the period to 3.75 percent at the close. Nonetheless, comments from
the Fed indicated that the central bank believed that the prevailing rate was
still well below equilibrium and that monetary policy would need to provide
ongoing support for economic activity.
In contrast to the steady increase in very short-term rates controlled by the
Fed, yields on intermediate and longer-term bonds were more volatile. After
starting the period in a downward trend, rates across the yield curve reversed
course and rose above their first quarter levels. (The yield curve charts the
difference between short- and long-term yields.) However, these upward movements
did not occur in a linear manner, and therefore masked considerable volatility.
In late August and early September, the magnitude of Hurricane Katrina's
devastation heightened concerns about soaring oil prices and the pace of
longer-term economic growth. Against this backdrop, yields dipped across the
curve. Yields soon resumed their upward course, however, after indications that
the hurricane would not have as much impact on long-term growth and energy
prices as many had originally speculated. The Fed affirmed this view in
September, raising rates and reiterating its belief that monetary policy
remained accommodative. For the overall period, although the yield of the
30-year Treasury rose markedly from its June low, the yield curve flattened.
Relative to other areas of the government bond market, Treasuries underperformed
as investors sought higher yields. Among mortgage-backed issues, higher-coupon,
slower-pre-paying issues outperformed their lower-coupon counterparts, due
mostly to their relatively higher yields and to slowing mortgage pre-payments.
While the struggles of the auto industry gave the corporate bond market pause in
the early portion of the reporting period, generally good corporate earnings
announcements and positive economic news helped the market regain its bearings.
Medium-quality corporate issues posted the highest returns. On an industry
level, utilities garnered the highest gains during the annual period, while the
industrial sector posted the lowest returns.
PERFORMANCE ANALYSIS
Morgan Stanley Limited Duration Fund outperformed the Lehman Brothers 1-5 Year
U.S. Credit Index and underperformed the Lipper Short Investment Grade
2
Bond Funds Index for the six months ended October 31, 2005.
Within its corporate bond allocation, the Fund gained from its emphasis on
insurance companies, which outperformed for the period. Additionally, a focus on
medium-quality credits and strong security selection in the energy sectors
further enhanced performance.
The Fund's mortgage position also had a positive impact on relative performance.
As interest rates rose throughout most of the period, the Fund was well served
by an emphasis on higher-coupon, slow pre-paying mortgage issues. Compared with
lower-coupon, faster pre-paying mortgages, the mortgages favored by the Fund
tend to be less sensitive to rising interest rates.
During the period, we managed the Fund's overall interest-rate exposure to be
in-line with or below that of its Lehman benchmark. The defensive, below-
benchmark duration* stance proved advantageous when interest rates rose across
the short and intermediate-term portions of the curve. The neutral position
benefited relative performance during periods when rates declined.
* A measure of the sensitivity of a bond's price to changes in interest rates,
expressed in years. Each year of duration represents an expected 1 percent
change in the price of a bond for every 1 percent change in interest rates.
The longer a bond's duration, the greater the effect of interest-rate
movements on its price. Typically, funds with shorter durations perform better
in rising-interest-rate environments, while funds with longer durations
perform better when rates decline.
There is no guarantee that any sectors mentioned will continue to perform well
or that securities in such sectors will be held by the Fund in the future.
3
<Table>
<Caption>
PORTFOLIO COMPOSITION**
Corporate Bonds 48.3%
Asset-Backed Securities 18.9
Mortgage-Backed Securities 15.9
Short-Term Investments 5.7
U.S. Government Agencies -- Bonds 4.4
U.S. Government Agencies -- CMOs 2.9
Private Issues -- CMOs 2.0
U.S. Treasury Notes 1.0
Foreign Government Obligations 0.9
</Table>
<Table>
<Caption>
LONG-TERM CREDIT ANALYSIS
Aaa/AAA 51.3%
Aa/AA 14.4
A/A 19.6
Baa/BBB 14.6
Ba/BB 0.1
</Table>
** Does not include outstanding open long futures contracts with an underlying
face amount of $53,968,421 and unrealized depreciation of $383,635 and open
short futures contracts with an underlying face amount of $9,988,766 and
unrealized appreciation of $191,469.
Data as of October 31, 2005. Subject to change daily. All percentages for
portfolio composition are as a percentage of total investments. All percentages
for long-term credit analysis are as a percentage of total long-term
investments. These data are provided for informational purposes only and should
not be deemed a recommendation to buy or sell the securities mentioned. Morgan
Stanley is a full-service securities firm engaged in securities trading and
brokerage activities, investment banking, research and analysis, financing and
financial advisory services.
INVESTMENT STRATEGY
THE FUND WILL NORMALLY INVEST AT LEAST 65 PERCENT OF ITS ASSETS IN SECURITIES
ISSUED OR GUARANTEED AS TO PRINCIPAL AND INTEREST BY THE U.S. GOVERNMENT, ITS
AGENCIES OR INSTRUMENTALITIES (INCLUDING ZERO COUPON SECURITIES), INVESTMENT
GRADE MORTGAGE-BACKED SECURITIES, INCLUDING COLLATERALIZED MORTGAGE OBLIGATIONS,
AND INVESTMENT GRADE CORPORATE AND OTHER TYPES OF BONDS. IN SELECTING PORTFOLIO
INVESTMENTS TO PURCHASE OR SELL, THE "INVESTMENT ADVISER," MORGAN STANLEY
INVESTMENT ADVISORS INC., CONSIDERS BOTH DOMESTIC AND INTERNATIONAL ECONOMIC
DEVELOPMENTS, INTEREST RATE LEVELS, THE STEEPNESS OF THE YIELD CURVE AND OTHER
FACTORS, AND SEEKS TO MAINTAIN AN OVERALL AVERAGE DURATION FOR THE FUND'S
PORTFOLIO OF THREE YEARS OR LESS.
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,
4
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.
PROXY VOTING POLICY AND PROCEDURES AND PROXY VOTING RECORD
YOU MAY OBTAIN A COPY OF THE FUND'S PROXY VOTING POLICY AND PROCEDURES WITHOUT
CHARGE, UPON REQUEST, BY CALLING TOLL FREE (800) 869-NEWS OR BY VISITING THE
MUTUAL FUND CENTER ON OUR WEB SITE AT WWW.MORGANSTANLEY.COM. IT IS ALSO
AVAILABLE ON THE SECURITIES AND EXCHANGE COMMISSION'S WEB SITE AT
HTTP://WWW.SEC.GOV.
YOU MAY OBTAIN INFORMATION REGARDING HOW THE FUND VOTED PROXIES RELATING TO
PORTFOLIO SECURITIES DURING THE MOST RECENT TWELVE-MONTH PERIOD ENDED JUNE 30
WITHOUT CHARGE BY VISITING THE MUTUAL FUND CENTER ON OUR WEB SITE AT
WWW.MORGANSTANLEY.COM. THIS INFORMATION IS ALSO AVAILABLE ON THE SECURITIES AND
EXCHANGE COMMISSION'S WEB SITE AT HTTP://WWW.SEC.GOV.
HOUSEHOLDING NOTICE
TO REDUCE PRINTING AND MAILING COSTS, THE FUND ATTEMPTS TO ELIMINATE DUPLICATE
MAILINGS TO THE SAME ADDRESS. THE FUND DELIVERS A SINGLE COPY OF CERTAIN
SHAREHOLDER DOCUMENTS, INCLUDING SHAREHOLDER REPORTS, PROSPECTUSES AND PROXY
MATERIALS, TO INVESTORS WITH THE SAME LAST NAME WHO RESIDE AT THE SAME ADDRESS.
YOUR PARTICIPATION IN THIS PROGRAM WILL CONTINUE FOR AN UNLIMITED PERIOD OF TIME
UNLESS YOU INSTRUCT US OTHERWISE. YOU CAN REQUEST MULTIPLE COPIES OF THESE
DOCUMENTS BY CALLING (800) 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.
5
PERFORMANCE SUMMARY
AVERAGE ANNUAL TOTAL RETURNS -- PERIOD ENDED OCTOBER 31, 2005
<Table>
<Caption>
(since 01/10/94)
SYMBOL MSLDX
1 YEAR 1.02%(3)
5 YEARS 3.49(3)
10 YEARS 4.50(3)
SINCE INCEPTION 4.48(3)
</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 most recent month-end performance figures, please visit
www.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.
(1) The Lehman Brothers U.S. Credit Index (1-5 Year) includes U.S. corporate
and specified foreign debentures and secured notes with maturities of one
to five years. Indexes are unmanaged and their returns do not include any
sales charges or fees. Such costs would lower performance. It is not
possible to invest directly in an index.
(2) The Lipper Short Investment Grade Bond Funds Index is an equally weighted
performance index of the largest qualifying funds (based on net assets) in
the Lipper Short Investment Grade Bond 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. There is no sales
charges.
6
EXPENSE EXAMPLE
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs including redemption fees; and (2) ongoing costs, including advisory 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 05/01/05 - 10/31/05.
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. 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), or exchange fees.
<Table>
<Caption>
BEGINNING ENDING EXPENSES PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD *
------------- ------------- ---------------
05/01/05 -
05/01/05 10/31/05 10/31/05
------------- ------------- ---------------
Actual (0.66% return)....................................... $1,000.00 $1,006.60 $4.05
Hypothetical (5% annual return before expenses)............. $1,000.00 $1,021.17 $4.08
</Table>
- ------------------
* Expenses are equal to the Fund's annualized expense ratio of 0.80%
multiplied by the average account value over the period, multiplied by
184/365 (to reflect the one-half year period).
7
Morgan Stanley Limited Duration Fund
PORTFOLIO OF INVESTMENTS - OCTOBER 31, 2005 (UNAUDITED)
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------------------------------
Corporate Bonds (49.6%)
Aerospace & Defense (0.6%)
$ 615 McDonnell Douglas Corp. ......................... 6.875% 11/01/06 $ 626,207
465 Northrop Grumman Corp. .......................... 4.079 11/16/06 461,395
65 Raytheon Co. .................................... 6.15 11/01/08 67,118
105 Raytheon Co. .................................... 6.75 08/15/07 108,088
385 Raytheon Co. .................................... 8.30 03/01/10 432,448
------------
1,695,256
------------
Air Freight/Couriers (0.2%)
540 Fedex Corp. ..................................... 2.65 04/01/07 523,729
------------
Airlines (0.2%)
615 Southwest Airlines Co. (Series 01-1)............. 5.496 11/01/06 619,573
------------
Auto Parts: O.E.M. (0.3%)
745 Johnson Controls, Inc. .......................... 5.00 11/15/06 744,826
------------
Beverages: Alcoholic (0.2%)
740 Miller Brewing Co. - 144A*....................... 4.25 08/15/08 725,693
------------
Building Products (0.4%)
275 Masco Corp. ..................................... 4.625 08/15/07 273,048
795 Masco Corp. ..................................... 6.75 03/15/06 801,058
------------
1,074,106
------------
Cable/Satellite TV (0.8%)
1,120 Comcast Cable Communications, Inc. .............. 6.875 06/15/09 1,179,461
290 Comcast Corp. ................................... 5.85 01/15/10 295,342
602 Cox Communications Inc. ......................... 4.406+ 12/14/07 606,880
350 Cox Communications Inc. ......................... 7.75 08/15/06 357,458
------------
2,439,141
------------
Chemicals: Major Diversified (0.1%)
390 ICI Wilmington Inc. ............................. 4.375 12/01/08 381,479
------------
Containers/Packaging (0.1%)
205 Sealed Air Corp. - 144A*......................... 6.95 05/15/09 215,126
------------
</Table>
See Notes to Financial Statements
8
Morgan Stanley Limited Duration Fund
PORTFOLIO OF INVESTMENTS - OCTOBER 31, 2005 (UNAUDITED) continued
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------------------------------
Department Stores (1.0%)
$ 160 Federated Department Stores, Inc. ............... 6.30% 04/01/09 $ 165,528
1,110 Federated Department Stores, Inc. ............... 6.625 09/01/08 1,153,814
1,155 May Department Stores Co., Inc. ................. 3.95 07/15/07 1,135,608
430 May Department Stores Co., Inc. ................. 6.875 11/01/05 430,000
------------
2,884,950
------------
Drugstore Chains (0.5%)
150 CVS Corp. ....................................... 3.875 11/01/07 147,265
1,455 CVS Corp. ....................................... 5.625 03/15/06 1,459,691
------------
1,606,956
------------
Electric Utilities (7.2%)
585 Ameren Corp. .................................... 4.263 05/15/07 577,298
545 Appalachian Power Co. (Series G)................. 3.60 05/15/08 527,248
1,655 Carolina Power & Light Company Inc. ............. 6.80 08/15/07 1,707,596
595 CC Funding Trust I............................... 6.90 02/16/07 608,534
1,000 Columbus Southern Power Co. ..................... 4.40 12/01/10 967,171
2,985 Consolidated Natural Gas Co. (Series B).......... 5.375 11/01/06 3,001,149
495 Consumers Energy Co. ............................ 4.80 02/17/09 489,901
1,485 DTE Energy Co. .................................. 6.45 06/01/06 1,499,054
475 Duke Energy Corp. ............................... 3.75 03/05/08 463,002
485 Entergy Gulf States, Inc. ....................... 3.60 06/01/08 465,542
415 Entergy Gulf States, Inc. ....................... 4.27+ 12/01/09 407,822
620 Exelon Corp. .................................... 6.75 05/01/11 656,201
1,820 FPL Group Capital Inc. .......................... 3.25 04/11/06 1,809,662
1,530 Pacific Gas & Electric Co. ...................... 3.60 03/01/09 1,464,005
235 Panhandle Eastern Pipe Line Co. (Series B)....... 2.75 03/15/07 228,358
835 Peco Energy Co. ................................. 3.50 05/01/08 806,268
1,920 Pinnacle West Capital Corp. ..................... 6.40 04/01/06 1,934,026
2,725 Public Service Electric & Gas Co. ............... 4.085+ 06/23/06 2,724,910
630 Southwestern Public Service Co. (Series A)....... 6.20 03/01/09 651,846
485 Wisconsin Electric Power Co. .................... 3.50 12/01/07 472,463
------------
21,462,056
------------
Electrical Products (0.2%)
680 Cooper Industries Inc. .......................... 5.25 07/01/07 683,794
------------
Environmental Services (0.2%)
510 WMX Technologies, Inc. .......................... 7.00 10/15/06 519,075
------------
</Table>
See Notes to Financial Statements
9
Morgan Stanley Limited Duration Fund
PORTFOLIO OF INVESTMENTS - OCTOBER 31, 2005 (UNAUDITED) continued
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------------------------------
Finance/Rental/Leasing (4.0%)
$1,185 American Honda Finance Corp. - 144A*............. 3.85% 11/06/08 $ 1,150,355
545 CIT Group, Inc. ................................. 2.875 09/29/06 535,984
1,300 CIT Group, Inc. ................................. 3.95+ 11/04/05 1,299,991
695 CIT Group, Inc. ................................. 4.75 08/15/08 691,784
1,035 CIT Group, Inc. ................................. 7.375 04/02/07 1,070,642
1,000 Countrywide Home Loans, Inc. (Series MTN)........ 3.25 05/21/08 958,407
1,845 Ford Motor Credit Co. ........................... 6.875 02/01/06 1,844,164
495 MBNA Corp. ...................................... 4.163+ 05/05/08 499,540
530 MBNA Corp. ...................................... 6.125 03/01/13 558,248
1,910 Nationwide Buildings Society - 144A* (United
Kingdom)....................................... 2.625 01/30/07 1,861,140
1,535 SLM Corp. ....................................... 4.00 01/15/10 1,479,679
------------
11,949,934
------------
Financial Conglomerates (4.6%)
1,300 Bank One NA Illinois............................. 3.833+ 05/05/06 1,301,253
1,390 Bank One NA Illinois............................. 5.50 03/26/07 1,404,188
410 Chase Manhattan Corp. ........................... 6.00 02/15/09 422,131
145 Chase Manhattan Corp. ........................... 7.00 11/15/09 155,389
2,505 Citigroup Global Markets Inc. ................... 3.943+ 12/12/06 2,508,803
835 Citigroup Inc. .................................. 5.50 08/09/06 840,653
1,190 General Electric Capital Corp. .................. 4.25 12/01/10 1,155,768
2,550 General Electric Capital Corp. .................. 5.375 03/15/07 2,571,022
1,150 ING Security Life Institutional - 144A*.......... 2.70 02/15/07 1,114,125
1,475 Pricoa Global Funding I - 144A*.................. 3.90 12/15/08 1,431,749
860 Prudential Insurance Co. - 144A*................. 6.375 07/23/06 869,701
------------
13,774,782
------------
Food Retail (1.0%)
2,510 Kroger Co. ...................................... 7.625 09/15/06 2,561,463
410 Safeway Inc. .................................... 7.50 09/15/09 437,224
------------
2,998,687
------------
Food: Major Diversified (1.3%)
1,300 Conagra Foods, Inc. ............................. 6.00 09/15/06 1,312,623
795 General Mills Inc. .............................. 3.875 11/30/07 778,932
1,790 Kraft Foods Inc. ................................ 5.25 06/01/07 1,801,529
------------
3,893,084
------------
Forest Products (0.1%)
202 Weyerhaeuser Co. ................................ 6.125 03/15/07 205,204
------------
</Table>
See Notes to Financial Statements
10
Morgan Stanley Limited Duration Fund
PORTFOLIO OF INVESTMENTS - OCTOBER 31, 2005 (UNAUDITED) continued
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------------------------------
Gas Distributors (0.7%)
$ 450 Nisource Finance Corp. .......................... 4.392+% 11/23/09 $ 451,822
88 Ras Laffan Liquid Natural Gas Co. Ltd. - 144A*
(Qatar)........................................ 7.628 09/15/06 89,814
1,440 Sempra Energy.................................... 4.75 05/15/09 1,415,118
------------
1,956,754
------------
Home Furnishings (0.2%)
630 Mohawk Industries, Inc. (Class C)................ 6.50 04/15/07 642,934
------------
Home Improvement Chains (0.2%)
565 Lowe's Companies, Inc. .......................... 7.50 12/15/05 566,815
------------
Hotels/Resorts/Cruiselines (0.4%)
795 Hyatt Equities LLC - 144A*....................... 6.875 06/15/07 807,385
295 Starwood Hotels & Resorts Worldwide, Inc. ....... 7.375 05/01/07 303,481
------------
1,110,866
------------
Household/Personal Care (0.4%)
1,305 Clorox Co. (The)................................. 3.981+ 12/14/07 1,307,359
------------
Industrial Conglomerates (0.8%)
2,035 Honeywell International, Inc. ................... 5.125 11/01/06 2,040,289
380 Textron Financial Corp. ......................... 4.125 03/03/08 373,708
------------
2,413,997
------------
Insurance Brokers/Services (0.6%)
1,785 Marsh & McLennan Companies Inc. ................. 5.375 03/15/07 1,789,852
------------
Integrated Oil (0.6%)
1,728 Conoco Funding Co. (Canada)...................... 5.45 10/15/06 1,739,479
------------
Investment Banks/Brokers (1.4%)
1,485 Goldman Sachs Group Inc. (The)................... 4.125 01/15/08 1,463,083
2,652 Lehman Brothers Holdings, Inc. .................. 8.25 06/15/07 2,785,555
------------
4,248,638
------------
Investment Managers (0.9%)
2,050 TIAA Global Markets - 144A*...................... 3.875 01/22/08 2,008,594
750 TIAA Global Markets - 144A*...................... 5.00 03/01/07 751,761
------------
2,760,355
------------
</Table>
See Notes to Financial Statements
11
Morgan Stanley Limited Duration Fund
PORTFOLIO OF INVESTMENTS - OCTOBER 31, 2005 (UNAUDITED) continued
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------------------------------
Life/Health Insurance (2.9%)
$2,165 Genworth Financial, Inc. ........................ 4.02+% 06/15/07 $ 2,169,053
1,425 John Hancock Financial Services, Inc. ........... 5.625 12/01/08 1,455,737
635 John Hancock Global Funding II - 144A*........... 5.625 06/27/06 638,724
135 John Hancock Global Funding II - 144A*........... 7.90 07/02/10 151,798
1,755 Met Life Global Funding I - 144A*................ 3.375 10/05/07 1,708,485
495 Monumental Global Funding II - 144A*............. 3.85 03/03/08 484,215
2,125 Monumental Global Funding II - 144A*............. 6.05 01/19/06 2,132,100
------------
8,740,112
------------
Major Banks (4.9%)
1,815 ABN Amro Bank (Netherlands)...................... 3.84+ 05/11/07 1,818,200
1,300 Bank of America Corp. ........................... 3.375 02/17/09 1,240,205
515 Bank of America Corp. ........................... 3.875 01/15/08 505,534
465 Bank of America Corp. ........................... 4.75 10/15/06 465,209
80 Bank of America Corp. ........................... 5.25 02/01/07 80,482
400 Bank of New York Co., Inc. (The)................. 5.20 07/01/07 402,807
3,405 Branch Banking & Trust Corp. .................... 3.831+ 06/04/07 3,408,616
750 Huntington National Bank......................... 2.75 10/16/06 735,701
1,260 Key Bank NA...................................... 7.125 08/15/06 1,281,182
2,000 Suntrust Bank Atlanta............................ 7.25 09/15/06 2,032,868
250 Wachovia Corp. .................................. 3.625 02/17/09 240,640
1,240 Wachovia Corp. .................................. 4.95 11/01/06 1,241,498
1,165 Wells Fargo Co. ................................. 3.861+ 03/03/06 1,165,397
------------
14,618,339
------------
Major Telecommunications (1.6%)
855 Deutsche Telekom International Finance Corp.
(Netherlands).................................. 8.50 06/15/10 955,051
1,925 GTE Corp. ....................................... 6.36 04/15/06 1,938,860
535 Telecom Italia Capital SpA (Luxembourg).......... 4.00 11/15/08 518,003
140 Telecom Italia Capital SpA (Luxembourg).......... 4.00 01/15/10 133,208
1,040 Verizon Global Funding Corp. .................... 6.125 06/15/07 1,060,783
------------
4,605,905
------------
Managed Health Care (1.4%)
870 Aetna, Inc. ..................................... 7.375 03/01/06 877,767
680 UnitedHealth Group Inc. ......................... 4.125 08/15/09 661,388
1,590 UnitedHealth Group Inc. ......................... 7.50 11/15/05 1,591,391
965 WellPoint Health Networks Inc. .................. 6.375 06/15/06 974,863
------------
4,105,409
------------
</Table>
See Notes to Financial Statements
12
Morgan Stanley Limited Duration Fund
PORTFOLIO OF INVESTMENTS - OCTOBER 31, 2005 (UNAUDITED) continued
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------------------------------
Media Conglomerates (0.8%)
$1,990 Time Warner, Inc. ............................... 6.125% 04/15/06 $ 2,002,008
480 Time Warner, Inc. ............................... 6.15 05/01/07 488,468
------------
2,490,476
------------
Motor Vehicles (0.6%)
415 DaimlerChrysler North American Holdings Co. ..... 4.05 06/04/08 403,146
1,215 DaimlerChrysler North American Holdings Co. ..... 6.40 05/15/06 1,225,263
------------
1,628,409
------------
Multi-Line Insurance (1.2%)
1,780 American General Finance Corp. (Series MTNF)..... 5.875 07/14/06 1,795,958
250 Equitable Life Assurance Society - 144A*......... 6.95 12/01/05 250,501
480 Hartford Financial Services Group, Inc. (The).... 2.375 06/01/06 473,823
500 International Lease Finance Corp. ............... 3.75 08/01/07 490,591
640 International Lease Finance Corp. ............... 4.625 06/02/08 633,014
------------
3,643,887
------------
Other Consumer Services (0.3%)
795 Cendant Corp. ................................... 6.25 01/15/08 809,135
------------
Property - Casualty Insurers (1.3%)
1,195 Allstate Finance Global Funding II - 144A*....... 2.625 10/22/06 1,167,282
1,145 Mantis Reef Ltd. - 144A* (Australia)............. 4.692 11/14/08 1,121,907
355 Platinum Underwriters Finance Holdings,
Ltd. - 144A*................................... 6.371 11/16/07 356,699
570 St. Paul Travelers Companies, Inc. (The)......... 5.01 08/16/07 568,612
700 XLLIAC Global Funding - 144A*.................... 4.80 08/10/10 688,977
------------
3,903,477
------------
Pulp & Paper (0.6%)
515 International Paper Co. ......................... 3.80 04/01/08 499,291
805 MeadWestvaco Corp. .............................. 2.75 12/01/05 803,414
530 Sappi Papier Holding AG - 144A* (Austria)........ 6.75 06/15/12 526,222
------------
1,828,927
------------
Railroads (0.8%)
380 Norfolk Southern Corp. .......................... 7.35 05/15/07 393,513
400 Union Pacific Corp. ............................. 3.625 06/01/10 375,585
1,575 Union Pacific Corp. (Series MTNE)................ 6.79 11/09/07 1,631,021
------------
2,400,119
------------
</Table>
See Notes to Financial Statements
13
Morgan Stanley Limited Duration Fund
PORTFOLIO OF INVESTMENTS - OCTOBER 31, 2005 (UNAUDITED) continued
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------------------------------
Real Estate Development (0.8%)
$1,812 World Financial Properties - 144A*............... 6.91% 09/01/13 $ 1,905,935
398 World Financial Properties - 144A*............... 6.95 09/01/13 418,949
------------
2,324,884
------------
Real Estate Investment Trusts (0.8%)
1,800 EOP Operating LP................................. 6.763 06/15/07 1,846,168
415 EOP Operating LP................................. 8.375 03/15/06 420,719
------------
2,266,887
------------
Regional Banks (0.6%)
1,190 US Bancorp....................................... 5.10 07/15/07 1,196,278
740 US Bank NA....................................... 2.85 11/15/06 723,571
------------
1,919,849
------------
Savings Banks (1.2%)
420 Household Finance Corp. ......................... 4.125 12/15/08 409,907
225 Household Finance Corp. ......................... 5.875 02/01/09 230,510
1,360 Household Finance Corp. ......................... 6.40 06/17/08 1,408,721
150 Sovereign Bank (Series CD)....................... 4.00 02/01/08 147,467
355 Washington Mutual Inc. .......................... 7.50 08/15/06 361,700
1,000 Washington Mutual Inc. .......................... 8.25 04/01/10 1,115,966
------------
3,674,271
------------
Trucks/Construction/Farm Machinery (0.6%)
700 Caterpillar Financial Services Corp. (Series
MTNF).......................................... 3.625 11/15/07 683,763
890 John Deere Capital Corp. ........................ 3.375 10/01/07 867,682
360 John Deere Capital Corp. ........................ 4.50 08/22/07 358,027
------------
1,909,472
------------
Total Corporate Bonds
(Cost $150,170,779)....................................................... 147,804,058
------------
Asset-Backed Securities (19.4%)
Finance/Rental/Leasing
2,000 Americredit Automoblie Receivables Trust 2004-BM
A3............................................. 2.07 08/06/08 1,978,343
3,800 BMW Vehicle Owner Trust 2005-A A3................ 4.04 02/25/09 3,767,773
1,600 Capital One Multi-Asset Execution Trust 2005-A2
A2............................................. 4.05 02/15/11 1,574,811
432 Chase Manhattan Auto Owner Trust 2002-A A4....... 4.24 09/15/08 432,219
718 Chase Manhattan Auto Owner Trust 2002-B A4....... 4.21 01/15/09 718,185
4,000 Chase Manhattan Auto Owner Trust 2003-C A4....... 2.94 06/15/10 3,899,737
3,600 Chase Manhattan Auto Owner Trust 2004-A A4....... 2.83 09/15/10 3,482,204
1,450 CNH Equipment Trust 2005-A A3.................... 4.02 04/15/09 1,434,427
1,300 Daimler Chrysler Auto Trust 2003-B A4............ 2.86 03/09/09 1,271,857
3,700 Daimler Chrysler Auto Trust 2004-A A4............ 2.58 04/08/09 3,601,907
</Table>
See Notes to Financial Statements
14
Morgan Stanley Limited Duration Fund
PORTFOLIO OF INVESTMENTS - OCTOBER 31, 2005 (UNAUDITED) continued
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------------------------------
$1,600 Daimler Chrysler Auto Trust 2005-B A3............ 4.04% 09/08/09 $ 1,583,880
1,425 Ford Credit Auto Owner Trust 2005-B A3........... 4.17 01/15/09 1,414,772
871 Harley-Davidson Motorcycle Trust 2002-2 A2....... 3.09 06/15/10 860,442
3,300 Harley-Davidson Motorcycle Trust 2003-3 A2....... 2.76 05/15/11 3,247,071
1,200 Harley-Davidson Motorcycle Trust 2005-2 A2....... 4.07 02/15/12 1,181,399
729 Hyundai Auto Receivables Trust 2003-A A3......... 2.33 11/15/07 724,054
3,500 MBNA Credit Card Master Trust 2004-A4 A4......... 2.70 09/15/09 3,402,141
2,000 Merrill Auto Trust Securitization 2005-1 A3...... 4.10 08/25/09 1,977,807
3,500 Nissan Auto Receivables Owner Trust 2003-A A4.... 2.61 07/15/08 3,450,956
2,900 Nissan Auto Receivables Owner Trust 2004-A A4.... 2.76 07/15/09 2,804,560
1,500 Nissan Auto Receivables Owner Trust 2005-B A3.... 3.99 07/15/09 1,483,304
3,700 USAA Auto Owner Trust 2004-1 A4.................. 2.67 10/15/10 3,590,598
2,500 USAA Auto Owner Trust 2004-3 A3.................. 3.16 02/17/09 2,462,186
1,775 USAA Auto Owner Trust 2005-1 A3.................. 3.90 07/15/09 1,755,000
2,150 USAA Auto Owner Trust 2005-3 A3.................. 4.55 02/16/10 2,143,029
1,125 Wachovia Auto Owner Trust 2005-A A3.............. 4.06 09/21/09 1,112,994
2,600 Whole Auto Loan Trust 2003-1 A4.................. 2.58 03/15/10 2,547,489
------------
Total Asset-Backed Securities
(Cost $59,072,431)........................................................ 57,903,145
------------
U.S. Government Agencies - Mortgage-Backed Securities
(16.3%)
162 Federal Home Loan Mortgage Corp. PC Gold......... 6.50 03/01/29 - 09/01/29 167,060
4,903 Federal Home Loan Mortgage Corp. PC Gold......... 7.50 10/01/26 - 08/01/32 5,187,485
1,102 Federal Home Loan Mortgage Corp. ARM............. 3.566 07/01/34 1,074,774
1,780 Federal Home Loan Mortgage Corp. ARM............. 4.171 08/01/34 1,763,165
2,406 Federal Home Loan Mortgage Corp. ARM............. 4.351 10/01/33 2,368,295
2,089 Federal Home Loan Mortgage Corp. ARM............. 4.372 07/01/35 2,062,148
1,987 Federal National Mortgage Assoc. ................ 6.50 02/01/28 - 10/01/32 2,045,179
7,050 Federal National Mortgage Assoc. ................ 7.00 *** 7,371,656
2,646 Federal National Mortgage Assoc. ................ 7.00 02/01/26 - 05/01/33 2,768,248
250 Federal National Mortgage Assoc. ................ 7.50 *** 263,906
1,864 Federal National Mortgage Assoc. ................ 7.50 09/01/29 - 09/01/32 1,968,526
1,177 Federal National Mortgage Assoc. ARM............. 3.63 07/01/34 1,163,379
619 Federal National Mortgage Assoc. ARM............. 3.773 06/01/34 616,502
1,911 Federal National Mortgage Assoc. ARM............. 4.04 07/01/33 1,909,682
1,567 Federal National Mortgage Assoc. ARM............. 4.113 09/01/34 1,558,902
1,871 Federal National Mortgage Assoc. ARM............. 4.238 05/01/35 1,861,369
1,617 Federal National Mortgage Assoc. ARM............. 4.31 04/01/35 1,596,834
1,333 Federal National Mortgage Assoc. ARM............. 4.343 05/01/35 1,322,350
1,447 Federal National Mortgage Assoc. ARM............. 4.503 04/01/35 1,433,944
2,495 Federal National Mortgage Assoc. ARM............. 4.533 05/01/35 2,473,589
1,504 Federal National Mortgage Assoc. ARM............. 4.778 07/01/35 1,488,739
2,093 Federal National Mortgage Assoc. ARM............. 4.80 09/01/35 2,073,433
</Table>
See Notes to Financial Statements
15
Morgan Stanley Limited Duration Fund
PORTFOLIO OF INVESTMENTS - OCTOBER 31, 2005 (UNAUDITED) continued
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------------------------------
$1,971 Government National Mortgage Assoc. II........... 3.50+% 08/20/29 - 09/20/29 $ 1,979,556
381 Government National Mortgage Assoc. II........... 4.125+ 10/20/24 - 12/20/24 384,783
1,675 Government National Mortgage Assoc. II........... 4.375+ 06/20/22 - 05/20/23 1,680,629
------------
Total U.S. Government Agencies - Mortgage-Backed Securities
(Cost $49,012,702)........................................................ 48,584,133
------------
U.S. Government Agencies - Bonds (4.5%)
5,800 Federal Home Loan Bank........................... 3.25 12/17/07 5,637,925
7,805 Federal Home Loan Mortgage Corp. ................ 3.625 02/15/07 7,712,261
------------
Total U.S. Government Agencies - Bonds
(Cost $13,556,466)........................................................ 13,350,186
------------
U.S. Government Agencies - Collateralized Mortgage
Obligations (3.0%)
3,150 Federal Home Loan Mortgage Corp. 2644 AU (PAC)... 3.50 05/15/22 3,083,509
451 Federal Home Loan Mortgage Corp. 2104 TE (PAC)... 5.50 02/15/12 451,534
1,861 Federal Home Loan Mortgage Corp. 2182 ZC......... 7.50 09/15/29 1,965,061
2,262 Federal National Mortgage Assoc. 2005 - 27 NA
(PAC).......................................... 5.50 01/25/24 2,275,257
1,190 Federal National Mortgage Assoc. 2005 - 52 PA
(PAC).......................................... 6.50 06/25/35 1,240,398
------------
Total U.S. Government Agencies - Collateralized Mortgage Obligations
(Cost $9,231,947)......................................................... 9,015,759
------------
Private Issues - Collateralized Mortgage Obligations
(2.0%)
2,025 Washington Mutual Mortgage Pass-Through
Certificates 2005-AR13 A1B3.................... 4.398+ 10/25/45 2,025,000
2,264 Washington Mutual Mortgage Pass-Through
Certificates 2005-AR8 2AB3..................... 4.398+ 07/25/45 2,263,627
1,725 Washington Mutual Mortgage Pass-Through
Certificates 2005 (WI)......................... 4.42 11/25/45 1,725,000
------------
Total Private Issues - Collateralized Mortgage Obligations
(Cost $6,013,627)......................................................... 6,013,627
------------
U.S. Government Obligation (1.0%)
3,030 U.S. Treasury Note (Cost $3,018,686)............. 1.875 01/31/06 3,015,208
------------
Foreign Government Obligations (0.9%)
935 Quebec Province (Canada)......................... 5.50 04/11/06 940,340
945 United Mexican States (Mexico)................... 8.625 03/12/08 1,023,435
730 United Mexican States (Mexico)................... 8.375 01/14/11 832,200
------------
Total Foreign Government Obligations
(Cost $2,778,038)......................................................... 2,795,975
------------
</Table>
See Notes to Financial Statements
16
Morgan Stanley Limited Duration Fund
PORTFOLIO OF INVESTMENTS - OCTOBER 31, 2005 (UNAUDITED) continued
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------------------------------
Short-Term Investments (5.9%)
U.S. Government Obligation (a) (0.1%)
$ 200 U.S. Treasury Bill**(Cost $198,660).............. 3.35% 01/12/06 $ 198,660
------------
Repurchase Agreement (5.8%)
Joint repurchase agreement account (dated
10/31/05; proceeds $17,284,923) (b) (Cost
$17,283,000)................................... 4.005 11/01/05 17,283,000
------------
Total Short-Term Investments
(Cost $17,481,660)........................................................ 17,481,660
------------
</Table>
<Table>
Total Investments
(Cost $310,336,336) (c) (d)................................. 102.6% 305,963,751
Liabilities in Excess of Other Assets....................... (2.6) (7,856,541)
----- ------------
Net Assets.................................................. 100.0% $298,107,210
===== ============
</Table>
- ---------------------
<Table>
PC Participation Certificate.
ARM Adjustable Rate Mortgage. Interest rate in effect as of
October 31, 2005.
PAC Planned Amortization Class.
WI Security purchased on a when-issued basis.
* Resale is restricted to qualified institutional investors.
** A portion of this security has been physically segregated in
connection with open futures contracts in the amount of
$57,000.
*** Security was purchased on a forward commitment basis with an
approximate principal amount and no definite maturity date;
the actual principal amount and maturity date will be
determined upon settlement.
+ Floating rate security; rate shown is the rate in effect at
October 31, 2005.
(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 an amount
equal to $75,547,356 in connection with securities purchased
on a forward commitment basis and 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 $106,589 and the
aggregate gross unrealized depreciation is $4,479,174,
resulting in net unrealized depreciation of $4,372,585.
</Table>
See Notes to Financial Statements
17
Morgan Stanley Limited Duration Fund
PORTFOLIO OF INVESTMENTS - OCTOBER 31, 2005 (UNAUDITED) continued
FUTURES CONTRACTS OPEN AT OCTOBER 31, 2005:
<Table>
<Caption>
UNDERLYING UNREALIZED
NUMBER OF DESCRIPTION, DELIVERY FACE AMOUNT APPRECIATION
CONTRACTS LONG/SHORT MONTH AND YEAR AT VALUE (DEPRECIATION)
- -----------------------------------------------------------------------------------
263 Long U.S. Treasury Notes 2 Year, $53,968,421 $(383,635)
December 2005
38 Short U.S. Treasury Notes 5 Year, (4,023,844) 37,895
December 2005
55 Short U.S. Treasury Notes 10 Year, (5,964,922) 153,574
December 2005
---------
Net Unrealized Depreciation.............. $(192,166)
=========
</Table>
See Notes to Financial Statements
18
Morgan Stanley Limited Duration Fund
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
October 31, 2005 (unaudited)
<Table>
Assets:
Investments in securities, at value
(cost $310,336,336)....................................... $305,963,751
Receivable for:
Interest................................................ 2,517,985
Investments sold........................................ 1,744,448
Shares of beneficial interest sold...................... 268,629
Principal paydowns...................................... 213,490
Prepaid expenses and other assets........................... 16,973
------------
Total Assets............................................ 310,725,276
------------
Liabilities:
Payable for:
Investments purchased................................... 10,910,554
Shares of beneficial interest redeemed.................. 1,356,148
Investment advisory fee................................. 134,025
Dividends to shareholders............................... 111,485
Administration fee...................................... 20,619
Variation margin........................................ 6,421
Transfer agent fee...................................... 2,137
Accrued expenses and other payables......................... 76,677
------------
Total Liabilities....................................... 12,618,066
------------
Net Assets.............................................. $298,107,210
============
Composition of Net Assets:
Paid-in-capital............................................. $329,701,786
Net unrealized depreciation................................. (4,564,751)
Dividends in excess of net investment income................ (5,272,286)
Accumulated net realized loss............................... (21,757,539)
------------
Net Assets.............................................. $298,107,210
============
Net Asset Value Per Share,
32,912,933 shares outstanding (unlimited shares authorized
of $.01 par value).......................................... $9.06
============
</Table>
See Notes to Financial Statements
19
Morgan Stanley Limited Duration Fund
FINANCIAL STATEMENTS continued
Statement of Operations
For the six months ended October 31, 2005 (unaudited)
<Table>
Net Investment Income:
Interest Income............................................. $ 5,733,659
-----------
Expenses
Investment advisory fee..................................... 860,842
Transfer agent fees and expenses............................ 185,719
Administration fee.......................................... 132,437
Professional fees........................................... 48,841
Shareholder reports and notices............................. 29,314
Custodian fees.............................................. 22,466
Registration fees........................................... 21,285
Trustees' fees and expenses................................. 2,113
Other....................................................... 17,420
-----------
Total Expenses.......................................... 1,320,437
-----------
Net Investment Income................................... 4,413,222
-----------
Net Realized and Unrealized Gain (Loss):
Net Realized Gain (Loss) on:
Investments................................................. (853,433)
Futures contracts........................................... 52,928
-----------
Net Realized Loss....................................... (800,505)
-----------
Net Change in Unrealized Appreciation/Depreciation on:
Investments................................................. (1,228,496)
Futures contracts........................................... (132,832)
-----------
Net Depreciation........................................ (1,361,328)
-----------
Net Loss................................................ (2,161,833)
-----------
Net Increase................................................ $ 2,251,389
===========
</Table>
See Notes to Financial Statements
20
Morgan Stanley Limited Duration Fund
FINANCIAL STATEMENTS continued
Statement of Changes in Net Assets
<Table>
<Caption>
FOR THE SIX MONTHS FOR THE YEAR
ENDED ENDED
OCTOBER 31, 2005 APRIL 30, 2005
------------------ --------------
(unaudited)
Increase (Decrease) in Net Assets:
Operations:
Net investment income....................................... $ 4,413,222 $ 11,464,957
Net realized loss........................................... (800,505) (1,312,107)
Net change in unrealized depreciation....................... (1,361,328) (5,091,390)
------------ -------------
Net Increase............................................ 2,251,389 5,061,460
Dividends to shareholders from net investment income........ (6,186,029) (16,474,040)
Net decrease from transactions in shares of beneficial
interest.................................................. (54,082,523) (120,871,693)
------------ -------------
Net Decrease............................................ (58,017,163) (132,284,273)
Net Assets:
Beginning of period......................................... 356,124,373 488,408,646
------------ -------------
End of Period
(Including dividends in excess of net investment income of
$5,272,286 and $3,499,479, respectively).................... $298,107,210 $ 356,124,373
============ =============
</Table>
See Notes to Financial Statements
21
Morgan Stanley Limited Duration Fund
NOTES TO FINANCIAL STATEMENTS - OCTOBER 31, 2005 (UNAUDITED)
1. Organization and Accounting Policies
Morgan Stanley Limited Duration Fund (the "Fund") is registered under the
Investment Company Act of 1940, as amended, as a diversified, open-end
management investment company. The Fund's investment objective is to provide a
high level of current income consistent with the preservation of capital. The
Fund was organized as a Massachusetts business trust on October 22, 1993 and
commenced operations on January 10, 1994.
Effective August 29, 2005, the Board of Trustees of the Fund approved the
implementation of a 2% redemption fee, which is paid directly to the Fund, for
shares redeemed within seven days of purchase. The redemption fee is designed to
protect the Fund and its remaining shareholders from the effects of short-term
trading.
The following is a summary of significant accounting policies:
A. Valuation of Investments -- (1) certain portfolio securities may be valued by
an outside pricing service approved by the Fund's Trustees; (2) 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; (3)
futures are valued at the latest price published by the commodities exchange on
which they trade; (4) when market quotations are not readily available or Morgan
Stanley Investment Advisors Inc. (the "Investment Adviser") determines that the
market quotations are not reflective of 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; and (5) 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.
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.
22
Morgan Stanley Limited Duration Fund
NOTES TO FINANCIAL STATEMENTS - OCTOBER 31, 2005 (UNAUDITED) continued
D. Futures Contracts -- A futures contract is an agreement between two parties
to buy and sell financial instruments or contracts based on financial indices at
a set price on a future date. Upon entering into such a contract, the Fund is
required to pledge to the broker cash, U.S. Government securities or other
liquid portfolio securities equal to the minimum initial margin requirements of
the applicable futures exchange. Pursuant to the contract, the Fund agrees to
receive from or pay to the broker an amount of cash equal to the daily
fluctuation in the value of the contract. Such receipts or payments known as
variation margin are recorded by the Fund as unrealized gains and losses. Upon
closing of the contract, the Fund realizes a gain or loss equal to the
difference between the value of the contract at the time it was opened and the
value at the time it was closed.
E. 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.
2. Investment Advisory/Administration Agreements
Pursuant to an Investment Advisory Agreement with the Investment Adviser, the
Fund pays an advisory fee, accrued daily and payable monthly, by applying the
following annual rates to the net assets of the Fund determined as of the close
of each business day: 0.52% to the portion of the daily net assets not exceeding
$1 billion; 0.47% to the portion of the daily net assets exceeding $1 billion
but not exceeding $2 billion and 0.42% to the portion of the daily net assets
exceeding $2 billion.
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.
Effective November 18, 2005, the Investment Adviser has agreed to cap the Fund's
operating expenses (except for brokerage and 12b-1 fees) for one year by
assuming the Fund's "other expenses" and/or waiving the Fund's advisory fees,
and the Administrator has agreed to waive the Fund's administrative fees, to the
extent such operating expenses on an annualized basis exceed 0.80% of the
average daily net assets of the Fund.
23
Morgan Stanley Limited Duration Fund
NOTES TO FINANCIAL STATEMENTS - OCTOBER 31, 2005 (UNAUDITED) continued
3. 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 October
31, 2005 were $105,179,526, and $149,267,390, respectively. Included in the
aforementioned are purchases and sales/prepayments of U.S. Government securities
of $81,591,599 and $90,345,379, respectively.
Morgan Stanley Trust, an affiliate of the Investment Adviser and Administration,
is the Fund's transfer agent.
The Fund has an unfunded Deferred Compensation Plan (the "Compensation Plan")
which allows each independent Trustee to defer payment of all, or a portion, of
the fees he 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.
4. Shares of Beneficial Interest
Transactions in shares of beneficial interest were as follows:
<Table>
<Caption>
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
OCTOBER 31, 2005 APRIL 30, 2005
------------------------- ---------------------------
(unaudited)
SHARES AMOUNT SHARES AMOUNT
---------- ------------ ----------- -------------
Sold........................................................ 2,722,476 $ 24,851,455 13,944,535 $ 129,742,246
Reinvestment of dividends................................... 497,408 4,538,926 1,321,375 12,255,388
---------- ------------ ----------- -------------
3,219,884 29,390,381 15,265,910 141,997,634
Redeemed.................................................... (9,142,310) (83,472,904) (28,350,418) (262,869,327)
---------- ------------ ----------- -------------
Net decrease................................................ (5,922,426) $(54,082,523) (13,084,508) $(120,871,693)
========== ============ =========== =============
</Table>
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.
24
Morgan Stanley Limited Duration Fund
NOTES TO FINANCIAL STATEMENTS - OCTOBER 31, 2005 (UNAUDITED) continued
As of April 30, 2005, the Fund had a net capital loss carryforward of
$19,274,017 of which $1,656,930 will expire on April 30, 2006, $20,504 will
expire on April 30, 2007, $51,242 will expire on April 30, 2008, $2,035,052 will
expire on April 30, 2009, $1,582,163 will expire on April 30, 2011, $2,183,130
will expire on April 30, 2012 and $11,744,996 will expire on April 30, 2013 to
offset future capital gains to the extent provided by regulations.
As of April 30, 2005, the Fund had temporary book/tax differences primarily
attributable to post-October losses (capital losses incurred after October 31
within the taxable year which are deemed to arise on the first business day of
the Fund's next taxable year), and book amortization of premiums on debt
securities.
6. Purposes of and Risks Relating to Certain Financial Instruments
To hedge against adverse interest rate and market risks on portfolio positions
or anticipated positions in U.S. Government securities, the Fund may enter into
interest rate futures contracts ("futures contracts").
These futures contracts involve elements of market risk in excess of the amount
reflected in the Statement of Assets and Liabilities. The Fund bears the risk of
an unfavorable change in the value of the underlying securities. Risk may also
arise upon entering into contracts from the potential inability of counterparts
to meet the terms of their contacts.
7. Expense Offset
The expense offset represents a reduction of the custodian fees for earnings on
cash balances maintained by the Fund.
8. 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, filed in the United States District
Court Southern District of New York on April 16, 2004, 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 March 9,
25
Morgan Stanley Limited Duration Fund
NOTES TO FINANCIAL STATEMENTS - OCTOBER 31, 2005 (UNAUDITED) continued
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 stage of the litigation, and no provision has been made in
the Fund's financial statements for the effect, if any, of this matter.
26
Morgan Stanley Limited Duration 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 APRIL 30,
MONTHS ENDED ---------------------------------------------------------
OCTOBER 31, 2005 2005 2004 2003 2002 2001
---------------- --------- --------- --------- --------- ---------
(unaudited)
Selected Per Share Data:
Net asset value, beginning of period.... $9.17 $9.41 $9.68 $9.59 $9.44 $9.20
----- ----- ----- ----- ----- -----
Income (loss) from investment
operations:
Net investment income............... 0.10 0.19 0.17 0.24 0.41 0.55
Net realized and unrealized gain
(loss).............................. (0.04) (0.08) (0.07) 0.13 0.19 0.24
----- ----- ----- ----- ----- -----
Total income from investment
operations............................. 0.06 0.11 0.10 0.37 0.60 0.79
----- ----- ----- ----- ----- -----
Less dividends from net investment
income:................................ (0.17) (0.35) (0.37) (0.28) (0.45) (0.55)
----- ----- ----- ----- ----- -----
Net asset value, end of period.......... $9.06 $9.17 $9.41 $9.68 $9.59 $9.44
===== ===== ===== ===== ===== =====
Total Return+........................... 0.66%(1) 1.20% 0.99% 3.93% 6.50% 8.82%
Ratios to Average Net Assets:
Expenses................................ 0.80%(2) 0.76%(3) 0.85%(3) 0.84%(4) 0.80%(4) 0.80%(4)
Net investment income................... 2.67%(2) 2.63% 1.75% 1.90% 3.94% 5.87%
Supplemental Data:
Net assets, end of period, in
thousands.............................. $298,107 $356,124 $488,409 $429,409 $166,631 $109,917
Portfolio turnover rate................. 33%(1) 82% 240% 217% 327% 133%
</Table>
- ---------------------
<Table>
+ Calculated based on the net asset value as of the last business day of the period.
(1) Not annualized.
(2) Annualized.
(3) Does not reflect the effect of expense offset of 0.01%.
(4) If the Fund had borne all expenses that were assumed or waived by the Investment Adviser, the annualized expense and
net investment income ratios would have been as follows:
EXPENSE NET INVESTMENT
PERIOD ENDED RATIO INCOME RATIO
----------------- ---- ----
April 30, 2003 0.87% 1.86%
April 30, 2002 0.92 3.82
April 30, 2001 0.92 5.75
</Table>
See Notes to Financial Statements
27
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
Ronald E. Robison
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 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) 2005 Morgan Stanley
[MORGAN STANLEY LOGO]
MORGAN STANLEY FUNDS
Morgan Stanley
Limited Duration Fund
Semiannual Report
October 31, 2005
[MORGAN STANLEY LOGO]
37880RPT-RA05-01055P-Y10/05
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.
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 Limited Duration Fund
/s/ Ronald E. Robison
Ronald E. Robison
Principal Executive Officer
December 19, 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
December 19, 2005
/s/ Francis Smith
Francis Smith
Principal Financial Officer
December 19, 2005
3