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: 811-09081
Morgan Stanley Institutional Strategies Fund
(Exact name of registrant as specified in charter)
522 Fifth Avenue, New York, New York 10036
(Address of principal executive offices) (Zip code)
Ronald E. Robison
522 Fifth Avenue, New York, New York 10036
(Name and address of agent for service)
Registrant's telephone number, including area code: 212-296-6990
Date of fiscal year end: September 30, 2007
Date of reporting period: September 30, 2007
Item 1 - Report to Shareholders
Welcome, Shareholder:
In this report, you'll learn about how your investment in Morgan Stanley
Institutional Strategies Fund performed during the annual 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 year ended September 30, 2007
TOTAL RETURN FOR THE 12 MONTHS ENDED SEPTEMBER 30, 2007
<Table>
<Caption>
S&P
500(R) BLENDED
CLASS A CLASS B CLASS C CLASS D INDEX(1) INDEX(2)
22.29% 21.43% 21.31% 22.68% 16.44% 19.55%
</Table>
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 and benchmark information.
MARKET CONDITIONS
For the 12-month period ended September 30, 2007, global equity markets posted
positive returns. In the U.S., the benchmark S&P 500(R) Index returned 16.44
percent, including dividends, while internationally, the MSCI EAFE Index
returned 24.86 percent, including (net) dividends. Remarkably, the year began on
a rather negative note, as investors entered 2007 with a high degree of
uncertainty. First quarter gross domestic product (GDP) was weak, posting its
slowest growth rate since 2002 and placing at risk the global recovery that had
powered profitability for the past three years. Growth recovered gradually in
the second quarter, fueled by exports and steady consumer demand. Corporate
profits, already well into a multi-year recovery, climbed further as well. Fixed
income, especially U.S. Treasuries, reversed course in the second quarter as
investors rotated away from these "safe harbors" back into more speculative
credits.
At mid-year, equity returns were running above historical averages, but investor
focus quickly shifted to the mortgage markets, where global dislocations began
to shake investor confidence once again. The housing sector, long a source of
global spending and investment, began to show signs of exhaustion, and the large
financing complex that had been balanced on the back of this juggernaut froze.
While initially affecting only the mortgage originators and housing sectors,
this credit deterioration spread to more diversified financial services
companies around the world. The pace of asset write-downs quickened, and, by mid
August, it became increasingly clear that these secondary effects could impact
both the U.S. and foreign economies.
The Federal Reserve clearly sensed these risks as well, and, in a series of
steps, reduced both the discount and federal funds rates, and joined the
European Central Bank in providing overnight liquidity as needed throughout
August and September. While risks of further deterioration in the housing
sector, as well as concerns over global consumption remained, equity markets
rallied back to new highs by September's end, confident that global central
banks would provide liquidity as needed.
PERFORMANCE ANALYSIS
All share classes of Morgan Stanley Institutional Strategies Fund outperformed
the S&P 500(R) Index and the Blended Index (a blend of 1/3 Russell 1000(R)
Growth Index, 1/3 Russell 1000(R) Value Index and 1/3 Morgan Stanley Capital
International [MSCI] EAFE Index) for the 12 months ended September 30, 2007,
assuming no deduction of applicable sales charges.
2
Morgan Stanley Institutional Strategies Fund invests equal dollar amounts in
three underlying Morgan Stanley Institutional Funds -- U.S. Large Cap Growth,
Large Cap Relative Value and Active International Allocation. For the 12 months
ended September 30, 2007, all three funds contributed positively to the overall
Fund's performance, with U.S. Large Cap Growth returning 29.33 percent, Active
International Allocation returning 28.75 percent, and Large Cap Relative Value
returning 13.54 percent.
During the 12-month period under review, emerging equity markets, such as those
in China, the Far East, Latin America and Eastern Europe, outperformed the
developed markets of the U.S., Europe and the United Kingdom. Within the U.S.
equity market, growth outperformed value, and small and mid capitalization
equities outperformed large-caps.
There is no guarantee that any sectors mentioned will continue to perform as
discussed herein or that securities in such sectors will be held by the Fund in
the future.
<Table>
<Caption>
PORTFOLIO ALLOCATION
Morgan Stanley Institutional Active International
Allocation 32.5%
Morgan Stanley Institutional U.S. Large Cap Growth
Portfolio 32.3
Morgan Stanley Institutional Large Cap Relative
Value 32.1
</Table>
Data as of September 30, 2007. Subject to change daily. All percentages 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.
INVESTMENT STRATEGY
THE FUND IS A "FUND OF FUNDS," MEANING THAT IT SEEKS TO ACHIEVE ITS INVESTMENT
OBJECTIVE BY INVESTING PRIMARILY IN A COMBINATION OF THREE PORTFOLIOS OF MORGAN
STANLEY INSTITUTIONAL FUND, INC. ("UNDERLYING FUNDS") ON A FIXED ALLOCATION
BASIS. THE FUND MAKES EQUAL ALLOCATIONS OF ITS ASSETS TO THE FOLLOWING THREE
UNDERLYING FUNDS: ACTIVE INTERNATIONAL ALLOCATION PORTFOLIO ("ACTIVE
INTERNATIONAL ALLOCATION"), LARGE CAP RELATIVE VALUE PORTFOLIO ("LARGE CAP
RELATIVE VALUE") AND U.S. LARGE CAP GROWTH PORTFOLIO ("U.S. LARGE CAP GROWTH").
INVESTORS MAY PURCHASE THE UNDERLYING FUNDS DIRECTLY ONLY IF THEY MEET CERTAIN
INVESTMENT MINIMUMS OR OTHER REQUIREMENTS SET FORTH IN EACH UNDERLYING FUND'S
PROSPECTUS. THE UNDERLYING FUNDS INVEST PRIMARILY IN U.S. AND FOREIGN EQUITY
SECURITIES. THE INVESTMENT POLICIES OF THE UNDERLYING FUNDS ARE DESCRIBED BELOW.
THE INVESTMENT RESULTS OF THE UNDERLYING FUNDS WILL VARY. AS A RESULT, THE
PERCENTAGE ALLOCATIONS TO THE UNDERLYING FUNDS WILL BE MONITORED DAILY BY THE
FUND'S "INVESTMENT ADVISER," MORGAN STANLEY INVESTMENT ADVISORS INC., AND THE
FUND'S ALLOCATIONS TO THE UNDERLYING FUNDS WILL BE REBALANCED WHENEVER THE
ACTUAL ALLOCATIONS EXCEED PLUS OR MINUS 5 PERCENT OF THE PRE-DETERMINED FIXED
PERCENTAGE ALLOCATION BASIS. ACCORDINGLY, IT MAY BE NECESSARY FOR THE FUND TO
SELL SHARES OF AN UNDERLYING FUND THAT HAVE APPRECIATED IN VALUE, IN ORDER TO
MAINTAIN THE FIXED PERCENTAGE ALLOCATION AMONG THE UNDERLYING FUNDS.
3
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. THE SEMIANNUAL REPORTS AND THE ANNUAL REPORTS ARE
FILED ELECTRONICALLY WITH THE SECURITIES AND EXCHANGE COMMISSION (SEC) ON FORM
N-CSRS AND FORM N-CSR, RESPECTIVELY. 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.
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) 869-NEWS, 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
(This Page Intentionally Left Blank)
5
PERFORMANCE SUMMARY
PERFORMANCE OF A $10,000 INVESTMENT
LINE GRAPH
<Table>
<Caption>
CLASS A CLASS B CLASS C CLASSD S&P 500
------- ------- ------- ------ -------
August 2006 9475 10000 10000 10000 10000
September 2006 9693 10220 10230 10230 10280
December 2006 10460 11010 11010 11050 10969
March 2007 10669 11200 11210 11270 11039
June 2007 11417 11970 11980 12080 11732
September 2007 11853 12010 12410 12550 11970
<Caption>
BLENDED INDEX
-------------
August 2006 10000
September 2006 10224
December 2006 11050
March 2007 11291
June 2007 11976
September 2007 12222
</Table>
6
AVERAGE ANNUAL TOTAL RETURNS -- PERIOD ENDED SEPTEMBER 30, 2007
<Table>
<Caption>
CLASS A SHARES* CLASS B SHARES** CLASS C SHARES(+) CLASS D SHARES(++)
(since 08/28/06) (since 08/28/06) (since 08/28/06) (since 08/28/06)
SYMBOL GVIAX GVIBX GVICX GVIDX
1 YEAR 22.29%(3) 21.43%(3) 21.31%(3) 22.68%(3)
15.87(4) 16.43(4) 20.31(4) --
SINCE INCEPTION 22.82(3) 21.91(3) 21.91(3) 23.18(3)
16.89(4) 18.30(4) 21.91(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 most recent month-end performance figures, please visit
www.morganstanley.com/msim 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 graph and table do 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 & Poor's 500(R) 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 is unmanaged and its 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 Blended Index is comprised of 1/3 Russell 1000(R) Growth Index
(measures the performance of those companies in the Russell 1000(R) Index
with higher price-to-book ratios and higher forecasted growth values), 1/3
Russell 1000(R) Value Index (measures the performance of those companies in
the Russell 1000(R) Index with lower price-to-book ratios and lower
forecasted growth values) and 1/3 Morgan Stanley Capital International
(MSCI) EAFE Index (measures the performance for a diverse range of global
stock markets within Europe, Australasia, and the Far East). The Index is
unmanaged and its returns do not include any sales charges or fees. Such
costs would lower performance. It is not possible to invest directly in an
index.
(3) 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.
+++ Ending value assuming a complete redemption on September 30, 2007.
7
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 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 04/01/07 - 09/30/07.
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 *
------------- ------------- ---------------
04/01/07 -
04/01/07 09/30/07 09/30/07
------------- ------------- ---------------
CLASS A
Actual (11.10% return)...................................... $1,000.00 $1,111.00 $3.39
Hypothetical (5% annual return before expenses)............. $1,000.00 $1,021.86 $3.24
CLASS B
Actual (10.80% return)...................................... $1,000.00 $1,108.00 $7.35
Hypothetical (5% annual return before expenses)............. $1,000.00 $1,018.10 $7.03
CLASS C
Actual (10.70% return)...................................... $1,000.00 $1,107.00 $7.34
Hypothetical (5% annual return before expenses)............. $1,000.00 $1,018.10 $7.03
CLASS D
Actual (11.36% return)...................................... $1,000.00 $1,113.60 $2.07
Hypothetical (5% annual return before expenses)............. $1,000.00 $1,023.11 $1.98
</Table>
- ------------------
* Expenses are equal to the Fund's annualized expense ratios of 0.64%, 1.39%,
1.39% and 0.39% for Class A, Class B, Class C and Class D shares,
respectively, multiplied by the average account value over the period,
multiplied by 183/365 (to reflect the one-half year period). If the Fund had
borne all of its expenses, the annualized expense ratios would have been
21.29%, 22.04%, 22.04% and 21.04% for Class A, Class B, Class C and Class D
shares, respectively.
8
INVESTMENT ADVISORY AGREEMENT APPROVAL
NATURE, EXTENT AND QUALITY OF SERVICES
The Board reviewed and considered the nature and extent of the investment
advisory services provided by the Investment Adviser under the Advisory
Agreement, including portfolio management, investment research and equity and
fixed income securities trading. The Board also reviewed and considered the
nature and extent of the non-advisory, administrative services provided by the
Fund's Administrator under the Administration Agreement, including accounting,
clerical, bookkeeping, compliance, business management and planning, and the
provision of supplies, office space and utilities at the Investment Adviser's
expense. (The Investment Adviser and the Administrator together are referred to
as the "Adviser" and the Advisory and Administration Agreements together are
referred to as the "Management Agreement.") The Board also compared the nature
of the services provided by the Adviser with similar services provided by
non-affiliated advisers as reported to the Board by Lipper Inc. ("Lipper").
The Board reviewed and considered the qualifications of the portfolio managers,
the senior administrative managers and other key personnel of the Adviser who
provide the advisory and administrative services to the Fund. The Board
determined that the Adviser's portfolio managers and key personnel are well
qualified by education and/or training and experience to perform the services in
an efficient and professional manner. The Board concluded that the nature and
extent of the advisory and administrative services provided were necessary and
appropriate for the conduct of the business and investment activities of the
Fund. The Board also concluded that the overall quality of the advisory and
administrative services was satisfactory.
PERFORMANCE RELATIVE TO COMPARABLE FUNDS MANAGED BY OTHER ADVISERS
On a regular basis, the Board reviews the performance of all funds in the Morgan
Stanley Fund Complex, including the Fund, compared to their peers, paying
specific attention to the underperforming funds. In addition, the Board
specifically reviewed the Fund's performance for the period August 31, 2006 to
November 30, 2006, as shown in a report provided by Lipper (the "Lipper
Report"), compared to the performance of comparable funds selected by Lipper
(the "performance peer group"). The Board also discussed with the Adviser the
performance goals and the actual results achieved in managing the Fund. The
Board concluded that the Fund's performance was competitive with that of its
performance peer group.
FEES RELATIVE TO OTHER PROPRIETARY FUNDS MANAGED BY THE ADVISER WITH COMPARABLE
INVESTMENT STRATEGIES
The Board noted that the Fund does not pay advisory and administrative fees
(together, the "management fee") under the Management Agreement, although the
Fund, through its investments in other mutual funds as
9
set forth in the Fund's Prospectus ("Underlying Funds"), will pay its pro rata
share of the management fee rate paid by the Underlying Funds.
FEES AND EXPENSES RELATIVE TO COMPARABLE FUNDS MANAGED BY OTHER ADVISERS
The Board reviewed the total expense ratio of the Fund as compared to the
average total expense ratio for funds, selected by Lipper (the "expense peer
group"), managed by other advisers with investment strategies comparable to
those of the Fund, as shown in the Lipper Report. The Board concluded that the
Fund's total expense ratio was competitive with its expense peer group.
BREAKPOINTS AND ECONOMIES OF SCALE
The Board noted that the Fund does not pay a management fee to the Adviser.
PROFITABILITY OF THE ADVISER AND AFFILIATES
Since the Fund had recently begun operations and had not yet paid fees to the
Adviser for a full year as of November 30, 2006, the Board concluded that this
was not a factor that needed to be considered at the present time.
FALL-OUT BENEFITS
The Board considered so-called "fall-out benefits" derived by the Adviser and
affiliates from their relationship with the Fund and the Morgan Stanley Fund
Complex, such as sales charges on sales of Class A shares and "float" benefits
derived from handling of checks for purchases and sales of Fund shares, through
a broker-dealer affiliate of the Adviser and "soft dollar" benefits (discussed
in the next section). The Board also considered that a broker-dealer affiliate
of the Adviser receives from the Fund 12b-1 fees for distribution and
shareholder services. The Board concluded that the float benefits were
relatively small and the sales charges and 12b-1 fees were competitive with
those of other broker-dealers.
SOFT DOLLAR BENEFITS
The Board considered whether the Adviser realizes any benefits as a result of
brokerage transactions executed through "soft dollar" arrangements. The Board
considered that the Fund invests only in the Underlying Funds, which do not
generate soft dollars.
ADVISER FINANCIALLY SOUND AND FINANCIALLY CAPABLE OF MEETING THE FUND'S NEEDS
The Board considered whether the Adviser is financially sound and has the
resources necessary to perform its obligations under the Management Agreement.
The Board concluded that the Adviser has the financial resources necessary to
fulfill its obligations under the Management Agreement.
10
HISTORICAL RELATIONSHIP BETWEEN THE FUND AND THE ADVISER
The Board also reviewed and considered the historical relationship between the
Fund and the Adviser, including the organizational structure of the Adviser, the
policies and procedures formulated and adopted by the Adviser for managing the
Fund's operations and the Board's confidence in the competence and integrity of
the senior managers and key personnel of the Adviser. The Board concluded that
it is beneficial for the Fund to continue its relationship with the Adviser.
OTHER FACTORS AND CURRENT TRENDS
The Board considered the controls and procedures adopted and implemented by the
Adviser and monitored by the Fund's Chief Compliance Officer and concluded that
the conduct of business by the Adviser indicates a good faith effort on its part
to adhere to high ethical standards in the conduct of the Fund's business.
GENERAL CONCLUSION
On April 25, 2007, after considering and weighing all of the above factors, the
Board concluded that it would be in the best interest of the Fund and its
shareholders to approve renewal of the Management Agreement for another year
until April 30, 2008. On June 20, 2007, the Board again considered and weighed
all of the above factors and concluded that it would be in the best interest of
the Fund and its shareholders to approve renewal of the Management Agreement to
continue until June 30, 2008.
11
Morgan Stanley Institutional Strategies Fund
PORTFOLIO OF INVESTMENTS - SEPTEMBER 30, 2007
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ---------------------------------------------------------------------------------------
Common Stocks (96.9%)
Investment Trusts/Mutual Funds
22,584 Morgan Stanley Institutional Active International Allocation
Portfolio (Class A)........................................ $ 396,804
30,936 Morgan Stanley Institutional Large Cap Relative Value
Portfolio (Class A)........................................ 391,953
16,060 Morgan Stanley Institutional U.S. Large Cap Growth Portfolio
(Class A).................................................. 393,945
----------
</Table>
<Table>
Total Investments (Cost $978,211) (a)............................ 96.9% 1,182,702
Other Assets in Excess of Liabilities............................ 3.1 38,121
----- ----------
Net Assets....................................................... 100.0% $1,220,823
===== ==========
</Table>
- ---------------------
<Table>
(a) The aggregate cost for federal income tax purposes is
$978,287. The aggregate gross and net unrealized
appreciation is $204,415.
</Table>
12
See Notes to Financial Statements
Morgan Stanley Institutional Strategies Fund
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
September 30, 2007
<Table>
Assets:
Investments in securities, at value
(cost $978,211)........................................... $1,182,702
Receivable for:
Investments sold........................................ 29,999
Shares of beneficial interest sold...................... 1,250
Prepaid expenses and other assets........................... 41,141
Receivable from Investment Adviser.......................... 84,317
Receivable from Distributor................................. 2,520
----------
Total Assets............................................ 1,341,929
----------
Liabilities:
Payable for:
Transfer agent fee...................................... 15
Payable to bank............................................. 24,644
Accrued expenses and other payables......................... 34,921
Offering costs.............................................. 61,526
----------
Total Liabilities....................................... 121,106
----------
Net Assets.............................................. $1,220,823
==========
Composition of Net Assets:
Paid-in-capital............................................. $982,103
Net unrealized appreciation................................. 204,491
Accumulated undistributed net investment income............. 11,551
Accumulated undistributed net realized gain................. 22,678
----------
Net Assets.............................................. $1,220,823
==========
Class A Shares:
Net Assets.................................................. $454,801
Shares Outstanding (unlimited authorized, $.01 par value)... 36,343
Net Asset Value Per Share............................... $12.51
==========
Maximum Offering Price Per Share,
(net asset value plus 5.54% of net asset value)......... $13.20
==========
Class B Shares:
Net Assets.................................................. $381,765
Shares Outstanding (unlimited authorized, $.01 par value)... 30,526
Net Asset Value Per Share............................... $12.51
==========
Class C Shares:
Net Assets.................................................. $227,445
Shares Outstanding (unlimited authorized, $.01 par value)... 18,328
Net Asset Value Per Share............................... $12.41
==========
Class D Shares:
Net Assets.................................................. $156,812
Shares Outstanding (unlimited authorized, $.01 par value)... 12,500
Net Asset Value Per Share............................... $12.54
==========
</Table>
13
See Notes to Financial Statements
Morgan Stanley Institutional Strategies Fund
FINANCIAL STATEMENTS continued
Statement of Operations
For the year ended September 30, 2007
<Table>
Net Investment Income:
Income
Dividends................................................... $ 15,906
Interest.................................................... 63
---------
Total Income............................................ 15,969
---------
Expenses
Offering costs.............................................. 88,871
Professional fees........................................... 65,950
Shareholder reports and notices............................. 24,766
Registration fees........................................... 16,660
Distribution fee (Class A shares)........................... 783
Distribution fee (Class B shares)........................... 719
Distribution fee (Class C shares)........................... 2,401
Trustees' fees and expenses................................. 519
Custodian fees.............................................. 282
Other....................................................... 9,329
---------
Total Expenses.......................................... 210,280
Less: amounts waived/reimbursed............................. (201,988)
---------
Net Expenses............................................ 8,292
---------
Net Investment Income................................... 7,677
---------
Net Realized and Unrealized Gain:
Net realized gain on:
Investments................................................. 8,376
Capital gain distribution received.......................... 14,378
---------
Net Realized Gain....................................... 22,754
---------
Net Change in Unrealized Appreciation/Depreciation.......... 191,082
---------
Net Gain................................................ 213,836
---------
Net Increase................................................ $ 221,513
=========
</Table>
14
See Notes to Financial Statements
Morgan Stanley Institutional Strategies Fund
FINANCIAL STATEMENTS continued
Statements of Changes in Net Assets
<Table>
<Caption>
FOR THE PERIOD
FOR THE YEAR AUGUST 28, 2006*
ENDED THROUGH
SEPTEMBER 30, 2007 SEPTEMBER 30, 2006
------------------ ------------------
Increase (Decrease) in Net Assets:
Operations:
Net investment income (loss)................................ $ 7,677 $ (462)
Net realized gain (loss).................................... 22,754 (10)
Net change in unrealized appreciation/depreciation.......... 191,082 13,409
---------- --------
Net Increase............................................ 221,513 12,937
Net increase from transactions in shares of beneficial
interest.................................................. 170,536 715,837
---------- --------
Net Increase............................................ 392,049 728,774
Net Assets:
Beginning of period......................................... 828,774 100,000
---------- --------
End of Period
(Including accumulated undistributed net investment income
of $11,551 and $0, respectively)............................ $1,220,823 $828,774
========== ========
</Table>
- ---------------------
* Commencement of operations.
15
See Notes to Financial Statements
Morgan Stanley Institutional Strategies Fund
NOTES TO FINANCIAL STATEMENTS - SEPTEMBER 30, 2007
1. Organization and Accounting Policies
Morgan Stanley Institutional Strategies Fund (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 will invest in
a combination of three portfolios of Morgan Stanley Institutional Fund, Inc.
(individually, an "Underlying Fund" and collectively, the "Underlying Funds") on
a fixed allocation basis. The Fund's investment objective is to seek capital
appreciation. The Fund was organized as a Massachusetts business trust on May 2,
2006 and commenced operations on August 28, 2006.
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 eighteen
months, 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) Investments are valued at the net asset value
per share of each Underlying Fund determined as of the close of the New York
Stock Exchange on valuation date; and (2) 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 and are included in interest income. 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-
16
Morgan Stanley Institutional Strategies Fund
NOTES TO FINANCIAL STATEMENTS - SEPTEMBER 30, 2007 continued
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.
H. Offering Costs -- The Investment Adviser incurred offering costs on behalf of
the Fund in an amount of $98,000 which will be reimbursed by the Fund for the
full amount thereof. Such expenses were deferred and were fully amortized as of
August 28, 2007.
2. Investment Advisory/Administration Agreements
Pursuant to an Investment Advisory Agreement, the Fund pays no investment
advisory fee. However, the Fund, through its investments in the Underlying
Funds, will pay its pro rata share of the advisory fees to the Investment
Adviser of the Underlying Funds.
Pursuant to an Administration Agreement with Morgan Stanley Services Company
Inc. (the "Administrator"), an affiliate of the Investment Adviser, the Fund
pays no administration fee. However, the Fund through its investments in the
Underlying Funds, will pay its pro rata share of the administration fee to the
Administrator of the Underlying Funds.
The Investment Adviser agreed to waive or reimburse all or a portion of the
Fund's other expenses such that the annualized actual total fund operating
expenses (exclusive of any indirect expenses from the Underlying Funds) does not
exceed 0.64%, 1.39%, 1.39% and 0.39% for Class A, Class B, Class C and Class D
shares respectively, until August 31, 2007. Thereafter, the fee waiver and/or
expense reimbursement can be terminated at any time. At September 30, 2007,
included in the
17
Morgan Stanley Institutional Strategies Fund
NOTES TO FINANCIAL STATEMENTS - SEPTEMBER 30, 2007 continued
Statements of Assets and Liabilities is a receivable from the Investment Adviser
an affiliate, which represents expense reimbursements due to the Fund.
3. Plan of Distribution
Shares of the Fund are distributed by Morgan Stanley Distributors Inc. (the
"Distributor"), an affiliate of the Investment Adviser and Administrator. 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 shares; (ii) Class
B -- up to 1.0% of the average daily net assets of Class B shares; and (iii)
Class C -- up to 1.0% of the average daily net assets of Class C shares.
In the case of Class B shares, provided that the Plan continues in effect, any
cumulative expenses incurred by the Distributor but not yet recovered may be
recovered through the payment of future distribution fees from the Fund pursuant
to the Plan and contingent deferred sales charges paid by investors upon
redemption of Class B shares. Although there is no legal obligation for the Fund
to pay expenses incurred in excess of payments made to the Distributor under the
Plan and the proceeds of contingent deferred sales charges paid by investors
upon redemption of shares, if for any reason the Plan is terminated, the
Trustees will consider at that time the manner in which to treat such expenses.
The Distributor has advised the Fund that there were no excess amounts at
September 30, 2007.
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 and other authorized
financial representatives at the time of sale may be reimbursed in the
subsequent calendar year. For the year ended September 30, 2007, the
distribution fee was accrued for Class A shares and Class C shares at the annual
rate of 0.22% and 1.0%, respectively.
The Distributor has informed the Fund that for the year ended September 30,
2007, it received contingent deferred sales charges from certain redemptions of
the Fund's Class B shares and Class C shares of $11 and $350, respectively and
received no 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.
18
Morgan Stanley Institutional Strategies Fund
NOTES TO FINANCIAL STATEMENTS - SEPTEMBER 30, 2007 continued
4. Security Transactions and Transactions with Affiliates
The cost of purchases and proceeds from sales of portfolio securities, excluding
short-term investments, for the year ended September 30, 2007 aggregated
$495,728 and $122,354, respectively.
Morgan Stanley Trust, an affiliate of the Investment Adviser, Administrator and
Distributor, is the Funds 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 or she 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.
19
Morgan Stanley Institutional Strategies Fund
NOTES TO FINANCIAL STATEMENTS - SEPTEMBER 30, 2007 continued
5. Shares of Beneficial Interest
<Table>
<Caption>
FOR THE PERIOD
FOR THE YEAR AUGUST 28, 2006*
ENDED THROUGH
SEPTEMBER 30, 2007 SEPTEMBER 30, 2006
----------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT
------- --------- ------ --------
CLASS A SHARES
Sold.................................................... 12,915 $ 134,327 10,891 $109,115
Conversion from Class B................................. 10,271 116,791 -- --
Redeemed................................................ (234) (2,743) -- --
------- --------- ------ --------
Net increase - Class A.................................. 22,952 248,375 10,891 109,115
------- --------- ------ --------
CLASS B SHARES
Sold.................................................... 7,274 78,259 31,949 324,156
Conversion to Class A................................... (10,313) (116,791) -- --
Redeemed................................................ (884) (10,327) -- --
------- --------- ------ --------
Net increase (decrease) - Class B....................... (3,923) (48,859) 31,949 324,156
------- --------- ------ --------
CLASS C SHARES
Sold.................................................... 2,343 26,735 18,208 182,566
Redeemed................................................ (4,723) (55,715) -- --
------- --------- ------ --------
Net increase (decrease) - Class C....................... (2,380) (28,980) 18,208 182,566
------- --------- ------ --------
CLASS D SHARES
Sold.................................................... -- -- 10,000 100,000
------- --------- ------ --------
Net increase - Class D.................................. -- -- 10,000 100,000
------- --------- ------ --------
Net increase in Fund.................................... 16,649 $ 170,536 71,048 $715,837
======= ========= ====== ========
</Table>
- ---------------------
* Commencement of operations.
20
Morgan Stanley Institutional Strategies Fund
NOTES TO FINANCIAL STATEMENTS - SEPTEMBER 30, 2007 continued
6. Federal Income Tax Status
The amount of dividends and distributions from net investment income and net
realized capital gains are determined in accordance with federal income tax
regulations which may differ from generally accepted accounting principles.
These "book/tax" differences are either considered temporary or permanent in
nature. To the extent these differences are permanent in nature, such amounts
are reclassified within the capital accounts based on their federal tax-basis
treatment; temporary differences do not require reclassification. Dividends and
distributions which exceed net investment income and net realized capital gains
for tax purposes are reported as distributions of paid-in-capital.
As of September 30, 2007, the tax-basis components of accumulated earnings were
as follows:
<Table>
Undistributed ordinary income............................... $ 19,930
Undistributed long-term gains............................... 14,375
--------
Net accumulated earnings.................................... 34,305
Net unrealized appreciation................................. 204,415
--------
Total accumulated earnings.................................. $238,720
========
</Table>
As of September 30, 2007, the Fund had temporary book/tax differences
attributable to capital loss deferrals on wash sales.
Permanent differences, due to nondeductible expenses, resulted in the following
reclassifications among the Fund's components of net assets at September 30,
2007:
<Table>
<Caption>
ACCUMULATED ACCUMULATED
UNDISTRIBUTED UNDISTRIBUTED
NET INVESTMENT NET REALIZED
INCOME GAIN PAID-IN-CAPITAL
- -------------- ------------- ---------------
$3,874 $(1) $(3,873)
====== === =======
</Table>
7. Accounting Pronouncements
In July 2006, the Financial Accounting Standards Board (FASB) issued
Interpretation 48, Accounting for Uncertainty in Income Taxes -- an
interpretation of FASB Statement 109 (FIN 48). FIN 48 clarifies the accounting
for income taxes by prescribing the minimum recognition threshold a tax position
must meet before being recognized in the financial statements. FIN 48 is
effective for fiscal years beginning after December 15, 2006 and is to be
applied to all open tax years as of the effective date. The impact to the Fund's
financial statements, if any, is currently being assessed.
In addition, in September 2006, Statement of Financial Accounting Standards No.
157, Fair Value Measurements (SFAS 157), was issued and is effective for fiscal
years beginning after November 15, 2007. SFAS 157 defines fair value,
establishes a framework for measuring fair value and expands disclosures about
fair value measurements. Management is currently evaluating the impact the
adoption of SFAS 157 will have on the Fund's financial statement disclosures.
21
Morgan Stanley Institutional Strategies Fund
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:
<Table>
<Caption>
FOR THE PERIOD
FOR THE YEAR AUGUST 28, 2006*
ENDED THROUGH
SEPTEMBER 30, 2007 SEPTEMBER 30, 2006
------------------ ------------------
Class A Shares
Selected Per Share Data:
Net asset value, beginning of period........................ $10.23 $10.00
------ ------
Income from investment operations:
Net investment income++................................. 0.07 0.00
Net realized and unrealized gain........................ 2.21 0.23
------ ------
Total income from investment operations..................... 2.28 0.23
------ ------
Net asset value, end of period.............................. $12.51 $10.23
====== ======
Total Return+............................................... 22.29% 2.30 %(1)
Ratios to Average Net Assets(3)(4)(5):
Total expenses (before expense offset)...................... 0.61% 0.64 %(2)
Net investment income (loss)................................ 0.81% (0.50)%(2)
Supplemental Data:
Net assets, end of period, in thousands..................... $455 $137
Portfolio turnover rate..................................... 12% 3 %(1)
</Table>
- ---------------------
<Table>
* Commencement of operations.
++ 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) Does not include any expenses incurred as a result of
investment in the Underlying Funds.
(4) Reflects overall Fund ratios for investment income and
non-class specific expenses.
(5) If the Fund had borne all its expenses that were reimbursed
or waived by the Investment Adviser and Administrator, the
annualized expense and net investment loss ratios, before
expense offset, would have been as follows:
</Table>
<Table>
<Caption>
EXPENSE NET INVESTMENT
PERIOD ENDED RATIO LOSS RATIO
------------ ------- --------------
September 30,
2007 18.55% (17.13)%
September 30,
2006 52.09 (51.95)
</Table>
22
See Notes to Financial Statements
Morgan Stanley Institutional Strategies Fund
FINANCIAL HIGHLIGHTS continued
<Table>
<Caption>
FOR THE PERIOD
FOR THE YEAR AUGUST 28, 2006*
ENDED THROUGH
SEPTEMBER 30, 2007 SEPTEMBER 30, 2006
------------------ ------------------
Class B Shares
Selected Per Share Data:
Net asset value, beginning of period........................ $10.22 $10.00
------ ------
Income (loss) from investment operations:
Net investment income (loss)++.......................... 0.11 (0.01)
Net realized and unrealized gain........................ 2.18 0.23
------ ------
Total income from investment operations..................... 2.29 0.22
------ ------
Net asset value, end of period.............................. $12.51 $10.22
====== ======
Total Return+............................................... 21.43% 2.20 %(1)
Ratios to Average Net Assets(3)(4)(5):
Total expenses (before expense offset)...................... 0.58% 1.39 %(2)
Net investment income (loss)................................ 0.84% (1.25)%(2)
Supplemental Data:
Net assets, end of period, in thousands..................... $382 $352
Portfolio turnover rate..................................... 12% 3 %(1)
</Table>
- ---------------------
<Table>
* Commencement of operations.
++ 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) Does not include any expenses incurred as a result of
investment in the Underlying Funds.
(4) Reflects overall Fund ratios for investment income and
non-class specific expenses.
(5) If the Fund had borne all its expenses that were reimbursed
or waived by the Investment Adviser and Administrator, the
annualized expense and net investment loss ratios, before
expense offset, would have been as follows:
</Table>
<Table>
<Caption>
EXPENSE NET INVESTMENT
PERIOD ENDED RATIO LOSS RATIO
------------ ------- --------------
September 30,
2007 18.52% (17.10)%
September 30,
2006 52.84 (52.70)
</Table>
23
See Notes to Financial Statements
Morgan Stanley Institutional Strategies Fund
FINANCIAL HIGHLIGHTS continued
<Table>
<Caption>
FOR THE PERIOD
FOR THE YEAR AUGUST 28, 2006*
ENDED THROUGH
SEPTEMBER 30, 2007 SEPTEMBER 30, 2006
------------------ ------------------
Class C Shares
Selected Per Share Data:
Net asset value, beginning of period........................ $10.22 $10.00
------ ------
Income (loss) from investment operations:
Net investment income (loss)++.......................... 0.01 (0.01)
Net realized and unrealized gain........................ 2.18 0.23
------ ------
Total income from investment operations..................... 2.19 0.22
------ ------
Net asset value, end of period.............................. $12.41 $10.22
====== ======
Total Return+............................................... 21.31% 2.30 %(1)
Ratios to Average Net Assets(3)(4)(5):
Total expenses (before expense offset)...................... 1.39% 1.39 %(2)
Net investment income (loss)................................ 0.03% (1.25)%(2)
Supplemental Data:
Net assets, end of period, in thousands..................... $227 $212
Portfolio turnover rate..................................... 12% 3 %(1)
</Table>
- ---------------------
<Table>
* Commencement of operations.
++ 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) Does not include any expenses incurred as a result of
investment in the Underlying Funds.
(4) Reflects overall Fund ratios for investment income and
non-class specific expenses.
(5) If the Fund had borne all its expenses that were reimbursed
or waived by the Investment Adviser and Administrator, the
annualized expense and net investment loss ratios, before
expense offset, would have been as follows:
</Table>
<Table>
<Caption>
EXPENSE NET INVESTMENT
PERIOD ENDED RATIO LOSS RATIO
------------ ------- --------------
September 30,
2007 19.33% (17.91)%
September 30,
2006 52.84 (52.70)
</Table>
24
See Notes to Financial Statements
Morgan Stanley Institutional Strategies Fund
FINANCIAL HIGHLIGHTS continued
<Table>
<Caption>
FOR THE PERIOD
FOR THE YEAR AUGUST 28, 2006*
ENDED THROUGH
SEPTEMBER 30, 2007 SEPTEMBER 30, 2006
------------------ ------------------
Class D Shares
Selected Per Share Data:
Net asset value, beginning of period........................ $10.23 $10.00
------ ------
Income from investment operations:
Net investment income++................................. 0.12 0.00
Net realized and unrealized gain........................ 2.19 0.23
------ ------
Total income from investment operations..................... 2.31 0.23
------ ------
Net asset value, end of period.............................. $12.54 $10.23
====== ======
Total Return+............................................... 22.68% 2.30 %(1)
Ratios to Average Net Assets(3)(4)(5):
Total expenses (before expense offset)...................... 0.39% 0.39 %(2)
Net investment income (loss)................................ 1.03% (0.25)%(2)
Supplemental Data:
Net assets, end of period, in thousands..................... $157 $128
Portfolio turnover rate..................................... 12% 3 %(1)
</Table>
- ---------------------
<Table>
* Commencement of operations.
++ 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) Does not include any expenses incurred as a result of
investment in the Underlying Funds.
(4) Reflects overall Fund ratios for investment income and
non-class specific expenses.
(5) If the Fund had borne all its expenses that were reimbursed
or waived by the Investment Adviser and Administrator, the
annualized expense and net investment loss ratios, before
expense offset, would have been as follows:
</Table>
<Table>
<Caption>
EXPENSE NET INVESTMENT
PERIOD ENDED RATIO LOSS RATIO
------------ ------- --------------
September 30,
2007 18.33% (16.91)%
September 30,
2006 51.84 (51.70)
</Table>
See Notes to Financial Statements
25
Morgan Stanley Institutional Strategies Fund
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Trustees of
Morgan Stanley Institutional Strategies Fund:
We have audited the accompanying statement of assets and liabilities of Morgan
Stanley Institutional Strategies Fund (the "Fund"), including the portfolio of
investments, as of September 30, 2007, and the related statement of operations
for the year then ended and the statements of changes in net assets and the
financial highlights for each of the periods presented. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. The Fund
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Fund's internal control over
financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. Our procedures included confirmation
of securities owned as of September 30, 2007, by correspondence with the
custodian. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Morgan
Stanley Institutional Strategies Fund as of September 30, 2007, the results of
its operations for the year then ended, the changes in its net assets and the
financial highlights for each of the periods presented, in conformity with
accounting principles generally accepted in the United States of America.
Deloitte & Touche LLP
New York, New York
November 21, 2007
26
Morgan Stanley Institutional Strategies Fund
TRUSTEE AND OFFICER INFORMATION (UNAUDITED)
Independent Trustees:
<Table>
<Caption>
Number of
Portfolios in
Fund Complex
Position(s) Term of Office Overseen by
Name, Age and Address of Held with and Length of Principal Occupation(s) During Independent
Independent Trustee Registrant Time Served* Past 5 Years Trustee**
- --------------------------------------- ----------- -------------- ------------------------------ -------------
Frank L. Bowman (62) Trustee Since August President and Chief Executive 171
c/o Kramer Levin Naftalis & Frankel LLP 2006 Officer, Nuclear Energy
Counsel to the Independent Trustees Institute (policy
1177 Avenue of the Americas organization) (since February
New York, NY 10036 2005); Director or Trustee of
various Retail Funds and
Institutional Funds (since
August 2006); Chairperson of
the Insurance Sub-Committee of
the Valuation, Insurance and
Compliance Committee (since
February 2007); formerly,
variously, Admiral in the U.S.
Navy, Director of Naval
Nuclear Propulsion Program and
Deputy Administrator-Naval
Reactors in the National
Nuclear Security
Administration at the U.S.
Department of Energy (1996-
2004). Honorary Knight
Commander of the Most
Excellent Order of the British
Empire.
Michael Bozic (66) Trustee Since April Private investor; Chairperson 173
c/o Kramer Levin Naftalis & Frankel LLP 1994 of the Valuation, Insurance
Counsel to the Independent Trustees and Compliance Committee
1177 Avenue of the Americas (since October 2006); Director
New York, NY 10036 or Trustee of the Retail Funds
(since April 1994) and the
Institutional Funds (since
July 2003); formerly,
Chairperson of the Insurance
Committee (July 2006-
September 2006); Vice Chairman
of Kmart Corporation (December
1998-October 2000), Chairman
and Chief Executive Officer of
Levitz Furniture Corporation
(November 1995-November 1998)
and President and Chief
Executive Officer of Hills
Department Stores (May
1991-July 1995); variously
Chairman, Chief Executive
Officer, President and Chief
Operating Officer (1987-1991)
of the Sears Merchandise Group
of Sears, Roebuck & Co.
<Caption>
Name, Age and Address of Other Directorships Held by
Independent Trustee Independent Trustee
- --------------------------------------- -----------------------------
Frank L. Bowman (62) Director of the National
c/o Kramer Levin Naftalis & Frankel LLP Energy Foundation, the U.S.
Counsel to the Independent Trustees Energy Association, the
1177 Avenue of the Americas American Council for Capital
New York, NY 10036 Formation and the Armed
Services YMCA of the USA.
Michael Bozic (66) Director of various business
c/o Kramer Levin Naftalis & Frankel LLP organizations.
Counsel to the Independent Trustees
1177 Avenue of the Americas
New York, NY 10036
</Table>
27
Morgan Stanley Institutional Strategies Fund
TRUSTEE AND OFFICER INFORMATION (UNAUDITED) continued
<Table>
<Caption>
Number of
Portfolios in
Fund Complex
Position(s) Term of Office Overseen by
Name, Age and Address of Held with and Length of Principal Occupation(s) During Independent
Independent Trustee Registrant Time Served* Past 5 Years Trustee**
- --------------------------------------- ----------- -------------- ------------------------------ -------------
Kathleen A. Dennis (54) Trustee Since August President, Cedarwood 171
c/o Kramer Levin Naftalis & Frankel LLP 2006 Associates (mutual fund
Counsel to the Independent Trustees consulting) (since July 2006);
1177 Avenue of the Americas Chairperson of the Money
New York, NY 10036 Market and Alternatives Sub-
Committee of the Investment
Committee (since October 2006)
and Director or Trustee of
various Retail Funds and
Institutional Funds (since
August 2006); formerly, Senior
Managing Director of Victory
Capital Management (1993-
2006).
Dr. Manuel H. Johnson (58) Trustee Since July Senior Partner, Johnson Smick 173
c/o Johnson Smick Group, Inc. 1991 International, Inc.
888 16th Street, N.W. (consulting firm); Chairperson
Suite 740 of the Investment Committee
Washington, D.C. 20006 (since October 2006) and
Director or Trustee of the
Retail Funds (since July 1991)
and the Institutional Funds
(since July 2003); Co-Chairman
and a founder of the Group of
Seven Council (G7C)
(international economic
commission); formerly,
Chairperson of the Audit
Committee (July 1991-
September 2006); Vice Chairman
of the Board of Governors of
the Federal Reserve System and
Assistant Secretary of the
U.S. Treasury.
<Caption>
Name, Age and Address of Other Directorships Held by
Independent Trustee Independent Trustee
- --------------------------------------- -----------------------------
Kathleen A. Dennis (54) None.
c/o Kramer Levin Naftalis & Frankel LLP
Counsel to the Independent Trustees
1177 Avenue of the Americas
New York, NY 10036
Dr. Manuel H. Johnson (58) Director of NVR, Inc. (home
c/o Johnson Smick Group, Inc. construction); Director of
888 16th Street, N.W. Evergreen Energy.
Suite 740
Washington, D.C. 20006
</Table>
28
Morgan Stanley Institutional Strategies Fund
TRUSTEE AND OFFICER INFORMATION (UNAUDITED) continued
<Table>
<Caption>
Number of
Portfolios in
Fund Complex
Position(s) Term of Office Overseen by
Name, Age and Address of Held with and Length of Principal Occupation(s) During Independent
Independent Trustee Registrant Time Served* Past 5 Years Trustee**
- --------------------------------------- ----------- -------------- ------------------------------ -------------
Joseph J. Kearns (65) Trustee Since August President, Kearns & Associates 174
c/o Kearns & Associates LLC 1994 LLC (investment consulting);
PMB754 Chairperson of the Audit
23852 Pacific Coast Highway Committee (since October 2006)
Malibu, CA 90265 and Director or Trustee of the
Retail Funds (since July 2003)
and the Institutional Funds
(since August 1994); formerly,
Deputy Chairperson of the
Audit Committee (July 2003-
September 2006) and
Chairperson of the Audit
Committee of the Institutional
Funds (October 2001-July
2003); CFO of the J. Paul
Getty Trust.
Michael F. Klein (48) Trustee Since August Managing Director, Aetos 171
c/o Kramer Levin Naftalis & Frankel LLP 2006 Capital, LLC (since March
Counsel to the Independent Trustees 2000) and Co-President, Aetos
1177 Avenue of the Americas Alternatives Management, LLC
New York, NY 10036 (since January 2004);
Chairperson of the
Fixed-Income Sub-Committee of
the Investment Committee
(since October 2006) and
Director or Trustee of various
Retail Funds and Institutional
Funds (since August 2006);
formerly, Managing Director,
Morgan Stanley & Co. Inc. and
Morgan Stanley Dean Witter
Investment Management,
President, Morgan Stanley
Institutional Funds (June
1998-March 2000) and
Principal, Morgan Stanley &
Co. Inc. and Morgan Stanley
Dean Witter Investment
Management (August
1997-December 1999).
<Caption>
Name, Age and Address of Other Directorships Held by
Independent Trustee Independent Trustee
- --------------------------------------- -----------------------------
Joseph J. Kearns (65) Director of Electro Rent
c/o Kearns & Associates LLC Corporation (equipment
PMB754 leasing), The Ford Family
23852 Pacific Coast Highway Foundation, and the UCLA
Malibu, CA 90265 Foundation.
Michael F. Klein (48) Director of certain
c/o Kramer Levin Naftalis & Frankel LLP investment funds managed or
Counsel to the Independent Trustees sponsored by Aetos Capital,
1177 Avenue of the Americas LLC. Director of Sanitized AG
New York, NY 10036 and Sanitized Marketing AG
(specialty chemicals).
</Table>
29
Morgan Stanley Institutional Strategies Fund
TRUSTEE AND OFFICER INFORMATION (UNAUDITED) continued
<Table>
<Caption>
Number of
Portfolios in
Fund Complex
Position(s) Term of Office Overseen by
Name, Age and Address of Held with and Length of Principal Occupation(s) During Independent
Independent Trustee Registrant Time Served* Past 5 Years Trustee**
- --------------------------------------- ----------- -------------- ------------------------------ -------------
Michael E. Nugent (71) Chairperson Chairperson of General Partner, Triumph 173
c/o Triumph Capital, L.P. of the the Boards Capital, L.P. (private
445 Park Avenue Board and since July investment partnership);
New York, NY 10022 Trustee 2006 and Chairperson of the Boards of
Trustee since the Retail Funds and
July 1991 Institutional Funds (since
July 2006); Director or
Trustee of the Retail Funds
(since July 1991) and the
Institutional Funds (since
July 2001); formerly,
Chairperson of the Insurance
Committee (until July 2006);
Vice President, Bankers Trust
Company and BT Capital
Corporation (1984-1988).
W. Allen Reed (60) Trustee Since August Chairperson of the Equity Sub- 171
c/o Kramer Levin Naftalis & Frankel LLP 2006 Committee of the Investment
Counsel to the Independent Trustees Committee (since October 2006)
1177 Avenue of the Americas and Director or Trustee of
New York, NY 10036 various Retail Funds and
Institutional Funds (since
August 2006); formerly,
President and CEO of General
Motors Asset Management;
Chairman and Chief Executive
Officer of the GM Trust Bank
and Corporate Vice President
of General Motors Corporation
(August 1994-December 2005).
Fergus Reid (75) Trustee Since June Chairman of Lumelite Plastics 174
c/o Lumelite Plastics Corporation 1992 Corporation; Chairperson of
85 Charles Colman Blvd. the Governance Committee and
Pawling, NY 12564 Director or Trustee of the
Retail Funds (since July 2003)
and the Institutional Funds
(since June 1992).
<Caption>
Name, Age and Address of Other Directorships Held by
Independent Trustee Independent Trustee
- --------------------------------------- -----------------------------
Michael E. Nugent (71) None.
c/o Triumph Capital, L.P.
445 Park Avenue
New York, NY 10022
W. Allen Reed (60) Director of GMAC (financial
c/o Kramer Levin Naftalis & Frankel LLP services) and Temple-Inland
Counsel to the Independent Trustees Industries (packaging,
1177 Avenue of the Americas banking and forest products);
New York, NY 10036 Director of Legg Mason, Inc.
and Director of the Auburn
University Foundation.
Fergus Reid (75) Trustee and Director of
c/o Lumelite Plastics Corporation certain investment companies
85 Charles Colman Blvd. in the JPMorgan Funds complex
Pawling, NY 12564 managed by J.P. Morgan
Investment Management Inc.
</Table>
30
Morgan Stanley Institutional Strategies Fund
TRUSTEE AND OFFICER INFORMATION (UNAUDITED) continued
Interested Trustee:
<Table>
<Caption>
Number of
Portfolios in
Fund Complex
Position(s) Term of Office Overseen by
Name, Age and Address of Held with and Length of Principal Occupation(s) During Interested
Interested Trustee Registrant Time Served* Past 5 Years Trustee**
- ------------------------------------- ----------- -------------- ------------------------------ -------------
James F. Higgins (59) Trustee Since June Director or Trustee of the 173
c/o Morgan Stanley Trust 2000 Retail Funds (since June 2000)
Harborside Financial Center and the Institutional Funds
Plaza Two (since July 2003); Senior
Jersey City, NJ 07311 Advisor of Morgan Stanley
(since August 2000).
<Caption>
Name, Age and Address of Other Directorships Held by
Interested Trustee Interested Trustee
- ------------------------------------- ------------------------------
James F. Higgins (59) Director of AXA Financial,
c/o Morgan Stanley Trust Inc. and The Equitable Life
Harborside Financial Center Assurance Society of the
Plaza Two United States (financial
Jersey City, NJ 07311 services).
</Table>
- ---------------------
* This is the earliest date the Trustee began serving the funds advised by
Morgan Stanley Investment Advisors Inc. (the "Investment Adviser") (the
"Retail Funds") or the funds advised by Morgan Stanley Investment Management
Inc. and Morgan Stanley AIP GP LP (the "Institutional Funds").
** The Fund Complex includes all open-end and closed-end funds (including all
of their portfolios) advised by the Investment Adviser and any funds that
have an investment adviser that is an affiliated person of the Investment
Adviser (including, but not limited to, Morgan Stanley Investment Management
Inc.).
31
Morgan Stanley Institutional Strategies Fund
TRUSTEE AND OFFICER INFORMATION (UNAUDITED) continued
Executive Officers:
<Table>
<Caption>
Term of
Position(s) Office and
Name, Age and Address of Held with Length of
Executive Officer Registrant Time Served* Principal Occupation(s) During Past 5 Years
- ----------------------------- --------------- -------------- ------------------------------------------------------------
Ronald E. Robison (68) President and President President (since September 2005) and Principal Executive
522 Fifth Avenue Principal since Officer (since May 2003) of funds in the Fund Complex;
New York, NY 10036 Executive September 2005 President (since September 2005) and Principal Executive
Officer and Principal Officer (since May 2003) of the Van Kampen Funds; Managing
Executive Director, Director and/or Officer of the Investment Adviser
Officer since and various entities affiliated with the Investment Adviser;
May 2003 Director of Morgan Stanley SICAV (since May 2004). Formerly,
Executive Vice President (July 2003-September 2005) of funds
in the Fund Complex and the Van Kampen Funds; President and
Director of the Institutional Funds (March 2001-July 2003);
Chief Administrative Officer of the Investment Adviser;
Chief Administrative Officer of Morgan Stanley Services
Company Inc.
J. David Germany (53) Vice President Since February Managing Director and (since December 2005) Chief Investment
Morgan Stanley Investment 2006 Officer -- Global Fixed Income of Morgan Stanley Investment
Management Limited Management; Managing Director and Director of Morgan Stanley
20 Bank Street Investment Management Limited; Vice President of the Retail
Canary Wharf, Funds and Institutional Funds (since February 2006).
London, England E14 4AD
Dennis F. Shea (54) Vice President Since February Managing Director and (since February 2006) Chief Investment
522 Fifth Avenue 2006 Officer -- Global Equity of Morgan Stanley Investment
New York, NY 10036 Management; Vice President of the Retail Funds and
Institutional Funds (since February 2006). Formerly,
Managing Director and Director of Global Equity Research at
Morgan Stanley.
Amy R. Doberman (45) Vice President Since July Managing Director and General Counsel, U.S. Investment
522 Fifth Avenue 2004 Management of Morgan Stanley Investment Management (since
New York, NY 10036 July 2004); Vice President of the Retail Funds and the
Institutional Funds (since July 2004); Vice President of the
Van Kampen Funds (since August 2004); Secretary (since
February 2006) and Managing Director (since July 2004) of
the Investment Adviser and various entities affiliated with
the Investment Adviser. Formerly, Managing Director and
General Counsel -- Americas, UBS Global Asset Management
(July 2000-July 2004).
Carsten Otto (43) Chief Since October Managing Director and Global Director of Compliance for
522 Fifth Avenue Compliance 2004 Morgan Stanley Investment Management (since April 2007);
New York, NY 10036 Officer Managing Director and Chief Compliance Officer of Morgan
Stanley Investment Management. Formerly, U.S. Director of
Compliance (October 2004-April 2007) and Assistant Secretary
and Assistant General Counsel of the Retail Funds.
Stefanie V. Chang Yu (40) Vice President Since December Executive Director of the Investment Adviser and various
522 Fifth Avenue 1997 entities affiliated with the Investment Adviser; Vice
New York, NY 10036 President of the Retail Funds (since July 2002) and the
Institutional Funds (since December 1997). Formerly,
Secretary of various entities affiliated with the Investment
Adviser.
</Table>
32
Morgan Stanley Institutional Strategies Fund
TRUSTEE AND OFFICER INFORMATION (UNAUDITED) continued
<Table>
<Caption>
Term of
Position(s) Office and
Name, Age and Address of Held with Length of
Executive Officer Registrant Time Served* Principal Occupation(s) During Past 5 Years
- ----------------------------- --------------- -------------- ------------------------------------------------------------
Francis J. Smith (42) Treasurer and Treasurer Executive Director of the Investment Adviser and various
c/o Morgan Stanley Trust Chief Financial since July entities affiliated with the Investment Adviser; Treasurer
Harborside Financial Center Officer 2003 and Chief and Chief Financial Officer of the Retail Funds (since July
Plaza Two Financial 2003). Formerly, Vice President of the Retail Funds
Jersey City, NJ 07311 Officer since (September 2002 to July 2003).
September 2002
Mary E. Mullin (40) Secretary Since June Executive Director of the Investment Adviser and various
1221 Avenue of the Americas 1999 entities affiliated with the Investment Adviser; Secretary
New York, NY 10020 of the Retail Funds (since July 2003) and the Institutional
Funds (since June 1999).
</Table>
- ---------------------
* This is the earliest date the Officer began serving the Retail Funds or
Institutional Funds.
2007 FEDERAL TAX NOTICE (UNAUDITED)
For Federal income tax purposes, the following information is
furnished with respect to the Fund's earnings for its taxable
year ended September 30, 2007. When distributed, certain
earnings may be subject to a maximum tax rate of 15% as
provided for by the Jobs and Growth Tax Relief Reconciliation
Act of 2003. The Fund designated up to a maximum of $11,461 as
taxable at this lower rate.
In January, the Fund provides tax information to shareholders
for the preceding calendar year.
33
(This Page Intentionally Left Blank)
(This Page Intentionally Left Blank)
TRUSTEES
Frank L. Bowman
Michael Bozic
Kathleen A. Dennis
James F. Higgins
Dr. Manuel H. Johnson
Joseph J. Kearns
Michael F. Klein
Michael E. Nugent
W. Allen Reed
Fergus Reid
OFFICERS
Michael E. Nugent
Chairperson of the Board
Ronald E. Robison
President and Principal Executive Officer
J. David Germany
Vice President
Dennis F. Shea
Vice President
Amy R. Doberman
Vice President
Carsten Otto
Chief Compliance Officer
Stefanie V. Chang Yu
Vice President
Francis J. Smith
Treasurer and Chief Financial Officer
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
LEGAL COUNSEL
Clifford Chance US LLP
31 West 52nd Street
New York, New York 10019
COUNSEL TO THE INDEPENDENT TRUSTEES
Kramer Levin Naftalis & Frankel LLP
1177 Avenue of the Americas
New York, New York 10036
INVESTMENT ADVISER
Morgan Stanley Investment Advisors Inc.
522 Fifth Avenue
New York, New York 10036
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.
Morgan Stanley Distributors Inc., member FINRA
(c) 2007 Morgan Stanley
[MORGAN STANLEY LOGO]
MORGAN STANLEY FUNDS
Morgan Stanley
Institutional Strategies
Fund
Annual Report
September 30, 2007
[MORGAN STANLEY LOGO]
INSTSTRATANN
IU07-04802P-Y09/07
Item 2. Code of Ethics.
(a) The Fund has adopted a code of ethics (the "Code of Ethics") that applies to
its principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar functions,
regardless of whether these individuals are employed by the Fund or a third
party.
(b) No information need be disclosed pursuant to this paragraph.
(c) Not applicable.
(d) Not applicable.
(e) Not applicable.
(f)
(1) The Fund's Code of Ethics is attached hereto as Exhibit 12 A.
(2) Not applicable.
(3) Not applicable.
Item 3. Audit Committee Financial Expert.
The Fund's Board of Trustees has determined that Joseph J. Kearns, an
"independent" Trustee, is an "audit committee financial expert" serving on its
audit committee. Under applicable securities laws, a person who is determined to
be an audit committee financial expert will not be deemed an "expert" for any
purpose, including without limitation for the purposes of Section 11 of the
Securities Act of 1933, as a result of being designated or identified as an
audit committee financial expert. The designation or identification of a person
as an audit committee financial expert does not impose on such person any
duties, obligations, or liabilities that are greater than the duties,
obligations, and liabilities imposed on such person as a member of the audit
committee and Board of Trustees in the absence of such designation or
identification
2
Item 4. Principal Accountant Fees and Services.
(a)(b)(c)(d) and (g). Based on fees billed for the periods shown:
2007
REGISTRANT COVERED ENTITIES(1)
---------- -------------------
AUDIT FEES.............. $16,500 N/A
NON-AUDIT FEES
AUDIT-RELATED FEES... $ --(2) $5,041,000(2)
TAX FEES............. $ 5,700(3) $ 761,000(4)
ALL OTHER FEES....... $ -- $ --
TOTAL NON-AUDIT FEES.... $ 5,700 $5,802,000
TOTAL................... $22,200 $5,802,000
2006
REGISTRANT COVERED ENTITIES(1)
---------- -------------------
AUDIT FEES ............. $34,200 N/A
NON-AUDIT FEES
AUDIT-RELATED FEES .. $ 531(2) $3,215,745(2)
TAX FEES ............ $ 5,400(3) $ 24,000(4)
ALL OTHER FEES ...... $ -- $ --
TOTAL NON-AUDIT FEES ... $ 5,931 $3,239,745
TOTAL .................. $40,131 $3,239,745
N/A- Not applicable, as not required by Item 4.
(1) Covered Entities include the Adviser (excluding sub-advisors) and any
entity controlling, controlled by or under common control with the Adviser
that provides ongoing services to the Registrant.
(2) Audit-Related Fees represent assurance and related services provided that
are reasonably related to the performance of the audit of the financial
statements of the Covered Entities' and funds advised by the Adviser or its
affiliates, specifically data verification and agreed-upon procedures
related to asset securitizations and agreed-upon procedures engagements.
(3) Tax Fees represent tax compliance, tax planning and tax advice services
provided in connection with the preparation and review of the Registrant's
tax returns.
(4) Tax Fees represent tax compliance, tax planning and tax advice services
provided in connection with the review of Covered Entities' tax returns.
3
(e)(1) The audit committee's pre-approval policies and procedures are as
follows:
APPENDIX A
AUDIT COMMITTEE
AUDIT AND NON-AUDIT SERVICES
PRE-APPROVAL POLICY AND PROCEDURES
OF THE
MORGAN STANLEY RETAIL AND INSTITUTIONAL FUNDS
AS ADOPTED AND AMENDED JULY 23, 2004,(1)
1. STATEMENT OF PRINCIPLES
The Audit Committee of the Board is required to review and, in its sole
discretion, pre-approve all Covered Services to be provided by the Independent
Auditors to the Fund and Covered Entities in order to assure that services
performed by the Independent Auditors do not impair the auditor's independence
from the Fund.
The SEC has issued rules specifying the types of services that an independent
auditor may not provide to its audit client, as well as the audit committee's
administration of the engagement of the independent auditor. The SEC's rules
establish two different approaches to pre-approving services, which the SEC
considers to be equally valid. Proposed services either: may be pre-approved
without consideration of specific case-by-case services by the Audit Committee
("general pre-approval"); or require the specific pre-approval of the Audit
Committee or its delegate ("specific pre-approval"). The Audit Committee
believes that the combination of these two approaches in this Policy will result
in an effective and efficient procedure to pre-approve services performed by the
Independent Auditors. As set forth in this Policy, unless a type of service has
received general pre-approval, it will require specific pre-approval by the
Audit Committee (or by any member of the Audit Committee to which pre-approval
authority has been delegated) if it is to be provided by the Independent
Auditors. Any proposed services exceeding pre-approved cost levels or budgeted
amounts will also require specific pre-approval by the Audit Committee.
The appendices to this Policy describe the Audit, Audit-related, Tax and All
Other services that have the general pre-approval of the Audit Committee. The
term of any general pre-approval is 12 months from the date of pre-approval,
unless the Audit Committee considers and provides a different period and states
otherwise. The Audit Committee will annually review and pre-approve the services
that may be provided by the Independent Auditors without obtaining specific
pre-approval from the Audit Committee. The Audit Committee will add to or
subtract from the list of general pre-approved services from time to time, based
on subsequent determinations.
- ----------
(1) This Audit Committee Audit and Non-Audit Services Pre-Approval Policy and
Procedures (the "Policy"), adopted as of the date above, supersedes and
replaces all prior versions that may have been adopted from time to time.
4
The purpose of this Policy is to set forth the policy and procedures by which
the Audit Committee intends to fulfill its responsibilities. It does not
delegate the Audit Committee's responsibilities to pre-approve services
performed by the Independent Auditors to management.
The Fund's Independent Auditors have reviewed this Policy and believes that
implementation of the Policy will not adversely affect the Independent Auditors'
independence.
2. DELEGATION
As provided in the Act and the SEC's rules, the Audit Committee may delegate
either type of pre-approval authority to one or more of its members. The member
to whom such authority is delegated must report, for informational purposes
only, any pre-approval decisions to the Audit Committee at its next scheduled
meeting.
3. AUDIT SERVICES
The annual Audit services engagement terms and fees are subject to the specific
pre-approval of the Audit Committee. Audit services include the annual financial
statement audit and other procedures required to be performed by the Independent
Auditors to be able to form an opinion on the Fund's financial statements. These
other procedures include information systems and procedural reviews and testing
performed in order to understand and place reliance on the systems of internal
control, and consultations relating to the audit. The Audit Committee will
approve, if necessary, any changes in terms, conditions and fees resulting from
changes in audit scope, Fund structure or other items.
In addition to the annual Audit services engagement approved by the Audit
Committee, the Audit Committee may grant general pre-approval to other Audit
services, which are those services that only the Independent Auditors reasonably
can provide. Other Audit services may include statutory audits and services
associated with SEC registration statements (on Forms N-1A, N-2, N-3, N-4,
etc.), periodic reports and other documents filed with the SEC or other
documents issued in connection with securities offerings.
The Audit Committee has pre-approved the Audit services in Appendix B.1. All
other Audit services not listed in Appendix B.1 must be specifically
pre-approved by the Audit Committee (or by any member of the Audit Committee to
which pre-approval has been delegated).
4. AUDIT-RELATED SERVICES
Audit-related services are assurance and related services that are reasonably
related to the performance of the audit or review of the Fund's financial
statements and, to the extent they are Covered Services, the Covered Entities or
that are traditionally performed by the Independent Auditors. Because the Audit
Committee believes that the provision of Audit-related services does not impair
the independence of the auditor and is consistent with the SEC's rules on
auditor independence, the Audit Committee may grant general pre-approval to
Audit-related services. Audit-related services include, among others, accounting
consultations related to accounting, financial reporting or disclosure matters
5
not classified as "Audit services"; assistance with understanding and
implementing new accounting and financial reporting guidance from rulemaking
authorities; agreed-upon or expanded audit procedures related to accounting
and/or billing records required to respond to or comply with financial,
accounting or regulatory reporting matters; and assistance with internal control
reporting requirements under Forms N-SAR and/or N-CSR.
The Audit Committee has pre-approved the Audit-related services in Appendix B.2.
All other Audit-related services not listed in Appendix B.2 must be specifically
pre-approved by the Audit Committee (or by any member of the Audit Committee to
which pre-approval has been delegated).
5. TAX SERVICES
The Audit Committee believes that the Independent Auditors can provide Tax
services to the Fund and, to the extent they are Covered Services, the Covered
Entities, such as tax compliance, tax planning and tax advice without impairing
the auditor's independence, and the SEC has stated that the Independent Auditors
may provide such services.
Pursuant to the preceding paragraph, the Audit Committee has pre-approved the
Tax Services in Appendix B.3. All Tax services in Appendix B.3 must be
specifically pre-approved by the Audit Committee (or by any member of the Audit
Committee to which pre-approval has been delegated).
6. ALL OTHER SERVICES
The Audit Committee believes, based on the SEC's rules prohibiting the
Independent Auditors from providing specific non-audit services, that other
types of non-audit services are permitted. Accordingly, the Audit Committee
believes it may grant general pre-approval to those permissible non-audit
services classified as All Other services that it believes are routine and
recurring services, would not impair the independence of the auditor and are
consistent with the SEC's rules on auditor independence.
The Audit Committee has pre-approved the All Other services in Appendix B.4.
Permissible All Other services not listed in Appendix B.4 must be specifically
pre-approved by the Audit Committee (or by any member of the Audit Committee to
which pre-approval has been delegated).
7. PRE-APPROVAL FEE LEVELS OR BUDGETED AMOUNTS
Pre-approval fee levels or budgeted amounts for all services to be provided by
the Independent Auditors will be established annually by the Audit Committee.
Any proposed services exceeding these levels or amounts will require specific
pre-approval by the Audit Committee. The Audit Committee is mindful of the
overall relationship of fees for audit and non-audit services in determining
whether to pre-approve any such services.
8. PROCEDURES
All requests or applications for services to be provided by the Independent
Auditors that do not require specific approval by the Audit Committee will be
submitted to the Fund's Chief Financial Officer and must include a detailed
description of the services to be
6
rendered. The Fund's Chief Financial Officer will determine whether such
services are included within the list of services that have received the general
pre-approval of the Audit Committee. The Audit Committee will be informed on a
timely basis of any such services rendered by the Independent Auditors. Requests
or applications to provide services that require specific approval by the Audit
Committee will be submitted to the Audit Committee by both the Independent
Auditors and the Fund's Chief Financial Officer, and must include a joint
statement as to whether, in their view, the request or application is consistent
with the SEC's rules on auditor independence.
The Audit Committee has designated the Fund's Chief Financial Officer to monitor
the performance of all services provided by the Independent Auditors and to
determine whether such services are in compliance with this Policy. The Fund's
Chief Financial Officer will report to the Audit Committee on a periodic basis
on the results of its monitoring. Both the Fund's Chief Financial Officer and
management will immediately report to the chairman of the Audit Committee any
breach of this Policy that comes to the attention of the Fund's Chief Financial
Officer or any member of management.
9. ADDITIONAL REQUIREMENTS
The Audit Committee has determined to take additional measures on an annual
basis to meet its responsibility to oversee the work of the Independent Auditors
and to assure the auditor's independence from the Fund, such as reviewing a
formal written statement from the Independent Auditors delineating all
relationships between the Independent Auditors and the Fund, consistent with
Independence Standards Board No. 1, and discussing with the Independent Auditors
its methods and procedures for ensuring independence.
10. COVERED ENTITIES
Covered Entities include the Fund's investment adviser(s) and any entity
controlling, controlled by or under common control with the Fund's investment
adviser(s) that provides ongoing services to the Fund(s). Beginning with
non-audit service contracts entered into on or after May 6, 2003, the Fund's
audit committee must pre-approve non-audit services provided not only to the
Fund but also to the Covered Entities if the engagements relate directly to the
operations and financial reporting of the Fund. This list of Covered Entities
would include:
Morgan Stanley Retail Funds
---------------------------
Morgan Stanley Investment Advisors Inc.
Morgan Stanley & Co. Incorporated
Morgan Stanley DW Inc.
Morgan Stanley Investment Management Inc.
Morgan Stanley Investment Management Limited
Morgan Stanley Investment Management Private Limited
Morgan Stanley Asset & Investment Trust Management Co., Limited
Morgan Stanley Investment Management Company
Van Kampen Asset Management
Morgan Stanley Services Company, Inc.
Morgan Stanley Distributors Inc.
Morgan Stanley Trust FSB
7
Morgan Stanley Institutional Funds
----------------------------------
Morgan Stanley Investment Management Inc.
Morgan Stanley Investment Advisors Inc.
Morgan Stanley Investment Management Limited
Morgan Stanley Investment Management Private Limited
Morgan Stanley Asset & Investment Trust Management Co., Limited
Morgan Stanley Investment Management Company
Morgan Stanley & Co. Incorporated
Morgan Stanley Distribution, Inc.
Morgan Stanley AIP GP LP
Morgan Stanley Alternative Investment Partners LP
(e)(2) Beginning with non-audit service contracts entered into on or after May
6, 2003, the audit committee also is required to pre-approve services to Covered
Entities to the extent that the services are determined to have a direct impact
on the operations or financial reporting of the Registrant. 100% of such
services were pre-approved by the audit committee pursuant to the Audit
Committee's pre-approval policies and procedures (attached hereto).
(f) Not applicable.
(g) See table above.
(h) The audit committee of the Board of Trustees has considered whether the
provision of services other than audit services performed by the auditors to the
Registrant and Covered Entities is compatible with maintaining the auditors'
independence in performing audit services.
Item 5. Audit Committee of Listed Registrants.
(a) The Fund has a separately-designated standing audit committee established
in accordance with Section 3(a)(58)(A) of the Exchange Act whose members are:
Joseph Kearns, Michael Nugent and Allen Reed.
(b) Not applicable.
Item 6. Schedule of Investments
Refer to Item 1.
8
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies.
Applicable only to reports filed by closed-end funds.
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 only 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 second fiscal quarter of the period covered
by this report that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting.
Item 12. Exhibits
(a) The Code of Ethics for Principal Executive and Senior Financial Officers is
attached hereto.
(b) A separate certification for each principal executive officer and principal
financial officer of the registrant are attached hereto as part of EX-99.CERT.
9
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 Institutional Strategies Fund
/s/ Ronald E. Robison
Ronald E. Robison
Principal Executive Officer
November 20, 2007
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
November 20, 2007
/s/ Francis Smith
Francis Smith
Principal Financial Officer
November 20, 2007
10