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: 811-22075
Morgan Stanley Series Fund - Large Cap Equity
(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: July 31, 2008
Date of reporting period: January 31, 2008
Item 1 - Report to Shareholders
Welcome, Shareholder:
In this report, you'll learn about how your investment in Morgan Stanley
Diversified Large Cap Equity Fund performed during the 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 period October 9, 2007 through January 31, 2008
TOTAL RETURN FOR THE PERIOD SINCE INCEPTION
(OCTOBER 9, 2007) THROUGH JANUARY 31, 2008
<Table>
<Caption>
LIPPER
MULTI-CAP
GROWTH
CLASS A CLASS B CLASS C CLASS D S&P 500(R) FUNDS INDEX(2)
- -11.91% -11.96% -11.96% -11.96% -11.41% -12.09%
</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
The Morgan Stanley Diversified Large Cap Equity Fund launched on October 9,
2007, during a turbulent time in the global stock markets. For the period since
the Fund's inception through January 31, 2008, U.S. stocks (as represented by
the S&P 500(R) Index) fell 11.41 percent.
In the fourth quarter of 2007 and beginning of 2008, global markets continued to
be roiled by ongoing bad news from the U.S. economy, tight credit conditions,
weak real estate markets and high commodity prices. In the U.S., the Federal
Open Market Committee (the "Fed") responded to the turbulence by lowering its
target federal funds rate five times between September and January. Although the
quick action by the Fed did bolster investor confidence at times, rallies were
short-lived as negative economic news continued to pummel the markets. U.S.
gross domestic product growth slowed to 0.6% in the fourth quarter, down from
4.9% in the third quarter. Weak manufacturing and employment data released in
January showed further evidence of a much slower economy, and rising commodity
prices and a weak U.S. dollar contributed to mounting inflationary pressures. By
the end of the period, the probability of a recession appeared very high,
although the potential length and severity continued to be debated.
PERFORMANCE ANALYSIS
All share classes of Morgan Stanley Diversified Large Cap Equity Fund
underperformed the S&P 500(R) (the "Index") and outperformed the Lipper Multi-
Cap Growth Funds Index for the period since inception (October 9, 2007) through
January 31, 2008, assuming no deduction of applicable sales charges.
The Fund's investment strategy is designed to add value through our quantitative
stock selection process, while maintaining a sector neutral stance relative to
the S&P 500 which minimizes the effects of sector allocation on relative
performance. As we expected, stock selection was indeed the main performance
driver during the period under review. The primary area of underperformance for
the Fund relative to the Index was our stock selection in the energy sector. In
particular, several holdings in the oil, gas and consumable fuels segment and an
energy service and equipment provider underperformed in this period. The
information technology sector was another significant detractor from relative
gains, with the Fund's overweight positions in a communications equipment
company, an internet software and services provider, an IT services company, a
semiconductor manufacturer, and a software bellwether dampening performance.
2
However, other investments benefited the Fund during the period. Our stock
selection in the financials sector had a net positive effect, driven by exposure
to a strong performing property and casualty insurance company. Additionally,
although the financials sector overall suffered, with many stocks declining by
the end of the period, the Fund was able to mitigate some of the losses to
relative performance by holding smaller weights in these stocks than the Index.
Stock selection in the industrials sector also contributed positively to
relative performance, largely stemming from a holding in the road and rail
industry that performed very well during the period. The Fund's overweight
position relative to the Index in this stock further amplified the positive
influence of the stock's strong gain.
There is no guarantee that the strategy discussed above will continue to perform
as discussed herein or the securities discussed above will be held by the Fund
in the future.
<Table>
<Caption>
TOP 10 HOLDINGS
Occidental Petroleum Corp. 1.6%
Exxon Mobil Corp. 1.5
ConocoPhillips 1.5
Chevron Corp. 1.4
Humana, Inc. 1.3
Valero Energy Corp. 1.3
Medco Health Solutions Inc. 1.3
Ryder System, Inc. 1.3
Microsoft Corp. 1.3
Marathon Oil Corp. 1.2
</Table>
<Table>
<Caption>
TOP FIVE INDUSTRIES
Pharmaceuticals: Major 6.1%
Integrated Oil 5.7
Managed Health Care 4.7
Investment Banks/Brokers 4.2
Tobacco 4.0
</Table>
Data as of January 31, 2008. Subject to change daily. All percentages for top 10
holdings and top five industries are as a percentage of net assets. These data
are provided for informational purposes only and should not be deemed a
recommendation to buy or sell the securities mentioned. Morgan Stanley is a
full-service securities firm engaged in securities trading and brokerage
activities, investment banking, research and analysis, financing and financial
advisory services.
3
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
PERFORMANCE SUMMARY
TOTAL RETURNS -- PERIOD ENDED JANUARY 31, 2008
CLASS A SHARES* CLASS B SHARES** CLASS C SHARES(+) CLASS D SHARES(++)
(since 10/09/07) (since 10/09/07) (since 10/09/07) (since 10/09/07)
SYMBOL DLEAX DLEBX DLECX DLEDX
SINCE INCEPTION (11.91)(3) (11.96)(3) (11.96)(3) (11.96)(3)
(16.53)(4) (16.36)(4) (12.84)(4) --
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 table does not reflect the
deduction of taxes that a shareholder would pay on portfolio distributions or
the redemption of portfolio 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 Lipper Multi-Cap Growth Funds Index is an equally weighted performance
index of the largest qualifying funds (based on net assets) in the Lipper
Multi-Cap Growth Funds classification. The Index, which is adjusted for
capital gains distributions and income dividends, is unmanaged and should
not be considered an investment. There are currently 30 funds represented in
this Index. The Fund is in the Lipper Multi-Cap Growth Funds classification
as of the date of this report.
(3) Figure shown assumes reinvestment of all distributions and does not reflect
the deduction of any sales charges.
(4) Figure shown assumes reinvestment of all distributions and the deduction of
the maximum applicable sales charge. See the Fund's current prospectus for
complete details on fees and sales charges.
5
EXPENSE EXAMPLE
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, including sales charges (loads) on purchase payments and redemption fees;
and (2) ongoing costs, including advisory fees; distribution and service (12b-1)
fees; and other Fund expenses. This example is intended to help you understand
your ongoing costs (in dollars) of investing in the Fund and to compare these
costs with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the
period and held for the entire period 10/09/07 - 01/31/08.
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*
------------- ------------- --------------
10/09/07 -
10/09/07 01/31/08 01/31/08
------------- ------------- --------------
CLASS A
Actual (-11.91% return)........................ $1,000.00 $ 880.90 $3.36
Hypothetical (5% annual return before
expenses).................................... $1,000.00 $1,021.57 $3.61
CLASS B
Actual (-11.96% return)........................ $1,000.00 $ 880.40 $4.25
Hypothetical (5% annual return before
expenses).................................... $1,000.00 $1,020.61 $4.57
CLASS C
Actual (-11.96% return)........................ $1,000.00 $ 880.40 $4.25
Hypothetical (5% annual return before
expenses).................................... $1,000.00 $1,020.61 $4.57
CLASS D
Actual (-11.96% return)........................ $1,000.00 $ 880.40 $3.07
Hypothetical (5% annual return before
expenses).................................... $1,000.00 $1,021.87 $3.30
</Table>
- ---------
* Expenses are equal to the Fund's annualized expense ratios of 0.71%, 0.90%,
0.90% and 0.65% for Class A, Class B, Class C and Class D shares,
respectively, multiplied by the average account value over the period,
multiplied by 115/366 (to reflect the actual days in the period for the
actual example) and multiplied by 184/366 (to reflect the one-half year
period for the hypothetical example). If the Fund had borne all its
expenses, the annualized expense ratios would have been 9.08%, 9.27%, 9.27%
and 9.02% for Class A, Class B, Class C and Class D, respectively.
6
INVESTMENT ADVISORY AGREEMENT APPROVAL
In approving the investment advisory agreement for the Diversified Large Cap
Equity Fund, a Fund of the Morgan Stanley Series Funds, the Board of Trustees,
including the Independent Trustees, considered the following factors:
NATURE, EXTENT AND QUALITY OF SERVICES.
The Boards reviewed and considered the nature and extent of the investment
advisory services to be provided by the Adviser under the Investment 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 to be provided by
the Adviser under the Administration Agreement, including accounting, clerical,
bookkeeping, compliance, business management and planning, and the provision of
supplies, office space and utilities (the Investment Advisory Agreement and
Administration Agreement together are referred to as the "Management
Agreement").
The Board reviewed and considered the qualifications of the portfolio managers,
the senior administrative managers and other key personnel of the Adviser who
will provide the advisory and administrative services to the Fund. The Board
determined that the Investment 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 to be provided are
necessary and appropriate for the conduct of the business and investment
activities of the Fund.
PERFORMANCE RELATIVE TO COMPARABLE FUNDS MANAGED BY OTHER INVESTMENT ADVISERS
The Board considered that the Investment Adviser plans to arrange for a public
offering of shares of the Fund to raise assets for investment and that the
offerings had not yet begun. The Board concluded that, since the Fund had no
assets to invest (other than seed capital required under the Investment Company
Act) and had no track record of performance, this was not a factor it needed to
address at the present time.
FEES RELATIVE TO OTHER PROPRIETARY FUNDS MANAGED BY THE INVESTMENT ADVISERS WITH
COMPARABLE INVESTMENT STRATEGIES
The Board reviewed the advisory and administrative fee (together, the
"Management fee") rates proposed to be paid by the Fund under the Management
Agreement. The Board noted that the Investment Adviser did not manage any other
funds with investment strategies comparable to those of the Fund.
FEES AND EXPENSES RELATIVE TO COMPARABLE FUNDS MANAGED BY OTHER ADVISERS
The Board reviewed the proposed Management fee rate and the anticipated total
annual expense ratio of the Fund. The Board reviewed the average fees paid
within the Lipper Large Cap Core Category and the Enhanced
7
Index Funds average within the category. The Board considered that the Fund
requires the Investment Adviser to develop processes, invest in additional
resources and incur additional risks to successfully manage the Fund. The Board
concluded that the proposed Management fee rate and anticipated total annual
expense ratio would be competitive with those of other similar non-affiliated
funds.
BREAKPOINTS AND ECONOMIES OF SCALE
The Board reviewed the structure of the Management fee schedules under the
Management Agreement. The Board noted that the Management fee includes
breakpoints at $500 million, $1 billion and $1.5 billion. The Board considered
that the Fund's potential growth was uncertain and concluded that it would be
premature to consider economies of scale as a factor in approving the Management
Agreement at the present time.
PROFITABILITY OF THE INVESTMENT ADVISER AND AFFILIATES
Since the Fund has not begun operations and has not paid any fees to the
Investment Adviser, 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 Investment
Adviser and its affiliates from their relationship with the Fund and the Morgan
Stanley Fund Complex. The Board considered 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 Investment
Adviser and "soft dollar" benefits (discussed in the next section). The Board
also considered that a broker-dealer affiliate of the Investment Adviser
receives from the Funds 12b-1 fees for distribution and shareholder services.
SOFT DOLLAR BENEFITS
The Board considered whether the Investment Adviser will realize any benefits as
a result of brokerage transactions executed through "soft dollar" arrangements.
Under such arrangements, brokerage commissions paid by the Fund and for other
funds managed by the Investment Adviser would be used to pay for research that a
securities broker obtains from third parties, or to pay for both research and
execution services from securities brokers who effect transactions for the Fund.
The Board recognized that the receipt of such research from brokers may reduce
the Investment Adviser's costs but concluded that the receipt of such research
strengthens the investment management resources of the Investment Adviser, which
may ultimately benefit the Fund and other funds in the Morgan Stanley Fund
Complex.
8
INVESTMENT ADVISER FINANCIALLY SOUND AND FINANCIALLY CAPABLE OF MEETING THE
FUND'S NEEDS
The Board considered whether the Investment Adviser is financially sound and has
the resources necessary to perform its obligations under the Management
Agreement. The Board concluded that the Investment Adviser has the financial
resources necessary to fulfill its obligations under the Management Agreement.
RELATIONSHIP WITH THE INVESTMENT ADVISER
The Boards also reviewed and considered the proposed relationship between the
the Investment Adviser and the Morgan Stanley Fund Complex, including the
organizational structure of the Investment Adviser, the policies and procedures
formulated and adopted by the Investment Adviser for managing the operations and
the Board's confidence in the competence and integrity of the senior managers
and key personnel of the Investment Adviser. The Board concluded that it is
beneficial for the Fund to approve the relationship with the Investment Adviser.
OTHER FACTORS AND CURRENT TRENDS
The Boards considered the controls and procedures adopted and implemented by the
Investment Advisers and monitored by the Fund's Chief Compliance Officer and
concluded that the conduct of business by each Investment 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
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 future shareholders to
approve the Management Agreement, which will remain in effect for two years and
thereafter must be approved annually by the Board of the Fund if they are to
continue in effect.
9
Morgan Stanley Diversified Large Cap Equity Fund
PORTFOLIO OF INVESTMENTS - JANUARY 31, 2008 (UNAUDITED)
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ------------------------------------------------------------------
Common Stocks (95.4%)
Aerospace & Defense (3.2%)
494 Boeing Co. ............................. $ 41,091
451 Lockheed Martin Corp. .................. 48,672
633 Northrop Grumman Corp. ................. 50,235
----------
139,998
----------
Air Freight/Couriers (1.0%)
467 FedEx Corp. ............................ 43,655
----------
Apparel/Footwear (1.0%)
1,117 Jones Apparel Group, Inc. .............. 18,766
391 Nike, Inc. (Class B).................... 24,148
----------
42,914
----------
Auto Parts: O.E.M. (0.5%)
595 Johnson Controls, Inc. ................. 21,045
----------
Beverages: Non-Alcoholic (2.6%)
707 Coca-Cola Co. (The)..................... 41,833
1,016 Pepsi Bottling Group, Inc. (The)........ 35,408
556 PepsiCo, Inc. .......................... 37,914
----------
115,155
----------
Building Products (1.1%)
2,065 Masco Corp. ............................ 47,350
----------
Cable/Satellite TV (0.4%)
1,002 Comcast Corp. (Special Class A)*........ 18,026
----------
Chemicals: Major Diversified (1.0%)
558 Dow Chemical Co. (The).................. 21,572
376 Eastman Chemical Co. ................... 24,842
----------
46,414
----------
Chemicals: Specialty (0.4%)
391 Ashland Inc. ........................... 17,802
----------
Commercial Printing/Forms (1.0%)
1,308 Donnelley (R.R.) & Sons Co. ............ 45,636
----------
Computer Communications (0.9%)
1,566 Cisco Systems, Inc.*.................... 38,367
----------
Computer Peripherals (0.9%)
2,377 EMC Corp.*.............................. 37,723
----------
Computer Processing Hardware (1.9%)
307 Apple Inc.*............................. 41,556
990 Hewlett-Packard Co. .................... 43,313
----------
84,869
----------
Data Processing Services (0.9%)
917 Computer Sciences Corp.*................ 38,807
----------
Department Stores (0.5%)
1,057 Dillard's, Inc. (Class A)............... 20,960
----------
Discount Stores (1.9%)
163 Sears Holdings Corp.*................... 18,010
364 Target Corp. ........................... 20,231
906 Wal-Mart Stores, Inc. .................. 46,097
----------
84,338
----------
Electric Utilities (3.8%)
1,446 Duke Energy Corp. ...................... 26,982
241 Entergy Corp. .......................... 26,071
356 Exelon Corp. ........................... 27,124
414 FirstEnergy Corp. ...................... 29,485
440 FPL Group, Inc. ........................ 28,371
305 Public Service Enterprise Group Inc. ... 29,280
----------
167,313
----------
Electronic Equipment/Instruments (1.1%)
3,080 Xerox Corp. ............................ 47,432
----------
Electronics/Appliance Stores (0.5%)
482 Best Buy Co., Inc. ..................... 23,526
----------
</Table>
See Notes to Financial Statements
10
Morgan Stanley Diversified Large Cap Equity Fund
PORTFOLIO OF INVESTMENTS - JANUARY 31, 2008 (UNAUDITED) continued
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ------------------------------------------------------------------
Environmental Services (0.9%)
3,851 Allied Waste Industries, Inc.*.......... $ 37,932
----------
Finance/Rental/Leasing (2.4%)
735 Fannie Mae.............................. 24,887
779 Freddie Mac............................. 23,674
1,074 Ryder System, Inc. ..................... 55,912
----------
104,473
----------
Financial Conglomerates (3.6%)
796 American Express Co. ................... 39,259
1,036 Citigroup, Inc. ........................ 29,236
1,033 JPMorgan Chase & Co. ................... 49,119
494 Prudential Financial, Inc. ............. 41,679
----------
159,293
----------
Food Retail (1.6%)
1,229 Safeway Inc. ........................... 38,087
1,140 SUPERVALU, Inc. ........................ 34,268
----------
72,355
----------
Forest Products (0.5%)
343 Weyerhaeuser Co. ....................... 23,228
----------
Home Building (1.0%)
846 Centex Corp. ........................... 23,502
824 KB Home................................. 22,660
----------
46,162
----------
Home Furnishings (0.5%)
1,210 Leggett & Platt, Inc. .................. 23,014
----------
Home Improvement Chains (1.0%)
708 Home Depot, Inc. (The).................. 21,714
827 Lowe's Companies, Inc. ................. 21,866
----------
43,580
----------
Household/Personal Care (0.9%)
577 Procter & Gamble Co. (The).............. 38,053
----------
Industrial Conglomerates (1.9%)
1,195 General Electric Co. ................... 42,315
1,103 Tyco International Ltd. (Bermuda)....... 43,414
----------
85,729
----------
Information Technology Services (1.1%)
438 International Business Machines Corp. .. 47,015
----------
Integrated Oil (5.6%)
740 Chevron Corp. .......................... 62,530
798 ConocoPhillips.......................... 64,095
744 Exxon Mobil Corp. ...................... 64,282
1,172 Marathon Oil Corp. ..................... 54,908
----------
245,815
----------
Internet Software/Services (1.1%)
83 Google Inc. (Class A)*.................. 46,837
----------
Investment Banks/Brokers (4.1%)
740 Ameriprise Financial, Inc. ............. 40,929
2,146 Charles Schwab Corp. (The).............. 47,856
77 CME GROUP INC........................... 47,655
212 Goldman Sachs Group, Inc. (The)......... 42,563
----------
179,003
----------
Life/Health Insurance (0.9%)
694 MetLife, Inc. .......................... 40,925
----------
Major Banks (1.9%)
930 Bank of America Corp. .................. 41,246
1,317 Wells Fargo & Co. ...................... 44,791
----------
86,037
----------
</Table>
See Notes to Financial Statements
11
Morgan Stanley Diversified Large Cap Equity Fund
PORTFOLIO OF INVESTMENTS - JANUARY 31, 2008 (UNAUDITED) continued
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ------------------------------------------------------------------
Major Telecommunications (1.9%)
834 AT&T Inc. .............................. $ 32,101
1,988 Sprint Nextel Corp. .................... 20,934
794 Verizon Communications, Inc. ........... 30,839
----------
83,874
----------
Managed Health Care (4.6%)
930 Aetna, Inc. ............................ 49,532
951 CIGNA Corp. ............................ 46,751
712 Humana, Inc.*........................... 57,174
641 WellPoint Inc.*......................... 50,126
----------
203,583
----------
Media Conglomerates (0.5%)
673 Disney (Walt) Co. (The)................. 20,143
----------
Multi-Line Insurance (0.9%)
701 American International Group, Inc. ..... 38,667
----------
Oil & Gas Production (1.6%)
1,035 Occidental Petroleum Corp. ............. 70,246
----------
Oil Refining/Marketing (2.5%)
1,334 Tesoro Corp. ........................... 52,093
955 Valero Energy Corp. .................... 56,527
----------
108,620
----------
Oilfield Services/Equipment (1.1%)
658 Schlumberger Ltd. (Netherlands
Antilles).............................. 49,653
----------
Other Consumer Services (0.8%)
1,326 eBay Inc.*.............................. 35,656
----------
Packaged Software (2.3%)
1,699 Microsoft Corp. ........................ 55,387
2,280 Oracle Corp.*........................... 46,854
----------
102,241
----------
Pharmaceuticals: Major (6.0%)
929 Abbott Laboratories..................... 52,303
1,708 Bristol-Myers Squibb Co. ............... 39,609
770 Johnson & Johnson....................... 48,710
956 Merck & Co., Inc. ...................... 44,244
2,002 Pfizer, Inc. ........................... 46,827
1,575 Schering-Plough Corp. .................. 30,823
----------
262,516
----------
Property -- Casualty Insurers (3.8%)
774 ACE Ltd. (Cayman Islands)............... 45,155
832 Allstate Corp. (The).................... 40,993
12 Berkshire Hathaway Inc. (Class B)*...... 54,600
601 XL Capital Ltd. (Class A) (Cayman
Islands)............................... 27,045
----------
167,793
----------
Pulp & Paper (0.5%)
696 International Paper Co. ................ 22,446
----------
Recreational Products (0.5%)
821 Hasbro, Inc. ........................... 21,321
----------
Regional Banks (1.1%)
684 Northern Trust Corp. ................... 50,178
----------
Restaurants (0.5%)
417 McDonald's Corp. ....................... 22,330
----------
Savings Banks (1.1%)
3,064 Hudson City Bancorp, Inc. .............. 50,188
----------
Semiconductors (2.7%)
2,005 Intel Corp. ............................ 42,506
4,930 Micron Technology, Inc.*................ 34,658
1,419 Texas Instruments Inc. ................. 43,890
----------
121,054
----------
Services to the Health Industry (1.3%)
1,122 Medco Health Solutions Inc.*............ 56,190
----------
</Table>
See Notes to Financial Statements
12
Morgan Stanley Diversified Large Cap Equity Fund
PORTFOLIO OF INVESTMENTS - JANUARY 31, 2008 (UNAUDITED) continued
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ------------------------------------------------------------------
Specialty Stores (1.3%)
1,301 AutoNation, Inc.*....................... $ 21,180
1,107 Office Depot, Inc.*..................... 16,417
717 OfficeMax Inc. ......................... 17,760
----------
55,357
----------
Specialty Telecommunications (0.7%)
2,565 Windstream Corp. ....................... 29,780
----------
Steel (0.6%)
241 United States Steel Corp. .............. 24,609
----------
Telecommunication Equipment (0.7%)
2,780 Motorola, Inc. ......................... 32,053
----------
Tobacco (3.8%)
584 Altria Group, Inc. ..................... 44,279
490 Loews Corp.- Carolina Group............. 40,244
655 Reynolds American, Inc. ................ 41,481
839 UST, Inc. .............................. 43,594
----------
169,598
----------
Trucks/Construction/Farm Machinery
(1.0%)
611 Caterpillar Inc. ....................... 43,467
----------
Total Common Stocks
(Cost $4,794,188)....................... 4,202,344
----------
<Caption>
NUMBER OF
SHARES (000) VALUE
- ------------------------------------------------------------------
Short-Term Investment (a) (1.9%)
Investment Company
84 Morgan Stanley Institutional Liquidity
Money Market Portfolio - Institutional
Class (Cost $84,095)................... $ 84,095
----------
</Table>
<Table>
Total Investments
(Cost $4,878,283) (b)(c)................... 97.3% 4,286,439
Other Assets in Excess of Liabilities...... 2.7 118,772
----- ----------
Net Assets................................. 100.0% $4,405,211
===== ==========
</Table>
<Table>
<Caption>
- --------------------------------------------------------------------
ADR American Depositary Receipt.
* Non-income producing security.
(a) See Note 4 to the financial statements regarding investments in
Morgan Stanley Institutional Liquidity Money Market Portfolio -
Institutional Class
(b) Securities have been designated as collateral in an amount
equal to $140,630 in connection with open futures contracts.
(c) The aggregate cost for federal income tax purposes approximates
the aggregate cost for book purposes. The aggregate gross
unrealized appreciation is $47,649 and the aggregate gross
unrealized depreciation is $639,493, resulting in net
unrealized depreciation of $591,844.
</Table>
FUTURES CONTRACTS OPEN AT JANUARY 31, 2008:
<Table>
<Caption>
NUMBER OF DESCRIPTION, DELIVERY UNDERLYING FACE UNREALIZED
CONTRACTS LONG/SHORT MONTH AND YEAR AMOUNT AT VALUE DEPRECIATION
- -----------------------------------------------------------------------------------
2 LONG S&P 500 Mini Index
March/2008 $147,830 ($9,873)
=======
</Table>
See Notes to Financial Statements
13
Morgan Stanley Diversified Large Cap Equity Fund
SUMMARY OF INVESTMENTS - JANUARY 31, 2008 (UNAUDITED)
<Table>
<Caption>
PERCENT OF
TOTAL
INDUSTRY VALUE INVESTMENTS
- ----------------------------------------------------
Pharmaceuticals: Major.... $ 262,516 6.1%
Integrated Oil............ 245,815 5.7
Managed Health Care....... 203,583 4.7
Investment Banks/Brokers.. 179,003 4.2
Tobacco................... 169,598 4.0
Property - Casualty
Insurers................ 167,793 3.9
Electric Utilities........ 167,313 3.9
Financial Conglomerates... 159,293 3.7
Aerospace & Defense....... 139,998 3.3
Semiconductors............ 121,054 2.8
Beverage: Non-alcoholic... 115,155 2.7
Oil Refining/Marketing.... 108,620 2.5
Finance/Rental/Leasing.... 104,473 2.4
Packaged Software......... 102,241 2.4
Major Banks............... 86,037 2.0
Industrial Conglomerates.. 85,729 2.0
Computer Processing
Hardware................ 84,869 2.0
Discount Stores........... 84,338 2.0
Investment Company........ 84,095 2.0
Major Telecommunications.. 83,874 2.0
Food Retail............... 72,355 1.7
Oil & Gas Production...... 70,246 1.6
Services To The Health
Industry................ 56,190 1.3
Specialty Stores.......... 55,357 1.3
Savings Banks............. 50,188 1.2
Regional Banks............ 50,178 1.2
Oilfield
Services/Equipment...... 49,653 1.2
Electronic
Equipment/Instruments... 47,432 1.1
Building Products......... 47,350 1.1
Information Technology
Services................ 47,015 1.1
Internet
Software/Services....... 46,837 1.1
Chemicals: Major
Diversified............. 46,414 1.1
Home Building............. 46,162 1.1
Commercial
Printing/Forms.......... 45,636 1.1
Air Freight/Couriers...... 43,655 1.0
Home Improvement chains... 43,580 1.0
Trucks/Construction/Farm
Machinery............... 43,467 1.0
Apparel/Footwear.......... 42,914 1.0
Life/Health Insurance..... 40,925 1.0
Data Processing Services.. 38,807 0.9
Multi-Line Insurance...... 38,667 0.9
Computer Communications... 38,367 0.9
Household/Personal Care... 38,053 0.9
Environmental Services.... 37,932 0.9
Computer Peripherals...... 37,723 0.9
Other Consumer Services... 35,656 0.8
Telecommunication
Equipment............... 32,053 0.7
Specialty
Telecommunications...... 29,780 0.7
Steel..................... 24,609 0.6
Electronics/Appliance
Stores.................. 23,526 0.5
Forest Products........... 23,228 0.5
Home Furnishings.......... 23,014 0.5
Pulp & Paper.............. 22,446 0.5
Restaurants............... 22,330 0.5
Recreational Products..... 21,321 0.5
Auto Parts: O.E.M......... 21,045 0.5
Department Stores......... 20,960 0.5
Media Conglomerates....... 20,143 0.5
Cable/Satellite TV........ 18,026 0.4
Chemicals: Specialty...... 17,802 0.4
---------- -----
$4,286,439* 100.0%
========== =====
</Table>
- ----------
<Table>
* Does not include open long futures contracts with an underlying
face amount of $147,830 with unrealized depreciation of $9,873.
</Table>
See Notes to Financial Statements
14
Morgan Stanley Diversified Large Cap Equity Fund
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
January 31, 2008 (unaudited)
<Table>
Assets:
Investments in securities, at
value (cost $4,794,187)....... $4,202,343
Investment in affiliate, at
value (cost $84,095).......... 84,095
Receivable for:
Dividends.................... 4,516
Variation margin............. 2,900
Dividends from affiliate..... 347
Prepaid expenses and other
assets........................ 1,151
Deferred offering costs......... 59,133
Receivable from Distributor..... 327
Receivable from Investment
Adviser....................... 121,548
----------
Total Assets................. 4,476,360
----------
Liabilities:
Transfer agent fee payable...... 5,358
Accrued expenses and other
payables...................... 9,268
Offering costs.................. 56,523
----------
Total Liabilities............ 71,149
----------
Net Assets................... $4,405,211
==========
Composition of Net Assets:
Paid-in-capital................. $5,012,600
Net unrealized depreciation..... (601,717)
Undistributed net investment
income........................ 6,376
Net realized loss............... (12,048)
----------
Net Assets................... $4,405,211
==========
Class A Shares:
Net Assets...................... $88,093
Shares Outstanding (unlimited
authorized, $.01 par value)... 10,022
Net Asset Value Per Share.... $8.79
=====
Maximum Offering Price Per
Share,
(net asset value plus 5.54%
of net asset value).......... $9.28
=====
Class B Shares:
Net Assets...................... $88,058
Shares Outstanding (unlimited
authorized, $.01 par value)... 10,005
Net Asset Value Per Share.... $8.80
=====
Class C Shares:
Net Assets...................... $88,053
Shares Outstanding (unlimited
authorized, $.01 par value)... 10,005
Net Asset Value Per Share.... $8.80
=====
Class D Shares:
Net Assets...................... $4,141,007
Shares Outstanding (unlimited
authorized, $.01 par value)... 471,298
Net Asset Value Per Share.... $8.79
=====
</Table>
Statement of Operations
For the period October 9, 2007* through January 31, 2008 (unaudited)
<Table>
Net Investment Income:
Income
Dividends....................... $ 24,477
Dividends from affiliate........ 4,217
Interest........................ 10
---------
Total Income................. 28,704
---------
Expenses
Professional fees............... 88,906
Offering costs.................. 27,093
Transfer agent fees and
expenses...................... 5,374
Investment advisory fee......... 5,152
Shareholder reports and
notices....................... 1,472
Administration fee.............. 1,178
Custodian fees.................. 258
Registration fees............... 202
Trustees' fees and expenses..... 85
Distribution fee (Class A
shares)....................... 19
Distribution fee (Class B
shares)....................... 74
Distribution fee (Class C
shares)....................... 74
Other........................... 3,010
---------
Total Expenses............... 132,897
Less: amounts
waived/reimbursed............. (123,169)
---------
Net Expenses................. 9,728
---------
Net Investment Income........ 18,976
---------
Net Realized and Unrealized Loss
Net Realized Loss on:
Investments..................... (1,831)
Futures contracts............... (10,217)
---------
Net Realized Loss............ (12,048)
---------
Net Unrealized
Appreciation/Depreciation on:
Investments..................... (591,844)
Futures contracts............... (9,873)
---------
Net Unrealized
Appreciation/Depreciation..... (601,717)
---------
Net Loss..................... (613,765)
---------
Net Decrease.................... $(594,789)
=========
</Table>
- ----------
* Commencement of operations
See Notes to Financial Statements
15
Morgan Stanley Diversified Large Cap Equity Fund
FINANCIAL STATEMENTS continued
Statement of Changes in Net Assets
<Table>
<Caption>
FOR THE PERIOD
OCTOBER 9, 2007*
THROUGH
JANUARY 31, 2008
----------------
(unaudited)
Increase (Decrease) in Net Assets:
Operations:
Net investment income.............................................. $ 18,976
Net realized loss.................................................. (12,048)
Net unrealized appreciation/depreciation........................... (601,717)
----------
Net Decrease.................................................... (594,789)
----------
Dividends to Shareholders from Net Investment Income:
Class A shares..................................................... (207)
Class B shares..................................................... (43)
Class C shares..................................................... (43)
Class D shares..................................................... (12,307)
----------
Total Dividends................................................. (12,600)
----------
Net increase from transactions in shares of beneficial interest.... 4,912,600
----------
Net Increase.................................................... 4,305,211
Net Assets:
Beginning of period................................................ 100,000
----------
End of Period
(Including undistributed net investment income of $6,376).......... $4,405,211
==========
</Table>
- ----------
* Commencement of operations
See Notes to Financial Statements
16
Morgan Stanley Diversified Large Cap Equity Fund
NOTES TO FINANCIAL STATEMENTS - JANUARY 31, 2008 (UNAUDITED)
1. Organization And Accounting Policies
Morgan Stanley Diversified Large Cap Equity Fund (the "Fund") was organized as a
separate diversified fund of Morgan Stanley Series Fund, a Massachusetts
business trust, which was registered under the Investment Company Act of 1940 as
amended (the "Act"), as an open-end management investment company and commenced
operations on October 9, 2007. The Fund's investment objective is to seek
capital appreciation.
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 Fund will assess a 2% redemption fee on Class A shares, Class B shares,
Class C shares, and Class D shares, which is paid directly to the Fund, for
shares redeemed or exchanged within seven days of purchase, subject to certain
exceptions. The redemption fee is designed to protect the Fund and its remaining
shareholders from the effects of short-term trading.
The following is a summary of significant accounting policies:
A. Valuation of Investments -- (1) an equity portfolio security listed or traded
on the New York Stock Exchange ("NYSE") or American Stock Exchange or other
exchange is valued at its latest sale price prior to the time when assets are
valued; if there were no sales that day, the security is valued at the mean
between the last reported bid and asked price; (2) an equity portfolio security
listed or traded on the Nasdaq is valued at the Nasdaq Official Closing Price;
if there were no sales that day, the security is valued at the mean between the
last reported bid and asked price; (3) all other portfolio securities for which
over-the-counter market quotations are readily available are valued at the mean
between the last reported bid and asked price. In cases where a security is
traded on more than one exchange, the security is valued on the exchange
designated as the primary market; (4) futures are valued at the latest price
published by the commodities exchange on which they trade; (5) when market
quotations are not readily available including circumstances under which Morgan
Stanley Investment Advisors Inc. (the "Investment Adviser"), determines that the
latest sale price, the bid price or the mean between the last reported bid and
asked price do not reflect a security's market value, portfolio securities are
valued at their fair value as determined in good faith under procedures
established by and under the general supervision of the Fund's Trustees.
Occasionally, developments affecting the closing prices of securities and other
assets may occur between the times at which valuations of such securities are
determined (that is, close of the foreign market on which the securities trade)
and the close of business on the NYSE. If developments occur during such periods
that are expected to materially affect the value of such securities,
17
Morgan Stanley Diversified Large Cap Equity Fund
NOTES TO FINANCIAL STATEMENTS - JANUARY 31, 2008 (UNAUDITED) continued
such valuations may be adjusted to reflect the estimated fair value of such
securities as of the close of the NYSE, as determined in good faith by the
Fund's Trustees or by the Investment Adviser using a pricing service and/or
procedures approved by the Trustees of the Fund; (6) certain portfolio
securities may be valued by an outside pricing service approved by the Fund's
Trustees; (7) investments in open-end mutual funds, including the Morgan Stanley
Institutional Liquidity Funds, are valued at the net asset value as of the close
of each business day; and (8) short-term debt securities having a maturity date
of more than sixty days at time of purchase are valued on a mark-to-market basis
until sixty days prior to maturity and thereafter at amortized cost based on
their value on the 61st day. Short-term debt securities having a maturity date
of sixty days or less at the time of purchase are valued at amortized cost.
B. Accounting for Investments -- Security transactions are accounted for on the
trade date (date the order to buy or sell is executed). Realized gains and
losses on security transactions are determined by the identified cost method.
Dividend income and other distributions are recorded on the ex-dividend date.
Discounts are accreted and premiums are amortized over the life of the
respective securities and are included in interest income. Interest income is
accrued daily.
C. 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.
D. Federal Income Tax Policy -- It is the Fund's policy to comply with the
requirements of Subchapter M of the Internal Revenue Code applicable to
regulated investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no federal income tax provision
is required. The Fund files tax returns with the U.S. Internal Revenue Service,
New York State and New York City. The Fund adopted the provisions of the
Financial Accounting Standards Board ("FASB") Interpretation No. 48 ("FIN 48")
Accounting for Uncertainty in Income Taxes on October 9, 2007. FIN 48 sets forth
a minimum threshold for financial statement recognition of the benefit of a tax
position taken or expected to be taken in a tax return. The implementation of
FIN 48 did not result in any unrecognized tax benefits in the accompanying
financial statements. If applicable, the Fund recognizes interest accrued
related to unrecognized tax benefits in interest expense and penalties in other
expenses in the Statement of Operations. For the period ended January 31, 2008,
the Fund remains subject to examination by taxing authorities.
E. Dividends and Distributions to Shareholders -- Dividends and distributions to
shareholders are recorded on the ex-dividend date.
F. 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.
18
Morgan Stanley Diversified Large Cap Equity Fund
NOTES TO FINANCIAL STATEMENTS - JANUARY 31, 2008 (UNAUDITED) continued
G. Offering Costs -- The Investment Adviser incurred offering costs on behalf of
the Fund in an amount of approximately $86,000 which will be reimbursed by the
Fund for the full amount thereof. Such expenses were deferred and are being
amortized on the straight-line method over a period of approximately one year or
less from the commencement of operations.
2. Investment Advisory/Administration Agreements
Pursuant to an Investment Advisory Agreement, the Fund pays the Investment
Adviser an advisory fee, accrued daily and payable monthly, by applying the
annual rates to the net assets of the Fund determined at the close of each
business day: 0.35% to the portion of the daily net assets not exceeding $500
million; 0.30% to the portion of the daily net assets exceeding $500 million but
not exceeding $1.5 billion; and 0.25% to the portion of the daily net assets
exceeding $1.5 billion.
The Investment Adviser has voluntarily agreed to cap the Fund's operating
expenses (except for brokerage and 12b-1 fees) by assuming the Fund's "other
expenses" and/or waiving the Fund's advisory fees, and Morgan Stanley Services
Company, Inc., the Fund's Administrator, has agreed to waive the Fund's
administrative fees, to the extent such operating expenses on an annualized
basis exceed 0.90%, 1.65%, 1.65% and 0.65% for Class A, Class B, Class C and
Class D shares, respectively, of the average daily net assets of the Fund. This
cap/waiver may be terminated at any time.
Pursuant to an Administration Agreement with Morgan Stanley Services Company
Inc. (the "Administrator"), an affiliate of the Investment Adviser, the Fund
pays an administration fee, accrued daily and payable monthly, by applying the
annual rate of 0.08% to the Fund's daily net assets.
Under an agreement between the Administrator and State Street Bank and Trust
Company ("State Street"), State Street provides certain administrative services
to the Fund. For such services, the Administrator pays State Street a portion of
the fee the Administrator receives from 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 "Distribution Plan") pursuant to
Rule 12b-1 under the Act regarding the payment of distribution fees by Class B
and Class C shares and a Shareholder Services Plan (the "Service Plan") pursuant
to Rule 12b-1 under the Act regarding the payment of service fees by Class A,
Class B and Class C shares. The Plans provide that the Fund will pay the
Distributor a fee, which is accrued daily and paid monthly, at the following
annual rates: (i) Class A -- a service fee of up to 0.25% of the average daily
net assets of Class A shares; (ii) Class B -- a combined distribution and
19
Morgan Stanley Diversified Large Cap Equity Fund
NOTES TO FINANCIAL STATEMENTS - JANUARY 31, 2008 (UNAUDITED) continued
service fee of up to 1.0% of the average daily net assets of Class B shares; and
(iii) Class C -- a combined distribution and service fee of up to 1.0% of the
average daily net assets of Class C shares.
In the case of Class B shares, provided that the Plans continue in effect, any
cumulative expenses incurred by the Distributor but not yet recovered may be
recovered through the payment of future distribution and/or service fees from
the Fund pursuant to the Plans 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 Plans and the proceeds of contingent deferred sales
charges paid by investors upon redemption of shares, if for any reason either
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 January 31, 2008.
In the case of Class A shares and Class C shares, expenses incurred pursuant to
the Service Plan in the case of Class A and either Plan in the case of Class C
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 period ended January 31, 2008, the distribution fee was accrued
for Class A shares and Class C shares at the annual rate of 0.06% and 0.25%,
respectively.
The Distributor has informed the Fund that for the period ended January 31,
2008, it did not received any contingent deferred sales charges from certain
redemptions of the Fund's Class A shares, Class B shares and Class C shares and
no front-end sales charges were received from sales of the Fund's Class A
shares.
4. Security Transactions and Transactions with Affiliates
The Fund invests in Morgan Stanley Institutional Liquidity Money Market
Portfolio -- Institutional Class, an open-end management investment company
managed by the Investment Adviser. Investment advisory fees paid by the Fund are
reduced by an amount equal to the advisory and administrative service fees paid
by Morgan Stanley Institutional Liquidity Money Market Portfolio
- -- Institutional Class with respect to assets invested by the Fund in Morgan
Stanley Institutional Liquidity Portfolio -- Institutional Class. For the period
ended January 31, 2008, advisory fees paid were reduced by $35 relating to the
Fund's investment in Morgan Stanley Institutional Liquidity Money Market
Portfolio -- Institutional Class. Income distributions earned by the Fund are
recorded as dividends from affiliate in the Statement of Operations and totaled
$4,217 for the period ended January 31, 2008. During the period ended January
31, 2008, cost of purchases and sales of investments in Morgan Stanley
Institutional Liquidity Money Market Portfolio -- Institutional Class aggregated
$5,084,686 and $5,000,591, respectively.
20
Morgan Stanley Diversified Large Cap Equity Fund
NOTES TO FINANCIAL STATEMENTS - JANUARY 31, 2008 (UNAUDITED) continued
The cost of purchases and proceeds from sales of portfolio securities, excluding
short-term investments, for the period ended January 31, 2008 aggregated
$5,028,599 and $231,796 respectively.
Morgan Stanley Trust, an affiliate of the Investment Adviser, Administrator and
Distributor, is the Fund's transfer agent.
The Fund has an unfunded Deferred Compensation Plan (the "Compensation Plan")
which allows each independent Trustee to defer payment of all, or a portion, of
the fees he 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.
5. Shares of Beneficial Interest
Transactions in shares of beneficial interest were as follows:
<Table>
<Caption>
FOR THE PERIOD
OCTOBER 9, 2007*
THROUGH
JANUARY 31, 2008
--------------------
(unaudited)
SHARES AMOUNT
------- ----------
CLASS A SHARES
Sold.............................................................. 7,500 $ 75,000
Reinvestment of dividends and distributions....................... 22 207
------- ----------
Net increase -- Class A........................................... 7,522 75,207
------- ----------
CLASS B SHARES
Sold.............................................................. 7,500 75,000
Reinvestment of dividends and distributions....................... 5 43
------- ----------
Net increase -- Class B........................................... 7,505 75,043
------- ----------
CLASS C SHARES
Sold.............................................................. 7,500 75,000
Reinvestment of dividends and distributions....................... 5 43
------- ----------
Net increase -- Class C........................................... 7,505 75,043
------- ----------
CLASS D SHARES
Sold.............................................................. 467,500 4,675,000
Reinvestment of dividends and distributions....................... 1,298 12,307
------- ----------
Net increase -- Class D........................................... 468,798 4,687,307
------- ----------
Net increase in Fund.............................................. 491,330 $4,912,600
======= ==========
</Table>
- ----------
* Commencement of operations
21
Morgan Stanley Diversified Large Cap Equity Fund
NOTES TO FINANCIAL STATEMENTS - JANUARY 31, 2008 (UNAUDITED) continued
6. Purposes of and Risks Relating to Certain Financial Instruments
To hedge against adverse interest rate, foreign currency and market risks, the
Fund may purchase and sell interest rate, currency and stock index futures
("futures contracts"). Futures contracts involve elements of market risk in
excess of the amounts reflected in the Statement of Assets and Liabilities.
Risks may also arise upon entering into these contracts from the potential
inability of the counterparties to meet the terms of their contracts.
7. Accounting Pronouncement
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.
22
Morgan Stanley Diversified Large Cap Equity Fund
FINANCIAL HIGHLIGHTS (UNAUDITED)
Selected ratios and per share data for a share of beneficial interest
outstanding throughout the period:
<Table>
<Caption>
FOR THE PERIOD OCTOBER 9, 2007*
THROUGH JANUARY 31, 2008
----------------------------------------------------
CLASS A CLASS B CLASS C CLASS D
SHARES SHARES SHARES SHARES
------- ------- ------- -------
Selected Per Share Data:
Net asset value, beginning of period......... $10.00 $10.00 $10.00 $10.00
------ ------ ------ ------
Income (loss) from investment operations:
Net investment income++................... 0.04 0.03 0.03 0.04
Net realized and unrealized loss.......... (1.23) (1.23) (1.23) (1.22)
------ ------ ------ ------
Total loss from investment operations........ (1.19) (1.20) (1.20) (1.18)
------ ------ ------ ------
Less dividend from net investment income..... (0.02) 0.00++ 0.00++ (0.03)
------ ----- ----- ------
Net asset value, end of period............... $8.79 $8.80 $8.80 $8.79
===== ===== ===== =====
Total Return+++(1)........................... (11.91)+% (11.96)+% (11.96)+% (11.96)%
Ratios to Average Net Assets(2)(3)(4)(5):
Expenses..................................... 0.71% 0.90% 0.90% 0.65%
Net investment income........................ 1.24% 1.05% 1.05% 1.30%
Supplemental Data:
Net assets, end of period, in thousands...... $88 $88 $88 $4,141
Portfolio turnover rate(1)................... 9% 9% 9% 9%
</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.
++ Reflects dividends of less than 0.005.
+++ Calculated based on the net asset value as of the last business day of the
period.
(1) Not annualized.
(2) Annualized.
(3) Reflects overall Fund ratios for investment income and non-class specific
expenses.
(4) Reflects waivers of certain Fund expenses in connection with the
investments in Morgan Stanley Institutional Liquidity Money Market
Portfolio - Institutional Class during the period. As a result of such
waivers the expenses as a percentage of it net assets had an effect of
less than 0.005%.
(5) If the Fund had borne all of its expenses that were reimbursed or waived
by the Investment Adviser and Administrator, the annualized expense and
net investment loss ratios would have been 9.08% and (7.13)%, respectively
for Class A; 9.27% and (7.32)%, respectively for Class B; 9.27% and
(7.32)%, respectively for Class C; and 9.02% and (7.07)%, respectively for
Class D.
</Table>
See Notes to Financial Statements
23
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
The financial statements included herein have been taken from the records of the
Fund without examination by the independent auditors and accordingly they do not
express an opinion thereon.
This report is submitted for the general information of the shareholders of the
Fund. For more detailed information about the Fund, its fees and expenses and
other pertinent information, please read its Prospectus. The Fund's Statement of
Additional Information contains additional information about the Fund, including
its trustees. It is available, without charge, by calling (800) 869-NEWS.
This report is not authorized for distribution to prospective investors in the
Fund unless preceded or accompanied by an effective Prospectus. Read the
Prospectus carefully before investing.
Morgan Stanley Distributors Inc., member FINRA.
(c) 2008 Morgan Stanley
[MORGAN STANLEY LOGO]
MORGAN STANLEY FUNDS
Morgan Stanley
Diversified Large
Cap Equity Fund
Semiannual Report
January 31, 2008
UQLSAN
IU08-01638P-Y01/08
Item 2. Code of Ethics.
Not applicable for semiannual reports.
Item 3. Audit Committee Financial Expert.
Not applicable for semiannual reports.
Item 4. Principal Accountant Fees and Services
Not applicable for semiannual reports.
Item 5. Audit Committee of Listed Registrants.
Not applicable for semiannual reports.
Item 6.
Refer to Item 1.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies.
Not applicable for semiannual reports.
Item 8. Portfolio Managers of Closed-End Management Investment Companies
Applicable only to reports filed by closed-end funds.
Item 9. Closed-End Fund Repurchases
Applicable to reports filed by closed-end funds.
Item 10. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 11. Controls and Procedures
(a) The Fund's principal executive officer and principal financial officer have
concluded that the Fund's disclosure controls and procedures are sufficient to
ensure that information required to be disclosed by the Fund in this Form N-CSR
was recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms, based
upon such officers' evaluation of these controls and procedures as of a date
within 90 days of the filing date of the report.
(b) There were no changes in the registrant's internal control over financial
reporting that occurred during the 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) Code of Ethics - Not applicable for semiannual reports.
(b) A separate certification for each principal executive officer and principal
financial officer of the registrant are attached hereto as part of EX-99.CERT.
2
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Morgan Stanley Series Fund - Large Cap Equity
/s/ Ronald E. Robison
Ronald E. Robison
Principal Executive Officer
March 20, 2008
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed by the following
persons on behalf of the registrant and in the capacities and on the dates
indicated.
/s/ Ronald E. Robison
Ronald E. Robison
Principal Executive Officer
March 20, 2008
/s/ Francis Smith
Francis Smith
Principal Financial Officer
March 20, 2008
3