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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: 811-05634
Morgan Stanley Strategist Fund
(Exact name of registrant as specified in charter)
1221 Avenue of the Americas, New York, New York 10020
(Address of principal executive offices) (Zip code)
Ronald E. Robison
1221 Avenue of the Americas, New York, New York 10020
(Name and address of agent for service)
Registrant's telephone number, including area code: 212-762-4000
Date of fiscal year end: July 31, 2005
Date of reporting period: July 31, 2005
Item 1 - Report to Shareholders
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WELCOME, SHAREHOLDER:
IN THIS REPORT, YOU'LL LEARN ABOUT HOW YOUR INVESTMENT IN MORGAN STANLEY
STRATEGIST 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.
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FUND REPORT
For the year ended July 31, 2005
TOTAL RETURN FOR THE 12 MONTHS ENDED JULY 31, 2005
<Table>
<Caption>
LEHMAN
BROTHERS U.S. LIPPER
GOVERNMENT/ FLEXIBLE
S&P 500(R) CREDIT PORTFOLIO
CLASS A CLASS B CLASS C CLASS D INDEX(1) INDEX(2) FUNDS INDEX(3)
14.23% 13.49% 13.44% 14.60% 14.04% 4.94% 13.14%
</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
While this past year might ultimately be viewed as a key inflection point for
interest rates and inflation, asset class performance for the reporting period
provided attractive returns relative to recent history. Stocks, as measured by
the S&P 500(R) Index, returned just over 14 percent, while bonds, as measured by
the Lehman Brothers U.S. Government/Credit Index, returned nearly five percent.
Yields on short-term investments nearly tripled, as certificates of deposit and
other short-term instruments recalibrated to higher federal funds target rates.
In June 2004, reacting to a lowered risk of deflation and more confident that
economic growth was imminent, the Federal Reserve began raising short term
interest rates, taking the federal funds target rate from 1.00 percent to 3.25
percent by July 31, 2005. While persistent in their drive to remove "easy" or
accommodative credit from the economy, the central bank found that their
"measured," predictable pace did little to slow asset class appreciation,
especially in markets which depend on low interest rates to grow, such as
housing, consumer durables and consumer financing. As of the close of the
reporting period, it would appear that this cycle of tightening has had little
impact on economic activity, leading us to surmise that the Federal Reserve will
likely continue to increase rates until there is some sense that monetary policy
is no longer fueling growth.
A balancing act between price increases and competitive discounting kept most
inflation indicators in check during the reporting period, although the
inflation picture clearly deteriorated as the summer months approached. While
many consumer goods, such as autos, personal computers, and services in general,
carried manufacturers' discounts and rebates (in an attempt to hold market
share), both individual and corporate buyers saw sharp price increases in a
number of goods and services. Oil, copper, gold and many agricultural commodity
prices also rose throughout the year, but only more recently began to affect
consumers at the retail level.
Despite higher rates and price pressures, corporate profits continued to come in
well ahead of expectations. Corporations around the world demonstrated strong
capital disciplines and avoided the temptations of large mergers and
acquisitions; preferring instead to retain cash, buy back their own stock, raise
dividends and lower debt. Cash flows have filled corporate coffers, and have led
to 75-year highs in balance sheet strength.
On the international front, although ongoing geopolitical uncertainty cast a
shadow, economic growth remained on track. In particular, many markets in Asia,
Eastern Europe, the Middle East and Africa continued to mature and provided
investors with outstanding returns as well as greater liquidity.
PERFORMANCE ANALYSIS
Morgan Stanley Strategist Fund Class A and D shares outperformed the S&P 500(R)
Index, the Lehman Brothers U.S. Government/Credit Index and the Lipper Flexible
Portfolio Funds Index for the 12-months ended July 31, 2005, assuming no
deduction of applicable sales charges. Class B and C shares underperformed the
S&P 500(R) Index and outperformed the Lehman Brothers
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U.S. Government/Credit Index and the Lipper Flexible Portfolio Funds Index
during the period assuming no deduction of applicable sales charges.
The Fund's allocations throughout the fiscal year were influenced by the global
macroeconomic and market conditions discussed above. We entered the summer
months of 2004 with a more positive bias toward economically sensitive global
industries and a growing skepticism toward interest-rate sensitive sectors, such
as bonds, financial services companies and utilities. As the fiscal year
progressed, we took steps to further adjust the portfolio's allocations to
reflect these general concerns.
In April 2005, we shifted the Fund's targeted asset allocation to a more
defensive blend. Targeted equity exposure was reduced from 70 percent of assets
to 65 percent, while fixed-income exposure was reduced from 30 percent to 25
percent. Cash was increased from 0 percent to 10 percent. This target allocation
represents a continued overweighted stance in equities (65 percent versus an
average balanced fund weight of 55 percent), a fixed-income underweight (25
percent versus the 35 percent average balanced fund weight), and a weight of 10
percent cash (equal to that of an average balanced fund).
Several factors led to the initiation of a cash reserve within the Fund, and to
an overall more defensive tone toward the fixed-income markets. The U.S.
Treasury markets had rallied in response to general economic weakness at the end
of the first quarter of 2005. This backdrop provided an opportunity to reduce
the Fund's exposure to bonds with longer maturities, capturing what we
considered to be attractive valuation levels. The reduction in the equity
allocation also reflected profit-taking, as a number of sectors benefited from
strong first-quarter earnings reports.
One overriding concern, however, outweighed any asset class-specific rationale
for this change. For the first time in this economic cycle, inflationary
pressures finally began to manifest themselves in consumer goods and services.
After facing spiking commodity prices for three years, companies seemed to have
finally reached their limits in terms of absorbing higher costs. Price increases
for both goods and services have been seen across the spectrum of consumer
goods, a trend that concerns us in light of the Federal Reserve's policy of
"measured" increases to the federal funds target rate. Our analysis was that the
central bank could grow more vigilant in its attempts to corral inflationary
pressures, even if economic growth appeared a bit less robust than last year.
Within the equity portfolio, many broad positioning themes remained constant
throughout much of the year. Our two largest strategic allocations were an
overweight stance (versus the S&P 500(R) Index) in information technology and an
underweight stance in financials. Holdings in industrials, energy and basic
materials were additive to performance during the year, but a more cautious view
of the utility industry and of real estate investment trusts hurt performance.
At the close of the reporting period, the fixed-income portion of the portfolio
was allocated among holdings in U.S. government and agency securities,
mortgage-backed securities, corporate credits and cash equivalents. We view the
fixed-income allocation as appropriately defensive in the current environment.
We have positioned the portfolio to reflect our view of the likelihood for
moderate macroeconomic recovery through early 2006 and for continued profit and
cash flow generation in cyclical industries, such as hardware and equipment,
chemicals and metals, and industrials. Sectors which could be negatively
impacted by a steepening yield curve (financials and utilities) were
underweighted versus the S&P 500(R) Index as of the close of the reporting
period.
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THERE IS NO GUARANTEE THAT ANY SECTORS MENTIONED WILL CONTINUE TO PERFORM WELL
OR THAT SECURITIES IN SUCH SECTORS WILL BE HELD BY THE FUND IN THE FUTURE.
TOP 10 HOLDINGS
<Table>
U.S. Treasury Notes 7.7%
U.S. Treasury Bonds 3.0
American Express Co. 1.7
Fed. Natl. Mtge. Assoc. 1.6
Corning Inc. 1.6
Coca-Cola Co. (The) 1.4
Motorola Inc. 1.4
Apple Computer, Inc. 1.4
Caterpillar Inc. 1.4
Bank of America Corp. 1.4
General Electric Co. 1.3
</Table>
PORTFOLIO COMPOSITION*
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Common Stocks 70.4%
U.S. Government Obligations 11.3
Short-Term Investments 6.7
Corporate Bonds 5.4
Asset-Backed Securities 3.8
U.S. Government Agency - Mortgage-Backed Securities 2.1
Foreign Government Obligations 0.2
Collateralized Mortgage Obligation 0.1
</Table>
DATA AS OF JULY 31, 2005. SUBJECT TO CHANGE DAILY. ALL PERCENTAGES FOR TOP 10
HOLDINGS ARE AS A PERCENTAGE OF NET ASSETS AND ALL PERCENTAGES FOR PORTFOLIO
COMPOSITION ARE AS A PERCENTAGE OF TOTAL INVESTMENTS.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.
* DOES NOT INCLUDE OUTSTANDING SHORT FUTURES WITH AN UNDERLYING FACE AMOUNT OF
$26,238,844 WITH TOTAL UNREALIZED APPRECIATION OF $284,205.
INVESTMENT STRATEGY
THE FUND'S "INVESTMENT ADVISER," MORGAN STANLEY INVESTMENT ADVISORS INC.,
ACTIVELY ALLOCATES THE FUND'S ASSETS AMONG THE MAJOR ASSET CATEGORIES OF EQUITY
SECURITIES (INCLUDING DEPOSITARY RECEIPTS), FIXED-INCOME SECURITIES AND MONEY
MARKET INSTRUMENTS. IN DETERMINING WHICH SECURITIES TO BUY, HOLD OR SELL FOR THE
FUND, THE INVESTMENT ADVISER ALLOCATES THE FUND'S ASSETS BASED ON, AMONG OTHER
THINGS, ITS ASSESSMENT OF THE EFFECTS OF ECONOMIC AND MARKET TRENDS ON DIFFERENT
SECTORS OF THE MARKET. THERE IS NO LIMIT AS TO THE PERCENTAGE OF ASSETS THAT MAY
BE ALLOCATED TO ANY ONE ASSET CLASS.
FOR MORE INFORMATION ABOUT PORTFOLIO HOLDINGS
EACH MORGAN STANLEY FUND PROVIDES A COMPLETE SCHEDULE OF PORTFOLIO HOLDINGS IN
ITS SEMIANNUAL AND ANNUAL REPORTS WITHIN 60 DAYS OF THE END OF THE FUND'S SECOND
AND FOURTH FISCAL QUARTERS BY FILING THE SCHEDULE ELECTRONICALLY WITH THE
SECURITIES AND EXCHANGE COMMISSION (SEC). THE SEMIANNUAL REPORTS ARE FILED ON
FORM N-CSRS AND THE ANNUAL REPORTS ARE FILED ON FORM N-CSR. MORGAN STANLEY ALSO
DELIVERS THE SEMIANNUAL AND ANNUAL REPORTS TO FUND SHAREHOLDERS AND MAKES THESE
REPORTS AVAILABLE ON ITS PUBLIC WEB SITE, www.morganstanley.com. EACH MORGAN
STANLEY FUND ALSO FILES A COMPLETE SCHEDULE OF PORTFOLIO HOLDINGS WITH THE SEC
FOR THE FUND'S FIRST AND THIRD FISCAL QUARTERS ON FORM N-Q. MORGAN STANLEY DOES
NOT DELIVER THE REPORTS FOR THE FIRST AND THIRD FISCAL QUARTERS TO SHAREHOLDERS,
NOR ARE THE REPORTS POSTED TO THE MORGAN
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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 BY
VISITING THE MUTUAL FUND CENTER ON OUR WEB SITE AT www.morganstanley.com. THIS
INFORMATION IS ALSO AVAILABLE ON THE SECURITIES AND EXCHANGE COMMISSION'S WEB
SITE AT http://www.sec.gov.
HOUSEHOLDING NOTICE
TO REDUCE PRINTING AND MAILING COSTS, THE FUND ATTEMPTS TO ELIMINATE DUPLICATE
MAILINGS TO THE SAME ADDRESS. THE FUND DELIVERS A SINGLE COPY OF CERTAIN
SHAREHOLDER DOCUMENTS, INCLUDING SHAREHOLDER REPORTS, PROSPECTUSES AND PROXY
MATERIALS, TO INVESTORS WITH THE SAME LAST NAME WHO RESIDE AT THE SAME ADDRESS.
YOUR PARTICIPATION IN THIS PROGRAM WILL CONTINUE FOR AN UNLIMITED PERIOD OF TIME
UNLESS YOU INSTRUCT US OTHERWISE. YOU CAN REQUEST MULTIPLE COPIES OF THESE
DOCUMENTS BY CALLING (800) 350-6414, 8:00 A.M. TO 8:00 P.M., ET. ONCE OUR
CUSTOMER SERVICE CENTER HAS RECEIVED YOUR INSTRUCTIONS, WE WILL BEGIN SENDING
INDIVIDUAL COPIES FOR EACH ACCOUNT WITHIN 30 DAYS.
5
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PERFORMANCE SUMMARY
[CHART]
PERFORMANCE OF $10,000 INVESTMENT--CLASS B
<Table>
<Caption>
FUND~~ S&P 500(R)(1) LEHMAN(2) LIPPER(3)
July 31, 1995 $ 10,000 $ 10,000 $ 10,000 $ 10,000
July 31, 1996 $ 11,147 $ 11,657 $ 10,531 $ 10,881
July 31, 1997 $ 14,461 $ 17,732 $ 11,667 $ 14,022
July 31, 1998 $ 16,308 $ 21,153 $ 12,608 $ 15,673
July 31, 1999 $ 17,812 $ 25,426 $ 12,902 $ 17,310
July 31, 2000 $ 20,091 $ 27,707 $ 13,639 $ 18,388
July 31, 2001 $ 18,675 $ 23,735 $ 15,372 $ 17,316
July 31, 2002 $ 15,543 $ 18,130 $ 16,431 $ 14,531
July 31, 2003 $ 16,973 $ 20,061 $ 17,600 $ 15,869
July 31, 2004 $ 18,881 $ 22,702 $ 18,430 $ 17,624
July 31, 2005 $ 21,428 $ 25,890 $ 19,341 $ 19,939
</Table>
6
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AVERAGE ANNUAL TOTAL RETURNS--PERIOD ENDED JULY 31, 2005
<Table>
<Caption>
CLASS A SHARES* CLASS B SHARES** CLASS C SHARES+ CLASS D SHARES++
(SINCE 07/28/97) (SINCE 10/31/88) (SINCE 07/28/97) (SINCE 07/28/97)
SYMBOL SRTAX SRTBX SRTCX SRTDX
1 YEAR 14.23%(4) 13.49%(4) 13.44%(4) 14.60%(4)
8.23(5) 8.49(5) 12.44(5) --
5 YEARS 2.09(4) 1.30(4) 1.30(4) 2.31(4)
0.99(5) 0.96(5) 1.30(5) --
10 YEARS -- 7.92(4) -- --
-- 7.92(5) -- --
SINCE INCEPTION 6.05(4) 9.76(4) 5.24(4) 6.30(4)
5.34(5) 9.76(5) 5.24(5) --
</Table>
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE, WHICH IS NO GUARANTEE OF
FUTURE RESULTS AND CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE FIGURES
SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE FIGURES, PLEASE VISIT
www.morganstanley.com OR SPEAK WITH YOUR FINANCIAL ADVISOR. INVESTMENT RETURNS
AND PRINCIPAL VALUE WILL FLUCTUATE AND FUND SHARES, WHEN REDEEMED, MAY BE WORTH
MORE OR LESS THAN THEIR ORIGINAL COST. THE 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% FOR SHARES
REDEEMED WITHIN ONE YEAR OF PURCHASE.
++ CLASS D HAS NO SALES CHARGE.
(1) THE STANDARD & POOR'S 500 INDEX (S&P 500(R)) IS A BROAD-BASED INDEX, THE
PERFORMANCE OF WHICH IS BASED ON THE PERFORMANCE OF 500 WIDELY-HELD COMMON
STOCKS CHOSEN FOR MARKET SIZE, LIQUIDITY AND INDUSTRY GROUP REPRESENTATION.
INDEXES ARE UNMANAGED AND THEIR RETURNS DO NOT INCLUDE ANY SALES CHARGES OR
FEES. SUCH COSTS WOULD LOWER PERFORMANCE. IT IS NOT POSSIBLE TO INVEST
DIRECTLY IN AN INDEX.
(2) THE LEHMAN BROTHERS U.S. GOVERNMENT/CREDIT INDEX TRACKS THE PERFORMANCE OF
GOVERNMENT AND CORPORATE OBLIGATIONS, INCLUDING U.S. GOVERNMENT AGENCY AND
TREASURY SECURITIES AND CORPORATE AND YANKEE BONDS. INDEXES ARE UNMANAGED
AND THEIR RETURNS DO NOT INCLUDE ANY SALES CHARGES OR FEES. SUCH COSTS
WOULD LOWER PERFORMANCE. IT IS NOT POSSIBLE TO INVEST DIRECTLY IN AN INDEX.
(3) THE LIPPER FLEXIBLE PORTFOLIO FUNDS INDEX IS AN EQUALLY WEIGHTED
PERFORMANCE INDEX OF THE LARGEST QUALIFYING FUNDS (BASED ON NET ASSETS) IN
THE LIPPER FLEXIBLE PORTFOLIO 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.
(4) FIGURE SHOWN ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AND DOES NOT REFLECT
THE DEDUCTION OF ANY SALES CHARGES.
(5) FIGURE SHOWN ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AND THE DEDUCTION OF
THE MAXIMUM APPLICABLE SALES CHARGE. SEE THE FUND'S CURRENT PROSPECTUS FOR
COMPLETE DETAILS ON FEES AND SALES CHARGES.
~~ ENDING VALUE ASSUMING A COMPLETE REDEMPTION ON JULY 31, 2005.
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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 02/01/05 - 07/31/05.
ACTUAL EXPENSES
The first line of the table below provides information about actual account
values and actual expenses. You may use the information in this line, together
with the amount you invested, to estimate the expenses that you paid over the
period. Simply divide your account value by $1,000 (for example, an $8,600
account value divided by $1,000 = 8.6), then multiply the result by the number
in the first line under the heading entitled "Expenses Paid During Period" to
estimate the expenses you paid on your account during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second line of the table below provides information about hypothetical
expenses based on the Fund's actual expense ratio and an assumed rate of return
of 5% per year before expenses, which is not the Fund's actual return. The
hypothetical account values and expenses may not be used to estimate the actual
ending account balance or expenses you paid for the period. You may use this
information to compare the ongoing cost of investing in the Fund and other
funds. To do so, compare this 5% hypothetical example with the 5% hypothetical
examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as sales
charges (loads) and redemption fees. Therefore, the second line of the table is
useful in comparing ongoing costs, and will not help you determine the relative
total cost of owning different funds. In addition, if these transactional costs
were included, your costs would have been higher.
<Table>
<Caption>
BEGINNING ENDING EXPENSES PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD *
------------- ------------- ---------------
02/01/05 -
02/01/05 07/31/05 07/31/05
------------- ------------- ---------------
CLASS A
Actual (5.49% return) $ 1,000.00 $ 1,054.90 $ 4.69
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,020.23 $ 4.61
CLASS B
Actual (5.15% return) $ 1,000.00 $ 1,051.50 $ 8.49
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,016.51 $ 8.35
CLASS C
Actual (5.12% return) $ 1,000.00 $ 1,051.20 $ 8.14
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,016.86 $ 8.00
CLASS D
Actual (5.65% return) $ 1,000.00 $ 1,056.50 $ 3.42
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,021.47 $ 3.36
</Table>
- ----------
* EXPENSES ARE EQUAL TO THE FUND'S ANNUALIZED EXPENSE RATIO OF 0.92%, 1.67%,
1.60% AND 0.67% RESPECTIVELY, MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER
THE PERIOD, MULTIPLIED BY 181/365 (TO REFLECT THE ONE-HALF YEAR PERIOD).
8
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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. (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 administrative and investment advisory 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
The Board reviewed the Fund's performance for the one-, three- and five-year
periods ended November 30, 2004, as shown in reports provided by Lipper (the
"Lipper Reports"), compared to the performance of comparable funds selected by
Lipper (the "performance peer group"), and noted that the Fund's performance was
lower than its performance peer group average for the three-year period but
better for the one- and five-year periods. The Board concluded that the Fund's
overall performance was competitive with its performance peer group.
FEES RELATIVE TO OTHER FUNDS MANAGED BY THE ADVISER WITH COMPARABLE INVESTMENT
STRATEGIES
The Board reviewed the advisory and administrative fees (together, the
"management fee") paid by the Fund under the Management Agreement. The Board
noted that the rate was comparable to the management fee rates charged by the
Adviser to any other funds it manages with investment strategies comparable to
those of the Fund.
FEES AND EXPENSES RELATIVE TO COMPARABLE FUNDS MANAGED BY OTHER ADVISERS
The Board reviewed the management fee rate and the total expense ratio of the
Fund. The Board noted that: (i) the Fund's management fee rate was lower than
the average management fee rate for funds, selected by Lipper (the "expense peer
group"), managed by other advisers with investment strategies comparable to
those of the Fund, as
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shown in the Lipper Report for the Fund; and (ii) the Fund's total expense ratio
was also lower than the average total expense ratio of the funds included in the
Fund's expense peer group. The Board concluded that the Fund's management fee
and total expense ratio were competitive with those of the Fund's expense peer
group.
BREAKPOINTS AND ECONOMIES OF SCALE
The Board reviewed the structure of the Fund's management fee schedule under the
Management Agreement and noted that it includes breakpoints. The Board also
reviewed the level of the Fund's management fee and noted that the fee, as a
percentage of the Fund's net assets, would decrease as net assets increase
because the management fee includes breakpoints. The Board concluded that the
Fund's management fee would reflect economies of scale as assets increase.
PROFITABILITY OF ADVISER AND AFFILIATES
The Board considered and reviewed information concerning the costs incurred and
profits realized by the Adviser and its affiliates during the last two years
from their relationship with the Fund and the Morgan Stanley Fund Complex and
reviewed with the Controller of the Adviser the cost allocation methodology used
to determine the Adviser's profitability. Based on their review of the
information they received, the Board concluded that the profits earned by the
Adviser and its affiliates were not excessive in light of the advisory,
administrative and other services provided to the Fund.
FALL-OUT BENEFITS
The Board considered so-called "fall-out benefits" derived by the Adviser and
its affiliates from their relationship with the Fund and the Morgan Stanley Fund
Complex, such as "float" benefits derived from handling of checks for purchases
and redemptions 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 also considered
that an affiliate of the Adviser, through a joint venture, receives revenue in
connection with trading done on behalf of the Fund through an electronic trading
system network ("ECN"). The Board concluded that the float benefits and the
above-referenced ECN-related revenue were relatively small and that the 12b-1
fees were competitive with those of other broker-dealer affiliates of investment
advisers of mutual funds.
SOFT DOLLAR BENEFITS
The Board considered whether the Adviser realizes any benefits as a result of
brokerage transactions executed through "soft dollar" arrangements. Under such
arrangements, brokerage commissions paid by the Fund and/or other funds managed
by the 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
10
<Page>
Fund. The Adviser informed the Board that it does not use Fund commissions to
pay for third party research. It does use commissions to pay for research which
is bundled with execution services. The Board recognized that the receipt of
such research from brokers may reduce Adviser's costs but concluded that the
receipt of such research strengthens the investment management resources of the
Adviser, which may ultimately benefit the Fund and other funds in Fund Complex.
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 noted that the Adviser's operations remain profitable, although
increased expenses in recent years have reduced the Adviser's profitability. The
Board concluded that the Adviser has the financial resources necessary to
fulfill its obligations under the Management Agreement.
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
After considering and weighing all of the above factors, the Board concluded it
would be in the best interest of the Fund and its shareholders to approve
renewal of the Management Agreement for another year.
11
<Page>
MORGAN STANLEY STRATEGIST FUND
PORTFOLIO OF INVESTMENTS - JULY 31, 2005
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- -------------------------------------------------------------------------------------
COMMON STOCKS (70.5%)
ADVERTISING/MARKETING SERVICES (1.2%)
138,500 Lamar Advertising Co. (Class A)* $ 6,095,385
68,400 Omnicom Group, Inc. 5,805,108
---------------
11,900,493
---------------
AEROSPACE & DEFENSE (1.5%)
174,835 Northrop Grumman Corp. 9,694,601
136,300 Raytheon Co. 5,360,679
---------------
15,055,280
---------------
AGRICULTURAL COMMODITIES/MILLING (1.1%)
491,000 Archer-Daniels-Midland Co. 11,263,540
---------------
APPAREL/FOOTWEAR RETAIL (1.7%)
463,240 Gap, Inc. (The) 9,778,996
275,000 Ross Stores, Inc. 7,287,500
---------------
17,066,496
---------------
BEVERAGES: NON-ALCOHOLIC (1.4%)
329,210 Coca-Cola Co. (The) 14,406,230
---------------
BIOTECHNOLOGY (2.3%)
262,030 Celgene Corp.* 12,538,135
240,740 Gilead Sciences, Inc.* 10,787,559
---------------
23,325,694
---------------
CHEMICALS: AGRICULTURAL (0.6%)
98,160 Monsanto Co. 6,613,039
---------------
CHEMICALS: MAJOR DIVERSIFIED (0.6%)
132,170 Dow Chemical Co. (The) 6,337,551
---------------
COMPUTER COMMUNICATIONS (1.2%)
656,590 Cisco Systems, Inc.* 12,573,699
---------------
COMPUTER PERIPHERALS (0.8%)
567,500 EMC Corp.* 7,769,075
---------------
COMPUTER PROCESSING HARDWARE (2.5%)
334,000 Apple Computer, Inc.* 14,245,100
271,100 Dell, Inc.* 10,971,417
---------------
25,216,517
---------------
CONTRACT DRILLING (0.7%)
130,910 Diamond Offshore Drilling, Inc. 7,469,725
---------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
12
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- -------------------------------------------------------------------------------------
DEPARTMENT STORES (1.1%)
189,650 Kohl's Corp.* $ 10,686,777
---------------
DISCOUNT STORES (1.3%)
279,140 Costco Wholesale Corp. 12,832,066
---------------
ELECTRICAL PRODUCTS (1.7%)
175,610 Emerson Electric Co. 11,555,138
186,400 Spectrum Brands, Inc.* 5,778,400
---------------
17,333,538
---------------
ELECTRONIC COMPONENTS (0.5%)
359,320 Flextronics International Ltd. (Singapore)* 4,865,193
---------------
ELECTRONIC PRODUCTION EQUIPMENT (0.7%)
394,400 Applied Materials, Inc. 7,280,624
---------------
ENVIRONMENTAL SERVICES (1.0%)
354,930 Waste Management, Inc. 9,980,632
---------------
FINANCIAL CONGLOMERATES (3.4%)
206,760 American Express Co. 11,371,800
269,490 Citigroup, Inc. 11,722,815
318,500 JPMorgan Chase & Co. 11,192,090
---------------
34,286,705
---------------
FOOD: MAJOR DIVERSIFIED (1.0%)
218,160 Kellogg Co. 9,884,830
---------------
FOOD: MEAT/FISH/DAIRY (1.0%)
277,500 Dean Foods Co.* 9,906,750
---------------
HOUSEHOLD/PERSONAL CARE (0.7%)
125,050 Colgate-Palmolive Co. 6,620,147
---------------
INDUSTRIAL CONGLOMERATES (1.3%)
391,720 General Electric Co. 13,514,340
---------------
INFORMATION TECHNOLOGY SERVICES (1.2%)
145,840 International Business Machines Corp. 12,171,806
---------------
INTEGRATED OIL (2.0%)
114,540 BP PLC (ADR) (United Kingdom) 7,545,895
129,200 Exxon Mobil Corp. 7,590,500
85,000 Royal Dutch Shell PLC (ADR) (Class A) (Netherlands) 5,208,800
---------------
20,345,195
---------------
INTERNET SOFTWARE/SERVICES (0.8%)
422,600 Siebel Systems, Inc. 3,549,840
130,000 Yahoo!, Inc.* 4,334,200
---------------
7,884,040
---------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
13
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- -------------------------------------------------------------------------------------
INVESTMENT BANKS/BROKERS (1.1%)
336,150 Ameritrade Holding Corp.* $ 6,565,009
300,000 Schwab (Charles) Corp. (The) 4,110,000
---------------
10,675,009
---------------
MAJOR BANKS (2.8%)
313,240 Bank of America Corp. 13,657,264
218,400 KeyCorp 7,478,016
111,990 Wells Fargo & Co. 6,869,467
---------------
28,004,747
---------------
MAJOR TELECOMMUNICATIONS (1.1%)
332,280 AT&T Corp. 6,579,144
167,000 SBC Communications, Inc. 4,083,150
---------------
10,662,294
---------------
MEDIA CONGLOMERATES (1.3%)
766,880 Time Warner, Inc.* 13,052,298
---------------
MEDICAL SPECIALTIES (3.3%)
188,100 Bard (C.R.), Inc. 12,563,199
196,340 Fisher Scientific International, Inc.* 13,164,597
189,900 Hospira, Inc.* 7,263,675
---------------
32,991,471
---------------
MOTOR VEHICLES (1.1%)
441,240 Honda Motor Co., Ltd. (ADR) (Japan) 11,370,755
---------------
OIL & GAS PRODUCTION (0.9%)
146,000 Burlington Resources, Inc. 9,360,060
---------------
OIL REFINING/MARKETING (0.8%)
101,820 Ashland Inc, 6,256,839
24,070 Marathon Oil Corp. 1,404,725
---------------
7,661,564
---------------
OILFIELD SERVICES/EQUIPMENT (1.9%)
188,200 Halliburton Co. 10,548,610
132,060 Smith International, Inc. 8,972,156
---------------
19,520,766
---------------
OTHER CONSUMER SERVICES (1.2%)
300,000 eBay, Inc.* 12,534,000
---------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
14
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- -------------------------------------------------------------------------------------
PACKAGED SOFTWARE (2.8%)
394,200 Microsoft Corp. $ 10,095,462
804,600 Oracle Corp.* 10,926,468
344,140 Sybase, Inc.* 7,323,299
---------------
28,345,229
---------------
PHARMACEUTICALS: MAJOR (4.1%)
178,840 Johnson & Johnson 11,438,606
159,700 Lilly (Eli) & Co. 8,994,304
410,670 Pfizer, Inc. 10,882,755
218,320 Wyeth 9,988,140
---------------
41,303,805
---------------
PROPERTY - CASUALTY INSURERS (1.1%)
178,600 Allstate Corp. (The) 10,941,036
---------------
RAILROADS (1.8%)
72,110 Burlington Northern Santa Fe Corp. 3,911,968
148,780 CSX Corp. 6,775,441
107,500 Union Pacific Corp. 7,558,325
---------------
18,245,734
---------------
REGIONAL BANKS (0.5%)
177,860 AmSouth Bancorporation 4,964,073
---------------
SEMICONDUCTORS (2.4%)
265,821 Freescale Semiconductor Inc. (Class B)* 6,844,891
277,450 Intel Corp. 7,529,993
472,400 Micron Technology, Inc.* 5,612,112
481,213 Taiwan Semiconductor Manufacturing Co.
Ltd. (ADR) (Taiwan) 4,133,620
---------------
24,120,616
---------------
SPECIALTY STORES (1.0%)
217,320 Bed Bath & Beyond Inc.* 9,974,988
---------------
SPECIALTY TELECOMMUNICATIONS (0.8%)
600,000 Citizens Communications Co. 7,884,000
---------------
STEEL (0.7%)
123,500 Nucor Corp. 6,848,075
---------------
TELECOMMUNICATION EQUIPMENT (4.2%)
844,550 Corning, Inc.* 16,088,678
679,110 Motorola, Inc. 14,383,550
743,870 Nokia Corp. (ADR) (Finland) 11,864,726
---------------
42,336,954
---------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
15
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- -------------------------------------------------------------------------------------
TOBACCO (0.9%)
132,820 Altria Group, Inc. $ 8,893,627
---------------
TRUCKS/CONSTRUCTION/FARM MACHINERY (1.4%)
262,920 Caterpillar Inc. 14,174,017
---------------
TOTAL COMMON STOCKS
(COST $507,684,198) 710,455,100
---------------
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE
- ------------- ------ --------
CORPORATE BONDS (5.4%)
ADVERTISING/MARKETING SERVICES (0.0%)
$ 385 WPP Finance (UK) Corp. (United Kingdom) 5.875% 06/15/14 398,133
---------------
AEROSPACE & DEFENSE (0.2%)
350 Northrop Grumman Corp. 4.079 11/16/06 347,539
199 Raytheon Co. 6.15 11/01/08 207,682
55 Raytheon Co. 8.30 03/01/10 62,682
834 Systems 2001 Asset Trust - 144A**
(Cayman Islands) 6.664 09/15/13 892,587
---------------
1,510,490
---------------
AIR FREIGHT/COURIERS (0.0%)
335 Fedex Corp. 2.65 04/01/07 325,356
---------------
AIRLINES (0.1%)
824 America West Airlines, Inc. (Series 01-1) 7.10 04/02/21 852,994
295 Southwest Airlines Co. (Series 01-1) 5.496 11/01/06 298,689
---------------
1,151,683
---------------
BEVERAGES: ALCOHOLIC (0.1%)
510 FBG Finance Ltd. - 144A** (Australia) 5.125 06/15/15 502,063
545 Miller Brewing Co. - 144A** 4.25 08/15/08 538,383
---------------
1,040,446
---------------
CABLE/SATELLITE TV (0.2%)
135 Comcast Cable Communications Inc. 6.75 01/30/11 146,972
205 Comcast Corp. 6.50 01/15/15 225,029
455 Cox Communications, Inc. 4.625 01/15/10 447,633
60 Lenfest Communications, Inc. 7.625 02/15/08 63,961
490 TCI Communications, Inc. 7.875 02/15/26 599,949
---------------
1,483,544
---------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
16
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------------
CHEMICALS: MAJOR DIVERSIFIED (0.0%)
$ 270 ICI Wilmington Inc. 4.375% 12/01/08 $ 265,463
---------------
CONTAINERS/PACKAGING (0.1%)
580 Sealed Air Corp. - 144A** 5.625 07/15/13 587,190
---------------
DEPARTMENT STORES (0.1%)
300 Federated Department Stores, Inc. 6.625 09/01/08 317,219
980 May Department Stores Co., Inc. 5.95 11/01/08 1,013,723
---------------
1,330,942
---------------
DRUGSTORE CHAINS (0.2%)
1,505 CVS Corp. 5.625 03/15/06 1,517,240
---------------
ELECTRIC UTILITIES (0.6%)
505 Arizona Public Service Co. 5.80 06/30/14 531,543
140 Arizona Public Service Co. 6.75 11/15/06 143,890
450 Carolina Power & Light Co. 5.125 09/15/13 457,020
305 CC Funding Trust I 6.90 02/16/07 315,366
250 Cincinnati Gas & Electric Co. 5.70 09/15/12 262,048
45 Columbus Southern Power Co. (Series E) 4.40 12/01/10 44,158
335 Consolidated Natural Gas Co. (Series A) 5.00 12/01/14 333,275
460 Consolidated Natural Gas Co. (Series C) 6.25 11/01/11 493,811
310 Consumers Energy Co. (Series H) 4.80 02/17/09 310,183
105 Detroit Edison Co. (The) 6.125 10/01/10 111,675
385 Detroit Edison Co. (The) - 144A** 4.80 02/15/15 378,095
205 Entergy Gulf States, Inc. 3.60 06/01/08 198,955
340 Entergy Gulf States, Inc. 3.73++ 12/01/09 341,152
285 Exelon Corp. 6.75 05/01/11 311,406
655 FPL Group Capital Inc. 3.25 04/11/06 651,033
230 Pacific Gas & Electric Co. 6.05 03/01/34 247,447
105 Panhandle Eastern Pipe Line Co.
(Series B) 2.75 03/15/07 102,012
315 Public Service Electric & Gas Co.
(Series MTNB) 5.00 01/01/13 318,700
155 South Carolina Electric & Gas Co. 5.30 05/15/33 155,684
240 Texas Eastern Transmission, LP 7.00 07/15/32 285,500
185 Wisconsin Electric Power Co. 3.50 12/01/07 181,046
---------------
6,173,999
---------------
ELECTRICAL PRODUCTS (0.1%)
520 Cooper Industries Inc. 5.25 07/01/07 525,996
---------------
ELECTRONICS/APPLIANCES (0.0%)
260 LG Electronics Inc. - 144A** (South Korea) 5.00 06/17/10 255,842
---------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
17
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------------
FINANCE/RENTAL/LEASING (0.5%)
$ 395 CIT Group, Inc. 2.875% 09/29/06 $ 388,582
5 CIT Group, Inc. 7.375 04/02/07 5,234
700 Countrywide Home Loans, Inc. (Series MTN) 3.25 05/21/08 674,720
105 Ford Motor Credit Co. 7.25 10/25/11 103,470
100 Ford Motor Credit Co. 7.375 10/28/09 99,867
100 MBNA Capital I (Series A) 8.278 12/01/26 108,036
630 MBNA Corp. (Series F) 3.64++ 05/05/08 635,701
440 MBNA Corp. 6.125 03/01/13 471,580
675 Nationwide Building Society - 144A**
(United Kingdom) 4.25 02/01/10 662,954
470 Residential Capital Corp. - 144A** 6.375 06/30/10 478,052
310 SLM Corp. (Series A) 4.00 01/15/10 301,521
580 SLM Corp. (Series MTNA) 5.00 10/01/13 583,747
---------------
4,513,464
---------------
FINANCIAL CONGLOMERATES (0.4%)
920 Chase Manhattan Corp. 6.00 02/15/09 961,300
275 Citicorp 6.75 08/15/05 275,285
660 Citigroup Inc. 5.625 08/27/12 691,613
530 Citigroup Inc. 5.75 05/10/06 536,401
530 Citigroup Inc. 6.00 02/21/12 566,830
180 General Electric Capital Corp.
(Series MTNA) 4.25 12/01/10 177,103
55 General Electric Capital Corp.
(Series MTNA) 4.75 09/15/14 54,685
800 General Electric Capital Corp.
(Series MTNA) 6.75 03/15/32 962,463
100 General Motors Acceptance Corp. 4.50 07/15/06 99,198
---------------
4,324,878
---------------
FOOD: MAJOR DIVERSIFIED (0.0%)
345 Kraft Foods Inc. 5.625 11/01/11 360,737
---------------
FOREST PRODUCTS (0.0%)
165 Weyerhaeuser Co. 6.00 08/01/06 167,440
---------------
GAS DISTRIBUTORS (0.1%)
325 NiSource Finance Corp. 3.854++ 11/23/09 326,634
415 Ras Laffan Liquid Natural
Gas Co. Ltd. - 144A** (Qatar) 8.294 03/15/14 487,632
305 Sempra Energy 4.621 05/17/07 305,029
---------------
1,119,295
---------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
18
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------------
HOME FURNISHINGS (0.0%)
$ 290 Mohawk Industries, Inc. (Series D) 7.20% 04/15/12 $ 325,052
---------------
HOTELS/RESORTS/CRUISELINES (0.1%)
510 Hyatt Equities LLC - 144A** 6.875 06/15/07 522,619
760 Marriott International, Inc. (Series E) 7.00 01/15/08 800,228
---------------
1,322,847
---------------
HOUSEHOLD/PERSONAL CARE (0.1%)
590 Clorox Co. (The) 3.525++ 12/14/07 591,182
---------------
INDUSTRIAL CONGLOMERATES (0.1%)
245 Hutchison Whampoa
International Ltd. - 144A** (Kyrgyzstan) 5.45 11/24/10 250,455
335 Hutchison Whampoa
International Ltd. - 144A** (Kyrgyzstan) 6.50 02/13/13 358,096
330 Textron Financial Corp. (Series E) 4.125 03/03/08 326,801
---------------
935,352
---------------
INSURANCE BROKERS/SERVICES (0.2%)
1,055 Farmers Exchange Capital - 144A** 7.05 07/15/28 1,111,297
805 Marsh & McLennan Companies, Inc. 5.375 07/15/14 779,438
---------------
1,890,735
---------------
INVESTMENT BANKS/BROKERS (0.1%)
360 Goldman Sachs Group Inc. (The) 5.25 10/15/13 365,777
640 Goldman Sachs Group Inc. (The) 6.60 01/15/12 699,224
---------------
1,065,001
---------------
MAJOR BANKS (0.2%)
195 Bank of New York Co., Inc. (The) 5.20 07/01/07 197,443
250 Bank of New York Co., Inc.
(The) (Series BKNT) 3.80 02/01/08 246,181
485 FleetBoston Financial Corp. 7.25 09/15/05 486,877
280 HSBC Finance Corp. 6.75 05/15/11 306,149
325 Huntington National Bank (Series BKNT) 4.375 01/15/10 320,838
---------------
1,557,488
---------------
MAJOR TELECOMMUNICATIONS (0.2%)
530 Deutsche Telekom International
Finance NV (Netherlands) 8.75 06/15/30 711,143
530 France Telecom S.A. - 144A** (France) 9.25 03/01/31 732,164
150 Sprint Capital Corp. 8.75 03/15/32 207,051
405 Telecom Italia Capital SpA - 144A**
(Luxembourg) 4.00 01/15/10 391,187
345 Telecom Italia Capital SpA (Luxembourg) 4.00 11/15/08 338,492
---------------
2,380,037
---------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
19
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------------
MANAGED HEALTH CARE (0.2%)
$ 855 Aetna, Inc. 7.875% 03/01/11 $ 980,306
530 WellPoint Health Networks Inc. 6.375 06/15/06 539,464
---------------
1,519,770
---------------
MEDIA CONGLOMERATES (0.1%)
325 Time Warner, Inc. 6.625 05/15/29 357,581
115 Time Warner, Inc. 7.70 05/01/32 144,141
---------------
501,722
---------------
MOTOR VEHICLES (0.1%)
545 DaimlerChrysler North American
Holdings Co. 8.50 01/18/31 700,642
---------------
MULTI-LINE INSURANCE (0.3%)
1,265 AIG Sun America Global
Finance VI - 144A** 6.30 05/10/11 1,357,700
575 American General Finance Corp.
(Series MTNF) 5.875 07/14/06 583,266
910 AXA Financial Inc. 6.50 04/01/08 954,818
95 Hartford Financial Services
Group, Inc. (The) 2.375 06/01/06 93,564
235 International Lease Finance Corp. 3.75 08/01/07 231,726
305 Two-Rock Pass Through - 144A**
(Bahamas)++ 4.19++ 12/31/49 303,097
---------------
3,524,171
---------------
OIL & GAS PRODUCTION (0.1%)
245 Pemex Project Funding Master Trust 7.375 12/15/14 271,338
430 Pemex Project Funding Master Trust 8.00 11/15/11 486,115
420 Pemex Project Funding Master Trust 8.625 02/01/22 510,930
145 Pemex Project Funding Master Trust 9.125 10/13/10 169,577
---------------
1,437,960
---------------
OTHER METALS/MINERALS (0.0%)
390 Brascan Corp. (Canada) 7.125 06/15/12 431,930
---------------
PROPERTY - CASUALTY INSURERS (0.1%)
760 Mantis Reef Ltd. - 144A** (Australia) 4.692 11/14/08 750,663
515 St. Paul Travelers 5.01 08/16/07 518,205
---------------
1,268,868
---------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
20
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------------
PULP & PAPER (0.0%)
$ 305 Sappi Papier Holding AG - 144A**
(Austria) 6.75 % 06/15/12 $ 316,667
---------------
RAILROADS (0.1%)
272 Burlington North Santa Fe Railway Co. 4.575 01/15/21 266,513
290 Norfolk Southern Corp. 7.35 05/15/07 303,919
110 Union Pacific Corp. 6.625 02/01/08 115,364
180 Union Pacific Corp. 6.65 01/15/11 196,624
100 Union Pacific Corp. - 144A**
(Series 2004-2) 5.214 09/30/14 100,710
140 Union Pacific Corp. (Series MTNE) 6.79 11/09/07 146,857
---------------
1,129,987
---------------
REAL ESTATE DEVELOPMENT (0.1%)
1,345 World Financial Properties - 144A**
(Series 1996 WFP - B) 6.91 09/01/13 1,436,088
---------------
REAL ESTATE INVESTMENT TRUSTS (0.1%)
770 EOP Operating L.P. 6.763 06/15/07 798,187
---------------
REGIONAL BANKS (0.1%)
800 Marshall & Isley Bank (Series BKNT) 3.80 02/08/08 787,192
---------------
SAVINGS BANKS (0.2%)
305 Household Finance Corp. 4.125 12/15/08 300,104
230 Household Finance Corp. 5.875 02/01/09 238,516
225 Household Finance Corp. 6.375 10/15/11 241,458
350 Household Finance Corp. 6.40 06/17/08 367,195
100 Sovereign Bank (Series CD) 4.00 02/01/08 98,885
470 Washington Mutual Bank 5.50 01/15/13 483,249
260 Washington Mutual Inc. 8.25 04/01/10 293,854
---------------
2,023,261
---------------
TOBACCO (0.1%)
325 Altria Group, Inc. 7.00 11/04/13 356,721
315 Altria Group, Inc. 7.75 01/15/27 368,362
---------------
725,083
---------------
TRUCKS/CONSTRUCTION/FARM MACHINERY (0.1%)
635 Caterpillar Financial Services Corp.
(Series MTNF) 3.35++ 08/20/07 636,187
190 Caterpillar Financial Services Corp.
(Series MTNF) 3.625 11/15/07 186,312
---------------
822,499
---------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
21
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------------
WIRELESS TELECOMMUNICATIONS (0.0%)
$ 250 AT&T Wireless Services, Inc. 8.75 % 03/01/31 $ 346,442
---------------
TOTAL CORPORATE BONDS
(COST $53,163,073) 54,890,300
---------------
ASSET-BACKED SECURITIES (3.8%)
FINANCE/RENTAL/LEASING
2,300 American Express Credit Account
Master Trust 2001-2 A 5.53 10/15/08 2,322,044
1,500 American Express Credit Account
Master Trust 2002-3 A 3.498++ 12/15/09 1,503,520
2,100 American Express Credit Account
Master Trust 2003-3 A 3.498++ 11/15/10 2,106,064
86 Asset Backed Funding Certificates
2004-HE1 A1 3.59++ 06/25/22 85,780
878 Asset Backed Funding Certificates
2005-WF1 A2A 3.54++ 01/25/35 878,480
1,225 Banc of America Securities Auto Trust
2005-WF1 A3 3.99 08/18/09 1,217,425
302 Capital Auto Receivables Asset Trust
2003-2 A3A 1.44 02/15/07 299,818
850 Capital Auto Receivables Asset Trust
2003-3 A3B 3.468++ 01/15/08 851,074
1,250 Capital Auto Receivables Asset Trust
2005-1 A4 4.05 07/15/09 1,244,048
1,050 Caterpillar Financial Asset Trust 2005-A A3 3.90 02/25/09 1,042,570
2,960 Chase Credit Card Master Trust 2001-4 A 5.50 11/17/08 2,998,975
500 CIT Equipment Collateral 2004-EF1 A3 3.50 09/20/08 492,675
2,230 Citibank Credit Card Issuance Trust
2000-A1 A1 6.90 10/15/07 2,245,475
800 CNH Equipment Trust 2005-A A3 4.02 04/15/09 795,591
950 Daimler Chrysler Auto Trust 2005-B A3 4.04 09/08/09 945,582
800 Ford Credit Auto Owner Trust 2005B A3 4.17 01/15/09 798,091
900 GE Capital Credit Card Master Note Trust
2004-2 A 3.428++ 09/15/10 901,250
850 GE Dealer Floorplan Master Note Trust
2004-1 A 3.48++ 07/20/08 850,444
1,500 Harley-Davidson Motorcycle Trust
2005-1 A2 3.76 12/17/12 1,479,012
750 Harley-Davidson Motorcycle Trust
2005-2 A2 4.07 02/15/12 743,789
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
22
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------------
$ 650 Honda Auto Receivables Owner Trust
2005-2 A3 3.93 % 01/15/09 $ 645,864
750 Hyundai Auto Receivables Trust
2005-A A3 3.98 11/16/09 744,369
1,475 MBNA Credit Card Master Note Trust
2003-A3 A3 3.508++ 08/16/10 1,479,957
1,550 MBNA Master Credit Card Trust
1999-B A 5.90 08/15/11 1,626,019
1,325 Merrill Auto Trust Securitization
2005-1 A3 4.10 08/25/09 1,318,391
925 National City Auto Receivables Trust
2004-A A4 2.88 05/15/11 897,652
562 Residential Asset Securities Corp.
2004-KSB AI1 3.62++ 10/25/22 562,201
275 TXU Electric Delivery Transition
Bond Co. LLC 2004-1 A2 4.81 11/17/14 276,289
1,600 USAA Auto Owner Trust 2004-2 A-4 3.58 02/15/11 1,575,631
1,550 USAA Auto Owner Trust 2004-3 A3 3.16 02/17/09 1,529,097
975 USAA Auto Owner Trust 2005-1 A3 3.90 07/15/09 968,597
850 Volkswagen Auto Lease Trust 2005-A A3 3.82 05/20/08 845,120
606 Wachovia Auto Owner Trust 2004-B A2 2.40 05/21/07 604,257
525 Wachovia Auto Owner Trust 2004-B A3 2.91 04/20/09 517,039
650 Wachovia Auto Owner Trust 2005-A A3 4.06 09/21/09 646,914
500 World Omni Auto Receivables Trust
2004-A A3 3.29 11/12/08 494,616
---------------
TOTAL ASSET-BACKED SECUIRTIES
(COST $38,589,405) 38,533,720
---------------
FOREIGN GOVERNMENT OBLIGATIONS (0.2%)
870 United Mexican States (Mexico)
(Series MTN) 8.00 09/24/22 1,044,000
535 United Mexican States (Mexico)
(Series MTN) 8.30 08/15/31 662,597
280 United Mexican States (Mexico)
(Series MTN) 8.375 01/14/11 321,860
---------------
FOREIGN GOVERNMENT OBLIGATIONS
(COST $1,745,155) 2,028,457
---------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
23
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY -
MORTGAGE-BACKED SECURITIES (2.0%)
Federal Home Loan Mortgage Corp. Gold
$ 1,128 6.50 % 05/01/29 - 12/01/32 $ 1,168,478
244 7.50 01/01/30 - 08/01/32 261,449
13 8.00 07/01/30 14,030
Federal Home Loan Mortgage Corp.
2,080 5.125 11/07/13 2,084,383
1,412 7.50 11/01/29 - 10/01/32 1,508,204
Federal National Mortgage Assoc.
5,165 4.25+ 08/15/10 5,125,312
1,144 6.50 12/01/29 - 01/01/33 1,186,324
2,634 7.00 12/01/17 - 09/01/32 2,773,914
2,825 7.50 07/01/29 - 03/01/32 3,012,726
3,657 8.00 05/01/09 - 01/01/32 3,929,063
---------------
TOTAL U.S. GOVERNMENT AGENCY - MORTGAGE-
BACKED SECURITIES(COST $20,932,626) 21,063,883
---------------
U.S. GOVERNMENT OBLIGATIONS (11.4%)
U.S. Treasury Bonds
250 5.50 08/15/28 284,199
5,400 6.125 08/15/29 6,655,505
1,295 6.375 08/15/27 1,622,191
5,550 8.125 08/15/19 7,635,157
9,900 8.125 08/15/21 13,935,804
U.S. Treasury Notes
8,025 3.50 11/15/06 7,983,310
41,500 3.625 05/15/13 39,968,069
4,850 3.875 02/15/13 4,746,370
24,400 4.25 08/15/13 24,438,137
850 4.375 08/15/12 861,920
U.S. Treasury Strips
11,750 0.00 02/15/25 4,795,152
755 0.00 02/15/25 306,940
3,250 0.00 02/15/27 1,217,723
---------------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(COST $110,934,042) 114,450,477
---------------
COLLATERALIZED MORTGAGE OBLIGATION (0.1%)
3,400 Federal National Mortgage Assoc. 2005 -
68 XI (IO) (COST $510,000) 6.00 08/25/35 586,500
---------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
24
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS (6.7%)
U.S. GOVERNMENT OBLIGATION (a) (0.0%)
$ 250 U.S. Treasury Bill***
(COST $246,185) 3.35% 01/12/06 $ 246,185
---------------
REPURCHASE AGREEMENT (6.7%)
67,148 Joint repurchase agreement account
(dated 07/29/05; proceeds $67,166,410) (b)
(COST $67,148,000) 3.29 08/01/05 67,148,000
---------------
TOTAL SHORT-TERM INVESTMENTS
(COST $67,394,185) 67,394,185
---------------
TOTAL INVESTMENTS
(COST $800,952,684) (c) (d) 100.1% 1,009,402,622
LIABILITIES IN EXCESS OF OTHER ASSETS (0.1) (1,038,384)
----- ---------------
NET ASSETS 100.0% $ 1,008,364,238
===== ===============
</Table>
- ----------
ADR AMERICAN DEPOSITARY RECEIPT.
IO INTEREST-ONLY SECURITY.
* NON-INCOME PRODUCING SECURITY.
** RESALE IS RESTRICTED TO QUALIFIED INSTITUTIONAL INVESTORS.
*** A PORTION OF THIS SECURITY HAS BEEN PHYSICALLY SEGREGATED IN
CONNECTION WITH OPEN FUTURES CONTRACTS IN AN AMOUNT EQUAL TO $74,900.
~~ FOREIGN ISSUED SECURITY WITH PERPETUAL MATURITY.
+ SECURITY PURCHASED ON A FORWARD COMMITMENT BASIS.
++ VARIABLE RATE SECURITY; RATE SHOWN IS THE RATE IN EFFECT AT JULY 31,
2005.
(a) PURCHASED ON A DISCOUNT BASIS. THE INTEREST RATE SHOWN HAS BEEN
ADJUSTED TO REFLECT A MONEY MARKET EQUIVALENT YIELD.
(b) COLLATERALIZED BY FEDERAL AGENCY AND U.S. TREASURY OBLIGATIONS.
(c) SECURITIES HAVE BEEN DESIGNATED AS COLLATERAL IN AN AMOUNT EQUAL TO
$32,123,909, IN CONNECTION WITH SECURITIES PURCHASED ON A FORWARD
COMMITMENT BASIS, A DELAYED DELIVERY BASIS AND OPEN FUTURES CONTRACTS.
(d) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES IS $806,680,928.
THE AGGREGATE GROSS UNREALIZED APPRECIATION IS $211,774,776 AND THE
AGGREGATE GROSS UNREALIZED DEPRECIATION IS $9,053,082, RESULTING IN
NET UNREALIZED APPRECIATION OF $202,721,694.
FUTURES CONTRACTS OPEN AT JULY 31, 2005:
<Table>
<Caption>
NUMBER OF DESCRIPTION, DELIVERY UNDERLYING FACE UNREALIZED
CONTRACTS LONG/SHORT MONTH AND YEAR AMOUNT AT VALUE APPRECIATION
- ----------------------------------------------------------------------------------------------------------
98 Short U.S. Treasury Notes 2 Year, $ (20,235,469) $ 166,866
September 2005
56 Short U.S. Treasury Notes 5 Year, (6,003,375) 117,339
September 2005
---------
Total unrealized appreciation $ 284,205
=========
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
25
<Page>
MORGAN STANLEY STRATEGIST FUND
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
JULY 31, 2005
<Table>
ASSETS:
Investments in securities, at value (cost $800,952,684) $ 1,009,402,622
Receivable for:
Interest 2,795,550
Investments sold 2,432,847
Shares of beneficial interest sold 819,704
Dividends 623,257
Variation margin 48,733
Foreign withholding taxes reclaimed 4,316
Prepaid expenses and other assets 69,855
-----------------
TOTAL ASSETS 1,016,196,884
-----------------
LIABILITIES:
Payable for:
Investments purchased 5,592,170
Shares of beneficial interest redeemed 1,127,787
Distribution fee 483,653
Investment advisory fee 358,978
Administration fee 68,377
Payable to bank 6,617
Accrued expenses and other payables 195,064
-----------------
TOTAL LIABILITIES 7,832,646
-----------------
NET ASSETS $ 1,008,364,238
=================
COMPOSITION OF NET ASSETS:
Paid-in-capital $ 882,495,195
Net unrealized appreciation 208,734,702
Accumulated undistributed net investment income 1,285,177
Accumulated net realized loss (84,150,836)
-----------------
NET ASSETS $ 1,008,364,238
=================
CLASS A SHARES:
Net Assets $ 510,015,624
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 27,848,771
NET ASSET VALUE PER SHARE $ 18.31
=================
MAXIMUM OFFERING PRICE PER SHARE,
(NET ASSET VALUE PLUS 5.54% OF NET ASSET VALUE) $ 19.32
=================
CLASS B SHARES:
Net Assets $ 398,020,672
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 21,682,707
NET ASSET VALUE PER SHARE $ 18.36
=================
CLASS C SHARES:
Net Assets $ 41,621,262
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 2,281,689
NET ASSET VALUE PER SHARE $ 18.24
=================
CLASS D SHARES:
Net Assets $ 58,706,680
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 3,201,483
NET ASSET VALUE PER SHARE $ 18.34
=================
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
26
<Page>
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JULY 31, 2005
<Table>
NET INVESTMENT INCOME:
INCOME
Interest $ 13,197,223
Dividends (net of $129,662 foreign withholding tax) 12,752,736
-----------------
TOTAL INCOME 25,949,959
-----------------
EXPENSES
Distribution fee (Class A shares) 451,637
Distribution fee (Class B shares) 7,895,928
Distribution fee (Class C shares) 412,183
Investment advisory fee 4,931,174
Transfer agent fees and expenses 1,359,232
Administration fee 636,066
Shareholder reports and notices 142,889
Professional fees 79,053
Registration fees 62,037
Custodian fees 45,908
Trustees' fees and expenses 23,664
Other 88,104
-----------------
TOTAL EXPENSES 16,127,875
-----------------
NET INVESTMENT INCOME 9,822,084
-----------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
NET REALIZED GAIN (LOSS) ON:
Investments 92,567,276
Futures contracts (959,188)
-----------------
NET REALIZED GAIN 91,608,088
-----------------
NET CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION ON:
Investments 35,403,999
Futures contracts 649,310
-----------------
NET APPRECIATION 36,053,309
-----------------
NET GAIN 127,661,397
-----------------
NET INCREASE $ 137,483,481
=================
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
27
<Page>
STATEMENT OF CHANGES IN NET ASSETS
<Table>
<Caption>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
JULY 31, 2005 JULY 31, 2004
---------------- ----------------
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income $ 9,822,084 $ 6,920,566
Net realized gain 91,608,088 107,937,929
Net change in unrealized appreciation 36,053,309 18,496,783
---------------- ----------------
NET INCREASE 137,483,481 133,355,278
---------------- ----------------
DIVIDENDS TO SHAREHOLDERS FROM NET INVESTMENT INCOME:
Class A shares (2,900,467) (801,953)
Class B shares (5,549,576) (6,130,739)
Class C shares (347,195) (254,636)
Class D shares (1,059,379) (1,005,940)
---------------- ----------------
TOTAL DIVIDENDS (9,856,617) (8,193,268)
---------------- ----------------
Net decrease from transactions in shares of beneficial interest (250,828,677) (187,139,550)
---------------- ----------------
NET DECREASE (123,201,813) (61,977,540)
NET ASSETS:
Beginning of period 1,131,566,051 1,193,543,591
---------------- ----------------
END OF PERIOD
(INCLUDING ACCUMULATED UNDISTRIBUTED NET INVESTMENT INCOME OF $1,285,177
AND $227,216, RESPECTIVELY) $ 1,008,364,238 $ 1,131,566,051
================ ================
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
28
<Page>
MORGAN STANLEY STRATEGIST FUND
NOTES TO FINANCIAL STATEMENTS - JULY 31, 2005
1. ORGANIZATION AND ACCOUNTING POLICIES
Morgan Stanley Strategist 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's investment objective is to maximize
the total return of its investments. The Fund was organized as a Massachusetts
business trust on August 5, 1988 and commenced operations on October 31, 1988.
On July 28, 1997, the Fund converted to a multiple class share structure.
The Fund offers Class A shares, Class B shares, Class C shares and Class D
shares. The four classes are substantially the same except that most Class A
shares are subject to a sales charge imposed at the time of purchase and some
Class A shares, and most Class B shares and Class C shares are subject to a
contingent deferred sales charge imposed on shares redeemed within 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.
Effective August 29, 2005, the Board of Trustees of the Fund approved the
implementation of 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 within seven days of purchase. The redemption fee is designed to
protect the Fund and its remaining shareholders from the effects of short-term
trading.
The following is a summary of significant accounting policies:
A. VALUATION OF INVESTMENTS -- (1) an equity portfolio security listed or traded
on the New York Stock Exchange ("NYSE") or American Stock Exchange or other
exchange is valued at its latest sale price prior to the time when assets are
valued; if there were no sales that day, the security is valued at the mean
between the last reported bid and asked price; (2) an equity portfolio security
listed or traded on the Nasdaq is valued at the Nasdaq Official Closing Price;
if there were no sales that day, the security is valued at the mean between the
last reported bid and asked price; (3) all other portfolio securities for which
over-the-counter market quotations are readily available are valued at the mean
between the last reported bid and asked price. In cases where a security is
traded on more than one exchange, the security is valued on the exchange
designated as the primary market; (4) for equity securities traded on foreign
exchanges, the last reported sale price or the latest bid price may be used if
there were no sales on a particular day; (5) futures are valued at the latest
price published by the commodities exchange on which they trade; (6) when market
quotations are not readily available or Morgan Stanley Investment Advisors Inc.
(the "Investment 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
29
<Page>
business on the NYSE. If developments occur during such periods that are
expected to materially affect the value of such securities, such valuations may
be adjusted to reflect the estimated fair value of such securities as of the
close of the NYSE, as determined in good faith by the Fund's Trustees or by the
Investment Adviser using a pricing service and/or procedures approved by the
Trustees of the Fund; (7) certain portfolio securities may be valued by an
outside pricing service approved by the Fund's Trustees; and (8) short-term debt
securities having a maturity date of more than sixty days at time of purchase
are valued on a mark-to-market basis until sixty days prior to maturity and
thereafter at amortized cost based on their value on the 61st day. Short-term
debt securities having a maturity date of sixty days or less at the time of
purchase are valued at amortized cost.
B. ACCOUNTING FOR INVESTMENTS -- Security transactions are accounted for on the
trade date (date the order to buy or sell is executed). Realized gains and
losses on security transactions are determined by the identified cost method.
Dividend income and other distributions are recorded on the ex-dividend date.
Discounts are accreted and premiums are amortized over the life of the
respective securities. Interest income is accrued daily.
C. REPURCHASE AGREEMENTS -- Pursuant to an Exemptive Order issued by the
Securities and Exchange Commission, the Fund, along with other affiliated
entities managed by the Investment Adviser, may transfer uninvested cash
balances into one or more joint repurchase agreement accounts. These balances
are invested in one or more repurchase agreements and are collateralized by
cash, U.S. Treasury or federal agency obligations. The Fund may also invest
directly with institutions in repurchase agreements. The Fund's custodian
receives the collateral, which is marked-to-market daily to determine that the
value of the collateral does not decrease below the repurchase price plus
accrued interest.
D. MULTIPLE CLASS ALLOCATIONS -- Investment income, expenses (other than
distribution fees), and realized and unrealized gains and losses are allocated
to each class of shares based upon the relative net asset value on the date such
items are recognized. Distribution fees are charged directly to the respective
class.
E. FUTURES CONTRACTS -- A futures contract is an agreement between two parties
to buy and sell financial instruments or contracts based on financial indices at
a set price on a future date. Upon entering into such a contract, the Fund is
required to pledge to the broker cash, U.S. Government securities or other
liquid portfolio securities equal to the minimum initial margin requirements of
the applicable futures exchange. Pursuant to the contract, the Fund agrees to
receive from or pay to the broker an amount of cash equal to the daily
fluctuation in the value of the contract. Such receipts or payments known as
variation margin are recorded by the Fund as unrealized gains and losses. Upon
closing of the contract, the Fund realizes a gain or loss equal to the
difference between the value of the contract at the time it was opened and the
value at the time it was closed.
30
<Page>
F. FOREIGN CURRENCY TRANSLATION AND FORWARD FOREIGN CURRENCY CONTRACTS -- The
books and records of the Fund are maintained in U.S. dollars as follows: (1) the
foreign currency market value of investment securities, other assets and
liabilities and forward foreign currency contracts ("forward contracts") are
translated at the exchange rates prevailing at the end of the period; and (2)
purchases, sales, income and expenses are translated at the exchange rates
prevailing on the respective dates of such transactions. The resultant exchange
gains and losses are recorded as realized and unrealized gain/loss on foreign
exchange transactions. Pursuant to U.S. federal income tax regulations, certain
foreign exchange gains/losses included in realized and unrealized gain/loss are
included in or are a reduction of ordinary income for federal income tax
purposes. The Fund does not isolate that portion of the results of operations
arising as a result of changes in the foreign exchange rates from the changes in
the market prices of the securities. Forward contracts are valued daily at the
appropriate exchange rates. The resultant unrealized exchange gains and losses
are recorded as unrealized foreign currency gain or loss. The Fund records
realized gains or losses on delivery of the currency or at the time the forward
contract is extinguished (compensated) by entering into a closing transaction
prior to delivery.
G. 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.
H. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- Dividends and distributions to
shareholders are recorded on the ex-dividend date.
I. USE OF ESTIMATES -- The preparation of financial statements in accordance
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures.
Actual results could differ from those estimates.
2. INVESTMENT ADVISORY/ADMINISTRATION AGREEMENT
Effective November 1, 2004, pursuant to an Investment Advisory Agreement the
Fund pays the Investment Adviser an advisory fee, accrued daily and payable
monthly, by applying the following annual rates to the net assets of the Fund
determined as of the close of each business day: 0.42% to the portion of the
daily net assets not exceeding $1.5 billion; and 0.395% to the portion of the
daily net assets exceeding $1.5 billion.
Effective November 1, 2004, pursuant to an Administration Agreement with Morgan
Stanley Services Company Inc. (the "Administrator"), an affiliate of the
Investment Adviser, the Fund pays an administration fee, accrued daily and
payable monthly, by applying the annual rate of 0.08% to the Fund's daily net
assets.
31
<Page>
Prior to November 1, 2004, the Fund had retained the Investment Adviser to
provide administrative services and to manage the investment of the Fund's
assets pursuant to an investment management agreement pursuant to which the Fund
paid the Investment Adviser a monthly management fee, accrued daily and payable
monthly, by applying the following annual rates to the net assets of the Fund
determined as of the close of each business day: 0.60% to the portion of daily
net assets not exceeding $500 million; 0.55% to the portion of daily net assets
exceeding $500 million but not exceeding $1 billion; 0.50% to the portion of
daily net assets exceeding $1 billion but not exceeding $1.5 billion; 0.475% to
the portion of daily net assets exceeding $1.5 billion but not exceeding $2
billion; 0.45% to the portion of daily net assets exceeding $2 billion but not
exceeding $3 billion; and 0.425% to the portion of daily net assets in excess of
$3 billion.
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; (ii) Class B -- up
to 1.0% of the lesser of: (a) the average daily aggregate gross sales of the
Class B shares since the inception of the Plan on November 8, 1989 (not
including reinvestment of dividend or capital gain distributions) less the
average daily aggregate net asset value of the Class B shares redeemed since the
Plan's inception upon which a contingent deferred sales charge has been imposed
or waived; or (b) the average daily net assets of Class B attributable to shares
issued, net of related shares redeemed, since the Plan's inception; and (iii)
Class C -- up to 1.0% of the average daily net assets of Class C.
In the case of Class B shares, provided that the Plan continues in effect, any
cumulative expenses incurred by the Distributor but not yet recovered may be
recovered through the payment of future distribution fees from the Fund pursuant
to the Plan and contingent deferred sales charges paid by investors upon
redemption of Class B shares. Although there is no legal obligation for the Fund
to pay expenses incurred in excess of payments made to the Distributor under the
Plan and the proceeds of contingent deferred sales charges paid by investors
upon redemption of shares, if for any reason the Plan is terminated, the
Trustees will consider at that time the manner in which to treat such expenses.
The Distributor has advised the Fund that such excess amounts totaled $9,855,351
at July 31, 2005.
In the case of Class A shares and Class C shares, expenses incurred pursuant to
the Plan in any calendar year in excess of 0.25% or 1.0% of the average daily
net assets of Class A or Class C, respectively, will not be reimbursed by the
Fund through payments in any subsequent year, except that expenses representing
a gross sales credit to Morgan Stanley Financial Advisors or other selected
broker-dealer representatives may be reimbursed in the subsequent calendar year.
For the year ended
32
<Page>
July 31, 2005, the distribution fee was accrued for Class A shares and Class C
shares at the annual rate of 0.25% and 0.97%, respectively.
The Distributor has informed the Fund that for the year ended July 31, 2005, it
received contingent deferred sales charges from certain redemptions of the
Fund's Class B shares and Class C shares of $891,958 and $9,372, respectively
and received $77,416 in front-end sales charges from sales of the Fund's Class A
shares. The respective shareholders pay such charges which are not an expense of
the Fund.
4. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES
The cost of purchases and proceeds from sales/maturities/prepayments of
portfolio securities, excluding short-term investments, for the year ended July
31, 2005 aggregated $500,610,244, and $794,492,491, respectively. Included in
the aforementioned are purchases and sales/maturities/prepayments of U.S.
Government securities of $209,370,846 and $322,486,870, respectively. Included
in the aforementioned are purchases and sales with other Morgan Stanley funds of
$691,600 and $2,190,936 respectively, including a net realized gain of $790,539.
For the year ended July 31, 2005, the Fund incurred brokerage commissions of
$217,401 with Morgan Stanley & Co., Inc. an affiliate of the Investment Adviser,
Administrator and Distributor, for portfolio transactions executed on behalf of
the Fund.
Morgan Stanley Trust, an affiliate of the Investment Adviser, Administrator and
Distributor, is the Fund's transfer agent. At July 31, 2005, the Fund had
transfer agent fees and expenses payable of approximately $10,400.
The Fund has an unfunded noncontributory defined benefit pension plan covering
certain independent Trustees of the Fund who will have served as independent
Trustees for at least five years at the time of retirement. Benefits under this
plan are based on factors which include years of service and compensation.
Aggregate pension costs for the year ended July 31, 2005 included in Trustees'
fees and expenses in the Statement of Operations amounted to $9,665. At July 31,
2005, the Fund had an accrued pension liability of $77,893 which is included in
accrued expenses in the Statement of Assets and Liabilities. On December 2,
2003, the Trustees voted to close the plan to new participants and eliminate the
future benefits growth due to increases to compensation after July 31, 2003.
The Fund has an unfunded Deferred Compensation Plan (the "Compensation Plan")
which allows each independent Trustee to defer payment of all, or a portion, of
the fees he receives for serving on the Board of Trustees. Each eligible Trustee
generally may elect to have the deferred amounts credited with a return equal to
the total return on one or more of the Morgan Stanley funds that are offered as
investment options under the Compensation Plan. Appreciation/depreciation and
distributions received from these investments are recorded with an offsetting
increase/decrease in the deferred compensation obligation and do not affect the
net asset value of the Fund.
33
<Page>
5. PURPOSES OF AND RISKS RELATING TO CERTAIN FINANCIAL INSTRUMENTS
The Fund may enter into forward contracts to facilitate settlement of foreign
currency denominated portfolio transactions or to manage foreign currency
exposure associated with foreign currency denominated securities.
To hedge against adverse interest rate and market risks, the Fund may enter into
interest rate futures ("future contracts").
Forward contracts and future contracts involve elements of market risk in excess
of the amounts reflected in the Statement of Asset and Liabilities. The Fund
bears the risk of an unfavorable change in the foreign exchange rates underlying
the forward contracts or in the value of underlying securities. Risks may also
arise upon entering into these contracts from the potential inability of the
counterparties to meet the terms of their contracts.
6. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest were as follows:
<Table>
<Caption>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
JULY 31, 2005 JULY 31, 2004
---------------------------------- ----------------------------------
SHARES AMOUNT SHARES AMOUNT
--------------- --------------- --------------- ---------------
CLASS A SHARES
Sold 840,672 $ 13,790,598 903,778 $ 14,533,257
Conversion from Class B 26,158,781 452,791,613 -- --
Reinvestment of dividends 148,520 2,628,095 46,974 756,837
Redeemed (2,922,292) (51,577,863) (993,765) (16,018,424)
--------------- --------------- --------------- ---------------
Net increase (decrease) -- Class A 24,225,681 417,632,443 (43,013) (728,330)
--------------- --------------- --------------- ---------------
CLASS B SHARES
Sold 1,802,497 31,046,194 4,954,252 79,101,285
Conversion to Class A (26,189,482) (452,791,613) -- --
Reinvestment of dividends 279,071 4,808,314 330,204 5,346,630
Redeemed (13,785,546) (237,957,003) (16,430,935) (264,441,706)
--------------- --------------- --------------- ---------------
Net decrease -- Class B (37,893,460) (654,894,108) (11,146,479) (179,993,791)
--------------- --------------- --------------- ---------------
CLASS C SHARES
Sold 341,082 5,845,255 682,246 10,833,219
Reinvestment of dividends 18,201 314,609 14,352 231,305
Redeemed (649,757) (11,210,612) (604,217) (9,773,538)
--------------- --------------- --------------- ---------------
Net decrease (increase) -- Class C (290,474) (5,050,748) 92,381 1,290,986
--------------- --------------- --------------- ---------------
CLASS D SHARES
Sold 226,903 3,947,950 493,807 7,927,291
Reinvestment of dividends 56,499 979,608 57,940 933,078
Redeemed (774,991) (13,443,822) (1,027,786) (16,568,784)
--------------- --------------- --------------- ---------------
Net decrease -- Class D (491,589) (8,516,264) (476,039) (7,708,415)
--------------- --------------- --------------- ---------------
Net decrease in Fund (14,449,842) $ (250,828,677) (11,573,150) $ (187,139,550)
=============== =============== =============== ===============
</Table>
34
<Page>
7. 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.
The tax character of distributions paid was as follows:
<Table>
<Caption>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
JULY 31, 2005 JULY 31, 2004
------------- -------------
Ordinary income $ 9,856,617 $ 8,193,268
============= =============
</Table>
As of July 31, 2005, the tax-basis components of accumulated earnings were as
follows:
<Table>
Undistributed ordinary income $ 2,305,515
Undistributed long-term gains --
-------------
Net accumulated earnings 2,305,515
Capital loss carryforward* (79,079,713)
Temporary differences (79,012)
Net unrealized appreciation 202,722,253
-------------
Total accumulated earnings $ 125,869,043
=============
</Table>
*During the year ended July 31, 2005, the Fund utilized $88,350,909 of its net
capital loss carryforward. As of July 31, 2005, the Fund had a net capital loss
carryforward of $79,079,713 which will expire on July 31, 2011 to offset future
capital gains to the extent provided by regulations.
As of July 31, 2005, the Fund had temporary book/tax differences primarily
attributable to capital loss deferrals on wash sales and straddles,
mark-to-market of open futures contracts and book amortization of premiums on
debt securities and permanent book/tax differences primarily attributable to
losses on paydowns and tax adjustments on debt securities sold by the Fund. To
reflect reclassifications arising from the permanent differences, accumulated
net realized loss was charged and accumulated undistributed net investment
income was credited $1,092,494.
8. LEGAL MATTERS
The Investment Adviser, certain affiliates of the Investment Adviser, certain
officers of such affiliates and certain investment companies advised by the
Investment Adviser or its affiliates, including the
35
<Page>
Fund, are named as defendants in a consolidated class action. This consolidated
action also names as defendants certain individual Trustees and Directors of the
Morgan Stanley funds. The consolidated amended complaint, filed in the United
States District Court Southern District of New York on April 16, 2004, generally
alleges that defendants, including the Fund, violated their statutory disclosure
obligations and fiduciary duties by failing properly to disclose (i) that the
Investment Adviser and certain affiliates of the Investment Adviser allegedly
offered economic incentives to brokers and others to recommend the funds advised
by the Investment Adviser or its affiliates to investors rather than funds
managed by other companies, and (ii) that the funds advised by the Investment
Adviser or its affiliates, including the Fund, allegedly paid excessive
commissions to brokers in return for their efforts to recommend these funds to
investors. The complaint seeks, among other things, unspecified compensatory
damages, rescissionary damages, fees and costs. The defendants have moved to
dismiss the action and intend to otherwise vigorously defend it. On March 10,
2005, Plaintiffs sought leave to supplement their complaint to assert claims on
behalf of other investors. While the Fund and Adviser believe that each has
meritorious defenses, the ultimate outcome of this matter is not presently
determinable at this early stage of the litigation, and no provision has been
made in the Fund's financial statements for the effect, if any, of this matter.
36
<Page>
MORGAN STANLEY STRATEGIST FUND
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:
<Table>
<Caption>
FOR THE YEAR ENDED JULY 31,
---------------------------------------------------------------------------
2005 2004 2003 2002 2001
----------- ----------- ----------- ----------- -----------
CLASS A SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period $ 16.28 $ 14.72 $ 13.53 $ 16.43 $ 20.64
----------- ----------- ----------- ----------- -----------
Income (loss) from investment operations:
Net investment income++ 0.27 0.20 0.14 0.22 0.44
Net realized and unrealized gain (loss) 2.03 1.58 1.21 (2.84) (1.55)
----------- ----------- ----------- ----------- -----------
Total income (loss) from investment
operations 2.30 1.78 1.35 (2.62) (1.11)
----------- ----------- ----------- ----------- -----------
Less dividends and distributions from:
Net investment income (0.27) (0.22) (0.16) (0.28) (0.50)
Net realized gain - - - - (2.60)
----------- ----------- ----------- ----------- -----------
Total dividends and distributions (0.27) (0.22) (0.16) (0.28) (3.10)
----------- ----------- ----------- ----------- -----------
Net asset value, end of period $ 18.31 $ 16.28 $ 14.72 $ 13.53 $ 16.43
=========== =========== =========== =========== ===========
TOTAL RETURN+ 14.23% 12.10% 10.11% (16.14)% (6.24)%
RATIOS TO AVERAGE NET ASSETS(1):
Expenses 0.93% 0.95% 0.93% 0.88% 0.85%
Net investment income 1.48% 1.24% 0.95% 1.44% 2.41%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands $ 510,016 $ 58,968 $ 53,951 $ 78,583 $ 116,383
Portfolio turnover rate 48% 42% 124% 164% 136%
</Table>
- ----------
++ THE PER SHARE AMOUNTS WERE COMPUTED USING AN AVERAGE NUMBER OF SHARES
OUTSTANDING DURING THE PERIOD.
+ DOES NOT REFLECT THE DEDUCTION OF SALES CHARGE. CALCULATED BASED ON THE NET
ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE PERIOD.
(1) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC
EXPENSES.
SEE NOTES TO FINANCIAL STATEMENTS
37
<Page>
<Table>
<Caption>
FOR THE YEAR ENDED JULY 31,
---------------------------------------------------------------------------
2005 2004 2003 2002 2001
----------- ----------- ----------- ----------- -----------
CLASS B SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period $ 16.29 $ 14.73 $ 13.54 $ 16.43 $ 20.65
----------- ----------- ----------- ----------- -----------
Income (loss) from investment operations:
Net investment income++ 0.11 0.08 0.02 0.10 0.30
Net realized and unrealized gain (loss) 2.08 1.58 1.22 (2.84) (1.57)
----------- ----------- ----------- ----------- -----------
Total income (loss) from investment operations 2.19 1.66 1.24 (2.74) (1.27)
----------- ----------- ----------- ----------- -----------
Less dividends and distributions from:
Net investment income (0.12) (0.10) (0.05) (0.15) (0.35)
Net realized gain - - - - (2.60)
----------- ----------- ----------- ----------- -----------
Total dividends and distributions (0.12) (0.10) (0.05) (0.15) (2.95)
----------- ----------- ----------- ----------- -----------
Net asset value, end of period $ 18.36 $ 16.29 $ 14.73 $ 13.54 $ 16.43
=========== =========== =========== =========== ===========
TOTAL RETURN+ 13.49% 11.24% 9.20% (16.77)% (7.05)%
RATIOS TO AVERAGE NET ASSETS(1):
Expenses 1.68% 1.71% 1.73% 1.67% 1.63%
Net investment income 0.73% 0.48% 0.15% 0.64% 1.63%
SUPPLEMENTAL DATA:
Net assets, end of period, in millions $ 398 $ 971 $ 1,042 $ 1,216 $ 1,827
Portfolio turnover rate 48% 42% 124% 164% 136%
</Table>
- ----------
++ THE PER SHARE AMOUNTS WERE COMPUTED USING AN AVERAGE NUMBER OF SHARES
OUTSTANDING DURING THE PERIOD.
+ DOES NOT REFLECT THE DEDUCTION OF SALES CHARGE. CALCULATED BASED ON THE NET
ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE PERIOD.
(1) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC
EXPENSES.
SEE NOTES TO FINANCIAL STATEMENTS
38
<Page>
<Table>
<Caption>
FOR THE YEAR ENDED JULY 31,
---------------------------------------------------------------------------
2005 2004 2003 2002 2001
----------- ----------- ----------- ----------- -----------
CLASS C SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period $ 16.21 $ 14.66 $ 13.46 $ 16.36 $ 20.57
----------- ----------- ----------- ----------- -----------
Income (loss) from investment operations:
Net investment income++ 0.13 0.08 0.03 0.10 0.29
Net realized and unrealized gain (loss) 2.04 1.57 1.21 (2.83) (1.55)
----------- ----------- ----------- ----------- -----------
Total income (loss) from investment
operations 2.17 1.65 1.24 (2.73) (1.26)
----------- ----------- ----------- ----------- -----------
Less dividends and distributions from:
Net investment income (0.14) (0.10) (0.04) (0.17) (0.35)
Net realized gain - - - - (2.60)
----------- ----------- ----------- ----------- -----------
Total dividends and distributions (0.14) (0.10) (0.04) (0.17) (2.95)
----------- ----------- ----------- ----------- -----------
Net asset value, end of period $ 18.24 $ 16.21 $ 14.66 $ 13.46 $ 16.36
=========== =========== =========== =========== ===========
TOTAL RETURN+ 13.44% 11.25% 9.09% (16.70)% (7.00)%
RATIOS TO AVERAGE NET ASSETS(1):
Expenses 1.65% 1.71% 1.73% 1.67% 1.63%
Net investment income 0.76% 0.48% 0.15% 0.64% 1.63%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands $ 41,621 $ 41,697 $ 36,351 $ 34,727 $ 45,612
Portfolio turnover rate 48% 42% 124% 164% 136%
</Table>
- ----------
++ THE PER SHARE AMOUNTS WERE COMPUTED USING AN AVERAGE NUMBER OF SHARES
OUTSTANDING DURING THE PERIOD.
+ DOES NOT REFLECT THE DEDUCTION OF SALES CHARGE. CALCULATED BASED ON THE NET
ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE PERIOD.
(1) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC
EXPENSES.
SEE NOTES TO FINANCIAL STATEMENTS
39
<Page>
<Table>
<Caption>
FOR THE YEAR ENDED JULY 31,
---------------------------------------------------------------------------
2005 2004 2003 2002 2001
----------- ----------- ----------- ----------- -----------
CLASS D SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period $ 16.29 $ 14.73 $ 13.55 $ 16.45 $ 20.67
----------- ----------- ----------- ----------- -----------
Income (loss) from investment operations:
Net investment income++ 0.30 0.24 0.16 0.26 0.48
Net realized and unrealized gain (loss) 2.06 1.58 1.21 (2.85) (1.56)
----------- ----------- ----------- ----------- -----------
Total income (loss) from investment
operations 2.36 1.82 1.37 (2.59) (1.08)
----------- ----------- ----------- ----------- -----------
Less dividends and distributions from:
Net investment income (0.31) (0.26) (0.19) (0.31) (0.54)
Net realized gain - - - - (2.60)
----------- ----------- ----------- ----------- -----------
Total dividends and distributions (0.31) (0.26) (0.19) (0.31) (3.14)
----------- ----------- ----------- ----------- -----------
Net asset value, end of period $ 18.34 $ 16.29 $ 14.73 $ 13.55 $ 16.45
=========== =========== =========== =========== ===========
TOTAL RETURN+ 14.60% 12.37% 10.25% (15.94)% (6.07)%
RATIOS TO AVERAGE NET ASSETS(1):
Expenses 0.68% 0.71% 0.73% 0.67% 0.63%
Net investment income 1.73% 1.48% 1.15% 1.64% 2.63%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands $ 58,707 $ 60,177 $ 61,423 $ 58,834 $ 81,594
Portfolio turnover rate 48% 42% 124% 164% 136%
</Table>
- ----------
++ THE PER SHARE AMOUNTS WERE COMPUTED USING AN AVERAGE NUMBER OF SHARES
OUTSTANDING DURING THE PERIOD.
+ CALCULATED BASED ON THE NET ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE
PERIOD.
(1) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC
EXPENSES.
SEE NOTES TO FINANCIAL STATEMENTS
40
<Page>
MORGAN STANLEY STRATEGIST FUND
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE SHAREHOLDERS AND BOARD OF
TRUSTEES OF MORGAN STANLEY STRATEGIST FUND:
We have audited the accompanying statement of assets and liabilities of Morgan
Stanley Strategist Fund (the "Fund"), including the portfolio of investments, as
of July 31, 2005, and the related statements of operations for the year then
ended and changes in net assets for each of the two years in the period then
ended, and the financial highlights for each of the five years in the period
then ended. 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 July 31, 2005, by correspondence with the custodian
and brokers. 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 Strategist Fund as of July 31, 2005, the results of its operations for
the year then ended, the changes in its net assets for each of the two years in
the period then ended, and the financial highlights for each of the five years
in the period then ended, in conformity with accounting principles generally
accepted in the United States of America.
Deloitte & Touche LLP
NEW YORK, NEW YORK
SEPTEMBER 16, 2005
41
<Page>
MORGAN STANLEY STRATEGIST FUND
TRUSTEE AND OFFICER INFORMATION
INDEPENDENT TRUSTEES:
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
TERM OF IN FUND
POSITION(S) OFFICE AND COMPLEX
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S) DURING OVERSEEN OTHER DIRECTORSHIPS
INDEPENDENT TRUSTEE REGISTRANT TIME SERVED* PAST 5 YEARS** BY TRUSTEE*** HELD BY TRUSTEE
- ------------------------ ----------- ------------ ------------------------------ ------------- ------------------------------
Michael Bozic (64) Trustee Since April Private Investor; Director or 197 Director of various business
c/o Kramer Levin 1994 Trustee of the Retail Funds organizations.
Naftalis & Frankel LLP (since April 1994) and the
Counsel to the Institutional Funds (since
Independent Trustees July 2003); formerly Vice
1177 Avenue of the Chairman of Kmart Corporation
Americas (December 1998-October 2000),
New York, NY 10036 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);
formerly variously Chairman,
Chief Executive Officer,
President and Chief Operating
Officer (1987-1991) of the
Sears Merchandise Group of
Sears, Roebuck & Co.
Edwin J. Garn (72) Trustee Since Consultant; Director or 197 Director of Franklin Covey
1031 N. Chartwell Court January 1993 Trustee of the Retail Funds (time management systems), BMW
Salt Lake City, UT 84103 (since January 1993) and the Bank of North America, Inc.
Institutional Funds (since (industrial loan corporation),
July 2003); member of the Utah Escrow Bank USA (industrial
Regional Advisory Board of loan corporation), United
Pacific Corp. (utility Space Alliance (joint venture
company); formerly Managing between Lockheed Martin and
Director of Summit Ventures the Boeing Company) and Nuskin
LLC (lobbying and consulting Asia Pacific (multilevel
firm) (2000-2004); United marketing); member of the
States Senator (R-Utah) board of various civic and
(1974-1992) and Chairman, charitable organizations.
Senate Banking Committee
(1980-1986), Mayor of Salt
Lake City, Utah (1971-1974),
Astronaut, Space Shuttle
Discovery (April 12-19, 1985),
and Vice Chairman, Huntsman
Corporation (chemical
company).
Wayne E. Hedien (71) Trustee Since Retired; Director or Trustee 197 Director of The PMI Group Inc.
c/o Kramer Levin September of the Retail Funds (since (private mortgage insurance);
Naftalis & Frankel LLP 1997 September 1997) and the Trustee and Vice Chairman of
Counsel to the Institutional Funds (since The Field Museum of Natural
Independent Trustees July 2003); formerly History; director of various
1177 Avenue of the associated with the Allstate other business and charitable
Americas Companies (1966-1994), most organizations.
New York, NY 10036 recently as Chairman of The
Allstate Corporation (March
1993-December 1994) and
Chairman and Chief Executive
Officer of its wholly-owned
subsidiary, Allstate Insurance
Company (July 1989-December
1994).
</Table>
42
<Page>
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
TERM OF IN FUND
POSITION(S) OFFICE AND COMPLEX
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S) DURING OVERSEEN OTHER DIRECTORSHIPS
INDEPENDENT TRUSTEE REGISTRANT TIME SERVED* PAST 5 YEARS** BY TRUSTEE*** HELD BY TRUSTEE
- ------------------------ ----------- ------------ ------------------------------ ------------- ------------------------------
Dr. Manuel H. Johnson Trustee Since July Senior Partner, Johnson Smick 197 Director of NVR, Inc. (home
(56) 1991 International, Inc., a construction); Director of KFX
c/o Johnson Smick Group, consulting firm; Chairman of Energy; Director of RBS
Inc. the Audit Committee and Greenwich Capital Holdings
888 16th Street, NW Director or Trustee of the (financial holding company).
Suite 740 Retail Funds (since July 1991)
Washington, D.C. 20006 and the Institutional Funds
(since July 2003); Co-Chairman
and a founder of the Group of
Seven Council (G7C), an
international economic
commission; formerly Vice
Chairman of the Board of
Governors of the Federal
Reserve System and Assistant
Secretary of the U.S.
Treasury.
Joseph J. Kearns (62) Trustee Since July President, Kearns & Associates 198 Director of Electro Rent
c/o Kearns & Associates 2003 LLC (investment consulting); Corporation (equipment
LLC Deputy Chairman of the Audit leasing), The Ford Family
PMB754 Committee and Director or Foundation, and the UCLA
23852 Pacific Coast Trustee of the Retail Funds Foundation.
Highway (since July 2003) and the
Malibu, CA 90265 Institutional Funds (since
August 1994); previously
Chairman of the Audit
Committee of the Institutional
Funds (October 2001-July
2003); formerly CFO of the
J. Paul Getty Trust.
Michael E. Nugent (69) Trustee Since July General Partner of Triumph 197 Director of various business
c/o Triumph Capital, 1991 Capital, L.P., a private organizations.
L.P. investment partnership;
445 Park Avenue Chairman of the Insurance
New York, NY 10022 Committee and Director or
Trustee of the Retail Funds
(since July 1991) and the
Institutional Funds (since
July 2001); formerly Vice
President, Bankers Trust
Company and BT Capital
Corporation (1984-1988).
Fergus Reid (72) Trustee Since July Chairman of Lumelite Plastics 198 Trustee and Director of
c/o Lumelite Plastics 2003 Corporation; Chairman of the certain investment companies
Corporation Governance Committee and in the JPMorgan Funds complex
85 Charles Colman Blvd. Director or Trustee of the managed by J.P. Morgan
Pawling, NY 12564 Retail Funds (since July 2003) Investment Management Inc.
and the Institutional Funds
(since June 1992).
</Table>
43
<Page>
INTERESTED TRUSTEES:
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
TERM OF IN FUND
POSITION(S) OFFICE AND COMPLEX
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S) DURING OVERSEEN OTHER DIRECTORSHIPS
INTERESTED TRUSTEE REGISTRANT TIME SERVED* PAST 5 YEARS** BY TRUSTEE*** HELD BY TRUSTEE
- ------------------------ ----------- ------------ ------------------------------ ------------- ------------------------------
Charles A. Fiumefreddo Chairman of Since July Chairman and Director or 197 None.
(72) the Board 1991 Trustee of the Retail Funds
c/o Morgan Stanley Trust and Trustee (since July 1991) and the
Harborside Financial Institutional Funds (since
Center, July 2003); formerly Chief
Plaza Two, Executive Officer of the
Jersey City, NJ 07311 Retail Funds (until September
2002).
James F. Higgins (57) Trustee Since June Director or Trustee of the 197 Director of AXA Financial,
c/o Morgan Stanley Trust 2000 Retail Funds (since June 2000) Inc. and The Equitable Life
Harborside Financial and the Institutional Funds Assurance Society of the
Center, (since July 2003); Senior United States (financial
Plaza Two, Advisor of Morgan Stanley services).
Jersey City, NJ 07311 (since August 2000); Director
of the Distributor and Dean
Witter Realty Inc.; previously
President and Chief Operating
Officer of the Private Client
Group of Morgan Stanley (May
1999-August 2000), and
President and Chief Operating
Officer of Individual
Securities of Morgan Stanley
(February 1997-May 1999).
</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").
** THE DATES REFERENCED BELOW INDICATING COMMENCEMENT OF SERVICES AS
DIRECTOR/TRUSTEE FOR THE RETAIL FUNDS AND THE FUNDS ADVISED BY MORGAN
STANLEY INVESTMENT MANAGEMENT INC. AND MORGAN STANLEY AIP GP LP (THE
"INSTITUTIONAL FUNDS") REFLECT THE EARLIEST DATE THE DIRECTOR/TRUSTEE BEGAN
SERVING THE RETAIL OR INSTITUTIONAL FUNDS, AS APPLICABLE.
*** 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.).
44
<Page>
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**
- ------------------------------ ------------- -------------- -----------------------------------------------------------------
Mitchell M. Merin (51) President Since May 1999 President and Chief Operating Officer of Morgan Stanley
1221 Avenue of the Americas Investment Management Inc.; President, Director and Chief
New York, NY 10020 Executive Officer of the Investment Adviser and the
Administrator; Chairman and Director of the Distributor; Chairman
and Director of the Transfer Agent; Director of various Morgan
Stanley subsidiaries; President of the Institutional Funds (since
July 2003) and President of the Retail Funds (since May 1999);
Trustee (since July 2003) and President (since December 2002) of
the Van Kampen Closed-End Funds; Trustee and President (since
October 2002) of the Van Kampen Open-End Funds.
Ronald E. Robison (66) Executive Since April Principal Executive Officer of Funds in the Fund Complex (since
1221 Avenue of the Americas Vice 2003 May 2003); Managing Director of Morgan Stanley & Co.
New York, NY 10020 President and Incorporated, Morgan Stanley Investment Management Inc. and
Principal Morgan Stanley; Managing Director, Chief Administrative Officer
Executive and Director of the Investment Adviser and the Administrator;
Officer Director of the Transfer Agent; Managing Director and Director of
the Distributor; Executive Vice President and Principal Executive
Officer of the Institutional Funds (since July 2003) and the
Retail Funds (since April 2003); Director of Morgan Stanley SICAV
(since May 2004); previously, President and Director of the
Institutional Funds (March 2001-July 2003) and Chief Global
Operations Officer and Managing Director of Morgan Stanley
Investment Management Inc.
Joseph J. McAlinden (62) Vice Since July Managing Director and Chief Investment Officer of the Investment
1221 Avenue of the Americas President 1995 Adviser and Morgan Stanley Investment Management Inc.; Chief
New York, NY 10020 Investment Officer of the Van Kampen Funds; Vice President of the
Institutional Funds (since July 2003) and the Retail Funds (since
July 1995).
Barry Fink (50) Vice Since February General Counsel (since May 2000) and Managing Director (since
1221 Avenue of the Americas President 1997 December 2000) of Morgan Stanley Investment Management; Managing
New York, NY 10020 Director (since December 2000), Secretary (since February 1997)
and Director of the Investment Adviser and the Administrator;
Vice President of the Retail Funds; Assistant Secretary of Morgan
Stanley DW; Vice President of the Institutional Funds (since July
2003); Managing Director, Secretary and Director of the
Distributor; previously Secretary (February 1997-July 2003) and
General Counsel (February 1997-April 2004) of the Retail Funds;
Vice President and Assistant General Counsel of the Investment
Adviser and the Administrator (February 1997-December 2001).
Amy R. Doberman (43) Vice Since July Managing Director and General Counsel, U.S. Investment
1221 Avenue of the Americas President 2004 Management; Managing Director of Morgan Stanley Investment
New York, NY 10020 Management Inc. and the Investment Adviser, Vice President of the
Institutional and Retail Funds (since July 2004); Vice President
of the Van Kampen Funds (since August 2004); previously, Managing
Director and General Counsel - Americas, UBS Global Asset
Management (July 2000-July 2004) and General Counsel, Aeltus
Investment Management, Inc. (January 1997-July 2000).
Carsten Otto (41) Chief Since October Executive Director and U.S. Director of Compliance for Morgan
1221 Avenue of the Americas Compliance 2004 Stanley Investment Management (since October 2004); Executive
New York, NY 10020 Officer Director of the Investment Adviser and Morgan Stanley Investment
Management Inc.; formerly Assistant Secretary and Assistant
General Counsel of the Morgan Stanley Retail Funds.
</Table>
45
<Page>
<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**
- ------------------------------ ------------- -------------- -----------------------------------------------------------------
Stefanie V. Chang (38) Vice Since July Executive Director of Morgan Stanley & Co. Incorporated, Morgan
1221 Avenue of the Americas President 2003 Stanley Investment Management Inc. and the Investment Adviser;
New York, NY 10020 Vice President of the Institutional Funds (since December 1997)
and the Retail Funds (since July 2003); formerly practiced law
with the New York law firm of Rogers & Wells (now Clifford Chance
US LLP).
Francis J. Smith (39) Treasurer and Treasurer Executive Director of the Investment Adviser and the
c/o Morgan Stanley Trust Chief since July Administration (since December 2001); previously, Vice President
Harborside Financial Center, Financial 2003 and Chief of the Retail Funds (September 2002-July 2003); Vice President of
Plaza Two, Officer Financial the Investment Adviser and the Administrator (August
Jersey City, NJ 07311 Officer since 2000-November 2001) and Senior Manager at PricewaterhouseCoopers
September 2002 LLP (January 1998-August 2000).
Thomas F. Caloia (59) Vice Since July Executive Director (since December 2002) and Assistant Treasurer
c/o Morgan Stanley Trust President 2003 of the Investment Adviser, the Distributor and the Administrator;
Harborside Financial Center, previously Treasurer of the Retail Funds (April 1989-July 2003);
Plaza Two, formerly First Vice President of the Investment Adviser, the
Jersey City, NJ 07311 Distributor and the Administrator.
Mary E. Mullin (38) Secretary Since July Executive Director of Morgan Stanley & Co. Incorporated, Morgan
1221 Avenue of the Americas 2003 Stanley Investment Management Inc. and the Investment Adviser;
New York, NY 10020 Secretary of the Institutional Funds (since June 1999) and the
Retail Funds (since July 2003); formerly practiced law with the
New York law firms of McDermott, Will & Emery and Skadden, Arps,
Slate, Meagher & Flom LLP.
</Table>
- ----------
* THIS IS THE EARLIEST DATE THE OFFICER BEGAN SERVING THE RETAIL FUNDS. EACH
OFFICER SERVES AN INDEFINITE TERM, UNTIL HIS OR HER SUCCESSOR IS ELECTED.
** THE DATES REFERENCED BELOW INDICATING COMMENCEMENT OF SERVICE AS AN OFFICER
FOR THE RETAIL AND INSTITUTIONAL FUNDS REFLECT THE EARLIEST DATE THE
OFFICER BEGAN SERVING THE RETAIL OR INSTITUTIONAL FUNDS, AS APPLICABLE.
2005 FEDERAL TAX NOTICE (UNAUDITED)
During the fiscal year ended July 31, 2005, 100% of the ordinary dividends
paid by the Fund qualified for the dividends received deduction available
to corporations. Additionally, please note that 100% of the Fund's ordinary
dividends paid during the fiscal year ended July 31, 2005 qualified for the
lower income tax rate available to individuals under the Jobs and Growth
Tax Relief Reconciliation Act of 2003.
Of the Fund's ordinary dividends paid during the fiscal year ended July
31,2005, 25.69% was attributable to qualifying Federal obligations. Please
consult your tax advisor to determine if any portion of the dividends you
received is exempt from state income tax.
46
<Page>
TRUSTEES
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
Wayne E. Hedien
James F. Higgins
Dr. Manuel H. Johnson
Joseph J. Kearns
Michael E. Nugent
Fergus Reid
OFFICERS
Charles A. Fiumefreddo
CHAIRMAN OF THE BOARD
Mitchell M. Merin
PRESIDENT
Ronald E. Robison
EXECUTIVE VICE PRESIDENT and PRINCIPAL EXECUTIVE OFFICER
Joseph J. McAlinden
VICE PRESIDENT
Barry Fink
VICE PRESIDENT
Amy R. Doberman
VICE PRESIDENT
Carsten Otto
CHIEF COMPLIANCE OFFICER
Stefanie V. Chang
VICE PRESIDENT
Francis J. Smith
TREASURER and CHIEF FINANCIAL OFFICER
Thomas F. Caloia
VICE PRESIDENT
Mary E. Mullin
SECRETARY
TRANSFER AGENT
Morgan Stanley Trust
Harborside Financial Center, Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
Two World Financial Center
New York, New York 10281
INVESTMENT ADVISER
Morgan Stanley Investment Advisors Inc.
1221 Avenue of the Americas
New York, New York 10020
This report is submitted for the general information of the shareholders of the
Fund. For more detailed information about the Fund, its fees and expenses and
other pertinent information, please read its Prospectus. The Fund's Statement of
Additional Information contains additional information about the Fund, including
its trustees. It is available, without charge, by calling (800) 869-NEWS.
This report is not authorized for distribution to prospective investors in the
Fund unless preceded or accompanied by an effective Prospectus. Read the
Prospectus carefully before investing.
Investments and services offered through Morgan Stanley DW Inc., member SIPC.
Morgan Stanley Distributors Inc., member NASD
(C) 2005 Morgan Stanley
[MORGAN STANLEY LOGO]
38585RPTRA05-00762P-Y07/05
[GRAPHIC]
MORGAN STANLEY FUNDS
MORGAN STANLEY
STRATEGIST FUND
ANNUAL REPORT
JULY 31, 2005
[MORGAN STANLEY LOGO]
<Page>
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) The Fund has amended its Code of Ethics during the period covered by the
shareholder report presented in Item 1 hereto to delete from the end of the
following paragraph on page 2 of the Code the phrase "to the detriment of the
Fund.":
"Each Covered Officer must not use his personal influence or personal
relationship improperly to influence investment decisions or financial reporting
by the Fund whereby the Covered Officer would benefit personally (directly or
indirectly)."
(d) Not applicable.
(e) Not applicable.
(f)
(1) The Fund's Code of Ethics is attached hereto as Exhibit A.
(2) Not applicable.
(3) Not applicable.
Item 3. Audit Committee Financial Expert.
The Fund's Board of Trustees has determined that it has two "audit committee
financial experts" serving on its audit committee, each of whom are
"independent" Trustees: Dr. Manuel H. Johnson and Joseph J. Kearns. 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.
<Page>
Item 4. Principal Accountant Fees and Services.
(a)(b)(c)(d) and (g). Based on fees billed for the periods shown:
2005
<Table>
<Caption>
REGISTRANT COVERED ENTITIES(1)
AUDIT FEES $ 33,836 N/A
NON-AUDIT FEES
AUDIT-RELATED FEES $ 540(2) $ 3,215,745(2)
TAX FEES $ 5,393(3) $ 24,000(4)
ALL OTHER FEES $ - $ -
TOTAL NON-AUDIT FEES $ 5,933 $ 3,239,745
TOTAL $ 39,769 $ 3,239,745
</Table>
2004
<Table>
<Caption>
REGISTRANT COVERED ENTITIES(1)
AUDIT FEES $ 32,344 N/A
NON-AUDIT FEES
AUDIT-RELATED FEES $ 452(2) $ 3,225,276(2)
TAX FEES $ 4,780(3) $ 610,053(4)
ALL OTHER FEES $ - $ -(5)
TOTAL NON-AUDIT FEES $ 5,232 $ 3,835,329
TOTAL $ 37,576 $ 3,835,329
</Table>
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.
(5) All other fees represent project management for future business
applications and improving business and operational processes.
<Page>
(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.
<Page>
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
<Page>
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
<Page>
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
<Page>
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:
Michael Bozic, Edwin J. Garn, Wayne E. Hedien, Manual H. Johnson, Joseph J.
Kearns, Michael Nugent and Fergus Reid.
(b) Not applicable.
Item 6. Schedule of Investments
Refer to Item 1.
<Page>
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 registrant's most recent fiscal half-year
(the registrant's second fiscal half-year in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.
Item 12. Exhibits
(a) 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.
<Page>
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 Strategist Fund
/s/ Ronald E. Robison
Ronald E. Robison
Principal Executive Officer
September 20, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed by the following
persons on behalf of the registrant and in the capacities and on the dates
indicated.
/s/ Ronald E. Robison
Ronald E. Robison
Principal Executive Officer
September 20, 2005
/s/ Francis Smith
Francis Smith
Principal Financial Officer
September 20, 2005