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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: 811-05181
Morgan Stanley Equally-Weighted S&P 500 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: June 30, 2006
Date of reporting period: June 30, 2006
Item 1 - Report to Shareholders
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Welcome, Shareholder:
In this report, you'll learn about how your investment in Morgan Stanley
Equally-Weighted S&P 500 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 JUNE 30, 2006
TOTAL RETURN FOR THE 12 MONTHS ENDED JUNE 30, 2006
S&P LIPPER MULTI-
EQUAL CAP CORE
WEIGHT FUNDS
CLASS A CLASS B CLASS C CLASS D INDEX(1) INDEX(2)
11.22% 10.38% 10.44% 11.49% 11.85% 10.85%
THE PERFORMANCE OF THE FUND'S FOUR SHARE CLASSES VARIES BECAUSE EACH HAS
DIFFERENT EXPENSES. THE FUND'S TOTAL RETURNS ASSUME THE REINVESTMENT OF ALL
DISTRIBUTIONS BUT DO NOT REFLECT THE DEDUCTION OF ANY APPLICABLE SALES CHARGES.
SUCH COSTS WOULD LOWER PERFORMANCE. SEE PERFORMANCE SUMMARY FOR STANDARDIZED
PERFORMANCE AND BENCHMARK INFORMATION.
MARKET CONDITIONS
The stock market performed reasonably well for the 12-month period. Although a
number of factors contributed to pockets of turbulence, market conditions
remained relatively calm until the final months of the period. Early in the
period, positive economic data, strong consumer confidence and healthy corporate
earnings buoyed investor sentiment. However, in August, the Gulf Coast
hurricanes sent oil prices spiking and consumer data appeared to falter,
increasing anxiety about future economic growth. By October, optimism returned
to the markets as the economy proved more resilient than expected. Although
December's gain was lackluster due to concerns about high gold prices, ongoing
difficulties in the auto industry, additional monetary tightening by the Federal
Open Market Committee (the "Fed") and the flattening yield curve, stocks rallied
strongly in January. The market exhibited a pronounced "January Effect"-a
historical trend wherein the market rallies in the first month of the calendar
year, particularly in higher-volatility segments of the market such as small-cap
and technology stocks. Stocks slowed their pace in February as investors became
apprehensive about employment and payroll data and corporate earnings
announcements. Sentiment brightened again in March and April as strong economic
growth data, high-profile merger-and-acquisition activity and more positive
developments on the corporate earnings front gave a boost to the stock market.
However, the market encountered a steep sell-off in May followed by flat
performance in June. The Fed raised the federal funds target rate in both
months, and its accompanying language did little to soothe investors seeking a
respite from monetary tightening.
PERFORMANCE ANALYSIS
Morgan Stanley Equally-Weighted S&P 500 Fund underperformed the S&P Equal Weight
Index for the 12 months ended June 30, 2006, assuming no deduction of applicable
sales charges. The Fund's Class A shares and Class D shares outperformed the
Lipper Multi-Cap Core Funds Index, and the Fund's Class B shares and Class C
shares underperformed the Lipper Multi-Cap Core Funds Index for the same period,
also assuming no deduction of applicable sales charges.
The financials sector added most to the Fund's overall performance during the
period. The strong performance of financial companies with exposure to capital
markets and merger and acquisition activity offset weakness in the banking
stocks. The industrials sector was another source of gains, as a growing global
economy benefited transportation stocks, in particular. The energy sector
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was also among the Fund's leading contributors as the high price of oil and
natural gas continued to drive earnings growth for many energy companies.
In contrast, the consumer discretionary sector was a significant detractor from
the Fund's return. Within the sector, the beleaguered auto and auto components
industries drew increasingly negative sentiment due to the high profile
financial woes of several companies during the period. Home building stocks also
slowed their advance as the rising interest rate environment began to slow
housing trends. The utilities sector also had a negative influence on
performance. Company-specific events drove the sector lower in the first half of
the period. Moreover, a backdrop of rising interest rates led investors to
rotate out of utilities stocks in favor of fixed income investments with more
attractive yields.
From a market-capitalization perspective, mid-cap stocks contributed the most
relative to small- and large-cap stocks. In terms of style, value stocks bested
their growth counterparts during the period.
THERE IS NO GUARANTEE THAT ANY SECTORS MENTIONED WILL CONTINUE TO PERFORM AS
DISCUSSED HEREIN OR THAT SECURITIES IN SUCH SECTORS WILL BE HELD BY THE FUND IN
THE FUTURE.
TOP 10 HOLDINGS
Kerr-McGee Corp. 0.3%
General Motors Corp. 0.2
Cummins Inc. 0.2
Hess Corp. 0.2
Gateway, Inc. 0.2
Murphy Oil Corp. 0.2
Schlumberger Ltd. (Netherlands Antilles) 0.2
Marathon Oil Corp. 0.2
Kroger Co. 0.2
United States Steel Corp. 0.2
TOP FIVE INDUSTRIES
Electric Utilities 4.9%
Medical Specialties 3.0
Semiconductors 2.8
Major Banks 2.4
Regional Banks 2.3
DATA AS OF JUNE 30, 2006. SUBJECT TO CHANGE DAILY. ALL PERCENTAGES FOR TOP 10
HOLDINGS AND TOP FIVE INDUSTRIES ARE AS A PERCENTAGE OF NET ASSETS. THESE DATA
ARE PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE DEEMED A
RECOMMENDATION TO BUY OR SELL THE SECURITIES MENTIONED. MORGAN STANLEY IS A
FULL-SERVICE SECURITIES FIRM ENGAGED IN SECURITIES TRADING AND BROKERAGE
ACTIVITIES, INVESTMENT BANKING, RESEARCH AND ANALYSIS, FINANCING AND FINANCIAL
ADVISORY SERVICES.
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INVESTMENT STRATEGY
The Fund invests in a diversified portfolio of common stocks represented in the
Standard & Poor's 500(R) Composite Stock Price Index ("S&P 500"). The S&P 500 is
a well known stock market index that includes common stocks of 500 companies.
The Fund generally invests in each stock included in the S&P 500 in
approximately equal proportions. This approach differs from the S&P 500 because
stocks in the S&P 500 are represented in proportion to their market value or
market-capitalization. For example, the 50 largest companies in the S&P 500
represent approximately 60 percent of the S&P 500's value; however, these same
50 companies represent roughly 10 percent of the Fund's value. The Fund may
invest in foreign securities represented in the S&P 500, including depositary
receipts.
FOR MORE INFORMATION ABOUT PORTFOLIO HOLDINGS
Each Morgan Stanley fund provides a complete schedule of portfolio holdings
in its semiannual and annual reports within 60 days of the end of the fund's
second and fourth fiscal quarters. The semiannual reports and the annual
reports are filed electronically with the Securities and Exchange Commission
(SEC) on Form N-CSRS and Form N-CSR, respectively. Morgan Stanley also
delivers the semiannual and annual reports to fund shareholders and makes
these reports available on its public web site, www.morganstanley.com. Each
Morgan Stanley fund also files a complete schedule of portfolio holdings with
the SEC for the fund's first and third fiscal quarters on Form N-Q. Morgan
Stanley does not deliver the reports for the first and third fiscal quarters
to shareholders, nor are the reports posted to the Morgan Stanley public web
site. You may, however, obtain the Form N-Q filings (as well as the Form
N-CSR and N-CSRS filings) by accessing the SEC's web site,
http://www.sec.gov. You may also review and copy them at the SEC's public
reference room in Washington, DC. Information on the operation of the SEC's
public reference room may be obtained by calling the SEC at (800) SEC-0330.
You can also request copies of these materials, upon payment of a duplicating
fee, by electronic request at the SEC's e-mail address (publicinfo@sec.gov)
or by writing the public reference section of the SEC, Washington, DC
20549-0102.
PROXY VOTING POLICY AND PROCEDURES AND PROXY VOTING RECORD
You may obtain a copy of the Fund's Proxy Voting Policy and Procedures without
charge, upon request, by calling toll free (800) 869-NEWS or by visiting the
Mutual Fund Center on our Web site at www.morganstanley.com. It is also
available on the Securities and Exchange Commission's Web site at
http://www.sec.gov.
You may obtain information regarding how the Fund voted proxies relating to
portfolio securities during the most recent twelve-month period ended June 30
without charge by visiting the Mutual Fund Center on our Web site at
www.morganstanley.com. This information is also available on the Securities and
Exchange Commission's Web site at http://www.sec.gov.
HOUSEHOLDING NOTICE
To reduce printing and mailing costs, the Fund attempts to eliminate duplicate
mailings to the same address. The Fund delivers a single copy of certain
shareholder documents, including shareholder reports, prospectuses and proxy
materials, to investors with the same last name who reside at the same address.
Your participation in this program will continue for an unlimited period of time
unless you instruct us otherwise. You can request multiple copies of these
documents by calling (800) 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.
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PERFORMANCE SUMMARY
PERFORMANCE OF $10,000 INVESTMENT--CLASS B
[CHART]
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($ IN THOUSANDS)
Lipper Multi-Cap Core
Fund++ S&P EWI(1) Funds Index(2)
June 30, 1996 $10,000 $10,000 $10,000
June 30, 1997 $12,471 $12,668 $12,672
June 30, 1998 $15,194 $15,629 $15,827
June 30, 1999 $17,241 $18,076 $18,230
June 30, 2000 $16,598 $17,527 $20,699
June 30, 2001 $18,508 $19,883 $18,197
June 30, 2002 $17,169 $17,686 $15,011
June 30, 2003 $16,983 $18,292 $15,206
June 30, 2004 $21,448 $23,594 $18,355
June 30, 2005 $23,440 $26,095 $19,918
June 30, 2006 $25,873 $29,187 $22,079
</Table>
ENDING VALUE
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AVERAGE ANNUAL TOTAL RETURNS--PERIOD ENDED JUNE 30, 2006
<Table>
<Caption>
CLASS A SHARE* CLASS B SHARES* CLASS C SHARES+ CLASS D SHARES++
(SINCE 07/28/97) (SINCE 12/01/87) (SINCE 07/28/97) (SINCE 07/28/97)
SYMBOL VADAX VADBX VADCX VADDDX
<s>
1 YEAR 11.22%(3) 10.38%(3) 10.44%(3) 11.49%(3)
5.38 (4) 5.38 (4) 9.44 (4) --
5 YEARS 7.74 (3) 6.93 (3) 6.94 (3) 8.01 (3)
6.58 (4) 6.62 (4) 6.94 (4) --
10 YEARS -- 9.97 (3) -- --
-- 9.97 (4) -- --
SINCE INCEPTION 8.63 (3) 12.12 (3) 7.84 (3) 8.89 (3)
7.98 (4) 12.12 (4) 7.84 (4) --
</Table>
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE, WHICH IS NO GUARANTEE OF
FUTURE RESULTS AND CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE FIGURES
SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE FIGURES, PLEASE VISIT
WWW.MORGANSTANLEY.COM 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 CDSC FOR CLASS C IS 1.0% FOR SHARES REDEEMED WITHIN ONE YEAR OF
PURCHASE.
++ CLASS D HAS NO SALES CHARGE.
(1) THE STANDARD & POOR'S EQUAL WEIGHT INDEX (S&P EWI) IS THE EQUAL-WEIGHTED
VERSION OF THE WIDELY REGARDED S&P 500(R), WHICH MEASURES 500 LEADING
COMPANIES IN LEADING U.S. INDUSTRIES. THE S&P EWI HAS THE SAME CONSTITUENTS
AS THE CAPITALIZATION WEIGHTED S&P 500(R) INDEX, BUT EACH COMPANY IN THE
S&P EWI IS ALLOCATED A FIXED WEIGHT, REBALANCING QUARTERLY. INDEXES ARE
UNMANAGED AND THEIR RETURNS DO NOT INCLUDE ANY SALES CHARGES OR FEES. SUCH
COSTS WOULD LOWER PERFORMANCE. IT IS NOT POSSIBLE TO INVEST DIRECTLY IN AN
INDEX.
(2) THE LIPPER MULTI-CAP CORE FUNDS INDEX IS AN EQUALLY WEIGHTED PERFORMANCE
INDEX OF THE LARGEST QUALIFYING FUNDS (BASED ON NET ASSETS) IN THE LIPPER
MULTI-CAP CORE FUNDS CLASSIFICATION. THE INDEX, WHICH IS ADJUSTED FOR
CAPITAL GAINS DISTRIBUTIONS AND INCOME DIVIDENDS, IS UNMANAGED AND SHOULD
NOT BE CONSIDERED AN INVESTMENT. THERE ARE CURRENTLY 30 FUNDS REPRESENTED
IN THIS INDEX.
(3) FIGURE SHOWN ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AND DOES NOT REFLECT
THE DEDUCTION OF ANY SALES CHARGES.
(4) FIGURE SHOWN ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AND THE DEDUCTION OF
THE MAXIMUM APPLICABLE SALES CHARGE. SEE THE FUND'S CURRENT PROSPECTUS FOR
COMPLETE DETAILS ON FEES AND SALES CHARGES.
++ ENDING VALUE ASSUMING A COMPLETE REDEMPTION ON JUNE 30, 2006.
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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 01/01/06 - 06/30/06.
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 *
------------- ------------- ---------------
01/01/06-
01/01/06 06/30/06 06/30/06
------------- ------------- ---------------
CLASS A
Actual (3.78% return) $1,000.00 $1,037.80 $3.18
Hypothetical (5% annual return before expenses) $1,000.00 $1,021.67 $3.16
CLASS B
Actual (3.40% return) $1,000.00 $1,034.00 $7.01
Hypothetical (5% annual return before expenses) $1,000.00 $1,017.90 $6.95
CLASS C
Actual (3.45% return) $1,000.00 $1,034.50 $6.46
Hypothetical (5% annual return before expenses) $1,000.00 $1,018.45 $6.41
CLASS D
Actual (3.92% return) $1,000.00 $1,039.20 $1.97
Hypothetical (5% annual return before expenses) $1,000.00 $1,022.86 $1.96
</Table>
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* EXPENSES ARE EQUAL TO THE FUND'S ANNUALIZED EXPENSE RATIOS OF 0.63%, 1.39%,
1.28% AND 0.39% FOR CLASS A, CLASS B, CLASS C AND CLASS D SHARES,
RESPECTIVELY, MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD,
MULTIPLIED BY 181/365 (TO REFLECT THE ONE-HALF YEAR PERIOD).
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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 at the Investment Adviser's
expense. (The Investment Adviser and the Administrator together are referred to
as the "Adviser" and the Advisory and Administration Agreements together are
referred to as the "Management Agreement.") The Board also compared the nature
of the services provided by the Adviser with similar services provided by
non-affiliated advisers as reported to the Board by Lipper Inc. ("Lipper").
The Board reviewed and considered the qualifications of the portfolio managers,
the senior administrative managers and other key personnel of the Adviser who
provide the advisory and administrative services to the Fund. The Board
determined that the Adviser's portfolio managers and key personnel are well
qualified by education and/or training and experience to perform the services in
an efficient and professional manner. The Board concluded that the nature and
extent of the advisory and administrative services provided were necessary and
appropriate for the conduct of the business and investment activities of the
Fund. The Board also concluded that the overall quality of the advisory and
administrative services was satisfactory.
PERFORMANCE RELATIVE TO COMPARABLE FUNDS MANAGED BY OTHER ADVISERS
On a regular basis, the Board reviews the performance of all funds in the Morgan
Stanley Fund Complex, including the Fund, compared to their peers, paying
specific attention to the underperforming funds. In addition, the Board
specifically reviewed the Fund's performance for the one-, three- and five-year
periods ended November 30, 2005, as shown in a report provided by Lipper (the
"Lipper Report"), compared to the performance of comparable funds selected by
Lipper (the "performance peer group"). The Board also discussed with the Adviser
the performance goals and the actual results achieved in managing the Fund. The
Board concluded that the Fund's performance was competitive with that of its
performance peer group.
FEES RELATIVE TO OTHER PROPRIETARY FUNDS MANAGED BY THE ADVISER WITH COMPARABLE
INVESTMENT STRATEGIES
The Board reviewed the advisory and administrative fee (together, the
"management fee") rate paid by the Fund under the Management Agreement. The
Board noted that the management fee rate was comparable to the management fee
rates charged by the Adviser to other proprietary funds it manages with
investment strategies comparable to those of the Fund.
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FEES AND EXPENSES RELATIVE TO COMPARABLE FUNDS MANAGED BY OTHER ADVISERS
The Board reviewed the management fee rate and total expense ratio of the Fund
as compared to the average management fee rate and average total expense ratio
for funds, selected by Lipper (the "expense peer group"), managed by other
advisers with investment strategies comparable to those of the Fund, as shown in
the Lipper Report. The Board concluded that the Fund's management fee rate and
total expense ratio were competitive with those of its 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 THE ADVISER AND AFFILIATES
The Board considered information concerning the costs incurred and profits
realized by the Adviser and affiliates during the last year from their
relationship with the Fund and during the last two years from their relationship
with the Morgan Stanley Fund Complex and reviewed with the Adviser the cost
allocation methodology used to determine the profitability of the Adviser and
affiliates. Based on its review of the information it received, the Board
concluded that the profits earned by the Adviser and 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
affiliates from their relationship with the Fund and the Morgan Stanley Fund
Complex, such as sales charges on sales of Class A shares and "float" benefits
derived from handling of checks for purchases and sales of Fund shares, through
a broker-dealer affiliate of the Adviser. 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 sold a joint venture that owned an electronic trading
system network ("ECN"), which may be used by the Adviser for trading on behalf
of the Fund. As part of the sale of the joint venture, the affiliate receives a
10-year payout based on the revenue stream from trading on the ECN. Although the
affiliate disgorges the portion of the payout that is comprised of commissions
received from trades executed by the Adviser on the ECN to a charitable
organization, the Board considered the fact that trades by the Adviser would
increase order flow, and, thus, result in a potential fall-out benefit to the
affiliate. The Board concluded that the float benefits were relatively small,
the sales charges and 12b-1 fees were competitive with those of other
broker-dealers, the affiliate disgorged revenues in connection with the
ECN-related revenue and the potential fall-out benefit from increased order flow
was relatively small.
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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 Fund. The Adviser
informed the Board that the Fund's commissions are used to pay for execution
services only.
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
that it would be in the best interest of the Fund and its shareholders to
approve renewal of the Management Agreement for another year.
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MORGAN STANLEY EQUALLY-WEIGHTED S&P 500 FUND
PORTFOLIO OF INVESTMENTS - JUNE 30, 2006
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------
Common Stocks (98.3%)
ADVERTISING/MARKETING SERVICES (0.4%)
468,757 Interpublic Group of Companies, Inc. (The)* $ 3,914,121
47,463 Omnicom Group, Inc. 4,228,479
-----------
8,142,600
-----------
AEROSPACE & DEFENSE (1.6%)
49,372 Boeing Co. 4,044,061
63,873 General Dynamics Corp. 4,181,127
100,794 Goodrich Corp. 4,060,990
53,556 L-3 Communications Holdings, Inc. 4,039,194
59,216 Lockheed Martin Corp. 4,248,156
64,589 Northrop Grumman Corp. 4,137,571
94,734 Raytheon Co. 4,222,294
78,252 Rockwell Collins, Inc. 4,371,939
-----------
33,305,332
-----------
AGRICULTURAL COMMODITIES/ MILLING (0.2%)
108,067 Archer-Daniels-Midland Co. 4,461,006
-----------
AIR FREIGHT/COURIERS (0.4%)
38,519 FedEx Corp. 4,501,330
53,270 United Parcel Service, Inc. (Class B) 4,385,719
-----------
8,887,049
-----------
AIRLINES (0.2%)
257,697 Southwest Airlines Co. 4,218,500
-----------
ALUMINUM (0.2%)
140,354 Alcoa, Inc. 4,541,855
-----------
APPAREL/FOOTWEAR (1.0%)
134,762 Coach, Inc.* 4,029,384
132,599 Jones Apparel Group, Inc. 4,215,322
112,650 Liz Claiborne, Inc. 4,174,809
49,582 NIKE, Inc. (Class B) 4,016,142
64,458 V.F. Corp. 4,377,987
-----------
20,813,644
-----------
APPAREL/FOOTWEAR RETAIL (0.8%)
232,451 Gap, Inc. (The) $ 4,044,647
163,692 Limited Brands, Inc. 4,188,878
112,057 Nordstrom, Inc. 4,090,080
176,666 TJX Companies, Inc. (The) 4,038,585
-----------
16,362,190
-----------
AUTO PARTS: O.E.M. (0.4%)
58,300 Eaton Corp. 4,395,820
52,489 Johnson Controls, Inc. 4,315,645
-----------
8,711,465
-----------
AUTOMOTIVE AFTERMARKET (0.4%)
362,568 Cooper Tire & Rubber Co. 4,039,007
344,237 Goodyear Tire & Rubber Co. (The)* 3,821,031
-----------
7,860,038
-----------
BEVERAGES: ALCOHOLIC (0.8%)
92,778 Anheuser-Busch Companies, Inc. 4,229,749
55,064 Brown-Forman Corp. (Class B) 3,934,323
164,788 Constellation Brands Inc. (Class A)* 4,119,700
62,493 Molson Coors Brewing Co. (Class B) 4,242,025
-----------
16,525,797
-----------
BEVERAGES: NON-ALCOHOLIC (0.6%)
97,738 Coca-Cola Co. (The) 4,204,689
210,076 Coca-Cola Enterprises Inc. 4,279,248
135,709 Pepsi Bottling Group, Inc. (The) 4,363,044
-----------
12,846,981
-----------
BIOTECHNOLOGY (1.1%)
60,120 Amgen Inc.* 3,921,628
91,274 Biogen Idec Inc.* 4,228,724
62,486 Genzyme Corp.* 3,814,770
71,241 Gilead Sciences, Inc.* 4,214,617
SEE NOTES TO FINANCIAL STATEMENTS
12
<Page>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------
134,898 MedImmune, Inc.* $ 3,655,736
63,938 Millipore Corp.* 4,027,455
-----------
23,862,930
-----------
BROADCASTING (0.4%)
141,435 Clear Channel Communications, Inc. 4,377,413
118,133 Univision Communications, Inc. (Class A)* 3,957,456
-----------
8,334,869
-----------
BUILDING PRODUCTS (0.4%)
101,809 American Standard Companies, Inc. 4,405,275
141,452 Masco Corp. 4,192,637
-----------
8,597,912
-----------
CABLE/SATELLITE TV (0.2%)
128,797 Comcast Corp. (Class A)* 4,216,814
-----------
CASINO/GAMING (0.4%)
58,624 Harrah's Entertainment, Inc. 4,172,856
115,928 International Game Technology 4,398,308
-----------
8,571,164
-----------
CHEMICALS: AGRICULTURAL (0.2%)
53,062 Monsanto Co. 4,467,290
-----------
CHEMICALS: MAJOR DIVERSIFIED (1.0%)
105,717 Dow Chemical Co. (The) 4,126,134
101,226 Du Pont (E.I.) de Nemours & Co. 4,211,002
80,612 Eastman Chemical Co. 4,353,048
280,989 Hercules Inc.* 4,287,892
88,390 Rohm & Haas Co. 4,430,107
-----------
21,408,183
-----------
CHEMICALS: SPECIALTY (0.8%)
67,561 Air Products & Chemicals, Inc. 4,318,499
67,167 Ashland Inc. 4,480,039
79,364 Praxair, Inc. 4,285,656
59,600 Sigma-Aldrich Corp. 4,329,344
-----------
17,413,538
-----------
COMMERCIAL PRINTING/ FORMS (0.2%)
133,463 Donnelley (R.R.) & Sons Co. $ 4,264,143
-----------
COMPUTER COMMUNICATIONS (0.8%)
368,844 Avaya Inc.* 4,212,198
208,616 Cisco Systems, Inc.* 4,074,270
239,836 Juniper Networks, Inc.* 3,834,978
229,295 QLogic Corp.* 3,953,046
-----------
16,074,492
-----------
COMPUTER PERIPHERALS (0.6%)
334,492 EMC Corp.* 3,669,377
78,383 Lexmark International, Inc. (Class A)* 4,376,123
122,307 Network Appliance, Inc.* 4,317,437
42,000 Seagate Technology Inc. (Escrow) (a)* 0
-----------
12,362,937
-----------
COMPUTER PROCESSING HARDWARE (1.2%)
69,792 Apple Computer, Inc.* 3,986,519
166,553 Dell Inc.* 4,065,559
2,526,572 Gateway, Inc.* 4,800,487
127,823 Hewlett-Packard Co. 4,049,432
114,300 NCR Corp.* 4,187,952
949,532 Sun Microsystems, Inc.* 3,940,558
-----------
25,030,507
-----------
CONSTRUCTION MATERIALS (0.2%)
55,449 Vulcan Materials Co. 4,325,022
-----------
CONTAINERS/PACKAGING (1.0%)
112,591 Ball Corp. 4,170,371
137,007 Bemis Company, Inc. 4,195,154
177,299 Pactiv Corp.* 4,388,150
77,240 Sealed Air Corp. 4,022,659
100,126 Temple-Inland Inc. 4,292,402
-----------
21,068,736
-----------
CONTRACT DRILLING (0.8%)
128,536 Nabors Industries, Ltd. (Bermuda)* 4,343,231
SEE NOTES TO FINANCIAL STATEMENTS
13
<Page>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------
58,128 Noble Corp. (Cayman Islands) $ 4,325,886
112,120 Rowan Companies, Inc. 3,990,351
55,373 Transocean Inc. (Cayman Islands)* 4,447,559
------------
17,107,027
------------
DATA PROCESSING SERVICES (1.4%)
82,152 Affiliated Computer Services, Inc. (Class A)* 4,239,865
93,014 Automatic Data Processing, Inc. 4,218,184
76,425 Computer Sciences Corp.* 3,702,027
225,121 Convergys Corp.* 4,389,860
91,770 First Data Corp. 4,133,321
96,114 Fiserv, Inc.* 4,359,731
105,796 Paychex, Inc. 4,123,928
------------
29,166,916
------------
DEPARTMENT STORES (0.8%)
137,431 Dillard's, Inc. (Class A) 4,377,177
120,321 Federated Department Stores, Inc. 4,403,749
73,448 Kohl's Corp.* 4,342,246
64,408 Penney (J.C.) Co., Inc. 4,348,184
------------
17,471,356
------------
DISCOUNT STORES (1.4%)
259,893 Big Lots, Inc.* 4,438,972
78,572 Costco Wholesale Corp. 4,488,818
276,290 Dollar General Corp. 3,862,534
170,714 Family Dollar Stores, Inc. 4,170,543
27,199 Sears Holdings Corp.* 4,211,493
81,618 Target Corp. 3,988,672
87,420 Wal-Mart Stores, Inc. 4,211,021
------------
29,372,053
------------
DRUGSTORE CHAINS (0.4%)
139,889 CVS Corp. 4,294,592
93,452 Walgreen Co. 4,190,388
------------
8,484,980
------------
ELECTRIC UTILITIES (4.9%)
241,329 AES Corp. (The)* $ 4,452,520
116,923 Allegheny Energy, Inc.* 4,334,336
83,322 Ameren Corp. 4,207,761
119,303 American Electric Power Co., Inc. 4,086,128
338,550 CenterPoint Energy, Inc. 4,231,875
312,626 CMS Energy Corp.* 4,045,380
93,929 Consolidated Edison, Inc. 4,174,205
75,792 Constellation Energy Group, Inc. 4,132,180
57,056 Dominion Resources, Inc. 4,267,218
98,747 DTE Energy Co. 4,022,953
145,179 Duke Energy Corp. 4,263,907
99,045 Edison International 3,862,755
59,119 Entergy Corp. 4,182,669
72,966 Exelon Corp. 4,146,658
79,865 FirstEnergy Corp. 4,329,482
102,382 FPL Group, Inc. 4,236,567
108,039 PG&E Corp. 4,243,772
105,617 Pinnacle West Capital Corp. 4,215,174
132,391 PPL Corp. 4,276,229
93,659 Progress Energy, Inc. 4,015,161
62,463 Public Service Enterprise Group, Inc. 4,130,054
125,304 Southern Co. (The) 4,015,993
269,253 TECO Energy, Inc. 4,022,640
72,378 TXU Corp. 4,327,481
219,733 Xcel Energy, Inc. 4,214,479
------------
104,437,577
------------
ELECTRICAL PRODUCTS (0.8%)
210,769 American Power Conversion Corp. 4,107,888
48,954 Cooper Industries Ltd. (Class A) (Bermuda) 4,548,806
51,598 Emerson Electric Co. 4,324,428
125,023 Molex Inc. 4,197,022
------------
17,178,144
------------
ELECTRONIC COMPONENTS (0.8%)
152,980 Jabil Circuit, Inc. 3,916,288
SEE NOTES TO FINANCIAL STATEMENTS
14
<Page>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------
74,504 SanDisk Corp.* $ 3,798,214
930,234 Sanmina-SCI Corp.* 4,279,076
1,221,049 Solectron Corp.* 4,175,988
------------
16,169,566
------------
ELECTRONIC EQUIPMENT/INSTRUMENTS (1.4%)
120,457 Agilent Technologies, Inc.* 3,801,623
1,660,021 JDS Uniphase Corp.* 4,199,853
61,963 Rockwell Automation, Inc. 4,461,956
392,154 Symbol Technologies, Inc. 4,231,342
131,713 Tektronix, Inc. 3,874,996
119,843 Thermo Electron Corp.* 4,343,110
293,873 Xerox Corp.* 4,087,773
------------
29,000,653
------------
ELECTRONIC PRODUCTION EQUIPMENT (0.8%)
246,457 Applied Materials, Inc. 4,012,320
96,429 KLA-Tencor Corp. 4,008,554
172,305 Novellus Systems, Inc.* 4,255,933
283,106 Teradyne, Inc.* 3,943,667
------------
16,220,474
------------
ELECTRONICS/APPLIANCE STORES (0.6%)
79,128 Best Buy Co., Inc. 4,339,380
143,259 Circuit City Stores - Circuit City Group 3,899,510
272,356 RadioShack Corp. 3,812,984
------------
12,051,874
------------
ELECTRONICS/APPLIANCES (0.6%)
171,898 Eastman Kodak Co. 4,087,734
48,134 Harman International Industries, Inc. 4,109,200
49,608 Whirlpool Corp. 4,100,101
------------
12,297,035
------------
ENGINEERING & CONSTRUCTION (0.2%)
47,986 Fluor Corp. 4,459,339
------------
ENVIRONMENTAL SERVICES (0.4%)
388,882 Allied Waste Industries, Inc.* $ 4,417,700
120,941 Waste Management, Inc. 4,339,363
------------
8,757,063
------------
FINANCE/RENTAL/LEASING (1.4%)
50,385 Capital One Financial Corp. 4,305,398
81,846 CIT Group, Inc. 4,279,727
114,919 Countrywide Financial Corp. 4,376,116
85,021 Fannie Mae 4,089,510
69,865 Freddie Mac 3,983,004
77,377 Ryder System, Inc. 4,521,138
79,746 SLM Corp. 4,220,158
------------
29,775,051
------------
FINANCIAL CONGLOMERATES (1.2%)
79,395 American Express Co. 4,225,402
87,330 Citigroup, Inc. 4,212,799
105,161 JPMorgan Chase & Co. 4,416,762
78,984 Principal Financial Group, Inc. 4,395,460
55,848 Prudential Financial, Inc. 4,339,390
71,727 State Street Corp. 4,166,621
------------
25,756,434
------------
FINANCIAL PUBLISHING/ SERVICES (0.6%)
115,173 Equifax, Inc. 3,955,041
77,416 McGraw-Hill Companies, Inc. (The) 3,888,606
76,185 Moody's Corp. 4,149,035
------------
11,992,682
------------
FOOD DISTRIBUTORS (0.2%)
134,282 SYSCO Corp. 4,103,658
------------
FOOD RETAIL (0.8%)
215,363 Kroger Co. 4,707,835
168,811 Safeway Inc. 4,389,086
141,958 Supervalu, Inc. 4,358,111
66,062 Whole Foods Market, Inc. 4,270,248
------------
17,725,280
------------
SEE NOTES TO FINANCIAL STATEMENTS
15
<Page>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------
FOOD: MAJOR DIVERSIFIED (1.4%)
119,877 Campbell Soup Co. $ 4,448,635
190,925 ConAgra Foods Inc. 4,221,352
83,728 General Mills, Inc. 4,325,388
102,781 Heinz (H.J.) Co. 4,236,633
89,155 Kellogg Co. 4,317,777
70,741 PepsiCo, Inc. 4,247,290
234,652 Sara Lee Corp. 3,759,125
-----------
29,556,200
-----------
FOOD: MEAT/FISH/DAIRY (0.4%)
111,901 Dean Foods Co.* 4,161,598
291,059 Tyson Foods, Inc. (Class A) 4,325,137
-----------
8,486,735
-----------
FOOD: SPECIALTY/CANDY (0.6%)
77,109 Hershey Co. (The) 4,246,393
128,094 McCormick & Co., Inc.
(Non-Voting) 4,297,554
89,015 Wrigley (Wm.) Jr. Co. 4,037,720
-----------
12,581,667
-----------
FOREST PRODUCTS (0.4%)
181,776 Louisiana-Pacific Corp. 3,980,894
68,031 Weyerhaeuser Co. 4,234,930
-----------
8,215,824
-----------
GAS DISTRIBUTORS (1.2%)
812,166 Dynegy, Inc. (Class A)* 4,442,548
105,056 KeySpan Corp. 4,244,262
101,171 Nicor Inc. 4,198,597
192,491 NiSource, Inc. 4,204,003
111,896 Peoples Energy Corp. 4,018,185
90,435 Sempra Energy 4,112,984
-----------
25,220,579
-----------
HOME BUILDING (0.9%)
81,734 Centex Corp. 4,111,220
162,906 D.R. Horton, Inc. 3,880,421
88,349 KB Home 4,050,802
89,491 Lennar Corp. (Class A) 3,970,716
143,678 Pulte Homes, Inc. 4,136,489
-----------
20,149,648
-----------
HOME FURNISHINGS (0.4%)
168,863 Leggett & Platt, Inc. $ 4,218,198
164,265 Newell Rubbermaid, Inc. 4,242,965
-----------
8,461,163
-----------
HOME IMPROVEMENT
CHAINS (0.6%)
108,839 Home Depot, Inc. (The) 3,895,348
64,545 Lowe's Companies, Inc. 3,915,945
91,038 Sherwin-Williams Co. 4,322,484
-----------
12,133,777
-----------
HOSPITAL/NURSING
MANAGEMENT (0.8%)
92,563 HCA, Inc. 3,994,093
199,682 Health Management
Associates, Inc. (Class A) 3,935,732
90,803 Manor Care, Inc. 4,260,477
569,941 Tenet Healthcare Corp.* 3,978,188
-----------
16,168,490
-----------
HOTELS/RESORTS/
CRUISELINES (0.8%)
99,956 Carnival Corp. (Panama)(Units)+ 4,172,163
160,033 Hilton Hotels Corp. 4,525,733
117,411 Marriott International, Inc.
(Class A) 4,475,707
71,014 Starwood Hotels & Resorts
Worldwide, Inc. 4,284,985
-----------
17,458,588
-----------
HOUSEHOLD/PERSONAL
CARE (1.6%)
90,473 Alberto-Culver Co. 4,407,845
140,717 Avon Products, Inc. 4,362,227
68,985 Clorox Co. (The) 4,206,015
69,587 Colgate-Palmolive Co. 4,168,261
110,124 Estee Lauder Companies, Inc.
(The) (Class A) 4,258,495
121,498 International Flavors &
Fragrances, Inc. 4,281,590
69,416 Kimberly-Clark Corp. 4,282,967
74,591 Procter & Gamble Co. (The) 4,147,260
-----------
34,114,660
-----------
SEE NOTES TO FINANCIAL STATEMENTS
16
<Page>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------
INDUSTRIAL
CONGLOMERATES (1.8%)
52,456 3M Co. $ 4,236,871
66,092 Danaher Corp. 4,251,037
122,726 General Electric Co.** 4,045,049
105,479 Honeywell International, Inc. 4,250,804
102,382 Ingersoll-Rand Co. Ltd.
(Class A) (Bermuda) 4,379,902
81,255 ITT Industries, Inc. 4,022,123
48,295 Textron, Inc. 4,451,833
157,174 Tyco International Ltd.
(Bermuda) 4,322,285
68,393 United Technologies Corp. 4,337,484
-----------
38,297,388
-----------
INDUSTRIAL MACHINERY (0.4%)
87,565 Illinois Tool Works Inc. 4,159,337
54,525 Parker Hannifin Corp. 4,231,140
-----------
8,390,477
-----------
INDUSTRIAL SPECIALTIES (0.4%)
109,185 Ecolab Inc. 4,430,727
65,234 PPG Industries, Inc. 4,305,444
-----------
8,736,171
-----------
INFORMATION TECHNOLOGY
SERVICES (0.8%)
114,483 Citrix Systems, Inc.* 4,595,348
167,037 Electronic Data
Systems Corp. 4,018,910
52,966 International Business
Machines Corp. 4,068,848
646,171 Unisys Corp.* 4,057,954
-----------
16,741,060
-----------
INSURANCE BROKERS/
SERVICES (0.4%)
117,395 AON Corp. 4,087,694
145,870 Marsh & McLennan
Companies, Inc. 3,922,444
-----------
8,010,138
-----------
INTEGRATED OIL (1.1%)
71,934 Chevron Corp. 4,464,224
69,041 ConocoPhillips $ 4,524,257
71,012 Exxon Mobil Corp. 4,356,586
91,019 Hess Corp. 4,810,354
85,909 Murphy Oil Corp. 4,798,877
-----------
22,954,298
-----------
INTERNET RETAIL (0.2%)
117,679 Amazon.com, Inc.* 4,551,824
-----------
INTERNET SOFTWARE/
SERVICES (0.6%)
10,282 Google, Inc. (Class A)* 4,311,551
182,397 VeriSign, Inc.* 4,226,138
139,106 Yahoo!, Inc.* 4,590,498
-----------
13,128,187
-----------
INVESTMENT BANKS/
BROKERS (1.6%)
97,563 Ameriprise Financial, Inc. 4,358,139
32,131 Bear Stearns
Companies, Inc. (The) 4,500,911
189,493 E*TRADE Group, Inc.* 4,324,230
29,328 Goldman Sachs
Group, Inc. (The) 4,411,811
63,414 Lehman Brothers
Holdings Inc. 4,131,422
59,736 Merrill Lynch & Co., Inc. 4,155,236
74,105 Morgan Stanley (Note 4) 4,684,177
258,843 Schwab (Charles)
Corp. (The) 4,136,311
-----------
34,702,237
-----------
INVESTMENT MANAGERS (1.2%)
130,642 Federated Investors, Inc.
(Class B) 4,115,223
47,240 Franklin Resources, Inc. 4,100,904
232,345 Janus Capital Group, Inc. 4,158,976
39,212 Legg Mason, Inc. 3,902,378
119,402 Mellon Financial Corp. 4,111,011
112,816 Price (T.) Rowe Group, Inc. 4,265,573
-----------
24,654,065
-----------
LIFE/HEALTH INSURANCE (1.2%)
90,901 AFLAC, Inc. 4,213,261
SEE NOTES TO FINANCIAL STATEMENTS
17
<Page>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------
123,513 Genworth Financial Inc. (Class A) $ 4,303,193
75,483 Lincoln National Corp. 4,260,261
84,238 MetLife, Inc. 4,313,828
72,341 Torchmark Corp. 4,392,545
221,214 UnumProvident Corp. 4,010,610
-----------
25,493,698
-----------
MAJOR BANKS (2.4%)
89,061 Bank of America Corp. 4,283,834
126,978 Bank of New York Co., Inc. (The) 4,088,692
100,125 BB&T Corp. 4,164,199
74,380 Comerica, Inc. 3,867,016
177,728 Huntington Bancshares, Inc. 4,190,826
120,081 KeyCorp 4,284,490
117,215 National City Corp. 4,242,011
60,968 PNC Financial Services Group 4,278,124
124,055 Regions Financial Corp. 4,108,702
54,983 SunTrust Banks, Inc. 4,193,004
78,672 Wachovia Corp. 4,254,582
63,365 Wells Fargo & Co. 4,250,524
-----------
50,206,004
-----------
MAJOR TELECOMMUNICATIONS (1.2%)
66,950 ALLTEL Corp. 4,273,418
151,971 AT&T Inc. 4,238,471
117,053 BellSouth Corp. 4,237,319
101,394 Embarq Corp.* 4,156,140
195,107 Sprint Nextel Corp. 3,900,189
129,787 Verizon Communications, Inc. 4,346,567
-----------
25,152,104
-----------
MANAGED HEALTH CARE (1.4%)
102,402 Aetna, Inc. 4,088,912
85,354 Caremark Rx, Inc. 4,256,604
42,988 CIGNA Corp. 4,234,748
78,662 Coventry Health Care, Inc.* 4,321,690
83,945 Humana, Inc.* 4,507,846
90,703 UnitedHealth Group Inc. $ 4,061,680
56,541 WellPoint Inc.* 4,114,489
-----------
29,585,969
-----------
MEDIA CONGLOMERATES (1.0%)
162,496 CBS Corp. (Class B) 4,395,517
143,405 Disney (Walt) Co. (The) 4,302,150
223,571 News Corp (Class A) 4,288,092
248,111 Time Warner, Inc. 4,292,320
111,281 Viacom, Inc. (Class B)* 3,988,311
-----------
21,266,390
-----------
MEDICAL DISTRIBUTORS (0.8%)
97,270 AmerisourceBergen Corp. 4,077,558
60,555 Cardinal Health, Inc. 3,895,503
87,617 McKesson Corp. 4,142,532
120,379 Patterson Companies, Inc.* 4,204,838
-----------
16,320,431
-----------
MEDICAL SPECIALTIES (3.0%)
138,877 Applera Corp. - Applied Biosystems Group 4,492,671
59,091 Bard (C.R.), Inc. 4,329,007
80,345 Bausch & Lomb, Inc. 3,940,119
109,551 Baxter International, Inc. 4,027,095
69,166 Becton, Dickinson & Co. 4,228,117
116,130 Biomet, Inc. 3,633,708
210,217 Boston Scientific Corp.* 3,540,054
59,845 Fisher Scientific International Inc.* 4,371,677
98,330 Hospira, Inc.* 4,222,290
80,426 Medtronic, Inc. 3,773,588
151,358 Pall Corp. 4,238,024
192,121 Perkinelmer, Inc. 4,015,329
116,747 St. Jude Medical, Inc.* 3,784,938
89,153 Stryker Corp. 3,754,233
99,394 Waters Corp.* 4,413,093
61,221 Zimmer Holdings, Inc.* 3,472,455
-----------
64,236,398
-----------
MISCELLANEOUS COMMERCIAL SERVICES (0.4%)
101,534 Cintas Corp. 4,036,992
SEE NOTES TO FINANCIAL STATEMENTS
18
<Page>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------
187,459 Sabre Holdings Corp. (Class A) $ 4,124,098
-----------
8,161,090
-----------
MISCELLANEOUS MANUFACTURING (0.2%)
92,050 Dover Corp. 4,550,032
-----------
MOTOR VEHICLES (0.6%)
600,486 Ford Motor Co. 4,161,368
164,971 General Motors Corp. 4,914,486
79,609 Harley-Davidson, Inc. 4,369,738
-----------
13,445,592
-----------
MULTI-LINE INSURANCE (0.8%)
67,100 American International Group, Inc. 3,962,255
50,397 Hartford Financial Services Group, Inc. (The) 4,263,586
124,104 Loews Corp. 4,399,487
76,287 Safeco Corp. 4,298,772
-----------
16,924,100
-----------
OFFICE EQUIPMENT/ SUPPLIES (0.4%)
72,490 Avery Dennison Corp. 4,208,769
100,987 Pitney Bowes, Inc. 4,170,763
-----------
8,379,532
-----------
OIL & GAS PIPELINES (0.6%)
286,517 El Paso Corp. 4,297,755
42,237 Kinder Morgan, Inc. 4,219,054
194,710 Williams Companies, Inc. (The) 4,548,426
-----------
13,065,235
-----------
OIL & GAS PRODUCTION (1.7%)
87,583 Anadarko Petroleum Corp. 4,176,833
65,598 Apache Corp. 4,477,064
134,453 Chesapeake Energy Corp. 4,067,203
73,603 Devon Energy Corp. 4,446,357
63,725 EOG Resources, Inc. 4,418,692
82,277 Kerr-McGee Corp. 5,705,910
43,660 Occidental Petroleum Corp. 4,477,333
100,381 XTO Energy Inc. 4,443,867
-----------
36,213,259
-----------
OIL REFINING/MARKETING (0.6%)
56,650 Marathon Oil Corp. $ 4,718,945
62,770 Sunoco, Inc. 4,349,333
70,388 Valero Energy Corp. 4,682,210
-----------
13,750,488
-----------
OILFIELD SERVICES/ EQUIPMENT (1.2%)
52,830 Baker Hughes Inc. 4,324,136
118,232 BJ Services Co. 4,405,324
56,741 Halliburton Co. 4,210,750
69,302 National OilwellVarco, Inc.* 4,388,203
72,502 Schlumberger Ltd. (Netherlands Antilles) 4,720,605
86,578 Weatherford International Ltd. (Bermuda)* 4,296,000
-----------
26,345,018
-----------
OTHER CONSUMER SERVICES (0.8%)
77,477 Apollo Group, Inc. (Class A)* 4,003,237
180,636 Block (H.&R.), Inc. 4,309,975
249,519 Cendant Corp. 4,064,665
132,670 eBay Inc.* 3,885,904
-----------
16,263,781
-----------
OTHER CONSUMER SPECIALTIES (0.2%)
56,950 Fortune Brands, Inc. 4,044,020
-----------
OTHER METALS/MINERALS (0.2%)
52,725 Phelps Dodge Corp. 4,331,886
-----------
PACKAGED SOFTWARE (2.2%)
137,955 Adobe Systems, Inc.* 4,188,314
109,105 Autodesk, Inc.* 3,759,758
193,995 BMC Software, Inc.* 4,636,481
188,073 CA Inc. 3,864,900
568,211 Compuware Corp.* 3,807,014
77,420 Intuit Inc.* 4,675,394
181,776 Microsoft Corp.** 4,235,381
682,046 Novell, Inc.* 4,521,965
297,622 Oracle Corp.* 4,312,543
SEE NOTES TO FINANCIAL STATEMENTS
19
<Page>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------
323,190 Parametric Technology Corp.* $ 4,107,745
269,341 Symantec Corp.* 4,185,559
-----------
46,295,054
-----------
PERSONNEL SERVICES (0.4%)
97,577 Monster Worldwide Inc.* 4,162,635
104,926 Robert Half International, Inc. 4,406,892
-----------
8,569,527
-----------
PHARMACEUTICALS: GENERIC DRUGS (0.5%)
78,692 Barr Pharmaceuticals Inc.* 3,752,821
192,397 Mylan Laboratories, Inc. 3,847,940
163,436 Watson Pharmaceuticals, Inc.* 3,804,790
-----------
11,405,551
-----------
PHARMACEUTICALS: MAJOR (1.6%)
98,720 Abbott Laboratories 4,305,179
167,723 Bristol-Myers Squibb Co. 4,337,317
68,471 Johnson & Johnson 4,102,782
74,287 Lilly (Eli) & Co. 4,105,842
122,734 Merck & Co., Inc. 4,471,200
171,458 Pfizer, Inc.** 4,024,119
219,390 Schering-Plough Corp. 4,174,992
91,115 Wyeth 4,046,417
-----------
33,567,848
-----------
PHARMACEUTICALS: OTHER (0.6%)
38,392 Allergan, Inc. 4,117,926
106,445 Forest Laboratories, Inc.* 4,118,357
248,746 King Pharmaceuticals, Inc.* 4,228,682
-----------
12,464,965
-----------
PRECIOUS METALS (0.4%)
83,121 Freeport-McMoRan Copper & Gold, Inc. (Class B) 4,605,735
84,364 Newmont Mining Corp. 4,465,387
-----------
9,071,122
-----------
PROPERTY - CASUALTY INSURERS (1.4%)
82,659 ACE Ltd. (Cayman Islands) $ 4,181,719
77,258 Allstate Corp. (The) 4,228,330
84,012 Chubb Corp. (The) 4,192,199
90,453 Cincinnati Financial Corp. 4,252,196
159,368 Progressive Corp. (The) 4,097,351
96,246 St. Paul Travelers Companies, Inc. (The) 4,290,647
64,847 XL Capital Ltd. (Class A) (Cayman Islands) 3,975,121
-----------
29,217,563
-----------
PUBLISHING: BOOKS/MAGAZINES (0.2%)
82,253 Meredith Corp. 4,074,814
-----------
PUBLISHING: NEWSPAPERS (1.0%)
115,604 Dow Jones & Co., Inc. 4,047,296
72,816 Gannett Co., Inc. 4,072,599
34,575 McClatchy Co. (The) (Class A) 1,387,155
169,147 New York Times Co. (The) (Class A) 4,150,867
89,857 Scripps (E.W.) Co. (Class A) 3,876,431
132,308 Tribune Co. 4,290,748
-----------
21,825,096
-----------
PULP & PAPER (0.4%)
128,657 International Paper Co. 4,155,621
153,229 MeadWestvaco Corp. 4,279,686
-----------
8,435,307
-----------
RAILROADS (0.8%)
54,670 Burlington Northern Santa Fe Corp. 4,332,598
65,630 CSX Corp. 4,622,977
83,617 Norfolk Southern Corp. 4,450,097
47,051 Union Pacific Corp. 4,373,861
-----------
17,779,533
-----------
SEE NOTES TO FINANCIAL STATEMENTS
20
<Page>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------
REAL ESTATE INVESTMENT TRUSTS (2.2%)
94,933 Apartment Investment & Management Co. (Class A) $ 4,124,839
84,601 Archstone-Smith Trust 4,303,653
45,619 Boston Properties, Inc. 4,123,958
117,476 Equity Office Properties Trust 4,289,049
94,926 Equity Residential 4,246,040
111,466 Kimco Realty Corp. 4,067,394
113,061 Plum Creek Timber Co., Inc. 4,013,666
80,240 ProLogis 4,182,109
54,703 Public Storage, Inc. 4,151,958
50,987 Simon Property Group, Inc. 4,228,862
44,516 Vornado Realty Trust 4,342,536
-----------
46,074,064
-----------
RECREATIONAL PRODUCTS (0.8%)
117,670 Brunswick Corp. 3,912,528
94,970 Electronic Arts Inc.* 4,087,509
221,825 Hasbro, Inc. 4,017,251
249,879 Mattel, Inc. 4,125,502
-----------
16,142,790
-----------
REGIONAL BANKS (2.3%)
155,450 AmSouth Bancorporation 4,111,653
114,746 Commerce Bancorp, Inc. 4,092,990
76,495 Compass Bancshares, Inc. 4,253,122
108,015 Fifth Third Bancorp 3,991,154
105,906 First Horizon National Corp. 4,257,421
36,351 M&T Bank Corp. 4,286,510
93,456 Marshall & Ilsley Corp. 4,274,677
141,483 North Fork Bancorporation, Inc. 4,268,542
76,926 Northern Trust Corp. 4,254,008
151,801 Synovus Financial Corp. 4,065,231
135,015 U.S. Bancorp 4,169,263
52,594 Zions Bancorporation 4,099,176
-----------
50,123,747
-----------
RESTAURANTS (1.0%)
111,436 Darden Restaurants, Inc. $ 4,390,578
123,502 McDonald's Corp. 4,149,667
115,358 Starbucks Corp.* 4,355,918
69,112 Wendy's International, Inc. 4,028,538
81,357 Yum! Brands, Inc. 4,089,816
-----------
21,014,517
-----------
SAVINGS BANKS (0.6%)
58,462 Golden West Financial Corp. 4,337,880
200,982 Sovereign Bancorp, Inc. 4,081,935
94,820 Washington Mutual, Inc. 4,321,896
-----------
12,741,711
-----------
SEMICONDUCTORS (2.8%)
156,679 Advanced Micro Devices, Inc.* 3,826,101
227,220 Altera Corp.* 3,987,711
121,772 Analog Devices, Inc. 3,913,752
124,953 Broadcom Corp. (Class A)* 3,754,838
148,497 Freescale Semiconductor Inc. (Class B)* 4,365,812
219,522 Intel Corp.** 4,159,942
120,320 Linear Technology Corp. 4,029,517
454,440 LSI Logic Corp.* 4,067,238
124,914 Maxim Integrated Products, Inc. 4,010,989
258,304 Micron Technology, Inc.* 3,890,058
164,979 National Semiconductor Corp. 3,934,749
185,469 NVIDIA Corp.* 3,948,635
430,573 PMC - Sierra, Inc.* 4,047,386
140,287 Texas Instruments Inc. 4,249,293
167,385 Xilinx, Inc. 3,791,270
-----------
59,977,291
-----------
SERVICES TO THE HEALTH INDUSTRY (1.0%)
59,008 Express Scripts, Inc.* 4,233,234
161,563 IMS Health Inc. 4,337,967
68,906 Laboratory Corp. of America Holdings* 4,288,020
SEE NOTES TO FINANCIAL STATEMENTS
21
<Page>
NUMBER OF
SHARES VALUE
- -------------------------------------------------------------------------------
77,733 Medco Health Solutions Inc.* $ 4,452,546
73,692 Quest Diagnostics Inc. 4,415,625
--------------
21,727,392
--------------
SPECIALTY INSURANCE (0.6%)
53,568 Ambac Financial Group, Inc. 4,344,365
70,458 MBIA Inc. 4,125,316
64,360 MGIC Investment Corp. 4,183,400
--------------
12,653,081
--------------
SPECIALTY STORES (1.3%)
192,950 AutoNation, Inc.* 4,136,848
44,397 AutoZone, Inc.* 3,915,815
115,057 Bed Bath & Beyond Inc.* 3,816,441
104,926 Office Depot, Inc.* 3,987,188
101,618 OfficeMax Inc. 4,140,934
170,706 Staples, Inc. 4,151,570
120,820 Tiffany & Co. 3,989,476
--------------
28,138,272
--------------
SPECIALTY TELECOMMUNICATIONS (0.6%)
114,981 CenturyTel, Inc. 4,271,544
320,857 Citizens Communications Co. 4,187,184
550,621 Qwest Communications International, Inc.* 4,454,524
--------------
12,913,252
--------------
STEEL (0.6%)
65,154 Allegheny Technologies Inc. 4,511,263
83,546 Nucor Corp. 4,532,371
67,100 United States Steel Corp. 4,705,052
--------------
13,748,686
--------------
TELECOMMUNICATION EQUIPMENT (1.7%)
243,617 ADC Telecommunications, Inc.* 4,107,383
434,297 Andrew Corp.* 3,847,871
975,061 CIENA Corp.* 4,690,043
199,764 Comverse Technology, Inc.* $ 3,949,334
181,530 Corning, Inc.* 4,391,211
1,646,414 Lucent Technologies Inc.* 3,984,322
200,062 Motorola, Inc. 4,031,249
91,405 QUALCOMM, Inc. 3,662,598
294,921 Tellabs, Inc.* 3,925,399
--------------
36,589,410
--------------
TOBACCO (0.6%)
57,583 Altria Group, Inc. 4,228,320
38,065 Reynolds American, Inc. 4,388,895
95,853 UST, Inc. 4,331,597
--------------
12,948,812
--------------
TOOLS/HARDWARE (0.6%)
49,287 Black & Decker Corp. 4,162,780
108,122 Snap-On, Inc. 4,370,291
88,817 Stanley Works (The) 4,193,939
--------------
12,727,010
--------------
TRUCKS/CONSTRUCTION/FARM MACHINERY (1.0%)
59,167 Caterpillar Inc. 4,406,758
39,718 Cummins Inc. 4,855,526
52,262 Deere & Co. 4,363,354
165,660 Navistar International Corp.* 4,076,893
54,983 PACCAR, Inc. 4,529,500
--------------
22,232,031
--------------
WHOLESALE DISTRIBUTORS (0.4%)
98,655 Genuine Parts Co. 4,109,967
59,307 Grainger (W.W.), Inc. 4,461,666
--------------
8,571,633
--------------
Total Common Stocks
(COST $1,270,057,596) 2,099,680,438
--------------
SEE NOTES TO FINANCIAL STATEMENTS
22
<Page>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
- -------------------------------------------------------------------------------
Short-Term Investments (1.7%)
Repurchase Agreements
$35,002 Joint repurchase agreement account 5.215% due
07/03/06 (dated 06/30/06; proceeds
$35,017,211)(b)
(COST $35,002,000) $ 35,002,000
841 The Bank of New York 5.188% due 07/03/06 (dated
06/30/06; proceeds $841,296)(c)
(COST $840,932) 840,932
--------------
Total Short-Term Investments
(Cost $35,842,932) 35,842,932
--------------
Total Investments
(COST $1,305,900,528) (d)(e) 100.0% 2,135,523,370
Liabilities in Excess of Other Assets (0.0) (171,272)
----- --------------
Net Assets 100.0% $2,135,352,098
===== ==============
- ----------
* NON-INCOME PRODUCING SECURITY.
** A PORTION OF THIS SECURITY HAS BEEN PHYSICALLY SEGREGATED IN CONNECTION
WITH OPEN FUTURES CONTRACTS IN THE AMOUNT OF $1,455,750.
+ CONSIST OF ONE OR MORE CLASS OF SECURITIES TRADED AS A UNIT; STOCKS WITH
ATTACHED TRUST SHARES.
(a) A SECURITY WITH TOTAL MARKET VALUE EQUAL TO $0 HAS BEEN VALUED AT ITS FAIR
VALUE AS DETERMINED IN GOOD FAITH UNDER PROCEDURES ESTABLISHED BY AND UNDER
THE GENERAL SUPERVISION OF THE FUND'S TRUSTEES.
(b) COLLATERALIZED BY FEDERAL AGENCY AND U.S. TREASURY OBLIGATIONS.
(c) COLLATERALIZED BY FEDERAL NATIONAL MORTGAGE ASSOCIATION 5.50% DUE 06/01/36
VALUED $857,695.
(d) SECURITIES HAVE BEEN DESIGNATED AS COLLATERAL IN AN AMOUNT EQUAL TO
$32,442,426 IN CONNECTION WITH OPEN FUTURES CONTRACTS.
(e) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES IS $1,308,684,713. THE
AGGREGATE GROSS UNREALIZED APPRECIATION IS $861,621,578 AND THE AGGREGATE
GROSS UNREALIZED DEPRECIATION IS $34,782,921, RESULTING IN NET UNREALIZED
APPRECIATION OF $826,838,657.
SEE NOTES TO FINANCIAL STATEMENTS
23
<Page>
FUTURES CONTRACTS OPEN AT JUNE 30, 2006:
NUMBER OF DESCRIPTION, DELIVERY UNDERLYING FACE UNREALIZED
CONTRACTS LONG/SHORT MONTH AND YEAR AMOUNT AT VALUE APPRECIATION
- -------------------------------------------------------------------------------
49 Long S&P 500 Index $15,672,650 $217,805
September/ 2006
30 Long S&P Midcap 400 Index 11,574,000 309,600
September/ 2006
80 Long S&P Midcap 400 6,172,800 261,024
Mini Index,
September/ 2006
20 Long S&P 500 Mini Index 1,279,400 11,600
September/ 2006
Total Unrealized --------
Appreciation $800,029
========
SEE NOTES TO FINANCIAL STATEMENTS
24
<Page>
SUMMARY OF INVESTMENTS
PERCENT OF
SECTOR VALUE NET ASSETS
- --------------------------------------------------------------------------------
Finance $ 366,331,893 17.2%
Electronic Technology 244,730,662 11.5
Consumer Non-Durables 147,874,496 6.9
Retail Trade 146,291,606 6.8
Health Technology 145,537,692 6.8
Utilities 129,658,156 6.0
Consumer Services 123,026,033 5.8
Producer Manufacturing 116,336,981 5.4
Technology Services 105,331,217 4.9
Consumer Durables 95,127,296 4.5
Process Industries 85,990,231 4.0
Energy Minerals 72,918,045 3.4
Industrial Services 69,733,682 3.3
Health Services 67,481,851 3.2
Non-Energy Minerals 44,234,395 2.1
Commercial Services 41,130,042 1.9
Communications 38,065,356 1.8
Repurchase Agreements 35,842,932 1.7
Transportation 30,885,082 1.4
Distribution Services 28,995,722 1.4
-------------- -----
$2,135,523,370* 100.0%
============== =====
- ----------
* DOES NOT INCLUDE OPEN LONG FUTURES CONTRACTS WITH AN UNDERLYING FACE AMOUNT
OF $34,698,850 WITH A TOTAL UNREALIZED APPRECIATION OF $800,029.
SEE NOTES TO FINANCIAL STATEMENTS
25
<Page>
Statement of Assets and Liabilities
JUNE 30, 2006
Assets:
Investments in securities, at value (cost $1,303,708,848) $2,130,839,193
Investment in affiliates (cost $2,191,680) 4,684,177
Receivable for:
Dividends 2,278,477
Shares of beneficial interest sold 1,959,450
Variation margin 58,800
Interest 5,191
Prepaid expenses and other assets 75,290
--------------
Total Assets 2,139,900,578
--------------
Liabilities:
Payable for:
Shares of beneficial interest redeemed 2,255,801
Investments purchased 840,309
Distribution fee 810,133
Investment advisory fee 206,960
Administration fee 139,266
Transfer agent fee 42,914
Accrued expenses and other payables 253,097
--------------
Total Liabilities 4,548,480
--------------
Net Assets $2,135,352,098
==============
Composition of Net Assets:
Paid-in-capital $1,210,819,332
Net unrealized appreciation 830,422,871
Accumulated undistributed net investment income 7,902,727
Accumulated undistributed net realized gain 86,207,168
--------------
Net Assets $2,135,352,098
==============
Class A Shares:
Net Assets $ 850,677,576
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 21,243,156
Net Asset Value Per Share $ 40.04
==============
Maximum Offering Price Per Share,
(NET ASSET VALUE PLUS 5.54% OF NET ASSET VALUE) $ 42.26
==============
Class B Shares:
Net Assets $ 674,370,679
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 17,041,291
Net Asset Value Per Share $ 39.57
==============
Class C Shares:
Net Assets $ 101,809,385
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 2,612,316
Net Asset Value Per Share $ 38.97
==============
Class D Shares:
Net Assets $ 508,494,458
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 12,624,471
Net Asset Value Per Share $ 40.28
==============
SEE NOTES TO FINANCIAL STATEMENTS
26
<Page>
Statement of Operations
FOR THE YEAR ENDED JUNE 30, 2006
Net Investment Income:
Income
Dividends $ 33,270,181
Dividends from affiliates 82,936
Interest 1,331,530
--------------
Total Income 34,684,647
--------------
Expenses
Distribution fee (Class A shares) 1,985,027
Distribution fee (Class B shares) 7,469,447
Distribution fee (Class C shares) 950,355
Transfer agent fees and expenses 2,954,984
Investment advisory fee 2,547,800
Administration fee 1,718,241
Shareholder reports and notices 259,236
Registration fees 109,825
Custodian fees 106,836
Professional fees 103,926
Trustees' fees and expenses 32,787
Other 361,212
--------------
Total Expenses 18,599,676
Less: expense offset (9,267)
--------------
Net Expenses 18,590,409
--------------
Net Investment Income 16,094,238
--------------
Net Realized and Unrealized Gain:
Net Realized Gain on:
Investments 116,290,875
Futures contracts 1,349,666
--------------
Net Realized Gain 117,640,541
--------------
Net Change in Unrealized Appreciation/Depreciation on:
Investments 86,323,069
Futures contracts 786,562
--------------
Net Appreciation 87,109,631
--------------
Net Gain 204,750,172
--------------
Net Increase $ 220,844,410
==============
SEE NOTES TO FINANCIAL STATEMENTS
27
<Page>
Statements of Changes in Net Assets
<Table>
<Caption>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
JUNE 30, 2006 JUNE 30, 2005
-------------- --------------
Increase (Decrease) in Net Assets:
Operations:
Net investment income $ 16,094,238 $ 8,287,254
Net realized gain 117,640,541 59,583,254
Net change in unrealized appreciation 87,109,631 107,481,580
-------------- --------------
Net Increase 220,844,410 175,352,088
-------------- --------------
Dividends and Distributions to Shareholders from:
Net investment income
Class A shares (7,136,306) (386,015)
Class C shares (176,707) --
Class D shares (5,186,984) (2,845,605)
Net realized gain
Class A shares (26,783,725) (1,323,954)
Class B shares (25,859,136) (23,233,359)
Class C shares (3,454,916) (1,392,512)
Class D shares (16,342,081) (6,457,707)
-------------- --------------
Total Dividends and Distributions (84,939,855) (35,639,152)
-------------- --------------
Net increase (decrease) from transactions in shares of beneficial interest (48,850,926) 200,493,084
-------------- --------------
Net Increase 87,053,629 340,206,020
Net Assets:
Beginning of period 2,048,298,469 1,708,092,449
-------------- --------------
End of Period
(INCLUDING ACCUMULATED UNDISTRIBUTED NET INVESTMENT INCOME OF $7,902,727
AND $5,022,320, RESPECTIVELY) $2,135,352,098 $2,048,298,469
============== ==============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
28
<Page>
MORGAN STANLEY EQUALLY-WEIGHTED S&P 500 FUND
NOTES TO FINANCIAL STATEMENTS - JUNE 30, 2006
1. ORGANIZATION AND ACCOUNTING POLICIES
Morgan Stanley Equally-Weighted S&P 500 Fund (the "Fund") is registered under
the Investment Company Act of 1940, as amended (the "Act"), as a diversified,
open-end management investment company. The Fund's investment objective is to
achieve a high level of total return on its assets through a combination of
capital appreciation and current income. The Fund was organized as a
Massachusetts business trust on May 27, 1987 and commenced operations on
December 1, 1987. 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, subject to certain exceptions. The
redemption fee is designed to protect the Fund and its remaining shareholders
from the effects of short-term trading.
The following is a summary of significant accounting policies:
A. Valuation of Investments -- (1) an equity portfolio security listed or traded
on the New York Stock Exchange ("NYSE") or American Stock Exchange or other
exchange is valued at its latest sale price prior to the time when assets are
valued; if there were no sales that day, the security is valued at the mean
between the last reported bid and asked price; (2) an equity portfolio security
listed or traded on the Nasdaq is valued at the Nasdaq Official Closing Price;
if there were no sales that day, the security is valued at the mean between the
last reported bid and asked price; (3) all other portfolio securities for which
over-the-counter market quotations are readily available are valued at the mean
between the last reported bid and asked price. In cases where a security is
traded on more than one exchange, the security is valued on the exchange
designated as the primary market; (4) 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
29
<Page>
affecting the closing prices of securities and other assets may occur between
the times at which valuations of such securities are determined (that is, close
of the foreign market on which the securities trade) and the close of business
on the NYSE. If developments occur during such periods that are expected to
materially affect the value of such securities, such valuations may be adjusted
to reflect the estimated fair value of such securities as of the close of the
NYSE, as determined in good faith by the Fund's Trustees or by the Investment
Adviser using a pricing service and/or procedures approved by the Trustees of
the Fund; and (7) short-term debt securities having a maturity date of more than
sixty days at time of purchase are valued on a mark-to-market basis until sixty
days prior to maturity and thereafter at amortized cost based on their value on
the 61st day. Short-term debt securities having a maturity date of sixty days or
less at the time of purchase are valued at amortized cost.
B. Accounting for Investments -- Security transactions are accounted for on the
trade date (date the order to buy or sell is executed). Realized gains and
losses on security transactions are determined by the identified cost method.
Dividend income and other distributions are recorded on the ex-dividend date.
Discounts are accreted and premiums are amortized over the life of the
respective securities. Interest income is accrued daily.
C. Repurchase Agreements -- Pursuant to an Exemptive Order issued by the
Securities and Exchange Commission, the Fund, along with other affiliated
entities managed by the Investment Adviser, may transfer uninvested cash
balances into one or more joint repurchase agreement accounts. These balances
are invested in one or more repurchase agreements and are collateralized by
cash, U.S. Treasury or federal agency obligations. The Fund may also invest
directly with institutions in repurchase agreements. The Fund's custodian
receives the collateral, which is marked-to-market daily to determine that the
value of the collateral does not decrease below the repurchase price plus
accrued interest.
D. Multiple Class Allocations -- Investment income, expenses (other than
distribution fees), and realized and unrealized gains and losses are allocated
to each class of shares based upon the relative net asset value on the date such
items are recognized. Distribution fees are charged directly to the respective
class.
E. 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. 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.
G. Dividends and Distributions to Shareholders -- Dividends and distributions to
shareholders are recorded on the ex-dividend date.
H. Use of Estimates -- The preparation of financial statements in accordance
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures.
Actual results could differ from those estimates.
2. INVESTMENT ADVISORY/ADMINISTRATION AGREEMENTS
Pursuant to an Investment Advisory Agreement, 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: 0.12% to the portion of the daily net assets not exceeding
$2 billion and 0.10% to the portion of the daily net assets in excess of $2
billion.
Pursuant to an Administration Agreement with Morgan Stanley Services Company
Inc. (the "Administrator"), an affiliate of the Investment Adviser, the Fund
pays an administration fee, accrued daily and payable monthly, by applying the
annual rate of 0.08% to the Fund's daily net assets.
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 Fund (not including reinvestment of
dividend or capital gain distributions) less the average daily aggregate net
asset value of the Class B shares redeemed since the Fund's inception upon which
a contingent deferred sales charge has been imposed or waived; or (b) the
average daily net assets of Class B; and (iii) Class C -- up to 1.0% of the
average daily net assets of Class C.
In the case of Class B shares, provided that the Plan continues in effect, any
cumulative expenses incurred by the Distributor but not yet recovered may be
recovered through the payment of future distribution fees from the Fund pursuant
to the Plan and contingent deferred sales charges paid by investors upon
redemption of Class B shares. Although there is no legal obligation for the Fund
to pay expenses incurred in excess of payments made to the Distributor under the
Plan and the proceeds of
31
<Page>
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 $43,078,334 at June 30, 2006.
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 June 30, 2006, the distribution fee was accrued for Class A
shares and Class C shares at the annual rate of 0.25% and 0.95%, respectively.
The Distributor has informed the Fund that for the year ended June 30, 2006, it
received contingent deferred sales charges from certain redemptions of the
Fund's Class B shares and Class C shares of $1,237,354 and $23,749, respectively
and received $645,343 in front-end sales charges from sales of the Fund's Class
A shares. The respective shareholders pay such charges which are not an expense
of the Fund.
4. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES
The cost of purchases and proceeds from sales of portfolio securities, excluding
short-term investments, for the year ended June 30, 2006 aggregated $331,305,426
and $416,094,120, respectively. Included in the aforementioned are purchases and
sales of Morgan Stanley common stock, an affiliate of the Investment Adviser,
Administrator and Distributor, of $82,672 and $275,584, respectively, including
a net realized gain of $4,770.
Morgan Stanley Trust, an affiliate of the Investment Adviser, Administrator and
Distributor, is the Fund's transfer agent.
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. 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. Aggregate
pension costs for the year ended June 30, 2006 included in Trustees' fees and
expenses in the Statement of Operations amounted to $9,256. At June 30, 2006,
the Fund had an accrued pension liability of $74,869 which is included in
accrued expenses in the Statement of Assets and Liabilities.
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
32
<Page>
Board of Trustees. Each eligible Trustee generally may elect to have the
deferred amounts credited with a return equal to the total return on one or more
of the Morgan Stanley funds that are offered as investment options under the
Compensation Plan. Appreciation/depreciation and distributions received from
these investments are recorded with an offsetting increase/decrease in the
deferred compensation obligation and do not affect the net asset value of the
Fund.
5. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest were as follows:
<Table>
<Caption>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
JUNE 30, 2006 JUNE 30, 2005
-------------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------- ----------- -------------
CLASS A SHARES
Sold 2,688,770 $ 106,515,636 1,866,922 $ 67,382,970
Conversion from Class B 2,343,137 92,947,322 16,800,206 596,406,429
Reinvestment of dividends and distributions 760,364 29,768,273 42,798 1,589,944
Redeemed (3,957,110) (156,807,113) (1,162,506) (42,314,935)
---------- ------------- --------- -------------
Net increase -- Class A 1,835,161 72,424,118 17,547,420 623,064,408
---------- ------------- --------- -------------
CLASS B SHARES
Sold 2,370,177 92,507,291 7,542,953 265,962,195
Conversion to Class A (2,370,974) (92,947,322) (16,997,255) (596,406,429)
Reinvestment of dividends and distributions 595,651 23,141,059 557,306 20,520,007
Redeemed (4,238,573) (165,874,473) (7,485,063) (263,706,209)
---------- ------------- --------- -------------
Net decrease -- Class B (3,643,719) (143,173,445) (16,382,059) (573,630,436)
---------- ------------- --------- -------------
CLASS C SHARES
Sold 541,752 20,932,763 925,194 32,344,651
Reinvestment of dividends and distributions 89,650 3,428,205 36,003 1,307,622
Redeemed (546,981) (21,093,935) (432,168) (15,117,148)
---------- ------------- --------- -------------
Net increase -- Class C 84,421 3,267,033 529,029 18,535,125
---------- ------------- --------- -------------
CLASS D SHARES
Sold 3,247,511 129,522,604 5,762,966 205,960,808
Reinvestment of dividends and distributions 472,263 18,574,090 212,137 7,908,463
Redeemed (3,245,631) (129,465,326) (2,255,633) (81,345,284)
---------- ------------- --------- -------------
Net increase -- Class D 474,143 18,631,368 3,719,470 132,523,987
---------- ------------- --------- -------------
Net increase (decrease) in Fund (1,249,994) $ (48,850,926) 5,413,860 $ 200,493,084
========== ============= ========= =============
</Table>
6. EXPENSE OFFSET
The expense offset represents a reduction of the transfer agent fees and
expenses for earnings on cash balances maintained by the Fund.
33
<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:
FOR THE YEAR FOR THE YEAR
ENDED ENDED
JUNE 30, 2006 JUNE 30, 2005
------------- -------------
Ordinary income $28,038,777 $17,307,953
Long-term capital gains 56,901,078 18,331,199
----------- -----------
Total distributions $84,939,855 $35,639,152
=========== ===========
As of June 30, 2006, the tax-basis components of accumulated earnings were as
follows:
Undistributed ordinary income $ 19,748,731
Undistributed long-term gains 78,023,542
------------
Net accumulated earnings 97,772,273
Temporary differences (78,164)
Net unrealized appreciation 826,838,657
------------
Total accumulated earnings $924,532,766
============
As of June 30, 2006, the Fund had temporary book/tax differences primarily
attributable to capital loss deferrals on wash sales, mark-to-market of open
futures contracts and tax adjustments on real estate investment trusts ("REITs")
held by the Fund and permanent book/tax differences attributable to tax
adjustments on REITs sold by the Fund. To reflect reclassifications arising from
the permanent differences, accumulated undistributed net investment income was
charged and accumulated undistributed net realized gain was credited $713,834.
8. PURPOSES OF AND RISKS RELATING TO CERTAIN FINANCIAL INSTRUMENTS
The Fund may purchase and sell stock index futures ("futures contracts") for the
following reasons: to simulate full investment in the S&P 500 Index while
retaining a cash balance for fund management purposes; to facilitate trading; to
reduce transaction costs; or to seek higher investment returns when a futures
contract is priced more attractively than stocks comprising the S&P 500 Index.
34
<Page>
These futures contracts involve elements of market risk in excess of the amount
reflected in the Statement of Assets and Liabilities. The Fund bears the risk of
an unfavorable change in the value of the underlying securities. Risks may also
arise upon entering into these contracts from the potential inability of the
counterparties to meet the terms of their contracts.
9. LEGAL MATTERS
The Investment Adviser, certain affiliates of the Investment Adviser, certain
officers of such affiliates and certain investment companies advised by the
Investment Adviser or its affiliates, including the Fund, are named as
defendants in a consolidated class action. This consolidated action also names
as defendants certain individual Trustees and Directors of the Morgan Stanley
funds. The consolidated amended complaint, filed in the United States District
Court Southern District of New York on April 16, 2004, generally alleges that
defendants, including the Fund, violated their statutory disclosure obligations
and fiduciary duties by failing properly to disclose (i) that the Investment
Adviser and certain affiliates of the Investment Adviser allegedly offered
economic incentives to brokers and others to recommend the funds advised by the
Investment Adviser or its affiliates to investors rather than funds managed by
other companies, and (ii) that the funds advised by the Investment Adviser or
its affiliates, including the Fund, allegedly paid excessive commissions to
brokers in return for their efforts to recommend these funds to investors. The
complaint seeks, among other things, unspecified compensatory damages,
rescissionary damages, fees and costs. The defendants have moved to dismiss the
action. On March 9, 2005, Plaintiffs sought leave to supplement their complaint
to assert claims on behalf of other investors, which motion defendants opposed.
On April 14, 2006, the Court granted defendants' motion to dismiss in its
entirety. Additionally, the Court denied Plaintiff's motion to supplement their
complaint. This matter is now concluded.
10. NEW ACCOUNTING PRONOUNCEMENT
In July 2006, the Financial Accounting Standards Board (FASB) issued
Interpretation 48, Accounting for Uncertainty in Income Taxes -- an
interpretation of FASB Statement 109 (FIN 48). FIN 48 clarifies the accounting
for income taxes by prescribing the minimum recognition threshold a tax position
must meet before being recognized in the financial statements. FIN 48 is
effective for fiscal years beginning after December 15, 2006. The Fund will
adopt FIN 48 during 2007 and the impact to the Fund's financial statements, if
any, is currently being assessed.
35
<Page>
MORGAN STANLEY EQUALLY-WEIGHTED S&P 500 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 JUNE 30
--------------------------------------------------
2006 2005 2004 2003 2002
-------- -------- ------- ------- -------
Class A Shares
Selected Per Share Data:
Net asset value, beginning of period $ 37.58 $ 34.88 $ 29.36 $ 29.59 $ 32.08
-------- -------- ------- ------- -------
Income (loss) from investment operations:
Net investment income++ 0.39 0.33 0.22 0.23 0.23
Net realized and unrealized gain (loss) 3.79 3.17 7.54 (0.34) (2.32)
-------- -------- ------- ------- -------
Total income (loss) from investment operations 4.18 3.50 7.76 (0.11) (2.09)
-------- -------- ------- ------- -------
Less dividends and distributions from:
Net investment income (0.36) (0.18) (0.12) (0.11) (0.36)
Net realized gain (1.36) (0.62) (2.12) (0.01) (0.04)
-------- -------- ------- ------- -------
Total dividends and distributions (1.72) (0.80) (2.24) (0.12) (0.40)
-------- -------- ------- ------- -------
Net asset value, end of period $ 40.04 $ 37.58 $ 34.88 $ 29.36 $ 29.59
======== ======== ======= ======= =======
Total Return+ 11.22% 10.07% 27.26% (0.32)% (6.53)%
Ratios to Average Net Assets(1):
Total expenses (before expense offset) 0.63% 0.70% 0.86% 0.89% 0.85%
Net investment income 0.98% 0.91% 0.66% 0.88% 0.73%
Supplemental Data:
Net assets, end of period, in thousands $850,678 $729,440 $64,890 $27,491 $19,625
Portfolio turnover rate 16% 14% 11% 25% 9%
</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
36
<Page>
<Table>
<Caption>
FOR THE YEAR ENDED JUNE 30
---------------------------------------------------------
2006 2005 2004 2003 2002
-------- -------- ---------- -------- ----------
Class B Shares
Selected Per Share Data:
Net asset value, beginning of period $ 37.10 $ 34.52 $ 29.20 $ 29.54 $ 31.91
-------- -------- ---------- -------- ----------
Income (loss) from investment operations:
Net investment income (loss)++ 0.09 0.06 (0.04) 0.03 (0.01)
Net realized and unrealized gain (loss) 3.74 3.14 7.49 (0.35) (2.30)
-------- -------- ---------- -------- ----------
Total income (loss) from investment operations 3.83 3.20 7.45 (0.32) (2.31)
-------- -------- ---------- -------- ----------
Less dividends and distributions from:
Net investment income 0.00 0.00 (0.01) (0.01) (0.02)
Net realized gain (1.36) (0.62) (2.12) (0.01) (0.04)
-------- -------- ---------- -------- ----------
Total dividends and distributions (1.36) (0.62) (2.13) (0.02) (0.06)
-------- -------- ---------- -------- ----------
Net asset value, end of period $ 39.57 $ 37.10 $ 34.52 $ 29.20 $ 29.54
======== ======== ========== ======== ==========
Total Return+ 10.38% 9.29% 26.29% (1.08)% (7.23)%
Ratios to Average Net Assets(1):
Total expenses (before expense offset) 1.38% 1.45% 1.63% 1.65% 1.60%
Net investment income (loss) 0.23% 0.16% (0.11)% 0.12% (0.02)%
Supplemental Data:
Net assets, end of period, in thousands $674,371 $767,445 $1,279,687 $928,148 $1,037,039
Portfolio turnover rate 16% 14% 11% 25% 9%
</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 JUNE 30
---------------------------------------------------
2006 2005 2004 2003 2002
-------- ------- -------- ------- -------
Class C Shares
Selected Per Share Data:
Net asset value, beginning of period $ 36.60 $ 34.07 $ 28.87 $ 29.22 $ 31.76
-------- ------- -------- ------- -------
Income (loss) from investment operations:
Net investment income (loss)++ 0.11 0.06 (0.03) 0.03 (0.01)
Net realized and unrealized gain (loss) 3.69 3.09 7.40 (0.35) (2.28)
-------- ------- -------- ------- -------
Total income (loss) from investment operations 3.80 3.15 7.37 (0.32) (2.29)
-------- ------- -------- ------- -------
Less dividends and distributions from:
Net investment income (0.07) 0.00 (0.05) (0.02) (0.21)
Net realized gain (1.36) (0.62) (2.12) (0.01) (0.04)
-------- ------- -------- ------- -------
Total dividends and distributions (1.43) (0.62) (2.17) (0.03) (0.25)
-------- ------- -------- ------- -------
Net asset value, end of period $ 38.97 $ 36.60 $ 34.07 $ 28.87 $ 29.22
======== ======= ======== ======= =======
Total Return+ 10.44% 9.26% 26.31% (1.09)% (7.23)%
Ratios to Average Net Assets(1):
Total expenses (before expense offset) 1.33% 1.45% 1.63% 1.65% 1.60%
Net investment income (loss) 0.28% 0.16% (0.11)% 0.12% (0.02)%
Supplemental Data:
Net assets, end of period, in thousands $101,809 $92,529 $ 68,101 $30,809 $23,962
Portfolio turnover rate 16% 14% 11% 25% 9%
</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 JUNE 30
----------------------------------------------------
2006 2005 2004 2003 2002
-------- -------- -------- -------- -------
Class D Shares
Selected Per Share Data:
Net asset value, beginning of period $ 37.77 $ 35.04 $ 29.44 $ 29.63 $ 32.19
-------- -------- -------- -------- -------
Income (loss) from investment operations:
Net investment income++ 0.49 0.42 0.30 0.30 0.30
Net realized and unrealized gain (loss) 3.81 3.20 7.56 (0.34) (2.33)
-------- -------- -------- -------- -------
Total income (loss) from investment operations 4.30 3.62 7.86 (0.04) (2.03)
-------- -------- -------- -------- -------
Less dividends and distributions from:
Net investment income (0.43) (0.27) (0.14) (0.14) (0.49)
Net realized gain (1.36) (0.62) (2.12) (0.01) (0.04)
-------- -------- -------- -------- -------
Total dividends and distributions (1.79) (0.89) (2.26) (0.15) (0.53)
-------- -------- -------- -------- -------
Net asset value, end of period $ 40.28 $ 37.77 $ 35.04 $ 29.44 $ 29.63
======== ======== ======== ======== =======
Total Return+ 11.49% 10.38% 27.55% (0.09)% (6.28)%
Ratios to Average Net Assets(1):
Total expenses (before expense offset) 0.38% 0.45% 0.63% 0.65% 0.60%
Net investment income 1.23% 1.16% 0.89% 1.12% 0.98%
Supplemental Data:
Net assets, end of period, in thousands $508,494 $458,885 $295,414 $152,558 $98,886
Portfolio turnover rate 16% 14% 11% 25% 9%
</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
39
<Page>
MORGAN STANLEY EQUALLY-WEIGHTED S&P 500 FUND
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Trustees of
Morgan Stanley Equally-Weighted S&P 500 Fund:
We have audited the accompanying statement of assets and liabilities of Morgan
Stanley Equally-Weighted S&P 500 Fund (the "Fund"), including the portfolio of
investments, as of June 30, 2006, 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 June 30, 2006, 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 Equally-Weighted S&P 500 Fund as of June 30, 2006, 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
AUGUST 22, 2006
40
<Page>
MORGAN STANLEY EQUALLY-WEIGHTED S&P 500 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 by Other Directorships Held
Independent Trustee Registrant Time Served* Past 5 Years** Trustee*** by Trustee
- ---------------------------- ----------- ------------ ------------------------------- ----------- ------------------------
Michael Bozic (65) Trustee Since Private Investor; Chairman of 197 Director of various
c/o Kramer Levin Naftalis & April 1994 the Insurance Committee (since business organizations.
Frankel LLP July 2006) and Director or
Counsel to the Independent Trustee of the Retail Funds
Trustees (since April 1994) and the
1177 Avenue of the Americas Institutional Funds (since July
New York, NY 10036 2003); formerly Vice Chairman
of Kmart Corporation (December
1998-October 2000), Chairman
and Chief Executive Officer of
Levitz Furniture Corporation
(November 1995-November 1998)
and President and Chief
Executive Officer of Hills
Department Stores (May 1991-
July 1995); 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 (73) Trustee Since Consultant; Director or Trustee 197 Director of Franklin
1031 N. Chartwell Court January 1993 of the Retail Funds (since Covey (time management
Salt Lake City, UT 84103 January 1993) and the systems), BMW Bank of
Institutional Funds (since July North America, Inc.
2003); member of the Utah (industrial loan
Regional Advisory Board of corporation), Escrow
Pacific Corp. (utility Bank USA (industrial
company); formerly Managing loan corporation),
Director of Summit Ventures LLC United Space Alliance
(2000-2004) (lobbying and (joint venture between
consulting firm); United States Lockheed Martin and the
Senator (R-Utah) (1974-1992) Boeing Company) and
and Chairman, Senate Banking Nuskin Asia Pacific
Committee (1980-1986), Mayor of (multilevel marketing);
Salt Lake City, Utah member of the board of
(1971-1974), Astronaut, Space various civic and
Shuttle Discovery (April 12-19, charitable
1985), and Vice Chairman, organizations.
Huntsman Corporation (chemical
company).
Wayne E. Hedien (72) Trustee Since Retired; Director or Trustee of 197 Director of The PMI
c/o Kramer Levin Naftalis & September the Retail Funds (since Group Inc. (private
Frankel LLP Counsel to the 1997 September 1997) and the mortgage insurance);
Independent Trustees 1177 Institutional Funds (since July Trustee and Vice
Avenue of the Americas 2003); formerly associated with Chairman of The Field
New York, NY 10036 the Allstate Companies Museum of Natural
(1966-1994), most recently as History; director of
Chairman of The Allstate various other business
Corporation (March 1993- and charitable
December 1994) and Chairman and organizations.
Chief Executive Officer of its
wholly-owned subsidiary,
Allstate Insurance Company
(July 1989-December 1994).
</Table>
41
<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 by Other Directorships Held
Independent Trustee Registrant Time Served* Past 5 Years** Trustee*** by Trustee
- ----------------------------- ----------- ------------ ------------------------------- ---------- ------------------------
Dr. Manuel H. Johnson (57) Trustee Since Senior Partner, Johnson Smick 197 Director of NVR, Inc.
c/o Johnson Smick Group, Inc. July 1991 International, Inc., a (home construction);
888 16th Street, NW consulting firm; Chairman of Director of KFX Energy;
Suite 740 the Audit Committee and Director of RBS
Washington, D.C. 20006 Director or Trustee of the Greenwich Capital
Retail Funds (since July 1991) Holdings (financial
and the Institutional Funds holding company).
(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 (63) Trustee Since President, Kearns & Associates 198 Director of Electro Rent
c/o Kearns & Associates LLC July 2003 LLC (investment consulting); Corporation (equipment
PMB754 Deputy Chairman of the Audit leasing), The Ford
23852 Pacific Coast Highway Committee and Director or Family Foundation, and
Malibu, CA 90265 Trustee of the Retail Funds the UCLA Foundation.
(since July 2003) and the
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 (70) Chairman of Chairman of General Partner of Triumph 197 None.
c/o Triumph Capital, L.P. the Board the Board Capital, L.P., a private
445 Park Avenue and Trustee (since July investment partnership;
New York, NY 10022 2006) and Chairman of the Board of the
Trustee Retail Funds and Institutional
(since July Funds (since July 2006) and
1991) Director or Trustee of the
Retail Funds (since July 1991)
and the Institutional Funds
(since July 2001); formerly
Chairman of the Insurance
Committee (July 1991-July 2006)
and Vice President, Bankers
Trust Company and BT Capital
Corporation (1984-1988).
Fergus Reid (73) Trustee Since Chairman of Lumelite Plastics 198 Trustee and Director of
c/o Lumelite Plastics July 2003 Corporation; Chairman of the certain investment
Corporation Governance Committee and companies in the
85 Charles Colman Blvd. Director or Trustee of the JPMorgan Funds complex
Pawling, NY 12564 Retail Funds (since July 2003) managed by J.P. Morgan
and the Institutional Funds Investment Management
(since June 1992). Inc.
</Table>
42
<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 by Other Directorships Held
Interested Trustee Registrant Time Served* Past 5 Years** Trustee*** by Trustee
- ----------------------------- ----------- ------------ ------------------------------- ---------- ------------------------
Charles A. Fiumefreddo (73) Trustee Since Director or Trustee of the 197 None.
c/o Morgan Stanley Trust July 1991 Retail Funds (since July 1991)
Harborside Financial Center and the Institutional Funds
Plaza Two (since July 2003); formerly
Jersey City, NJ 07311 Chairman of the Retail Funds
(July 1991-July 2006) and the
Institutional Funds (July
2003-July 2006) and Chief
Executive Officer of the Retail
Funds (until September 2002).
James F. Higgins (58) Trustee Since Director or Trustee of the 197 Director of AXA
c/o Morgan Stanley Trust June 2000 Retail Funds (since June 2000) Financial, Inc. and The
Harborside Financial Center and the Institutional Funds Equitable Life Assurance
Plaza Two (since July 2003); Senior Society of the United
Jersey City, NJ 07311 Advisor of Morgan Stanley States (financial
(since August 2000). services).
</Table>
- ----------
* THIS IS THE EARLIEST DATE THE TRUSTEE BEGAN SERVING THE FUNDS ADVISED BY
MORGAN STANLEY INVESTMENT ADVISORS INC. (THE "INVESTMENT ADVISER") (THE
"RETAIL FUNDS").
** 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.).
43
<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**
- --------------------------- -------------- ----------------- ---------------------------------------------------------------
Ronald E. Robison (67) President and President (since President (since September 2005) and Principal Executive Officer
1221 Avenue of the Americas Principal September 2005) (since May 2003) of funds in the Fund Complex; President (since
New York, NY 10020 Executive and Principal September 2005) and Principal Executive Officer (since May 2003)
Officer Executive Officer of the Van Kampen Funds; Managing Director, Director and/or
(since May 2003) Officer of the Investment Adviser and various entities
affiliated with the Investment Adviser; Director of Morgan
Stanley SICAV (since May 2004). Formerly, Executive Vice
President (July 2003 to September 2005) of funds in the Fund
Complex and the Van Kampen Funds; President and Director of the
Institutional Funds (March 2001 to July 2003); Chief Global
Operating Officer of Morgan Stanley Investment Management Inc.;
Chief Administrative Officer of Morgan Stanley Investment
Advisors Inc.; Chief Administrative Officer of Morgan Stanley
Services Company Inc.
J. David Germany (51) Vice President Since Managing Director and (since December 2005) Chief Investment
Morgan Stanley February 2006 Officer - Global Fixed Income of Morgan Stanley Investment
Investment Management Ltd. Management; Managing Director and Director of Morgan Stanley
25 Cabot Square Investment Management Ltd.; Vice President (since February 2006)
Canary Wharf, London of the Retail and Institutional Funds.
United Kingdom E144QA
Dennis F. Shea (53) Vice President Since Managing Director and (since February 2006) Chief Investment
1221 Avenue of the Americas February 2006 Officer - Global Equity of Morgan Stanley Investment
New York, NY 10020 Management; Vice President (since February 2006) of the Retail
and Institutional Funds. Formerly, Managing Director and
Director of Global Equity Research at Morgan Stanley.
Barry Fink (51) Vice President Since Managing Director and General Counsel of Morgan Stanley
1221 Avenue of the Americas February 1997 Investment Management; Managing Director of the Investment
New York, NY 10020 Adviser and various entities affiliated with the Investment
Adviser; Vice President of the Retail Funds and (since
July 2003) the Institutional Funds. Formerly, Secretary, General
Counsel and/or Director of the Investment Adviser and various
entities affiliated with the Investment Adviser; Secretary and
General Counsel of the Retail Funds.
Amy R. Doberman (44) Vice President Since July 2004 Managing Director and General Counsel, U.S. Investment
1221 Avenue of the Americas Management of Morgan Stanley Investment Management (since
New York, NY 10020 July 2004); Vice President of the Retail Funds and the
Institutional Funds (since July 2004); Vice President of the Van
Kampen Funds (since August 2004); Secretary (since February 2006)
and Managing Director (since July 2004) of the Investment
Adviser and various entities affiliated with the Investment
Adviser. Formerly, Managing Director and General Counsel -
Americas, UBS Global Asset Management (July 2000 to July 2004).
Carsten Otto (42) Chief Since October Managing Director and U.S. Director of Compliance for Morgan
1221 Avenue of the Americas Compliance 2004 Stanley Investment Management (since October 2004); Managing
New York, NY 10020 Officer Director and Chief Compliance Officer of Morgan Stanley
Investment Management. Formerly, Assistant Secretary and
Assistant General Counsel of the Retail Funds.
</Table>
44
<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 Yu (39) Vice President Since July 2003 Executive Director of the Investment Adviser and various
1221 Avenue of the Americas entities affiliated with the Investment Adviser; Vice President
New York, NY 10020 of the Retail Funds (since July 2002) and the Institutional
Funds (since December 1997). Formerly, Secretary of various
entities affiliated with the Investment Adviser.
Francis J. Smith (40) Treasurer and Treasurer (since Executive Director of the Investment Adviser and various
c/o Morgan Stanley Trust Chief Financial July 2003) and entities affiliated with the Investment Adviser; Treasurer and
Harborside Financial Center Officer Chief Financial Chief Financial Officer of the Retail Funds (since July 2003).
Plaza Two Officer (since Formerly, Vice President of the Retail Funds (September 2002 to
Jersey City, NJ 07311 September 2002) July 2003).
Mary E. Mullin (39) Secretary Since July 2003 Executive Director of the Investment Adviser and various
1221 Avenue of the Americas entities affiliated with the Investment Adviser; Secretary of
New York, NY 10020 the Retail Funds (since July 2003) and the Institutional Funds
(since June 1999).
</Table>
- ----------
* THIS IS THE EARLIEST DATE THE OFFICER BEGAN SERVING THE RETAIL FUNDS. 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.
2006 FEDERAL TAX NOTICE (UNAUDITED)
During the fiscal year ended June 30, 2006, the Fund paid to its shareholders
$1.07 per share from long-term capital gains. For such period, 100% of the
ordinary dividends paid 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 June 30, 2006 qualified for the lower income tax rate
available to individuals under the Jobs and Growth Tax Relief Reconciliation Act
of 2003.
45
<Page>
(This page has been left blank intentionally.)
<Page>
(This page has been left blank intentionally.)
<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
Michael E. Nugent
CHAIRMAN OF THE BOARD
Ronald E. Robison
PRESIDENT AND PRINCIPAL EXECUTIVE OFFICER
J. David Germany
VICE PRESIDENT
Dennis F. Shea
VICE PRESIDENT
Barry Fink
VICE PRESIDENT
Amy R. Doberman
VICE PRESIDENT
Carsten Otto
CHIEF COMPLIANCE OFFICER
Stefanie V. Chang Yu
VICE PRESIDENT
Francis J. Smith
TREASURER AND CHIEF FINANCIAL OFFICER
Mary E. Mullin
SECRETARY
TRANSFER AGENT
Morgan Stanley Trust
Harborside Financial Center, Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
Two World Financial Center
New York, New York 10281
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) 2006 Morgan Stanley
[Morgan Stanley LOGO]
MORGAN STANLEY FUNDS
MORGAN STANLEY
EQUALLY-WEIGHTED
S&P 500 FUND
Annual Report
June 30, 2006
[Morgan Stanley LOGO]
VADSAR-38565RPT-RAO6-00713P-Y06/O6
<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) Not applicable.
(d) Not applicable.
(e) Not applicable.
(f)
(1) The Fund's Code of Ethics is attached hereto as Exhibit 12 A.
(2) Not applicable.
(3) Not applicable.
Item 3. Audit Committee Financial Expert.
The Fund's Board of Trustees has determined that 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.
Item 4. Principal Accountant Fees and Services.
(a)(b)(c)(d) and (g). Based on fees billed for the periods shown:
2006
REGISTRANT COVERED ENTITIES(1)
<Page>
AUDIT FEES $32,720 N/A
NON-AUDIT FEES
AUDIT-RELATED FEES $ 531(2) $5,190,300(2)
TAX FEES $ 5,500(3) $2,044,491(4)
ALL OTHER FEES $ -- $ --
TOTAL NON-AUDIT FEES $ 6,031 $7,234,791
TOTAL $38,751 $7,234,791
2005
REGISTRANT COVERED ENTITIES(1)
AUDIT FEES $32,784 N/A
NON-AUDIT FEES
AUDIT-RELATED FEES $ 540(2) $3,215,745(2)
TAX FEES $ 5,911(3) $ 24,000(4)
ALL OTHER FEES $ -- $ --
TOTAL NON-AUDIT FEES $ 6,451 $3,239,745
TOTAL $39,235 $3,239,745
N/A- Not applicable, as not required by Item 4.
(1) Covered Entities include the Adviser (excluding sub-advisors) and any
entity controlling, controlled by or under common control with the Adviser
that provides ongoing services to the Registrant.
(2) Audit-Related Fees represent assurance and related services provided that
are reasonably related to the performance of the audit of the financial
statements of the Covered Entities' and funds advised by the Adviser or its
affiliates, specifically data verification and agreed-upon procedures
related to asset securitizations and agreed-upon procedures engagements.
(3) Tax Fees represent tax compliance, tax planning and tax advice services
provided in connection with the preparation and review of the Registrant's
tax returns.
(4) Tax Fees represent tax compliance, tax planning and tax advice services
provided in connection with the review of Covered Entities' tax returns.
<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
- ----------
(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>
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.
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
<Page>
pre-approval to Audit-related services. Audit-related services include, among
others, accounting consultations related to accounting, financial reporting or
disclosure matters 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
<Page>
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 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
<Page>
Morgan Stanley Services Company, Inc.
Morgan Stanley Distributors Inc.
Morgan Stanley Trust FSB
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/Directors 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 second fiscal quarter of the period covered
by this report that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting.
Item 12. Exhibits
(a) The Code of Ethics for Principal Executive and Senior Financial Officers is
attached hereto.
(b) A separate certification for each principal executive officer and principal
financial officer of the registrant are attached hereto as part of EX-99.CERT.
<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 Equally-Weighted S&P 500 Fund
/s/ Ronald E. Robison
- ---------------------------
Ronald E. Robison
Principal Executive Officer
August 10, 2006
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
August 10, 2006
/s/ Francis Smith
- ---------------------------
Francis Smith
Principal Financial Officer
August 10, 2006