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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 811-05634
Morgan Stanley Strategist Fund
(Exact name of registrant as specified in charter)
1221 Avenue of the Americas, New York, New York 10020
(Address of principal executive offices) (Zip code)
Ronald E. Robison
1221 Avenue of the Americas, New York, New York 10020
(Name and address of agent for service)
Registrant's telephone number, including area code: 212-762-4000
Date of fiscal year end: July 31, 2006
Date of reporting period: July 31, 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
STRATEGIST FUND PERFORMED DURING THE ANNUAL PERIOD. WE WILL PROVIDE AN OVERVIEW
OF THE MARKET CONDITIONS, AND DISCUSS SOME OF THE FACTORS THAT AFFECTED
PERFORMANCE DURING THE REPORTING PERIOD. IN ADDITION, THIS REPORT INCLUDES THE
FUND'S FINANCIAL STATEMENTS AND A LIST OF FUND INVESTMENTS.
THIS MATERIAL MUST BE PRECEDED OR ACCOMPANIED BY A PROSPECTUS FOR THE FUND BEING
OFFERED.
MARKET FORECASTS PROVIDED IN THIS REPORT MAY NOT NECESSARILY COME TO PASS. THERE
IS NO ASSURANCE THAT THE FUND WILL ACHIEVE ITS INVESTMENT OBJECTIVE. THE FUND IS
SUBJECT TO MARKET RISK, WHICH IS THE POSSIBILITY THAT MARKET VALUES OF
SECURITIES OWNED BY THE FUND WILL DECLINE AND, THEREFORE, THE VALUE OF THE
FUND'S SHARES MAY BE LESS THAN WHAT YOU PAID FOR THEM. ACCORDINGLY, YOU CAN LOSE
MONEY INVESTING IN THIS FUND. PLEASE SEE THE PROSPECTUS FOR MORE COMPLETE
INFORMATION ON INVESTMENT RISKS.
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FUND REPORT
FOR THE YEAR ENDED JULY 31, 2006
TOTAL RETURN FOR THE 12 MONTHS ENDED JULY 31, 2006
LEHMAN LIPPER
BROTHERS U.S. FLEXIBLE
S&P GOVERNMENT/ PORTFOLIO
500(R) CREDIT FUNDS
CLASS A CLASS B CLASS C CLASS D INDEX (1) INDEX (2) INDEX (3)
- ------- ------- ------- ------- --------- ------------- ---------
9.60% 8.72% 8.79% 9.80% 5.38% 0.90% 6.95%
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
As the 12-month reporting period progressed, mounting concerns about rising
interest rates, robust global economic growth, geopolitical tensions and
inflationary indicators were gradually priced into the financial markets. Stocks
and bonds posted gains below their long-term historic levels, and cash returned
as a viable asset class, as short-term interest rates ended the period at 5.25
percent. International markets -- led by Europe, the emerging markets and
recoveries in Japan and Latin America -- posted returns well in excess of those
in the U.S.
As the Federal Open Market Committee (the "Fed") continued its campaign to
return monetary policy to a less accommodative level, investors began to
consider the inevitability of this policy's impact on the economy as a whole,
and, more importantly, how far the central bank needed to go before the
tightening cycle was complete. Markets generally do not perform well during
periods of uncertainty and especially during the latter stages of tightening
cycles.
The consumer responded to these shifts with increased caution toward
discretionary purchases, and began adjusting spending habits in response to less
buoyant housing price appreciation. On the industrial side of the economy,
diversified manufacturers, energy and basic material companies enjoyed robust
results, primarily from demand in the export markets. Overall, profitability
remained strong throughout the past year, as corporations maintained capital
spending discipline and adjusted pricing to account for higher input costs and
operating expenses.
PERFORMANCE ANALYSIS
Morgan Stanley Strategist Fund outperformed the S&P 500(R) Index, the Lehman
Brothers U.S. Government/Credit Index and the Lipper Flexible Portfolio Funds
Index for the 12 months ended July 31, 2006, assuming no deduction of applicable
sales charges.
The Fund's performance during the period was driven by its strategic positioning
and by sector and individual security selection. The Fund entered the year with
a strong bias to equities, a favorable stance considering the outperformance of
stocks versus bonds and cash during the fiscal year's first half (July 2005 to
January 2006). During the second half of the fiscal year, the Fund's more
conservative asset blend and a more defensive equity portfolio stance helped
shield its returns from the equity market correction suffered in May, June and
July 2006.
The Fund's strategic asset allocation target was adjusted twice during the
12-month period under review. The first change occurred in March 2006, and
resulted in a reduction of the bond allocation from 25 to 20 percent of total
Fund assets. The second modification, in
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May 2006, was a reduction in the equity allocation from 65 to 60 percent of
total Fund assets. In both cases, the proceeds were reinvested in cash. Our
decisions were based in large part on rising inflationary pressures and
improving returns on cash investments, where rates had virtually doubled
year-over-year. At fiscal year end, the Fund's strategic asset allocation target
stood at 60 percent equity (versus a neutral benchmark weight of 55 percent), 20
percent fixed income (versus a neutral benchmark weight of 35 percent), and 20
percent cash (versus a neutral benchmark weight of 10 percent).*
Throughout the year, the equity portion of the Fund was gradually repositioned
with respect to macroeconomic conditions, as sectors with the highest
sensitivity to industrial growth and capital spending were reduced in favor of
those that we believe offered more stable, visible growth. Energy, information
technology and industrial exposures were trimmed, funding additional investment
in consumer staples, telecommunications equipment and health care. A couple of
exceptions bear mention: basic materials, a sector with a great dependency on
global economic growth, remained heavily weighted in the portfolio, as
expectations for strong demand coupled with a lack of additional capacity
created, in our view, a long-term investment opportunity; and financials
remained underweighted in the portfolio, due to valuation concerns and unease
surrounding their ability to manage risk in a rising rate environment.
At fiscal year end, the Fund's equity portfolio featured the following sector
weights, as measured versus the S&P 500 Index: basic materials, 155 percent
overweight; consumer staples, 58 percent overweight; telecommunication services,
49 percent overweight; information technology, 28 percent overweight; health
care, 5 percent overweight; consumer discretionary, equal weight; industrials, 6
percent underweight; energy, 36 percent underweight; financials, 39 percent
underweight; and utilities, 100 percent underweight.
The fixed income portion of the Fund ended the period allocated among holdings
in U.S. government securities (29.8 percent), mortgage-backed securities (21.9
percent) and non-government securities (32.8 percent). The non-government
portion was broadly diversified with 7.4 percent invested in asset-back
securities and the remainder in corporate credits and dollar-denominated
non-U.S. governments. We allocated 15.5 percent to cash equivalents, most of
which was in short duration, non-money market securities such as high coupon
mortgage securities. The effective duration** of the fixed income portion was
4.54 years.
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.
* SOURCE: MORGAN STANLEY INVESTMENT MANAGEMENT.
** A MEASURE OF THE SENSITIVITY OF A BOND'S PRICE TO CHANGES IN INTEREST
RATES, EXPRESSED IN YEARS. EACH YEAR OF DURATION REPRESENTS AN EXPECTED 1
PERCENT CHANGE IN THE PRICE OF A BOND FOR EVERY 1 PERCENT CHANGE IN
INTEREST RATES. THE LONGER A BOND'S DURATION, THE GREATER THE EFFECT OF
INTEREST-RATE MOVEMENTS ON ITS PRICE. TYPICALLY, FUNDS WITH SHORTER
DURATIONS PERFORM BETTER IN RISING-INTEREST-RATE ENVIRONMENTS, WHILE FUNDS
WITH LONGER DURATIONS PERFORM BETTER WHEN RATES DECLINE.
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TOP 10 HOLDINGS
U.S. Treasury Securities 5.7%
Fed. Natl. Mtge. Assoc. 4.6
United States Steel Corp. 1.9
Altria Group, Inc. 1.6
Archer-Daniels-Midland Co. 1.4
Windstream Corp. 1.4
Waste Management, Inc. 1.4
Bank of America Corp. 1.4
Oracle Corp. 1.4
Citizens Communications Co. 1.3
PORTFOLIO COMPOSITION***
Common Stocks 59.3%
Short-Term Investments 21.3
U.S. Government Agencies & Obligations 10.7
Corp Notes/Bonds 5.0
Asset-Backed Securities 3.7
Put Option Purchased 0.0
DATA AS OF JULY 31, 2006. SUBJECT TO CHANGE DAILY. ALL PERCENTAGES FOR TOP 10
HOLDINGS ARE AS A PERCENTAGE OF NET ASSETS AND ALL PERCENTAGES FOR PORTFOLIO
COMPOSITION ARE AS A PERCENTAGE OF TOTAL INVESTMENTS. THESE DATA ARE PROVIDED
FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE DEEMED A RECOMMENDATION TO BUY
OR SELL THE SECURITIES MENTIONED. MORGAN STANLEY IS A FULL-SERVICE SECURITIES
FIRM ENGAGED IN SECURITIES TRADING AND BROKERAGE ACTIVITIES, INVESTMENT BANKING,
RESEARCH AND ANALYSIS, FINANCING AND FINANCIAL ADVISORY SERVICES.
*** DOES NOT INCLUDE OPEN LONG FUTURES CONTRACTS WITH AN UNDERLYING FACE AMOUNT
OF $30,445,313 WITH UNREALIZED APPRECIATION OF $189,970 AND OPEN SHORT
FUTURES CONTRACTS WITH AN UNDERLYING FACE AMOUNT OF $20,550,345 WITH
UNREALIZED DEPRECIATION OF $77,951.
INVESTMENT STRATEGY
THE FUND'S "INVESTMENT ADVISER," MORGAN STANLEY INVESTMENT ADVISORS INC.,
ACTIVELY ALLOCATES THE FUND'S ASSETS AMONG THE MAJOR ASSET CATEGORIES OF EQUITY
SECURITIES (INCLUDING DEPOSITARY RECEIPTS), FIXED-INCOME SECURITIES AND MONEY
MARKET INSTRUMENTS. IN DETERMINING WHICH SECURITIES TO BUY, HOLD OR SELL FOR THE
FUND, THE INVESTMENT ADVISER ALLOCATES THE FUND'S ASSETS BASED ON, AMONG OTHER
THINGS, ITS ASSESSMENT OF THE EFFECTS OF ECONOMIC AND MARKET TRENDS ON DIFFERENT
SECTORS OF THE MARKET. THERE IS NO LIMIT AS TO THE PERCENTAGE OF ASSETS THAT MAY
BE ALLOCATED TO ANY ONE ASSET CLASS.
FOR MORE INFORMATION ABOUT PORTFOLIO HOLDINGS
EACH MORGAN STANLEY FUND PROVIDES A COMPLETE SCHEDULE OF PORTFOLIO HOLDINGS IN
ITS SEMIANNUAL AND ANNUAL REPORTS WITHIN 60 DAYS OF THE END OF THE FUND'S SECOND
AND FOURTH FISCAL QUARTERS. 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.
4
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INFORMATION ON THE OPERATION OF THE SEC'S PUBLIC REFERENCE ROOM MAY BE OBTAINED
BY CALLING THE SEC AT (800) SEC-0330. YOU CAN ALSO REQUEST COPIES OF THESE
MATERIALS, UPON PAYMENT OF A DUPLICATING FEE, BY ELECTRONIC REQUEST AT THE SEC'S
E-MAIL ADDRESS (publicinfo@sec.gov) OR BY WRITING THE PUBLIC REFERENCE SECTION
OF THE SEC, WASHINGTON, DC 20549-0102.
PROXY VOTING POLICY AND PROCEDURES AND PROXY VOTING RECORD
YOU MAY OBTAIN A COPY OF THE FUND'S PROXY VOTING POLICY AND PROCEDURES WITHOUT
CHARGE, UPON REQUEST, BY CALLING TOLL FREE (800) 869-NEWS OR BY VISITING THE
MUTUAL FUND CENTER ON OUR WEB SITE AT www.morganstanley.com. IT IS ALSO
AVAILABLE ON THE SECURITIES AND EXCHANGE COMMISSION'S WEB SITE AT
http://www.sec.gov.
YOU MAY OBTAIN INFORMATION REGARDING HOW THE FUND VOTED PROXIES RELATING TO
PORTFOLIO SECURITIES DURING THE MOST RECENT TWELVE-MONTH PERIOD ENDED JUNE 30
WITHOUT CHARGE BY VISITING THE MUTUAL FUND CENTER ON OUR WEB SITE AT
www.morganstanley.com. THIS INFORMATION IS ALSO AVAILABLE ON THE SECURITIES AND
EXCHANGE COMMISSION'S WEB SITE AT http://www.sec.gov.
HOUSEHOLDING NOTICE
TO REDUCE PRINTING AND MAILING COSTS, THE FUND ATTEMPTS TO ELIMINATE DUPLICATE
MAILINGS TO THE SAME ADDRESS. THE FUND DELIVERS A SINGLE COPY OF CERTAIN
SHAREHOLDER DOCUMENTS, INCLUDING SHAREHOLDER REPORTS, PROSPECTUSES AND PROXY
MATERIALS, TO INVESTORS WITH THE SAME LAST NAME WHO RESIDE AT THE SAME ADDRESS.
YOUR PARTICIPATION IN THIS PROGRAM WILL CONTINUE FOR AN UNLIMITED PERIOD OF TIME
UNLESS YOU INSTRUCT US OTHERWISE. YOU CAN REQUEST MULTIPLE COPIES OF THESE
DOCUMENTS BY CALLING (800) 350-6414, 8:00 A.M. TO 8:00 P.M., ET. ONCE OUR
CUSTOMER SERVICE CENTER HAS RECEIVED YOUR INSTRUCTIONS, WE WILL BEGIN SENDING
INDIVIDUAL COPIES FOR EACH ACCOUNT WITHIN 30 DAYS.
5
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PERFORMANCE SUMMARY
PERFORMANCE OF $10,000 INVESTMENT--CLASS B
[CHART]
($ IN THOUSANDS)
ENDING VALUE
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<Caption>
LEHMAN BROTHERS U.S. LIPPER FLEXIBLE PORTFOLIO
FUND ++ S&P 500(R)(1) GOVERNMENT/CREDIT INDEX (2) FUNDS INDEX (3)
------- ------------- --------------------------- ------------------------
Jul-96 $10,000 $10,000 $10,000 $10,000
Jul-97 $12,973 $15,211 $11,079 $12,888
Jul-98 $14,630 $18,147 $11,973 $14,405
Jul-99 $15,980 $21,812 $12,252 $15,909
Jul-00 $18,023 $23,769 $12,952 $16,900
Jul-01 $16,754 $20,361 $14,598 $15,915
Jul-02 $13,943 $15,553 $15,603 $13,355
Jul-03 $15,227 $17,210 $16,713 $14,585
Jul-04 $16,938 $19,476 $17,502 $16,198
Jul-05 $19,223 $22,213 $18,367 $18,326
Jul-06 $20,899 $23,408 $18,532 $19,600
</Table>
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AVERAGE ANNUAL TOTAL RETURNS--PERIOD ENDED JULY 31, 2006
<Table>
<Caption>
CLASS A SHARES * CLASS B SHARES ** CLASS C SHARES + CLASS D SHARES @@
(SINCE 07/28/97) (SINCE 10/31/88) (SINCE 07/28/97) (SINCE 07/28/97)
SYMBOL SRTAX SRTBX SRTCX SRTDX
- --------------- ---------------- ----------------- ---------------- ----------------
1 YEAR 9.60%(4) 8.72%(4) 8.79%(4) 9.80%(4)
3.84 (5) 3.72 (5) 7.79 (5) --
5 YEARS 5.32 (4) 4.52 (4) 4.52 (4) 5.56 (4)
4.19 (5) 4.18 (5) 4.52 (5) --
10 YEARS -- 7.65 (4) -- --
-- 7.65 (5) -- --
SINCE INCEPTION 6.44 (4) 9.70 (4) 5.63 (4) 6.68 (4)
5.80 (5) 9.70 (5) 5.63 (5) --
</Table>
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE, WHICH IS NO GUARANTEE OF
FUTURE RESULTS AND CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE FIGURES
SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE FIGURES, PLEASE VISIT
www.morganstanley.com OR SPEAK WITH YOUR FINANCIAL ADVISOR. INVESTMENT RETURNS
AND PRINCIPAL VALUE WILL FLUCTUATE AND FUND SHARES, WHEN REDEEMED, MAY BE WORTH
MORE OR LESS THAN THEIR ORIGINAL COST. THE GRAPH AND TABLE DO NOT REFLECT THE
DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE
REDEMPTION OF FUND SHARES. PERFORMANCE FOR CLASS A, CLASS B, CLASS C, AND CLASS
D SHARES WILL VARY DUE TO DIFFERENCES IN SALES CHARGES AND EXPENSES.
* THE MAXIMUM FRONT-END SALES CHARGE FOR CLASS A IS 5.25%.
** THE MAXIMUM CONTINGENT DEFERRED SALES CHARGE (CDSC) FOR CLASS B IS 5.0%.
THE CDSC DECLINES TO 0% AFTER SIX YEARS.
+ THE MAXIMUM CONTINGENT DEFERRED SALES CHARGE FOR CLASS C IS 1.0% FOR SHARES
REDEEMED WITHIN ONE YEAR OF PURCHASE.
@@ CLASS D HAS NO SALES CHARGE.
(1) THE STANDARD & POOR'S 500 INDEX (S&P 500 (R)) IS A BROAD-BASED INDEX, THE
PERFORMANCE OF WHICH IS BASED ON THE PERFORMANCE OF 500 WIDELY-HELD COMMON
STOCKS CHOSEN FOR MARKET SIZE, LIQUIDITY AND INDUSTRY GROUP REPRESENTATION.
INDEXES ARE UNMANAGED AND THEIR RETURNS DO NOT INCLUDE ANY SALES CHARGES OR
FEES. SUCH COSTS WOULD LOWER PERFORMANCE. IT IS NOT POSSIBLE TO INVEST
DIRECTLY IN AN INDEX.
(2) THE LEHMAN BROTHERS U.S. GOVERNMENT/CREDIT INDEX TRACKS THE PERFORMANCE OF
GOVERNMENT AND CORPORATE OBLIGATIONS, INCLUDING U.S. GOVERNMENT AGENCY AND
TREASURY SECURITIES AND CORPORATE AND YANKEE BONDS. INDEXES ARE UNMANAGED
AND THEIR RETURNS DO NOT INCLUDE ANY SALES CHARGES OR FEES. SUCH COSTS
WOULD LOWER PERFORMANCE. IT IS NOT POSSIBLE TO INVEST DIRECTLY IN AN INDEX.
(3) THE LIPPER FLEXIBLE PORTFOLIO FUNDS INDEX IS AN EQUALLY WEIGHTED
PERFORMANCE INDEX OF THE LARGEST QUALIFYING FUNDS (BASED ON NET ASSETS) IN
THE LIPPER FLEXIBLE PORTFOLIO FUNDS CLASSIFICATION. THE INDEX, WHICH IS
ADJUSTED FOR CAPITAL GAINS DISTRIBUTIONS AND INCOME DIVIDENDS, IS UNMANAGED
AND SHOULD NOT BE CONSIDERED AN INVESTMENT. THERE ARE CURRENTLY 30 FUNDS
REPRESENTED IN THIS INDEX.
(4) FIGURE SHOWN ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AND DOES NOT REFLECT
THE DEDUCTION OF ANY SALES CHARGES.
(5) FIGURE SHOWN ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AND THE DEDUCTION OF
THE MAXIMUM APPLICABLE SALES CHARGE. SEE THE FUND'S CURRENT PROSPECTUS FOR
COMPLETE DETAILS ON FEES AND SALES CHARGES.
++ ENDING VALUE ASSUMING A COMPLETE REDEMPTION ON JULY 31, 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 02/01/06 - 07/31/06.
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 *
------------- ------------- ---------------
02/01/06 -
02/01/06 07/31/06 07/31/06
------------- ------------- ---------------
CLASS A
Actual (2.63% return) $1,000.00 $1,026.30 $4.62
Hypothetical (5% annual return before expenses) $1,000.00 $1,020.23 $4.61
CLASS B
Actual (2.22% return) $1,000.00 $1,022.20 $8.42
Hypothetical (5% annual return before expenses) $1,000.00 $1,016.46 $8.40
CLASS C
Actual (2.28% return) $1,000.00 $1,022.80 $8.02
Hypothetical (5% annual return before expenses) $1,000.00 $1,016.86 $8.00
CLASS D
Actual (2.75% return) $1,000.00 $1,027.50 $3.42
Hypothetical (5% annual return before expenses) $1,000.00 $1,021.42 $3.41
</Table>
- ----------
* EXPENSES ARE EQUAL TO THE FUND'S ANNUALIZED EXPENSE RATIOS OF 0.92%, 1.68%,
1.60% AND 0.68% 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).
8
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INVESTMENT ADVISORY AGREEMENT APPROVAL
NATURE, EXTENT AND QUALITY OF SERVICES
The Board reviewed and considered the nature and extent of the investment
advisory services provided by the Investment Adviser under the Advisory
Agreement, including portfolio management, investment research and equity and
fixed income securities trading. The Board also reviewed and considered the
nature and extent of the non-advisory, administrative services provided by the
Fund's Administrator under the Administration Agreement, including accounting,
clerical, bookkeeping, compliance, business management and planning, and the
provision of supplies, office space and utilities 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.
9
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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 a breakpoint. 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 a breakpoint. 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 and "soft dollar" benefits (discussed
in the next section). The Board also considered that a broker-dealer affiliate
of the Adviser receives from the Fund 12b-1 fees for distribution and
shareholder services. The Board also considered that an affiliate of the Adviser
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,
10
<Page>
the affiliate disgorged revenues in connection with the ECN-related revenue and
the potential fall-out benefit from increased order flow was relatively small.
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 it does not use Fund commissions to pay for third party
research. It does use commissions to pay for research which is bundled with
execution services. The Board recognized that the receipt of such research from
brokers may reduce the Adviser's costs but concluded that the receipt of such
research strengthens the investment management resources of the Adviser, which
may ultimately benefit the Fund and other funds in the Morgan Stanley Fund
Complex.
ADVISER FINANCIALLY SOUND AND FINANCIALLY CAPABLE OF MEETING THE FUND'S NEEDS
The Board considered whether the Adviser is financially sound and has the
resources necessary to perform its obligations under the Management Agreement.
The Board noted that the Adviser's operations remain profitable, although
increased expenses in recent years have reduced the Adviser's profitability. The
Board concluded that the Adviser has the financial resources necessary to
fulfill its obligations under the Management Agreement.
HISTORICAL RELATIONSHIP BETWEEN THE FUND AND THE ADVISER
The Board also reviewed and considered the historical relationship between the
Fund and the Adviser, including the organizational structure of the Adviser, the
policies and procedures formulated and adopted by the Adviser for managing the
Fund's operations and the Board's confidence in the competence and integrity of
the senior managers and key personnel of the Adviser. The Board concluded that
it is beneficial for the Fund to continue its relationship with the Adviser.
OTHER FACTORS AND CURRENT TRENDS
The Board considered the controls and procedures adopted and implemented by the
Adviser and monitored by the Fund's Chief Compliance Officer and concluded that
the conduct of business by the Adviser indicates a good faith effort on its part
to adhere to high ethical standards in the conduct of the Fund's business.
GENERAL CONCLUSION
After considering and weighing all of the above factors, the Board concluded
that it would be in the best interest of the Fund and its shareholders to
approve renewal of the Management Agreement for another year.
11
<Page>
MORGAN STANLEY STRATEGIST FUND
PORTFOLIO OF INVESTMENTS - JULY 31, 2006
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------
Common Stocks (59.7%)
ADVERTISING/MARKETING SERVICES (0.8%)
84,070 Omnicom Group, Inc. $ 7,441,036
-----------
AEROSPACE & DEFENSE (1.9%)
156,335 Northrop Grumman Corp. 10,347,814
136,300 Raytheon Co. 6,143,041
-----------
16,490,855
-----------
AGRICULTURAL COMMODITIES/MILLING (1.4%)
284,500 Archer-Daniels-Midland Co. 12,518,000
-----------
BEVERAGES: NON-ALCOHOLIC (0.8%)
164,605 Coca-Cola Co. (The) 7,324,923
-----------
BIOTECHNOLOGY (2.3%)
169,460 Celgene Corp.* 8,115,439
94,540 Gilead Sciences, Inc.* 5,812,319
204,100 Vertex Pharmaceuticals Inc.* 6,841,432
-----------
20,769,190
-----------
CHEMICALS: MAJOR DIVERSIFIED (0.5%)
132,170 Dow Chemical Co. (The) 4,570,439
-----------
COMPUTER COMMUNICATIONS (0.8%)
380,485 Cisco Systems, Inc.* 6,791,657
-----------
COMPUTER PERIPHERALS (0.5%)
422,490 EMC Corp.* 4,288,274
-----------
COMPUTER PROCESSING HARDWARE (0.7%)
95,690 Apple Computer, Inc.* 6,503,092
-----------
DEPARTMENT STORES (0.8%)
125,060 Kohl's Corp.* 7,082,148
-----------
DISCOUNT STORES (1.1%)
177,740 Costco Wholesale Corp. 9,377,562
-----------
ELECTRICAL PRODUCTS (0.8%)
88,540 Emerson Electric Co. 6,987,577
-----------
ELECTRONICS/APPLIANCES (1.0%)
196,180 Sony Corp. (ADR) (Japan) 9,022,318
-----------
ENVIRONMENTAL SERVICES (1.4%)
354,930 Waste Management, Inc. 12,202,493
-----------
SEE NOTES TO FINANCIAL STATEMENTS
12
<Page>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------
FINANCIAL CONGLOMERATES (3.4%)
171,600 American Express Co. $ 8,933,496
219,645 Citigroup, Inc. 10,611,050
222,430 JPMorgan Chase & Co. 10,147,257
-----------
29,691,803
-----------
FOOD: MAJOR DIVERSIFIED (2.1%)
208,170 Kellogg Co. 10,027,549
263,400 Kraft Foods Inc. (Class A) 8,534,160
-----------
18,561,709
-----------
HOUSEHOLD/PERSONAL CARE (0.8%)
121,870 Colgate-Palmolive Co. 7,229,328
-----------
INDUSTRIAL CONGLOMERATES (1.2%)
191,935 General Electric Co. 6,274,355
112,020 Ingersoll-Rand Co. Ltd. (Class A) (Bermuda) 4,010,316
-----------
10,284,671
-----------
INFORMATION TECHNOLOGY SERVICES (0.9%)
103,260 International Business Machines Corp. 7,993,357
-----------
INTEGRATED OIL (1.7%)
139,200 Exxon Mobil Corp. 9,429,408
85,000 Royal Dutch Shell PLC (ADR) (Class A) (United Kingdom) 6,018,000
-----------
15,447,408
-----------
INTERNET SOFTWARE/SERVICES (0.9%)
290,080 Yahoo!, Inc.* 7,872,771
-----------
INVESTMENT BANKS/BROKERS (1.2%)
688,800 Schwab (Charles) Corp. (The) 10,938,144
-----------
MAJOR BANKS (2.3%)
234,820 Bank of America Corp. 12,100,275
111,990 Wells Fargo & Co. 8,101,357
-----------
20,201,632
-----------
MAJOR TELECOMMUNICATIONS (0.4%)
111,932 AT&T Inc. 3,356,841
-----------
MARINE SHIPPING (0.8%)
144,734 Tidewater, Inc. 6,905,259
-----------
SEE NOTES TO FINANCIAL STATEMENTS
13
<Page>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------
MEDIA CONGLOMERATES (1.3%)
241,750 Disney (Walt) Co. (The) $ 7,177,558
268,985 Time Warner, Inc. 4,438,253
-----------
11,615,811
-----------
MEDICAL SPECIALTIES (2.8%)
107,815 Bard (C.R.), Inc. 7,651,631
100,180 Fisher Scientific International Inc.* 7,424,340
262,050 St. Jude Medical, Inc.* 9,669,645
-----------
24,745,616
-----------
MOTOR VEHICLES (0.9%)
238,570 Honda Motor Co., Ltd. (ADR) (Japan) 7,860,882
-----------
OILFIELD SERVICES/EQUIPMENT (1.7%)
184,060 Halliburton Co. 6,140,242
202,400 Smith International, Inc. 9,020,968
-----------
15,161,210
-----------
OTHER CONSUMER SERVICES (0.3%)
214,860 Expedia, Inc.* 2,879,124
-----------
OTHER METALS/MINERALS (0.7%)
66,860 Southern Copper Corp. 6,451,990
-----------
PACKAGED SOFTWARE (3.0%)
394,200 Microsoft Corp. 9,472,626
804,600 Oracle Corp.* 12,044,862
230,620 Sybase, Inc.* 4,854,551
-----------
26,372,039
-----------
PHARMACEUTICALS: MAJOR (2.8%)
131,190 Johnson & Johnson 8,205,935
130,900 Lilly (Eli) & Co. 7,431,193
196,520 Wyeth 9,525,324
-----------
25,162,452
-----------
PROPERTY - CASUALTY INSURERS (1.0%)
160,900 Allstate Corp. (The) 9,142,338
-----------
RECREATIONAL PRODUCTS (0.8%)
389,060 Mattel, Inc. 7,018,642
-----------
SEE NOTES TO FINANCIAL STATEMENTS
14
<Page>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------
SEMICONDUCTORS (2.2%)
219,851 Freescale Semiconductor Inc. (Class B)* $ 6,270,151
470,625 Intel Corp. 8,471,250
495,645 Taiwan Semiconductor Manufacturing Co., Ltd.
(ADR) (Taiwan) 4,297,238
-----------
19,038,639
-----------
SPECIALTY TELECOMMUNICATIONS (2.7%)
925,880 Citizens Communications Co. 11,879,040
988,250 Windstream Corp. 12,382,773
-----------
24,261,813
-----------
STEEL (3.2%)
213,900 Nucor Corp. 11,373,063
267,450 United States Steel Corp. 16,868,072
-----------
28,241,135
-----------
TELECOMMUNICATION EQUIPMENT (2.0%)
159,825 Corning, Inc.* 3,047,863
319,625 Motorola, Inc. 7,274,665
350,225 Nokia Corp. (ADR) (Finland) 6,951,966
-----------
17,274,494
-----------
TOBACCO (2.9%)
172,820 Altria Group, Inc. 13,820,415
232,560 UST, Inc. 11,755,908
-----------
25,576,323
-----------
TRUCKS/CONSTRUCTION/FARM MACHINERY (0.9%)
111,500 Caterpillar Inc. 7,902,005
-----------
Total Common Stocks
(COST $382,688,873) 528,557,000
-----------
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE
- --------- ------ --------
Corporate Bonds (5.0%)
ADVERTISING/MARKETING SERVICES (0.0%)
$320 WPP Finance (UK) Corp. (United Kingdom) 5.875% 06/15/14 313,697
-----------
AEROSPACE & DEFENSE (0.1%)
350 Northrop Grumman Corp. 4.079 11/16/06 348,500
199 Raytheon Co. 6.15 11/01/08 201,823
SEE NOTES TO FINANCIAL STATEMENTS
15
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------
$688 Systems 2001 Asset Trust - 144A**
(Cayman Islands) 6.664% 09/15/13 $ 714,959
----------
1,265,282
----------
AIR FREIGHT/COURIERS (0.0%)
335 Fedex Corp. 2.65 04/01/07 328,206
----------
AIRLINES (0.1%)
790 America West Airlines, Inc. (Series 01-1) 7.10 04/02/21 814,001
295 Southwest Airlines Co. (Series 01-1) 5.496 11/01/06 295,201
----------
1,109,202
----------
APPAREL/FOOTWEAR RETAIL (0.0%)
120 Limited Brands, Inc. 6.95 03/01/33 115,704
----------
BEVERAGES: ALCOHOLIC (0.1%)
475 FBG Finance Ltd. - 144A** (Australia) 5.125 06/15/15 441,943
470 Miller Brewing Co. - 144A** 4.25 08/15/08 457,839
----------
899,782
----------
CABLE/SATELLITE TV (0.1%)
135 Comcast Cable Communications Inc. 6.75 01/30/11 140,320
60 Comcast Corp. 7.625 02/15/08 61,634
390 TCI Communications, Inc. 7.875 02/15/26 421,875
----------
623,829
----------
CASINO/GAMING (0.1%)
755 Harrah's Operating Co., Inc. 5.625 06/01/15 705,542
210 Harrah's Operating Co., Inc. 6.50 06/01/16 207,067
----------
912,609
----------
CHEMICALS: MAJOR DIVERSIFIED (0.0%)
270 ICI Wilmington Inc. 4.375 12/01/08 262,105
----------
COMPUTER PROCESSING HARDWARE (0.0%)
335 Hewlett-Packard Co. 5.339@@ 05/22/09 335,430
----------
CONTAINERS/PACKAGING (0.0%)
260 Sealed Air Corp. - 144A** 5.625 07/15/13 251,735
----------
DEPARTMENT STORES (0.1%)
980 May Department Stores Co., Inc. 5.95 11/01/08 985,918
----------
ELECTRIC UTILITIES (0.6%)
460 Ameren Corp. 4.263 05/15/07 455,343
485 Arizona Public Service Co. 5.80 06/30/14 474,048
140 Arizona Public Service Co. 6.75 11/15/06 140,428
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
16
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------
$450 Carolina Power & Light Co. 5.125% 09/15/13 $ 433,885
515 CC Funding Trust I 6.90 02/16/07 518,200
230 Cincinnati Gas & Electric Co. 5.70 09/15/12 227,487
45 Columbus Southern Power Co. (Series E) 4.40 12/01/10 42,860
205 Consolidated Natural Gas Co. (Series A) 5.00 12/01/14 190,251
460 Consolidated Natural Gas Co. (Series C) 6.25 11/01/11 468,530
280 Consumers Energy Co. (Series H) 4.80 02/17/09 274,121
215 Detroit Edison Co. (The) 6.125 10/01/10 219,023
140 Entergy Gulf States, Inc. 3.60 06/01/08 134,552
340 Entergy Gulf States, Inc. 5.631@@ 12/01/09 336,912
415 Ohio Power Company - IBC (Series K) 6.00 06/01/16 415,752
105 Panhandle Eastern Pipe Line Co.
(Series B) 2.75 03/15/07 103,107
315 Public Service Electric & Gas Co.
(Series MTNB) 5.00 01/01/13 303,705
240 Texas Eastern Transmission, LP 7.00 07/15/32 258,580
345 Wisconsin Electric Power Co. 3.50 12/01/07 336,510
----------
5,333,294
----------
ELECTRICAL PRODUCTS (0.1%)
520 Cooper Industries, Inc. 5.25 07/01/07 516,404
415 Cooper Industries, Inc. 5.25 11/15/12 406,266
----------
922,670
----------
ELECTRONICS/APPLIANCES (0.0%)
310 LG Electronics Inc. - 144A** (South Korea) 5.00 06/17/10 296,759
----------
FINANCE/RENTAL/LEASING (0.4%)
395 CIT Group, Inc. 2.875 09/29/06 393,433
5 CIT Group, Inc. 7.375 04/02/07 5,061
635 Countrywide Home Loans, Inc.
(Series MTN) 3.25 05/21/08 611,050
100 MBNA Capital A (Series A) 8.278 12/01/26 104,746
630 MBNA Corp. (Series MTNF) 5.58@@ 05/05/08 634,932
630 Nationwide Building Society - 144A**
(United Kingdom) 4.25 02/01/10 604,784
915 Residential Capital Corp. 6.375 06/30/10 912,696
310 SLM Corp. 4.00 01/15/10 295,269
----------
3,561,971
----------
FINANCIAL CONGLOMERATES (0.1%)
725 JP Morgan Chance & Co. 6.00 02/15/09 733,051
310 CIT Group Inc. (Series MTN) 4.75 08/15/08 305,797
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
17
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ------------------------------------------------------------------------------------
$ 180 General Electric Capital Corp.
(Series MTNA) 4.25% 12/01/10 $ 172,189
55 General Electric Capital Corp.
(Series MTNA) 4.75 09/15/14 52,049
----------
1,263,086
----------
FOOD RETAIL (0.1%)
365 Fred Meyer, Inc. 7.45 03/01/08 374,486
----------
FOOD: MAJOR DIVERSIFIED (0.1%)
210 ConAgra Foods, Inc. 7.00 10/01/28 217,070
215 ConAgra Foods, Inc. 8.25 09/15/30 252,971
----------
470,041
----------
GAS DISTRIBUTORS (0.1%)
325 NiSource Finance Corp. 5.764@@ 11/23/09 325,759
305 Sempra Energy 4.621 05/17/07 302,843
----------
628,602
----------
HOME FURNISHINGS (0.0%)
290 Mohawk Industries, Inc. (Series D) 7.20 04/15/12 301,206
----------
HOTELS/RESORTS/CRUISELINES (0.1%)
510 Hyatt Equities LLC - 144A** 6.875 06/15/07 513,494
----------
HOUSEHOLD/PERSONAL CARE (0.1%)
590 Clorox Co. (The) 5.444@@ 12/14/07 591,031
----------
INDUSTRIAL CONGLOMERATES (0.1%)
330 Textron Financial Corp. 4.125 03/03/08 322,725
445 Textron Financial Corp. (Series MTN) 5.125 02/03/11 437,629
----------
760,354
----------
INSURANCE BROKERS/SERVICES (0.1%)
900 Farmers Exchange Capital - 144A** 7.05 07/15/28 875,013
----------
MAJOR BANKS (0.5%)
195 Bank of New York Co., Inc. (The) 5.20 07/01/07 194,366
250 Bank of New York Co., Inc. (The)
(Series BKNT) 3.80 02/01/08 244,311
280 HSBC Finance Corp. 6.75 05/15/11 293,191
325 Huntington National Bank (Series BKNT) 4.375 01/15/10 313,401
295 Popular North America Inc. (Series MTN) 5.65 04/15/09 294,268
765 USB Capital IX 6.189@@ ++ 759,401
2,340 Wachovia Capital Trust III 5.80@@ ++ 2,304,385
----------
4,403,323
----------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
18
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------
MAJOR TELECOMMUNICATIONS (0.3%)
$ 275 Deutsche Telekom International
Finance Corp. BV (Netherlands) 8.25% 06/15/30 $ 322,627
525 France Telecom S.A. (France) 8.50 03/01/31 649,562
305 SBC Communications, Inc. 6.15 09/15/34 284,405
150 Sprint Capital Corp. 8.75 03/15/32 183,227
270 Telecom Italia Capital SA (Luxembourg) 4.00 11/15/08 260,345
405 Telecom Italia Capital SA (Luxembourg) 4.00 01/15/10 381,500
265 Telefonica Europe BV (Netherlands) 8.25 09/15/30 307,584
----------
2,389,250
----------
MEDIA CONGLOMERATES (0.1%)
470 Viacom, Inc. - 144A** 6.875 04/30/36 452,135
----------
MOTOR VEHICLES (0.0%)
250 DaimlerChrysler North American
Holdings Co. 8.50 01/18/31 289,526
----------
MULTI-LINE INSURANCE (0.3%)
1,165 AIG Sun America Global Finance VI - 144A** 6.30 05/10/11 1,202,099
910 AXA Financial, Inc. 6.50 04/01/08 920,854
235 International Lease Finance Corp. 3.75 08/01/07 230,666
405 Two-Rock Pass Through - 144A**
(Bahamas) 6.102@@ ++++ 399,079
----------
2,752,698
----------
OIL& GAS PIPELINES (0.1%)
170 Kinder Morgan Energy Partners, L.P. 5.125 11/15/14 158,335
470 Plains All American Pipeline L.P. - 144A** 6.70 05/15/36 466,633
----------
624,968
----------
OTHER METALS/MINERALS (0.1%)
445 Brascan Corp. (Canada) 7.125 06/15/12 467,973
----------
PROPERTY - CASUALTY INSURERS (0.3%)
760 Mantis Reef Ltd. - 144A** (Australia) 4.692 11/14/08 740,895
300 Platinum Underwriters Finance
Holdings, Ltd. (Series B) 7.50 06/01/17 298,092
360 Platinum Underwriters Holdings, Ltd.
(Series B) (Bermuda) 6.371 11/16/07 357,205
515 St. Paul Travelers Companies, Inc. (The) 5.01 08/16/07 509,763
630 XLLIAC Global Funding - 144A** 4.80 08/10/10 610,420
----------
2,516,375
----------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
19
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ----------------------------------------------------------------------------------------
PULP & PAPER (0.0%)
$ 220 Sappi Papier Holding AG - 144A**
(Austria) 6.75% 06/15/12 $ 207,645
-----------
RAILROADS (0.1%)
310 Burlington North Santa Fe Railway Co. 6.125 03/15/09 314,750
290 Norfolk Southern Corp. 7.35 05/15/07 293,788
110 Union Pacific Corp. 6.625 02/01/08 111,712
140 Union Pacific Corp. (Series MTNE) 6.79 11/09/07 141,894
-----------
862,144
-----------
REAL ESTATE DEVELOPMENT (0.1%)
1,218 World Financial Properties - 144A**
(Series 1996WFP-B) 6.91 09/01/13 1,265,664
-----------
REAL ESTATE INVESTMENT TRUSTS (0.1%)
770 EOP Operating LP 6.763 06/15/07 776,726
-----------
REGIONAL BANKS (0.1%)
800 Marshall & Ilsley Bank (Series BKNT) 3.80 02/08/08 780,338
-----------
RESTAURANTS (0.0%)
200 Tricon Global 8.875 04/15/11 224,215
-----------
SAVINGS BANKS (0.2%)
305 Household Finance Corp. 4.125 12/15/08 296,272
230 Household Finance Corp. 5.875 02/01/09 232,365
175 Household Finance Corp. 6.375 10/15/11 180,691
350 Household Finance Corp. 6.40 06/17/08 355,798
100 Sovereign Bank (Series CD) 4.00 02/01/08 97,562
470 Washington Mutual Bank 5.50 01/15/13 461,146
260 Washington Mutual Inc. 8.25 04/01/10 280,429
-----------
1,904,263
-----------
TRUCKS/CONSTRUCTION/FARM MACHINERY (0.1%)
190 Caterpillar Financial Services Corp.
(Series MTNF) 3.625 11/15/07 185,583
480 Caterpillar Financial Services Corp.
(Series MTNF) 5.259@@ 08/20/07 480,576
-----------
666,159
-----------
WIRELESS TELECOMMUNICATIONS (0.1%)
480 Vodafone Group PLC (United Kingdom) 5.59@@ 12/28/07 480,169
-----------
TOTAL CORPORATE BONDS
(COST $44,851,401) 44,359,077
-----------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
20
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------------------
U.S. GOVERNMENT OBLIGATIONS (5.8%)
U.S. Treasury Bonds
$ 250 5.50% 08/15/28 $ 261,133
8,475 6.125 08/15/29 9,578,741
1,295 6.375 08/15/27 1,493,803
300 7.625 02/15/25 386,766
16,300 8.125 08/15/19 - 08/15/21 21,152,940
U.S. Treasury Notes
3,200 3.375 02/15/08 3,122,752
850 4.00 11/15/12 808,231
6,255 + 4.25 08/15/13 6,005,714
8,400 4.25 11/15/13 8,046,612
-----------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(COST $50,897,581) 50,856,692
-----------
U.S. GOVERNMENT AGENCY - MORTGAGE-BACKED SECURITIES (4.5%)
Federal Home Loan Mortgage Corp.
1,291 7.50 11/01/29 - 09/01/32 1,337,637
Federal Home Loan Mortgage Corp. PC Gold
656 6.50 05/01/29 - 09/01/32 667,353
48 7.50 01/01/30 49,490
4 8.00 07/01/30 4,530
Federal National Mortgage Assoc.
238 6.50 12/01/29 242,074
5,811 7.00 12/01/17 - 10/01/35 5,971,204
875 7.00 # 896,601
3,398 7.50 07/01/29 -09/01/35 3,520,324
2,540 8.00 05/01/09 -02/01/32 2,684,649
Federal National Mortgage Assoc. ARM
1,795 1.354 07/01/36 1,855,291
1,127 5.358 07/01/36 1,165,269
683 5.663 07/01/33 692,459
1,929 6.116 03/01/36 1,969,608
3,585 6.164 01/01/36 3,688,255
3,618 6.165 01/01/36 3,716,656
1,732 6.17 03/01/36 1,780,022
1,802 6.389 05/01/36 1,863,178
2,154 6.406 04/01/36 2,226,317
1,799 6.489 05/01/36 1,859,911
3,519 6.671 04/01/36 3,676,479
-----------
TOTAL U.S. GOVERNMENT AGENCY - MORTGAGE-BACKED SECURITIES
(COST $40,076,520) 39,867,307
-----------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
21
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------------
ASSET-BACKED SECURITIES (3.8%)
Finance/Rental/Leasing
$1,500 American Express Credit Account Master Trust 2002-3 A 5.479@@% 12/15/09 $1,502,325
2,100 American Express Credit Account Master Trust 2003-3 A 5.479@@ 11/15/10 2,104,926
3 Asset Backed Funding Certificates 2005-WF1 A2A 5.465@@ 01/25/35 2,808
1,225 Banc of America Securities Auto Trust 2005-WF1 A3 3.99 08/18/09 1,208,744
492 Capital Auto Receivables Asset Trust 2003-3 A3B 5.449@@ 01/15/08 492,518
1,250 Capital Auto Receivables Asset Trust 2005-1 A4 4.05 07/15/09 1,234,827
1,050 Caterpillar Financial Asset Trust 2005-A A3 3.90 02/25/09 1,037,690
1,200 Caterpillar Financial Asset Trust 2006-A A3 5.57 05/25/10 1,205,594
307 CIT Equipment Collateral 2004-EF1 A3 3.50 09/20/08 302,701
800 CNH Equipment Trust 2005-A A3 4.02 04/15/09 791,065
950 DaimlerChrysler Auto Trust 2005-B A3 4.04 09/08/09 939,472
800 Ford Credit Auto Owner Trust 2005-B A3 4.17 01/15/09 793,564
700 Ford Credit Auto Owner Trust 2006-A A3 5.05 03/15/10 696,489
900 GE Capital Credit Card Master Note Trust 2004-2 A3 5.409@@ 09/15/10 901,012
725 GE Equipment Small Ticket LLC -2005-2A 4.88 10/22/09 720,091
1,125 GS Auto Loan Trust 2006-1 A3 5.37 12/15/10 1,124,908
950 Harley-Davidson Motorcycle Trust 2005-3 A2 4.41 06/15/12 934,998
1,500 Harley-Davidson Motorcycle Trust 2005-1 A2 3.76 12/17/12 1,468,399
750 Harley-Davidson Motorcycle Trust 2005-2 A2 4.07 02/15/12 731,844
700 Hertz Vehicle Financing LLC 2005-2A A2 4.93 02/25/10 691,850
650 Honda Auto Receivables Owner Trust 2005-2 A3 3.93 01/15/09 642,947
750 Hyundai Auto Receivables Trust 2005-A A3 3.98 11/16/09 737,392
1,475 MBNA Credit Card Master Note Trust 2003-A3 A3 5.489@@ 08/16/10 1,478,693
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
22
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ------------------------------------------------------------------------------------------------------
$ 1,550 MBNA Master Credit Card Trust 1999-B A 5.90% 08/15/11 $ 1,574,739
1,325 Merrill Auto Trust Securitization 2005-1 A3 4.10 08/25/09 1,307,514
925 National City Auto Receivables Trust 2004-A A4 2.88 05/15/11 898,707
275 TXU Electric Delivery Transition Bond Co. LLC 2004-1 A2 4.81 11/17/14 266,585
1,600 USAA Auto Owner Trust 2004-2 A-4 3.58 02/15/11 1,569,521
1,111 USAA Auto Owner Trust 2004-3 A3 3.16 02/17/09 1,098,881
955 USAA Auto Owner Trust 2005-1 A3 3.90 07/15/09 945,311
850 Volkswagen Auto Lease Trust 2005-A A3 3.82 05/20/08 844,318
900 Volkswagen Auto Loan Enhanced Trust 2005-1 A3 4.80 07/20/09 893,991
344 Wachovia Auto Owner Trust 2004-B A3 2.91 04/20/09 340,211
650 Wachovia Auto Owner Trust 2005-A A3 4.06 09/21/09 642,248
975 Wachovia Auto Owner Trust 2005-B A3 4.79 04/20/10 967,633
315 World Omni Auto Receivables Trust 2004-A A3 3.29 11/12/08 312,845
-----------
TOTAL ASSET-BACKED SECURITIES
(COST $33,633,736) 33,407,361
-----------
U.S. GOVERNMENT AGENCIES - COLLATERALIZED
MORTGAGE OBLIGATIONS (0.5%)
1,760 Federal National Mortgage Assoc. 2006-28 1P 5.495@@ 03/25/36 1,760,087
20,293 Federal National Mortgage Assoc. 2006-28 1A1 (IO) 1.519@@ 03/25/36 523,176
2,464 Federal National Mortgage Assoc. 2005 - 68 XI (IO) 6.00 08/25/35 967,846
1,208 Freddie Mac Whole Loan 2005-5001 2A2 5.535@@ 09/25/45 1,212,768
-----------
TOTAL U.S. GOVERNMENT AGENCIES - COLLATERALIZED MORTGAGE OBLIGATIONS
(COST $3,924,336) 4,463,877
-----------
NUMBER OF
CONTRACTS
- ---------
PUT OPTION PURCHASED (0.0%)
459 90 day Euro $ June/2007 @ $94.25
(COST $146,297) 109,013
-----------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
23
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS (21.4%)
U.S. GOVERNMENT OBLIGATION (a) (0.0%)
$ 250 U.S. Treasury Bills***
(COST $244,238) 5.09% 01/11/07 $ 244,238
REPURCHASE AGREEMENT (21.4%)
189,545 Joint repurchase agreement account
(dated 07/31/06; proceeds $189,572,747) (b)
(COST $189,545,000) 5.27 08/01/06 189,545,000
------------
TOTAL SHORT-TERM INVESTMENTS
(COST $189,789,238) 189,789,238
------------
TOTAL INVESTMENTS
(COST $746,007,982) (c)(d) 100.7% 891,409,565
LIABILITIES IN EXCESS OF OTHER ASSETS (0.7) (6,747,549)
----- ------------
NET ASSETS 100.0% $884,662,016
===== ============
</Table>
- ----------
ADR AMERICAN DEPOSITARY RECEIPT.
ARM ADJUSTABLE RATE MORTGAGE.
IO INTEREST ONLY SECURITY.
PC PARTICIPATION CERTIFICATE.
* NON-INCOME PRODUCING SECURITY.
** RESALE IS RESTRICTED TO QUALIFIED INSTITUTIONAL INVESTORS.
*** A PORTION OF THIS SECURITY HAS BEEN PHYSICALLY SEGREGATED IN CONNECTION
WITH OPEN FUTURES CONTRACTS IN AN AMOUNT EQUAL TO $12,036.
++ SECURITIES REPRESENT BENEFICIAL INTEREST IN TRUSTS. THE CORRESPONDING
ASSETS OF THE TRUST ARE JUNIOR SUBORDINATED NOTES DUE 2042 AND A STOCK
PURCHASE CONTRACT TO PURCHASE PREFERRED STOCK ON MARCH 15, 2011 FOR
WACHOVIA CAPITAL TRUST III AND ON APRIL 15, 2011 FOR USB CAPITAL IX.
SECURITIES HAVE A PERPETUAL MATURITY AND THE TRUST WILL REDEEM THEM ONLY TO
THE EXTENT THE PREFERRED STOCK IS REDEEMED.
++++ FOREIGN ISSUED SECURITY WITH PERPETUAL MATURITY.
+ SECURITY WAS PURCHASED ON FORWARD COMMITMENT BASIS.
@@ VARIABLE RATE SECURITY; RATE SHOWN IS THE RATE IN EFFECT AS OF JULY 31,
2006.
# SECURITY WAS PURCHASED ON A FORWARD COMMITMENT BASIS WITH AN APPROXIMATE
PRINCIPAL AMOUNT AND NO DEFINITE MATURITY DATE; THE ACTUAL PRINCIPAL AMOUNT
AND MATURITY DATE WILL BE DETERMINED UPON SETTLEMENT.
(a) PURCHASED ON A DISCOUNT BASIS. THE INTEREST RATE SHOWN HAS BEEN ADJUSTED TO
REFLECT A MONEY MARKET EQUIVALENT YIELD.
(b) COLLATERALIZED BY FEDERAL AGENCY AND U.S. TREASURY OBLIGATIONS.
(c) SECURITIES HAVE BEEN DESIGNATED AS COLLATERAL IN A AMOUNT EQUAL TO
$57,648,185 IN CONNECTION WITH SECURITIES PURCHASED ON A FORWARD COMMITMENT
BASIS AND OPEN FUTURES CONTRACTS.
(d) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES IS $750,597,433. THE
AGGREGATE GROSS UNREALIZED APPRECIATION IS $151,517,996 AND THE AGGREGATE
GROSS UNREALIZED DEPRECIATION IS $10,705,864, RESULTING IN NET UNREALIZED
APPRECIATION OF $140,812,132.
FUTURES CONTRACTS OPEN AT JULY 31, 2006:
<Table>
<Caption>
UNREALIZED
NUMBER OF DESCRIPTION, DELIVERY UNDERLYING FACE APPRECIATION
CONTRACTS LONG/SHORT MONTH AND YEAR AMOUNT AT VALUE (DEPRECIATION)
- -------------------------------------------------------------------------------------------------------
180 Long U.S. Treasury Notes 5 Year, September 2006 $ 18,759,375 $124,532
100 Long U.S. Treasury Notes 10 Year, September 2006 10,603,125 55,840
10 Long U.S. Treasury Bonds 20 Year, September 2006 1,082,813 9,598
101 Short U.S. Treasury Notes 2 Year, September 2006 (20,550,345) (77,951)
--------
Net Unrealized Appreciation $112,019
========
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
24
<Page>
MORGAN STANLEY STRATEGIST FUND
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
JULY 31, 2006
ASSETS:
Investments in securities, at value (cost $746,007,982
including repurchase agreement of $189,545,000) $891,409,565
Cash 6,771
Receivable for:
Interest 2,088,025
Investments sold 899,115
Dividends 501,324
Shares of beneficial interest sold 456,166
Variation margin receivable 8,405
Prepaid expenses and other assets 87,612
------------
TOTAL ASSETS 895,456,983
------------
LIABILITIES:
Payable for:
Investments purchased 8,952,709
Shares of beneficial interest redeemed 858,578
Distribution fee 393,526
Investment advisory fee 314,111
Administration fee 59,831
Transfer agent fee 21,300
Accrued expenses and other payables 194,912
------------
TOTAL LIABILITIES 10,794,967
------------
NET ASSETS $884,662,016
============
COMPOSITION OF NET ASSETS:
Paid-in-capital $687,846,239
Net unrealized appreciation 145,513,602
Accumulated undistributed net investment income 3,671,983
Accumulated undistributed net realized gain 47,630,192
------------
NET ASSETS $884,662,016
============
CLASS A SHARES:
Net Assets $483,552,842
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 24,497,409
NET ASSET VALUE PER SHARE $ 19.74
============
MAXIMUM OFFERING PRICE PER SHARE,
(NET ASSET VALUE PLUS 5.54% OF NET ASSET VALUE) $ 20.83
============
CLASS B SHARES:
Net Assets $302,701,849
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 15,294,836
NET ASSET VALUE PER SHARE $ 19.79
============
CLASS C SHARES:
Net Assets $ 39,886,796
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 2,028,747
NET ASSET VALUE PER SHARE $ 19.66
============
CLASS D SHARES:
Net Assets $ 58,520,529
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 2,960,965
NET ASSET VALUE PER SHARE $ 19.76
============
SEE NOTES TO FINANCIAL STATEMENTS
25
<Page>
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JULY 31, 2006
NET INVESTMENT INCOME:
INCOME
Interest $ 14,637,169
Dividends (net of $124,463 foreign withholding tax) 10,827,076
------------
TOTAL INCOME 25,464,245
------------
EXPENSES
Investment advisory fee 3,950,719
Distribution fee (Class A shares) 1,219,600
Distribution fee (Class B shares) 3,497,101
Distribution fee (Class C shares) 391,614
Transfer agent fees and expenses 1,185,933
Administration fee 752,518
Shareholder reports and notices 174,044
Custodian fees 88,906
Professional fees 84,730
Registration fees 66,307
Trustees' fees and expenses 21,155
Other 58,788
------------
TOTAL EXPENSES 11,491,415
Less: expense offset (4,011)
------------
NET EXPENSES 11,487,404
------------
NET INVESTMENT INCOME 13,976,841
------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
NET REALIZED GAIN (LOSS) ON:
Investments 132,772,995
Futures contracts (204,597)
Options contracts 22,402
------------
NET REALIZED GAIN 132,590,800
------------
NET CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION ON:
Investments (63,011,630)
Futures contracts (172,186)
Options contracts (37,284)
------------
NET DEPRECIATION (63,221,100)
------------
NET GAIN 69,369,700
------------
NET INCREASE $ 83,346,541
============
SEE NOTES TO FINANCIAL STATEMENTS
26
<Page>
STATEMENTS OF CHANGES IN NET ASSETS
<Table>
<Caption>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
JULY 31, 2006 JULY 31, 2005
-------------- --------------
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income $ 13,976,841 $ 9,822,084
Net realized gain 132,590,800 91,608,088
Net change in unrealized appreciation (63,221,100) 36,053,309
-------------- --------------
NET INCREASE 83,346,541 137,483,481
-------------- --------------
DIVIDENDS TO SHAREHOLDERS FROM NET INVESTMENT INCOME:
Class A shares (8,017,425) (2,900,467)
Class B shares (2,927,298) (5,549,576)
Class C shares (373,233) (347,195)
Class D shares (1,081,851) (1,059,379)
-------------- --------------
TOTAL DIVIDENDS (12,399,807) (9,856,617)
-------------- --------------
NET DECREASE FROM TRANSACTIONS IN SHARES OF
BENEFICIAL INTEREST (194,648,956) (250,828,677)
-------------- --------------
NET DECREASE (123,702,222) (123,201,813)
NET ASSETS:
Beginning of period 1,008,364,238 1,131,566,051
-------------- --------------
END OF PERIOD
(INCLUDING ACCUMULATED UNDISTRIBUTED NET INVESTMENT
INCOME OF $3,671,983 AND $1,285,177, RESPECTIVELY) $ 884,662,016 $1,008,364,238
============== ==============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
27
<Page>
MORGAN STANLEY STRATEGIST FUND
NOTES TO FINANCIAL STATEMENTS - JULY 31, 2006
1. ORGANIZATION AND ACCOUNTING POLICIES
Morgan Stanley Strategist Fund (the "Fund") is registered under the Investment
Company Act of 1940, as amended (the "Act"), as a diversified, open-end
management investment company. The Fund's investment objective is to maximize
the total return of its investments. The Fund was organized as a Massachusetts
business trust on August 5, 1988 and commenced operations on October 31, 1988.
On July 28, 1997, the Fund converted to a multiple class share structure.
The Fund offers Class A shares, Class B shares, Class C shares and Class D
shares. The four classes are substantially the same except that most Class A
shares are subject to a sales charge imposed at the time of purchase and some
Class A shares, and most Class B shares and Class C shares are subject to a
contingent deferred sales charge imposed on shares redeemed within eighteen
months, six years and one year, respectively. Class D shares are not subject to
a sales charge. Additionally, Class A shares, Class B shares and Class C shares
incur distribution expenses.
Effective August 29, 2005, the Board of Trustees of the Fund approved the
implementation of a 2% redemption fee on Class A shares, Class B shares, Class C
shares, and Class D shares, which is paid directly to the Fund, for shares
redeemed within seven days of purchase, 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) listed options are valued at the
latest sale price on the exchange on which they are listed unless no sales of
such options have taken place that day, in which case they are valued at the
mean between their latest bid and asked price; (6) futures are valued at the
latest price published by the commodities exchange on which they trade; (7) when
market quotations are not readily available including circumstances under which
Morgan Stanley Investment Advisors Inc. (the "Investment Adviser), determines
that the latest sale price, the bid price or the mean between the last reported
bid and asked price do not reflect a security's market value, portfolio
securities are valued at their fair value as determined in good faith under
procedures established by and under the general supervision of
28
<Page>
the Fund's Trustees. Occasionally, developments affecting the closing prices of
securities and other assets may occur between the times at which valuations of
such securities are determined (that is, close of the foreign market on which
the securities trade) and the close of business on the NYSE. If developments
occur during such periods that are expected to materially affect the value of
such securities, 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 (8) certain
portfolio securities may be valued by an outside pricing service approved by the
Fund's Trustees; and (9) 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.
29
<Page>
F. OPTIONS -- When the Fund writes a call option, an amount equal to the premium
received is included in the Fund's Statement of Assets and Liabilities as a
liability which is subsequently marked-to-market to reflect the current market
value of the option written. If a written option either expires or the Fund
enters into a closing purchase transaction, the Fund realizes a gain or loss
without regard to any unrealized gain or loss on the underlying security and the
liability related to such option is extinguished. If a written call option is
exercised, the Fund realizes a gain or loss from the sale of the underlying
security and the proceeds from such sale are increased by the premium originally
received.
When the Fund purchases a call or put option, the premium paid is recorded as an
investment and is subsequently marked-to-market to reflect the current market
value. If a purchased option expires, the Fund will realize a loss to the extent
of the premium paid. If the Fund enters into a closing sale transaction, a gain
or loss is realized for the difference between the proceeds from the sale and
the cost of the option. If a put option is exercised, the cost of the security
or currency sold upon exercise will be increased by the premium originally paid.
If a call option is exercised, the cost of the security purchased upon exercise
will be increased by the premium originally paid.
G. FOREIGN CURRENCY TRANSLATION AND FORWARD FOREIGN CURRENCY CONTRACTS -- The
books and records of the Fund are maintained in U.S. dollars as follows: (1) the
foreign currency market value of investment securities, other assets and
liabilities and forward foreign currency contracts ("forward contracts") are
translated at the exchange rates prevailing at the end of the period; and (2)
purchases, sales, income and expenses are translated at the exchange rates
prevailing on the respective dates of such transactions. The resultant exchange
gains and losses are recorded as realized and unrealized gain/loss on foreign
exchange transactions. Pursuant to U.S. federal income tax regulations, certain
foreign exchange gains/losses included in realized and unrealized gain/loss are
included in or are a reduction of ordinary income for federal income tax
purposes. The Fund does not isolate that portion of the results of operations
arising as a result of changes in the foreign exchange rates from the changes in
the market prices of the securities. Forward contracts are valued daily at the
appropriate exchange rates. The resultant unrealized exchange gains and losses
are recorded as unrealized foreign currency gain or loss. The Fund records
realized gains or losses on delivery of the currency or at the time the forward
contract is extinguished (compensated) by entering into a closing transaction
prior to delivery.
H. 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.
I. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- Dividends and distributions to
shareholders are recorded on the ex-dividend date.
J. 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.
30
<Page>
2. INVESTMENT ADVISORY/ADMINISTRATION AGREEMENTS
Pursuant to an Investment Advisory Agreement with the Investment Adviser, the
Fund pays an advisory fee, accrued daily and payable monthly, by applying the
following annual rates to the net assets of the Fund determined as of the close
of each business day: 0.42% to the portion of the daily net assets not exceeding
$1.5 billion and 0.395% to the portion of the daily net assets exceeding $1.5
billion.
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 Plan on November 8, 1989 (not
including reinvestment of dividend or capital gain distributions) less the
average daily aggregate net asset value of the Class B shares redeemed since the
Plan's inception upon which a contingent deferred sales charge has been imposed
or waived; or (b) the average daily net assets of Class B attributable to shares
issued, net of related shares redeemed, since the Plan's inception; and (iii)
Class C -- up to 1.0% of the average daily net assets of Class C.
In the case of Class B shares, provided that the Plan continues in effect, any
cumulative expenses incurred by the Distributor but not yet recovered may be
recovered through the payment of future distribution fees from the Fund pursuant
to the Plan and contingent deferred sales charges paid by investors upon
redemption of Class B shares. Although there is no legal obligation for the Fund
to pay expenses incurred in excess of payments made to the Distributor under the
Plan and the proceeds of contingent deferred sales charges paid by investors
upon redemption of shares, if for any reason the Plan is terminated, the
Trustees will consider at that time the manner in which to treat such expenses.
The Distributor has advised the Fund that such excess amounts totaled $7,018,901
at July 31, 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 and other authorized
financial representatives at the time of sale may be reimbursed in the
subsequent calendar year. For the year ended July 31, 2006, the distribution fee
was accrued for Class A shares and Class C shares at the annual rate of 0.25%
and 0.96%, respectively.
31
<Page>
The Distributor has informed the Fund that for the year ended July 31, 2006, it
received contingent deferred sales charges from certain redemptions of the
Fund's Class A shares, Class B shares and Class C shares of $382, $657,798 and
$5,540, respectively and received $100,740 in front-end sales charges from sales
of the Fund's Class A shares. The respective shareholders pay such charges which
are not an expense of the Fund.
4. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES
The cost of purchases and proceeds from sales/maturities/prepayments of
portfolio securities, excluding short-term investments, for the year ended July
31, 2006 aggregated $355,442,345, and $664,727,184, respectively. Included in
the aforementioned are purchases and sales/maturities/prepayments of U.S.
Government securities of $113,484,281 and $149,443,805, respectively.
For the year ended July 31, 2006, the Fund incurred brokerage commissions of
$267,653 with Morgan Stanley & Co., Inc. an affiliate of the Investment Adviser,
Administrator and Distributor, for portfolio transactions executed on behalf of
the Fund.
Morgan Stanley Trust, an affiliate of the Investment Adviser, Administrator and
Distributor, is the Fund's transfer agent.
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 July 31, 2006 included in Trustees' fees and
expenses in the Statement of Operations amounted to $9,665. At July 31, 2006,
the Fund had an accrued pension liability of $78,480 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 they receive for serving on the Board of Trustees. Each eligible
Trustee generally may elect to have their 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. PURPOSES OF AND RISKS RELATING TO CERTAIN FINANCIAL INSTRUMENTS
For hedging and investment purposes, the Fund may engage in transactions in
listed and over-the-counter options and interest rate futures or in the case of
forward contracts, to facilitate settlement of foreign currency denominated
portfolio transactions or to manage foreign currency exposure associated with
foreign currency denominated securities ("derivative instruments").
32
<Page>
These derivative instruments involve elements of market risk in excess of the
amounts reflected in the Statement of Asset and Liabilities. The Fund bears the
risk of an unfavorable change in the value of underlying securities or
currencies. Risks may also arise upon entering into these contracts from the
potential inability of the counterparties to meet the terms of their contracts.
6. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest were as follows:
<Table>
<Caption>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
JULY 31, 2006 JULY 31, 2005
--------------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ------------- ----------- -------------
CLASS A SHARES
Sold 571,556 $ 10,913,191 840,672 $ 13,790,598
Conversion from Class B 2,288,510 43,709,577 26,158,781 452,791,613
Reinvestment of dividends 373,001 7,105,612 148,520 2,628,095
Redeemed (6,584,429) (125,229,011) (2,922,292) (51,577,863)
----------- ------------- ----------- -------------
Net increase (decrease) -- Class A (3,351,362) (63,500,631) 24,225,681 417,632,443
----------- ------------- ----------- -------------
CLASS B SHARES
Sold 761,167 14,550,372 1,802,497 31,046,194
Conversion to Class A (2,282,614) (43,709,577) (26,189,482) (452,791,613)
Reinvestment of dividends 129,978 2,483,126 279,071 4,808,314
Redeemed (4,996,402) (95,170,042) (13,785,546) (237,957,003)
----------- ------------- ----------- -------------
Net decrease -- Class B (6,387,871) (121,846,121) (37,893,460) (654,894,108)
----------- ------------- ----------- -------------
CLASS C SHARES
Sold 263,064 4,975,961 341,082 5,845,255
Reinvestment of dividends 17,595 335,035 18,201 314,609
Redeemed (533,601) (10,119,456) (649,757) (11,210,612)
----------- ------------- ----------- -------------
Net decrease -- Class C (252,942) (4,808,460) (290,474) (5,050,748)
----------- ------------- ----------- -------------
CLASS D SHARES
Sold 309,368 5,962,339 226,903 3,947,950
Reinvestment of dividends 52,295 997,106 56,499 979,608
Redeemed (602,181) (11,453,189) (774,991) (13,443,822)
----------- ------------- ----------- -------------
Net decrease -- Class D (240,518) (4,493,744) (491,589) (8,516,264)
----------- ------------- ----------- -------------
Net decrease in Fund (10,232,693) $(194,648,956) (14,449,842) $(250,828,677)
=========== ============= =========== =============
</Table>
7. 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>
8. 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
JULY 31, 2006 JULY 31, 2005
------------- -------------
Ordinary income $ 12,399,807 $9,856,617
============= ==========
As of July 31, 2006, the tax-basis components of accumulated earnings were as
follows:
Undistributed ordinary income $ 4,725,589
Undistributed long-term gains 51,321,206
-------------
Net accumulated earnings 56,046,795
Temporary differences (80,434)
Net unrealized appreciation 140,849,416
-------------
Total accumulated earnings $ 196,815,777
=============
During the year ended July 31, 2006, the Fund utilized its net capital loss
carryforward of $78,425,459.
As of July 31, 2006, the Fund had temporary book/tax differences primarily
attributable to capital loss deferrals on wash sales and straddles,
mark-to-market of open futures contracts and book amortization of premiums on
debt securities and permanent book/tax differences attributable to losses on
paydowns and tax adjustments on debt securities sold by the Fund. To reflect
reclassifications arising from the permanent differences, accumulated
undistributed net realized gain was charged and accumulated undistributed net
investment income was credited $809,772.
34
<Page>
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.
11. SUBSEQUENT EVENT -- FUND MERGER
On September 27, 2006, shareholders of Morgan Stanley Total Return Trust ("Total
Return") approved an Agreement and Plan of Reorganization by and between the
Fund and Total Return, pursuant to which substantially all of the assets of
Total Return would be combined with those of the Fund and shareholders of Total
Return would become shareholders of the Fund, receiving shares of the Fund equal
to the value of their holdings in Total Return (the "Reorganization"). Each
shareholder of Total Return will receive the Class of shares of the Fund that
corresponds to the Class of shares of Total Return currently held by that
shareholder. It is anticipated that the Reorganization will be consummated on or
about October 20, 2006.
35
<Page>
MORGAN STANLEY STRATEGIST FUND
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:
<Table>
<Caption>
FOR THE YEAR ENDED JULY 31,
-------------------------------------------------
2006 2005 2004 2003 2002
-------- -------- ------- ------- -------
CLASS A SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period $ 18.31 $ 16.28 $ 14.72 $ 13.53 $ 16.43
-------- -------- ------- ------- -------
Income (loss) from investment operations:
Net investment income++ 0.34 0.27 0.20 0.14 0.22
Net realized and unrealized gain (loss) 1.40 2.03 1.58 1.21 (2.84)
-------- -------- ------- ------- -------
Total income (loss) from investment operations 1.74 2.30 1.78 1.35 (2.62)
-------- -------- ------- ------- -------
Less dividends from net investment income (0.31) (0.27) (0.22) (0.16) (0.28)
-------- -------- ------- ------- -------
Net asset value, end of period $ 19.74 $ 18.31 $ 16.28 $ 14.72 $ 13.53
======== ======== ======= ======= =======
TOTAL RETURN+ 9.60% 14.23% 12.10% 10.11% (16.14)%
RATIOS TO AVERAGE NET ASSETS(1):
Total expenses (before expense offset) 0.93% 0.93% 0.95% 0.93% 0.88%
Net investment income 1.78% 1.48% 1.24% 0.95% 1.44%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands $483,553 $510,016 $58,968 $53,951 $78,583
Portfolio turnover rate 43% 48% 42% 124% 164%
</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 JULY 31,
-------------------------------------------
2006 2005 2004 2003 2002
------ ------ ------ ------ -------
CLASS B SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period $18.36 $16.29 $14.73 $13.54 $ 16.43
------ ------ ------ ------ -------
Income (loss) from investment operations:
Net investment income++ 0.19 0.11 0.08 0.02 0.10
Net realized and unrealized gain (loss) 1.41 2.08 1.58 1.22 (2.84)
------ ------ ------ ------ -------
Total income (loss) from investment operations 1.60 2.19 1.66 1.24 (2.74)
------ ------ ------ ------ -------
Less dividends from net investment income (0.17) (0.12) (0.10) (0.05) (0.15)
------ ------ ------ ------ -------
Net asset value, end of period $19.79 $18.36 $16.29 $14.73 $ 13.54
====== ====== ====== ====== =======
TOTAL RETURN+ 8.72% 13.49% 11.24% 9.20% (16.77)%
RATIOS TO AVERAGE NET ASSETS(1):
Total expenses (before expense offset) 1.68% 1.68% 1.71% 1.73% 1.67%
Net investment income 1.03% 0.73% 0.48% 0.15% 0.64%
SUPPLEMENTAL DATA:
Net assets, end of period, in millions $ 303 $ 398 $ 971 $1,042 $ 1,216
Portfolio turnover rate 43% 48% 42% 124% 164%
</Table>
- ----------
++ THE PER SHARE AMOUNTS WERE COMPUTED USING AN AVERAGE NUMBER OF SHARES
OUTSTANDING DURING THE PERIOD.
+ DOES NOT REFLECT THE DEDUCTION OF SALES CHARGE. CALCULATED BASED ON THE NET
ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE PERIOD.
(1) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC
EXPENSES.
SEE NOTES TO FINANCIAL STATEMENTS
37
<Page>
<Table>
<Caption>
FOR THE YEAR ENDED JULY 31,
-----------------------------------------------
2006 2005 2004 2003 2002
------- ------- ------- ------- -------
CLASS C SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period $ 18.24 $ 16.21 $ 14.66 $ 13.46 $ 16.36
------- ------- ------- ------- -------
Income (loss) from investment operations:
Net investment income++ 0.20 0.13 0.08 0.03 0.10
Net realized and unrealized gain (loss) 1.40 2.04 1.57 1.21 (2.83)
------- ------- ------- ------- -------
Total income (loss) from investment operations 1.60 2.17 1.65 1.24 (2.73)
------- ------- ------- ------- -------
Less dividends from net investment income (0.18) (0.14) (0.10) (0.04) (0.17)
------- ------- ------- ------- -------
Net asset value, end of period $ 19.66 $ 18.24 $ 16.21 $ 14.66 $ 13.46
======= ======= ======= ======= =======
TOTAL RETURN+ 8.79% 13.44% 11.25% 9.09% (16.70)%
RATIOS TO AVERAGE NET ASSETS(1):
Total expenses (before expense offset) 1.64% 1.65% 1.71% 1.73% 1.67%
Net investment income 1.07% 0.76% 0.48% 0.15% 0.64%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands $39,887 $41,621 $41,697 $36,351 $34,727
Portfolio turnover rate 43% 48% 42% 124% 164%
</Table>
- ----------
++ THE PER SHARE AMOUNTS WERE COMPUTED USING AN AVERAGE NUMBER OF SHARES
OUTSTANDING DURING THE PERIOD.
+ DOES NOT REFLECT THE DEDUCTION OF SALES CHARGE. CALCULATED BASED ON THE NET
ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE PERIOD.
(1) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC
EXPENSES.
SEE NOTES TO FINANCIAL STATEMENTS
38
<Page>
<Table>
<Caption>
FOR THE YEAR ENDED JULY 31,
-----------------------------------------------
2006 2005 2004 2003 2002
------- ------- ------- ------- -------
CLASS D SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period $ 18.34 $ 16.29 $ 14.73 $ 13.55 $ 16.45
------- ------- ------- ------- -------
Income (loss) from investment operations:
Net investment income++ 0.39 0.30 0.24 0.16 0.26
Net realized and unrealized gain (loss) 1.39 2.06 1.58 1.21 (2.85)
------- ------- ------- ------- -------
Total income (loss) from investment operations 1.78 2.36 1.82 1.37 (2.59)
------- ------- ------- ------- -------
Less dividends from net investment income (0.36) (0.31) (0.26) (0.19) (0.31)
------- ------- ------- ------- -------
Net asset value, end of period $ 19.76 $ 18.34 $ 16.29 $ 14.73 $ 13.55
======= ======= ======= ======= =======
TOTAL RETURN+ 9.80% 14.60% 12.37% 10.25% (15.94)%
RATIOS TO AVERAGE NET ASSETS(1):
Total expenses (before expense offset) 0.68% 0.68% 0.71% 0.73% 0.67%
Net investment income 2.03% 1.73% 1.48% 1.15% 1.64%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands $58,521 $58,707 $60,177 $61,423 $58,834
Portfolio turnover rate 43% 48% 42% 124% 164%
</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 STRATEGIST FUND
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES OF
MORGAN STANLEY STRATEGIST FUND:
We have audited the accompanying statement of assets and liabilities of Morgan
Stanley Strategist Fund (the "Fund"), including the portfolio of investments, as
of July 31, 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 July 31, 2006, by correspondence with the custodian
and brokers; where replies were not received from brokers, we performed other
auditing procedures. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Morgan
Stanley Strategist Fund as of July 31, 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
SEPTEMBER 25, 2006
40
<Page>
MORGAN STANLEY STRATEGIST FUND
TRUSTEE AND OFFICER INFORMATION
INDEPENDENT TRUSTEES:
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
TERM OF IN FUND
POSITION(S) OFFICE AND COMPLEX
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
INDEPENDENT TRUSTEE REGISTRANT TIME SERVED* DURING PAST 5 YEARS BY TRUSTEE** HELD BY TRUSTEE
- --------------------------------------- ----------- ------------ ----------------------- ------------ --------------------
Frank L. Bowman (61) Trustee Since President and Chief 108 Director of the
c/o Kramer Levin Naftalis & Frankel LLP August 2006 Executive Officer of National Energy
Counsel to the Independent Trustees the Nuclear Energy Foundation, the U.S.
1177 Avenue of the Americas Institute (policy Energy Association,
New York, NY 10036 organization) (since the American Council
February 2005); for Capital
formerly variously, Formation and the
Admiral in the U.S. Armed Services YMCA
Navy, Director of Naval of the USA.
Nuclear Propulsion
Program and Deputy
Administrator Naval
Reactors in the
National Nuclear
Security Administration
at the U.S. Department
of Energy (1996-2004),
Honorary Knight
Commander of the Most
Excellent Order of the
British Empire.
Michael Bozic (65) Trustee Since Private Investor; 175 Director of various
c/o Kramer Levin Naftalis & Frankel LLP April 1994 Chairman of the business
Counsel to the Independent Trustees Insurance Committee organizations.
1177 Avenue of the Americas (since July 2006) and
New York, NY 10036 Director or Trustee of
the Retail Funds (since
April 1994) and the
Institutional Funds
(since July 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);
variously Chairman,
Chief Executive
Officer, President and
Chief Operating Officer
(1987-1991) of the
Sears Merchandise Group
of Sears, Roebuck & Co.
Kathleen A. Dennis (53) Trustee Since President, Cedarwood 108 None.
c/o Kramer Levin Naftalis & Frankel LLP August 2006 Associates (mutual fund
Counsel to the Independent Trustees consulting) (since
1177 Avenue of the Americas 2006); formerly, Senior
New York, NY 10036 Managing Director of
Victory Capital
Management (1993-2006).
</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) OVERSEEN OTHER DIRECTORSHIPS
INDEPENDENT TRUSTEE REGISTRANT TIME SERVED* DURING PAST 5 YEARS BY TRUSTEE** HELD BY TRUSTEE
- --------------------------------------- ----------- ------------ ----------------------- ------------ --------------------
Edwin J. Garn (73) Trustee Since Consultant; Director or 175 Director of Franklin
1031 N. Chartwell Court January 1993 Trustee of the Retail Covey (time
Salt Lake City, UT 84103 Funds (since January management systems),
1993) and the BMW Bank of North
Institutional Funds America, Inc.
(since July 2003); (industrial loan
Member of the Utah corporation), Escrow
Regional Advisory Board Bank USA (industrial
of Pacific Corp. loan corporation),
(utility company); United Space
formerly Managing Alliance (joint
Director of Summit venture between
Ventures LLC Lockheed Martin and
(2000-2004) (lobbying the Boeing Company)
and consulting firm); and Nuskin Asia
United States Senator Pacific (multilevel
(R-Utah) (1974-1992) marketing); member
and Chairman, Senate of the board of
Banking Committee various civic and
(1980-1986), Mayor of charitable
Salt Lake City, Utah organizations.
(1971-1974), Astronaut,
Space Shuttle Discovery
(April 12-19, 1985),
and Vice Chairman,
Huntsman Corporation
(chemical company).
Wayne E. Hedien (72) Trustee Since Retired; Director or 175 Director of The PMI
c/o Kramer Levin Naftalis & Frankel LLP September Trustee of the Retail Group Inc. (private
Counsel to the Independent Trustees 1997 Funds (since September mortgage insurance);
1177 Avenue of the Americas 1997) and the Trustee and Vice
New York, NY 10036 Institutional Funds Chairman of The
(since July 2003); Field Museum of
formerly associated Natural History;
with the Allstate director of various
Companies (1966-1994), other business and
most recently as charitable
Chairman of The organizations.
Allstate Corporation
(March 1993-December
1994) and Chairman and
Chief Executive Officer
of its wholly-owned
subsidiary, Allstate
Insurance Company (July
1989-December 1994).
Dr. Manuel H. Johnson (57) Trustee Since Senior Partner, Johnson 175 Director of NVR,
c/o Johnson Smick Group, Inc. July 1991 Smick International, Inc. (home
888 16th Street, NW Inc., a consulting construction);
Suite 740 firm; Chairman of the Director of KFX
Washington, D.C. 20006 Audit Committee and Energy; Director of
Director or Trustee of RBS Greenwich
the Retail Funds (since Capital Holdings
July 1991) and the (financial holding
Institutional Funds 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.
</Table>
42
<Page>
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
TERM OF IN FUND
POSITION(S) OFFICE AND COMPLEX
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
INDEPENDENT TRUSTEE REGISTRANT TIME SERVED* DURING PAST 5 YEARS BY TRUSTEE** HELD BY TRUSTEE
- --------------------------------------- ----------- ------------ ----------------------- ------------ --------------------
Joseph J. Kearns (63) Trustee Since President, Kearns & 176 Director of Electro
c/o Kearns & Associates LLC July 2003 Associates LLC Rent Corporation
PMB754 (investment (equipment leasing),
23852 Pacific Coast Highway consulting); Deputy The Ford Family
Malibu, CA 90265 Chairman of the Audit Foundation, and the
Committee and Director UCLA Foundation.
or Trustee of the
Retail Funds (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 F. Klein (47) Trustee Since Chief Operating Officer 108 Director of certain
c/o Kramer Levin Naftalis & Frankel LLP August 2006 and Managing Director, investment funds
Counsel to the Independent Trustees Aetos Capital, LLC managed or sponsored
1177 Avenue of the Americas (since March 2000); by Aetos Capital
New York, NY 10036 formerly Managing LLC.
Director, Morgan
Stanley & Co. Inc. and
Morgan Stanley Dean
Witter Investment
Management, and
President, Morgan
Stanley Institutional
Funds (June 1998-March
2000); Principal,
Morgan Stanley & Co.
Inc. and Morgan Stanley
Dean Witter Investment
Management (August
1997-December 1999).
Michael E. Nugent (70) Chairman of Chairman of General Partner of 175 None.
c/o Triumph Capital, L.P. the Board the Board Triumph Capital, L.P.,
445 Park Avenue and Trustee (since July a private investment
New York, NY 10022 2006) and partnership; Chairman
Trustee of the Board of the
(since July Retail Funds and
1991) Institutional Funds
(since July 2006) and
Director or Trustee of
the Retail Funds (since
July 1991) and the
Institutional Funds
(since July 2001);
formerly Chairman of
the Insurance Committee
(until July 2006); Vice
President, Bankers
Trust Company and BT
Capital Corporation
(1984-1988).
</Table>
43
<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) OVERSEEN OTHER DIRECTORSHIPS
INDEPENDENT TRUSTEE REGISTRANT TIME SERVED* DURING PAST 5 YEARS BY TRUSTEE** HELD BY TRUSTEE
- --------------------------------------- ----------- ------------ ----------------------- ------------ --------------------
W. Allen Reed (59) Trustee Since President and CEO of 108 Director of GMAC
c/o Kramer Levin Naftalis & August 2006 General Motors Asset (financial
Frankel LLP Management; Chairman services), GMAC
Counsel to the Independent and Chief Executive Insurance Holdings,
Trustees Officer of the GM Trust iShares, Inc.
1177 Avenue of the Americas Bank and Corporate Vice (exchange traded
New York, NY 10036 President of General funds), and Temple-
Motors Corporation Inland Industries
(August 1994-December (Packaging, Banking
2005). and Forest
Products); member of
the Board of
Executives of the
New York Stock
Exchange, the
Investment Advisory
Committee for the
New York State
Retirement System
and the Morgan
Stanley Capital
International
Editorial Board;
Director of various
investment fund
advisory boards.
Fergus Reid (73) Trustee Since Chairman of Lumelite 176 Trustee and Director
c/o Lumelite Plastics Corporation July 2003 Plastics Corporation; of certain
85 Charles Colman Blvd. Chairman of the investment companies
Pawling, NY 12564 Governance Committee in the JPMorgan
and Director or Trustee Funds complex
of the Retail Funds managed by J.P.
(since July 2003) and Morgan Investment
the Institutional Funds Management Inc.
(since June 1992).
</Table>
44
<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) OVERSEEN OTHER DIRECTORSHIPS
INTERESTED TRUSTEE REGISTRANT TIME SERVED* DURING PAST 5 YEARS BY TRUSTEE** HELD BY TRUSTEE
- --------------------------------------- ----------- ------------ ----------------------- ------------ --------------------
Charles A. Fiumefreddo (73) Trustee Since Director or Trustee of 175 None.
c/o Morgan Stanley Trust July 1991 the Retail Funds (since
Harborside Financial Center July 1991) and the
Plaza Two Institutional Funds
Jersey City, NJ 07311 (since July 2003);
formerly 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 175 Director of AXA
c/o Morgan Stanley Trust June 2000 the Retail Funds (since Financial, Inc. and
Harborside Financial Center June 2000) and the The Equitable Life
Plaza Two Institutional Funds Assurance Society of
Jersey City, NJ 07311 (since July 2003); the United States
Senior Advisor of (financial
Morgan Stanley (since services).
August 2000).
</Table>
- ----------
* THIS IS THE EARLIEST DATE THE TRUSTEE BEGAN SERVING THE FUNDS ADVISED BY
MORGAN STANLEY INVESTMENT ADVISORS INC. (THE "INVESTMENT ADVISER") (THE
"RETAIL FUNDS") OR THE FUNDS ADVISED BY MORGAN STANLEY INVESTMENT
MANAGEMENT INC. AND MORGAN STANLEY AIP GP LP (THE "INSTITUTIONAL FUNDS").
** THE FUND COMPLEX INCLUDES ALL OPEN-END AND CLOSED-END FUNDS (INCLUDING ALL
OF THEIR PORTFOLIOS) ADVISED BY THE INVESTMENT ADVISER AND ANY FUNDS THAT
HAVE AN INVESTMENT ADVISER THAT IS AN AFFILIATED PERSON OF THE INVESTMENT
ADVISER (INCLUDING, BUT NOT LIMITED TO, MORGAN STANLEY INVESTMENT
MANAGEMENT INC.) AS OF AUGUST 23, 2006
45
<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) of
Officer Executive Officer the Van Kampen Funds; Managing Director, Director and/or Officer of
(since May 2003) 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 Officer
Morgan Stanley February 2006 - Global Fixed Income of Morgan Stanley Investment Management;
Investment Management Ltd. Managing Director and Director of Morgan Stanley Investment
25 Cabot Square Management Limited; Vice President of the Retail and Institutional
Canary Wharf, London Funds (since February 2006).
United Kingdom E144QA
Dennis F. Shea (53) Vice President Since Managing Director and (since February 2006) Chief Investment Officer
1221 Avenue of the Americas February 2006 - Global Equity of Morgan Stanley Investment Management; Vice
New York, NY 10020 President of the Retail and Institutional Funds (since February
2006). 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 Investment
1221 Avenue of the Americas February 1997 Management; Managing Director of the Investment Adviser and various
New York, NY 10020 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 Management of
1221 Avenue of the Americas Morgan Stanley Investment Management (since July 2004); Vice
New York, NY 10020 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 Stanley
1221 Avenue of the Americas Compliance 2004 Investment Management (since October 2004); Managing Director and
New York, NY 10020 Officer Chief Compliance Officer of Morgan Stanley Investment Management.
Formerly, Assistant Secretary and Assistant General Counsel of the
Retail Funds.
</Table>
46
<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 Executive Director of the Investment Adviser and various entities
1221 Avenue of the Americas December 1997 affiliated with the Investment Adviser; Vice President of the Retail
New York, NY 10020 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 entities
c/o Morgan Stanley Trust Chief Financial July 2003) and affiliated with the Investment Adviser; Treasurer and Chief
Harborside Financial Center Officer Chief Financial Financial Officer of the Retail Funds (since July 2003). Formerly,
Plaza Two Officer (since Vice President of the Retail Funds (September 2002 to July 2003).
Jersey City, NJ 07311 September 2002)
Mary E. Mullin (39) Secretary Since July 1999 Executive Director of the Investment Adviser and various entities
1221 Avenue of the Americas affiliated with the Investment Adviser; Secretary of the Retail
New York, NY 10020 Funds (since July 2003) and the Institutional Funds (since June
1999).
</Table>
- ----------
* THIS IS THE EARLIEST DATE THE OFFICER BEGAN SERVING THE RETAIL FUNDS OR THE
INSTITUTIONAL FUNDS.
2006 FEDERAL TAX NOTICE (UNAUDITED)
During the fiscal year ended July 31, 2006, 72.76% of the ordinary dividends
paid by the Fund qualified for the dividends received deduction available to
corporations. Additionally, please note that 80.99% of the Fund's ordinary
dividends paid during the fiscal year ended July 31, 2006 qualified for the
lower income tax rate available to individuals under the Jobs and Growth Tax
Relief Reconcilliation Act of 2003.
Of the Fund's ordinary dividends paid during the fiscal year ended July 31,
2006, 15.63% was attritutable to qualifying Federal obligations. Please consult
your tax advisor to determine if any portion of the dividends you received is
exempt from state income tax.
47
<Page>
TRUSTEES
Frank L. Bowman
Michael Bozic
Kathleen A. Dennis
Charles A. Fiumefreddo
Edwin J. Garn
Wayne E. Hedien
James F. Higgins
Dr. Manuel H. Johnson
Joseph J. Kearns
Michael F. Klein
Michael E. Nugent
W. Allen Reed
Fergus Reid
OFFICERS
Michael E. Nugent
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 STRATEGIST FUND
ANNUAL REPORT JULY 31, 2006
[Morgan Stanley LOGO]
SRTRPT-38585RPT-RA06-00845P-Y07/06.
<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.
<Page>
Item 4. Principal Accountant Fees and Services.
(a)(b)(c)(d) and (g). Based on fees billed for the periods shown:
<Table>
<Caption>
2006
REGISTRANT COVERED ENTITIES(1)
AUDIT FEES $36,420
NON-AUDIT FEES
AUDIT-RELATED FEES $ 8,031(2) $5,190,300(2)
TAX FEES $ 5,200(3) $2,044,491(4)
ALL OTHER FEES $ -- $ --
TOTAL NON-AUDIT FEES $13,231 $7,234,791
TOTAL $49,651 $7,234,791
</Table>
<Table>
<Caption>
2005
REGISTRANT COVERED ENTITIES(1)
AUDIT FEES $33,836 N/A
NON-AUDIT FEES
AUDIT-RELATED FEES $ 540(2) $3,215,745(2)
TAX FEES $ 5,393(3) $ 24,000(4)
ALL OTHER FEES $ -- $ --
TOTAL NON-AUDIT FEES $ 5,933 $3,239,745
TOTAL $39,769 $3,239,745
</Table>
N/A- Not applicable, as not required by Item 4.
(1) Covered Entities include the Adviser (excluding
sub-advisors) and any entity controlling, controlled by or
under common control with the Adviser that provides ongoing
services to the Registrant.
(2) Audit-Related Fees represent assurance and related services
provided that are reasonably related to the performance of
the audit of the financial statements of the Covered
Entities' and funds advised by the Adviser or its
affiliates, specifically data verification and agreed-upon
procedures related to asset securitizations and agreed-upon
procedures engagements.
(3) Tax Fees represent tax compliance, tax planning and tax
advice services provided in connection with the preparation
and review of the Registrant's tax returns.
(4) Tax Fees represent tax compliance, tax planning and tax
advice services provided in connection with the review of
Covered Entities' tax returns.
(5) All other fees represent project management for future
business applications and improving business and operational
processes.
<Page>
(e)(1) The audit committee's pre-approval policies and procedures are as
follows:
APPENDIX A
AUDIT COMMITTEE
AUDIT AND NON-AUDIT SERVICES
PRE-APPROVAL POLICY AND PROCEDURES
OF THE
MORGAN STANLEY RETAIL AND INSTITUTIONAL FUNDS
AS ADOPTED AND AMENDED JULY 23, 2004,(1)
1. STATEMENT OF PRINCIPLES
The Audit Committee of the Board is required to review and, in its sole
discretion, pre-approve all Covered Services to be provided by the Independent
Auditors to the Fund and Covered Entities in order to assure that services
performed by the Independent Auditors do not impair the auditor's independence
from the Fund.
The SEC has issued rules specifying the types of services that an independent
auditor may not provide to its audit client, as well as the audit committee's
administration of the engagement of the independent auditor. The SEC's rules
establish two different approaches to pre-approving services, which the SEC
considers to be equally valid. Proposed services either: may be pre-approved
without consideration of specific case-by-case services by the Audit Committee
("GENERAL PRE-APPROVAL"); or require the specific pre-approval of the Audit
Committee or its delegate ("SPECIFIC PRE-APPROVAL"). The Audit Committee
believes that the combination of these two approaches in this Policy will result
in an effective and efficient procedure to pre-approve services performed by the
Independent Auditors. As set forth in this Policy, unless a type of service has
received general pre-approval, it will require specific pre-approval by the
Audit Committee (or by any member of the Audit Committee to which pre-approval
authority has been delegated) if it is to be provided by the Independent
Auditors. Any proposed services exceeding pre-approved cost levels or budgeted
amounts will also require specific pre-approval by the Audit Committee.
The appendices to this Policy describe the Audit, Audit-related, Tax and All
Other services that have the general pre-approval of the Audit Committee. The
term of any general pre-approval is 12 months from the date of pre-approval,
unless the Audit Committee considers and provides a different period and states
otherwise. The Audit Committee will annually review and pre-approve the services
that may be provided by the Independent Auditors without obtaining specific
pre-approval from the Audit Committee. The Audit Committee will add to or
subtract from the list of general pre-approved services from time to time, based
on subsequent determinations.
- ----------
(1) This Audit Committee Audit and Non-Audit Services Pre-Approval Policy and
Procedures (the "POLICY"), adopted as of the date above, supersedes and
replaces all prior versions that may have been adopted from time to time.
<Page>
The purpose of this Policy is to set forth the policy and procedures by which
the Audit Committee intends to fulfill its responsibilities. It does not
delegate the Audit Committee's responsibilities to pre-approve services
performed by the Independent Auditors to management.
The Fund's Independent Auditors have reviewed this Policy and believes that
implementation of the Policy will not adversely affect the Independent Auditors'
independence.
2. DELEGATION
As provided in the Act and the SEC's rules, the Audit Committee may delegate
either type of pre-approval authority to one or more of its members. The member
to whom such authority is delegated must report, for informational purposes
only, any pre-approval decisions to the Audit Committee at its next scheduled
meeting.
3. AUDIT SERVICES
The annual Audit services engagement terms and fees are subject to the specific
pre-approval of the Audit Committee. Audit services include the annual financial
statement audit and other procedures required to be performed by the Independent
Auditors to be able to form an opinion on the Fund's financial statements. These
other procedures include information systems and procedural reviews and testing
performed in order to understand and place reliance on the systems of internal
control, and consultations relating to the audit. The Audit Committee will
approve, if necessary, any changes in terms, conditions and fees resulting from
changes in audit scope, Fund structure or other items.
In addition to the annual Audit services engagement approved by the Audit
Committee, the Audit Committee may grant general pre-approval to other Audit
services, which are those services that only the Independent Auditors reasonably
can provide. Other Audit services may include statutory audits and services
associated with SEC registration statements (on Forms N-1A, N-2, N-3, N-4,
etc.), periodic reports and other documents filed with the SEC or other
documents issued in connection with securities offerings.
The Audit Committee has pre-approved the Audit services in Appendix B.1. All
other Audit services not listed in Appendix B.1 must be specifically
pre-approved by the Audit Committee (or by any member of the Audit Committee to
which pre-approval has been delegated).
4. AUDIT-RELATED SERVICES
Audit-related services are assurance and related services that are reasonably
related to the performance of the audit or review of the Fund's financial
statements and, to the extent they are Covered Services, the Covered Entities or
that are traditionally performed by the Independent Auditors. Because the Audit
Committee believes that the provision of Audit-related services does not impair
the independence of the auditor and is consistent with the SEC's rules on
auditor independence, the Audit Committee may grant general pre-approval to
Audit-related services. Audit-related services include, among others, accounting
consultations related to accounting, financial reporting or disclosure matters
<Page>
not classified as "Audit services"; assistance with understanding and
implementing new accounting and financial reporting guidance from rulemaking
authorities; agreed-upon or expanded audit procedures related to accounting
and/or billing records required to respond to or comply with financial,
accounting or regulatory reporting matters; and assistance with internal control
reporting requirements under Forms N-SAR and/or N-CSR.
The Audit Committee has pre-approved the Audit-related services in Appendix B.2.
All other Audit-related services not listed in Appendix B.2 must be specifically
pre-approved by the Audit Committee (or by any member of the Audit Committee to
which pre-approval has been delegated).
5. TAX SERVICES
The Audit Committee believes that the Independent Auditors can provide Tax
services to the Fund and, to the extent they are Covered Services, the Covered
Entities, such as tax compliance, tax planning and tax advice without impairing
the auditor's independence, and the SEC has stated that the Independent Auditors
may provide such services.
Pursuant to the preceding paragraph, the Audit Committee has pre-approved the
Tax Services in Appendix B.3. All Tax services in Appendix B.3 must be
specifically pre-approved by the Audit Committee (or by any member of the Audit
Committee to which pre-approval has been delegated).
6. ALL OTHER SERVICES
The Audit Committee believes, based on the SEC's rules prohibiting the
Independent Auditors from providing specific non-audit services, that other
types of non-audit services are permitted. Accordingly, the Audit Committee
believes it may grant general pre-approval to those permissible non-audit
services classified as All Other services that it believes are routine and
recurring services, would not impair the independence of the auditor and are
consistent with the SEC's rules on auditor independence.
The Audit Committee has pre-approved the All Other services in Appendix B.4.
Permissible All Other services not listed in Appendix B.4 must be specifically
pre-approved by the Audit Committee (or by any member of the Audit Committee to
which pre-approval has been delegated).
7. PRE-APPROVAL FEE LEVELS OR BUDGETED AMOUNTS
Pre-approval fee levels or budgeted amounts for all services to be provided by
the Independent Auditors will be established annually by the Audit Committee.
Any proposed services exceeding these levels or amounts will require specific
pre-approval by the Audit Committee. The Audit Committee is mindful of the
overall relationship of fees for audit and non-audit services in determining
whether to pre-approve any such services.
8. PROCEDURES
All requests or applications for services to be provided by the Independent
Auditors that do not require specific approval by the Audit Committee will be
submitted to the Fund's Chief Financial Officer and must include a detailed
description of the services to be
<Page>
rendered. The Fund's Chief Financial Officer will determine whether such
services are included within the list of services that have received the general
pre-approval of the Audit Committee. The Audit Committee will be informed on a
timely basis of any such services rendered by the Independent Auditors. Requests
or applications to provide services that require specific approval by the Audit
Committee will be submitted to the Audit Committee by both the Independent
Auditors and the Fund's Chief Financial Officer, and must include a joint
statement as to whether, in their view, the request or application is consistent
with the SEC's rules on auditor independence.
The Audit Committee has designated the Fund's Chief Financial Officer to monitor
the performance of all services provided by the Independent Auditors and to
determine whether such services are in compliance with this Policy. The Fund's
Chief Financial Officer will report to the Audit Committee on a periodic basis
on the results of its monitoring. Both the Fund's Chief Financial Officer and
management will immediately report to the chairman of the Audit Committee any
breach of this Policy that comes to the attention of the Fund's Chief Financial
Officer or any member of management.
9. ADDITIONAL REQUIREMENTS
The Audit Committee has determined to take additional measures on an annual
basis to meet its responsibility to oversee the work of the Independent Auditors
and to assure the auditor's independence from the Fund, such as reviewing a
formal written statement from the Independent Auditors delineating all
relationships between the Independent Auditors and the Fund, consistent with
Independence Standards Board No. 1, and discussing with the Independent Auditors
its methods and procedures for ensuring independence.
10. COVERED ENTITIES
Covered Entities include the Fund's investment adviser(s) and any entity
controlling, controlled by or under common control with the Fund's investment
adviser(s) that provides ongoing services to the Fund(s). Beginning with
non-audit service contracts entered into on or after May 6, 2003, the Fund's
audit committee must pre-approve non-audit services provided not only to the
Fund but also to the Covered Entities if the engagements relate directly to the
operations and financial reporting of the Fund. This list of Covered Entities
would include:
MORGAN STANLEY RETAIL FUNDS
Morgan Stanley Investment Advisors Inc.
Morgan Stanley & Co. Incorporated
Morgan Stanley DW Inc.
Morgan Stanley Investment Management Inc.
Morgan Stanley Investment Management Limited
Morgan Stanley Investment Management Private Limited
Morgan Stanley Asset & Investment Trust Management Co., Limited
Morgan Stanley Investment Management Company
Van Kampen Asset Management
Morgan Stanley Services Company, Inc.
Morgan Stanley Distributors Inc.
Morgan Stanley Trust FSB
<Page>
MORGAN STANLEY INSTITUTIONAL FUNDS
Morgan Stanley Investment Management Inc.
Morgan Stanley Investment Advisors Inc.
Morgan Stanley Investment Management Limited
Morgan Stanley Investment Management Private Limited
Morgan Stanley Asset & Investment Trust Management Co., Limited
Morgan Stanley Investment Management Company
Morgan Stanley & Co. Incorporated
Morgan Stanley Distribution, Inc.
Morgan Stanley AIP GP LP
Morgan Stanley Alternative Investment Partners LP
(e)(2) Beginning with non-audit service contracts entered into on or after May
6, 2003, the audit committee also is required to pre-approve services to Covered
Entities to the extent that the services are determined to have a direct impact
on the operations or financial reporting of the Registrant. 100% of such
services were pre-approved by the audit committee pursuant to the Audit
Committee's pre-approval policies and procedures (attached hereto).
(f) Not applicable.
(g) See table above.
(h) The audit committee of the Board of Trustees has considered whether the
provision of services other than audit services performed by the auditors to the
Registrant and Covered Entities is compatible with maintaining the auditors'
independence in performing audit services.
Item 5. Audit Committee of Listed Registrants.
(a) The Fund has a separately-designated standing audit committee established in
accordance with Section 3(a)(58)(A) of the Exchange Act whose members are:
Michael Bozic, Edwin J. Garn, Wayne E. Hedien, Manual H. Johnson, Joseph J.
Kearns, Michael Nugent and Fergus Reid.
(b) Not applicable.
Item 6. Schedule of Investments
Refer to Item 1.
<Page>
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies.
Applicable only to reports filed by closed-end funds.
Item 8. Portfolio Managers of Closed-End Management Investment Companies
Applicable only to reports filed by closed-end funds.
Item 9. Closed-End Fund Repurchases
Applicable only to reports filed by closed-end funds.
Item 10. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 11. Controls and Procedures
(a) The Fund's principal executive officer and principal financial officer have
concluded that the Fund's disclosure controls and procedures are sufficient to
ensure that information required to be disclosed by the Fund in this Form N-CSR
was recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms, based
upon such officers' evaluation of these controls and procedures as of a date
within 90 days of the filing date of the report.
(b) There were no changes in the registrant's internal control over financial
reporting that occurred during the 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 Strategist Fund
/s/ Ronald E. Robison
- -------------------------------------
Ronald E. Robison
Principal Executive Officer
September 21, 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
September 21, 2006
/s/ Francis Smith
- -------------------------------------
Francis Smith
Principal Financial Officer
September 21, 2006